<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): AUGUST 1, 1996
HOUGHTEN PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 0-27972 51-0336233
(State or Other (Commission (IRS Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
3550 GENERAL ATOMICS COURT, SAN DIEGO, CA 92121
(Address of Principal Executive Offices) (Zip Code)
(619) 455-3814
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 24, 1996, Houghten Pharmaceuticals, Inc., a Delaware
corporation ("HPI"), ChromaXome Corp., a Delaware corporation ("CXC"), CXC
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of
HPI ("Acquisition Corporation"), Katie A. Thompson, Michael C. Dickman, Robert
E. Leach and Donna C. Leach entered into an Agreement and Plan of Reorganization
(the "Merger Agreement") providing for the merger of Acquisition Corporation
with and into CXC (the "Merger"), with CXC being the surviving corporation. At a
special meeting of CXC stockholders held on July 23, 1996, the Merger was
approved. On August 1, 1996, the Merger was consummated with the filing of a
Certificate of Merger in Delaware.
CXC, located in San Diego, California, is an early stage combinatorial
biology company which has developed technology to transfer metabolic pathways
from marine and terrestrial microbes into bacteria. CXC will operate as a
wholly-owned subsidiary of HPI, and HPI intends for CXC to continue CXC's
research and development activities in the area of combinatorial biology.
Pursuant to the terms of the Merger Agreement, HPI has acquired all of
the outstanding shares of CXC capital stock. Holders of CXC capital stock prior
to the Merger will receive, in the aggregate, up to approximately 579,500 shares
of the common stock, par value $.001 per share, of HPI ("HPI Common Stock");
however, two-thirds of this amount, or approximately 386,330 shares of HPI
Common Stock, is subject to the achievement of certain milestones by the
business of CXC. In addition, holders of options to acquire CXC capital stock
prior to the Merger have received, in the aggregate, options to acquire up to
approximately 53,900 shares of HPI Common Stock (which amount is subject to
vesting and, in some instances, the achievement of certain milestones by the
business of CXC). The number of shares of HPI Common Stock issued in the Merger
was determined by negotiation between HPI and CXC.
The acquisition will be accounted for using the purchase method of
accounting, and HPI will record a charge of approximately $1.6 million related
to the acquisition of in-process technology in the third quarter of 1996. Upon
the achievement of milestones by the business of CXC and the related issuance of
shares of HPI Common Stock (and milestone-based vesting of options to acquire
such stock), HPI will record an additional charge related to the acquisition of
in-process technology in the quarter of such issuance (the amount of which will
be dependent upon the market price of HPI's Common Stock at that time, the
number of shares issued and the value of milestone-based options which vest at
that time).
-2-
<PAGE> 3
Upon the effectiveness of the Merger, Bernard D. King, M.D. became the
President and Chief Executive Officer of CXC, and Terence E. McMorrow became the
Treasurer, Chief Financial Officer and Secretary of CXC. Messrs. King and
McMorrow are presently executive officers of HPI. Messrs. King and McMorrow also
joined Katie A. Thompson as directors of CXC. Ms. Thompson had previously served
as a director and executive officer of CXC. Michael C. Dickman, the former
President and a director of CXC, has been retained as a consultant to CXC.
Ms. Thompson, as well as full-time CXC employees, are (to the extent
not treated by continuation of CXC benefit plans) eligible to participate in HPI
employee benefit plans, including HPI's stock option plan. It is HPI's general
policy to offer stock options to new employees; however, in the context of the
Merger, this policy will be balanced against the already outstanding options to
acquire HPI Common Stock which certain CXC employees received as a result of the
Merger.
The foregoing description of the transactions involving HPI and CXC and
the various agreements entered into in connection therewith, is qualified in its
entirety by reference to the Agreement and Plan of Merger, a copy of which is
filed as an exhibit to this Form 8-K and incorporated herein by this reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The report of independent auditors, the audited balance sheets of CXC
(a development stage company) as of April 30, 1996 and December 31,
1995, 1994 and 1993 and the related audited statements of operations,
net capital deficiency and cash flows for the four months ended April
30, 1996, each of the two years in the period ended December 31, 1995,
the period from March 10, 1993 (inception) to December 31, 1993 and the
period from March 10, 1993 (inception) to April 30, 1996 are filed as a
part of this report.
B. PRO FORMA FINANCIAL INFORMATION.
An unaudited pro forma condensed combined balance sheet as of June 30,
1996 and unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1995 and the six months
ended June 30, 1996, giving effect to the Merger as of June 30, 1996
for the pro forma condensed combined balance sheet and as of January 1,
1995 for the pro forma condensed combined statements of operations, are
filed as a part of this report.
-3-
<PAGE> 4
C. EXHIBITS.
2.1 Agreement and Plan of Reorganization dated as of June
24, 1996 by and among HPI, CXC, CXC Acquisition
Corporation, Katie A. Thompson, Michael C. Dickman,
Robert E. Leach and Donna C. Leach.
23.1 Consent of Ernst & Young LLP.
-4-
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: August 15, 1996.
HOUGHTEN PHARMACEUTICALS, INC.
By /s/ Terence E. McMorrow
--------------------------
Terence E. McMorrow
Vice President, Finance and
Corporate Development
-5-
<PAGE> 6
ITEM 7.A.
Financial Statements
ChromaXome Corporation
(A Development Stage Company)
April 30, 1996
with Report of Independent Auditors
<PAGE> 7
ChromaXome Corporation
(a Development Stage Company)
Financial Statements
April 30, 1996
<TABLE>
<S> <C>
Report of Independent Auditors............................................. 1
Audited Financial Statements
Balance Sheets............................................................. 2
Statements of Operations .................................................. 3
Statements of Net Capital Deficiency....................................... 4
Statements of Cash Flows .................................................. 5
Notes to Financial Statements.............................................. 6
</TABLE>
<PAGE> 8
Report of Independent Auditors
The Board of Directors and Stockholders
ChromaXome Corporation
We have audited the accompanying balance sheets of ChromaXome Corporation (a
development stage company) as of April 30, 1996 and December 31, 1995, 1994 and
1993 and the related statements of operations, net capital deficiency and cash
flows for the four months ended April 30, 1996, each of the two years in the
period ended December 31, 1995, the period from March 10, 1993 (inception) to
December 31, 1993 and the period from March 10, 1993 (inception) to April 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ChromaXome Corporation (a
development stage company) at April 30, 1996 and December 31, 1995, 1994 and
1993, and the results of its operations and its cash flows for the four months
ended April 30, 1996, each of the two years in the period ended December 31,
1995, the period from March 10, 1993 (inception) to December 31, 1993 and the
period from March 10, 1993 (inception) to April 30, 1996, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that ChromaXome Corporation will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses and has
limited capital. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
---------------------
San Diego, California
June 7, 1996
1
<PAGE> 9
ChromaXome Corporation
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
APRIL 30, -------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 63,028 $ 75,858 $ 2,374 $ 99,516
Other current assets 3,384 1,575 1,575 547
--------- --------- -------- ---------
Total current assets 66,412 77,433 3,949 100,063
Property and equipment, at cost:
Equipment 292,552 115,955 80,456 --
Leasehold improvements 52,183 41,021 33,057 --
--------- --------- -------- ---------
344,735 156,976 113,513 --
Less accumulated depreciation and
amortization (69,434) (47,638) (20,857) --
--------- --------- -------- ---------
275,301 109,338 92,656 --
Advances to stockholder 16,513 -- -- --
Other assets, net 62,441 8,322 5,385 6,643
--------- --------- -------- ---------
$ 420,667 $ 195,093 $101,990 $ 106,706
========= ========= ======== =========
LIABILITIES AND NET CAPITAL
DEFICIENCY
Current liabilities:
Accounts payable $ 83,266 $ 41,594 $ 2,662 $ 11,818
Accrued compensation 24,191 17,645 100 3,334
Deferred contract revenue
(Note 5) -- -- 93,677 115,008
Payables to stockholder -- -- 25,364 45,984
Current portion of obligations
under capital leases (Note 2) 50,900 22,000 7,000 --
--------- --------- -------- ---------
Total current liabilities 158,357 81,239 128,803 176,144
Convertible note payable to Houghten
Pharmaceuticals, Inc. (Note 4) 500,000 500,000 -- --
Obligations under capital leases
(Note 2) 161,791 44,698 30,918 --
Commitments and contingencies (Note 2)
Net capital deficiency:
Common stock, $.01 par value;
Authorized - 10,000,000
Issued and outstanding -
2,468,089, 1,994,089,
1,061,928 and 1,061,928 in
1996, 1995, 1994 and 1993,
respectively 24,681 19,941 10,619 10,619
Paid-in capital 547,964 53,682 21,056 21,056
Deficit accumulated during the
development stage (972,126) (504,467) (89,406) (101,113)
--------- --------- -------- ---------
Net capital deficiency (399,481) (430,844) (57,731) (69,438)
--------- --------- -------- ---------
$ 420,667 $ 195,093 $101,990 $ 106,706
========= ========= ======== =========
</TABLE>
See accompanying notes.
2
<PAGE> 10
ChromaXome Corporation
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
MARCH 10, 1993 MARCH 10, 1993
(INCEPTION) (INCEPTION)
FOUR MONTHS YEARS ENDED DECEMBER 31, THROUGH DECEMBER THROUGH
ENDED APRIL 30, ------------------------ 31, APRIL 30,
1996 1995 1994 1993 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Contract revenue
from related party
(Note 5) $ -- $ 120,838 $529,948 $ -- $ 650,786
Expenses:
Research and development 248,257 141,646 279,574 28,082 697,559
Selling, general and
administrative 216,903 393,418 230,215 72,755 913,291
--------- --------- -------- --------- ----------
465,160 535,064 509,789 100,837 1,610,850
--------- --------- -------- --------- ----------
Income (loss) from
operations (465,160) (414,226) 20,159 (100,837) (960,064)
Interest expense, net (2,499) (835) (8,452) (276) (12,062)
--------- --------- -------- --------- ----------
Net income (loss) $(467,659) $(415,061) $ 11,707 $(101,113) $ (972,126)
========= ========= ======== ========= ==========
</TABLE>
See accompanying notes.
3
<PAGE> 11
ChromaXome Corporation
(A Development Stage Company)
Statements of Net Capital Deficiency
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE NET
------------ PAID - IN DEVELOPMENT CAPITAL
SHARES AMOUNT CAPITAL STAGE DEFICIENCY
------ ------ ------- ----- ----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock at March 10, 1993 (inception) for cash and
services 1,000,000 $10,000 $ -- $ -- $ 10,000
Issuance of common stock at $0.35 per share for cash and services 61,928 619 21,056 -- 21,675
Net loss -- -- -- (101,113) (101,113)
--------- ------- -------- --------- ---------
Balance at December 31, 1993 1,061,928 10,619 21,056 (101,113) (69,438)
Net income -- -- -- 11,707 11,707
--------- ------- -------- --------- ---------
Balance at December 31, 1994 1,061,928 10,619 21,056 (89,406) (57,731)
Issuance of common stock at $0.045 per share for cash 500,000 5,000 17,500 -- 22,500
Issuance of common stock at $0.045 per share for services 38,107 381 1,334 -- 1,715
Issuance of common stock at $0.045 per share in connection with the
dissolution of Bio Partnership Number One (Note 5) 394,054 3,941 13,792 -- 17,733
Net loss -- -- -- (415,061) (415,061)
--------- ------- -------- --------- ---------
Balance at December 31, 1995 1,994,089 19,941 53,682 (504,467) (430,844)
Issuance of common stock at $1.053 per share for cash 474,000 4,740 494,282 -- 499,022
Net loss -- -- -- (467,659) (467,659)
--------- ------- -------- --------- ---------
Balance at April 30, 1996 2,468,089 $24,681 $547,964 $(972,126) $(399,481)
========= ======= ======== ========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 12
ChromaXome Corporation
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
MARCH 10, 1993 MARCH 10, 1993
FOUR MONTHS (INCEPTION) (INCEPTION)
ENDED YEARS ENDED DECEMBER 31, THROUGH THROUGH
APRIL 30, ------------------------ DECEMBER 31, APRIL 30,
1996 1995 1994 1993 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(467,659) $(415,061) $ 11,707 $(101,113) $ (972,126)
Adjustments to reconcile net income
(loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 21,796 26,781 20,857 -- 69,434
Common stock issued for
services and dissolution of
Bio Partnership Number One -- 19,448 -- 6,175 25,623
Changes in operating assets
and liabilities:
Other current assets (1,809) -- (1,028) (547) (3,384)
Accounts payable and accrued
compensation 48,218 56,477 (12,390) 15,152 107,457
Deferred contract revenue -- (93,677) (21,331) 115,008 --
--------- --------- -------- --------- ----------
Net cash provided by (used for)
operating activities (399,454) (406,032) (2,185) 34,675 (772,996)
INVESTING ACTIVITIES
Additions to property and equipment (28,130) (8,041) (71,199) -- (107,370)
Advances to stockholder (16,513) -- -- -- (16,513)
Other assets (54,119) (2,937) 1,258 (6,643) (62,441)
--------- --------- -------- --------- ----------
Net cash used for investing
activities (98,762) (10,978) (69,941) (6,643) (186,324)
FINANCING ACTIVITIES
Principal payments under capital
lease obligations (13,636) (6,642) (4,396) -- (24,674)
Proceeds from issuance of common
stock 499,022 22,500 -- 25,500 547,022
Proceeds from convertible note
payable to Houghten
Pharmaceuticals, Inc. -- 500,000 -- -- 500,000
Payables to stockholder -- (25,364) (20,620) 45,984 --
--------- --------- -------- --------- ----------
Net cash provided by (used for)
financing activities 485,386 490,494 (25,016) 71,484 1,022,348
--------- --------- -------- --------- ----------
Net increase (decrease) in cash and
cash equivalents (12,830) 73,484 (97,142) 99,516 63,028
Cash and cash equivalents at
beginning of period 75,858 2,374 99,516 -- --
--------- --------- -------- --------- ----------
Cash and cash equivalents at end of
period $ 63,028 $ 75,858 $ 2,374 $ 99,516 $ 63,028
========= ========= ======== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 4,600 $ 2,700 $ 3,000 $ 300 $ 10,600
========= ========= ======== ========= ==========
Equipment acquired under capital
leases $ 159,600 $ 35,400 $ 42,300 $ -- $ 237,300
========= ========= ======== ========= ==========
</TABLE>
See accompanying notes.
5
<PAGE> 13
ChromaXome Corporation
(A Development Stage Company)
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
ChromaXome Corporation (the "Company") was incorporated in the state of Delaware
on March 10, 1993. The Company is engaged in the research and development of
combinatorial biology. The Company has not commenced planned commercial
operations and is considered to be in the development stage.
The Company will require additional financing in order to continue its research
and development activities. Management is in the process of negotiating an
agreement to sell the Company to Houghten Pharmaceuticals, Inc. ("HPI") (see
Note 4). The accompanying financial statements have been prepared on a going
concern basis and do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the possible inability of the
Company to continue as a going concern.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments with
remaining maturities when acquired of three months or less.
INCOME TAXES
The Company accounts for income taxes using the liability method under Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes".
6
<PAGE> 14
ChromaXome Corporation
(A Development Stage Company)
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is provided on the straight-line method
over the estimated useful lives of the assets (generally five years).
Amortization of leasehold improvements is provided on the straight-line method
over the lesser of the remaining lease term or the life of the asset.
PATENTS
The Company has filed several patent applications in the U.S. Patent Office and
in foreign countries. Legal and other related costs incurred in connection with
pending patent applications have been deferred. Costs related to successful
patent applications are amortized over the lesser of the remaining useful life
of the related technology or the remaining patent life, commencing on the date
the patent is issued. Deferred costs related to patent applications are charged
to operations at the time a determination is made not to pursue such
applications.
2. COMMITMENTS
RESEARCH AGREEMENTS
Effective April 1, 1996, the Company entered into an agreement with a university
to perform research for the Company through March 31, 1997. Under the terms of
the agreement, the Company is required to make payments of $13,000 in June 1996,
$13,000 in October, 1996 and $14,000 in March, 1997.
Effective April 2, 1996, the Company entered into a research collaboration
agreement with a non-profit research institution for a period of two years.
Under the terms of the agreement, the Company is required to purchase $10,000 of
materials from the institution by April 1, 1997.
LEASES
The Company leases its office facilities in San Diego, California under an
operating lease which expires in November 1996. The lease provides the Company
with an option to extend the lease term for an additional three years. The
Company also leases certain equipment under capital leases, several of which are
guaranteed by a stockholder of the Company.
7
<PAGE> 15
ChromaXome Corporation
(A Development Stage Company)
Notes to Financial Statements (continued)
2. COMMITMENTS (CONTINUED)
Annual future minimum lease payments as of April 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------ ------ ------
<S> <C> <C>
1996 $37,500 $ 47,900
1997 3,900 73,900
1998 - 53,800
1999 - 42,700
2000 and thereafter - 48,700
------- --------
$41,400 267,000
=======
Less amount representing interest (54,309)
--------
Present value of net minimum lease payments 212,691
Less current portion (50,900)
--------
Long-term portion of capital lease obligations $161,791
========
</TABLE>
Equipment acquired under capital leases totaled $210,200, $61,700 and $36,000
(net of accumulated amortization of $27,100, $16,000 and $6,300), at April 30,
1996 and December 31, 1995 and 1994, respectively.
Rent expense under all operating leases totaled $19,300, $53,500, $71,400 and
$18,000 for the four months ended April 30, 1996, the years ended December 31,
1995 and 1994 and the period from March 10, 1993 (inception) through December
31, 1993, respectively. Rent expense totaled $162,200 for the period from March
10, 1993 (inception) through April 30, 1996.
3. NET CAPITAL DEFICIENCY
PREFERRED STOCK
As of April 30, 1996, the Company was authorized to issue 3,000,000 shares of
preferred stock at a par value of $.01 per share. No shares were issued or
outstanding at April 30, 1996.
8
<PAGE> 16
ChromaXome Corporation
(A Development Stage Company)
Notes to Financial Statements (continued)
3. NET CAPITAL DEFICIENCY (CONTINUED)
STOCK OPTION PLAN
Effective March 1994, the Company adopted a stock option plan (the "Plan") under
which 200,000 shares of common stock are reserved for issuance upon exercise of
options granted by the Company to qualifying employees, directors and
consultants (as defined). Options under the Plan shall be either incentive stock
options or nonstatutory stock options. The exercise price of the options shall
not be less than the fair market value on the date of grant. Options generally
become exercisable over a period of four years and the maximum term of options
granted is ten years.
As of April 30, 1996, the Company had outstanding options to purchase 259,066
shares of common stock, of which 177,000 were issued outside of the Plan. The
outstanding options are exercisable at prices ranging from $.043 to $.85 per
share. As of April 30, 1996, options to purchase 62,320 common shares were
exercisable.
WARRANTS
In January and February 1996, 474,000 shares of the Company's common stock were
issued to a group of investors for cash proceeds of $499,022. Warrants to
purchase 276,795 shares of the Company's common stock were also issued at an
exercise price of $1.05 per share. These warrants can be exercised through July
5, 1996 or earlier upon notification given by HPI to exercise its option to
purchase the Company (see Note 4).
4. CONVERTIBLE NOTE PAYABLE
In August 1995, HPI acquired an option to purchase the Company in exchange for a
$500,000 loan. The parties are in the process of negotiating a definitive
acquisition agreement. The option expires on the earlier of June 30, 1996 or 30
days after HPI receives data from certain research being conducted by a research
partner of the Company. The option may, under certain circumstances, be extended
by HPI for a limited period of time. If the option expires, HPI's loan will be
converted into the Company's common stock for the number of shares it would
convert at $1.67 per share.
9
<PAGE> 17
ChromaXome Corporation
(A Development Stage Company)
Notes to Financial Statements (continued)
5. CONTRACT REVENUE
Effective December 31, 1993, the Company established a partnership, Bio
Partnership Number One (the "Partnership"), with EBR Holdings Limited
Partnership ("EBR"). The Company contributed all rights and ownership of its
intellectual property in exchange for a 49% interest in the Partnership. EBR
contributed cash of $140,000 and agreed to finance all research services
performed by the Company. Also on December 31, 1993, the Company entered into an
agreement to provide all services for the Partnership at cost. The Company
recognized contract revenue, which approximated the related costs, from this
agreement of $120,838 and $529,948 in 1995 and 1994, respectively.
Effective February 2, 1995, the Company and EBR entered into an agreement to
dissolve the Partnership. Under the terms of the dissolution agreement, EBR
received 394,054 shares of the Company's common stock and all rights and
ownership of the Partnership's intellectual property rights were transferred to
the Company. The common stock was valued at $17,733 and was charged to
operations. In addition, EBR agreed to pay certain of the Company's obligations,
including approximately $26,000 of payables owed to a stockholder.
In connection with the dissolution agreement, the Company granted EBR the
preemptive right to purchase additional stock for the purpose of maintaining
EBR's proportionate interest in the issued and outstanding shares of the
Company.
6. INCOME TAXES
At April 30, 1996, the Company had federal and California income tax net
operating loss carryforwards of approximately $966,000 and $919,000,
respectively. The Company also had federal and California research tax credit
carryforwards of $2,200 and $6,000, respectively. The federal net operating loss
and tax credit carryforwards will begin to expire in 2008 unless previously
utilized, while the California net operating loss carryforwards will begin to
expire in 1998.
In accordance with certain provisions of the Internal Revenue Code, a change in
ownership of greater than 50% within a three-year period will place an annual
limitation on the Company's ability to utilize its existing net operating loss
and tax credit carryforwards. If the transaction described in Note 4 is
completed, a change in ownership will occur.
10
<PAGE> 18
ChromaXome Corporation
(A Development Stage Company)
Notes to Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets are shown below.
<TABLE>
<CAPTION>
DECEMBER 31,
APRIL 30, ------------------------------------------
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 393,000 $ 198,000 $ 30,000 $ 34,000
Research and development tax
credits 6,000 3,000 3,000 3,000
--------- --------- -------- --------
Total deferred tax assets 399,000 201,000 33,000 37,000
Valuation allowance for deferred
tax assets (399,000) (201,000) (33,000) (37,000)
--------- --------- -------- --------
Net deferred tax assets $ -- $ -- $ -- $ --
========= ========= ======== ========
</TABLE>
The difference between the thirty-five percent federal statutory rate and the
zero percent actual rate for 1994 is attributable to the utilization of net
operating loss carryforwards in 1994.
A valuation allowance of $399,000 has been recognized to offset the deferred tax
assets as realization of such assets is uncertain.
11
<PAGE> 19
ITEM 7. B.
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined balance sheet as
of June 30, 1996 and the unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1995 and the six months ended June
30, 1996 give effect to the acquisition of ChromaXome Corporation ("ChromaXome")
as of June 30, 1996 for the pro forma condensed combined balance sheet and as of
January 1, 1995 for the pro forma condensed combined statements of operations.
The pro forma condensed combined financial statements are based on
historical financial statements of Houghten Pharmaceuticals, Inc. ("Houghten")
and ChromaXome, giving effect to the acquisition applying the purchase method of
accounting and the assumptions and adjustments as discussed in the accompanying
notes to the pro forma condensed combined financial statements. These pro forma
condensed combined financial statements have been prepared by the management of
Houghten based upon the audited consolidated financial statements of Houghten
and ChromaXome as of December 31, 1995 and for the year then ended, the
unaudited consolidated financial statements of Houghten as of June 30, 1996 and
for the six months then ended and the audited financial statements of ChromaXome
as of April 30, 1996 and for the four months then ended. Operating results of
ChromaXome for May and June 1996 are not material. The unaudited pro forma
condensed combined financial statements should be read in conjunction with the
accompanying notes as well as the historical financial statements and notes
thereto and narrative sections. The audited consolidated financial statements of
Houghten as of December 31, 1995 and for the year then ended were previously
reported in Houghten's prospectus dated March 29, 1996 filed with the Securities
and Exchange Commission pursuant to Rule 424(b) of the Securities Act of 1933,
as amended, with reference to Registration Nos. 333-1376 and 333-2982. The
unaudited consolidated financial statements of Houghten as of June 30, 1996 and
for the six months then ended were previously reported in Houghten's Form 10-Q
for the quarter ended June 30, 1996. The audited financial statements of
ChromaXome as of December 31, 1995 and for the year then ended and as of April
30, 1996 and for the four months then ended are included with this Form 8-K at
Item 7.A. The pro forma condensed combined financial statements do not purport
to be indicative of what actual results of operations would have been for the
periods presented had the transaction occurred on the dates indicated and do not
purport to indicate the results of future operations or financial position of
Houghten from the transaction date forward.
<PAGE> 20
HOUGHTEN PHARMACEUTICALS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
ASSETS Houghten ChromaXome Adjustments Combined
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 6,617,456 $ 63,028 - $ 6,680,484
Short term investments 25,539,606 - - 25,539,606
Accounts receivable 419,225 - - 419,225
Other current assets 395,037 3,384 - 398,421
------------ --------- ----------- ------------
Total current assets 32,971,324 66,412 - 33,037,736
Property and equipment, net 836,875 275,301 - 1,112,176
Advances to stockholder - 16,513 - 16,513
Other assets 438,762 62,441 (100,000) (b) 401,203
------------ --------- ----------- ------------
$ 34,246,961 $ 420,667 (100,000) $ 34,567,628
============ ========= =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY (net capital deficiency)
Current liabilities:
Accounts payable $ 469,811 83,266 457,500 (b) $ 1,010,577
Accrued compensation 399,331 24,191 - 423,522
Other accrued liabilities 1,593,141 - - 1,593,141
Current portion of obligations under capital leases 361,842 50,900 - 412,742
Deferred revenue 2,711,772 - - 2,711,772
------------ --------- ----------- ------------
Total current liabilities 5,535,897 158,357 457,500 6,151,754
Convertible note payable to Houghten Pharmaceuticals, Inc. - 500,000 (500,000) (a) -
Obligations under capital leases 315,587 161,791 - 477,378
Stockholders' equity (net capital deficiency):
Paid-in capital 69,698,169 572,645 (1,072,645) (C) 70,791,171
1,093,002 (e)
500,000 (a)
Deferred compensation, net (1,875,151) - - (1,875,151)
Accumulated deficit (39,427,541) (972,126) 972,126 (c) (40,977,524)
- - (1,549,983) (d)
------------ --------- ----------- ------------
Total stockholders' equity (net capital deficiency) 28,395,477 (399,481) (57,500) 27,938,496
------------ --------- ----------- ------------
$ 34,246,961 420,667 (100,000) $ 34,567,628
============ ========= =========== ============
</TABLE>
See accompanying notes to Pro Forma Condensed Combined Financial Statements
<PAGE> 21
HOUGHTEN PHARMACEUTICALS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Houghton ChromaXome Adjustments Combined
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Net Sales $ 1,369,662 $ 120,838 $ - $ 1,490,500
----------- --------- --------- -----------
1,369,662 120,838 - 1,490,500
Costs and expenses:
Cost of sales 1,313,132 - - 1,313,132
Research and development 7,288,199 141,646 (400,000) (a) 7,029,845
Selling, general and administrative 2,722,221 393,418 - 3,115,639
----------- --------- --------- -----------
11,323,552 535,064 (400,000) 11,458,616
----------- --------- --------- -----------
Loss from operations (9,953,890) (414,226) 400,000 (9,968,116)
Other income (expense):
Interest income 135,749 - - 135,749
Interest expense (85,645) (835) - (86,480)
Corporate joint venture 414,063 - - 414,063
----------- --------- --------- -----------
Net loss $(9,489,723) $(415,061) $ 400,000 $(9,504,784)
=========== ========= ========= ===========
Net loss per share $ (1.00) $ - $ - $ (0.97)
=========== ========= ========= ===========
Shares used in computing
net loss per share 9,647,000 - 193,170 (b) 9,840,170
=========== ========= ========= ===========
</TABLE>
(1) The above pro forma condensed consolidated statement of operations
does not include a $1.6 million charge for in-process research and
development for the estimated fair value of the in-process technology of
ChromaXome.
<PAGE> 22
HOUGHTEN PHARMACEUTICALS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30. 1996
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Houghton ChromaXome Adjustments Combined
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Net sales $ 890,429 $ - $ - $ 890,429
----------- --------- -------- -----------
890,429 - - 890,429
Costs and expenses:
Cost of sales 482,552 - - 482,552
Research and development 3,002,911 248,257 - 3,251,168
Selling, general and administrative 866,512 216,903 - 1,083,415
----------- --------- -------- -----------
4,351,975 465,160 - 4,817,135
----------- --------- -------- -----------
Loss from operations (3,461,546) (465,160) - (3,926,706)
Other income (expense):
Interest income 431,280 - - 431,280
Interest expense (17,473) (2,499) - (19,972)
----------- --------- -------- -----------
Net loss $(3,047,739) $(467,659) $ - $(3,515,398)
=========== ========= ======== ===========
Net loss per share $ (0.23) $ - $ - $ (0.27)
=========== ========= ======== ===========
Shares used in computing
net loss per share 13,000,939 - 193,170 (b) 13,194,109
=========== ========= ======== ===========
</TABLE>
(1) The above pro forma condensed consolidated statement of operations does
not include a $1.6 million charge for in-process research and development
for the estimated fair value of the in-process technology of ChromaXome.
<PAGE> 23
Notes To Pro Forma Condensed Combined Financial Statements
(Unaudited)
1. Historical
The historical balances represent the financial position and results of
operations for each company and were derived from their respective financial
statements for the indicated period.
2. Pro Forma
Effective August 1, 1996, Houghten acquired all the outstanding shares
of ChromaXome. As part of the acquisition, a wholly-owned subsidiary of Houghten
merged with and into ChromaXome, and ChromaXome became a wholly-owned subsidiary
of Houghten. The estimated purchase price of $1,651,000 consists of the
following: (i) $1,093,000 related to market value of shares and options to
acquire shares of Houghten Common Stock issued in connection with the
transaction, (ii) $100,000 of outstanding advances to ChromaXome and (iii)
estimated transaction costs of $458,000. The estimated purchase price does not
included the value of additional shares of Houghten Common Stock and options to
acquire such shares which may be issued upon the achievement of milestones by
the business of ChromaXome. The estimated total purchase price has been
allocated to the fair market value of the tangible and intangible assets
acquired and liabilities assumed. Based on the estimated purchase price,
Houghten has allocated $1,550,000 to acquired in-process research and
development which will be charged to Houghten's statement of operations in the
third quarter of 1996.
The unaudited pro forma condensed balance sheet has been prepared to
reflect the acquisition of ChromaXome as if it occurred on June 30, 1996. The
unaudited pro forma condensed combined statements of operations have been
prepared to reflect the acquisition of ChromaXome as if it occurred on
January 1, 1995. The acquisition has been accounted for under the purchase
method of accounting. The following pro forma adjustments are reflected in the
unaudited pro forma condensed combined financial statements.
Pro forma Condensed Combined Balance Sheet:
(a) Elimination of intercompany receivables and payables between
Houghten and ChromaXome.
(b) Accrual of certain transaction costs related to the acquisition
and elimination of advances to ChromaXome.
(c) Elimination of ChromaXome's equity accounts as required by
generally accepted accounting principals.
(d) Estimated charge to operations for in-process research and
development technology. This amount is not included in the pro
forma combined statements of operations as it represents a
one-time nonrecurring charge.
(e) Issuance of 193,170 shares of Houghten common stock to former
ChromaXome stockholders and issuance of options to acquire
approximately 27,660 shares of Houghten Common Stock.
Pro forma Condensed Combined Statements of Operations:
(a) Elimination of advances from Houghten previously written off to
research and development.
(b) The shares used in computing the pro forma net loss per share
are based on the shares issued to former ChromaXome stockholders
related to the acquisition.
<PAGE> 24
Exhibit Index
Exhibit
Number Description
2.1 Agreement and Plan of Reorganization dated as of June
24, 1996 among HPI, CXC, CXC Acquisition Corporation,
Katie A. Thompson, Michael C. Dickman, Robert E. Leach
and Donna C. Leach.
23.1 Consent of Ernst & Young LLP.
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as
of June 24, 1996 by and among HOUGHTEN PHARMACEUTICALS, INC., a Delaware
corporation ("HPI"), CXC ACQUISITION CORPORATION, a Delaware corporation and the
wholly-owned subsidiary of HPI ("ACQUISITION CORPORATION"), CHROMAXOME CORP., a
Delaware corporation ("CXC"), KATIE A. THOMPSON, an individual stockholder,
director and officer of CXC, MICHAEL C. DICKMAN, an individual stockholder,
director and officer of CXC, ROBERT E. LEACH, an individual stockholder,
director and officer of CXC, and DONNA C. LEACH, an individual stockholder of
CXC (the foregoing individuals, owning a majority of the outstanding shares of
CXC, being herein referred to herein as the "CXC MAJORITY STOCKHOLDERS"). CXC
and Acquisition Corporation are herein sometimes referred to as the "CONSTITUENT
CORPORATIONS," and CXC, Acquisition Corporation and HPI are herein sometimes
referred to as the "CORPORATE PARTIES."
RECITALS
A. The parties intend that, subject to the terms and conditions
hereinafter set forth, (i) Acquisition Corporation will be merged with and into
CXC (the "MERGER") and (ii) all outstanding shares of the Common Stock, par
value $.01 per share, of CXC ("CXC COMMON STOCK") will be converted into present
and contingent rights to receive shares of the Common Stock, $.001 par value, of
HPI ("HPI COMMON STOCK") in accordance with the provisions set forth in Section
1.5 of this Agreement.
B. The parties hereto desire to enter into this Agreement for the
purpose of setting forth certain representations, warranties and covenants made
by each to the other as an inducement to the Merger and the conditions precedent
to the consummation of the Merger.
NOW, THEREFORE, in consideration of the premises and of the mutual
provisions, agreements and covenants herein contained, HPI, Acquisition
Corporation, CXC and the CXC Majority Stockholders agree as follows:
ARTICLE 1
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Time (as defined in Section 1.3) Acquisition Corporation shall
be merged with and into CXC in the Merger and the separate corporate existence
of Acquisition Corporation shall thereupon cease.
1.2 Closing. The closing of the Merger (the "CLOSING") shall take place
(i) at the offices of Pillsbury Madison & Sutro LLP, 101 West Broadway Street,
San Diego, CA at 9:00 A.M. on the first business day on which the last to be
fulfilled or waived of the conditions
<PAGE> 2
set forth in Article 5 hereof shall be fulfilled or waived in accordance with
this Agreement or (ii) at such other place and time and/or on such other date as
HPI and CXC may agree (the "CLOSING DATE").
1.3 Effective Time. As soon as practicable following the Closing, and
provided that this Agreement shall not have been terminated or abandoned
pursuant to Article 7 hereof, the Corporate Parties will cause a Certificate of
Merger (the "DELAWARE CERTIFICATE OF MERGER") to be executed and filed with the
Secretary of State of Delaware as provided in Section 251 of the Delaware
General Corporation Law (the "DGCL"). The Merger shall become effective at the
time and on the date on which the Delaware Certificate of Merger has been duly
filed with the Secretary of State of Delaware, and such time is hereinafter
referred to as the "EFFECTIVE TIME."
1.4 Effects of the Merger. CXC shall be the surviving corporation in
the Merger (sometimes hereinafter referred to as the "SURVIVING CORPORATION")
and shall continue to be governed by the laws of the State of Delaware, and the
separate corporate existence of CXC with all its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger. The Merger shall
have the effects specified in the DGCL. At the Effective Time:
(a) The Certificate of Incorporation of CXC, in the form
attached hereto as EXHIBIT A (the "CXC CHARTER"), shall continue as the
Certificate of Incorporation of the Surviving Corporation, except that the CXC
Charter shall be amended and restated in its entirety in substantially the form
attached hereto as EXHIBIT B (the "CXC RESTATED CHARTER").
(b) The bylaws of Acquisition Corporation, as in effect
immediately prior to the Effective Time, shall be and become the bylaws of the
Surviving Corporation without change or amendment until altered, amended or
repealed as provided for in such bylaws or by law.
(c) The directors and officers of Surviving Corporation shall
be as follows:
Directors and Chairman:
Bernard King Chairman
Terence McMorrow
Katie Thompson
Officers:
Bernard King President and Chief Executive Officer
Terence McMorrow Treasurer, Chief Financial Officer and Secretary
1.5 Effect on Securities. As of the Effective Time, by virtue of the
Merger and without any action on the part of the Corporate Parties or any
stockholder thereof, the securities
-2-
<PAGE> 3
of the Constituent Corporations outstanding at the Effective Time shall be
converted or treated as follows:
(a) Capital Stock of Acquisition Corporation. All issued and
outstanding shares of capital stock of Acquisition Corporation shall continue to
be issued and shall be converted into 100 shares of Common Stock, $.01 par
value, of the Surviving Corporation. Each stock certificate of Acquisition
Corporation evidencing ownership of any such shares shall continue to evidence
ownership of such shares of capital stock of the Surviving Corporation.
(b) Cancellation of CXC-Owned and HPI-Owned Stock. All shares
of CXC Common Stock, if any, that are owned directly or indirectly by CXC or HPI
shall be canceled, and no stock of HPI or other consideration shall be delivered
in exchange therefor.
(c) Conversion of CXC Common Stock.
(i) Per Share Merger Consideration. Other than shares
to be canceled pursuant to Section 1.5(b) and fractional shares as
provided in Section 1.5(f), each share of CXC Common Stock issued and
outstanding immediately prior to the Effective Time, and all rights
existing with respect thereto, shall cease to be outstanding and shall
be converted, without any action on the part of the holder thereof,
into the following:
(A) The right as of the Effective Time to receive
one-half (1/2) of the "PER SHARE MERGER
CONSIDERATION" (as defined in SCHEDULE 1 attached
hereto - "SCHEDULE 1") (such shares of HPI Common
Stock are referred to herein, in the aggregate, as
the "CURRENT SHARES"); provided, however, that
one-third (1/3) of the Current Shares will be placed
into the Escrow Account (as defined below) and be
subject to the terms thereof as provided in Section
1.5(c)(ii) below; and
(B) The contingent right to receive up to an additional
one-half (1/2) of the Per Share Merger Consideration
as and when provided in this Agreement (including,
without limitation, SCHEDULE 1) (such shares of HPI
Common Stock are referred to herein, in the
aggregate, as the "FUTURE SHARES"). The Future Shares
and any rights thereto (1) shall not be assignable or
transferable unless and until issued pursuant to this
Section 1.5 and SCHEDULE 1 and (2) are subject to the
conditions, requirements and agreements set forth in
this Agreement (including, without limitation, the
provisions of Article 6 below and SCHEDULE 1).
(ii) Escrow Shares. An amount of HPI Common Stock
representing one-third (1/3) of the Current Shares (the "ESCROW
SHARES") shall be delivered by HPI, promptly following the Effective
Time, into the "ESCROW ACCOUNT" as defined in, and pursuant to the
terms of, the Escrow Agreement attached hereto as EXHIBIT C (the
"ESCROW AGREEMENT"). The Escrow Shares shall (A) be held in the Escrow
Account and released therefrom when and as provided by the Escrow
Agreement, this Agreement and SCHEDULE 1, (B) be subject to the
conditions, requirements and agreements set
-3-
<PAGE> 4
forth in this Agreement (including, without limitation, the provisions
of Article 6 below and SCHEDULE 1) and (C) not be assignable or
transferable unless and until released pursuant to the Escrow
Agreement, this Agreement and SCHEDULE 1. Future Shares and Escrow
Shares are referred to herein collectively as "POTENTIAL EARN-OUT
SHARES."
(iii) Distribution of Current Shares. Promptly after
the Effective Time, HPI shall make available in exchange for
certificates representing shares of CXC Common Stock outstanding
immediately prior to the Effective Time in accordance with this Article
1 (including Section 1.7 below), certificates representing the Current
Shares (exclusive of the Escrow Shares which will be delivered into the
Escrow Account).
(iv) Distribution of Potential Earn-Out Shares.
Potential Earn-Out Shares shall be distributed to persons entitled
thereto, when "earned" (i.e., when related "MILESTONES" (as set forth
in SCHEDULE 1) have been achieved) and as otherwise provided in
SCHEDULE 1, first from the available Escrow Shares in the Escrow
Account, if any, in accordance with the provisions of the Escrow
Agreement, and, when all Escrow Shares have been distributed from the
Escrow Account, from the Future Shares (comprised of authorized but
unissued shares and/or treasury shares of HPI Common Stock). For each
former stockholder of CXC to whom Current Shares were available for
exchange at the Effective Time (each being an "ENTITLED HOLDER"),
within 30 days of the date as of which any tranche of Potential
Earn-Out Shares is "earned" (a "TRANCHE") pursuant to SCHEDULE 1 (i.e.,
the related Milestone for such Tranche is achieved pursuant to SCHEDULE
1), HPI shall, as applicable, deliver to the Escrow Agent instructions
for the release of Escrow Shares and/or cause to be issued to such
Entitled Holder a number of Future Shares, the combined amount of
Escrow Shares and Future Shares of which shall represent such Entitled
Holder's proportionate amount of such Tranche, in each case together
with any cash in lieu of fractional shares as provided in Section
1.5(f) below; provided, however, that notwithstanding any other
provision of the Escrow Agreement or this Agreement to the contrary
(including, without limitation, SCHEDULE 1):
(X) no Potential Earn-Out Shares shall be released (in
the instance of Escrow Shares) or issued (in the
instance of Future Shares) to any Entitled Holder on
or before the date which is nine months after the
Effective Time (and, in the interim, such Potential
Earn-Out Shares shall remain subject to the
provisions of this Agreement including, without
limitation, any rights of HPI under Article 6);
(Y) if, when a release or issuance of Potential Earn-Out
Shares would otherwise occur under the provisions of
this Agreement, there shall exist a good faith claim
by HPI to exercise its Offset Right (as defined in
Section 6.1(a) below) which claim has not been
perfected or has otherwise been objected to (as
provided in Section 6.3 below), an amount of such
Potential Earn-Out Shares determined by HPI (in its
reasonable discretion) to represent the Damages (as
defined in Section 6.1(a)) at issue (pursuant to
Section 6.2) shall be withheld from release and/or
-4-
<PAGE> 5
issuance until such time as the claim has been
perfected, in which case the Offset Right shall apply
against such shares, or resolution of the objection
has been ultimately determined (e.g., without the
possibility of further appeal), in which case the
consequences of such determination shall ensue; and
(Z) any Escrow Shares or Future Shares which are
otherwise distributable to any CXC Majority
Stockholder shall, during the period of two years
from and after the Effective Time, be delivered to
HPI pursuant to the terms of each CXC Majority
Stockholder's Pledge Agreement (defined below in
Section 5.2(m)).
Each Entitled Holder's proportionate amount of a Tranche shall be the
product of (A) multiplied by (B) where:
(A) Is the number of shares of HPI Common Stock
comprising such Tranche (e.g., the percentage of
"TOTAL POTENTIAL MERGER CONSIDERATION" (as defined in
SCHEDULE 1) earned and available for distribution
pursuant to the terms of SCHEDULE 1 multiplied by the
Total Potential Merger Consideration - but subject,
without limitation, to any rights of HPI under
Article 6); and
(B) Is the quotient of (x) the number of issued and
outstanding shares of CXC Common Stock held by such
Entitled Holder immediately prior to the Effective
Time divided by (y) the "NUMBER OF FULLY DILUTED CXC
SHARES OUTSTANDING" (as defined in SCHEDULE 1).
With respect to shares of CXC Common Stock issued and outstanding
immediately prior to the Effective Time, HPI shall be entitled to treat
those holders properly surrendering Certificates to HPI or HPI's
transfer agent (as HPI may determine) as the Entitled Holders.
(d) [Reserved]
(e) Substitution of Stock Options. With respect to each option
to purchase CXC Common Stock outstanding as of the Effective Time (whether or
not granted under the CXC Stock Option Plan - together, the "CXC OPTIONS"), HPI
shall grant a substitute non-qualified option to purchase shares of HPI Common
Stock pursuant to the terms set forth on SCHEDULE 4 attached hereto
(collectively, the "HPI SUBSTITUTE OPTIONS").
(f) Fractional Shares. No fractional shares of HPI Common
Stock shall be issued (whether in connection with the distribution of Current
Shares, Escrow Shares or a Tranche, upon the exercise of any HPI Substitute
Option, or otherwise), but in lieu thereof each person who would otherwise be
entitled to receive a fraction of a share of HPI Common Stock (after aggregating
all fractional shares of HPI Common Stock which may then be received by such
person) shall receive from HPI an amount of cash (rounded up to the nearest
whole cent)
-5-
<PAGE> 6
equal to the product of (i) the fraction of a share of HPI Common Stock to which
such holder would otherwise be entitled multiplied by (ii) $8.00.
1.6 Dissenting CXC Shares. Without limiting the provisions of Section
5.2(k) below, shares of CXC Common Stock which are not voted in favor of the
Merger and with respect to which a demand for payment and appraisal in respect
of the Merger shall have been properly made in accordance with the DGCL
("DISSENTING CXC SHARES") shall not be converted into present and contingent
rights to receive Per Share Merger Consideration as set forth in Section 1.5
above unless and until the holder of such shares withdraws its demand or becomes
ineligible for such payment and appraisal. If a holder of Dissenting CXC Shares
shall withdraw its demand for such payment and appraisal or shall become
ineligible for such payment and appraisal, then as of the Effective Time or the
occurrence of such event of withdrawal or ineligibility, whichever last occurs,
such holder's Dissenting CXC Shares shall cease to be Dissenting CXC Shares and
shall be converted into the right to receive, and shall be exchangeable for, the
present and contingent rights to receive Per Shares Merger Consideration into
which such Dissenting CXC Shares would have been converted pursuant to Section
1.5 above.
1.7 Exchange of Certificates for Current Shares.
(a) Letter of Transmittal. As soon as practicable after the
Effective Time, HPI shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding CXC Common Stock (the "CERTIFICATES") and who has not surrendered
the Certificates at the Closing, a letter of transmittal and instructions for
use in effecting the surrender of Certificates in exchange for shares of HPI
Common Stock representing Current Shares (exclusive of the Escrow Shares which
will be delivered into the Escrow Account). Upon surrender of a Certificate for
cancellation to HPI or HPI's transfer agent (as HPI may determine), the holder
of such Certificate shall be entitled to receive in exchange therefor the
certificates representing the number of Current Shares of HPI Common Stock
(exclusive of Escrow Shares) and a payment in lieu of fractional shares to which
such the holder is entitled pursuant to Section 1.5 above (and as represented by
the Certificate so surrendered). Each Certificate so surrendered shall thereupon
be canceled.
(b) Transfers of Shares. In the event of a transfer of
ownership of CXC Common Stock which is not registered in the transfer records of
CXC, the stock certificates representing shares of HPI Common Stock and cash in
lieu of any fractional shares may be delivered to a transferee if the
Certificate representing the right to receive such HPI Common Stock is presented
to HPI and accompanied by all documents required to evidence and effect such
transfer (including evidence regarding compliance with applicable securities
laws and that any applicable taxes have been paid or withheld).
(c) Lost Certificates. HPI shall follow the same procedure
with respect to lost, stolen or mutilated Certificates as it follows with
respect to lost, stolen or mutilated HPI certificates.
-6-
<PAGE> 7
(d) Status of Unexchanged Shares. Unless and until a
Certificate shall be surrendered as provided in this Section 1.7, or procedures
respecting lost, stolen or mutilated Certificates are followed, the holder of
the Certificate shall not be entitled to receive certificates for (i) the
Current Shares of HPI Common Stock, (ii) any Escrow Shares, (iii) any Future
Shares or (iv) cash for any fractional share, and any dividends paid or other
distributions made to holders of record of HPI Common Stock after the Effective
Time shall be paid to and retained by HPI and paid over to such holder when such
Certificate is surrendered or such procedures are followed in accordance with
this Section 1.7.
1.8 No Further Ownership Rights in CXC Securities. All HPI Common Stock
or rights to acquire HPI Common Stock delivered upon the surrender for exchange
of, or deemed to be issued in replacement of, CXC Common Stock, CXC Options and
CXC Warrants (defined below in Section 2.2), if any (collectively, the "CXC
SECURITIES"), in accordance with the terms hereof shall be deemed to have been
delivered in full satisfaction of all rights pertaining to such CXC Securities.
There shall be no further registration of transfers on the transfer books of the
Surviving Corporation of the CXC Securities which were outstanding immediately
prior to the Effective Time. If, after the Effective Time, Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged only as provided in this Article 1.
1.9 Accounting/Tax Treatment.
(a) The Corporate Parties intend that the purchase method of
accounting will be used by HPI to account for the Merger.
(b) Tax Treatment. The Corporate Parties intend that the
Merger will be a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "CODE").
1.10 Additional Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any further deeds, bills
of sale, assignments or assurances in law or any other actions or things are
necessary or desirable (a) to vest, perfect or confirm, of record or otherwise,
in the Surviving Corporation, its rights, title or interest in, to or under any
of the rights, property or assets of Acquisition Corporation as a result of, or
in connection with, the Merger or (b) otherwise to carry out the purposes of
this Agreement, Acquisition Corporation and its proper officers and directors
shall be deemed to have granted to the Surviving Corporation an irrevocable
power of attorney to execute and deliver all such proper deeds, bills of sale,
assignments and assurances in law and to take and do all such other actions as
may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the
Surviving Corporation and otherwise to carry out the purposes of this Agreement;
and the proper officers and directors of the Surviving Corporation are fully
authorized in the name of Acquisition Corporation or otherwise to take any and
all such actions.
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ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF CXC
AND CXC MAJORITY STOCKHOLDERS
Except as otherwise set forth in SCHEDULE 2 (the "CXC DISCLOSURE
SCHEDULE") delivered to HPI prior to the execution of this Agreement and
attached hereto (it being agreed that any item set forth in the CXC Disclosure
Schedule having relevance to more than one of the following sections of this
Article 2 shall be recited in full or cross-referenced in each applicable
section of the CXC Disclosure Schedule), each of CXC, on the one hand, and the
Majority CXC Shareholders jointly and severally, on the other hand, represents,
warrants and covenants to HPI and Acquisition Corporation as follows:
2.1 Organization. CXC is a corporation (a) duly organized, validly
existing and in good standing under the laws of the State of Delaware and (b)
duly qualified and in good standing to do business as a foreign corporation in
the State of California. CXC is not required to be qualified to do business in
any other jurisdiction. CXC has all requisite power and authority to own, lease
and operate its properties and to carry on its business as it is now being
conducted. CXC has heretofore delivered to HPI true, correct and complete copies
of the CXC Charter and CXC's Bylaws (the "CXC BYLAWS") and all amendments
thereto through and including the Closing Date, and true, correct and complete
copies of the minutes of all meetings and other corporate actions of the
directors, committees of the directors and of the stockholders of CXC since
inception.
2.2 Capital Structure. The authorized capital stock of CXC consists of
10,000,000 shares of CXC Common Stock and 3,000,000 shares of preferred stock,
par value $.01 ("CXC PREFERRED STOCK"). Immediately prior to the Effective Time,
(a) 2,482,375 shares of CXC Common Stock will be issued and outstanding, (b)
259,066 shares of CXC Common Stock will be reserved for issuance upon exercise
of the CXC Options and (c) 297,359 shares of CXC Common Stock will be reserved
for issuance upon the exercise of warrants to acquire such shares (each with an
exercise price of $1.05279 per share - collectively, the "CXC WARRANTS");
provided, however, that prior to the Effective Time the CXC Warrants may be
exercised for up to 297,359 shares of CXC Common Stock (or a lesser amount if
cashless exercises are effected). A true, correct and complete list of holders
of CXC Common Stock, CXC Options and CXC Warrants, showing the number of shares,
options and warrants held by each such securityholder, is attached hereto as
SCHEDULE 2.2. All of the outstanding CXC Common Stock, CXC Options and CXC
Warrants were issued in compliance with the applicable registration and
qualification provisions of federal and state securities laws. All of the
outstanding shares of CXC Common Stock are, and any shares of CXC Common Stock
issuable upon exercise of any CXC Option and CXC Warrants when issued pursuant
to such exercise will be, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, the CXC
Charter, the CXC Bylaws or any agreement to which CXC is a party or is bound.
2.3 Obligations With Respect to Capital Stock. CXC has provided or
shall provide any required notices of the Merger or the transactions
contemplated hereby to (or obtain
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<PAGE> 9
required consents for the Merger or the transactions contemplated hereby from)
the holders of all CXC Options and CXC Warrants. Except as set forth in Section
2.2 above, (a) there are no equity securities of any class of CXC, or any
security or obligation exchangeable into or exercisable for such equity
securities, issued, reserved for issuance or outstanding and (b) there are not
any options, warrants, calls, rights, commitments or agreements of any character
(i) to which CXC is a party or by which CXC is bound obligating CXC to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
capital stock of CXC or obligating CXC to grant, extend or enter into any such
option, warrant, call, right, commitment or agreement, or (ii) which could
obligate HPI to issue Per Share Merger Consideration or other securities. There
are no voting trusts, proxies or other agreements or understandings with respect
to the voting of shares of capital stock of CXC, other than (x) that certain
Shareholder Agreement dated as of August 31, 1995 among HPI and the Majority
Stockholders (the "SHAREHOLDER AGREEMENT") and (y) a voting trust relating to
shares of CXC Common Stock issuable upon the exercise of certain CXC Options
issued under CXC's Stock Option Plan (which voting trust shall be terminated
prior to the Effective Time).
2.4 Equity Investments. CXC does not own and has not subscribed or
otherwise agreed to purchase any equity interest, directly or indirectly, in any
corporation, partnership, joint venture, firm or other entity.
2.5 Authority. CXC has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement, and the consummation of
the transactions contemplated hereby, have been duly authorized by all necessary
corporate action on the part of CXC. This Agreement and related agreements have
been duly executed and delivered by CXC, and such agreements constitute valid
and binding obligations of CXC enforceable in accordance with their terms,
subject to the effect of applicable bankruptcy, insolvency, reorganization,
moratorium or other similar federal or state laws affecting the rights of
creditors and the effect or availability of rules of law governing specific
performance, injunctive relief or other equitable remedies (regardless of
whether any such remedy is considered in a proceeding at law or in equity). The
execution and delivery of this Agreement does not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under (a) any provision of the
CXC Charter or the CXC Bylaws or (b) any agreement, contract or arrangement or
any instrument, permit, franchise, license, judgment, or order or any local,
state, federal or foreign law applicable to CXC or its properties or assets.
There are no consents, waivers and approvals ("CONSENTS") of third parties
applicable to CXC or its operations or business that are required to be obtained
by CXC or the Majority Stockholders in connection with the execution and
delivery of this Agreement by such parties and the performance of their
respective obligations hereunder. No Consent, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality (a "GOVERNMENTAL
ENTITY"), is required by or with respect to CXC or the Majority Stockholders in
connection with the execution and delivery of this Agreement by such parties and
the consummation of the transactions contemplated hereby, except for (a) the
filing of the Delaware Certificate of Merger with the Delaware Secretary of
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State and (b) the filing of a Form D with the Securities and Exchange Commission
(the "SEC") (with reference to Section 4.9 below).
2.6 Financial Statements. Attached hereto as SCHEDULE 2.6 are (a) CXC's
audited balance sheets as of December 31, 1995, 1994 and 1993 and the related
statements of operations, changes in stockholders' equity and cash flows for the
three (3) fiscal years ended December 31, 1995, (b) CXC's audited balance sheet
as of April 30, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for the four-month period ended April 30,
1996 and (c) CXC's unaudited balance sheet as of May 31, 1996 and the related
statements of operations, changes in stockholders' equity and cash flows for the
five-month period then ended. The balance sheet at April 30, 1996 is hereinafter
referred to as the "CXC BALANCE SHEET," and all such financial statements are
hereinafter referred to collectively as the "CXC FINANCIAL STATEMENTS." The CXC
Financial Statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis during the periods
involved and are in accordance with CXC's books and records, and fairly present
the financial position of CXC and the results of its operations as of the date
and for the periods indicated thereon, subject in the case of the unaudited
portion of the CXC Financial Statements to normal year-end audit adjustments
which will not be material and the absence of certain footnote disclosures. At
the date of the CXC Balance Sheet (the "CXC BALANCE SHEET DATE") and as of the
Closing Date, CXC had and has no liabilities or obligations, secured or
unsecured (whether accrued, absolute, contingent or otherwise collectively,
"LIABILITIES") not reflected on the CXC Balance Sheet except for Liabilities (x)
as may have arisen in the ordinary course of business prior to the date of the
CXC Balance Sheet and which, under GAAP, would not have been required to be
reflected on the CXC Balance Sheet and (y) incurred in the ordinary course of
business since the date of the CXC Balance Sheet which are usual and normal in
amount, but in any event not greater than $50,000.00 in the aggregate (inclusive
of clauses (x) and (y)).
2.7 Business Changes. Since the CXC Balance Sheet Date, except as
otherwise contemplated by this Agreement, CXC has conducted its business only in
the ordinary and usual course and, without limiting the generality of the
foregoing:
(a) There have been no changes in the condition (financial or
otherwise), business, net worth, assets, properties, employees, operations or
Liabilities of CXC which, in the aggregate, have had or may be reasonably
expected to have a material adverse effect on the condition, business, net
worth, assets, properties or operations of CXC.
(b) CXC has not issued, nor authorized for issuance, nor
entered into any commitment to issue, any equity security, bond, note or other
security of CXC, except for shares of CXC Common Stock issuable upon the
exercise of the outstanding CXC Options and CXC Warrants.
(c) CXC has not incurred additional debt for borrowed money,
nor incurred any Liability except for HPI Advances (as defined in SCHEDULE 1).
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(d) CXC has not paid any Liability, nor discharged, settled or
satisfied any claim, lien or encumbrance, except for current Liabilities in the
ordinary and usual course of business and in any event not in excess of
$2,500.00 for any single occurrence or $50,000.00 in the aggregate.
(e) CXC has not authorized, declared or made any dividend,
payment or other distribution on or with respect to any share or shares of
capital stock of CXC.
(f) CXC has not purchased, redeemed or otherwise acquired or
committed itself to acquire, directly or indirectly, any share or shares of
capital stock of CXC.
(g) CXC has not mortgaged, pledged, or otherwise, voluntarily
or involuntarily, encumbered or granted a lien or security interest in any of
its assets or properties, except for liens for current taxes which are not yet
delinquent.
(h) CXC has not disposed of, or agreed to dispose of, by sale,
lease, license or otherwise, any asset or property, tangible or intangible.
(i) CXC has not (i) purchased or agreed to purchase or
otherwise acquire any securities of any corporation, partnership, joint venture,
firm or other entity or (ii) made any expenditure or commitment for the
purchase, license, acquisition, construction or improvement of a capital asset.
(j) CXC has not entered into any transaction or contract, or
made any commitment to do the same.
(k) CXC has not sold, assigned, transferred or conveyed, or
committed itself to sell, assign, transfer or convey, any Proprietary Rights (as
defined below).
(l) CXC has not adopted or amended any bonus, incentive,
profit-sharing, stock option, stock purchase, pension, retirement,
deferred-compensation, severance, life insurance, medical or other benefit plan,
agreement, trust, fund or arrangement for the benefit of employees of any kind
whatsoever, nor entered into or amended any agreement relating to employment,
services as an independent contractor or consultant, or severance or termination
pay, nor agreed to do any of the foregoing.
(m) CXC has not effected or agreed to effect any change in its
directors, officers, employees, consultants or advisors, and no officer,
employee, consultant or advisor of CXC has indicated that he or she intends to
terminate his or her employment or relationship with CXC.
(n) CXC has not effected or committed itself to effect any
amendment or modification of the CXC Charter or the CXC Bylaws.
(o) To the knowledge of the CXC Majority Stockholders after
due inquiry, no statute has been enacted nor has any rule or regulation been
adopted by any state where laws
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<PAGE> 12
apply to the business of CXC or any federal or foreign agency or authority which
may reasonably be expected to have a material and adverse effect on the
condition (financial or otherwise), business, net worth, assets, prospects,
properties, employees, operations or Liabilities of CXC which has not yet been
reflected in the operating results of CXC.
2.8 Properties.
(a) CXC owns no real property. CXC's audited balance sheet at
December 31, 1995 or the CXC Balance Sheet reflect all of the real and personal
property used by CXC in its business or otherwise held by CXC. Except as
reflected in the notes to CXC's audited balance sheet at December 31, 1995 or
the CXC Balance Sheet, CXC has good and marketable title to all assets and
properties listed on the CXC Balance Sheet or thereafter acquired, free and
clear of any material imperfections of title, lien, claim, encumbrance,
restriction, charge or equity of any nature whatsoever, except for the lien of
current taxes not yet delinquent. All of the fixed assets and properties
reflected on CXC's audited balance sheet at December 31, 1995 or the CXC Balance
Sheet or thereafter acquired are in satisfactory condition and repair for the
requirements of the business as presently conducted by CXC.
(b) CXC is, and at all times has been, in material compliance
with all material local, state and federal statutes, orders, rules, ordinances
and regulations relating to pollution or protection of the environment,
including, without limitation, laws relating to exposures, emissions,
discharges, releases or threatened releases of Hazardous Substances (as defined
below) into or on land, ambient air, surface water, groundwater, personal
property or structures (including the protection, cleanup, removal, remediation
or damage thereof), or otherwise related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, discharge or
handling of Hazardous Substances. "HAZARDOUS SUBSTANCES" shall mean any
pollutant, contaminant, material, substance or waste regulated, restricted or
prohibited by any law, regulation or ordinance or designated by any governmental
agency to be hazardous, toxic, radioactive, biohazardous or otherwise a danger
to health or the environment.
(c) Except as set forth on SCHEDULE 2.8 attached hereto, there
are no Hazardous Substances on the premises leased or occupied by CXC, nor have
there ever been at any time. CXC has not disposed of any Hazardous Substances on
or about such property; and CXC has not disposed of any materials at any site
being investigated or remediated for contamination or possible contamination of
the environment.
(d) There have been no judicial or administrative proceedings
or other investigations and there are no judicial or administrative proceedings
or other investigations pending or threatened alleging violation by CXC of any
local, state or federal laws respecting land use, pollution or protection of the
environment including, without limitation, laws regulating the use, storage,
transportation or disposal of Hazardous Substances; and CXC has not received any
notice of any investigation, claim or proceeding against CXC by any individual
or governmental entity relating to Hazardous Substances and there exists no fact
or circumstance which could involve CXC in any environmental litigation,
proceeding, investigation or claim or impose any environmental liability upon
CXC.
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<PAGE> 13
(e) CXC has provided HPI with a complete list of all real
property leased by CXC. All such property leased by CXC is held under valid,
subsisting and enforceable leases and neither real property leased by CXC nor
the operations of CXC thereon violate any applicable material building code,
zoning requirement or classification, or pollution control ordinance or statute
relating to the property or to such operations, and such non-violation is not
dependent, in any instance, on so-called non-conforming use exemptions.
(f) CXC has provided HPI with a true, correct and complete
list of all permits, consents and approvals which CXC is required to have under
local, state or federal laws respecting land use, pollution or protection of the
environment for the construction, maintenance or operation of its facilities and
the conduct or operation of its business. CXC has obtained each and every one of
such permits, consents and approvals and is, and at all times has been, in full
compliance with each and every one of the terms and conditions thereof. Further,
all of the listed permits, consents and approvals are in full force and effect,
none have been modified, and there is no proceeding pending which may result in
the reversal, rescission, termination, modification or suspension of any such
permit, consent or approval.
(g) CXC has kept all records and made all filings required to
be made by CXC under or pursuant to all applicable local, state and federal laws
relating to land use, pollution and protection of the environment with respect
to all exposures, emissions, discharges and releases into the environment and
the proper use, storage, transportation and disposal of all Hazardous
Substances.
2.9 Accounts Receivable. [Reserved].
2.10 Personal Property. A true, correct and complete list of all
personal property assets and computer software (the "SCHEDULED ASSETS") used in
the conduct of CXC's business (as it is now being conducted and as it is
proposed to be conducted) is attached hereto as SCHEDULE 2.10. CXC has good and
marketable title to (or, as otherwise disclosed hereunder, a valid leasehold
interest in) the Scheduled Assets free and clear of any lien, claim or
Liability. The Scheduled Assets are in good condition and repair in all material
respects and are suitable for the conduct of CXC's business as it is now being
conducted and as it is proposed to be conducted.
2.11 Taxes. CXC has duly filed with the appropriate United States,
state, local and foreign governmental agencies all tax returns and reports
required to be filed, which returns are accurate and complete, and has paid or
accrued in full all taxes, duties, charges, withholding obligations and other
governmental liabilities as well as any interest, penalties, assessments or
deficiencies, if any, due to, or claimed to be due by, any Governmental Entity
(all such items are collectively referred to herein as "TAXES"). The CXC Balance
Sheet fully accrues or reserves for all current and deferred Taxes. CXC is not a
party to any pending action or proceeding, nor is any such action or proceeding
threatened by any Governmental Entity for the assessment or collection of Taxes.
Since the Balance Sheet Date, no liability for Taxes has been incurred other
than in the ordinary course of business. There are no liens for Taxes except for
liens for Taxes not yet delinquent. CXC is not a party to any Tax sharing, Tax
allocation,
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Tax indemnity or statute of limitations extension or waiver agreement and has
never been included on any consolidated, combined or unitary return with any
entity.
2.12 Compensation/Change in Control. A true, correct and complete list
of all directors, officers, employees or consultants of CXC as of the date
hereof, specifying their names and job designations, their dates of hire, the
total amount paid or payable as wages, salaries or other forms of direct
compensation, and the basis of such compensation, whether fixed or commission or
a combination thereof, is attached hereto as SCHEDULE 2.12. There are no
provisions, contracts, agreements, terms or arrangements relating to any amounts
or benefits payable to any person or entity (whether currently payable or
payable in the future) relating to a change in control of CXC (including,
without limitation, a change in control effected by the Merger).
2.13 Increases in Compensation. Except for de minimis increases
affecting only non-officer employees (all of which are reflected on SCHEDULE
2.12 attached hereto), since April 30, 1996, CXC has not paid or committed
itself to pay to or for the benefit of any of its directors, officers,
employees, consultants, advisors or stockholders any compensation of any kind
other than wages, salaries and benefits at times and rates in effect on April
30, 1996, nor has CXC effected or agreed to effect any amendment or supplement
to any employee profit sharing, stock option, stock purchase, pension, bonus,
incentive, retirement, medical reimbursement, life insurance, deferred
compensation or any other employee benefit plan or arrangement.
2.14 Compliance with Law.
(a) All material licenses, franchises, permits, clearances,
consents, certificates and other evidences of authority of CXC which are
necessary to the conduct of CXC's operations or business ("PERMITS") are in full
force and effect and CXC is not in violation of any Permit in any respect. The
business of CXC has been conducted in compliance with all applicable laws,
regulations, orders and other requirements of governmental authorities,
including, without limiting the generality of the foregoing, all laws,
regulations and orders relating to employment practices and procedures, the
health and safety of employees and export controls.
(b) There have been no judicial or administrative proceedings
or other investigations and there are no judicial or administrative proceedings
or other investigations pending or threatened alleging violation by CXC of any
local, state, federal or foreign laws, regulations and orders respecting the
business of CXC including, without limitation, laws, regulations and orders
promulgated under or by the Clinical Laboratory Improvement Act, the Food and
Drug Administration Act and any foreign, federal, state or local agencies
regulating clinical or research laboratories; and CXC has not received any
notice of any investigation, claim or proceeding against CXC by any such
governmental entity and no fact or circumstance exists which could involve CXC
in any such litigation, proceeding, investigation or claim or impose any such
liability upon CXC.
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2.15 Litigation. There is no claim, dispute, action, proceeding,
notice, order, suit, appeal or investigation, at law or in equity, pending
against CXC, or involving any of its assets or properties, before any court,
agency, authority, arbitration panel or other tribunal, and none have been
threatened. No facts exist which, if known to stockholders, customers,
governmental authorities or other persons, would result in any such claim,
dispute, action, proceeding, suit or appeal or investigation. CXC is not subject
to any order, writ, injunction or decree of any court, agency, authority,
arbitration panel or other tribunal, nor is it in default with respect to any
notice, order, writ, injunction or decree.
2.16 Products and Services. All products manufactured or services
provided by CXC heretofore and prior to the Effective Time shall comply in all
material respects with any and all specified requirements as to proper design
and construction therefor and shall comply in all material respects with all
warranties, express or implied, applicable thereto. The provisions of any and
all agreements to which CXC is a party or by which it is bound comply in all
material respects with the laws of appropriate jurisdictions. CXC has performed
all obligations required to be performed by it and is not in default in any
respect under any agreement, lease or other instrument to which it is a party or
by which it or its assets or properties are bound; and no event has occurred
which, with notice or lapse of time, or both, would constitute such a default.
CXC has not in any respect misrepresented its products or services or employed
misleading or deceptive advertising, packaging or labeling in connection with
the sale of its products or services.
2.17 Contracts.
(a) A complete list of each executory contract and agreement
in the following categories to which CXC is a party, or by which it or its
assets or properties are bound in any respect, is attached hereto as SCHEDULE
2.17 (copies of which have been provided to HPI):
(i) agreements for the purchase, sale, lease or other
disposition of equipment, goods, materials, research and development, supplies,
studies or capital assets, or for the performance of services, in any case
involving more than $2,500.00;
(ii) contracts or agreements for the joint
performance of work or services, and all other joint venture agreements;
(iii) management or employment contracts, consulting
contracts, collective bargaining contracts, termination and severance
agreements;
(iv) notes, mortgages, deeds of trust, loan
agreements, security agreement, guarantees, debentures, indentures, credit
agreements and other evidences of indebtedness;
(v) pension, retirement, profit-sharing, deferred
compensation, bonus, incentive, life insurance, hospitalization or other
employee benefit plans or arrangements (including, without limitation, any
contracts or agreements with trustees, insurance companies or others relating to
any such employee benefit plan or arrangement);
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(vi) stock option, stock purchase, warrant,
repurchase or other contracts or agreements relating to any share of capital
stock of CXC;
(vii) contracts or agreements with agents, brokers,
consignees, sale representatives or distributors;
(viii) contracts or agreements with any director,
officer, employee, consultant or stockholder;
(ix) powers of attorney or similar authorizations
granted by CXC to third parties;
(x) licenses, sublicenses, royalty agreements and
other contracts or agreements to which CXC is a party, or otherwise subject,
relating to technical assistance or to Proprietary Rights (as defined below);
and
(xi) to the extent not listed elsewhere in this
Agreement, all other material contracts.
(b) Neither CXC nor any of its officers has entered into any
contract or agreement containing covenants limiting the right of CXC to compete
in any business or with any person. As used in this Agreement, the terms
"CONTRACT" and "AGREEMENT" include every contract, agreement, commitment,
understanding and promise, whether written or oral.
2.18 No Default.
(a) Each of CXC's contracts, agreements or other instruments
(including, without limitation, those referred to in SCHEDULE 2.17 attached
hereto) is a legal, binding and enforceable obligation by or against CXC,
subject to the effect of applicable bankruptcy, insolvency, reorganization,
moratorium or other similar federal or state laws affecting the rights of
creditors and the effect or availability of rules of law governing specific
performance, injunctive relief or other equitable remedies (regardless of
whether any such remedy is considered in a proceeding at law or in equity). No
party with whom CXC has an agreement or contract is in default thereunder or has
breached any terms or provisions thereof.
(b) CXC has performed, or is now performing, the obligations
of, and CXC is not in default (or would by the lapse of time and/or the giving
of notice be in default) in respect of, any contract, agreement or commitment
binding upon it or its assets or properties. No third party has raised any
claim, dispute or controversy with respect to any of the executory contracts of
CXC, nor has CXC received notice or warning of alleged nonperformance, delay in
delivery or other noncompliance by CXC or any third party with respect to their
respective obligations under any of those contracts, nor are there any facts
which exist indicating that any of those contracts may be totally or partially
terminated or suspended by the other parties thereto.
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2.19 Proprietary Rights.
(a) CXC owns or possesses all patents, patent applications,
computer programs, trade secrets, copyrights, inventions, drawings, designs,
data, trademarks, trade names, service marks, proprietary know-how or
information, or other rights with respect thereto (collectively referred to as
"PROPRIETARY RIGHTS"), which are used in CXC's business as it has been, is now
being and as it is proposed to be conducted.
(b) A true, correct and complete list of all patents,
trademarks, trade names, service marks, and copyrights, and any applications for
the foregoing, owned by CXC or in which CXC has any rights or licenses, as well
as pending or contemplated inventions for which CXC may prepare or file patent
applications, is attached hereto as SCHEDULE 2.19(a) (with a specific indication
on such SCHEDULE 2.19(a) if CXC's rights are other than full outright
ownership). Such list includes, as applicable:
(i) The title of the patent, mark or copyright, or
patent, mark or copyright application constituting such
Proprietary Right;
(ii) The jurisdictions by or in which such
Proprietary Right has been issued or registered or in which an
application for such issuance or registration has been filed
or is pending, including the respective registration or
application numbers; and
(iii) Material licenses, sublicenses, research
agreements, collaborations, joint development and similar
agreements with licensors, licensees or sublicensees as to
which CXC or any of its affiliates is a party.
The Proprietary Rights on such list are free of any unresolved ownership
disputes or claims with respect to any third party and there is no unauthorized
use, infringement or misappropriation of any of such Proprietary Rights by any
third party, including any current or former employee, officer, consultant or
advisor of CXC.
(c) CXC has received from each current or former officer,
employee, advisor or consultant of CXC an agreement providing CXC with title and
ownership to all Proprietary Rights (including, without limitation, those
developed or used by CXC in its business as it has been, is now being and as it
is proposed to be conducted) by assignment or otherwise. All of such agreements
are valid, enforceable and legally binding, subject to the effect or
availability of rules of law governing specific performance, injunctive relief
or other equitable remedies (regardless of whether any such remedy is considered
in a proceeding at law or in equity).
(d) The operations of CXC (including, without limitation, its
research and development strategies, methods, processes and inventions) do not
conflict with or infringe, and no one has asserted to CXC that such operations
conflict with or infringe, any Proprietary Rights or any trademarks, trade names
or service marks (collectively referred to as "MARKS") owned, possessed or used
by any third party. There are no claims, disputes, actions, proceed-
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ings, suits or appeals pending against CXC with respect to any Proprietary
Rights or Marks and none has been threatened. There are no facts or alleged
facts which would reasonably serve as a basis for any claim that CXC does not
have the right to use, free of any rights or claims of others, all Proprietary
Rights and Marks in the development, manufacture, use, sale or other disposition
of any or all products or services in the conduct of CXC's business as it has
been, is now being and as it is proposed to be conducted.
(e) A list of any proceedings before any patent or trademark
authority to which CXC is a party, a description of the subject matter of each
proceeding, and the current status of each proceeding, including, without
limitation, office actions, interferences, priority contests, oppositions and
protests, is attached hereto as SCHEDULE 2.19(c). Such list also includes any
pending applications for reissue or reexamination of a patent.
(f) CXC has taken all commercially reasonable measures to
maintain the confidentiality of the processes and formulae, technical
strategies, methods, inventions, trade secrets, research and development results
and other know-how, the value of which to CXC or HPI is contingent upon
maintenance of the confidentiality thereof.
(g) Each current and former employee, officer, consultant and
advisor of CXC has executed a commercially reasonable and valid and enforceable
employee secrecy agreement. No current or former employee, officer, consultant
or advisor of CXC is in violation of any term of any employment contract,
proprietary information and inventions agreement, non-competition agreement,
employee secrecy agreement or any other contract or agreement relating to the
relationship of any such person with CXC or any previous employer or such
person.
2.20 Insurance. CXC has provided HPI with true, correct and complete
copies of all policies of insurance to which CXC is a party or is a beneficiary
or named insured. A list of such policies is attached hereto as SCHEDULE 2.20.
CXC has in full force and effect, with all premiums due thereon paid, such
policies of insurance. CXC has received no notices of cancellation, termination
or non-renewal with respect to such policies. All the insurable properties of
CXC are insured in amounts and coverages and against risks and losses which are
adequate and usually insured against by persons holding or operating similar
properties in similar businesses. There have been no claims asserted under any
of the insurance policies of CXC for the period from CXC's inception to the
Effective Time.
2.21 Bank Accounts. Attached hereto as SCHEDULE 2.21 is a true, correct
and complete list setting forth the names and addresses of all banks, other
institutions and state governmental departments at which CXC has accounts, money
market accounts, deposits or safety deposit boxes, or special deposits required
to be held by such state governmental departments with the nature of such
account and the names of all persons authorized to draw on or give instructions
with respect to such accounts or deposits, or to have access thereto, and the
names and addresses of all persons, if any, holding a power-of-attorney on
behalf of CXC. All cash in such accounts is held in demand deposits and is not
subject to any restriction or limitation as to withdrawal.
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2.22 Brokers or Finders. With the exception of the Olmstead Group,
L.L.C. (the "OLMSTEAD GROUP") on terms disclosed to HPI, CXC has not dealt with
any broker or finder in connection with the transactions contemplated by this
Agreement. CXC has not incurred, and shall not incur, directly or indirectly,
any liability for any brokerage or finders' fees or agents' commissions or any
similar charges in connection with this Agreement or any transaction
contemplated hereby.
2.23 Certain Advances. There are no receivables of CXC owing from
directors, officers, employees, consultants, advisors or stockholders of CXC, or
owing by any affiliate of any director, officer or stockholder of CXC.
2.24 Related Parties. To the knowledge of the CXC Majority Stockholders
after due inquiry, no officer, director, employee or securityholder of CXC, or
any affiliate of any such person, has, either directly or indirectly, (a) an
interest in any corporation, partnership, firm or other person or entity which
competes, or which potentially will compete, directly or indirectly, with CXC,
provided that the foregoing shall not apply to securities of other companies
held by holders of CXC Warrants or their affiliates, or (b) a beneficial
interest in any contract or agreement to which CXC is a party or by which CXC
may be bound. For purposes of this Section 2.24, there shall be disregarded any
interest which arose solely from the ownership of less than a one percent (1%)
equity interest in a corporation whose stock is regularly traded on any national
securities exchange or in the over-the-counter market.
2.25 Employees and Union Activities. CXC has complied in all material
respects with all applicable state and federal laws related to employment. None
of CXC's employees are represented by any union or are parties to any collective
bargaining arrangement, and no attempts are being made to organize or unionize
any of such employees.
2.26 ERISA.
(a) Attached hereto as SCHEDULE 2.26 is a list of each
"employee benefit plan," as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and all other plans,
agreements, or arrangements involving direct or indirect compensation (including
any employment agreements entered into between CXC and any employee of CXC, but
excluding worker's compensation, unemployment compensation and other
government-mandated programs) currently or previously maintained, contributed to
or entered into by CXC or any ERISA Affiliate (defined below) thereof for the
benefit of any employee or former employee of CXC under which CXC or any ERISA
Affiliate thereof has any present or future obligation or liability
(collectively, the "EMPLOYEE PLANS"). For purposes of this Section 2.26 "ERISA
Affiliate" shall mean any entity which is a member of (i) a "controlled group of
corporations," as defined in section 414(b) of the Code, (ii) a group of
entities under "common control," as defined in section 414(c) of the Code, (iii)
an "affiliated service group," as defined in section 414(m) of the Code, or (iv)
a group of entities aggregated under treasury regulations promulgated under
section 414(o) of the Code, any of which includes CXC. Copies of all Employee
Plans (and, if applicable, related trust agreements), all amendments thereto and
all material written interpretations thereof, including (without limitation)
summary plan descriptions, have been provided to HPI, together with (x) the most
recent annual
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report (Form 5500), including if applicable, Schedule B thereto prepared in
connection with any such Employee Plan and (y) the most recent actuarial
valuation prepared in connection with any such Employee Plan. SCHEDULE 2.26
attached hereto expressly identifies which of CXC's Employee Plans, individually
or collectively, constitute an "employee pension benefit plan," as defined in
section 3(2) of ERISA (collectively, the "PENSION PLANS").
(b) No Pension Plan is subject to Title IV of ERISA, Part 3 of
Subtitle B of Title I of ERISA or Section 412 of the Code. No Pension Plan
constitutes or has since the enactment of ERISA constituted a "multiemployer
plan," as defined in Section 3(37) of ERISA. No "prohibited transaction," as
defined in Section 406 of ERISA or Section 4975 of the Code, excluding
transactions effected pursuant to a statutory or administrative exemption, has
occurred with respect to any Employee Plan which is covered by Title I of ERISA
which would make CXC or any officer or director thereof subject to any liability
under Title I of ERISA or liable for any tax pursuant to Section 4975 of the
Code.
(c) Each Pension Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, except to the extent that the requirements for
qualification may be satisfied by adopting retroactive amendments under Section
401(b) of the Code and the regulations thereunder or under section 1140 of the
Tax Reform Act of 1986, and each trust forming a part of each such Pension Plan
is exempt from tax pursuant to Section 501(a) of the Code. CXC has provided to
HPI copies of the most recent Internal Revenue Service determination letters
with respect to each such Pension Plan. Each Pension Plan has been maintained in
compliance with its terms and with the applicable requirements of ERISA and the
Code.
(d) To the extent not specifically referenced on another
schedule attached hereto, SCHEDULE 2.26 attached hereto includes a list and
description of each employment, severance or other similar contract, arrangement
or policy and each plan, agreement, policy or arrangement (written or oral)
providing for insurance coverage (including any self-insured arrangements),
vacation benefits, severance benefits, disability benefits, early retirement
benefits, death benefits, hospitalization benefits, retirement benefits,
deferred compensation, profit-sharing, bonuses, stock options, stock purchase,
phantom stock, stock appreciation or other forms of compensation or
post-retirement benefits which (i) is not an Employee Plan, (ii) is entered
into, maintained or contributed to, as the case may be, by CXC and (iii) covers
any employee or former employee of CXC. Such contracts, plans and arrangements
as are described in this Section 2.26(d) are herein referred to collectively as
the "Benefit Arrangements." Each Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed by
any and all statutes, orders, rules and regulations which are applicable to such
Benefit Arrangements, and HPI has been provided with a copy of each such Benefit
Arrangement.
(e) There has been no amendment to, written interpretation or
announcement (whether or not written) by CXC relating to, or change in employee
participation or coverage under, any Employee Plan or Benefit Arrangement which
would increase materially the expense of maintaining such Employee Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the four-month period ended April 30, 1996.
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(f) CXC has materially complied with the requirements of
section 4980B of the Code with respect to any "qualifying event" (as defined in
section 4980B(f)(3) of the Code) occurring prior to and including the Closing
Date, and no tax payable on account of Section 4980B of the Code has been
incurred with respect to any current or former employee of CXC.
(g) CXC is not a party to any contract, instrument, agreement
or arrangement with a "disqualified individual" (as defined in Section 280G(c)
of the Code) that could result in a disallowance of the deduction for any
"excess parachute payment" (as defined in Section 280G(b)(i) of the Code) or
subject any such disqualified individual to the excise tax imposed under Section
4999 of the Code.
(h) Each Employee Plan or Benefit Arrangement complies in all
material respects with all applicable requirements of (i) the Age Discrimination
in Employment Act of 1967, as amended, and the regulations thereunder, and (ii)
Title VII of the Civil Rights Act of 1964, as amended, and the regulations
thereunder.
(i) There is no pending or threatened claim or litigation
relating to any Employee Plan or Benefit Arrangement.
2.27 Underlying Documents. All documents which have been provided by
CXC to HPI are true, correct and complete copies, and there are no amendments or
modifications thereto that have not also been disclosed and provided to HPI.
2.28 Full Disclosure.
(a) Information. Any information furnished by or on behalf of
CXC to HPI (including without limitation all information and financial data
pertaining to CXC) does not and will not contain any untrue statement of a
material fact and does not and will not omit to state any material fact
necessary to make any statement, in light of the circumstances under which such
statement is made, not misleading.
(b) Collaboration Agreements/Proprietary Rights. Without
limiting the generality of the foregoing clause (a), CXC has provided and/or
disclosed to HPI (in the person of Bernard D. King or Terence E. McMorrow) all
information, analyses and materials (whether of CXC or its officers or
employees, any third party or its officers or employees or any consultant,
advisor, government representative or official) with respect to (i) the
collaborations of CXC with third parties and (ii) the Proprietary Rights
(including, without limitation, with respect to the patentability,
copyrightability or other similar protection with respect thereto, as
applicable, and any potential or actual infringement with the rights of any
third parties).
2.29 Proxy Statement and Other Information. On the date CXC mails to
the CXC stockholders its proxy material and disclosure documents relating to the
Merger (collectively, the "MERGER PROXY STATEMENT") and on the date CXC's
stockholders' meeting is held (or a vote on the Merger by CXC's stockholders
otherwise takes place), and on the Effective Time, CXC's Merger Proxy Statement
will contain all material statements concerning CXC which are required to be set
forth therein in accordance with any applicable federal or state securities or
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corporate laws; and at such respective times, the Merger Proxy Statement will
not include any untrue statement of a material fact concerning CXC or omit to
state any material fact concerning CXC required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made.
2.30 CXC Affiliates. SCHEDULE 2.30 attached hereto includes a list of
each person who, as of the date hereof, may be deemed to be an "affiliate" of
CXC as that term is used in Rule 145 under the Securities Act of 1933, as
amended (the "1933 ACT"), and the rules and regulations thereunder and who will
become a beneficial owner of HPI Common Stock pursuant to the Merger (the "CXC
AFFILIATES").
2.31 Discussions. SCHEDULE 2.31 attached hereto includes a list of each
Discussion (as defined in Section 4.3(b) below) as of the date hereof.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF
HPI AND ACQUISITION CORPORATION
Except as otherwise set forth in SCHEDULE 3 (the "HPI DISCLOSURE
SCHEDULE") delivered to CXC prior to the execution of this Agreement and
attached hereto (it being agreed that any item set forth in the HPI Disclosure
Schedule having relevance to more than one of the following sections of this
Article 3 shall be recited in full or cross-referenced in each applicable
section of the HPI Disclosure Schedule), each of HPI and Acquisition Corporation
represent and warrant to CXC as follows:
3.1 Organization. Each of HPI and Acquisition Corporation (a) is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, (b) is duly qualified to do business and is in
good standing in each jurisdiction in which it owns or leases property or
conducts business, except where the failure to be so qualified would not have a
material adverse effect on the business of HPI, (c) has all requisite power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted, and (d) possesses all licenses, franchises, rights and
privileges material to the conduct of its respective business.
3.2 Authority.
(a) HPI and Acquisition Corporation have all requisite
corporate power and authority to enter into this Agreement and the related
agreements contemplated herein, and, subject to satisfaction of the conditions
set forth herein, to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the related agreements
contemplated hereby and thereby and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of HPI and Acquisition Corporation. This Agreement
and the related agreements contemplated hereby and thereby have been duly
executed and delivered by HPI and
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Acquisition Corporation and constitute valid and binding obligations of HPI and
Acquisition Corporation, enforceable in accordance with their terms, subject to
the effect of applicable bankruptcy, insolvency, reorganization, moratorium or
other similar federal or state laws affecting the rights of creditors and the
effect or availability of rules of law governing specific performance,
injunctive relief or other equitable remedies (regardless of whether any such
remedy is considered in a proceeding at law or in equity). Provided the
conditions set forth in Article 5 are satisfied, the execution and delivery of
this Agreement, and the related agreements contemplated hereby do not, and the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit, or result in
the creation of any lien, encumbrance or restriction in favor of any third party
upon any of the assets or properties of HPI, under (a) any provision of the
Certificate of Incorporation or Bylaws of HPI, (b) any provision of the Articles
of Incorporation or Bylaws of Acquisition Corporation or (c) any agreement or
instrument, permit, license, judgment, order, statute, law, ordinance, rule or
regulation applicable to HPI or Acquisition Corporation or their respective
properties or assets, other than any such conflicts, violations, defaults,
terminations, cancelations or accelerations which individually or in the
aggregate would not have a material adverse effect on HPI.
(b) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity or other
person is required by or with respect to HPI or Acquisition Corporation in
connection with the execution and delivery of this Agreement, or the related
agreements contemplated hereby by HPI and Acquisition Corporation or the
consummation by HPI and Acquisition Corporation of the transactions contemplated
hereby, except for (a) the filing of the Delaware Certificate of Merger with the
Delaware Secretary of State, (b) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable federal or state securities laws (including, without limitation, the
filing of a Form D with the SEC - with reference to Section 4.9 below) and (c)
such other consents, authorizations, filings, approvals and registrations which
if not obtained or made would not have a material adverse effect on HPI.
3.3 Capital Structure. The authorized capital stock of HPI consists of
40,000,000 shares of HPI Common Stock and 5,000,000 shares of preferred stock,
$.001 par value ("HPI PREFERRED STOCK"). At the close of business on May 31,
1996: (a) approximately 13,141,544 shares of HPI Common Stock were issued and
outstanding; (b) up to approximately 1,860,465 shares of HPI Common Stock were
reserved (or available) for issuance upon the exercise of options granted (or
available for grant) by HPI under its 1992, 1995 or 1996 Stock Plans ("HPI
OPTIONS"); and (c) up to approximately 100,000 shares of HPI Common Stock were
reserved for issuance under the HPI Employee Stock Purchase Plan. No shares of
HPI Preferred Stock are outstanding.
3.4 SEC Documents. HPI has furnished, or made available to CXC, true,
correct and complete copies of HPI's prospectus dated March 29, 1996 and HPI's
Form 10-Q for the quarter ended March 31, 1996 (the "HPI SEC DOCUMENTS"). As of
their respective dates, each HPI SEC Document complied in all material respects
with the applicable requirements of the Securities Exchange Act of 1934, as
amended (the "1934 ACT"), or the 1933 Act, and none of
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the HPI SEC Documents, as of their respective dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
3.5 Shares of Common Stock. The shares of HPI Common Stock to be issued
and delivered to the CXC securityholders as of the Effective Time (the "CXC
SECURITYHOLDERS") in accordance with this Agreement, when so issued and
delivered, will (a) be duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, HPI's
Certificate of Incorporation or Bylaws or any agreement to which HPI is a party,
and (b) based in part upon the representations of the CXC Securityholders and
the covenants of CXC, be issued in compliance with all applicable federal and
state securities laws.
ARTICLE 4
ADDITIONAL AGREEMENTS
4.1 Legal Conditions to the Merger. Each party will take all reasonable
actions (a) necessary to comply promptly with all legal requirements which may
be imposed on such party with respect to the Merger and will promptly cooperate
with and furnish information to the other parties hereto in connection with any
such requirements imposed upon the other parties in connection with the Merger
and (b) to obtain (and to cooperate with the other parties, if any, in
obtaining) any consent, authorization, order or approval of, or any exemption
by, any governmental authority, or other third party, required to be obtained or
made by such party, if any (or by the other parties), in connection with the
Merger or the taking of any action contemplated thereby or by this Agreement.
4.2 CXC Stockholders' Approval.
(a) CXC agrees to use its best efforts promptly to (i) submit
this Agreement and any related matters to its stockholders for approval, by
means of the Merger Proxy Statement, all as provided by law and the CXC Charter
and Bylaws, at a meeting which will be held as soon as practicable after the
date of this Agreement and (ii) obtain the approval of all CXC stockholders to
the Merger as contemplated herein. The Merger Proxy Statement shall include,
without limitation, an opinion of counsel to CXC, in form and substance
reasonably satisfactory to HPI and its counsel, to the effect that (i) the
Merger will constitute a reorganization within the meaning of Section 368(a) of
the Code, (ii) each of HPI and CXC is a party to the reorganization within the
meaning of Section 368(b) of the Code and (iii) neither HPI nor CXC will
recognize any income, gain or loss as a result of the Merger.
(b) Each of the CXC Majority Stockholders agrees to approve
the Merger as contemplated herein, and CXC agrees to solicit such approval from
all other CXC stockholders.
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(c) The Corporate Parties and their counsel will promptly
prepare the Merger Proxy Statement. Each Corporate Party shall take all
commercially reasonable actions to provide appropriate information regarding
such Corporate Party and the transactions contemplated hereby for inclusion in
the Merger Proxy Statement.
4.3 Interim Operations of CXC.
(a) CXC covenants and agrees that, prior to the Effective Time
(unless HPI shall otherwise agree in writing):
(i) Its business shall be conducted only in the
ordinary and usual course and, to the extent consistent therewith, it
shall use its best efforts to preserve its business organization intact
and maintain its existing relations with customers, suppliers,
employees and business associates.
(ii) It shall not (A) create any subsidiaries; (B)
amend its charter or by-laws; (C) split, combine or reclassify its
capital stock; or (D) declare, set aside or pay any dividend payable in
cash, stock or property with respect to its capital stock.
(iii) It shall not (A) issue, sell, pledge, dispose
of or encumber any shares of, or securities convertible or exchangeable
for, or options, warrants, calls, commitments or rights of any kind to
acquire any shares of, its capital stock of any class or any other
property or assets other than shares issuable upon the exercise of
outstanding options, warrants or rights as expressly identified above
(in Section 2.2); (B) transfer, lease, license, guarantee, sell,
mortgage, pledge, dispose of or encumber any assets or properties
(including, without limitation, any Proprietary Rights); (C) incur or
modify any indebtedness or other liability other than in the ordinary
and usual course of business; (D) acquire, directly or indirectly by
redemption or otherwise, any shares of its capital stock; or (E)
authorize capital expenditures in excess of $2,500.00 or make any
acquisition of, or investment in, assets or stock of any other person
or entity.
(iv) It shall not commit to or effect any licensing
arrangement (inbound or outbound), corporate partnering or
collaboration agreement, research and development agreement or any
similar agreement or arrangement with any third party.
(v) It shall not grant any severance or termination
pay to, or enter into any employment or severance agreement with, any
director, officer or other employee; and it shall not establish, adopt,
enter into, make any new grants or awards under or amend any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, employee stock ownership,
deferred compensation, employment, termination, severance or other
plan, agreement, trust, fund, policy or arrangement for the benefit of
any director, officer or employee.
(vi) It shall not settle or compromise any material
claims or litigation or modify, amend or terminate any of its contracts
or agreements or waive, release or assign any material rights or
claims.
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(vii) It shall not make any tax election or permit
any insurance policy naming it as a beneficiary or a loss payable payee
to be canceled or terminated.
(viii) It shall not authorize or enter into any
agreement or arrangement to do any of the foregoing, or, except as
expressly permitted pursuant to the provisions of Section 4.3(b) below,
negotiate, hold discussions with respect to, or otherwise take any
actions regarding any of the foregoing.
(b) On or prior to the date hereof, CXC shall advise HPI
regarding all negotiations or discussions with any third party regarding any
activity contemplated by Section 4.3(a) above (collectively, the "DISCUSSIONS").
In HPI's sole discretion, HPI may notify CXC in writing to continue any such
Discussions on terms approved by HPI (in its sole discretion). In the absence of
such written notice, CXC shall immediately terminate and thereafter refrain from
further such Discussions, and CXC shall promptly advise any interested third
parties accordingly.
4.4 Access. Upon reasonable notice, CXC shall afford the officers,
employees, counsel, accountants and other authorized representatives
(collectively, "REPRESENTATIVES") of HPI access, during normal business hours
throughout the period prior to the Effective Time, to its properties, books,
contracts, agreements and records and, during such period, CXC shall furnish
promptly to HPI all information concerning its business, properties and
personnel as HPI or its Representatives may reasonably request. Without limiting
the foregoing, CXC shall prepare and provide HPI with monthly (unaudited)
financial statements promptly following the end of each calendar month from and
after the date of this Agreement.
4.5 Good Faith. Each party shall act in good faith (a) in an attempt to
cause to be satisfied all the conditions precedent to its obligations and those
of the other parties to this Agreement over which it has control or influence
and (b) take all reasonable action within its capability necessary to render
accurate as of the Effective Time its representations and warranties contained
in this Agreement.
4.6 State Statutes. If any state takeover law shall become applicable
to the transactions contemplated by this Agreement, HPI and its Board of
Directors or CXC and its Board of Directors, as the case may be, shall use their
reasonable efforts to obtain such approvals and take such actions as are
necessary so that the transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated by this
Agreement and otherwise to minimize the effects of such state takeover law on
the transactions contemplated by this Agreement.
4.7 Update to Disclosures. Without limiting a party's right to rely on
the representations and warranties of the other party(ies) as of the date of
this Agreement, each party shall provide updates to the disclosures provided or
made available hereunder as to material facts which arise between the date of
this Agreement and the Closing Date and which, if they had occurred prior to the
date of this Agreement, would have been required to have been disclosed in order
to make the representations and warranties contained in Article 2 or 3, as the
case may be, true and correct as of the date of this Agreement.
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4.8 No Solicitation. Unless and until this Agreement shall have been
terminated pursuant to Article 7 hereof, neither CXC nor any of its officers,
directors or affiliates nor any of the CXC Majority Stockholders shall (a)
initiate contact with, solicit or encourage any inquiry or proposal by or (b)
enter into discussions with, or disclose, directly or indirectly, any
information not customarily disclosed to the public concerning the business and
properties of CXC to, or afford access to the properties, books or records of
CXC to, any corporation, partnership, person or other entity or group in
connection with any possible proposal (an "ACQUISITION PROPOSAL") regarding a
sale of CXC's capital stock or a merger, consolidation, sale of all or a
substantial portion of the assets of CXC or any similar transaction. CXC will
notify HPI promptly if any discussions or negotiations are sought to be
initiated, any inquiry or proposal is made, or any such information is
requested, with respect to an Acquisition Proposal or potential Acquisition
Proposal or if any Acquisition Proposal is received or indicated to be
forthcoming.
4.9 Exempt Transaction. Each party shall take all actions necessary or
advisable for the issuances of shares of HPI Common Stock in connection with the
Merger to qualify as a transaction exempt from the registration provisions of
Section 5 of the 1933 Act pursuant to Rule 506 of Regulation D promulgated
thereunder ("REGULATION D"). In connection with the distribution of the Merger
Proxy Statement, CXC agrees to cause each CXC Securityholder (including, without
limitation, the holders of CXC Warrants and CXC Options) to complete (i) a
Prospective Investor Questionnaire in the form attached hereto as EXHIBIT D-1 (a
"QUESTIONNAIRE") and (ii) an investment representation letter in the form
attached hereto as EXHIBIT D-2 (a "REPRESENTATION LETTER"). To the extent that
any Corporate Party or counsel for any Corporate Party reasonably determines
that a holder of CXC Common Stock is not sophisticated for purposes of Rule 506
of Regulation D, CXC agrees that it shall retain a "PURCHASER REPRESENTATIVE"
(as defined in Rule 501 of Regulation D) to assist such holder(s) in evaluating
the Merger Proxy Statement and the investment decision represented by this
Agreement and the transactions contemplated hereby (including, without
limitation, the Merger).
4.10 Registration Rights. The former stockholders of CXC receiving
Current Shares and Future Shares in connection with the Merger shall have such
registration rights with respect thereto as are set forth on SCHEDULE 5 attached
hereto; provided, however, that such stockholders shall agree to be bound by the
provisions of such SCHEDULE 5 as a condition precedent to the enjoyment of any
such rights and, at the request of HPI, any such stockholder shall execute a
specific acknowledgement and agreement to be so bound (or else such stockholder
shall be deemed to have forfeited such rights).
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ARTICLE 5
CONDITIONS PRECEDENT
5.1 Conditions to Obligations of HPI, Acquisition Corporation and CXC
to Effect the Merger. The obligations of HPI, Acquisition Corporation and CXC to
effect the Merger shall be subject to the satisfaction on or prior to the
Closing Date of the following conditions unless waived by HPI, Acquisition
Corporation and CXC:
(a) Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the Merger shall have been issued by any federal or state court and remain in
effect, and no litigation seeking the issuance of such an order or injunction
shall be pending which, in the good faith judgment of CXC or HPI, has a
reasonable probability of resulting in such order, injunction or damages. In the
event any such order or injunction shall have been issued, each party agrees to
use its reasonable efforts to have any such injunction lifted.
(b) Statutes. No statute, rule or regulation shall have been
enacted by any Governmental Entity which would (i) make the consummation of the
Merger illegal, (ii) prohibit HPI's or Surviving Corporation's ownership or
operation of all or a material portion of the business or assets of CXC, or
compel HPI or Surviving Corporation to dispose of or hold separate all or a
material portion of the business or assets of CXC, as a result of the Merger, or
(iii) render HPI, CXC or Acquisition Corporation unable to consummate the
Merger, except for any waiting period provisions.
(c) Escrow Agreement. All parties to the Escrow Agreement
(including, without limitation, the Escrow Agent) shall have executed and
mutually delivered the Escrow Agreement.
(d) Certificate of Merger. The Delaware Certificate of Merger
shall be fully executed and in the possession of HPI's agent for filing in
Delaware promptly following the Closing.
5.2 Conditions to Obligations of HPI and Acquisition Corporation. The
obligations of HPI and Acquisition Corporation to effect the Merger are subject
to the satisfaction on or prior to the Closing Date of the following additional
conditions, unless waived by HPI:
(a) Representations and Warranties. The representations and
warranties of CXC and the CXC Majority Stockholders set forth in this Agreement
shall be true, correct and complete in all respects as of the Closing Date,
except as otherwise specified by this Agreement, and HPI shall have received a
certificate or certificates to such effect signed by (i) the Chief Executive
Officer, the President and the Secretary of CXC (the "CXC OFFICERS") and (ii)
each of the CXC Majority Stockholders.
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(b) Performance of Obligations of CXC. CXC shall have
performed in all respects all obligations required to be performed by it under
this Agreement prior to the Closing Date, and HPI shall have received a
certificate to such effect signed by the CXC Officers.
(c) Stockholder Approval. This Agreement shall have been
approved and adopted by the required affirmative vote of the holders of the
outstanding shares of CXC Common Stock.
(d) Employment and Consulting Agreements. Katie A. Thompson
shall have executed and delivered to HPI the Employment Agreement in the form
attached hereto as EXHIBIT E-1. Michael C. Dickman shall have executed and
delivered to HPI the Consulting Agreement in the form attached hereto as EXHIBIT
E-2.
(e) CXC Options.
(i) No Acceleration. Neither the Merger nor any of
the other transactions contemplated by this Agreement shall cause or be
deemed to constitute an acceleration event for, or otherwise cause the
immediate or modified vesting of, any CXC Option. Insofar as any such
rights may have existed or be in existence prior to the Closing, CXC
shall provide to HPI, in advance of the Closing, reasonable evidence of
the termination of such rights.
(ii) Substitute Options. Each holder of a CXC Option
shall have executed (A) a release regarding any and all rights with
respect thereto and (B) an acknowledgement of receipt, to be effective
promptly following the Effective Time, of a Substitute HPI Option
pursuant to SCHEDULE 4 attached hereto.
(f) Questionnaires and Representation Letters. HPI shall have
received a copy of a Questionnaire and a Representation Letter, each completed
to the reasonable satisfaction of HPI and its counsel, from each holder of CXC
Securities.
(g) Government Approvals. All authorizations, consents, orders
or approvals of, or declarations or filings with, or expiration of waiting
periods imposed by, any governmental authority necessary for the consummation of
the transactions contemplated by this Agreement including any such requirements
under applicable federal or state securities laws shall have been filed,
occurred or been obtained, other than filings with and approvals by governments
relating to the Merger if failure to make such filings or obtain such approvals
would not be materially adverse to HPI.
(h) Third-Party Approvals. Any and all notices to or consents
or approvals required from third parties in order to consummate the transactions
contemplated herein relating to contracts, agreements, licenses, leases and
other instruments material to the business of CXC shall have been given or
obtained, as the case may be.
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(i) Opinions of CXC's Counsel.
(i) Corporate Opinion. HPI shall have received the
legal opinion of corporate counsel to CXC dated as of the Closing and
substantially in the form attached hereto as EXHIBIT F-1.
(ii) Patent Opinion. HPI shall have received the
legal opinion of intellectual property counsel to CXC, dated as of the
Closing, which shall, in HPI's discretion, be in substantially the form
attached hereto as EXHIBIT F-2 or in form and substance satisfactory to
HPI.
(j) Resignation of CXC Board. Except as otherwise contemplated
by Section 1.4(c), each director of CXC shall have submitted his or her
resignation to be effective as of the Effective Time.
(k) Absence of Dissenting CXC Shares. There shall be no
Dissenting CXC Shares.
(l) Affiliate Agreements. [Reserved]
(m) Pledge Agreements. Each CXC Majority Stockholder shall
have executed and delivered to HPI a pledge agreement in substantially the form
attached as EXHIBIT G hereto (a "PLEDGE AGREEMENT").
(n) Olmstead Group. The Olmstead Group shall have released any
and all rights that it may have with respect to its current arrangements with
CXC in exchange for a new arrangement between CXC and the Olmstead Group which
shall be acceptable to HPI in HPI's sole discretion.
(o) Diligence and Corporate Matters. The corporate matters and
affairs of CXC, and the results of any and all diligence inquiries by HPI and
its Representatives, shall be acceptable to HPI and its counsel in the sole
discretion of HPI; provided, however, that neither the provisions of this
paragraph nor any other provisions of this Agreement shall lessen HPI's ability
to rely upon the representations, warranties, covenants and agreements of CXC
and the CXC Majority Stockholders (which ability shall be absolute and
unfettered).
(p) CXC Warrants. All CXC Warrants shall have either been
exercised for no more than 297,359 shares of CXC Common Stock or been canceled
(with a related release of all associated rights by the holders thereof).
(q) Dillon Waiver. HPI shall have obtained a waiver from
Dillon, Read & Co., Inc. with respect to the issuances of HPI Common Stock
contemplated hereby if the Effective Time is on or before September 26, 1996.
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(r) BMS. BMS (as defined in SCHEDULE 1) shall have committed
in writing to provide HPI with reports as expressly contemplated by note (3) in
SCHEDULE 1 with respect to the achievement or non-achievement of Milestones.
5.3 Conditions to Obligations of CXC. The obligations of CXC to effect
the Merger are subject to the satisfaction on or prior to the Closing Date of
the following additional conditions unless waived by CXC:
(a) Representations and Warranties. The representations and
warranties of HPI and Acquisition Corporation set forth in this Agreement shall
be true, correct and complete in all respects as of the Closing Date, except as
otherwise contemplated herein or therein, and CXC shall have received a
certificate signed by the Chief Executive Officer or Chief Financial Officer of
HPI (an "HPI OFFICER") to such effect.
(b) Performance of Obligations of HPI and Acquisition
Corporation. HPI and Acquisition Corporation shall have performed in all
respects all obligations required to be performed by them under this Agreement
prior to the Closing Date, and CXC shall have received a certificate signed by
an HPI Officer to such effect.
(c) Opinion of HPI's Counsel. CXC shall have received the
legal opinion of counsel to HPI dated as of the Closing and substantially in the
form attached hereto as EXHIBIT F-3.
(d) Trading. There shall not have occurred and be in effect at
the Effective Time any suspension in trading of shares of HPI on the Nasdaq
National Market.
ARTICLE 6
OFFSET/INDEMNIFICATION
6.1 Offset.
(a) Offset Right. HPI and its successors and assigns shall be
entitled to recover (the "OFFSET RIGHT") against the pool of potential shares of
HPI Common Stock represented by the Potential Earn-Out Shares (comprised at any
given time of the unreleased Escrow Shares, if any, and the Future Shares -
collectively, the "OFFSET SHARES") any and all losses, liabilities, taxes,
claims, suits, proceedings, demands, judgments, damages, expenses and costs,
including, without limitation, reasonable counsel fees, costs and expenses
incurred in the investigation, defense or settlement of any claims
(collectively, "DAMAGES"), which HPI may suffer or incur (including, without
limitation, as a result of a decrease in or adverse effect upon the value of its
investment or ownership interest in CXC) to the extent of and by reason of the
inaccuracy or breach of any of the representations, warranties, covenants or
agreements of CXC contained in this Agreement or any documents, certificates or
agreements delivered pursuant hereto.
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(b) Olmstead Group. Without in any way limiting the nature or
breadth of either the Offset Right or the concept of Damages, in the event that
HPI and/or CXC shall be required to pay any compensation, fees or expenses to
the Olmstead Group (including, without limitation, amounts paid in settlement),
the aggregate amount of such payment(s), plus any Damages which HPI may suffer
or incur with respect thereto, shall constitute Damages with respect to which
HPI may exercise the Offset Right (or, if the Offset Right shall be unavailable,
with respect to which HPI shall be entitled to CXC Majority Stockholder
Indemnification (as defined below)).
(c) No Limit on Exercise. In order to exercise the Offset
Right, HPI shall not be required to (i) proceed against any person or entity
including any CXC Securityholder, (ii) proceed against or exhaust any collateral
or security or any part thereof or (iii) pursue any other remedy in its power,
and CXC waives any defense arising by reason of any inability of any other
obligor to pay or any defense based on bankruptcy or insolvency or other similar
limitations on creditors' remedies with respect to any other person.
6.2 Claims Upon Offset Shares.
(a) Exercise of Right. To exercise the Offset Right, HPI shall
deliver to any spokesperson for the CXC Securityholders (each a "SPOKESPERSON")
a certificate signed by an HPI Officer (an "OFFICER'S CERTIFICATE"):
(i) stating that HPI has incurred, paid, properly
accrued or otherwise suffered Damages in an aggregate stated amount
with respect to which HPI is entitled to recover pursuant to the Offset
Right; and
(ii) specifying in reasonable detail the individual
items of Damages included in the amount so stated and the nature of the
misrepresentation, breach of warranty or claim to which such item is
related.
(b) Value of Shares. For the purposes of the Offset Right,
each share of HPI Common Stock (or right to acquire a share of HPI Common Stock)
constituting a portion of the Offset Shares shall be valued at an amount equal
to the average closing price per share of HPI Common Stock on the Nasdaq
National Market for the twenty (20) trading days preceding the date Damages are
fixed. In the absence of a dispute regarding the amount of Damages, the date
Damages are deemed fixed for purposes of the Offset Right shall be the date of
the related Officer's Certificate.
6.3 Objections to Claims. For a period of ten (10) days following the
time of delivery of an Officer's Certificate to a Spokesperson, no exercise of
the Offset Right for the Damages referenced in such Officer's Certificate shall
be deemed to occur unless HPI receives written authorization from a
Spokesperson. After the expiration of such ten (10) day period, the Offset Right
shall be deemed perfected, and the Potential Earn-Out Shares shall be reduced
accordingly (which shall have the effect in the Milestones (as defined in
SCHEDULE 1) as set forth in SCHEDULE 1), unless (a) any Spokesperson shall
object in a written statement delivered to HPI to the claims made in the
Officer's Certificate and (b) such statement shall
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have been delivered to HPI prior to the expiration of such ten (10) day period.
In addition to having the effect described in SCHEDULE 1, implementation of the
Offset Right shall serve first to reduce the number of available Future Shares
and thereafter, if applicable, the number of Escrow Shares (with any such Escrow
Shares to be released from the Escrow Account to HPI for return to the status of
authorized but unissued shares).
6.4 Spokespersons. Initially, each of the CXC Majority Stockholders,
except for Donna C. Leach, shall each be a Spokesperson; however, a successor to
any or all Spokespersons may be chosen by CXC Securityholders holding at least
90% of the then present percentage interests in the Offset Shares.
6.5 Resolution of Conflicts. If a Spokesperson shall object in writing
to an exercise of the Offset Right by HPI in respect of any claim or claims made
in any Officer's Certificate, such Spokesperson and HPI shall attempt in good
faith to agree upon the rights of the respective parties with respect to each of
such claims within sixty (60) days after objection by the Spokesperson. If the
Spokesperson and HPI should so agree on a claim, a memorandum setting forth such
agreement shall be prepared and signed by both parties.
6.6 Spokespersons; Powers of Attorney.
(a) Attorney-in-Fact. Each Spokesperson shall be deemed to be
appointed and constituted agent and attorney-in-fact by each CXC Securityholder
who does not exercise dissenter's rights in respect of the Merger, for and on
behalf of such CXC Securityholder, to do the following: (i) to execute the
Escrow Agreement; (ii) to give and receive notices and communications; (iii) to
authorize recovery by HPI against the Offset Shares in satisfaction of claims by
HPI (whether against Escrow Shares or Future Shares); (iv) to object to such
recovery; (v) to agree to, negotiate, enter into settlements and compromises of,
and comply with orders of courts and awards of arbitrators with respect to
claims by HPI; (vi) to modify the Milestones or the methods or protocols by
which Milestones are deemed to be achieved; (vii) to waive or settle any and all
rights of CXC Securityholders with respect to the achievement of Milestones
and/or the issuance or delivery of Potential Earn-Out Shares (whether from
Escrow Shares or Future Shares); (viii) to participate in Dispute Resolution (as
defined in SCHEDULE 1) and to resolve, with full authority to settle in any
manner, any Dispute (as defined in SCHEDULE 1); and (ix) to take all actions
necessary or appropriate in the judgment of any Spokesperson for the
accomplishment of the foregoing. Any Spokesperson may resign upon thirty (30)
days' notice to the Corporate Parties. Any Spokesperson may be replaced by the
CXC Securityholders from time to time upon not less than five (5) days' prior
written notice to HPI; provided, however, that a Spokesperson may not be
replaced unless holders of at least 90% of the then present percentage interests
in the Offset Shares agree to such replacement. No bond shall be required of the
Spokespersons, and the Spokespersons shall receive no compensation for their
services. Notice or communications to or from any Spokesperson shall constitute
notice to or from each of the CXC Securityholders.
(b) No Liability. Spokespersons shall not be personally liable
for their service in such capacity to HPI, the Surviving Corporation or the CXC
Securityholders for any act done or omitted hereunder as a Spokesperson while
acting in good faith. The CXC
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Securityholders shall jointly and severally indemnify the Spokespersons and hold
the Spokespersons harmless against any loss, liability or expense incurred
without bad faith on the part of any Spokesperson and arising out of or in
connection with the acceptance or administration of such Spokesperson's duties
hereunder.
6.7 Actions of Spokespersons. A decision, act, consent or instruction
of any Spokesperson shall constitute a decision of all the CXC Securityholders,
and shall be final binding and conclusive upon each of the CXC Securityholders,
and the Escrow Agent and HPI may rely upon any decision, act, consent or
instruction of any Spokesperson as being the decision, act, consent or
instruction of each and all of the CXC Securityholders. The Escrow Agent and HPI
are hereby relieved from any liability to any person for any acts done by them
in accordance with such decision, act, consent or instruction of any
Spokesperson. Although the Spokespersons shall not be obligated to obtain
instructions from the CXC Securityholders prior to any decision, act, consent or
instruction, if, and to the extent that, a Spokesperson receives any written
instructions from the holders of at least 90% of the then present percentage
interests in the Offset Shares, the Spokesperson shall comply with such
instructions and such instruction shall be binding as if unanimously given by
all CXC Securityholders.
6.8 Indemnification by CXC Majority Stockholders.
(a) From and after the Closing Date, each CXC Majority
Stockholder shall jointly and severally indemnify and hold harmless HPI and its
successors and assigns ("CXC MAJORITY STOCKHOLDER INDEMNIFICATION") against and
in respect of any and all Damages which HPI may suffer or incur (including,
without limitation, as a result of a decrease in or adverse effect upon the
value of its investment or ownership interest in CXC) to the extent of and by
reason of the inaccuracy or breach of any of the representations, warranties,
covenants or agreements of any CXC Majority Stockholder contained in this
Agreement or any documents, certificates or agreements delivered pursuant
hereto; provided, however, that:
(x) CXC Majority Stockholder Indemnification shall
not be available if and to the extent HPI has successfully exercised
its Offset Right with respect to the subject Damages; and
(y) the obligation represented by CXC Majority
Stockholder Indemnification shall, with respect to each CXC Majority
Stockholder, be non-recourse except with respect to all shares of HPI
Common Stock which are issued or issuable to such CXC Majority
Stockholder in connection with the Merger (the "SUBJECT SHARES").
(b) To provide security (and recourse) for the obligations
represented by the CXC Majority Stockholder Indemnification, each CXC Majority
Stockholder shall, effective as of the Closing, pledge his or her Subject Shares
to HPI pursuant to the terms of a Pledge Agreement; provided, however, that
certain amounts of the Subject Shares of the CXC Majority Stockholders other
than Mr. Robert E. Leach shall not be subject to such pledge and/or shall be
released from such pledge pursuant to the provisions of SCHEDULE 6 attached
hereto. Without limiting the obligations of the CXC Majority Stockholders
hereunder, each CXC Majority Stockholder hereby appoints HPI as his or her
attorney-in-fact with full power to take
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any and all actions (including the execution and delivery of documents)
necessary to implement and perfect such pledge.
(c) Within a reasonable period of time after which HPI becomes
aware of an event or circumstance for which it intends to seek CXC Majority
Stockholder Indemnification, HPI shall provide notice to each affected CXC
Majority Stockholder. Such notice shall include a summary of the event(s) or
circumstance(s) at issue. If a third party action is involved, the CXC Majority
Stockholders acknowledge and agree that, without an obligation to do so, HPI
shall have the absolute right to control the defense thereof with counsel
reasonably acceptable to HPI.
(d) Any claim by HPI for CXC Majority Stockholder
Indemnification shall be effective only if notice thereof is sent to the
affected CXC Majority Stockholder(s) (to the address(es) and by any method of
delivery specified in Section 8.3 below), on or before the date which is two
years after the Effective Time.
ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER
7.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval by the stockholders of CXC:
(a) By mutual written consent of HPI, Acquisition Corporation
and CXC;
(b) By HPI or Acquisition Corporation, if (i) there has been a
material breach of this Agreement on the part of CXC with respect to any of its
agreements, covenants, representations or warranties contained herein and such
breach has not been cured within five (5) business days after written notice
thereof from HPI or Acquisition Corporation or (ii) the Merger has not been
consummated on or before July 31, 1996 (and neither HPI nor Acquisition
Corporation is in breach of its obligations under this Agreement);
(c) By CXC, if (i) there has been a material breach of this
Agreement on the part of HPI or Acquisition Corporation with respect to any of
their agreements, covenants, representations or warranties contained herein and
such breach has not been cured within five (5) business days after written
notice thereof from CXC or (ii) the Merger has not been consummated on or before
September 30, 1996 (and CXC is not in breach of its obligations under this
Agreement); or
(d) By HPI, Acquisition Corporation or CXC if: (i) there shall
be a final nonappealable order of a federal or state court in effect preventing
consummation of the Merger; (ii) there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity which would make
consummation of the Merger illegal; or (iii) there shall be any action taken, or
any statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the
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Merger by any Governmental Entity, which would (A) prohibit HPI's or CXC's
ownership or operation of all or a material portion of the business of CXC, or
compel HPI or CXC to dispose of or hold separate all or a material portion of
the business or assets of CXC or HPI as a result of the Merger or (B) render
HPI, Acquisition Corporation or CXC unable to consummate the Merger.
7.2 Effect of Termination. In the event of termination of this
Agreement as provided above, this Agreement shall forthwith become void and
there shall be no liability on the part of either HPI, Acquisition Corporation
or CXC, except for liability arising out of the breach by a party hereto of any
of its representations, warranties, covenants or agreements set forth in this
Agreement.
7.3 Amendment/ Waiver. Except as provided in Section 6.6 above, this
Agreement may not be amended except by an instrument in writing signed on behalf
of all the parties hereto. At any time prior to the Effective Time, the parties
hereto may (a) mutually extend the time for the performance of any of the
obligations or other acts of the parties hereto, (b) waive any inaccuracies in
the representations and warranties by another party contained herein or in any
document delivered by such party pursuant hereto to and (c) waive compliance by
another party with any of the agreements or conditions contained herein. Any
agreement on the part of the parties hereto to any such extension or waiver
shall be valid only if set forth in a writing signed on behalf of the party to
be bound.
ARTICLE 8
GENERAL
8.1 Payment of Expenses. HPI, Acquisition Corporation and CXC shall
each pay its own fees and expenses incurred incident to the preparation and
carrying out of the transactions herein contemplated (including legal and
accounting expenses).
8.2 Survival. The representations, warranties, covenants and agreements
of the Corporate Parties and the CXC Majority Stockholders shall survive the
Merger and continue thereafter indefinitely.
8.3 Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the other shall be in writing and delivered
personally or sent by
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certified mail, postage prepaid, by courier service, or by telecopy with
confirmation copy sent by one of the above methods, as follows:
if to HPI:
Houghten Pharmaceuticals, Inc.
3550 General Atomics Court
San Diego, CA 92121
Attention: President
Fax: (619) 455-2544
with a copy to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, CA 94104
Attention: Thomas E. Sparks, Jr., Esq.
Fax: (415) 983-7396
if to CXC:
ChromaXome Corp.
11111 Flintkote Ave., Suite A
San Diego, CA 92121
Attention: President
Fax: (619) 453-5215
with a copy to:
Law Offices of J. Douglass Jennings, Jr.
9171 Towne Centre Drive, Suite 350
San Diego, CA 92122
Attention: Joseph W. Robinson, Esq.
Fax: (619) 457-0252
or if to any Spokesperson and/or CXC Majority Stockholder:
Robert E. Leach
14710 Caminito Porte Delgata
Del Mar, CA 92014
Donna C. Leach
14710 Caminito Porte Delgata
Del Mar, CA 92014
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Michael C. Dickman
12991 Caminito Bodega
Del Mar, CA 92014
Katie A. Thompson
12991 Caminito Bodega
Del Mar, CA 92014
or to such other persons as may be designated in writing by the parties, by a
notice given as aforesaid.
8.4 Headings/Gender/Plural. The headings of the several sections of
this Agreement are inserted for convenience of reference only and are not
intended to affect the meaning or interpretation of this Agreement. Any
reference to the masculine, feminine or neutral gender shall be deemed to
include any or all other genders as appropriate. Any reference to the singular
form of a word or phrase shall be deemed to include or mean the plural, if
appropriate, and vice versa.
8.5 Counterparts. This Agreement may be executed in counterparts, and
when so executed each counterpart shall be deemed to be an original, and said
counterparts together shall constitute one and the same instrument.
8.6 Binding Nature. This Agreement shall be binding upon and inure to
the benefit of the parties hereto. No party may assign or transfer any rights
under this Agreement.
8.7 Merger of Documents. This Agreement and all agreements and
documents contemplated hereby constitute one agreement and are interdependent
upon each other in all respects, and shall constitute the entire agreement
between the parties hereto with respect to the subject matter hereof and shall
supersede all previous negotiations, understandings, agreements, commitments and
writings with respect to such subject matter; provided, however, that (i) each
of that certain Loan and Option Agreement between HPI and CXC dated as of August
31, 1995 and the Shareholder Agreement shall remain in full force and effect and
shall not be modified by the provisions of this Agreement or the event of the
Merger and (ii) any promissory notes evidencing lending from HPI to CXC shall
remain in full force and effect and shall not be modified by the provisions of
this Agreement or the event of the Merger.
8.8 Incorporation. All Exhibits and Schedules attached hereto are by
this reference incorporated herein and made a part hereof for all purposes as if
fully set forth herein.
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8.9 Milestone Dispute Resolution. Dispute Resolution (as defined in
SCHEDULE 1) shall constitute the sole and exclusive method, means and procedure
to resolve any Dispute (as defined in SCHEDULE 1), and THE PARTIES HEREBY
IRREVOCABLY WAIVE ANY AND ALL RIGHTS TO THE CONTRARY AND SHALL AT ALL TIMES
CONDUCT THEMSELVES IN STRICT, FULL, COMPLETE AND TIMELY ACCORDANCE WITH THE
REQUIREMENTS OF DISPUTE RESOLUTION. ANY AND ALL ATTEMPTS TO CIRCUMVENT THE
PROVISIONS OF THIS SECTION 8.9 SHALL BE ABSOLUTELY NULL AND VOID AND OF NO FORCE
OR EFFECT WHATSOEVER.
8.10 Nasdaq References. Where reference is made in this Agreement to
the trading price of HPI Common Stock on the Nasdaq National Market, any such
reference shall be deemed modified to mean the primary trading market for HPI
Common Stock if such market is not then the Nasdaq National Market or, in the
absence of an active and organized national market for HPI Common Stock, a
determination in the good faith and reasonable discretion of the Board of
Directors of HPI regarding an appropriate price for HPI Common Stock.
8.11 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 in any relevant jurisdiction, then
such illegal or unenforceable provision shall be modified by the proper court,
if possible, but only to the extent necessary to make such provision
enforceable, and such modified provision and 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 portion thereof
determined to be illegal or unenforceable and shall not be affected thereby;
provided, however, that any such modification shall apply only with respect to
the operation of this Agreement (or any affected agreement entered into pursuant
to this Agreement) in the particular jurisdiction in which such determination of
illegality or unenforceability is made.
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8.12 Applicable Law. This Agreement shall be governed by, construed and
enforced in accordance with, the laws of the State of California as applied to
contracts entered into solely between residents of, and to be performed entirely
in, such state.
IN WITNESS WHEREOF, HPI, Acquisition Corporation, CXC and each of the
CXC Majority Stockholders have caused this Agreement to be executed and attested
(in the case of the Corporate Parties, by their respective officers thereunto
duly authorized), all as of the date first above written.
CHROMAXOME CORP., a Delaware
corporation
ATTEST: By /s/ Robert E. Leach
-------------------------------------
/s/ Katie A. Thompson Title Chairman
- ------------------------------- ----------------------------------
CXC ACQUISITION CORPORATION,
a Delaware corporation
ATTEST: By /s/ Terence E. McMorrow
-------------------------------------
/s/ Patricia O'Brien Title Treasurer, CFO and Secretary
- ------------------------------- ----------------------------------
HOUGHTEN PHARMACEUTICALS, INC.,
a Delaware corporation
ATTEST: By /s/ Robert S. Whitehead
-------------------------------------
/s/ Patricia O'Brien Title President and CEO
- ------------------------------- ----------------------------------
CXC MAJORITY STOCKHOLDERS
(in their individual capacities
and, except for Donna C. Leach,
as Spokespersons):
/s/ Katie A. Thompson /s/ Michael C. Dickman
- ------------------------------- ----------------------------------------
KATIE A. THOMPSON, MICHAEL C. DICKMAN,
an individual an individual
/s/ Robert E. Leach /s/ Donna C. Leach
- ------------------------------- ----------------------------------------
ROBERT E. LEACH, DONNA C. LEACH,
an individual an individual
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INDEX OF EXHIBITS
Exhibit Description
- ------- -----------
A CXC Charter
B CXC Restated Charter
C Escrow Agreement
D-1 Form of Investor Questionnaire
D-2 Form of Representation Letter
E-1 Employment Agreement for Katie A. Thompson
E-2 Consulting Agreement for Michael D. Dickman
F-1 Form of Legal Opinion for Corporate Counsel to CXC
F-2 Form of Legal Opinion for Intellectual Property Counsel to CXC
F-3 Form of Legal Opinion for Counsel to HPI
G Form of Pledge Agreement
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INDEX OF SCHEDULES
Schedule Description
- -------- -----------
1 Merger Consideration
1-A Certain Liabilities Excluded from Total CXC Liabilities at 5/31/96
2 CXC Disclosure Schedule
3 HPI Disclosure Schedule
4 Provisions for Substituted Options
5 Registration Rights
6 Provisions Relative to Certain Pledged Shares
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SCHEDULE 1
MERGER CONSIDERATION
DEFINITIONS
For purposes of the Agreement and this SCHEDULE 1, the following terms
shall have their respective meanings:
"CXC CASH AT CLOSING" means any cash in the possession of CXC at the
Effective Time (including any cash resulting from the exercise of any CXC
Warrants or CXC Options); provided, however, that the amount of CXC Cash at
Closing shall be reduced (to an amount not less than zero) by the amount of any
HPI Advances.
"HPI ADVANCES" means any cash advanced by HPI to CXC from and after May
20, 1996 (whether pursuant to a promissory note or otherwise).
"NUMBER OF FULLY DILUTED CXC SHARES OUTSTANDING" means the number of
shares of CXC Common Stock outstanding as of immediately prior to the Effective
Time on a fully-diluted basis (i.e., assuming that all CXC Options were fully
vested, all CXC Options and CXC Warrants were fully exercised and any other
contingent rights to acquire shares of CXC Common Stock were also fully
exercised).(1)
"PER SHARE MERGER CONSIDERATION" means the quotient of A divided by B
where:
A = Total Potential Merger Consideration
B = the Number of Fully Diluted CXC Shares Outstanding
"TOTAL CXC LIABILITIES AT 5/31/96" means the total of all Liabilities of
CXC as of the close of business on 5/31/96; provided, however, that Total CXC
Liabilities at 5/31/96 shall not include (1) any HPI Advances or (2) the
Liabilities listed on APPENDIX 1-A attached hereto.
- ------------------------
(1) For example, if the capitalization of CXC at the Effective Time is identical
to the capitalization of CXC as represented in the Agreement, the Number of
Fully Diluted CXC Shares Outstanding would be determined as follows: (i)
2,482,375 shares of CXC Common Stock issued and outstanding; plus (ii) 297,359
shares issuable upon the exercise of outstanding CXC Warrants; plus (iii)
259,066 shares issuable upon the exercise of outstanding CXC Options; for a
total of 3,038,800 shares.
1-1
<PAGE> 44
"TOTAL POTENTIAL MERGER CONSIDERATION" means a number of shares of HPI
Common Stock equal to 120% of the sum of X, Y and Z where:
X = 465,116
Y = the quotient of (a) divided by (b) where:
(a) = $600,000 minus Total CXC Liabilities at 5/31/96
(b) = $8.00
Z = the quotient of (x) divided by (y) where:
(x) = CXC Cash at Closing
(y) = the Twenty-Day Average Price of HPI Common Stock
"TWENTY-DAY AVERAGE PRICE OF HPI COMMON STOCK" means the average of the
closing prices of HPI Common Stock quoted on the Nasdaq National Market for the
period of twenty (20) trading days immediately preceding the Closing Date.
SAMPLE MERGER CONSIDERATION CALCULATION
The following is an example of a Per Share Merger Consideration
calculation. This example assumes, solely for purposes of this example, the
following: (i) the capitalization of CXC at the Effective Time is identical to
the capitalization of CXC as represented in the Agreement (without any exercise
of the CXC Warrants - which is an HPI condition to Closing); (ii) the amount of
Total CXC Liabilities at 5/31/96 is $100,000; (iii) the amount of CXC Cash at
Closing is $200,000; and (iv) the Twenty-Day Average Price of HPI Common Stock
is $10.
TOTAL POTENTIAL MERGER CONSIDERATION:
1.2[(465,116) + (($600,000 - $100,000)/$8) + ($200,000/$10)]
or
1.2(547,616) = 657,139.2
---------
PER SHARE MERGER CONSIDERATION:
(657,139.2)/(3,038,800) = 0.2162 shares of HPI Common Stock
Thus, 0.2162 shares would be the maximum amount of HPI Common Stock into
which each share of CXC Common Stock could convert pursuant to the Merger
(assuming, among other things, that all Potential Earn-Out Shares are earned and
released from the Escrow Account (with respect to Escrow Shares) and/or issued
(with respect to Future Shares)).
1-2
<PAGE> 45
In respect of shares of CXC Common Stock issued prior to the Effective
Time (e.g., 2,482,375 shares), one-third of 0.2162 times 2,482,375 (or 178,896)
would be the number of shares of HPI Common Stock issued immediately (the
Current Shares less the Escrow Shares), one-sixth of 0.2162 times 2,482,375 (or
89,448) would be the number of shares of HPI Common Stock comprising the Escrow
Shares and one-half of 0.2162 times 2,482,375 (or 268,345) would be the number
of shares of HPI Common Stock comprising the Future Shares.
STAGING OF MILESTONES - ACHIEVEMENT OF POTENTIAL EARN-OUT SHARES
The staging of Milestones and the related achievement of Potential
Earn-Out Shares shall occur pursuant to the following tables. For purposes of
these tables and the following notes:
"TPMC" means Total Potential Merger Consideration; and
"BMS" refers to Bristol-Myers Squibb Pharmaceutical Group, Inc.,
a Delaware corporation, the party with which CXC entered into
its principal collaboration agreement (the "BMS AGREEMENT")
effective August 30, 1995.
The descriptions of the Other Technology Milestones referenced in the tables are
more fully set forth in, and qualified entirely by reference to, the discussion
below the tables under "DISCUSSION OF MILESTONES." The tables are also qualified
by reference, as indicated, to the notes following the tables.
Technology Milestones - BMS-Related
<TABLE>
<CAPTION>
POSSIBLE
MILESTONE SHARES
================================================================================
<S> <C>
1. Shipment of the natural pathway libraries by CXC to 8.333% of TPMC
BMS pursuant to the BMS Agreement. (1)(2)(3)(4)(*)
- --------------------------------------------------------------------------------
2. Shipment of any combinatorial libraries by CXC to BMS 8.333% of TPMC
pursuant to the BMS Agreement if such libraries are (1)(2)(3)(4)(*)
sufficient for analysis by BMS.
- --------------------------------------------------------------------------------
3. Expression of any known chemistry previously identified 8.333% of TPMC
in the cognate BMS species not from host by the natural (1)(2)(3)(5)(*)
pathway libraries shipped by CXC to BMS pursuant to
the BMS Agreement.
- --------------------------------------------------------------------------------
</TABLE>
1-3
<PAGE> 46
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
4. Expression of 1% of the BMS known chemistry as 8.333% of TPMC
measured in profiles by the natural pathway libraries (1)(2)(3)(5)(*)
shipped by CXC to BMS pursuant to the BMS
Agreement.
- -----------------------------------------------------------------------------------
5. Expression of chemistry not previously identified by BMS 8.333% of TPMC
in the cognate BMS species by the natural pathway (1)(2)(3)(5)(*)
libraries shipped by CXC to BMS pursuant to the BMS
Agreement.
- -----------------------------------------------------------------------------------
6. Expression of any novel compound not from host by 8.333% of TPMC
combinatorial libraries shipped by CXC to BMS pursuant (1)(2)(3)(5)(*)
to the BMS Agreement.
===================================================================================
</TABLE>
Technology Milestones - Other
<TABLE>
<CAPTION>
POSSIBLE
MILESTONE SHARES
===================================================================================
<S> <C>
7. Establish two additional expression host-vector systems. 4.167% of TPMC
(1)(2)(6)(7)(*)
- -----------------------------------------------------------------------------------
8. Modify Streptomyces host with efflux pump and 4.167% of TPMC
demonstrate functioning. (1)(2)(6)(7)(*)
- -----------------------------------------------------------------------------------
9. Construct an improved (+20%) efficiency Streptomyces 4.167% of TPMC
vector. (1)(2)(6)(7)(*)
- -----------------------------------------------------------------------------------
10. Demonstrate an engineered E coli host with built-in assay. 8.333% of TPMC
(1)(2)(6)(7)(*)
- -----------------------------------------------------------------------------------
11. Demonstrate a co-encapsulation with target cell (e.g., 8.333% of TPMC
Staph aureus). (1)(2)(6)(7)(*)
- -----------------------------------------------------------------------------------
12. Demonstrate a co-encapsulation with engineered target 8.333% of TPMC
cell (e.g., SOS test). (1)(2)(6)(7)(*)
- -----------------------------------------------------------------------------------
13. Demonstrate expression in fungal combinatorial library. 4.167% of TPMC
(1)(2)(6)(7)(*)
- -----------------------------------------------------------------------------------
14. Demonstrate expression of natural pathway library from 4.167% of TPMC
environmental samples. (1)(2)(6)(7)(*)
- -----------------------------------------------------------------------------------
</TABLE>
1-4
<PAGE> 47
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------
15. Demonstrate libraries on libraries using multiple hosts. 8.333% of TPMC
(1)(2)(6)(7)(*)
- -----------------------------------------------------------------------------------------
16. Demonstrate analoging of a clone in multiple hosts. 8.333% of TPMC
(1)(2)(6)(7)(*)
=========================================================================================
</TABLE>
Business Development Milestones
<TABLE>
<CAPTION>
POSSIBLE
MILESTONE SHARES
=========================================================================================
<S> <C>
17. One or more relationships between third parties and the 8.333% of TPMC
business of CXC shall produce $1,000,000 in (2)(8)(*)
recognizable revenues prior to the date which is 36
months after the Effective Time and $2,000,000 in
contractually committed payments (exclusive of equity
investments).
- -----------------------------------------------------------------------------------------
18. One or more relationships between third parties and the 16.667% of TPMC
business of CXC shall produce $2,000,000 in (2)(8)(*)
recognizable revenues prior to the date which is 36
months after the Effective Time and $4,000,000 in
contractually committed payments (exclusive of equity
investments).
- -----------------------------------------------------------------------------------------
19. One or more relationships between third parties and the 25% of TPMC (2)(8)(*)
business of CXC shall produce $3,000,000 in
recognizable revenues prior to the date which is 36
months after the Effective Time and $6,000,000 in
contractually committed payments (exclusive of equity
investments).
=========================================================================================
</TABLE>
(1) Solely a maximum of 41.667% of TPMC can be earned from all Technology
Milestones (Nos. 1 through 16). See "HPI's Efforts" below for a
discussion of HPI's obligations with respect to the Milestones.
(2) In no event shall more than 50% of TPMC be earned unless either:
(x) At least 12 of the Technology Milestones are achieved and
Business Development Milestone No. 19 is achieved (the "FIRST
BONUS CIRCUMSTANCES"); or
(y) At least two of the BMS-Related Technology Milestones Nos. 3
through 6 are achieved and there exists one or more
relationships between third parties and the business of CXC
which shall produce $6,000,000 in recognizable revenues prior
1-5
<PAGE> 48
to the date which is 36 months after the Effective Time and
$10,000,000 in contractually committed payments (exclusive of
equity investments) (the "SECOND BONUS CIRCUMSTANCES").
In the event of the First Bonus Circumstances, an additional 16.667% of
TPMC (for a total of 66.667% of "earned" TPMC) shall be deemed earned as
the final Milestone achievement. Under the First Bonus Circumstances,
taking into account the Current Shares (exclusive of the Escrow Shares)
distributed promptly following the Effective Time (being an amount equal
to 33.333% of total potential Per Share Merger Consideration) and
assuming no exercise of HPI's rights under Article 6 of the Agreement,
an amount of HPI Common Stock equal to 100% of total potential Per Share
Merger Consideration would be available for distribution in respect of
each share of CXC Common Stock outstanding immediately prior to the
Effective Time.
In the event of the Second Bonus Circumstances, the minimum incremental
amount of TPMC required to advance "earned" TPMC to 66.667% (for a total
of 66.667% of earned TPMC) shall be deemed earned as the final Milestone
achievement.
Notwithstanding the foregoing, in no event (including, without
limitation, in the event of the First Bonus Circumstances and/or the
Second Bonus Circumstances) shall either (i) TPMC earned exceed 66.667%
of TPMC or (ii) the amount of consideration distributed in respect of
any share of CXC Common Stock outstanding immediately prior to the
Effective Time exceed the quotient of (A) total consideration
distributable in respect of the Merger (e.g., TPMC) divided by (B) the
Number of Fully Diluted CXC Shares Outstanding (thus, notwithstanding
any achievement of the specified levels of TPMC, no portion of TPMC
attributable to derivative securities outstanding immediately prior to
the Effective Time shall be distributed in respect of shares of CXC
Common Stock actually issued and outstanding immediately prior to the
Effective Time).
(3) Solely a maximum of 41.667% of TPMC can be earned from BMS-Related
Technology Milestones (Nos. 1 through 6). BMS shall be requested to
deliver to HPI reports as to whether BMS-Related Technology Milestones
Nos. 1 through 6 have been met, with such reports signed by an officer
of BMS (such officer must be at least the Vice President of Biomolecular
Screening and Drug Diversity, or a more senior officer of BMS). In the
absence of manifest error or negligence, any such report shall be
dispositive of the issue of achievement or non-achievement of any
BMS-Related Technology Milestones which are the subject of such
report(s); provided, however, that if it is not obvious from reading any
such report(s) that BMS-Related Technology Milestones have been
achieved, then HPI shall determine from any such report(s), in its
reasonable and good faith discretion, whether such BMS-Related
Technology Milestones have been achieved.
On or prior to 1/31/97, HPI shall make a determination as to whether any
or all of the BMS-Related Technology Milestones (Nos. 1 through 6) have
been achieved (a "MILESTONE DETERMINATION") and notice of such Milestone
Determination shall be provided to one or more of the Spokespersons.
Failure by HPI to deliver such notice with respect to any or all of the
BMS-Related Technology Milestones shall be deemed a
1-6
<PAGE> 49
Milestone Determination of non-achievement. On or prior to 2/15/97, the
Spokespersons must initiate Dispute Resolution (as defined below) with
respect to any Dispute (as defined below) regarding a Milestone
Determination of non-achievement for any BMS-Related Technology
Milestone. In the absence of any Spokesperson initiating such Dispute
Resolution on or prior to 2/15/97, the deemed and/or actual Milestone
Determinations made as of 1/31/97 by HPI for the BMS-Related Technology
Milestones shall become binding upon the parties.
(4) Without limitation, achievement of this Milestone requires delivery by
BMS to HPI, prior to the deadline for this Milestone, of a report from
BMS as contemplated by note (3) above. This Milestone cannot be achieved
if not achieved prior to the "deadline" of 8/31/96 (unless such date is
extended, in the reasonable discretion of HPI, for delay caused by BMS).
(5) Without limitation, achievement of this Milestone requires delivery by
BMS to HPI, prior to the deadline for this Milestone, of a report from
BMS as contemplated by note (3) above. This Milestone cannot be achieved
if not achieved prior to the "deadline" of 11/30/96 (unless such date is
extended, in the reasonable discretion of HPI, for delay caused by BMS).
If, as determined in the reasonable discretion of HPI, BMS does not meet
its material commitments under the BMS Agreement as in effect on June 1,
1996, then this Milestone may be achieved by equivalent proof as
determined in the reasonable discretion of HPI. Notwithstanding the
foregoing, in no event can this Milestone be achieved if it is not
achieved prior to the absolute "deadline" of 1/31/97.
(6) Solely a maximum of 16.667% of TPMC can be earned from the Other
Technology Milestones (Nos. 7 through 16).
(7) This Milestone cannot be achieved if it is not achieved prior to
11/30/97. In addition, at least two of the BMS-Related Technology
Milestones Nos. 3 through 6 must be achieved (pursuant to note (5)
above) in order for this Milestone to be achieved.
On or prior to 1/31/98, HPI shall make a Milestone Determination with
respect to any or all of the Other Technology Milestones (Nos. 7 through
16) and notice of such Milestone Determination shall be provided to one
or more of the Spokespersons. Failure by HPI to deliver such notice with
respect to any or all of the Other Technology Milestones shall be deemed
a Milestone Determination of non-achievement. On or prior to 2/15/98,
the Spokespersons must initiate Dispute Resolution with respect to any
Dispute regarding a Milestone Determination of non-achievement for any
Other Technology Milestone. In the absence of any Spokesperson
initiating such Dispute Resolution on or prior to 2/15/98, the deemed
and/or actual Milestone Determinations made as of 1/31/98 by HPI for the
Other Technology Milestones shall become binding upon the parties.
(8) Solely a maximum of 33.333% of TPMC can be earned from all Business
Development Milestones (Nos. 17 through 19). This Milestone cannot be
achieved if it is not achieved prior to the date which is 36 months
after the Effective Time. Once a Business
1-7
<PAGE> 50
Development Milestone has been achieved, the revenues and committed
payments from that Milestone are excluded from the achievement of any
other Business Development Milestone.
Without limiting the provisions of Article 6 and/or the Offset Right,
reference is made to the provisions of Section 6.1(b) (and/or Section
6.1(a)) of the Agreement by which HPI may offset any amounts payable to
the Olmstead Group (and/or any other person or entity retained by CXC
prior to the Effective Time) against the Offset Shares.
On or prior to the date which is 38 months after the Effective Time
("XX/XX/XX"), HPI shall make a Milestone Determination with respect to
any or all of the Business Development Milestones (Nos. 17 through 19
and including, solely for purposes of this paragraph and the following
two paragraphs, the revenue/payment relationship required for the Second
Bonus Circumstances as outlined in note (2)(y) above) and notice of such
Milestone Determination shall be provided to one or more of the
Spokespersons. Failure by HPI to deliver such notice with respect to any
or all of the Business Development Milestones shall be deemed a
Milestone Determination of non-achievement. On or prior to 15 days after
XX/XX/XX, the Spokespersons must initiate Dispute Resolution with
respect to any Dispute regarding a Milestone Determination of
non-achievement for any Business Development Milestone. In the absence
of any Spokesperson initiating such Dispute Resolution on or prior to 15
days after XX/XX/XX, the deemed and/or actual Milestone Determinations
made as of XX/XX/XX by HPI for the Business Development Milestones shall
become binding upon the parties.
HPI will maintain complete and accurate records which are relevant to
revenues and payments for relationships with third parties involving the
business of CXC in any material way ("RECORDS"). The Records shall be
available to any Spokesperson(s), or any certified public accountant
selected by the Spokespersons which is reasonably acceptable to HPI, on
the following two occasions:
(i) for one review of reasonable scope and duration at any
time following the date which is 18 months after the
Effective Time; and
(ii) for one review of reasonable scope and duration in
connection with a Dispute Resolution involving the
Business Development Milestones on or after XX/XX/XX;
provided, however, that the availability of the Records shall be
contingent upon the implementation of such confidentiality restrictions
as shall be reasonably requested by HPI.
In the event that a relationship with a third party involving the
business of CXC in any material way might reasonably qualify for
achievement of a Business Development Milestone and such relationship
includes aspects of HPI's business other than the business of CXC, then
HPI shall make a determination, in its reasonable discretion, regarding
an appropriate allocation of related revenues and payments to the
business of CXC for
1-8
<PAGE> 51
purposes of measuring any Business Development Milestone achievement.
Any such allocation shall be included with the Records and can be
"Disputed" by CXC as part of a Dispute Resolution involving the Business
Development Milestones.
(*) Notwithstanding any other provision herein or in the Agreement to the
contrary, in the event that HPI is entitled to exercise its Offset Right
against the Offset Shares as provided in Article 6 of the Agreement,
then in HPI's reasonable and good faith discretion a portion of the next
earned increment(s) of Potential Earn-Out Shares (and/or as of then
earned but undistributed Potential Earn-Out Shares - reference is made,
without limitation, to the provisions of Section 1.5(c)(iv)(X) and (Y)
of the Agreement) equal to the amount of such offset (i.e., the amount
of Damages relative to the number of Offset Shares to compensate
therefore, as provided in the Agreement) which would otherwise be earned
and distributed pursuant to Section 1.5 of the Agreement shall be earned
for purposes of this SCHEDULE 1 and the Agreement but not distributed
(and, for all intents and purposes except satisfaction of the Offset
Right to the extent of Damages thereby covered, canceled).
DISPUTE RESOLUTION
Any dispute concerning the achievement or non-achievement of any
Milestone (a "DISPUTE") shall be resolved by Dispute Resolution. "DISPUTE
RESOLUTION" means the following process:
(A) Any Dispute shall be settled within thirty (30) days of receipt
by any Spokesperson, on the one hand, and HPI, on the other hand
(each a "DISPUTE PARTY"), of a notice of the Dispute (such
notice to be delivered pursuant to the provisions of Section 8.3
of the Agreement) by negotiations between the Dispute Parties;
provided, however, that no Dispute Resolution shall commence
with respect to any Technology Milestone (Nos. 1 through 16)
prior to 1/31/98 and no Dispute Resolution shall commence with
respect to any Business Development Milestone (Nos. 17 through
19) prior to 15 days after XX/XX/XX (the purpose of such
deferral being that a subsequent and undisputed achievement of
other Milestones may render the subject Dispute moot).
(B) In the absence of such a negotiated settlement, any Dispute
shall be resolved by arbitration before a single arbitrator
(except as provided below) in San Diego, California, in
accordance with the Rules of the American Arbitration
Association then existing, and judgment on the arbitration award
may be entered in any state or federal court sitting in San
Diego County, California.
(C) The arbitrator shall be a person experienced in the subject
matter of the circumstances to be arbitrated and shall be
selected by mutual agreement of the Dispute Parties. If the
Dispute Parties are unable to agree on the arbitrator within a
period of thirty (30) days after arbitration is demanded by any
Dispute Party, then each of the Dispute Parties shall select a
qualified arbitrator and the two
1-9
<PAGE> 52
arbitrators so selected shall select a third and the three so
chosen shall constitute the board of arbitrators.
(D) The arbitrator(s) shall render a decision as soon as possible.
The Dispute Parties agree to abide by the decision of the
arbitrator(s) whose decision shall be final and binding as to
law, fact and for all other purposes.
(E) The costs of the arbitrator(s) shall be borne by the Dispute
Party against which the decision is made unless the decision
otherwise directs. Each Dispute Party shall be entitled to
pre-hearing discovery as provided in California Civil Code of
Procedure Section 1283.05.
HPI'S EFFORTS
The research plan in existence under the BMS Agreement, as such plan was
in effect on June 1, 1996, shall not be modified by HPI on or before 11/15/96
unless:
(1) circumstances beyond the reasonable control of HPI make such a
modification advisable;
(2) such modification is not reasonably likely to delay or hinder
the achievement of BMS-Related Technology Milestones; or
(3) HPI elects, in its discretion (and in circumstances other than
as contemplated by clauses (1) or (2) above), to modify the BMS
Agreement (including, without limitation, in the context of
entering into a new arrangement with BMS).
In the absence of consent from a Spokesperson with respect to a modification
under the foregoing clause (3), BMS-Related Technology Milestones Nos. 1 and 2
and two of Nos. 3 through 6 (the designation of which shall be determined by
HPI) shall be deemed achieved (if and to the extent not as of then achieved)
upon such a "clause (3)" modification. If BMS-Related Technology Milestones Nos.
1 and 2 and two of Nos. 3 through 6 have already been achieved, a "clause (3)"
modification shall be without effect or earn-out liability for HPI under this
Agreement. From and after 11/15/96, HPI may modify the research plan under the
BMS Agreement, or any other plan or course of action with respect to the
Technology Milestones, without effect or earn-out liability for HPI under this
Agreement. Except as provided in the first sentence of this paragraph, HPI may
devote such efforts to the achievement of the Milestones (Business and/or
Technology) as it shall deem advisable in its sole discretion.
DISCUSSION OF MILESTONES
[attached]
1-10
<PAGE> 53
SCHEDULE 1-A
CERTAIN EXCLUDED LIABILITIES
The "excluded" Liabilities are the equipment lease payment obligations
which are the subject of the attached two-page schedule.
1-11
<PAGE> 54
SCHEDULE 2
CXC DISCLOSURE SCHEDULE
[attached]
2-1
<PAGE> 55
SCHEDULE 3
HPI DISCLOSURE SCHEDULE
All Sections
The HPI SEC Documents are incorporated herein by reference.
Section 3.2(b)
The consent of Dillon, Read & Co., Inc. is required with respect to the
issuance of shares of HPI Common Stock as contemplated by the Agreement if such
issuance occurs on or prior to September 26, 1996.
3-1
<PAGE> 56
SCHEDULE 4
SUBSTITUTE OPTION PROVISIONS
OPTIONS HELD BY CURRENT CXC EMPLOYEES (with reference to SCHEDULE 2.2 to the
Agreement - Nasby, Li, Foster, Farr, Fielding, Peterson, Silva, Cantafio and
Brian - each an "EMPLOYEE")
* Each Employee must execute a release of all CXC option-related
rights in exchange for substitute options to acquire HPI Common
Stock ("NEW EMPLOYEE OPTIONS").
* New Employee Options will be exercisable, subject to vesting,
for the number of shares of HPI Common Stock the Employee's
prior option would have converted into assuming full vesting,
full exercise of such prior option and full distribution of the
Potential Earn-Out Shares. The New Employee Option exercise
price shall be proportionally adjusted (e.g., if the prior
option was exercisable for up to 1,000 shares of CXC Common
Stock at $0.25 per share and the New Employee Option is
exercisable for 200 shares of HPI Common Stock, the exercise
price for the New Employee Option would be $1.25 per share).
* New Employee Options will be 25% vested at the Effective Time,
with the balance to be subject to vesting over a four-year term
commencing as of the Effective Time pursuant to HPI's standard
provisions for grants of employee options to new employees
(e.g., 10% of the remaining 75% will vest at the end of the
first three-month period following the Effective Time and
increments of 6% of the remaining 75% will vest at the end of
each successive three-month period); provided, however, that if
HPI terminates the employment of an Employee within 12 months of
the Effective Time without cause, then such Employee's New
Employee Option shall immediately become 100% vested and
exercisable in accordance with its terms.
* New Employee Options will not be subject to the earn-out
provisions of the Agreement.
* New Employee Options will be granted under HPI's 1996 Stock
Incentive Plan (which has been registered under the 1933 Act on
Form S-8).
At HPI's sole discretion, HPI may elect to grant Employees additional
options to acquire HPI Common Stock.
4-1
<PAGE> 57
OPTIONS HELD BY CONSULTANTS AND SAB MEMBERS (with reference to SCHEDULE 2.2 to
the Agreement - Rozbruch, Kahn, Thompson, Colwell, Haygood, Erion, Djerassi,
Pirrung, Sherman, Saier and Hughes - each a "CONSULTANT")
* Each consultant must execute a release of all CXC option-related
rights in exchange for substitute options to acquire HPI Common
Stock ("NEW CONSULTANT OPTIONS").
* New Consultant Options will be exercisable for up to the number
of shares of HPI Common Stock the Consultant's prior option(s)
would have converted into assuming full vesting, full exercise
of such prior option(s) and full distribution of the Potential
Earn-Out Shares (the "FULL AMOUNT").
* New Consultant Options will be 33.333% vested at the Effective
Time (the "VESTED PORTION"); however, for an option with respect
to which the Vested Portion is larger than 33.333% (in the
absence of the Merger Agreement) as of the Effective Time, the
"VESTED PORTION" shall mean such larger portion of the related
New Consultant Option. The exercise price for the Vested Portion
shall be proportionally adjusted (e.g., if the Consultant's
option was exercisable for up to 1,500 shares of CXC Common
Stock at $0.25 per share and the New Consultant Option is
exercisable for up to 300 shares of HPI Common Stock, the
exercise price for the Vested Portion (100 shares of HPI Common
Stock) shall be $1.25 per share).
* The balance of each New Consultant Option (the Full Amount less
the Vested Portion, referred to as the "UNVESTED PORTION") shall
be subject to two tiers of vesting:
(a) 100% of the Unvested Portion shall be subject to the
earn-out provisions of the Agreement (i.e., the
Unvested Portion shall be eligible for vesting based
upon the proportion of the amount of Potential Earn-Out
Shares which is actually distributed to former
stockholders of CXC pursuant to the terms of the
Agreement versus the total amount potentially available
- the shares eligible for further vesting under any New
Consultant Option pursuant to the earn-out provisions
of the Agreement are referred to as the "EARNED
SHARES"); and
(b) The Earned Shares shall further vest over a three-year
term commencing on the Effective Time pursuant to the
following schedule: 12% of any Earned Shares shall vest
at the end of the three-month period following the
Effective Time; and additional increments of 8% of any
Earned Shares shall vest at the end of each successive
three-month period.
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* The exercise price for Earned Shares shall be equal to the
quotient of (1) divided by (2) where:
(1) = The total exercise price for the Consultant's
prior option less the sum of (i) the total
exercise price of the Vested Portion and (ii) the
aggregate exercise price paid with respect to
prior purchases of Earned Shares pursuant to the
New Consultant Option; and
(2) = The total number of Earned Shares less the number
of Earned Shares already purchased pursuant to the
New Consultant Option.
* EXAMPLE: Assume: Consultant's prior option was for 1,500 shares
of CXC Common Stock; the prior exercise price for the prior
option was $.50 per share; the full pay-out potential for 1,500
shares of CXC Common Stock in the Merger is 300 shares of HPI
Common Stock; the earn-out provisions of the Agreement have thus
far resulted in the actual distribution of 50% of the Potential
Earn-Out Shares; and the Consultant has previously exercised for
10 Earned Shares at a time when 50 Earned Shares were available.
Vested Portion = an option to acquire 100 shares of HPI
Common Stock at $2.50 per share; immediately
exercisable from and after the Effective Time.
10 Earned Shares were exercised for [($750-$250)/50] or
$10 per share.
90 Earned Shares are presently exercisable (50% of 200,
or total Unvested Portion possible, less 10 shares
already purchased). Price per share for presently
exercisable Earned Shares is [($750-($250 + $100)/90]
or $4.44.
If no Earned Shares were exercised until all shares
were earned, and 100% distribution of Potential
Earn-Out Shares under the Agreement was achieved, 200
Earned Shares would be exercisable at a price per share
of [($750-$250)/200] or $2.50.
* New Consultant Options will be granted under HPI's 1996 Stock
Incentive Plan (which has been registered under the 1933 Act on
Form S-8).
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SCHEDULE 5*
REGISTRATION RIGHTS
Subject to each Holder (as defined below) acknowledging and agreeing to
be bound by the terms of this SCHEDULE 5, such Holder shall have the rights set
forth herein with respect to such Holder's Registrable Securities (as defined
below).
1. Definitions. For purposes of this SCHEDULE 5:
1.1 The term "REGISTER," "REGISTERED," and "REGISTRATION" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the 1933 Act, and the declaration or
ordering of effectiveness of such registration statement or document;
1.2 The term "REGISTRABLE SECURITIES" means (a) the shares of
HPI Common Stock issued as Current Shares or Future Shares to the former
stockholders of CXC in connection with the Merger, and (b) any HPI Common Stock
issued as (or issuable upon the conversion or exercise of any warrant, right or
other security which is issued as) a dividend or other distribution with respect
to, or in exchange for or in replacement of, such HPI Common Stock, excluding in
all cases, however, any Registrable Securities sold by a person in a transaction
in which such person's registration rights are not assigned;
1.3 The term "HOLDER" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 10 below; and
1.4 The term "PREFERRED REGISTRABLE SECURITIES" means (a) the
HPI Common Stock issued upon the conversion of HPI's Series A, Series B, Series
C, Series D, Series E, Series F and Series G Preferred Stock, or any warrant to
acquire any such Preferred Stock, and (b) any HPI Common Stock issued as (or
issuable upon the conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of, such HPI Common Stock.
2. HPI Registration. If (but without any obligation to do so) HPI
proposes to register (including for this purpose a registration effected by HPI
for stockholders other than the Holders) any of its stock or other securities
under the 1933 Act in connection with the public offering of such securities
solely for cash (other than a registration relating solely to the sale of
securities to participants in an HPI stock plan or an SEC Rule 145 transaction,
or a registration on any form which does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities), HPI shall, at such time,
promptly give each Holder written notice of such
- --------
* Except as otherwise noted, Section references in this SCHEDULE 5 relate
to sections of this SCHEDULE 5.
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registration. Upon the written request of each Holder given within 20 days after
mailing of such notice by HPI to the address for each such Holder as reflected
in the records of HPI, HPI shall, subject to the provisions of Section 6 below,
cause to be registered under the 1933 Act all of the Registrable Securities that
each such Holder has requested to be registered. In the event a Holder
determines not to include any or all of the Registrable Securities held by such
Holder in any such registration, such Holder shall continue to have the right to
include such Registrable Securities in any subsequent registration, pursuant to
the terms of this Section 2.
3. Obligations of HPI. Whenever required under this SCHEDULE 5 to effect
the registration of any Registrable Securities, HPI shall, as expeditiously as
reasonably possible:
3.1 Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to 120 days.
3.2 Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the 1933 Act with respect to the disposition of all securities
covered by such registration statement.
3.3 Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the 1933 Act, and such other documents as they may reasonably
request in order to facilitate the disposition of Registrable Securities owned
by them.
3.4 Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that HPI shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
3.5 In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
3.6 Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing.
3.7 Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this SCHEDULE 5, on the date
that such Registrable Securities are deliv-
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ered to the underwriters for sale in connection with a registration pursuant to
this SCHEDULE 5, if such securities are being sold through underwriters, or, if
such securities are not being sold through underwriters, on the date that the
registration statement with respect to such securities becomes effective, (i) an
opinion, dated such date, of the counsel representing HPI for the purposes of
such registration, in form and substance as is customarily given to underwriters
in an underwritten public offering, addressed to the underwriters, if any, and
to the Holders requesting registration of Registrable Securities and (ii) a
letter dated such date, from the independent certified public accountants of
HPI, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders requesting registration of
Registrable Securities.
4. Furnish Information. It shall be a condition precedent to the
obligations of HPI to take any action pursuant to this SCHEDULE 5 that the
selling Holders shall furnish to HPI such information regarding themselves, the
Registrable Securities held by them, and the intended method of disposition of
such securities as shall be required to effect the registration of the
Registrable Securities.
5. Expenses of Registration. HPI shall bear and pay all expenses
incurred in connection with any registration, filing or qualification of
Registrable Securities with respect to registrations pursuant to Section 2 above
for each Holder (which right may be assigned as provided in Section 10 below),
including (without limitation) all registration, filing and qualification fees,
printers' and accounting fees relating or apportionable thereto and the fees and
disbursements of one counsel for all selling stockholders (in this regard, the
Holder may be unable to select their own counsel and have the fees and
disbursements of such counsel paid for by HPI), but excluding underwriting
discounts and commissions relating to Registrable Securities.
6. Underwritings; Cut-Backs; Superior Rights.
(a) In connection with any offering involving an underwriting of
shares being issued by HPI, HPI shall not be required under Section 2 above to
include any of the Holders' securities in such underwriting unless they accept
the terms of the underwriting as agreed upon between HPI and the underwriters
selected by it, and then only in such quantity as will not, in the opinion of
the underwriters, jeopardize the success of the offering by HPI.
(b) If the total amount of securities, including Registrable
Securities, requested by stockholders to be included in such offering exceeds
the amount of securities sold other than by HPI that the underwriters reasonably
believe compatible with the success of the offering, then HPI shall be required
to include in the offering only that number of such securities, including
Registrable Securities, which the underwriters believe will not jeopardize the
success of the offering (the securities so included to be apportioned pro rata
among the selling stockholders according to the total amount of securities
requested and entitled to be included therein owned by each selling stockholder
or in such other proportions as shall mutually be agreed to by such selling
stockholders). For purposes of the preceding parenthetical phrase concerning
apportionment, for any selling stockholder which is a holder of Registrable
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<PAGE> 62
Securities and which is a partnership or corporation, the partners, retired
partners and stockholders of such holder, or the estates and family members of
any such partners and retired partners and any trusts for the benefit of any of
such persons shall be deemed to be a single "selling stockholder," and any pro
rata reduction with respect to such "selling stockholder" shall be based upon
the aggregate amount of shares carrying registration rights owned by all
entities and individuals deemed hereby to be such "selling stockholder.
(c) Any and all rights of Holders and/or rights relating to
Registrable Securities pursuant to this SCHEDULE 5 shall be subject to, and
qualified in their entirety by, the registration rights of the holders of
Preferred Registrable Securities including, without limitation, the rights of
such holders of Preferred Registrable Securities to have Preferred Registrable
Securities included in a registration requested by holders of Preferred
Registrable Securities from which the Holders and/or Registrable Securities can
be excluded (e.g., because inclusion would reduce the number of Preferred
Registrable Securities otherwise included).
7. Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of the provisions of this SCHEDULE 5.
8. Indemnification. In the event any Registrable Securities are included
in a registration statement under this SCHEDULE 5:
8.1 To the extent permitted by law, HPI will indemnify and hold
harmless each Holder, the officers and directors of each Holder, any underwriter
(as defined in the 1933 Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the 1933 Act or the
1934 Act against any losses, claims, damages or liabilities (joint or several)
to which they may become subject under the 1933 Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "VIOLATION"): (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus or final prospectus
contained therein or any amendments or supplements thereto, (ii) 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 (iii) any
violation or alleged violation by HPI of the 1933 Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the 1933 Act, the
1934 Act or any state securities law; and, within 30 days after HPI receives a
written request containing a description in reasonable detail of the expenses
incurred, HPI will advance to each Holder, officer, director, underwriter or
controlling person any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action, whether prior to or after final disposition of any claim or
action (unless there has been a final determination that such Holder, officer,
director, underwriter or controlling person is not entitled to be indemnified
for such expenses); provided, however, that at the time of such advance, such
Holder, officer, director, underwriter or controlling person shall agree to
repay the amounts advanced if it is ultimately determined that he or she is not
entitled to be indemnified pursuant to the terms of this Agreement;
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provided, further, that the indemnity agreement contained in this Section 8.1
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of HPI
(which consent shall not be unreasonably withheld), nor shall HPI be liable in
any such case for any such loss, claim, damage, liability or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, officer, director,
underwriter or controlling person.
8.2 To the extent permitted by law, each selling Holder will
indemnify and hold harmless HPI, each of its directors, each of its officers who
have signed the registration statement, each person, if any, who controls HPI
within the meaning of the 1933 Act, any underwriter and any other Holder selling
securities in such registration statement or any of its directors or officers or
any person who controls such Holder, against any losses, claims, damages or
liabilities (joint or several) to which HPI or any such director, officer,
controlling person, or underwriter or controlling person, or other such Holder
or director, officer or controlling person may become subject, under the 1933
Act, the 1934 Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereto) arise out of or are based
upon any Violation, in each case to the extent (and only to the extent) that
such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such
registration; and each such Holder will reimburse as incurred any legal or other
expenses reasonably incurred by HPI or any such director, officer, controlling
person, underwriter or controlling person, other Holder, officer, director, or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this Section 8.2 shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; provided, further that in no event shall any
indemnity under this Section 8.2 exceed the net proceeds from the offering
received by such Holder.
8.3 Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain its own counsel, with
the fees and expenses to be paid by the indemnifying party, if representation of
such indemnified party by the counsel retained by the indemnifying party would
be inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if prejudicial
to its ability to defend such action, shall relieve such indemnifying party of
any liability to the indemnified party under this Section 8 to the extent such
delay is
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prejudicial, but the omission so to deliver written notice to the indemnifying
party will not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 8.
8.4 The obligations of HPI and the Holders under this Section 8
shall survive the completion of any offering of Registrable Securities in a
registration statement under this SCHEDULE 5, and otherwise.
8.5 If the indemnification provided for in this Section 8 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage or expense
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 that resulted in such loss,
liability, claim, damage or expense 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 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, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
9. Reports Under the 1934 Act. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the 1933 Act and any other
rule or regulation of the SEC that may at any time permit a Holder to sell
securities of HPI to the public without registration, HPI agrees to:
9.1 make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times;
9.2 file with the SEC in a timely manner all reports and other
documents required of HPI under the 1933 Act and the 1934 Act; and
9.3 furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by HPI
that it has complied with the reporting requirements of SEC Rule 144, the 1933
Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report
of HPI and such other reports and documents so filed by HPI with the SEC, and
(iii) such other information as may be reasonably requested in availing any
Holder of any rule or regulation of the SEC which permits the selling of any
such securities without registration.
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10. Assignment of Registration Rights. The rights to cause HPI to
register Registrable Securities pursuant to this SCHEDULE 5 may be assigned by
(a) a Holder to a transferee or assignee of an amount of such securities
representing not less than five percent of the aggregate number of shares of
Registrable Securities or (b) any Holder who transfers all of such Holder's
shares; provided, that in each case HPI is, within a reasonable time after such
transfer, furnished with (x) written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned and (y) an undertaking by the assignee to
be bound by the provisions of this SCHEDULE 5; and provided, further, that such
assignment shall be effective only if immediately following such transfer the
further disposition of such securities by the transferee or assignee is
restricted under the 1933 Act.
11. Amendment of Registration Rights. Any provision of this SCHEDULE 5
may be amended and the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of HPI and either (a) the holders of a majority of the
Registrable Securities or (b) any Spokesperson. Any amendment or waiver effected
in accordance with this Section 11 shall be binding upon all Holders and all
Registrable Securities.
12. Termination of Registration Rights. HPI's obligations pursuant to
this SCHEDULE 5 shall terminate as to any Holder and any Registrable Securities
on the earlier of (a) when the Holder can sell all of such Holder's shares
pursuant to Rule 144 under the 1933 Act during any 95-day period or (b) March
29, 2001.
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SCHEDULE 6
PROVISIONS RELATIVE TO CERTAIN PLEDGED SHARES
Robert E. Leach
All Subject Shares issuable to Mr. Leach shall be subject to (and
therefore pledged pursuant to) the terms of the Pledge Agreement for Mr. Leach.
CXC Majority Stockholders other than Mr. Leach
One-half of the Current Shares issuable to the CXC Majority Stockholders
other than Mr. Leach (the "OTHER HOLDERS") shall not be subject to (and
therefore need not be pledged pursuant to) the terms of their respective Pledge
Agreements. Such unpledged shares shall be comprised of three-quarters of the
Current Shares issuable to the Other Holders, respectively, exclusive of the
Escrow Shares (thus, one-quarter of the Current Shares issuable to the Other
Holders, respectively, exclusive of the Escrow Shares (the "FIRST PLEDGED
SHARES"), shall be pledged).
At such time as at least four Milestones shall have been achieved
(pursuant to SCHEDULE 1), the First Pledged Shares shall be released from the
respective Pledge Agreements of the Other Holders (bring the total "unpledged"
shares, at that time, to two-thirds of the Current Shares issuable to each Other
Holder, or all Current Shares issuable to each Other Holder exclusive of the
Escrow Shares). Without limitation, the provisions of this SCHEDULE 6 shall not
affect Subject Shares issuable to the Other Holders which are Escrow Shares or
Future Shares (all such Subject Shares being "pledged" shares under each
respective Other Holder's Pledge Agreement).
The arrangements which are the subject of this SCHEDULE 6 shall in no
way diminish the obligations of each CXC Majority Stockholder with respect to
CXC Majority Stockholder Indemnification.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-2908 and Form S-8 No. 333-2910) pertaining to the 1996
Employee Stock Purchase Plan and the 1996 Stock Incentive Plan of Houghton
Pharmaceuticals, Inc. of our report dated June 7, 1996 with respect to the
financial statements of ChromaXome Corporation (a development stage company)
included in its Current Report on Form 8-K dated August 1, 1996, filed with
the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Diego, California
August 15, 1996
