<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 14, 1997
REGISTRATION NO. 333-05369
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PROGENITOR, INC.
(Exact name of Registrant as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2836 31-1344193
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
------------------------------
1507 CHAMBERS ROAD
COLUMBUS, OHIO 43212
(614) 488-6688
(Address and telephone number of Registrant's principal executive offices)
------------------------------
DOUGLASS B. GIVEN, M.D., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PROGENITOR, INC.
1507 CHAMBERS ROAD
COLUMBUS, OHIO 43212
(614) 488-6688
(Name, address and telephone number of agent for service for Registrant)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
GAVIN B. GROVER, ESQ. CHARLES W. MULANEY, JR., ESQ.
KRISTIAN E. WIGGERT, ESQ. RODD M. SCHREIBER, ESQ.
EDA S.L. TAN, ESQ. SKADDEN, ARPS, SLATE,
MORRISON & FOERSTER LLP MEAGHER & FLOM (ILLINOIS)
425 MARKET STREET 333 WEST WACKER DRIVE
SAN FRANCISCO, CALIFORNIA 94105 CHICAGO, ILLINOIS 60606
(415) 268-7000 (312) 407-0700
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE(3)
<S> <C> <C> <C> <C>
Common Stock, Class A, $.001 par value......... 3,162,500 $12.00 $37,950,000 $13,933
</TABLE>
(1) Includes 412,500 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the amount of the registration
fee pursuant to Rule 457(a) of the Securities Act of 1933.
(3) A registration fee of $12,888 was paid on June 6, 1996 for an aggregate
offering price of $37,375,000, and a registration fee of $1,045 is paid
herewith.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
<PAGE>
PROSPECTUS
2,750,000 SHARES
[LOGO]
COMMON STOCK
----------------
All of the 2,750,000 shares of Common Stock, par value $0.001 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by Progenitor,
Inc. (the "Company"). Prior to the Offering, there has been no public market for
the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $10.00 and $12.00 per share. See
"Underwriting" for information relating to the factors considered in determining
the initial public offering price for the Common Stock. Application has been
made to list the Common Stock on the Nasdaq National Market under the symbol
"PGEN."
Amgen Inc. ("Amgen") has agreed to purchase directly from the Company $5.5
million of Common Stock (the "Amgen Shares") at the initial public offering
price concurrently with the closing of the Offering pursuant to a stock purchase
agreement with the Company. See "Business--Corporate Agreements--Amgen
Agreements."
---------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to
Price to Public Commissions(1) Company(2)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total(3)............................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $950,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
412,500 additional shares of Common Stock on the same terms and conditions
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
---------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters, subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1997.
---------------------
LEHMAN BROTHERS GENESIS MERCHANT GROUP
SECURITIES
, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK
OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
Progenitor, Mercator, and the Progenitor logo are trademarks of the Company.
This Prospectus may contain trademarks, trade names and servicemarks of other
parties.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, OR THE CONTEXT OTHERWISE REQUIRES,
REFERENCES IN THIS PROSPECTUS TO "PROGENITOR" REFER TO PROGENITOR, INC. PRIOR TO
THE COMPLETION OF THE MERGER OF A WHOLLY-OWNED SUBSIDIARY OF PROGENITOR WITH AND
INTO MERCATOR GENETICS, INC. ("MERCATOR") WITH MERCATOR AS THE SURVIVING ENTITY
(THE "ACQUISITION"). REFERENCES HEREIN TO "MERCATOR" REFER TO MERCATOR PRIOR TO
THE ACQUISITION. REFERENCES TO THE "COMPANY" REFER TO PROGENITOR AFTER THE
ACQUISITION AND INCLUDE THE COMBINED OPERATIONS OF PROGENITOR AND MERCATOR. THE
CLOSING OF THE OFFERING IS CONTINGENT UPON THE CLOSING OF THE ACQUISITION. SEE
"BUSINESS--OVERVIEW" AND "--MERCATOR ACQUISITION." CERTAIN OF THE STATEMENTS
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS ARE FORWARD-LOOKING
STATEMENTS. THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS."
THE COMPANY
Progenitor is engaged in the discovery and functional characterization of
genes to identify targets for the development of new pharmaceuticals. The
Company's initial focus is on the identification of genes important in blood and
immune cell development, blood vessel development, bone formation, asthma and
schizophrenia. Using its core developmental biology approach and an array of
genomics technologies, Progenitor has identified several potential therapeutic
targets, and intends to accelerate its discovery of potential targets by
accessing complementary gene discovery and characterization technologies.
Consistent with this strategy, Progenitor will complete the acquisition of
Mercator Genetics, Inc. ("Mercator") concurrently with the closing of the
Offering. Through the Acquisition, Progenitor gains a complementary gene
discovery approach, disease genetics, established discovery programs and
worldwide rights to two genes. The Company intends to use its integrated
genomics system to provide its partners with in-depth functional information in
support of each therapeutic target. Such well-characterized targets may have the
potential to expedite product development and to reduce development costs.
Using its developmental biology approach, the Company has identified the
B219 leptin receptor gene, for which it has received two notices of allowance
from the United States Patent and Trademark Office ("USPTO"). The B219 leptin
receptor may have therapeutic applications in obesity, diabetes and certain
blood and immune cell disorders. The Company also has discovered a red blood
cell growth factor activity that may have therapeutic applications in cancer,
anemias and other diseases. In addition, the Company has discovered, with its
collaborators, a gene that the Company believes may play a role in blood vessel
development and bone formation, and may be useful for the development of new
therapies for cancer and osteoporosis. Using its disease genetics approach, the
Company has identified a gene associated with iron overload, one of the most
common genetic disorders. The Company has received a notice of allowance from
the USPTO for a patent application relating to certain diagnostic markers for
this condition. In addition, the Company has exclusive worldwide rights to the
EPM1 epilepsy gene, which also was discovered using this disease genetics
approach.
The Company intends to enter into partnerships with biopharmaceutical firms
to support gene discovery programs in specific disease areas and, in parallel,
to develop certain gene discoveries to a later stage internally before
partnering. The Company has entered into a license agreement with Amgen Inc.
("Amgen") relating to certain aspects of the Company's leptin receptor
technology, and has retained certain rights, including rights to small molecule
screening and cell sorting, for development with potential partners. In
connection with this license agreement, Amgen has agreed to purchase directly
from the Company $5.5 million of Common Stock at the initial public offering
price concurrently with the closing of the Offering. The Company is
collaborating with Novo Nordisk A/S ("Novo Nordisk") in the isolation,
development and commercialization of the Company's red blood cell growth factor
activity. Under these agreements, the Company is entitled to receive milestone
and royalty payments in connection with the development and commercialization of
any products.
Developmental biology is the study of the genetic events that control cell
growth and differentiation. Because genes responsible for growth and
differentiation are expressed at higher levels in developing
3
<PAGE>
systems, the Company believes that developing cells and tissues provide a rich
and largely unexploited source of genes with fundamental biological roles. These
genes may have significance in the treatment of diseases characterized by
abnormal cell growth and differentiation, such as cancer, blood and immune
system disorders and osteoporosis. The Company believes that its expertise in
manipulating and analyzing developing cells and tissues may allow it to isolate
and characterize the function of these genes. The Company's disease genetics
approach incorporates enhanced positional cloning techniques for the discovery
of genes associated with complex diseases, and facilitates evaluation of genes
discovered using developmental biology. Moreover, the Company's disease genetics
approach provides it with genes directly associated with a specific disease that
can be functionally characterized using developmental biology.
Progenitor was incorporated in Delaware in February 1992 as a majority-owned
subsidiary of Interneuron Pharmaceuticals, Inc. ("Interneuron"), and commenced
operations in May 1992. Following the closing of the Offering and the
Acquisition, Interneuron is expected to own approximately 43% of the Company's
Common Stock (approximately 41% if the Underwriters' over-allotment option is
exercised in full) based upon certain assumptions. The Company's executive
offices are located at 1507 Chambers Road, Columbus, Ohio 43212, and its
telephone number is (614) 488-6688. See "Certain Transactions-- Relationship
with Interneuron."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered........................... 2,750,000 shares
Common Stock to be outstanding after the
Offering..................................... 10,614,998 shares (1)
Use of proceeds................................ For research and development, expansion of
facilities and acquisition of equipment,
expenses relating to the Acquisition,
repayment of a bridge loan from
Interneuron, repayment to Interneuron for
certain costs of the Offering and working
capital and general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol......... PGEN
</TABLE>
- ------------------------
(1) Based on shares outstanding as of February 28, 1997. Includes: (i) 1,679,255
shares of Common Stock to be issued to Mercator stockholders in the
Acquisition (assuming Final Acquisition Consideration (as defined below) of
$22.0 million for Mercator) upon the closing of the Offering; (ii) 500,000
shares of Common Stock to be sold by the Company to Amgen for $4.5 million
in cash and a $1.0 million promissory note pursuant to a stock purchase
agreement dated as of December 31, 1996 (the "Amgen Purchase Agreement"),
concurrently with the closing of the Offering; (iii) 25,000 shares of Common
Stock to be purchased by The Ohio University Foundation at a price of $5.50
per share, pursuant to a stock purchase right; and (iv) 5,303 shares of
Common Stock to be issued to The Ohio University Foundation pursuant to an
anti-dilution adjustment in connection with the Offering. Excludes: (i)
1,786,775 shares of Common Stock reserved for grants or awards under the
Company's 1992 Stock Option Plan, 1996 Stock Incentive Plan and 1996
Employee Stock Purchase Plan, of which (a) options to purchase 695,962
shares of Common Stock were outstanding as of February 28, 1997 under such
stock plans, with a weighted average exercise price of $5.13 per share, and
(b) options to purchase 926,150 shares of Common Stock are to be granted
under the 1996 Stock Incentive Plan upon the closing of the Offering, with
an exercise price equal to the initial public offering price; (ii) 293,022
shares of Common Stock issuable upon exercise of replacement options to be
issued to stockholders of Mercator under the 1997 Stock Option Plan in
connection with the Acquisition (the "Replacement Options"), with a weighted
average exercise price of $1.72 per share; (iii) 31,952 shares of Common
Stock issuable upon exercise of warrants outstanding as of February 28,
1997, with an exercise price of $7.50 per share; and (iv) 27,723 shares of
Common Stock issuable upon exercise of outstanding Mercator warrants, which
will be converted into warrants to purchase Common Stock in connection with
the Acquisition (the "Mercator Warrants"), with a weighted average exercise
price of $6.02 per share. The number of shares of Common Stock to be issued
(i) in the Acquisition, (ii) to Amgen and (iii) to The Ohio University
Foundation will depend upon a variety of factors including the initial
public offering price. See "Capitalization," "Business--Corporate
Agreements," "--Mercator Acquisition," "Management-- Stock Plans," "Certain
Transactions" and "Description of Capital Stock."
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED (1)
HISTORICAL ----------------------------
-------------------------------------------------------------- THREE MONTHS
THREE MONTHS ENDED YEAR ENDED ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
---------------------------------- ---------------------- ------------- ------------
1994 1995 1996 1995 1996 1996 1996
---------- ---------- ---------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PROGENITOR STATEMENT OF OPERATIONS
DATA:
Revenues.......................... $ -- $ 2,821 $ 1,332 $ 202 $ 676 $ 1,832 $ 801
Expenses:
Research and development........ 4,113 4,228 3,873 809 1,066 9,981 2,782
General and administrative...... 1,275 1,116 2,765(2) 355 445 4,358 854
Interest, net................... 648 352 178 24 120 124 39
---------- ---------- ---------- ---------- ---------- ------------- ------------
Total expenses................ 6,036 5,696 6,816 1,188 1,631 14,463 3,675
---------- ---------- ---------- ---------- ---------- ------------- ------------
Net loss.......................... $ (6,036) $ (2,875) $ (5,484) $ (986) $ (955) $ (12,631) $ (2,874)
---------- ---------- ---------- ---------- ---------- ------------- ------------
---------- ---------- ---------- ---------- ---------- ------------- ------------
Net loss per share................ $ (0.95) $ (0.17) $ (1.15) $ (0.26)
---------- ---------- ------------- ------------
---------- ---------- ------------- ------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Shares used in computing net loss per
share................................. 5,758,615 5,784,327 10,973,391 10,999,103
---------- ---------- ------------- ------------
---------- ---------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------------------
PRO FORMA
PROGENITOR FOR ACQUISITION PRO FORMA AS
HISTORICAL AND CONVERSIONS(3) ADJUSTED(4)
---------- ------------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 197 $ 636 $ 32,384
Working capital.................................................................. (944) (2,334) 29,414
Total assets..................................................................... 1,829 4,162 35,910
Long-term obligations............................................................ 5,921 787 715
Deficit accumulated during development stage..................................... (21,113) (43,099) (43,099)
Total stockholders' equity (deficit)............................................. (6,120) (898) 30,922
</TABLE>
- ------------------------------
(1) Assumes the Acquisition, debt and equity conversions, and the Offering
occurred as of October 1, 1995.
(2) Includes $974,000 for costs expensed in accordance with accounting
requirements related to the initial filing of the Registration Statement
with the Securities and Exchange Commission on June 6, 1996.
(3) Gives pro forma effect to: (i) the Acquisition as if it had occurred on
December 31, 1996; (ii) the automatic conversion of all outstanding shares
of Progenitor's Preferred Stock into an aggregate of 2,170,893 shares of
Common Stock upon the closing of the Offering; (iii) the conversion of a
convertible debenture and a portion of the promissory note held by
Interneuron into an aggregate of 529,124 shares of Common Stock (based on
outstanding balances of $5.8 million as of December 31, 1996) upon the
closing of the Offering; and (iv) the issuance of 5,303 shares of Common
Stock to The Ohio University Foundation pursuant to an anti-dilution
adjustment in connection with the Offering. See "Capitalization," "Certain
Transactions--The Ohio University Foundation" and "Description of Capital
Stock--Stock Purchase Right and Warrants."
(4) Pro forma as adjusted for the Offering to give effect to: (i) the issuance
and sale of the 2,750,000 shares of Common Stock offered hereby (after
deducting estimated underwriting discounts and commissions and the estimated
expenses of the Offering) and the receipt and application of the estimated
net proceeds therefrom; (ii) the sale of 500,000 shares of Common Stock to
Amgen for $4.5 million in cash and a $1.0 million promissory note,
concurrently with the closing of the Offering; and (iii) the sale of 25,000
shares of Common Stock to The Ohio University Foundation at a price of $5.50
per share, pursuant to a stock purchase right, concurrently with the closing
of the Offering. See "Use of Proceeds," "Capitalization,"
"Business--Corporate Agreements," "Certain Transactions" and "Description of
Capital Stock."
------------------------------
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING
FINANCIAL INFORMATION, SHARE AND PER SHARE DATA: (I) ASSUMES THE CLOSING OF THE
OFFERING OCCURRED AS OF FEBRUARY 28, 1997 WITH AN INITIAL PUBLIC OFFERING PRICE
OF $11.00 PER SHARE; (II) REFLECTS THE CONSUMMATION OF A 1-FOR-2 REVERSE STOCK
SPLIT TO BE EFFECTED PRIOR TO OR CONCURRENTLY WITH THE OFFERING; (III) REFLECTS
THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF PROGENITOR'S PREFERRED
STOCK INTO AN AGGREGATE OF 2,170,893 SHARES OF COMMON STOCK UPON THE CLOSING OF
THE OFFERING; AND (IV) REFLECTS THE CONVERSION OF A CONVERTIBLE DEBENTURE AND A
PORTION OF THE PROMISSORY NOTE HELD BY INTERNEURON INTO AN AGGREGATE OF 597,331
SHARES OF COMMON STOCK (BASED ON OUTSTANDING BALANCES OF $6.6 MILLION AS OF
FEBRUARY 28, 1997) UPON THE CLOSING OF THE OFFERING. THE NUMBERS OF SHARES OF
COMMON STOCK TO BE ISSUED UPON CONVERSION OF PROGENITOR'S PREFERRED STOCK AND
THE INTERNEURON CONVERTIBLE DEBENTURE AND A PORTION OF THE PROMISSORY NOTE WILL
DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE DATE OF THE CLOSING OF THE
OFFERING AND THE INITIAL PUBLIC OFFERING PRICE. SEE "BUSINESS--CORPORATE
AGREEMENTS," "--MERCATOR ACQUISITION," "CERTAIN TRANSACTIONS," "DESCRIPTION OF
CAPITAL STOCK" AND "UNDERWRITING."
5
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR
STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE IN
THIS PROSPECTUS REGARDING, AMONG OTHER THINGS, UNCERTAINTIES RELATING TO
TECHNOLOGICAL APPROACH OF THE COMPANY; HISTORY OF OPERATING LOSSES AND
ANTICIPATION OF FUTURE LOSSES; UNCERTAINTY OF PRODUCT DEVELOPMENT; NEED FOR
ADDITIONAL CAPITAL AND UNCERTAINTY OF ADDITIONAL FUNDING; DEPENDENCE ON
COLLABORATORS AND LICENSEES; INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE;
UNCERTAINTY OF PATENT AND PROPRIETARY RIGHTS; RISKS ASSOCIATED WITH THE
ACQUISITION OF MERCATOR; MANAGEMENT OF GROWTH, AND RISKS OF ACQUIRING NEW
TECHNOLOGIES; UNCERTAINTIES RELATED TO CLINICAL TRIALS; GOVERNMENT REGULATION
AND UNCERTAINTY OF OBTAINING REGULATORY APPROVAL; DEPENDENCE ON KEY PERSONNEL;
DEPENDENCE ON RESEARCH COLLABORATORS AND SCIENTIFIC ADVISORS; CONTROL OF THE
COMPANY BY, AND POTENTIAL CONFLICTS OF INTEREST WITH, INTERNEURON; UNCERTAINTY
OF HEALTH CARE REFORM MEASURES AND THIRD-PARTY REIMBURSEMENT; AND RISK OF
PRODUCT LIABILITY. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. IT
IS IMPORTANT TO NOTE THAT THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FACTORS DETAILED
BELOW. ACCORDINGLY, IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY.
UNCERTAINTIES RELATING TO TECHNOLOGICAL APPROACH OF THE COMPANY. To date,
the Company has not developed or commercialized any products. There can be no
assurance that the Company's genomics approaches will enable it to discover
genes with functions relevant to the treatment of diseases. There is limited
scientific understanding relating to the role of genes in diseases and
relatively few products based on genetic discoveries have been developed and
commercialized to date. Accordingly, even if the Company is successful in
identifying genes associated with specific diseases, there can be no assurance
that the Company will be successful in marketing its discoveries to
biopharmaceutical firms for use in the development of therapeutic and diagnostic
products or that any such resulting products will be commercialized
successfully.
The development of products based on the Company's discoveries also will be
subject to the risks of failure inherent in the development of products based on
new technologies. These risks include the possibility that any such products
will be found to be ineffective or toxic, or otherwise fail to receive necessary
regulatory approvals; that any such products will be difficult to manufacture on
a commercial scale or will be uneconomical to market; that proprietary rights of
third parties will preclude the Company or its licensees and collaborators from
marketing any such products; or that third parties will market superior or
equivalent products. As a result, there can be no assurance that the Company's
research and development activities or those of its licensees and collaborators
will result in any commercially viable products. See "--Uncertainty of Patents
and Proprietary Rights," "Business--The Company's Genomics System," "--Corporate
Agreements," "--Technology Agreements" and "--License Agreements."
Genomics, biotechnology, developmental biology, disease genetics and
pharmaceutical technologies have undergone and are expected to continue to
undergo rapid and significant change. The Company's future success will depend
in large part on its ability to maintain a competitive position with respect to
these technologies. Rapid technological developments by the Company or others
may result in the Company's technologies becoming obsolete before the Company
recovers any expenses it incurs in connection with its related development
programs. See "--Intense Competition; Rapid Technological Change" and
"Business--Competition."
HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES. Progenitor is a
development stage company that commenced operations in May 1992. As of December
31, 1996, Progenitor had an accumulated deficit of approximately $21.1 million
and a working capital deficit of $944,000. As of December 31, 1996, the Company
had an accumulated deficit of approximately $43.1 million on a pro forma basis
(including
6
<PAGE>
the results of Mercator). In connection with the Acquisition, the Company
expects to incur several nonrecurring charges in the quarter ended June 30, 1997
which in the aggregate are currently estimated to be approximately $30.0
million, including the write-off of costs related to the purchase of in-process
research and development, severance, employee retention and relocation, other
employee benefit costs, the consolidation of operations, the elimination of
duplicate systems and facilities, and other integration costs. These amounts are
preliminary estimates only and could be materially higher. Factors that could
increase such costs include delays beyond May 31, 1997 in the completion of the
Offering, any unexpected employee turnover, unforeseen delays in addressing
duplicate facilities once the Acquisition has been completed and the associated
costs of hiring temporary employees and consultants, and any additional fees and
charges to obtain consents, regulatory approvals or permits. In addition, there
can be no assurance that the Company will not incur additional charges in
subsequent periods to reflect other costs associated with the Acquisition or
from the integration of operations after the Acquisition. Neither the Company
nor any of its collaborative partners or licensees has yet developed products
that have generated any revenues to the Company or entered clinical trials that
would lead to revenues to the Company if successful. To date, all of the
Company's revenues have resulted from payments from collaborative and license
agreements and a development grant from a governmental agency. The Company
expects to incur substantial additional losses over the next several years as it
expands its research and development activities. Payments from collaborators and
licensees, payments under governmental grants and investment income, in each
case, if any, are expected to be the only sources of revenue for the foreseeable
future. The Company has not yet generated any revenues from the achievement of
milestones under its corporate agreements. Royalties or other revenues from
commercial sales of products are not expected for a number of years, if at all.
To achieve profitable operations, the Company, alone or with others, must
successfully discover and functionally characterize medically relevant genes and
thereafter use these discoveries to develop products, conduct preclinical
studies and clinical trials, obtain required regulatory approvals and
successfully manufacture, introduce and market such products, of which there can
be no assurance. The time required to reach or sustain profitability is highly
uncertain and there can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all. Moreover, if profitability is
achieved, the level of profitability cannot be predicted and may vary
significantly from quarter to quarter. See "--Risks Associated with the
Acquisition of Mercator" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
UNCERTAINTY OF PRODUCT DEVELOPMENT. Significant discovery, research and
development efforts will be required prior to the time any of the Company's
genes may lead to product candidates or result in products that may be brought
to the market, if at all. Products, if any, resulting from the Company's
research and development programs are not expected to be commercially available
for a number of years, if at all. Significant additional research and
development efforts and extensive preclinical studies and clinical trials will
be required prior to submission of any regulatory application for commercial
use. There can be no assurance that the Company or any collaborator or licensee
will be permitted to undertake clinical trials of any potential products, if
developed, that sufficient numbers of patients can be enrolled for such trials,
or that such clinical trials will demonstrate that the products tested are safe
and efficacious. Even if clinical trials are successful, there can be no
assurance that the Company or any collaborator or licensee will obtain
regulatory approval for any product, that an approved product can be produced
and distributed in commercial quantities at reasonable costs or gain acceptance
for use by physicians and other health care providers, or that any potential
products will be marketed successfully at prices that would permit the Company
to operate profitably. The failure of any of these events to occur could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--The Company's Genomics System,"
"--Discovery Programs" and "--Government Regulation."
NEED FOR ADDITIONAL CAPITAL; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
expects negative cash flow from operations to continue for the foreseeable
future. The Company will require substantial additional funds to continue
research and development, conduct preclinical studies and clinical trials,
conduct activities relating to commercialization of rights it has retained in
corporate agreements, if any, and expand administrative capabilities. The
Company estimates that at its planned rate of spending, any existing cash and
cash equivalents, together with the net proceeds from the Offering, and the
proceeds
7
<PAGE>
from the sale of the Amgen Shares, and the interest income earned on such
proceeds, will be sufficient to fund operations for the next 18 months. There
can be no assurance, however, that the Company's assumptions regarding its
future levels of expenditures and operating losses will prove accurate. The
Company's future funding requirements will depend on many factors, including the
scientific progress in and the breadth of the Company's research and development
programs; the results of research and development, preclinical studies and
clinical trials conducted by the Company or its collaborative partners or
licensees, if any; the acquisition and licensing of products and technologies or
businesses, if any; the Company's ability to establish and maintain corporate
relationships and academic collaborations; the Company's ability to integrate
the operations of Mercator with those of Progenitor; the Company's ability to
manage growth; competing technological and market developments; the time and
costs involved in filing, prosecuting, defending and enforcing patent and
intellectual property claims; the receipt of licensing or milestone fees from
any current or future collaborative and license arrangements, if established;
the continued funding of governmental research grants; the timing of regulatory
approvals; and other factors. To the extent undertaken by the Company, the time
and costs involved in conducting preclinical studies and clinical trials,
seeking regulatory approvals, and scaling-up manufacturing and commercialization
activities also would increase the Company's funding requirements.
The Company will need to raise substantial additional capital to fund
operations. Prior to the Offering, Interneuron has funded substantially all of
the Company's operations. Interneuron, however, is under no obligation to
provide, and the Company does not expect that Interneuron will provide, any
additional funds in the future. The Company intends to seek additional funding
through public or private equity or debt financing and from collaborators and
licensees. There can be no assurance that additional financing will be available
when needed, or that, if available, such financing will be available on terms
acceptable to the Company. If additional funds are raised by issuing equity
securities, dilution to existing stockholders will result. In addition, in the
event that additional funds are obtained through arrangements with collaborators
or licensees, such arrangements may require the Company to relinquish rights to
certain of its technologies or potential products that it would otherwise seek
to develop or commercialize itself. If funding is insufficient at any time in
the future, the Company may be required to delay, scale back or eliminate some
or all of its research and development programs or cease operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions."
DEPENDENCE ON COLLABORATORS AND LICENSEES. The Company's strategy for
development and commercialization of drugs and other products from its
discoveries depends upon the establishment of various corporate relationships.
The Company expects to rely on these relationships in order to research and
develop potential products, conduct clinical trials, obtain regulatory
approvals, and manufacture and market any resulting products. The Company has
entered into agreements with Amgen, Chiron Corporation ("Chiron") and Novo
Nordisk. The Company's revenues will be dependent on the success of the products
developed through these and future corporate relationships. The failure of the
Company's collaborators and licensees to develop, obtain regulatory approval of,
and market products incorporating the Company's discoveries would have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that any collaborators and
licensees will commit sufficient development resources, technology, regulatory
expertise, manufacturing, marketing and other resources towards developing,
promoting and commercializing products incorporating the Company's discoveries.
Further, competitive conflicts may arise among these third parties that could
prevent them from working cooperatively with the Company. The amount and timing
of resources devoted to these activities by such parties could depend on the
achievement of milestones by the Company and generally will be controlled by
such parties. In addition, the Company's corporate agreements generally provide
the Company's collaborators and licensees with the right to terminate the
agreement in part or in full under certain circumstances. Any such termination
would substantially reduce the likelihood that the applicable product candidate
or candidates would be developed, would obtain regulatory approvals and would be
manufactured and successfully commercialized and any such termination could,
therefore, have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's milestone payments or
royalties from sales of products by collaborators or licensees, if any, may be
less
8
<PAGE>
than the revenues the Company could have generated had it commercialized and
marketed products itself. There can be no assurance that the Company will be
successful in establishing additional or maintaining existing collaborative or
licensing arrangements, that any collaborators or licensees will be successful
in developing and commercializing products or that the Company will receive
milestone payments or generate revenues from royalties sufficient to offset the
Company's significant investment in research and development and other costs. If
the Company chooses in the future to engage directly in the development,
manufacturing and marketing of certain products, it will require substantial
additional funds, personnel and production, and other facilities. There can be
no assurance that any of these resources will be available to the Company on
acceptable terms, if at all. See "--Need for Additional Capital; Uncertainty of
Additional Funding," "Business--Corporate Agreements," "--Technology Agreements"
and "--License Agreements."
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE. Research in the field of
genomics is highly competitive. Competitors of the Company in the genomics area
include, among others, public companies such as Genome Therapeutics Corporation,
Human Genome Sciences, Inc., Incyte Pharmaceuticals, Inc., Microcide
Pharmaceuticals, Inc., Millennium Pharmaceuticals, Inc. ("Millennium"), Myriad
Genetics, Inc. and Sequana Therapeutics, Inc., as well as private companies and
major pharmaceutical companies and universities and other research institutions,
including those receiving funding from the federally funded Human Genome
Project. A number of entities are attempting to rapidly identify and patent
randomly-sequenced genes and gene fragments. In addition, certain other entities
are pursuing a gene identification, characterization and product development
strategy based on gene mapping. The Company's competitors may discover,
characterize or develop important genes in advance of the Company, which could
have a material adverse effect on any related Company discovery program. The
Company expects competition to intensify in genomics research as technical
advances in the field are made and become more widely known.
The Company is subject to significant competition from organizations that
are pursuing the same or similar technologies as those which constitute the
Company's discovery platforms, and from organizations that are pursuing
pharmaceutical or other products that are or may be competitive with the
Company's or its collaborators' or licensees' potential products. Many of the
organizations competing with the Company have greater capital resources, larger
research and development staffs and facilities, greater experience in drug
discovery and development, obtaining regulatory approvals and pharmaceutical
product manufacturing, and greater marketing capabilities than the Company.
The Company is and will continue to be reliant on its collaborators and
licensees for support of its programs, including support for its preclinical and
clinical development, manufacturing and marketing. The Company's present and
future collaborators and licensees are now conducting or in the future are
expected to conduct, multiple product development efforts within each disease or
technology area that is the subject of the relationship with the Company. Any
product candidate or technology of the Company, therefore, may be subject to
internal competition with a potential product under development or technology
platform under evaluation by a collaborator or licensee. See "--Dependence on
Collaborators and Licensees," "Business--Overview," "--The Company's Genomics
System" and "--Competition."
UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS. The Company's success will
depend to a significant extent on its ability to obtain and enforce patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. Because the patent positions of
biotechnology and pharmaceutical companies can be highly uncertain and
frequently involve complex legal and factual questions, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted with certainty. Commercialization of pharmaceutical products
can be subject to substantial delays as a result of the time required for
product development, testing and regulatory approval. The value of any patents
issued or licensed to the Company may depend upon the remaining term of patent
protection available at the time any products covered by such patents are
commercialized.
The Company actively pursues a policy of seeking patent protection for a
number of its proprietary products and technologies. Progenitor has licensed
from Ohio University two issued U.S. patents and pending U.S. patent
applications relating to stem cell technology and to gene delivery technology,
along
9
<PAGE>
with certain corresponding foreign patent applications and one issued foreign
patent. Progenitor presently has eight pending U.S. patent applications which
disclose certain leptin receptors (including various isoforms of the leptin
receptor), nucleic acid molecules encoding the receptors, genetically-engineered
cells and antibodies to the receptors. Among these are two patent applications
filed in September and December 1994, for which the USPTO issued two notices of
allowance, one in September 1996 and one in January 1997, for claims relating to
nucleic acid molecules that encode the B219 leptin receptor. Also, in March
1996, Progenitor's international patent application, corresponding to the
September and December 1994 U.S. applications, was published. The Company
believes that there may be significant litigation regarding patent and other
intellectual property rights relating to leptin and leptin receptors. The
Company is aware that Millennium has filed at least one patent application
relating to a receptor for leptin and its use in obesity applications, and has
licensed to Hoffmann-La Roche Inc. rights to develop certain therapeutics for
obesity using Millennium's discovery of a leptin receptor.
In June 1996, Millennium filed a "Protest" in the USPTO in connection with
the Progenitor applications relating to leptin receptors, particularly the
applications filed in September and December 1994. A Protest is a procedure
available for use by a third party to provide the patent examiner who is
reviewing the involved application or applications with what the third party
believes to be relevant information. The Protest procedure does not afford any
right to the third party to participate in the patent prosecution process beyond
the filing of its written protest. Millennium's Protest primarily argued that
any claims allowed to Progenitor should not be so broad as to cover Millennium's
own leptin receptor. Notwithstanding the Protest, the USPTO recently issued two
notices of allowance for claims in the September and December 1994 applications
relating to nucleic acid molecules encoding the leptin receptor.
There can be no assurance that Millennium's patent application, or
additional patent applications filed by Millennium or others, will not result in
issued patents covering a leptin receptor, the leptin protein or other ligands,
or any of their respective uses, including obesity. There can be no assurance
that the invention by Millennium will be accorded an invention date later than
the Company's invention date, that any patent will issue to the Company or that
any such patent issued to the Company would be broad enough to cover leptin
receptors of Millennium or others. The Company's failure to obtain a patent on a
leptin receptor, or its failure to obtain a patent that covers the leptin
receptors of Millennium or others, or the issuance of a patent to a third party
covering a leptin receptor, the leptin protein or other ligands, or any of their
respective uses, including obesity, could have a material adverse effect on the
Company's business, financial condition and results of operations.
A number of other groups are attempting to identify partial gene sequences
and full-length genes, the functions of which have not been characterized. The
public availability of partial gene sequence information before the Company
applies for patent protection on a corresponding full-length gene could
adversely affect the Company's ability to obtain patent protection with respect
to such gene. To the extent any patents issue to other parties on such partial
or full-length genes, and as other patents issue with the expansion of the
biotechnology industry, the risk increases that the potential products and
processes of the Company or its collaborators or licensees may give rise to
claims of patent infringement.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to human therapeutic uses. Substantial periods of time pass before the USPTO
responds to patent applications. In addition, the coverage claimed in a patent
application can be significantly reduced before a patent is issued.
Consequently, the Company does not know whether any of its pending or future
patent applications will result in the issuance of patents or, if any patents
are issued, whether the patents will be subjected to further proceedings
limiting their scope, and whether they will provide significant proprietary
protection or competitive advantage, or will be circumvented or invalidated.
Because patent applications in the U.S. are maintained in secrecy until patents
issue and patent applications in certain other countries generally are not
published until more than 18 months after they are filed, and since publication
of discoveries in scientific or patent literature often lags behind actual
discoveries, the Company cannot be certain that it or any licensor was the first
creator of inventions covered by
10
<PAGE>
pending patent applications or that it or such licensor was the first to file
patent applications on such inventions.
There can be no assurance that the Company's patents, if issued, would not
be found invalid or unenforceable by a court or that such patents would cover
products or technologies of the Company's competitors. Competitors or potential
competitors may have filed applications for or received patents, and may obtain
additional patents and proprietary rights relating to compounds or processes
competitive with those of the Company. To protect its proprietary rights, the
Company may be required to participate in interference proceedings declared by
the USPTO to determine priority of invention, which could result in substantial
cost to the Company. Moreover, even if the Company's patents issue, there can be
no assurance that they will provide sufficient proprietary protection or will
not be later limited, circumvented or invalidated. Accordingly, there can be no
assurance that the Company will develop proprietary technologies that are
patentable, that the Company's patent applications will result in patents being
issued or that, if issued, patents will afford protection against competitors
with similar technology or products, nor can there be any assurance that the
Company's patents will not be held invalid by a court of competent jurisdiction.
In addition to patent protection, the Company also relies to a significant
extent upon trade secret protection for its confidential and proprietary
information including many of the Company's key discovery technologies. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology. To protect its trade
secrets, Progenitor has required its employees, consultants, scientific advisors
and parties to collaboration and licensing agreements to execute confidentiality
agreements upon the commencement of employment, the consulting relationship or
the collaboration or licensing arrangement, as the case may be, with Progenitor.
In the case of employees, the agreements also provide that all inventions
resulting from work performed by them while employed by Progenitor will be the
exclusive property of Progenitor. Mercator has confidentiality and inventions
assignment agreements with all existing employees but has not entered into such
agreements with all of its former employees and consultants. The Company will
continue to require its employees, consultants, scientific advisors and
collaborators and licensees to execute confidentiality agreements and inventions
assignment agreements (in the case of its employees) upon the commencement of
employment, the consulting relationship or the collaboration or license with the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection of the Company's trade secrets or adequate remedies in the
event of unauthorized use or disclosure of such information, that the Company
can meaningfully protect its rights in such unpatented proprietary technology
through other means, that any obligation to maintain the confidentiality of such
proprietary technology will not be breached by employees, consultants, advisors,
collaborators, licensees or others, that former Mercator employees or
consultants will not disclose proprietary information of Mercator without being
in breach of any confidentiality restriction, or that others will not
independently develop the same or substantially equivalent technology. The loss
of trade secret protection of any of the Company's key discovery technologies
would materially and adversely affect the Company's competitive position and
could have a material adverse effect on the Company's business, financial
condition and results of operations. Finally, disputes may arise as to the
ownership of proprietary rights to the extent that outside collaborators,
licensees or consultants apply technological information developed independently
by them or others to Company projects or apply Company technology to other
projects and, if adversely determined, such disputes could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company may incur substantial costs if it is required to defend itself
in patent suits brought by third parties or if the Company initiates such a suit
to enforce the Company's patents or to determine the validity, scope or
enforceability of other parties' proprietary rights. Any legal action against
the Company or its collaborators or licensees claiming damages and seeking to
enjoin commercial activities relating to the affected products and processes
could, in addition to subjecting the Company to potential liability for damages,
require the Company or its collaborators or licensees to obtain a license or
licenses in order to continue to manufacture or market the affected products and
processes or require the Company or its
11
<PAGE>
collaborators or licensees to cease doing so. There can be no assurance that the
Company or its collaborators or licensees would prevail in any such action or
that any license required under any such patents would be made available on
commercially acceptable terms, if at all. Any adverse outcome of such litigation
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, if the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources. The Company is unable to predict
how courts will resolve any future issues relating to the validity, scope or
enforceability of its patents should they be challenged.
It is uncertain whether any third-party patents will require the Company to
alter its products or processes, obtain licenses, cease certain activities or
pay substantial damages. If any licenses are required, there can be no assurance
that the Company will be able to obtain any such license on commercially
acceptable terms, if at all. Failure by the Company or its collaborators and
licensees to obtain a license to any technology required to commercialize the
Company's discoveries may have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Patents
and Proprietary Rights."
MANAGEMENT OF GROWTH; RISK OF ACQUIRING NEW TECHNOLOGIES. One of the
Company's strategies is to maintain its technological competitiveness by
accessing new equipment and advanced technologies. The expansion of the
Company's scientific infrastructure may involve the retention of additional
personnel, the establishment of new or expanded facilities and the acquisition
of technology rights, products, equipment, businesses or assets of other
companies. There can be no assurance that the Company's management personnel,
systems, procedures and controls will be adequate to support the expansion of
the Company's operations. The acquisition of additional personnel, technology
rights, products, equipment, businesses or assets of other companies, as well as
the entry into new areas of scientific research, will require the dedication of
management resources in order to achieve the strategic objectives associated
with such growth and expansion. There can be no assurance that the Company will
be able to manage successfully the growth and expansion of its operations.
Failure of the Company to manage its growth, or any specific acquisition of
additional capabilities, could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH THE ACQUISITION OF MERCATOR. On February 14, 1997,
Progenitor entered into a definitive Agreement and Plan of Reorganization, as
amended (as the same may be amended, supplemented or modified, the "Acquisition
Agreement") with Mercator under which the operations of the respective companies
will be combined by means of a merger of a wholly-owned subsidiary of Progenitor
with and into Mercator, contingent upon the completion of the Offering. In
completing the Acquisition, Progenitor will rely upon certain representations
and warranties made by Mercator with respect to Mercator and its operations as
well as Progenitor's own due diligence investigation. There can be no assurance
that such representations and warranties are true in all respects or that
Progenitor's due diligence uncovered all materially adverse facts relating to
the assets, research capabilities and operations of Mercator. The
representations and warranties of Mercator do not survive the closing of the
Acquisition and the Company will not have any remedy for breaches of
representations and warranties identified after the closing. Furthermore, the
Acquisition involves the integration of two companies that have previously
operated independently at different locations with separate work forces. No
assurance can be given that difficulties encountered in integrating the
operations of Mercator will be overcome, or that the specific benefits expected
from integration of Mercator, including the addition of new research
capabilities, equipment and technologies, will be achieved or that any
anticipated cost savings will be realized. The acquisition of Mercator also
involves a number of special risks, including assimilation of new operations and
personnel; the diversion of resources from the Company's existing business,
research capabilities, equipment and technologies; coordination of
geographically separated facilities and work forces; management challenges
associated with the integration of the companies in addition to the other
requirements associated with growth of the Company's scientific infrastructure
and research capabilities; assimilation of new management personnel; and
maintenance of standards, controls, procedures and policies. The process of
integrating Mercator's operations, including its personnel, could cause
interruption of, or loss of
12
<PAGE>
momentum in, the activities of the Company's business and operations, including
those of the businesses acquired.
In connection with the Acquisition, the Company expects to incur several
one-time charges in the quarter ended June 30, 1997 which in the aggregate are
currently estimated to be approximately $30.0 million, including the write-off
of costs related to the purchase of in-process research and development,
severance, employee retention, other employee benefit costs, the consolidation
of operations, the elimination of duplicate systems and facilities, and other
integration costs. These amounts are preliminary estimates only and could be
materially higher. Factors that could increase such costs include delays beyond
May 31, 1997 in the completion of the Offering, any unexpected employee
turnover, unforeseen delays in addressing duplicate facilities once the
Acquisition has been completed and the associated costs of hiring temporary
employees and consultants, and any additional fees and charges to obtain
consents, regulatory approvals or permits. In addition, there can be no
assurance that the Company will not incur additional charges in subsequent
periods to reflect other costs associated with the Acquisition or from the
integration of operations after the Acquisition. There can be no assurance that
the Acquisition will not have a material adverse effect on the business,
financial condition and results of operations of the Company or that the Company
will realize the benefits and strategic objectives sought through the
Acquisition. Costs associated with the Acquisition, or liabilities and expenses
associated with the operations of Mercator, that exceed the expectations of
Progenitor, could have a material adverse effect on the Company's financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Business--Human Resources" and "--Facilities."
Under Section 382 of the Internal Revenue Code of 1986, as amended,
utilization of prior net operating loss carryforwards is limited after an
ownership change to an annual amount equal to the value of the loss
corporation's stock immediately before the date of the ownership change,
multiplied by the federal long-term tax exempt rate. To date, the Company has
not incurred an ownership change under Section 382. As a result of the actions
contemplated by the Offering, the Acquisition and the related transactions, the
Company is likely to incur such a change of ownership, in which case the
Company's ability to use the losses incurred prior to the date of the Offering
may be limited as to timing, pursuant to the Internal Revenue Code Section 382.
UNCERTAINTIES RELATED TO CLINICAL TRIALS. Before seeking regulatory
approvals for the commercial sale of any products that may be developed
incorporating the Company's discoveries, the Company or its collaborators or
licensees will be required to demonstrate through preclinical studies and
clinical trials that such products are safe and effective for use in the target
indications. To date, no product candidates incorporating the Company's
discoveries have entered clinical trials. The results from preclinical studies
and early clinical trials may not be indicative of results that will be obtained
in large-scale testing, and there can be no assurance that any clinical trials,
if undertaken, will demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals or will result in marketable products. Clinical
trials also are often conducted with patients having advanced stages of disease.
During the course of treatment, these patients can die or suffer other adverse
medical effects for reasons that may not be related to the product candidate
being tested but which can nevertheless affect clinical trial results. A number
of companies in the biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after achieving promising results in earlier
trials. If products developed by the Company or its collaborators or licensees
are not shown to be safe and effective in clinical trials, the resulting delays
in developing other product candidates and conducting related preclinical
testing and clinical trials, as well as the need for additional financing, would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--The Company's Genomics System" and
"--Discovery Programs."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL. Prior to
marketing, any new drug or other product developed by the Company or its
collaborators or licensees must undergo an extensive regulatory approval process
in the United States and other countries. This regulatory process, which
includes preclinical studies and clinical trials, and may include post-marketing
studies, of each product candidate to establish its safety and efficacy, usually
takes many years and requires the expenditure of substantial resources.
Preclinical tests include laboratory evaluations and will require animal studies
13
<PAGE>
conducted in accordance with the United States Food and Drug Administration's
("FDA") current Good Laboratory Practices ("cGLP") regulations to assess the
product's potential safety and efficacy. Data obtained from preclinical studies
and clinical trials are susceptible to varying interpretations that could delay,
limit or prevent regulatory approval. Delays or rejections also may be
encountered based upon changes in FDA policies for drug or biologic approval
during the period of product development and FDA regulatory review of each new
drug application ("NDA") submitted in the case of new pharmaceutical agents, or
product license application ("PLA") in the case of biologics. Product
development of new pharmaceuticals is highly uncertain, and unanticipated
developments, clinical or regulatory delays, unexpected adverse side effects or
inadequate therapeutic efficacy could slow or prevent the product development
efforts of the Company and its collaborators or licensees, and have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that regulatory approval will be obtained
for any drugs or other products developed by the Company or its collaborators or
licensees. Furthermore, regulatory approval may entail limitations on the
indicated use of a drug or other product. Because certain of the products likely
to result from the Company's discovery programs involve the application of new
technologies and may be based upon a new therapeutic approach, such products may
be subject to substantial additional review by various government regulatory
authorities other than the FDA and, as a result, regulatory approvals may be
obtained more slowly than for products using conventional technologies. Under
current guidelines, proposals to conduct clinical research involving gene
therapy at institutions supported by the National Institutes of Health ("NIH")
must be approved by the Recombinant DNA Advisory Committee ("RAC") and the NIH.
Furthermore, gene therapies are relatively new technologies and have not been
tested extensively in humans. The regulatory requirements governing these
products and related clinical procedures for their use are uncertain and are
subject to change. The NIH has proposed revised rules with respect to the RAC
that would, among other things, remove the RAC's authority over the approval of
individual gene therapy experiments. There can be no assurance, however, that
such proposed rules will be adopted.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Among the conditions for product
approval and continued marketing approval is that the quality control and
manufacturing procedures of the Company or its collaborators or licensees
conform to the FDA's current good manufacturing practice ("cGMP") regulations
which must be followed at all times. In complying with cGMP requirements,
manufacturers must expend time, money and effort on a continuing basis in
production, record keeping and quality control. Manufacturing establishments,
both domestic and foreign, are subject to inspection by or under the authority
of the FDA and by other federal, state and local agencies. Failure to pass such
inspections may subject the manufacturer to possible FDA actions such as the
suspension of manufacturing, seizure of the product, withdrawal of approval or
other regulatory sanctions. The FDA also may require the manufacturer to recall
a product from the market.
Discovery of previously unknown problems with a product may have adverse
effects on the Company's business, including withdrawal of the product from the
market. Violations of regulatory requirements at any stage, including
preclinical studies and clinical trials, the approval process or post-approval,
may result in various adverse consequences to the Company, including the FDA's
delay in approval or refusal to approve a product, withdrawal of an approved
product from the market or the imposition of criminal penalties against the
manufacturer and NDA or PLA holder. The Company has not submitted an
investigational new drug application ("IND") for any product candidate, and no
product candidate has been approved for commercialization in the U.S. or
elsewhere. The Company intends to rely primarily on its collaborators or
licensees to file INDs and generally direct the regulatory approval process. No
assurance can be given that the Company or any of its collaborators or licensees
will be able to conduct clinical testing or obtain the necessary approvals from
the FDA or other regulatory authorities for any products. Failure to obtain
required governmental approvals will delay or preclude the Company's
collaborators or licensees from marketing drugs or other products developed by
the Company or limit the commercial use of such products and could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Government Regulation."
14
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent upon the
principal members of its scientific and management staff and the services of Dr.
Douglass B. Given, President and Chief Executive Officer, and Dr. H. Ralph
Snodgrass, Vice President, Research and Chief Scientific Officer, in particular.
The loss of either of these persons could have a material adverse effect on the
Company's business, financial condition and results of operations. In order to
support the Company's existing operations, the Company will be required to hire
and retain additional management, administrative and financial personnel.
Recruiting and retaining qualified scientific personnel and advisors to perform
research and development work in the future also will be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain such personnel and advisors on acceptable terms given the
competition among numerous pharmaceutical, biotechnology and other companies,
universities and other research institutions for experienced personnel and
advisors. In addition, the Company's anticipated growth and expansion, including
the Acquisition, is expected to place increased demands on the Company's
resources and management skills. The failure of the Company's existing personnel
to handle such increased demands or the Company's failure to attract and to
retain additional personnel with such capabilities could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "--Risks Associated with the Acquisition of Mercator," "Business--Human
Resources" and "Management."
DEPENDENCE ON RESEARCH COLLABORATORS AND SCIENTIFIC ADVISORS. The Company
has relationships with collaborators at academic and other institutions who
conduct research in cooperation with the Company. Such collaborators are not
employees of the Company. All of the Company's consultants are employed by
employers other than the Company and may have commitments to, or consulting or
advisory contracts with, other entities that may limit their availability to the
Company. As a result, the Company has limited control over their activities and,
except as otherwise required by its collaboration and consulting agreements, can
expect only limited amounts of their time to be dedicated to the Company's
activities. The potential success of the Company's discovery programs depends in
part on continued collaborations with researchers at academic and other
institutions. There can be no assurance that the Company will be able to
negotiate additional acceptable collaborations at academic and other
institutions or that its existing collaborations will be maintained or be
successful.
The Company's research collaborators and scientific advisors sign agreements
which provide for confidentiality of the Company's proprietary information and
results of studies, but not all of Mercator's former employees and consultants
have signed such agreements. There can be no assurance that the Company will be
able to maintain the confidentiality of its technology and other confidential
information in connection with every collaboration, and any unauthorized
dissemination of the Company's confidential information could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Uncertainty of Patents and Proprietary Rights."
CONTROL OF COMPANY BY, AND POTENTIAL CONFLICTS OF INTEREST WITH,
INTERNEURON. Following the closing of the Offering and the Acquisition,
Interneuron is expected to own approximately 43% of the outstanding Common Stock
(approximately 41% if the Underwriters' over-allotment option is exercised in
full) based upon certain assumptions. The actual ownership percentage of
Interneuron in the Company after the Offering will depend upon a variety of
factors, including: (i) the amount of the Final Acquisition Consideration
payable with respect to the Acquisition; (ii) the outstanding balances of loans
from Interneuron to the Company that will be converted into Common Stock upon
the closing of the Offering; (iii) the initial public offering price which will
determine the number of shares of Common Stock to be issued in the Acquisition,
to be issued upon conversion of outstanding balances of loans from Interneuron
to the Company, to be issued in respect of the Amgen Purchase Agreement, and to
be issued to Interneuron in connection with the conversion provisions of its
Series A Preferred Stock upon the closing of the Offering; and (iv) the passage
of measurement dates for determining the guaranteed quarterly return to the
holders of the Series A Preferred Stock on each of April 7, July 7, October 7
and January 7. Interneuron is and will continue to be the Company's largest
stockholder. Accordingly, Interneuron will continue to have substantial
influence over the election of directors of the Company and other matters
submitted to a stockholder vote, including extraordinary corporate transactions
such as a merger or sale of
15
<PAGE>
substantially all of the Company's assets. In addition, the Company and
Interneuron intend to enter into an intercompany services agreement that will
provide among other things that in the event of any future equity offering by
the Company, Interneuron will have the right to purchase (at the same price and
on the same terms as such equity offering) a portion of the shares being offered
so as to maintain its fully-diluted interest in the Company immediately prior to
such equity offering, subject to certain limitations. Interneuron may elect to
increase its ownership percentage in the Company through other means, including
additional equity investments or the purchase of Common Stock in the open
market. Interneuron, however, has not made any commitment to purchase additional
securities and there can be no assurance that it will do so. Interneuron's
ownership of a substantial block of the Company's voting stock could have the
effect of delaying or preventing sales of additional securities of the Company
or a sale of the Company or other change of control supported by the other
stockholders of the Company. In addition, the Company may be subject to various
risks arising from Interneuron's influence over the Company, including conflicts
of interest relating to new business opportunities that could be pursued by the
Company or by Interneuron and its other affiliates, and significant corporate
transactions for which stockholder approval is required. See "Certain
Transactions--Relationship with Interneuron," "Principal Stockholders" and
"Description of Capital Stock--Preferred Stock."
UNCERTAINTY OF HEALTH CARE REFORM MEASURES AND THIRD-PARTY
REIMBURSEMENT. The business and financial condition of pharmaceutical and
biotechnology companies will continue to be affected by the efforts of
third-party payors, such as government health administration authorities,
private health insurers and other organizations, to contain or reduce the cost
of health care. In the U.S. and in certain foreign jurisdictions there have
been, and the Company expects that there will continue to be, a number of
legislative and regulatory proposals aimed at changing the health care system.
While the Company cannot predict whether any such legislative or regulatory
proposals will be adopted or the effect that such proposals may have on its
business, the consideration or approval of such proposals could have a material
adverse effect on the trading and market price of the Common Stock or on the
Company's ability to raise capital or to complete additional corporate
agreements, and the adoption of such proposals could have a material adverse
effect on the Company's business, financial condition and results of operations.
In both domestic and foreign markets, successful commercial sales of the
Company's or its collaborators' or licensees' potential products will depend in
part on the availability of reimbursement from government and health
administrative authorities, private health insurers or other third-party payors.
Third-party payors are increasingly challenging the price and cost-effectiveness
of medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. Future legislation
and regulations affecting the pricing of pharmaceuticals could further limit
reimbursement for medical products and services. There can be no assurance that
any of the Company's potential products will be considered cost-effective or
that adequate third-party reimbursement will be available to enable the Company,
its collaborators or licensees to maintain price levels sufficient to realize an
appropriate return on its investment. In addition, the trend toward managed
health care in the U.S. and the concurrent growth of managed care organizations,
such as health maintenance organizations, which could control or significantly
influence the purchase of health care services and products, as well as
legislative proposals to reduce government insurance programs, could result in
pricing pressure for any products that might be developed by the Company. If
adequate reimbursement is not provided by government and other third-party
payors for the Company's or its collaborators' or licensees' potential products,
there would be a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Government Regulation."
RISK OF PRODUCT LIABILITY. The testing, manufacture, marketing and sale of
pharmaceutical and other products entail the inherent risk of liability claims
or product recalls and associated adverse publicity. Clinical trials and sales
by the Company or its collaborators or licensees of potential products
incorporating the Company's discoveries may expose the Company to potential
liability resulting from the use of such products. Such liability might result
from claims made directly by consumers or by regulatory agencies, pharmaceutical
companies or others selling such products. The Company currently has a limited
amount of clinical trial and product liability insurance coverage through
Interneuron. The Company will seek to
16
<PAGE>
obtain its own coverage upon completion of the Offering and to maintain and
appropriately increase such coverage as clinical development of any product
candidates progresses and if and when its products are ready to be
commercialized. There can be no assurance that the Company will be able to
obtain such insurance or, if obtained, that such insurance can be acquired at a
reasonable cost or in sufficient amounts to protect the Company against such
liability. Certain of the Company's license agreements require it to indemnify
licensors against product liability claims arising from products developed using
the licensed technology. Also, certain of these agreements and other
collaborative and license agreements require the Company to maintain minimum
levels of insurance coverage. The failure to maintain product liability
coverage, the occurrence of any product liability claim or a recall of products
of the Company or its collaborators or licensees, if developed, could inhibit or
prevent commercialization of products being developed by the Company and could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, to the extent any product liability
claim exceeds the amount of any insurance coverage, the Company's business,
financial condition and results of operations could be materially and adversely
affected. See "Business--Corporate Agreements," "--Technology Agreements,"
"--License Agreements" and "--Product Liability Insurance."
NO PRIOR TRADING MARKET; NO ASSURANCE OF ACTIVE TRADING MARKET; POTENTIAL
VOLATILITY OF STOCK PRICE. Prior to the Offering, there has been no public
market for the Common Stock and there can be no assurance that an active public
market for the Common Stock will develop or be sustained after the Offering. The
initial public offering price will be determined through negotiations between
the Company and representatives of the Underwriters and there can be no
assurance that future market prices for the Common Stock will equal or exceed
the initial public offering price. The stock market has experienced significant
price and volume fluctuations that are often unrelated to the operating
performance of particular companies. In addition, the market prices of
securities of other biotechnology companies in the past have been highly
volatile and the market price of the Company's Common Stock also may experience
such volatility. Factors such as the results of preclinical studies and clinical
trials by the Company or its collaborative partners, licensees or competitors,
evidence of the safety or efficacy of products of the Company or its
competitors, announcements of technological innovations or new discoveries,
product opportunities or products by the Company or its competitors, changes in
governmental regulations or third-party reimbursement policies, developments in
patent or other proprietary rights of the Company or its competitors,
fluctuations in the Company's operating results and changes in general market
conditions for biotechnology stocks could have an adverse impact on the future
price of the Common Stock. See "Underwriting."
ANTI-TAKEOVER CONSIDERATIONS. After the Offering, the Company will have the
authority to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the powers, designations, preferences and relative rights
thereof without any further vote or action by the Company's stockholders. The
Company has no current plans to issue shares of Preferred Stock. However, the
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock would dilute the voting power of
holders of Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company. In addition, all outstanding
options under the Company's 1992 Stock Option Plan and 1996 Stock Incentive Plan
become exercisable, and purchase dates under the 1996 Employee Stock Purchase
Plan could be accelerated, upon certain changes in control of the Company. The
Company is subject to the provisions of Section 203 of the Delaware General
Corporation Law, which could delay or make more difficult a merger, tender offer
or proxy contest involving the Company and may have the effect of discouraging
takeovers which could be in the best interest of certain stockholders. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. There can be no assurance that this provision, the rights
of option holders and the Company's ability to issue Preferred Stock will not
have an adverse effect on the market value of the Company's stock in the future.
See "Management--Stock Plans" and "Description of Capital Stock."
HAZARDOUS AND RADIOACTIVE MATERIALS; ENVIRONMENTAL MATTERS. Research and
development conducted by the Company involves the controlled use of hazardous
materials, chemicals, biological materials and
17
<PAGE>
radioactive compounds. The Company, and its collaborators and licensees, as
applicable, are subject to international, federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such substances and certain waste products. The Company believes that the safety
procedures relating to its in-house research and development and production
efforts are in material compliance with the standards currently prescribed by
such laws and regulations. However, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such an accident, the Company could be held liable for any resulting damages,
and any such liability could exceed the Company's resources. Moreover, there can
be no assurance that the Company's collaborators and licensees are and will
continue to be in compliance with such standards or that the Company will not be
required to incur significant costs in the future to comply with new or modified
standards. In such events, there would be a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Government Regulation."
MANAGEMENT DISCRETION AS TO USE OF PROCEEDS. The Company intends to use the
net proceeds of the Offering, together with the cash proceeds received from the
sale of the Amgen Shares, primarily for research and development. In addition,
the Company intends to use a portion of such net proceeds as follows: (i)
approximately $3.0 million to repay the Interneuron Bridge Loan (as defined
below); (ii) approximately $1.0 million to pay expenses relating to employee
benefit and retention plans relating to the Acquisition; and (iii) approximately
$500,000 to reimburse Interneuron for certain costs of the Offering incurred
after October 1, 1996. In the event the Company consolidates its operations in
California, the Company may use approximately $2.5 million of such net proceeds
to facilitate employee relocation, plant closing and consolidation. The Company
anticipates using the balance of such net proceeds for the expansion or upgrade
of facilities, acquisition of equipment and for working capital and other
general corporate purposes. The Company also may use such proceeds for other
purposes, including the acquisition of technology rights, products, equipment,
businesses or assets of other companies. No such transactions involving a
material amount of consideration are being negotiated as of the date of this
Prospectus. Accordingly, management will retain broad discretion over the use of
such net proceeds. There can be no assurance as to the timing or application of
such proceeds, or that the application thereof will not have a material adverse
effect on the Company's future business, financial condition or results of
operations. See "Use of Proceeds," "Certain Transactions" and "Description of
Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POSSIBLE ADVERSE
EFFECT ON STOCK PRICE. Prior to the Offering, there has not been any public
market for the Common Stock and there can be no assurance that a significant
public market for the Common Stock will be developed or be sustained after the
Offering. Sales of substantial amounts of Common Stock in the public market
after the Offering, or the possibility of such sales occurring, could adversely
affect prevailing market prices for the Common Stock or the future ability of
the Company to raise capital through an offering of equity securities.
After the Offering, the Company will have outstanding 10,614,998 shares of
Common Stock (11,027,498 shares if the Underwriters' over-allotment option is
exercised in full), including the shares of Common Stock to be issued to
Mercator stockholders in the Acquisition, the Amgen Shares and the 25,000 shares
to be purchased by The Ohio University Foundation. Of these shares, the
2,750,000 shares of Common Stock offered hereby will be freely tradeable without
restriction in the public market under the Securities Act of 1933, as amended
(the "Securities Act"), unless such shares are held by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act. The
shares of the Company's Common Stock to be issued in connection with the
Acquisition will be registered under the Company's Registration Statement on
Form S-4. However, 1,650,123 of such shares issued to "affiliates" of Mercator
within the meaning of Rule 145 under the Securities Act will be subject to
certain volume, manner of sale and other limitations under Rules 144 and 145.
The remaining 6,185,743 shares of Common Stock outstanding upon completion
of the Offering will be "restricted securities" as that term is defined in Rule
144 ("Restricted Shares"). The Restricted Shares were issued and sold by the
Company in private transactions in reliance upon exemptions from registration
under the Securities Act. Restricted Shares may not be sold in the public market
unless they are registered under the Securities Act or are sold pursuant to Rule
144 or another exemption from registration.
18
<PAGE>
Pursuant to "lockup" agreements, all of the Company's executive officers and
directors and certain stockholders, who collectively hold 1,007,581 of such
Restricted Shares, have agreed not to offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any such shares for a period of 180
days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. Interneuron will hold 4,529,745 Restricted Shares and has
agreed pursuant to a lockup agreement not to offer, sell or otherwise dispose of
any of its Restricted Shares for a period of 365 days from the date of this
Prospectus without the prior written consent of Lehman Brothers Inc. The Company
also has agreed that it will not offer, sell or otherwise dispose of Common
Stock for a period of 180 days from the date of this Prospectus, other than
pursuant to existing stock option plans, without the prior written consent of
Lehman Brothers Inc. In addition, Amgen has agreed not to offer, sell or
otherwise dispose of, for a period of 180 days from the date of this Prospectus,
any of the Amgen Shares without the prior written consent of the Company, and
the Company has agreed in the Underwriting Agreement that it will not grant such
consent without the prior written consent of Lehman Brothers Inc. To date,
substantially all stockholders and optionholders of Mercator have entered into
lockup agreements ("Mercator Lockup Agreements"), pursuant to which they have
agreed not to offer, sell or otherwise dispose of shares of the Company's Common
Stock acquired in the Acquisition (including upon the exercise of any
Replacement Options after the Acquisition) without the prior written consent of
Lehman Brothers Inc. Such restrictions lapse as to one-third of all shares
beneficially owned by a holder after each of 180 days, 270 days and 365 days
following completion of the Acquisition. It is a condition to the closing of the
Acquisition that all stockholders and optionholders of Mercator enter into such
Mercator Lockup Agreements, although there can be no assurance that such persons
will do so.
Upon termination of the agreements described above, approximately 692,362,
550,041 and 5,579,786 of such shares will be eligible for immediate sale in the
public market beginning 181 days, 271 and 366 days, respectively, after the date
of this Prospectus, subject to certain volume, manner of sale and other
limitations under Rules 144 and 145 and approximately 843,360, 9,711 and 40,014
of such shares will be eligible for immediate sale in the public market
beginning 181, 271 and 366 days after the date of this Prospectus without
limitation under Rule 144(k). Lehman Brothers Inc. may, at any time without
notice, release all or any portion of the shares subject to such agreements.
As of February 28, 1996, options to purchase a total of 988,984 shares were
outstanding under the Company's stock option plans (including the 1997 Stock
Option Plan). Of such shares, approximately 730,112, 97,674 and 97,674 shares
are subject to lockup agreements for a period of 180, 270 and 365 days from the
date of this Prospectus, and the remaining 63,524 shares will be available for
sale in the public market 90 days after the date of this Prospectus pursuant to
Rule 701. As of February 28, 1996, 1,786,775 shares were available or were to be
reserved for future option grants under such plans, and options to purchase
926,150 shares of Common Stock were to be granted under the 1996 Stock Incentive
Plan upon the closing of the Offering.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares of the Company are aggregated) who
has beneficially owned Restricted Shares for at least one year (including the
holding period of any prior owner who is not an affiliate of the Company) would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (approximately 106,150 shares immediately after the Offering), or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner who is not an affiliate of the
Company) is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701
19
<PAGE>
under the Act, which permit non-affiliates to sell their Rule 701 shares without
having to comply with the public information, holding period, volume limitation
or notice provisions of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with Rule 144's holding period restrictions, in
each case commencing 90 days after the date of this Prospectus.
After the effective date of the Offering, the Company intends to file
registration statements on Form S-8 to register an aggregate of 695,962 shares
of Common Stock reserved for issuance upon exercise of outstanding options, an
aggregate of 926,150 shares of Common Stock reserved for issuance pursuant to
options to be granted upon the closing of the Offering with an exercise price
equal to the initial public offering price, an aggregate of 1,786,775 shares of
Common Stock to be reserved for grants or awards under its 1992 Stock Option
Plan, 1996 Stock Incentive Plan and 1996 Employee Stock Purchase Plan and an
aggregate of 293,022 shares of Common Stock subject to Replacement Options that
are reserved for issuance under its 1997 Stock Option Plan. Such registration
statements will become effective automatically upon filing. Shares issued under
the foregoing plans after the filing of the registration statements on Form S-8
may be sold in the open market subject, in the case of certain holders, to the
Rule 144 limitations applicable to affiliates, the above-referenced lockup
agreements and vesting restrictions imposed by the Company.
After the closing of the Offering, 31,952 shares of Common Stock issuable
upon exercise of outstanding warrants will be entitled to certain rights with
respect to the registration of such shares under the Securities Act. Certain
registration rights also have been granted to Amgen in connection with the
purchase of the Amgen Shares. See "Description of Capital Stock--Registration
Rights" and "Shares Eligible for Future Sale."
DILUTION. Investors purchasing shares of Common Stock in the Offering will
incur immediate and substantial dilution equal to $8.07 per share. If the Common
Stock is sold at a price of less than $11.00 per share, the per share amount of
dilution will be lower, however, investors purchasing in the Offering will own a
lesser percentage of the total shares of Common Stock outstanding as a result of
the issuance of additional shares of Common Stock to stockholders of Mercator in
connection with the Acquisition as well as the issuance of additional shares of
Common Stock to Interneuron and other holders of Progenitor's Preferred Stock
upon conversion into Common Stock of such Preferred Stock and the repayment of
amounts owed to Interneuron. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has never declared or paid cash dividends
on its Common Stock. The Company currently intends to retain any future earnings
to finance the growth and development of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. See "Dividend
Policy."
USE OF PROCEEDS
The aggregate net proceeds from the sale of the 2,750,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $11.00 per
share are estimated to be approximately $27.2 million ($31.4 million if the
Underwriters' over-allotment option is exercised in full), after deducting
estimated underwriting discounts and commissions and estimated expenses of the
Offering payable by the Company. The Company will also receive $4.5 million in
cash and a $1.0 million promissory note from the sale of the Amgen Shares, and
approximately $137,000 in cash from the sale of 25,000 shares of Common Stock to
The Ohio University Foundation, pursuant to a stock purchase right.
The Company intends to use the net proceeds of the Offering together with
the cash proceeds received from sale of the Amgen Shares, primarily for research
and development. In addition, the Company intends to use a portion of such net
proceeds as follows: (i) approximately $3.0 million to repay the Interneuron
Bridge Loan (as defined below); (ii) approximately $1.0 million to pay expenses
relating to employee benefit and retention plans relating to the Acquisition;
and (iii) approximately $500,000 to reimburse Interneuron for certain costs of
the Offering incurred after October 1, 1996. In the event the Company
consolidates its operations in California, the Company may use approximately
$2.5 million of
20
<PAGE>
such net proceeds to facilitate employee relocation, and for the consolidation
of operations and elimination of duplicate systems and facilities. The Company
anticipates using the balance of such net proceeds for the expansion or upgrade
of facilities, acquisition of equipment and for working capital and other
general corporate purposes. The Company also may use a portion of the net
proceeds of the Offering to acquire technology rights, products, equipment,
businesses or assets of other companies. No such transactions involving a
material amount of consideration are being negotiated as of the date of this
Prospectus. In connection with the Company's bridge financing of Mercator prior
to the closing of the Acquisition, Interneuron has agreed to provide to the
Company a line of credit of up to an aggregate maximum amount of $6.6 million
bearing interest at the rate of 10% per annum becoming due upon the closing of
the Acquisition (the "Interneuron Bridge Loan"). The amounts actually expended
for each purpose will depend on numerous factors, including the scientific
progress in and the breadth of the Company's research and development programs;
the results of research and development, preclinical studies and clinical trials
conducted by the Company or its collaborative partners or licensees, if any; the
acquisition and licensing of products and technologies; the Company's ability to
establish and maintain relationships with corporate and academic collaborators;
the ability of the Company to integrate the operations of Mercator with those of
Progenitor; the Company's ability to manage growth; competing technological and
market developments; the time and costs involved in filing, prosecuting,
defending and enforcing patent and intellectual property claims; the receipt of
licensing or milestone fees from any current or future collaborative
arrangements, if established; the continued funding of governmental research
grants; the timing of regulatory approvals, if any; and other factors. The
Company estimates that, at its planned rate of spending, subject to the factors
described above, the net proceeds of the Offering, together with the proceeds
from the sale of the Amgen Shares, and the interest income earned on such
proceeds, together with any existing cash and cash equivalents, will be
sufficient to meet its funding requirements for the next 18 months. There can be
no assurance, however, that the Company's assumptions regarding its future
levels of expenditures and operating losses will prove accurate. Pending such
uses, the Company intends to invest the net proceeds of the Offering in
investment grade, interest-bearing securities. See "Risk Factors--History of
Operating Losses; Anticipation of Future Losses," "--Need for Additional
Capital; Uncertainty of Additional Funding," "--Management Discretion as to Use
of Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," "Certain Transactions"
and "Description of Capital Stock."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on shares of its
Common Stock. The Company currently intends to retain any future earnings for
its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future. Any payment of cash dividends would be made at the
discretion of the Board of Directors after taking into account various factors,
including the Company's financial condition, results of operations, current and
anticipated cash needs and plans for expansion.
21
<PAGE>
CAPITALIZATION
The following table sets forth (i) the historical capitalization of
Progenitor as of December 31, 1996 on an actual basis as if the 1-for-2 reverse
stock split had occurred prior to December 31, 1996; (ii) the Company's pro
forma capitalization as of December 31, 1996 as if the Acquisition had occurred
as of December 31, 1996 (assuming Final Acquisition Consideration (as defined
below) of $22.0 million for Mercator) and giving effect to (a) the automatic
conversion of all outstanding shares of Progenitor's Preferred Stock into an
aggregate of 2,170,893 shares of Common Stock upon the closing of the Offering,
(b) the conversion of a convertible debenture and a portion of the promissory
note held by Interneuron into an aggregate of 529,124 shares of Common Stock
(based on outstanding balances of $5.8 million as of December 31, 1996), and (c)
the issuance of 5,303 shares of Common Stock to The Ohio University Foundation
pursuant to an anti-dilution adjustment in connection with the Offering; and
(iii) on a pro forma as adjusted basis to reflect (a) the issuance and sale of
the 2,750,000 shares of Common Stock offered hereby (after deducting estimated
underwriting discounts and commissions and the estimated expenses of the
Offering) and the receipt and application of the estimated net proceeds
therefrom, (b) the sale of 500,000 shares of Common Stock to Amgen, concurrently
with the closing of the Offering, and (c) the sale of 25,000 shares of Common
Stock to The Ohio University Foundation at a price of $5.50 per share, pursuant
to a stock purchase right, concurrently with the closing of the Offering. The
number of shares of Common Stock to be issued (i) upon conversion of
Progenitor's Preferred Stock, (ii) upon conversion of the Interneuron
convertible debenture and a portion of the promissory note, (iii) in the
Acquisition, (iv) to Amgen and (v) to The Ohio University Foundation will depend
upon a number of factors including the date of the closing of the Offering and
the initial public offering price. See "Use of Proceeds," "Business--Corporate
Agreements," "--Mercator Acquisition," "Certain Transactions" and "Description
of Capital Stock."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------------------------
PRO FORMA
PROGENITOR FOR ACQUISITION PRO FORMA AS
HISTORICAL AND CONVERSIONS ADJUSTED
----------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................................................ $ 197 $ 636 $ 32,384
----------- --------------- ------------
----------- --------------- ------------
Long-term obligations (1)............................................................ $ 5,921 $ 787 $ 715
Stockholders' equity (deficit):
Preferred Stock, Series A $0.01 par value: 2,120,000 shares authorized; 2,020,496
shares issued and outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted................................. 20 -- --
Preferred Stock, Series B $0.01 par value: 880,000 shares authorized; 349,000
shares issued and outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted................................. 3 -- --
Common Stock $0.001 par value: 39,000,000 shares authorized; 2,885,904 shares
issued and outstanding, actual; 7,270,479 shares issued and outstanding, pro
forma; and 10,545,479 shares issued and outstanding, pro forma as adjusted (2)... 3 7 10
Shareholder promissory note receivable............................................. -- -- (1,000)
Additional paid-in capital......................................................... 14,967 42,194 75,011
Deficit accumulated during development stage....................................... (21,113) (43,099) (43,099)
----------- --------------- ------------
Total stockholders' equity (deficit)............................................. (6,120) (898) 30,922
----------- --------------- ------------
Total capitalization........................................................... $ (199) $ (111) $ 31,637
----------- --------------- ------------
----------- --------------- ------------
</TABLE>
- ------------------------------
(1) See Notes 5, 9 and 10 to the Progenitor Financial Statements.
(2) Excludes: (i) 1,786,775 shares of Common Stock reserved for grants or awards
under the Company's 1992 Stock Option Plan, 1996 Stock Incentive Plan and
1996 Employee Stock Purchase Plan, of which (a) options to purchase 695,962
shares of Common Stock were outstanding as of February 28, 1997 under such
stock plans, with a weighted average exercise price of $5.13 per share, and
(b) options to purchase 926,150 shares of Common Stock are to be granted
under the 1996 Stock Incentive Plan upon the closing of the Offering, with
an exercise price equal to the initial public offering price; (ii) 293,022
shares of Common Stock to be issuable upon exercise of Replacement Options
to be issued under the 1997 Stock Option Plan in connection with the
Acquisition, with a weighted average exercise price of $1.72 per share;
(iii) 31,952 shares of Common Stock issuable upon exercise of warrants
outstanding as of February 28, 1997, with an exercise price of $7.50 per
share; and (iv) 27,723 shares of Common Stock issuable upon exercise of the
Mercator Warrants, with a weighted average exercise price of $6.02 per
share. See "Management--Stock Plans," "Certain Transactions" and
"Description of Capital Stock."
22
<PAGE>
DILUTION
Pro forma net tangible book value per share is equal to the Company's net
tangible assets (tangible assets of the Company less total liabilities) divided
by 7,270,479 shares of Common Stock outstanding as of December 31, 1996 (as if
the 1-for-2 reverse split of the Company's Common Stock had occurred prior to
December 31, 1996), assuming (i) the Acquisition occurred as of December 31,
1996, (ii) the automatic conversion of all outstanding shares of Progenitor's
Preferred Stock into an aggregate of 2,170,893 shares of Common Stock upon the
closing of the Offering, (iii) the conversion of a convertible debenture and a
portion of the promissory note held by Interneuron into an aggregate of 529,124
shares of Common Stock (based on outstanding balances of $5.8 million as of
December 31, 1996) upon the closing of the Offering, and (iv) the issuance of
5,303 shares of Common Stock to The Ohio University Foundation pursuant to an
anti-dilution adjustment in connection with the Offering. The number of shares
of Common Stock to be issued (i) in the Acquisition, (ii) upon conversion of
Progenitor's Preferred Stock, (iii) upon conversion of the Interneuron
convertible debenture and a portion of the promissory note, (iv) to Amgen and
(v) to The Ohio University Foundation will depend upon a number of factors
including the date of the closing of the Offering and the initial public
offering price. See "Business--Corporate Agreements," "--Mercator Acquisition,"
"Description of Capital Stock" and "Certain Transactions--Relationship with
Interneuron."
The pro forma net tangible book value of the Company prior to the Offering
as of December 31, 1996 was approximately negative $898,000 or negative $0.12
per share. Without taking into account any other changes in pro forma net
tangible book value other than to give effect to (i) the issuance and sale of
the 2,750,000 shares of Common Stock offered hereby and the receipt and
application of the estimated net proceeds therefrom, (ii) the sale of 500,000
shares of Common Stock to Amgen for $4.5 million in cash and a $1.0 million
promissory note, concurrently with the closing of the Offering, and (iii) the
sale of 25,000 shares of Common Stock to The Ohio University Foundation at a
price of $5.50 per share, pursuant to a stock purchase right, concurrently with
the closing of the Offering, the pro forma net tangible book value of the
Company as of December 31, 1996 would have been approximately $30.9 million or
$2.93 per share. This represents an immediate increase in pro forma net tangible
book value of $3.05 per share to existing stockholders and an immediate dilution
of $8.07 per share to new investors. The following table sets forth the per
share dilution to new investors in the Offering:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $ 11.00
Pro forma net tangible book value per share as of December 31,
1996.......................................................... $ (0.12)
Increase per share attributable to new investors................ 3.05
---------
Pro forma net tangible book value per share after the Offering.... 2.93
---------
Dilution per share to new investors............................... $ 8.07
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996, the differences between existing stockholders, former Mercator
stockholders, Amgen, and new investors with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price paid per share (assuming an initial public offering price of
$11.00 per share and before deducting estimated underwriting discounts and
commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 5,616,224 53.3% $ 19,230,000 26.2% $ 3.41
Former Mercator stockholders.......... 1,679,255 15.9 18,472,000 25.1 11.00
Amgen................................. 500,000 4.7 5,500,000 7.5 11.00
New investors......................... 2,750,000 26.1 30,250,000 41.2 11.00
------------ ----- ------------- -----
Total............................. 10,545,479 100.0% $ 73,452,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
23
<PAGE>
The foregoing tables reflect no exercise of outstanding options or warrants
subsequent to December 31, 1996. As of February 28, 1997, there were (i)
1,786,775 shares of Common Stock reserved for grants or awards under the
Company's 1992 Stock Option Plan, 1996 Stock Incentive Plan and 1996 Employee
Stock Purchase Plan, of which (a) options to purchase 695,962 shares of Common
Stock were outstanding as of February 28, 1997 under such stock plans, with a
weighted average exercise price of $5.13 per share, and (b) options to purchase
926,150 shares of Common Stock are to be granted under the 1996 Stock Incentive
Plan upon the closing of the Offering, with an exercise price equal to the
initial public offering price; (ii) 293,022 shares of Common Stock issuable upon
exercise of Replacement Options to be issued under the 1997 Stock Option Plan in
connection with the Acquisition, with a weighted average exercise price of $1.72
per share; (iii) 31,952 shares of Common Stock issuable upon exercise of
outstanding warrants, with an exercise price of $7.50 per share; and (iv) 27,723
shares of Common Stock issuable upon exercise of the Mercator Warrants, with a
weighted average exercise price of $6.02 per share. See "Capitalization,"
"Business--Corporate Agreements," "Management--Stock Plans" and "Description of
Capital Stock--Preferred Stock."
24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial statements are presented assuming (i) that
the consummation of the Acquisition was accounted for using the purchase method
of accounting, (ii) the automatic conversion of all outstanding shares of
Progenitor's Preferred Stock into an aggregate of 2,170,893 shares of Common
Stock upon the closing of the Offering, the conversion of a convertible
debenture and a portion of the promissory note held by Interneuron into an
aggregate of 529,124 shares of Common Stock (based on outstanding balances of
$5.8 million as of December 31, 1996) upon the closing of the Offering, and the
issuance of 5,303 shares of Common Stock to The Ohio University Foundation
pursuant to an anti-dilution adjustment, in connection with the Offering
(collectively, the "Conversions"), and (iii) the issuance and sale of 2,750,000
shares of Common Stock offered hereby (after deducting estimated underwriting
discounts and commissions and the estimated expenses of the Offering) and the
receipt and application of the estimated net proceeds therefrom, the sale of the
Amgen Shares for $4.5 million in cash and a $1.0 million promissory note,
concurrently with the closing of the Offering, and the sale of 25,000 shares of
Common Stock to The Ohio University Foundation at a price of $5.50 per share,
pursuant to a stock purchase right, concurrently with the closing of the
Offering (collectively, the "Offering Adjustments"). The number of shares of
Common Stock to be issued in the Acquisition, upon the Conversions and upon the
Offering Adjustments will depend upon a variety of factors including the date of
the closing of the Offering and the initial public offering price. See
"Business--Corporate Agreements," "Certain Transactions--Relationship with
Interneuron" and "Description of Capital Stock."
The pro forma balance sheet assumes that the Acquisition, Conversions and
Offering Adjustments were consummated as of December 31, 1996. The pro forma
statements of operations have been prepared by combining the historical
financial statements of Progenitor for the fiscal year ended September 30, 1996
and for the three months ended December 31, 1996 with the historical financial
statements of Mercator for the year ended December 31, 1996 and for the three
months ended December 31, 1996, respectively. The pro forma statements of
operations assume that the Acquisition, Conversions and Offering Adjustments
were consummated as of October 1, 1995.
The pro forma statements of financial position and results of operations
exclude certain non-recurring items such as estimated costs of severance, the
elimination of duplicate systems and facilities, employee retention, and other
employee benefit and integration costs related to the combination of operations
of Progenitor and Mercator subsequent to the consummation of the Acquisition. In
addition, the Company will likely incur additional costs of being a public
reporting entity. Such increases in costs, particularly insurance and annual
financial reporting costs, have not been included in the pro forma statements of
operations for either period presented. See "Risk Factors--History of Operating
Losses; Anticipation of Future Losses" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
In management's opinion, all material adjustments necessary to reflect the
transactions are presented in the pro forma adjustments. The pro forma financial
statements do not represent what the Company's actual results of operations
would have been had the transactions occurred on such dates nor does it purport
to predict or indicate the Company's financial position or results of operations
at any future date or for any future period. The pro forma financial statements
should be read in conjunction with the historical financial statements of both
Progenitor and Mercator and the related notes thereto included elsewhere in this
Prospectus and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
25
<PAGE>
PRO FORMA BALANCE SHEETS
AS OF DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO DEBT AND
ACQUI- FORMA EQUITY
HISTORICAL SITION FOR CONVERSION
------------------------- ADJUST- ACQUI- ADJUST-
PROGENITOR MERCATOR(1) MENTS(2) SITION MENTS(3)
----------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 197 $ 439 $ -- $ 636 $ --
Accounts receivable.................................... 676 -- -- 676 --
Current portion of notes receivable from officers...... -- 175 -- 175 --
Deferred interest expense.............................. -- 750 (750) -- --
Prepaid expenses and other current assets.............. 211 241 -- 452 --
----------- ------------ ---------- ---------- -----------
Total current assets................................. 1,084 1,605 (750) 1,939 --
----------- ------------ ---------- ---------- -----------
Property and equipment at cost........................... 1,384 2,465 (1,149) 2,700 --
Less accumulated depreciation........................ (749) (1,149) 1,149 (749) --
----------- ------------ ---------- ---------- -----------
635 1,316 -- 1,951 --
Notes receivable from officers, net and other............ 110 162 -- 272 --
----------- ------------ ---------- ---------- -----------
Total assets......................................... $ 1,829 $ 3,083 $ (750) $ 4,162 $ --
----------- ------------ ---------- ---------- -----------
----------- ------------ ---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................... $ 273 $ 588 $ 1,100 $ 1,961 $ --
Accrued expenses....................................... 1,490 83 -- 1,573 --
Convertible notes payable.............................. -- 2,250 (2,250) -- --
Equipment financing obligations--current............... 265 474 -- 739 --
----------- ------------ ---------- ---------- -----------
Total current liabilities............................ 2,028 3,395 (1,150) 4,273 --
----------- ------------ ---------- ---------- -----------
Note payable--Interneuron................................ 5,407 -- -- 5,407 (5,335)
Convertible debenture--Interneuron....................... 485 -- -- 485 (485)
Equipment financing obligations.......................... 29 686 -- 715 --
----------- ------------ ---------- ---------- -----------
Total liabilities.................................... 7,949 4,081 (1,150) 10,880 (5,820)
----------- ------------ ---------- ---------- -----------
Redeemable preferred stock,
Series A............................................... -- 3,015 (3,015) -- --
Redeemable preferred stock,
Series B............................................... -- 8,020 (8,020) -- --
Redeemable preferred stock,
Series C............................................... -- 4,526 (4,526) -- --
Redeemable preferred stock,
Series D............................................... -- -- -- -- --
Stockholders' equity (deficit):
Preferred stock, Series A.............................. 20 -- -- 20 (20)
Preferred stock, Series B.............................. 3 -- -- 3 (3)
Common stock, Class A.................................. 3 -- 2 5 2
Common stock........................................... -- 50 (50) -- --
Shareholder promissory note receivable................. -- -- -- -- --
Additional paid-in capital............................. 14,967 -- 21,327 36,294 5,900
Deficit accumulated during development stage........... (21,113 ) (16,609 ) (5,318) (43,040) (59)
----------- ------------ ---------- ---------- -----------
Total stockholders' equity (deficit)................. (6,120 ) (16,559 ) 15,961 (6,718) 5,820
----------- ------------ ---------- ---------- -----------
Total liabilities and stockholders' equity
(deficit).......................................... $ 1,829 $ 3,083 $ (750) $ 4,162 $ --
----------- ------------ ---------- ---------- -----------
----------- ------------ ---------- ---------- -----------
<CAPTION>
PRO
FORMA
FOR
ACQUI-
SITION OFFERING PRO
AND ADJUST- FORMA AS
CONVERSIONS MENTS(4) ADJUSTED
------------ ---------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 636 $ 31,748 $ 32,384
Accounts receivable.................................... 676 -- 676
Current portion of notes receivable from officers...... 175 -- 175
Deferred interest expense.............................. -- -- --
Prepaid expenses and other current assets.............. 452 -- 452
------------ ---------- ------------
Total current assets................................. 1,939 31,748 33,687
------------ ---------- ------------
Property and equipment at cost........................... 2,700 -- 2,700
Less accumulated depreciation........................ (749) -- (749)
------------ ---------- ------------
1,951 -- 1,951
Notes receivable from officers, net and other............ 272 -- 272
------------ ---------- ------------
Total assets......................................... $ 4,162 $ 31,748 $ 35,910
------------ ---------- ------------
------------ ---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable....................................... $ 1,961 $ -- $ 1,961
Accrued expenses....................................... 1,573 -- 1,573
Convertible notes payable.............................. -- -- --
Equipment financing obligations--current............... 739 -- 739
------------ ---------- ------------
Total current liabilities............................ 4,273 -- 4,273
------------ ---------- ------------
Note payable--Interneuron................................ 72 (72) --
Convertible debenture--Interneuron....................... -- -- --
Equipment financing obligations.......................... 715 -- 715
------------ ---------- ------------
Total liabilities.................................... 5,060 (72) 4,988
------------ ---------- ------------
Redeemable preferred stock,
Series A............................................... -- -- --
Redeemable preferred stock,
Series B............................................... -- -- --
Redeemable preferred stock,
Series C............................................... -- -- --
Redeemable preferred stock,
Series D............................................... -- -- --
Stockholders' equity (deficit):
Preferred stock, Series A.............................. -- -- --
Preferred stock, Series B.............................. -- -- --
Common stock, Class A.................................. 7 3 10
Common stock........................................... -- -- --
Shareholder promissory note receivable................. -- (1,000) (1,000)
Additional paid-in capital............................. 42,194 32,817 75,011
Deficit accumulated during development stage........... (43,099 ) -- (43,099)
------------ ---------- ------------
Total stockholders' equity (deficit)................. (898 ) 31,820 30,922
------------ ---------- ------------
Total liabilities and stockholders' equity
(deficit).......................................... $ 4,162 $ 31,748 $ 35,910
------------ ---------- ------------
------------ ---------- ------------
</TABLE>
26
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED DEBT AND
SEPTEMBER 30, DECEMBER 31, PRO FORMA EQUITY
1996 1996 FOR CONVERSION PRO FORMA
FOR THE YEAR ENDED SEPTEMBER 30, 1996 PROGENITOR MERCATOR(1) ACQUISITION ADJUSTMENTS AS ADJUSTED
- ------------------------------------------ ------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 1,332 $ 500 $ 1,832 $ -- $ 1,832
Operating expenses:
Research and development................ 3,873 6,049 9,922 59(5) 9,981
General and administrative.............. 1,791 1,593 3,384 -- 3,384
------------- ------------ ------------ ----- ------------
Total operating expenses.............. 5,664 7,642 13,306 59 13,365
------------- ------------ ------------ ----- ------------
Nonrecurring expense...................... 974 -- 974 -- 974
Interest expense, net..................... 178 66 244 (120)(6) 124
------------- ------------ ------------ ----- ------------
Net loss................................ $ (5,484) $ (7,208) $ (12,692) $ 61 $ (12,631)
------------- ------------ ------------ ----- ------------
------------- ------------ ------------ ----- ------------
Supplemental net loss per share........... $ (0.95)
-------------
-------------
Shares used in computing supplemental net
loss per share........................... 5,758,615(7)
-------------
-------------
Pro forma net loss per share.............. $ (1.15)
------------
------------
Shares used in computing pro forma net
loss per share........................... 10,973,391(7)
------------
------------
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
-------------------------
FOR THE THREE MONTHS DEBT AND
ENDED DECEMBER 31, 1996 PRO FORMA EQUITY
------------------------- FOR CONVERSION PRO FORMA
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 PROGENITOR MERCATOR(1) ACQUISITION ADJUSTMENTS AS ADJUSTED
- -------------------------------------------- ------------ ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 676 $ 125 $ 801 $ -- $ 801
Operating expenses:
Research and development.................. 1,066 1,657 2,723 59(5) 2,782
General and administrative................ 445 409 854 -- 854
------------ ----------- ------------ ----- ------------
Total operating expenses................ 1,511 2,066 3,577 59 3,636
------------ ----------- ------------ ----- ------------
Interest expense, net....................... 120 30 150 (111)(6) 39
------------ ----------- ------------ ----- ------------
Net loss.................................. $ (955) $ (1,971) $ (2,926) $ 52 $ (2,874)
------------ ----------- ------------ ----- ------------
------------ ----------- ------------ ----- ------------
Supplemental net loss per share............. $ (0.17)
------------
------------
Shares used in computing supplemental net
loss per share............................. 5,784,327(7)
------------
------------
Pro forma net loss per share................ $ (0.26)
------------
------------
Shares used in computing pro forma net loss
per share.................................. 10,999,103(7)
------------
------------
</TABLE>
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
(1) Reflects the historical financial statements of Mercator for the date or
period indicated. Progenitor will consummate the Acquisition upon the
closing of the Offering.
(2) In connection with the Acquisition, the allocation of the purchase price to
the assets and liabilities of Mercator at estimated fair values is as
follows:
<TABLE>
<S> <C> <C>
Purchase Price:
Common stock, stock options and warrants to be issued:
1,679,255 shares of common stock.......................... $ 18,472
Stock options for 293,022 shares of common stock.......... 2,719
Warrants for 27,723 shares of common stock................ 138
Estimated acquisition fees and costs........................ 1,100
---------
Total purchase price...................................... $ 22,429
---------
---------
Allocation of purchase price:
In-process research and development......................... $ 21,927
Estimated fair value of Mercator net assets as of
December 31, 1996......................................... 502
---------
Total..................................................... $ 22,429
---------
---------
</TABLE>
For pro forma financial statement purposes, the purchase price was estimated
using the initial public offering price of $11.00 per share. The actual
purchase price will be determined by a valuation of the Common Stock, stock
options and warrants issued at the time of the closing of the Offering.
The Acquisition was reflected in the unaudited pro forma balance sheet as
follows:
<TABLE>
<CAPTION>
To establish fair value of property and equipment........... $ (1,149)
<S> <C> <C>
To eliminate Mercator accumulated depreciation.............. 1,149
Eliminate deferred interest expense......................... (750)
Accounts payable incurred for acquisition costs............. (1,100)
Eliminate Mercator convertible notes payable, net........... 2,250
Eliminate Mercator redeemable preferred stock, Series A..... 3,015
Eliminate Mercator redeemable preferred stock, Series B..... 8,020
Eliminate Mercator redeemable preferred stock, Series C..... 4,526
Reflect par value of the 1,679,255 shares of common stock
issued..................................................... (2)
Eliminate Mercator common stock............................. 50
Reflect the issuance of common stock, options and warrants
in additional
paid-in capital............................................ (21,327)
Deficit accumulated during the development stage:
Reflect charge for purchased in-process
research and development................................ 21,927
Eliminate Mercator deficit accumulated
during the development stage............................ (16,609)
---------
Subtotal................................................ 5,318
---------
Total................................................. $ 0
---------
---------
</TABLE>
The allocation of the Mercator purchase price among the identifiable tangible
and intangible assets is based on preliminary estimates of the fair market
value of those assets. The technological feasibility of the purchased
in-process research and development technology has not yet been established
and the
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
technology has no alternative future use. Final determination of the
allocation of the purchase price will be based on independent appraisals
expected to be completed shortly after the Acquisition is consummated.
Accordingly, final amounts could differ from those used herein and the
impact of such difference in the Company's financial statements could be
material.
In addition, the Company will provide additional funding to Mercator prior to
the closing of the Offering, funded in stages based upon a plan sufficient
to meet the working capital obligations of Mercator. The additional funding
will be part of Progenitor's purchase price consideration; however, such
consideration has not been reflected in the December 31, 1996 unaudited pro
forma balance sheet as no funding had commenced as of such date. Prior to
the closing of the Offering, Progenitor anticipates that approximately
$3,000 will be funded to Mercator, and that the amount allocated to in-
process research and development to be written off in connection with the
Acquisition would be approximately $25,000.
In connection with the Acquisition, the Company expects to incur several
nonrecurring charges in the quarter ended June 30, 1997 which in the
aggregate is currently estimated to be $30,000, including the write-off of
costs related to the purchase of in-process research and development,
severance, employee retention and relocation, and other employee benefit
costs, the consolidation of operations, the elimination of duplicate systems
and facilities, and other integration costs. Factors that could increase
such costs include delays in the closing of the Offering beyond May 31,
1997, any unexpected employee turnover, unforeseen delays in consolidating
duplicate facilities once the Acquisition has been completed and the
associated costs of hiring temporary employees and consultants, and any
additional fees and charges to obtain consents, regulatory approvals or
permits. The costs of the write-off of in-process research and development
have been considered in the purchase price allocation above, while the
remaining costs have been excluded from the pro forma presentation. In
addition, the charge for purchased in-process research and development
($21,927) has been excluded from the pro forma statement of operations as it
is a material nonrecurring charge which will be reflected in the statement
of operations of the Company within the year following the Acquisition.
(3) Reflects the following Conversions which will occur upon the closing of the
Offering:
<TABLE>
<CAPTION>
(a) The automatic conversion of all outstanding shares of Progenitor's
Preferred Stock Series A and Series B into an aggregate of
2,170,893 shares of Common Stock:
<S> <C> <C>
$ (20)
Preferred stock, Series A.........................................
$ (3)
Preferred stock, Series B.........................................
(b) The conversion of a convertible debenture and a portion of the
promissory note held by Interneuron into an aggregate of 529,124
shares of Common Stock:
$ (5,335)
Note payable--Interneuron.........................................
$ (485)
Convertible debenture--Interneuron................................
(c) Issuance of 5,303 shares of Common Stock to The Ohio University $ (59)
Foundation in connection with an anti-dilution adjustment pursuant
to a stock purchase right.........................................
(d) To reflect the par value and additional paid-in capital as a
result of items (a) through (c) above:
$ 2
Common Stock, Class A (par value of $0.001) for a total issuance
of 2,705,320 shares of Common Stock...............................
$ 5,900
Additional paid-in capital........................................
</TABLE>
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The Conversions described above will occur upon the closing of the Offering.
The number of shares of Common Stock to be issued upon the Conversions is
dependent on the initial public offering price. A decrease of $1.00 from the
assumed initial public offering price of $11.00 per share would cause an
increase of 276,368 in the number of shares issued under the Conversions.
Since the Preferred Stock has a guaranteed quarterly return that is
determined on each of April 7, July 7, October 7 and January 7, the passage
of any such dates will alter the conversion ratio and the number of shares
of Common Stock issuable upon such Conversion.
(4) Reflects the Offering Adjustments as follows:
<TABLE>
<CAPTION>
(a) To record the receipt and application of cash and cash
equivalents:
<S> <C> <C>
$ 27,183
The issuance and sale of the 2,750,000 shares of Common Stock
offered hereby (after deducting estimated underwriting discounts
and commissions and the estimated expenses of the Offering).....
4,500
The receipt of $4,500 in cash in connection with the purchase of
the Amgen Shares................................................
137
The sale of 25,000 shares of Common Stock to The Ohio University
Foundation at a price of $5.50 per share........................
(72)
The repayment of the remaining portion of the promissory note
payable to Interneuron..........................................
---------
$ 31,748
---------
---------
(b) To reflect the shareholder promissory note receivable from $ (1,000)
Amgen...........................................................
(c) To reflect the par value and additional paid-in capital as a
result of item (a) above:
$ 3
Common Stock, Class A (par value of $.001) for consideration of
a total issuance of 3,275,000 shares of Common Stock............
$ 32,817
Additional paid-in capital......................................
</TABLE>
(5) Reflects research and development expense regarding the additional shares
issued to The Ohio University Foundation pursuant to an anti-dilution
adjustment in connection with the Offering relating to previous research and
technology arrangements.
(6) Eliminates interest expense relating to a convertible debenture and portion
of promissory note held by Interneuron which will convert to Common Stock
upon the closing of the Offering.
(7) Supplemental loss per share amounts are computed using the weighted-average
number of shares outstanding of Common Stock and Common Stock equivalents.
Common Stock equivalents are excluded from the computation when their effect
is anti-dilutive; however, pursuant to the requirements of the Securities
and Exchange Commission, Common Stock equivalent shares relating to stock
options and warrants (using the treasury stock method) that were issued
during the 12-month period prior to the filing of this Registration
Statement are included for all periods presented whether or not they are
anti-dilutive. In addition, the supplemental net loss per share amounts have
been presented to reflect net loss per share had the Conversions occurred as
of October 1, 1995.
Pro forma, as adjusted net loss per share amounts are based upon the
supplemental net loss per share amounts adjusted for the Acquisition and the
Offering Adjustments assuming the Acquisition and the Offering occurred as
of October 1, 1995.
30
<PAGE>
PROGENITOR SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of
Progenitor. The selected financial statement of operations data for each of the
three years in the period ended September 30, 1996 and the balance sheet data as
of September 30, 1995 and 1996 are derived from the financial statements of
Progenitor, which have been audited by Coopers & Lybrand L.L.P., independent
accountants, that are included elsewhere in this Prospectus and are qualified by
reference to such financial statements and the notes related thereto. Coopers &
Lybrand L.L.P.'s report on these financial statements which appears elsewhere
herein, includes an explanatory paragraph with respect to Progenitor's ability
to continue as a going concern described in Note 1 to the Progenitor Financial
Statements. The selected statement of operations data for the period from May 8,
1992 (date of inception) to September 30, 1992 and for the year ended September
30, 1993, and the balance sheet data as of September 30, 1992, 1993, and 1994,
are derived from audited financial statements audited by Coopers & Lybrand
L.L.P. that are not included herein. The statement of operations data for the
three months ended December 31, 1995 and 1996 and for the period from May 8,
1992 (date of inception) to December 31, 1996 and the balance sheet data as of
December 31, 1996, have been derived from unaudited financial statements which
include all adjustments, consisting solely of normal recurring adjustments,
which management considers necessary to fairly present the financial information
set forth herein. The results for the three months ended December 31, 1995 and
1996, are not necessarily indicative of the results to be expected for future
periods. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Progenitor Financial Statements and related Notes thereto
and other financial information included elsewhere herein.
<TABLE>
<CAPTION>
MAY 8, 1992
MAY 8, 1992 THREE MONTHS ENDED (DATE OF
(DATE OF INCEPTION)
INCEPTION) TO YEARS ENDED SEPTEMBER 30, DECEMBER 31, TO
SEPTEMBER 30, ------------------------------------------ -------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1995 1996 1996
------------- --------- --------- --------- --------- --------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ -- $ -- $ -- $ 2,821 $ 1,332 $ 202 $ 676 $ 4,829
Expenses:
Research and development....... 775 3,116 4,113 4,228 3,873 809 1,066 17,171
General and administrative..... 264 1,339 1,275 1,116 1,791 355 445 6,230
Nonrecurring expense........... -- -- -- -- 974 -- -- 974
Interest....................... 23 246 648 352 178 24 120 1,567
------------- --------- --------- --------- --------- --------- --------- ------------
Total expenses............... 1,062 4,701 6,036 5,696 6,816 1,188 1,631 25,942
------------- --------- --------- --------- --------- --------- --------- ------------
Net loss....................... $ (1,062) $ (4,701) $ (6,036) $ (2,875) $ (5,484) $ (986) $ (955) $ (21,113)
------------- --------- --------- --------- --------- --------- --------- ------------
------------- --------- --------- --------- --------- --------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
-------------------------------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1996
--------- --------- ---------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 35 $ 11 $ 10 $ 1,174 $ 22 $ 197
Working capital......................... (379) (562) (988) (269) (1,755) (944)
Total assets............................ 568 979 977 2,395 920 1,829
Long-term obligations................... 1,210 6,150 11,767 705 4,010 5,921
Deficit accumulated during development
stage................................. (1,062) (5,763) (11,799) (14,674) (20,158) (21,113)
Total stockholders' deficit............. (1,057) (5,755) (11,791) (101) (5,164) (6,120)
</TABLE>
31
<PAGE>
MERCATOR SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of
Mercator. The selected financial statement of operations data for each of the
three years in the period ended December 31, 1996 and for the period from
inception (October 9, 1992) to December 31, 1996, and the balance sheet data as
of December 31, 1995 and 1996, are derived from the financial statements of
Mercator, which have been audited by Ernst & Young LLP, independent auditors,
that are included elsewhere in this Prospectus and are qualified by reference to
such financial statements and the notes related thereto. Ernst & Young LLP's
report on these financial statements which appears elsewhere herein, includes an
explanatory paragraph with respect to Mercator's ability to continue as a going
concern described in Note 1 to the Mercator Financial Statements. The selected
statement of operations data for the period from October 9, 1992 (date of
inception) to December 31, 1993 and the balance sheet data as of December 31,
1993 and 1994, are derived from financial statements audited by Ernst & Young
LLP that are not included herein. The selected financial data should be read in
conjunction with the Mercator Financial Statements and related Notes thereto and
other financial information included elsewhere herein.
<TABLE>
<CAPTION>
OCTOBER 9,
OCTOBER 9, 1992 1992
(DATE OF (DATE OF
INCEPTION) TO YEARS ENDED DECEMBER 31, INCEPTION) TO
DECEMBER 31, ------------------------------- DECEMBER 31,
1993 1994 1995 1996 1996
--------------- --------- --------- --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ -- $ -- $ 375 $ 500 $ 875
Operating costs and expenses:
Research and development............................. 1,222 2,330 4,183 6,049 13,784
General and administrative........................... 180 639 1,524 1,593 3,936
------- --------- --------- --------- --------------
Total operating costs and expenses..................... 1,402 2,969 5,707 7,642 17,720
------- --------- --------- --------- --------------
Loss from operations................................... (1,402) (2,969) (5,332) (7,142) (16,845)
Interest income........................................ 54 229 291 114 688
Interest expense....................................... (21) (95) (156) (180) (452)
------- --------- --------- --------- --------------
Net loss............................................... $ (1,369) $ (2,835) $ (5,197) $ (7,208) $ (16,609)
------- --------- --------- --------- --------------
------- --------- --------- --------- --------------
Net loss per share..................................... $ (14.38) $ (28.62) $ (48.70) $ (55.27)
------- --------- --------- ---------
------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 858 $ 2,002 $ 1,446 $ 439
Short-term investments.............................................. 690 4,094 487 --
Working capital..................................................... 1,393 6,355 1,112 (1,790)
Total assets........................................................ 2,187 7,834 3,573 3,083
Long-term obligations and redeemable preferred stock................ 3,331 11,580 12,004 16,247
Deficit accumulated during development stage........................ (1,369) (4,204) (9,401) (16,609)
</TABLE>
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH EACH OF
THE PROGENITOR AND MERCATOR FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
A development stage company, Progenitor was incorporated in February 1992
and commenced operations in May 1992. Progenitor has devoted substantially all
of its resources since inception to research and development programs. To date,
all of Progenitor's revenues have resulted from payments from collaborators and
licensees and a grant from the U.S. Department of Commerce's National Institute
of Standards and Technology Advanced Technology Program ("ATP") that was awarded
to Progenitor in November 1994. Payments from collaborators, license fees,
payments under governmental grants and investment income, in each case, if any,
are expected to be the only sources of revenue for the foreseeable future.
Certain payments under collaborative and license arrangements are contingent
upon the Company meeting certain milestones. Payments under collaborative or
licensing arrangements, if any, will be subject to significant fluctuation in
both timing and amount and therefore the Company's results of operations for any
period may not be comparable to the results of operations for any other period.
The Company has not yet received any royalties or other revenues from the sale
of products or services and does not expect to receive any such revenues for the
next several years, if at all. As of December 31, 1996, Progenitor had a total
stockholders' deficit of $6.1 million, including an accumulated deficit of $21.1
million. See "Risk Factors--History of Operating Losses; Anticipation of Future
Losses."
Interneuron provided the initial funding of Progenitor and had invested
$18.6 million in Progenitor in equity and debt financings through December 31,
1996. Following the close of the Offering and the Acquisition, Interneuron is
expected to own approximately 43% (approximately 41% if the Underwriters'
over-allotment option is exercised in full) of the outstanding Common Stock of
the Company based upon certain assumptions. Accordingly, Interneuron is and will
continue to be the Company's largest stockholder. Interneuron has no obligation
to invest any additional funds in the Company, and the Company does not expect
Interneuron to do so. Progenitor raised an additional $1.6 million in net
proceeds through a private placement of Preferred Stock in fiscal 1995. The
Company intends to seek additional funding through public or private equity or
debt financing and collaborative and license arrangements. There can be no
assurance, however, that additional financing will be available when needed, or
that, if available, such financing will be available on terms acceptable to the
Company. See "Risk Factors--Need for Additional Capital; Uncertainty of
Additional Funding," "--Control of Company By, and Potential Conflicts of
Interest With, Interneuron" and "Certain Transactions--Relationship With
Interneuron."
On February 14, 1997, Progenitor entered into the Acquisition Agreement.
Progenitor intends to close the Acquisition by issuing 1,679,255 shares of
Common Stock to the Mercator stockholders (assuming Final Acquisition
Consideration of $22.0 million for Mercator). See "Business--Mercator
Acquisition."
Significant discovery, research and development efforts will be required
prior to the time any of the Company's gene discoveries may lead to product
candidates or result in products that may be brought to the market, if at all.
Products, if any, resulting from the Company's research and development programs
are not expected to be commercially available for a number of years, if at all,
even if any are successfully developed and proven safe and effective.
Significant additional research and development efforts and extensive
preclinical studies and clinical trials will be required prior to submission of
any regulatory application for commercial use. See "Risk Factors--Uncertainty of
Product Development."
The Company intends to use the net proceeds of the Offering, together with
the cash proceeds received from sale of the Amgen Shares, primarily for research
and development. In addition, the Company intends to use a portion of such net
proceeds as follows: (i) approximately $3.0 million to repay the Interneuron
Bridge Loan; (ii) approximately $1.0 million to pay expenses relating to
employee benefit and retention plans relating to the Acquisition; and (iii)
approximately $500,000 to reimburse Interneuron
33
<PAGE>
for certain costs of the Offering incurred after October 1, 1996. In the event
the Company consolidates its operations in California, the Company may use
approximately $2.5 million of such net proceeds to facilitate employee
relocation, plant closing and consolidation. The Company anticipates using the
balance of such net proceeds for the expansion or upgrade of facilities,
acquisition of equipment and for working capital and other general corporate
purposes.
PRO FORMA FOR ACQUISITION
As of December 31, 1996, the Company, on a pro forma basis (including the
results of Mercator) had an accumulated deficit of approximately $43.1 million.
The Company expects to incur substantial additional losses over the next several
years as it expands its research and development activities. In connection with
the Acquisition, the Company expects to incur several nonrecurring charges in
the quarter ended June 30, 1997 which in the aggregate are currently estimated
to be approximately $30.0 million, including the write-off of costs related to
the purchase of in-process research and development, severance, employee
retention and relocation, other benefit costs, the consolidation of operations,
the elimination of duplicate systems and facilities, and other integration
costs. Factors that could increase such costs include delays in the closing of
the Offering beyond May 31, 1997, any unexpected employee turnover, unforeseen
delays in consolidating duplicate facilities once the Acquisition has been
completed and the associated costs of hiring temporary employees and
consultants, and any additional fees and charges to obtain consents, regulatory
approvals or permits. In addition, the Company will likely incur material
additional costs associated with being a public reporting entity. Such increases
in costs will primarily relate to communication with stockholders, insurance and
annual financial reporting costs. See "Risk Factors--Risks Associated with the
Acquisition of Mercator" and "Business--Facilities."
RESULTS OF OPERATIONS
PROGENITOR THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996
Revenues for the three months ended December 31, 1995 and 1996 were $202,000
and $676,000, respectively. Progenitor recognized $194,000 of revenue related to
Progenitor's ATP grant in the first three months of fiscal 1996. For the first
three months of fiscal 1997, Progenitor recognized $500,000 in revenue as a
result of entering into a license agreement with Amgen. In addition, $176,000 of
revenues related to Progenitor's ATP grant were recognized during the first
three months of fiscal 1997.
Research and development expenses increased from $809,000 for the three
months ended December 31, 1995 to $1,066,000 for the three months ended December
31, 1996. The increase is due to the addition of five scientific staff members
and related recruiting costs, costs associated with additional sponsored
research agreements entered into during September 1996, and increased legal fees
associated with intellectual property work related to the Amgen license
agreement and collaborative and license agreements in process.
General and administrative expenses were $355,000 for the three months ended
December 31, 1995 and $444,000 for the three months ended December 31, 1996. The
increase is due primarily to new administration personnel and overall increases
in annual salaries.
Interest expense increased from $24,000 during the three months ended
December 31, 1995 to $120,000 for the three months ended December 31, 1996
primarily as a result of increased borrowings under the promissory note payable
to Interneuron.
PROGENITOR FISCAL YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
Progenitor recognized no revenues for fiscal 1994. Revenues increased to
$2.8 million in fiscal 1995, primarily attributable to an initial cash payment
of $2.5 million under Progenitor's collaboration agreement with Chiron and
recognition of $260,000 of revenues related to a payment under Progenitor's ATP
grant. Revenues for fiscal 1996 totaled $1.3 million as a result of a $500,000
milestone payment received from Chiron in January 1996 and revenues recognized
under the ATP grant totaling $751,000.
34
<PAGE>
Research and development expenses increased from $4.1 million for fiscal
1994, to $4.2 million for fiscal 1995 and decreased to $3.9 million for fiscal
1996. The increase in fiscal 1994 was largely due to the addition of senior
research and development management in late fiscal 1993 as well as annual salary
increases, increased short-term sponsored research commitments and increased
depreciation expenses resulting from additions of laboratory, office and
computer equipment. The increase in research and development expenses in fiscal
1995 was largely attributable to the $750,000 reimbursement to Chiron for
certain start-up manufacturing costs related to the Chiron collaboration. The
decrease in research and development expenses to $3.9 million was largely
attributable to the $750,000 Chiron reimbursement recorded in June 1995. Other
research and development expenses consisted primarily of salaries and consulting
fees, legal fees, sponsored research projects, license fees and expenditures for
laboratory supplies and animal facilities. The Company expects research and
development expenses to increase in the future. However, continued growth in
such expenses will be dependent on the availability of capital.
General and administrative expenses were $1.3 million for fiscal 1994,
decreased to $1.1 million for fiscal 1995, and increased to $1.8 million for
fiscal 1996. The slight decrease between fiscal 1994 and fiscal 1995 resulted
from a reimbursement from Interneuron of employee benefit expenses. The fiscal
1996 increase was largely due to increases in annual salaries, recruitment and
relocation fees associated with new administrative personnel, consulting and
legal fees, travel expenses and occupancy charges. The Company expects general
and administrative expenses to increase in the future as it expands its
operations and hires additional employees.
Interest expense decreased from $648,000 for fiscal 1994 to $352,000 for
fiscal 1995, and to $179,000 for fiscal 1996. The decrease in interest expense
in fiscal 1995 was due to a lower average debt balance resulting from the
conversion into equity of $11.5 million of Progenitor's debt payable to
Interneuron and the receipt by Progenitor of a cash payment of $2.5 million in
fiscal 1995 under its collaboration agreement with Chiron. Interest expense
incurred by Progenitor in fiscal 1996 resulted from debt funding provided to
Progenitor by Interneuron which resumed upon depletion of the cash received from
Chiron in fiscal 1995. Progenitor began incurring interest expense related to
equipment financings in fiscal 1994. The Company expects to continue financing
equipment purchases through sale-leaseback arrangements, if favorable terms are
available, which could result in an increase in interest expense.
During fiscal 1996, Progenitor incurred $974,000 of nonrecurring expense
related to its initial filing of the Registration Statement in connection with
the Offering.
No income tax provision or benefit has been provided for federal income tax
purposes as Progenitor has incurred losses since inception. As of September 30,
1996, Progenitor had deferred tax assets of $8.0 million. Because of
uncertainties surrounding the realization of these favorable tax attributes in
future tax periods, all of the net deferred tax assets have been fully offset by
a valuation allowance. As of September 30, 1996, Progenitor had total net
operating loss carryforwards of $18.4 million and tax credits of approximately
$618,000, both of which expire on dates through 2010. Under Section 382 of the
Internal Revenue Code of 1986, as amended, utilization of prior net operating
loss carryforwards is limited after an ownership change to an annual amount
equal to the value of the loss corporation's stock immediately before the date
of the ownership change, multiplied by the federal long-term tax exempt rate. To
date, Progenitor has not incurred an ownership change under Section 382. As a
result of the actions contemplated by the Offering, the Acquisition and the
related transactions, Progenitor is likely to incur such a change of ownership,
in which case Progenitor's ability to use the losses incurred prior to the date
of the Offering may be limited as to timing, pursuant to the Internal Revenue
Code Section 382.
LIQUIDITY AND CAPITAL RESOURCES
PROGENITOR
Since inception, Progenitor has financed its operations primarily through
debt and equity financings from Interneuron of $18.6 million through December
31, 1996, a private financing of $1.6 million in net proceeds from the sale of
Progenitor's Preferred Stock in fiscal 1995 and a private financing from The
Ohio University Foundation in February, 1996 of $350,000. In addition,
Progenitor received payments of
35
<PAGE>
$2.5 million and $500,000 from Chiron in April 1995 and January 1996,
respectively, and received payments of $65,000 and $769,000 in fiscal 1995 and
fiscal 1996, respectively, under the ATP grant. Progenitor also completed
sale-leaseback transactions generating $88,000 and $117,000 in cash during
fiscal 1995 and fiscal 1996, respectively. Progenitor used these sources of
financing to fund its operations. During fiscal 1995 and fiscal 1996,
respectively, Progenitor used $1.6 million and $4.8 million of cash in operating
activities. As of December 31, 1996, Progenitor had cash and cash equivalents
totaling $197,000.
The Company expects negative cash flow from operations to continue for the
foreseeable future. The Company will require substantial additional funds to
continue research and development, conduct preclinical studies and clinical
trials, conduct activities relating to commercialization of rights it has
retained in collaborative or license agreements, if any, and expand
administrative capabilities. The Company estimates that, at its planned rate of
spending, its existing cash and cash equivalents, together with the net proceeds
from the Offering, and the proceeds from the sale of the Amgen Shares, and the
interest income earned on such proceeds, will be sufficient to meet its funding
requirements for the next 18 months. There can be no assurance, however, that
the Company's assumptions regarding its future levels of expenditures and
operating losses will prove accurate. The Company's future funding requirements
will depend on many factors, including the scientific progress in and the
breadth of the Company's research and development programs; the results of
research and development, preclinical studies and clinical trials conducted by
the Company or its collaborative partners or licensees, if any; the acquisition
and licensing of products and technologies or businesses, if any; the Company's
ability to establish and maintain corporate relationships and academic
collaborations; the Company's ability to integrate the operations of Mercator
with those of Progenitor; the Company's ability to manage growth; competing
technological and market developments; the time and costs involved in filing,
prosecuting, defending and enforcing patent and intellectual property claims;
the receipt of licensing or milestone fees from any current or future
collaborative and licensing arrangements, if established; the continued funding
of governmental research grants; the timing of regulatory approvals, if any; and
other factors. To the extent undertaken by the Company, the time and costs
involved in conducting preclinical studies and clinical trials, seeking
regulatory approvals, and scaling-up manufacturing and commercialization
activities also would increase the Company's funding requirements.
The Company will need to raise substantial additional capital to fund
operations. Prior to the Offering, Interneuron has funded substantially all of
Progenitor's operations. Interneuron, however, is under no obligation to
provide, and the Company does not expect that Interneuron will provide, any
additional funds in the future. The Company intends to seek additional funding
through public or private equity or debt financing and collaborative
arrangements. There can be no assurance that additional financing will be
available when needed, or that, if available, such financing will be available
on terms acceptable to the Company. If additional funds are raised by issuing
equity securities, dilution to existing stockholders will result. In addition,
in the event that additional funds are obtained through collaborative or license
arrangements, such arrangements may require the Company to relinquish rights to
certain of its technologies or potential products that it would otherwise seek
to develop or commercialize itself. If funding is insufficient at any time in
the future, the Company may be required to delay, scale back or eliminate some
or all of its research and development programs or cease operations. See "Risk
Factors-- Need for Additional Capital; Uncertainty of Additional Funding."
FUNDING FOR MERCATOR PRIOR TO THE ACQUISITION
In connection with the Acquisition, the Company has committed an aggregate
maximum amount of $6.6 million to fund Mercator's interim working capital needs
(the "Mercator Bridge Financing"), estimated to be $800,000 per month. The
Mercator Bridge Financing will bear interest at a fixed rate of 10% per annum
and would be payable on January 15, 1999, or on such earlier date as provided in
the Agreement. Upon closing of the Offering, the Mercator Bridge Financing would
become part of Progenitor's purchase price consideration.
In order to provide funding for the Mercator Bridge Financing, Interneuron
has agreed to provide Progenitor a line of credit of up to an aggregate maximum
amount of $6.6 million bearing interest at 10%
36
<PAGE>
per annum (the "Interneuron Bridge Loan"). The outstanding principal and accrued
interest on the Interneuron Bridge Loan will be repaid upon the closing of the
Offering from the net proceeds of the Offering. See "Use of Proceeds."
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In October, 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION," which establishes an alternative method of accounting
for employee stock compensation plans based on a fair value methodology.
However, the statement allows an entity to continue to use the accounting
prescribed by APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
The Company will adopt the disclosure requirements of SFAS No. 123 in fiscal
year 1997, but will elect to continue to measure compensation cost following the
accounting prescribed in APB Opinion No. 25.
37
<PAGE>
BUSINESS
OVERVIEW
Progenitor is engaged in the discovery and functional characterization of
genes to identify targets for the development of new pharmaceuticals. The
Company's initial focus is on the identification of genes important in blood and
immune cell development ("hematopoiesis"), blood vessel development
("angiogenesis"), bone formation ("osteogenesis"), asthma and schizophrenia.
Using its core developmental biology approach and an array of genomics
technologies, Progenitor has identified several potential therapeutic targets,
and intends to accelerate its discovery of potential targets by accessing
complementary gene discovery and characterization technologies. Consistent with
this strategy, Progenitor will complete the acquisition of Mercator concurrently
with the closing of the Offering. Through the Acquisition, Progenitor gains a
complementary gene discovery approach, disease genetics, established discovery
programs and worldwide rights to two genes. The Company intends to use its
integrated genomics system to provide its partners with in-depth functional
information in support of each therapeutic target. Such well-characterized
targets may have the potential to expedite product development and to reduce
development costs.
Using its developmental biology approach and integrated genomics
technologies, Progenitor discovered the B219 leptin receptor gene, for which it
has received two notices of allowance from the USPTO. The B219 leptin receptor
may have therapeutic applications in obesity, diabetes and certain blood and
immune cell disorders. Progenitor has entered into a license agreement wth Amgen
relating to certain aspects of the Company's leptin receptor technology. The
Company is seeking collaborations for its retained rights to the leptin receptor
technology, including small-molecule screening and cell sorting. Progenitor also
has discovered a red blood cell growth factor activity that may have therapeutic
applications in cancer, anemias and other diseases, and is collaborating with
Novo Nordisk in the isolation, development and commercialization of the
associated growth factor. In addition, Progenitor has discovered, in
collaboration with Vanderbilt University ("Vanderbilt"), the
developmentally-regulated endothelial locus-1 ("DEL-1") gene, which the Company
believes has roles in angiogenesis and osteogenesis. Progenitor and Vanderbilt
have filed joint patent applications with respect to DEL-1.
On February 14, 1997, Progenitor entered into an agreement to acquire
Mercator concurrently with the closing of this Offering. In addition to
obtaining a disease genetics approach to gene discovery, Progenitor will obtain
technologies that will enhance and extend its genomics capabilities. Progenitor
also will obtain worldwide rights to a gene associated with hereditary
hemochromatosis ("HH"), an iron overload disease, and the EPM1 epilepsy gene,
both discovered using this disease genetics approach. Mercator has seven pending
U.S. patent applications and certain corresponding foreign applications relating
to its genomics technologies and discoveries, and has received notices of
allowance from the USPTO for a patent application relating to the diagnosis of
HH using specific gene markers, and for an application relating to its automated
genomic sequencing technology. A provisional patent application relating to the
EPM1 epilepsy gene is pending in the USPTO. See "--Mercator Acquisition."
BUSINESS STRATEGY
The Company's objective is to identify and functionally characterize genes
as therapeutic targets, and to commercialize those targets through partnerships
with biopharmaceutical firms. A further objective of the Company is to provide
its partners with a comprehensive package of in-depth functional information in
support of each target. The information package may include patents and patent
applications, proof of principle and accompanying data from assays and model
systems, and high-throughput functional assays for drug candidate design and
testing. The Company believes that such a package may increase the likelihood of
obtaining corporate partnerships because it has the potential to expedite
development to the clinical testing stage, and to reduce the need to pay
multiple royalties for separate technology components.
38
<PAGE>
Key elements of the Company's business strategy to achieve this objective
include:
EMPLOY ITS INTEGRATED GENOMICS SYSTEM. The Company intends to implement its
integrated genomics system to accelerate the discovery and characterization of
therapeutic targets for the development of new pharmaceuticals. Using its
complementary gene discovery approaches in developmental biology and disease
genetics, and applying its genomics technologies, the Company believes it can
generate more potential targets with more in-depth functional characterization
than could be achieved through a single approach.
EMPLOY FLEXIBLE DEVELOPMENT AND COMMERCIALIZATION APPROACH. The Company
intends to use a two-tiered approach to developing and commercializing its gene
discoveries. The Company intends to enter into partnerships with
biopharmaceutical firms to support gene discovery programs in specific disease
areas. In parallel, the Company intends to continue to identify and characterize
promising genes that can be developed to a later stage internally before
partnering. Such genes may command higher milestone and royalty payments than
genes derived from programs underwritten by third parties.
PURSUE PATENT PROTECTION. The Company will continue to seek protection for
its discoveries and proprietary technologies through the maintenance of trade
secrets and by filing applications for patents, where appropriate. The Company
believes that its integrated system may improve its ability to identify gene
sequences correlated with biological functions and, therefore, may enhance the
likelihood of ultimately securing patent protection for its discoveries of novel
genes and related proteins and their uses.
MAINTAIN TECHNOLOGICAL COMPETITIVENESS. The Company intends to continue to
access the best available genomics technologies in order to maintain its
competitiveness and ensure a sustainable flow of therapeutic targets. The
Company has entered into and intends to continue to enter into multiple
collaborations, licensing agreements and other business arrangements to gain
access to such technologies.
THE COMPANY'S GENOMICS SYSTEM
Genomics generally refers to technologies and methods directed toward the
identification of the location, structure and function of genes of a given
organism. Many genomics initiatives have focused largely on determining the
location and structure of genes. The Company focuses on elucidating gene
function using approaches that the Company believes may accelerate discovery of
genes with medical relevance. The Company's system combines developmental
biology and disease genetics approaches with genomics capabilities, including
sequencing, positional cloning, statistical analysis, model organisms and assay
development.
Developmental biology is the study of the genetic events that control cell
growth and differentiation in an organism from its beginning as a fertilized egg
through maturation. In the course of development, precursor cells differentiate
into specialized adult cells in discrete stages that are marked by changes in
the expression of a few fundamental genes. The timing and level of expression of
such genes is what distinguishes one cell type from another. Because such genes
are expressed at higher levels during development, and thus may be found more
easily in developing cells and tissues than in mature systems, the Company
believes that developing cells and tissues provide a rich and largely
unexploited source of genes with fundamental biological roles. These genes may
have significance in the treatment and management of diseases characterized by
abnormal cell growth and differentiation, such as cancer, blood and immune
system disorders and osteoporosis. The Company believes that its expertise in
manipulating and analyzing developing cells and tissues may allow it to isolate
and characterize the function of these genes. The Company used its developmental
biology approach to identify the B219 leptin receptor and DEL-1.
The Company combines its developmental biology expertise with expertise in
disease genetics. Disease genetics facilitates the discovery of multiple genes
associated with complex diseases, such as asthma, schizophrenia and epilepsy.
The Company's disease genetics approach incorporates enhanced positional cloning
techniques, carefully selected patient populations, technologies for discovery
and analysis of multiple genetic markers, mutation analyses, and statistically
powerful methods to expedite
39
<PAGE>
discovery of genes potentially associated with a given disease. The Company used
its disease genetics approach in the discovery of its HH gene. This approach
also was used in the discovery of the EPM1 epilepsy gene.
Bioinformatics serves as an essential interface between the Company's gene
discovery approaches. The Company's bioinformatics system provides a means to
assess gene discoveries in relation to information in public databases, to
correlate discoveries with known sequences, to capture additional intellectual
property based on discovered genes and to expedite evaluation and recognition of
gene discoveries as therapeutic targets. The Company also uses its
bioinformatics system as a discovery tool to capitalize on the wealth of
information being generated by the Human Genome Project and other genomics
programs.
The Company believes that its integrated genomics system provides it with
the capabilities necessary to discover and characterize new candidate genes as
therapeutic targets for major unmet medical needs. Developmental biology
provides the Company access to fundamental genes involved in cell growth and
differentiation. Disease genetics methods facilitate evaluation of genes
discovered using devolopmental biology. Moreover, the Company's disease genetics
approach provides it with genes directly associated with a specific disease that
can be functionally characterized using developmental biology.
DISCOVERY RESOURCES
The Company believes that, taken together, the following resources provide a
unique platform for the discovery and functional characterization of candidate
genes for therapeutic development.
STEM CELLS
The Company has developed proprietary lines of mouse ("murine") yolk sac
stem cells and murine embryonic stem ("ES") cells, and methods for using them.
These methods enable the Company to take multiple "molecular snapshots" in order
to identify, isolate and study the function of genes associated with critical
stages of development. Because these genes control fundamental changes in the
cells that form major organs, the Company believes that they may be useful in
the treatment and management of diseases characterized by abnormal changes in
the cells of such organs.
The Company uses proprietary techniques to isolate, grow, maintain and
differentiate in culture stem cells derived from the murine yolk sac, a tissue
that surrounds the organism during early development. The yolk sac is a source
of novel hematopoietic and angiogenic genes that may be expressed exclusively or
at enhanced levels during early development. The Company used cultured murine
yolk sac stem cell lines to identify its BFU-e red blood cell growth factor
activity. In May 1995, the Company entered into a collaboration with Novo
Nordisk relating to this growth factor. In November 1996, the Company's licensor
received a notice of allowance from the USPTO for a patent application relating
to cellular compositions derived from the human and murine yolk sac and methods
of obtaining and using such compositions. See "Risk Factors--Dependence on
Collaborators and Licensees" and "--Uncertainty of Patents and Proprietary
Rights," and "--Corporate Agreements--Novo Nordisk Agreement."
In addition to yolk sac stem cells, the Company uses proprietary methods to
exploit murine ES cells for the discovery of novel genes. ES cells have the
capacity to develop into all cells and tissues of the adult organism. This
development occurs in discrete stages that are marked by changes in the
expression of a few fundamental genes. In developing tissues, the genetic
transition from one stage to another is blurred because cells within a tissue
co-exist in a number of different stages. The Company has developed methods to
eliminate this blurring through the isolation, identification, and study of the
differentiation, function and gene expression of single precursor cells.
Furthermore, the Company uses its murine ES system as an in vitro
differentiation model for experimentally manipulating and studying the function
of novel genes from various sources in the context of organ formation. The
Company believes that these proprietary stem cell lines and related methods may
yield potential therapeutic targets for blood, immune, vascular and bone
diseases as well as other disorders.
40
<PAGE>
DEVELOPING TISSUES
The Company uses a variety of developing tissues, including tissues from the
murine liver, pancreas, brain and bone, as sources for the discovery of novel
genes. For example, the B219 leptin receptor was discovered in early
hematopoietic cells found in the developing murine liver, which is a rich source
of genes important in blood and immune system development. The Company also
selectively targets and isolates murine tissue-specific precursor cells. For
example, early endothelial precursor cells are purified and studied for changes
in gene expression as they develop into blood vessels. The Company believes that
genes responsible for blood vessel development may have therapeutic potential in
cancer, cardiovascular disorders and other diseases characterized by abnormal
blood vessel formation or degeneration.
PATIENT DNA COLLECTIONS
The Company uses multiple strategic populations to identify genes associated
with complex diseases. These populations include genetically isolated
populations that have intermarried for centuries, as well as large populations
that have been accessed through national databases. The Company believes that
the analysis of these types of populations provides it with the ability to
narrow the chromosomal regions that are selected for study and thus to decrease
the time required to locate genes associated with complex diseases. Clinical
collaborations are in place to obtain approximately 5,500 DNA samples from
selected groups in Denmark, Finland, Israel and the U.S. for the study of genes
associated with asthma, schizophrenia and HH. As of February 28, 1997,
approximately 60% of the samples from these collaborations had been collected,
and the Company anticipates obtaining the balance within the next 18 months.
These collaborations typically entail relationships with physicians caring for
selected patient groups and access to patient family histories and samples. Most
of these agreements allow the Company to re-study patients as the research
program proceeds. Stringent criteria are applied to select patients most likely
to have a genetic predisposition to a particular disease, thus reducing the
complexity of gene isolation. Once a patient population is selected, blood
samples from patients, their families and control groups within the population
are used for DNA extraction and the establishment of permanent cell lines. These
cell lines become continuing sources for DNA and RNA extraction and chromosomal
analyses. The Company uses DNA samples in linkage and disease association
studies, supplemented by analysis of information from detailed clinical
databases, to discover disease genes.
DISCOVERY TOOLS
The Company employs a variety of discovery tools in order to identify
candidate genes with medical relevance from its discovery resources.
GROWTH FACTOR RECEPTOR TECHNOLOGIES
The Company has developed proprietary gene cloning and screening techniques,
and related bioinformatics capabilities, to identify novel members of a family
of genes that encode receptors for growth factors involved in blood cell
formation as well as in the growth and development of neural and other tissues.
The Company used these technologies to facilitate the discovery of the B219
leptin receptor. The Company intends to use its discovered receptors to identify
and clone novel growth factors, to screen for small molecules that activate or
inhibit receptor functions, and to identify and purify bone marrow cell
populations with potential therapeutic characteristics. In addition, the Company
will seek to identify the therapeutic activities of various forms of these
receptors.
GENE EXPRESSION ANALYSIS
The Company uses a range of molecular biology technologies in proprietary
ways to reveal the expression of genes in single stem cells, developing tissues,
and adult normal and diseased tissues. The Company believes that the use of
these technologies, which allow comparisons of the timing and levels of gene
expression in such cells and tissues, may yield important insights on the
genetic basis of development and disease. The Company applied gene expression
analysis in its discovery of the B219 leptin receptor and
41
<PAGE>
DEL-1. The Company continues to apply these technologies to its various
discovery resources, and has identified several novel genes involved in
hematopoiesis and angiogenesis, which will be subjected to further functional
characterization. The Company is developing bioinformatics applications and
high-throughput systems to further exploit its capabilities in the analysis of
gene expression.
BIOINFORMATICS
The Company has implemented and intends to continue to upgrade and integrate
its bioinformatics system to capture, manage and analyze the data from its
discovery programs and to serve as an interface between its developmental
biology and disease genetics approaches. Bioinformatics allows the Company to
correlate and analyze data on its potential gene targets with data from public
and proprietary databases using a combination of standard and proprietary
computational tools and screening algorithms. This correlation and analysis may
provide new insights and guidance to discovery programs, contributing both to
the isolation of new genes and to the elucidation of gene and protein function
and the determination of their novelty. The Company's bioinformatics
capabilities and computational biology tools also allow gene discovery through
analysis of data from the Human Genome Project and other genomic databases.
In order to enhance its bioinformatics capabilities, the Company recently
entered into a purchase and license agreement with Pangea Systems, Inc.
("Pangea") under which it acquired a custom bioinformatics hardware and software
system, technical support, bioinformatics and data management consulting
services, and access to system enhancements. This system is compatible with and
expands the Company's existing bioinformatics and general laboratory data
management capabilities. In addition, the Company has entered into a separate
collaboration agreement with Pangea under which the Company will explore
potential collaborations that would combine the Company's developmental biology
expertise with Pangea software to produce new bioinformatics products. The
Company also will serve as a beta test site for, and gain an option for
discounted purchase of, new bioinformatics products. See "Technology
Agreements-- Pangea Agreements."
HIGH-THROUGHPUT GENOMIC SEQUENCING
The Company has developed an automated, proprietary system for sequencing
large regions of genomic DNA, and has adapted this for sequencing of
complementary DNA ("cDNA"), a DNA molecule that encodes a protein. This system
integrates directed sequencing and bioinformatics to facilitate analysis and
comparison of large regions of human chromosomes and genes discovered in
developing cells, tissues and organs. The Company believes that this system's
efficiency in generating complete human genomic DNA sequences (based on labor
and capital costs incurred to produce a given amount of such sequences) is
comparable to that of systems used by the world's largest, best-equipped genome
centers. In February 1997, the Company received a notice of allowance from the
USPTO for a patent application relating to portions of this genomic sequencing
process.
CHROMOSOME ANALYSIS AND GENE MAPPING
The Company possesses a number of technologies that expedite positional
cloning of disease genes from human populations and evaluation of genes
discovered through developmental biology. These include physical mapping to
locate markers, chromosome separation to analyze separately each parental
chromosome for inheritance patterns, and clone coverage to obtain a proprietary
series of overlapping contiguous clones spanning the chromosomal region believed
to contain a disease gene. In addition to these technologies, the Company has
developed a high-throughput approach for identifying and assaying new markers in
any region of genomic DNA. This marker development approach is critical to the
implementation of disease association studies.
GENETIC ANALYSIS
The Company implements several analytical methods for the identification of
genes associated with complex diseases. These methods include linkage analysis,
identity-by-descent and population-based
42
<PAGE>
disease association. Linkage analysis involves determination of the likelihood
that a specific genetic marker is associated with an inherited disease trait.
Identity-by-descent analyzes whether affected individuals carry a particular
chromosomal region more often than would be expected by chance. Identification
of such a region that is identical-by-descent allows the researcher to reduce
the size of the chromosomal region to be investigated for a specific gene.
Population-based disease association represents a statistically powerful
comparison of affected and unaffected individuals from a given population to
determine whether a particular chromosomal region is found at a higher frequency
among affected individuals than unaffected individuals. The Company believes
disease association may be applicable to a broad range of population types and
diseases, including complex diseases. To provide it with the flexibility
necessary to address complicated patterns of gene inheritance and expression,
the Company has developed the ability to apply alternative analytical methods to
a given disease gene discovery program. The Company used a combination of these
methods to discover its HH gene.
FURTHER ELUCIDATION OF GENE FUNCTION
Many of the tools the Company uses for gene discovery and initial functional
characterization also are used in the further elucidation of gene function. The
Company has built and will continue to supplement a set of developmental and
adult models and systems for in-depth evaluation of the biological roles of its
discoveries. In combination, developmental biology and disease genetics
approaches to gene identification provide initial information on gene function
and medical relevance. A more thorough understanding of biological functions and
therapeutic implications is necessary to determine the appropriateness of genes
as therapeutic targets. The Company has assembled a group of well-characterized
cellular, developmental and adult models and methods to study the role of genes
in tissue and organ formation in order to determine their therapeutic relevance.
These include murine assays, transgenic and gene knockout technologies and
methods of gene delivery and protein expression.
The Company believes that genes discovered using developmental biology and
disease genetics are equally amenable to further functional characterization
using these biological models. For example, developing cells, tissues and model
systems allow direct evaluation of the role and potential utility of a gene by
over-expressing or inhibiting the expression of the gene during cell growth,
early organization of tissues and organ formation. In addition, the Company uses
animal and human models of disease, such as tumor implants in animals or tissue
samples from cancer patients, to study the expression and potential therapeutic
relevance of its discoveries. By using this range of models, the Company has
been able to predict and to elucidate further the role of the B219 leptin
receptor in adult hematopoiesis, and the role of DEL-1 in angiogenesis and
osteogenesis.
The Company believes that access to a variety of cellular and animal models
is important because different models may reveal different gene functions.
Multiple models also may provide the breadth and flexibility necessary to
develop appropriate assays and screens for exploring diverse potential effects
of genes and high-throughput functional assays for drug candidate design and
testing.
The Company uses the following to accelerate the further elucidation of gene
function:
MURINE DEVELOPMENTAL ASSAYS
The Company's murine ES and yolk sac stem cell lines and related proprietary
methods serve as assay systems for functional characterization of genes. Murine
stem cells can be manipulated in order to study the effects of the addition or
deletion of specific genes on normal cell functions in development, either in
vitro or in vivo, and the effects of candidate molecules on the genes in
question. The Company currently is using this technology to identify and
characterize novel genes, receptors and related proteins involved in the
development of the blood and vascular systems. In addition, the Company has
licensed an ES cell-based assay system from the National Jewish Center for
Immunology and Respiratory Medicine ("National Jewish Center") to support
cloning of an identified murine BFU-e red blood cell growth factor and its human
equivalent. The Company also uses certain murine yolk sac stem cell lines to
evaluate the effects of discovered genes on endothelial cell growth and blood
vessel formation.
43
<PAGE>
The Company has entered into a collaboration with Cambridge University to
exploit murine development to evaluate candidate genes from its discovery
programs. This collaboration allows the Company to prioritize gene sequences for
further functional characterization and to obtain whole-body evaluation of gene
expression during murine development using in situ DNA hybridization. This
technique, which uses complementary binding of DNA strands to indicate gene
expression at specific sites throughout an animal, was instrumental in the
discovery by Cambridge University researchers of two genes involved in the early
formation of mammalian tissues.
TRANSGENIC AND GENE KNOCK-OUT TECHNOLOGIES
Transgenic and gene knock-out animal models allow the Company to distinguish
the effects of the gain or loss of function of individual genes from the
background of genetic and cellular activity. Transgenic animals provide a means
to evaluate the functional effects of the selective over-expression of a gene in
living systems. The classical transgenic approach is to produce adult animals
that express a given gene at continuous, high levels. This approach is
time-consuming and unsuitable for high-throughput analyses. The Company's
transgenic technologies minimize these drawbacks through over-expression of
genes at selected stages in early development, and evaluation of the effects on
tissue and organ formation. The Company also produces developmental and adult
gene knock-out models through genetic manipulation of ES cells. These models
allow the Company to evaluate the biological effects of eliminating expression
of a gene of interest. The Company has access to and implements a range of
techniques to evaluate the effects of gene over-expression, or lack of
expression, in major organs of mature animal models.
GENE DELIVERY AND EXPRESSION
Gene delivery and expression technologies permit the Company to study the
function of newly discovered genes in a range of cellular and animal models.
Among a variety of systems the Company uses is a proprietary gene delivery
system, T7T7, which the Company developed in collaboration with Ohio University.
T7T7 is a nonviral system that can effect expression of the gene it carries in a
cell's cytoplasm (the area surrounding the nucleus). The T7T7 system works in
both cell cultures and whole organisms, and in both dividing and nondividing
cells. The Company currently is collaborating with Chiron to explore potential
commercialization of the T7T7 system in clinical gene therapy applications. See
"--Corporate Agreements--Chiron Agreement" and "--Patents and Proprietary
Rights."
DISCOVERY PROGRAMS
The Company has established gene discovery programs for the identification
of medically relevant genes in the areas of hematopoiesis, angiogenesis,
osteogenesis and diseases such as HH, asthma, schizophrenia and epilepsy. To
date, these programs have produced five notices of allowance from the USPTO,
three ongoing corporate collaborations and identification and initial functional
characterization of three novel gene and protein candidates.
LEPTIN RECEPTORS
Abnormalities in the expression of leptin and the functioning of leptin
receptors have been implicated in obesity, diabetes and other metabolic
disorders. The Company used its proprietary receptor discovery technology and
murine developmental tissue resources to identify gene sequences that encode
various forms of the B219 leptin receptor. In September and December 1994, the
Company filed U.S. patent applications relating to the B219 leptin receptor, and
recently received notices of allowance from the USPTO for claims within these
applications relating to genes encoding the leptin receptor. In December 1996,
the Company licensed certain aspects of its leptin receptor technology to Amgen
for human therapeutic, diagnostic and prophylactic uses. The Company has
retained exclusive rights to the leptin receptor technology for certain other
uses, including small molecule screening and cell sorting. The Company is
seeking collaborators in these two areas. See "Risk Factors--Dependence on
Collaborators and Licensees," "--Corporate Agreements--Amgen Agreements" and
"--Patents and Proprietary Rights."
44
<PAGE>
The Company recently published findings suggesting that leptin receptors may
play a broad and fundamental biological role. In particular, the Company has
demonstrated in vitro that leptin stimulates the growth and differentiation of
certain hematopoietic cells, including stem cell populations found in adult bone
marrow. In order to characterize further the function of leptin receptors, the
Company is investigating the role of leptin in the hematopoietic and immune
systems, for potential adjunct therapies for cancer and treatments for anemias
and other disorders of the blood and immune system.
RED BLOOD CELL GROWTH FACTOR
The Company believes there is a large and growing market for agents that
stimulate new red blood cell development for patients with inherited anemias,
and as support therapies for patients who are undergoing kidney dialysis, cancer
chemotherapy or bone marrow transplantation. The Company has identified a growth
factor activity that stimulates the formation and development of red blood cells
from burst-forming units-erythroid ("BFU-e"), which are the earliest red blood
cell precursors found in adult bone marrow. The identified activity is distinct
from that of erythropoietin and other known growth factors. The Company is
collaborating with Novo Nordisk, through its subsidiary, ZymoGenetics, Inc.
("ZymoGenetics"), for research, development and commercialization efforts
relating to the BFU-e red blood cell growth factor activity identified by the
Company. The Company, along with Novo Nordisk, is seeking to purify the murine
BFU-e red blood cell growth factor and clone its gene and its human equivalent.
See "Risk Factors--Dependence on Collaborators and Licensees," "--Corporate
Agreements--Novo Nordisk Agreement" and "--Patents and Proprietary Rights."
HEREDITARY HEMOCHROMATOSIS
Hereditary hemochromatosis is an iron overload disease that can lead to
life-threatening conditions such as cirrhosis, liver cancer, diabetes, heart
failure and arthritis. HH is one of the most common genetic disorders, with an
estimated one million affected individuals in the U.S. If the disease is
detected early, the simple treatment of blood removal can prevent serious liver
disease and death. HH is under-diagnosed because it is difficult to correlate
early symptoms, such as general fatigue and abdominal pain, with the disease. In
addition, the confirmatory test for the disease is liver biopsy, an invasive
procedure. The Company targeted HH because it believes that an accurate,
non-invasive diagnosis of HH is an unmet medical need with significant
implications for patient care.
Using its disease genetics approach, the Company has discovered a gene
associated with HH. The Company has pending U.S. and foreign patent applications
relating to certain diagnostic markers for HH, and has received a notice of
allowance from the USPTO for one such application. The Company also has pending
patent applications relating to mutations in its HH gene and relating to the
gene itself. In addition, the Company has pending a patent application on the
transcript map of all genes in the region of the HH gene.
The Company is seeking corporate collaborations to commercialize a
diagnostic test for HH. The Company believes that its HH gene also may yield new
clues regarding the biology of iron metabolism. The Company intends to develop
functional data on the HH gene in this area in an effort to provide insight into
novel therapeutic applications for certain anemias and other diseases associated
with iron metabolism. The Company is seeking collaborations to develop and
commercialize these therapeutic applications. See "--Patents and Proprietary
Rights."
DEL-1 GENE IN ANGIOGENESIS AND BONE DEVELOPMENT
The Company believes that drugs designed to inhibit the growth of new blood
vessels may represent an important therapeutic approach to treating cancer. The
Company, in collaboration with Vanderbilt, has discovered DEL-1, a gene that
encodes a novel cell-surface protein ("Del-1") involved in the early growth and
development of blood vessels and bone. Since DEL-1 is not expressed in most
normal adult tissues, and Del-1 is accessible in the lining of blood vessels,
the Company believes that Del-1 may be a highly specific, accessible and stable
target for the development of cancer therapeutics, diagnostics and imaging
agents.
45
<PAGE>
The Company has shown that mice implanted with human tumors express the murine
DEL-1 gene in developing blood vessels that feed the tumor. The Company also has
demonstrated that a variety of human tumor samples have a higher level of DEL-1
expression than normal, noncancerous tissues.
Progenitor and Vanderbilt have filed jointly two U.S. patent applications
relating to the DEL-1 nucleotide sequences, the proteins they encode, methods of
expressing functional gene products, methods of using DEL-1 and Del-1, and
genetically-engineered cells. A corresponding international patent application
was published in December 1996. The Company has an exclusive, worldwide license
to Vanderbilt's commercial rights under these patent applications.
The Company also is investigating DEL-1 expression in bone and cartilage
formation for potential therapeutic applications in bone growth and repair, and
osteoporosis. The Company is seeking additional collaborations to pursue the
research, development and commercialization of DEL-1 and Del-1.
EPILEPSY
Epilepsy is a neurological disorder that affects approximately 150 million
people worldwide. In February 1997, the Company obtained an exclusive, worldwide
license to the EPM1 epilepsy gene from Stanford University ("Stanford"). The
EPM1 gene, discovered using a disease genetics approach, implicates a new
biochemical pathway for epilepsy that the Company believes may serve as a target
for therapeutics and diagnostics for the disease. The Company intends to
investigate the EPM1 gene for the development of such therapeutics and
diagnostics. See "--License Agreements--Stanford University."
ASTHMA
Asthma is a respiratory disease that affects approximately 12 million people
in the U.S. Current medications address only symptoms, leaving an unmet medical
need for treatments of the causes of asthma. The Company is attempting to
identify and characterize novel genes as potential therapeutic targets for such
treatments. To this end, the Company is conducting gene identification
activities using its disease genetics approach. In November 1995, the Company
began a program to collect up to 3,000 samples for the identification of genes
associated with asthma from carefully selected populations in Denmark, Israel
and the U.S. As of February 28, 1997, the Company had collected over 1,400
patient samples. In the initial studies performed by the Company using a portion
of the population samples, linkages have been established to specific
chromosomal regions. The Company is applying disease association methods and
chromosome analysis technologies to some of these regions to identify candidate
disease genes for evaluation. The Company is seeking a corporate collaboration
for this program.
SCHIZOPHRENIA
Schizophrenia is a disabling psychiatric disease that affects approximately
50 million people worldwide. Current therapies for schizophrenia include
antipsychotic drugs that treat the symptoms of the disease, often with poor
response or severe side effects. The Company is using its disease genetics
approach to identify genes that play a role in schizophrenia. In March 1996, the
Company began a program to collect patient samples for the identification of
genes associated with schizophrenia. As of February 28, 1997, the Company had
collected over 600 samples, and anticipates collecting up to 1,500 over the
course of the program. Patient samples are being obtained through a number of
research collaborations, including a collaboration with the University Central
Hospital in Finland. This collaboration provides access to the geographically
isolated population of Finland, which is recognized to be a powerful resource
for the study of inherited diseases. The Company's schizophrenia program also
includes populations in the U.S. and Denmark, involving hundreds of affected
sibling pairs and their parents. In addition, samples from more than 70 families
have been obtained from the U.S. National Institute of Mental Health collection
program. The Company is seeking a corporate collaboration for this program.
46
<PAGE>
ANGIOGENESIS
The Company believes that genes important in blood vessel development may
provide unique targets for therapeutic and diagnostic approaches to cancer and
to other diseases characterized by abnormal blood vessel growth, such as
diabetic retinopathy and macular degeneration, diseases that are leading causes
of blindness. As of January 1997, the Company, in collaboration with Vanderbilt,
had identified fifteen novel gene sequences in addition to the DEL-1 gene that
are expressed during the early stages of blood vessel development. These
identified sequences and their biological significance are being evaluated for
functional and therapeutic relevance in collaboration with Vanderbilt. If these
gene sequences are determined to be therapeutically relevant, the Company will
seek to exercise its rights under its agreement with Vanderbilt and enter into
commercial collaborations for further development of these gene sequences as
therapeutic targets. See "--DEL-1 Gene in Angiogenesis and Bone Development" and
"--License Agreements--Vanderbilt Agreement."
HEMATOPOIESIS
The Company believes that substantial medical needs remain in the treatment
of cancer, hematopoietic and immune system disorders and diseases of the central
nervous system, and that early developmental systems, such as ES, yolk sac and
developing liver cells, provide a key discovery source for therapeutic targets
for these diseases. The Company has developed selective, stage-specific cDNA
libraries from these sources that may enable it to discover novel hematopoietic
growth factors and regulatory molecules for cancer adjunct therapy and other
potential indications. The Company's developmental systems enable gene isolation
during differentiation of rare hematopoietic precursor cells that appear only
briefly during development. The Company, together with its collaborators at the
National Jewish Center and the Ontario Cancer Center, will seek to isolate novel
genes from these cells, determine their function and identify therapeutic uses
for its discoveries.
T7T7 GENE THERAPY
The Company is collaborating with Chiron to explore clinical uses of the
T7T7 gene delivery system. In this collaboration, Chiron has agreed to develop
and potentially to commercialize the T7T7 system for selected applications. The
Company has retained the right to market and license the T7T7 system for other
applications and to use and license joint technologies of the collaboration as
well as technological improvements to the T7T7 system made by Chiron. The
initial T7T7-based gene therapy product being developed by Chiron is intended
for treatment of solid-tumor cancers. See "Risk Factors--Dependence on
Collaborators and Licensees" and "--Corporate Agreements--Chiron Agreement."
With respect to all of the above programs, there can be no assurance that
the Company will be successful in entering into additional collaborative
agreements or that any drugs or other products will be developed or
commercialized, that patents will issue from any of the Company's applications
with respect to such programs or that, if issued, any resulting patents will
provide the Company with meaningful protection or rights. See "Risk
Factors--Early Stage of Development; Uncertainty of Final Product Development,"
"--Dependence on Collaborators and Licensees," "--Uncertainty of Patents and
Proprietary Rights" and "--Dependence upon Research Collaborators and Scientific
Advisors."
CORPORATE AGREEMENTS
AMGEN AGREEMENTS
On December 31, 1996, the Company entered into a license agreement with
Amgen relating to certain aspects of the Company's leptin receptor technology.
The agreement grants Amgen an exclusive, worldwide license, with the right to
grant sublicenses, to use the Company's patent rights relating to the leptin
receptor and antibodies to the leptin receptor to develop products with human
therapeutic, diagnostic and prophylactic uses. In addition, Amgen received a
non-exclusive, worldwide license, with the right to grant sublicenses, to other
patent rights that are necessary or useful to Amgen in the development and
commercialization of the leptin receptor technology in Amgen's field of use. The
Company retained
47
<PAGE>
exclusive rights to use its leptin receptor technology for the following uses:
(i) any ex vivo uses for ligand and small molecule drug screening; (ii) any ex
vivo uses for cell sorting; (iii) any anti-sense uses for human therapeutic,
diagnostic and/or prophylactic applications; and (iv) any in vivo human
therapeutic, diagnostic and/or prophylactic applications of antibodies to the
leptin receptor. The Company also retained a non-exclusive right, with a right
to grant licenses, to the leptin receptor technology for human diagnostic uses
to the extent necessary to develop and commercialize products under the
Company's exclusive retained rights, and a non-exclusive right, without the
right to grant licenses, to the licensed technology in Amgen's field of use for
research and development purposes only. Amgen has sole discretion over the
development and commercialization of licensed products.
The license agreement terminates upon the expiration of the last to expire
of any patents that might issue relating to the licensed technology. Amgen may
terminate the agreement earlier by providing written notice of its election to
discontinue all development and commercialization activities relating to the
licensed technology, and also may terminate, in whole or in part, any of the
licenses granted to it under the agreement by providing 60 days written notice
of termination. In addition, the Company may terminate the agreement earlier in
the event of a material breach by Amgen of its obligations or any of its
representations and warranties under the agreement. Upon a termination, other
than as a result of a material breach by the Company, Amgen's license rights
revert to the Company.
The Company received a $500,000 license fee upon execution of the agreement.
In addition, in the event that Amgen pursues the development of products related
to the licensed technology, the Company would be entitled to receive up to an
additional $22.0 million upon attainment of certain development, regulatory and
commercialization milestones, plus potential royalties on product sales.
Additional milestone payments of up to $12.0 million, plus royalty payments,
could be made to the Company for the development and commercialization of a
subsequent product. An additional $2.0 million in milestone payments, plus
royalties, could be paid to the Company for the regulatory approval and
commercialization of a diagnostic test. There can be no assurance that Amgen
will pursue the development of products related to the licensed technology, or,
if it decides to pursue such development, that it will be successful in
developing or commercializing any products using the Company's leptin receptor
technology or that the license agreement will not terminate prior to its
expiration. As such, there can be no assurance that any milestones will be
achieved or that any royalties or other payments contemplated by the license
agreement will ever be made. See "Risk Factors--Dependence on Collaborators and
Licensees."
In connection with the license agreement, the Company and Amgen entered into
the Amgen Purchase Agreement, which provides for the purchase by Amgen of the
Amgen Shares concurrently with the closing of the Offering. Pursuant to the
Amgen Purchase Agreement, Amgen has agreed for a period of time to limit its
ownership interest in the Common Stock below a specified percentage. Pursuant to
the Amgen Purchase Agreement, Amgen also will receive certain registration
rights with respect to the Amgen Shares. See "Description of Capital
Stock--Registration Rights."
NOVO NORDISK AGREEMENT
In May 1995, the Company and Novo Nordisk, through its subsidiary
ZymoGenetics, entered into a research, development and commercialization
agreement under which Novo Nordisk received an exclusive, worldwide license to
any and all rights of the Company related to the BFU-e red blood cell growth
factor activity identified by the Company for use in any and all human
therapeutic and small molecule drug design uses. An amended and restated
agreement was executed between the parties in January 1997. Under the agreement,
the development effort is divided into two stages. During the first stage, which
has not yet commenced, Novo Nordisk and the Company will attempt to purify,
clone and sequence a BFU-e red blood cell growth factor and other growth factors
with similar hematopoietic functions. If this stage is successfully completed,
Novo Nordisk will have the right to decide whether to proceed to the second
stage, in which the Company may conduct research to establish the biological
function of the growth factor. During the second stage, if commenced, Novo
Nordisk has the option to engage the Company for additional research, which may
entitle the Company to receive up to $4.0 million in research fees from Novo
Nordisk.
48
<PAGE>
The agreement with Novo Nordisk terminates upon the expiration of the last
patent that might issue relating to the Company's growth factor discoveries.
Novo Nordisk also has a right to earlier termination of the agreement upon 30
days notice. If Novo Nordisk exercises this right prior to paying a license fee,
it would be obligated to grant to the Company an exclusive worldwide license to
all of Novo Nordisk's rights arising from the research conducted pursuant to the
agreement to make, use and sell related products. In the event that Novo Nordisk
and the Company had developed joint technology under the agreement prior to such
early termination, the Company would be obligated to pay Novo Nordisk royalties
for any sales of products made using the licensed technology.
If Novo Nordisk decides to develop any licensed products, it will be
obligated to pay the Company a one-time license fee of $2.0 million and up to an
additional $22.0 million for each product if certain clinical testing,
regulatory and marketing approval milestones are met. In addition, the Company
has the right to receive royalties for sales of any resulting products. In the
event that all milestones are reached with respect to the BFU-e red blood cell
growth factor, the Company would receive an aggregate of $28.0 million under the
agreement, plus royalties on any net product sales. Novo Nordisk has the right
to manufacture and market any such products on an exclusive worldwide basis.
There can be no assurance that the Company or Novo Nordisk will successfully
clone the murine BFU-e red blood cell growth factor or its human equivalent, or,
if the factor is cloned, that Novo Nordisk will continue the program, that the
license agreement will not otherwise be terminated prior to its expiration, that
the Company will be able to clarify the biological function of the growth factor
or that Novo Nordisk will be successful in developing and commercializing any
drugs or other products utilizing the BFU-e red blood cell growth factor. As
such, there can be no assurance that any milestones will be achieved, or that
any royalties or other payments contemplated by the agreement will ever be made.
See "Risk Factors--Dependence on Collaborators and Licensees."
CHIRON AGREEMENT
In March 1995, the Company entered into an agreement with Chiron for the
development and commercialization of the T7T7 gene delivery system for selected
applications. The agreement grants Chiron an exclusive, worldwide license to the
T7T7 gene delivery system for (i) all products carrying a single specified gene,
which has potential applications for tumor ablation; (ii) four infectious
disease vaccine constructs; (iii) products used for the prevention, therapy or
diagnosis of human restenosis; (iv) five additional constructs designated by
Chiron; and (v) additional constructs, with certain limitations, that may be
designated by Chiron upon payment of a fee for each such additional construct.
The Company also may grant licenses to third parties to constructs for fields of
use not licensed to and not in conflict with the exclusive licenses granted to
Chiron. Any such third-party licenses are subject to Chiron's right of first
refusal for any construct of the T7T7 gene delivery system not already covered
by the agreement for the development of a noninfectious disease vaccine.
Pursuant to the agreement, Chiron and the Company may develop jointly the T7T7
tumor ablation product for the treatment of cancer. The parties will own jointly
all preclinical and clinical data from the collaboration, which may be used by
either party for any purpose subject to the exclusive licenses granted to
Chiron. The Company has the right to collaborate and jointly invest in Chiron's
development efforts on the tumor ablation product, with the Company's level of
participation in any resulting product revenues based on its relative
contribution to development costs. Under the agreement, Chiron has committed to
use reasonable efforts to commercialize one or more licensed products and has
certain manufacturing rights and obligations for any resulting products. If
Chiron chooses to abandon development of a construct, its license rights
terminate with respect to that construct. Subject to the foregoing rights, the
agreement provides that each party will retain ownership of all inventions (and
any related patents) made solely by its employees and arising from the
activities performed under the agreement.
The agreement terminates upon the later of the expiration of the patents
upon which it is based or, within any given country, ten years after the first
commercial sale of a product developed under the agreement within such country.
In such events, Chiron's affected license rights become fully paid and non-
exclusive. Chiron also may terminate the agreement earlier with respect to any
particular construct upon
49
<PAGE>
30 days notice, and either party may terminate the agreement in the event of a
material breach by the other party of its obligations under the agreement. In
such events, Chiron's license rights would revert to the Company, but Chiron
would retain exclusive rights to inventions and discoveries made solely by its
employees, and joint rights to discoveries made jointly with the Company. Chiron
also would be required to pay the Company all royalties accrued before
termination.
The Company received a $2.5 million payment upon execution of the agreement
as a license fee and reimbursement of past research and development expenses,
and an additional $500,000 in January 1996 for continued funding of the
Company's research and development expenses. The Company has paid Chiron
$750,000 pursuant to the agreement, in full satisfaction of the Company's
obligation to reimburse Chiron for certain start-up manufacturing costs. Under
the agreement, the Company is entitled to receive up to an additional $4.3
million in various fees and milestone payments for each licensed product if all
specified research, clinical development, regulatory and marketing approval
milestones are achieved, plus additional fees for development of specific
constructs and for the first product developed. The agreement encompasses a
minimum of eleven potential products that Chiron may develop. In the event that
all such milestones are achieved and all contemplated products reach market, the
Company would receive an aggregate of $51.3 million (including payments already
received) plus royalties on net product sales. There can be no assurance that
the Company and Chiron will be successful in developing or commercializing any
drugs or products utilizing the T7T7 gene delivery system or that such agreement
will not terminate prior to its expiration. As such, there can be no assurance
that any milestones will be achieved or that any royalties or other payments
contemplated by the agreement will ever be made. See "Risk Factors-- Dependence
on Collaborators and Licensees."
TECHNOLOGY AGREEMENTS
AFFYMETRIX AGREEMENTS
The Company has entered into two agreements with Affymetrix, Inc.
("Affymetrix") with respect to a technology that has the potential to expedite
the discovery of candidate genes in disease association studies. Pursuant to one
agreement, Affymetrix and the Company have agreed to use a DNA-enrichment method
developed by the Company in combination with Affymetrix' GeneChip-TM- technology
to evaluate the utility of this combined technology for identifying DNA
variations in expressed genes. Once identified, the Company believes that such
variations may accelerate the identification of candidate genes and chromosomal
regions that are implicated in human disease. In connection with a separate
agreement, the Company recently has completed a study that validates the use of
the combined technology in identifying chromosomal regions that harbor gene
mutations in human cancers. The Company believes that the combined technology
may be applicable to a wide range of diseases that exhibit genetic
predisposition.
PANGEA AGREEMENTS
The Company has entered into purchase and collaboration agreements with
Pangea relating to the licensing and further development of advanced
bioinformatics technology. Pursuant to the agreements, the Company purchased
bioinformatics products that combine hardware and software for use in
information management and high-throughput analysis. The Company will serve as a
principal test site for new systems and technologies developed by Pangea, and
will be eligible to purchase new products at a substantial discount. The Company
and Pangea also will explore potential collaborations that would combine the
Company's developmental biology expertise with Pangea software to produce new
bioinformatics products.
LICENSE AGREEMENTS
VANDERBILT UNIVERSITY
In July 1995, the Company entered into a license agreement with Vanderbilt
pursuant to which the Company obtained an exclusive worldwide license to
Vanderbilt's commercial rights under a jointly owned patent application to
develop and market products and processes utilizing technology relating to DEL-1
and Del-1. Under this agreement, the Company is obligated to pay royalties on
any resulting product sales.
50
<PAGE>
Vanderbilt University may terminate the agreement after three years if the
Company has not made adequate efforts to commercialize products based on the
gene.
STANFORD UNIVERSITY
In February 1997, the Company entered into a license agreement with Stanford
for an exclusive worldwide license to Stanford's commercial rights under a
patent application relating to the EPM1 epilepsy gene, to develop and market
diagnostic and therapeutic products relating to the gene. Under this agreement,
the Company is obligated to pay certain patent expenses, royalty milestones on
patents, and royalties on any resulting products.
OHIO UNIVERSITY
The Company entered into licensing agreements with Ohio University as of
January 1992 relating to yolk sac stem cells and as of April 1993 relating to
the T7T7 gene delivery system. The licensing agreements, as amended, grant the
Company an exclusive worldwide license to the yolk sac stem cells and T7T7 gene
delivery system, respectively, and related technologies covered in Ohio
University's existing patents and patent applications, as well as any technology
developed from related sponsored research. In exchange, the Company is obligated
to pay certain license and research fees as well as royalties based on net sales
of any resulting products. In addition, under the 1992 license agreement and the
terms of a related stock purchase agreement, The Ohio University Foundation
received a 5% equity interest in the Company subject to certain anti-dilution
protection and was granted the right to purchase 25,000 shares of the Company's
Common Stock in the event of an initial public offering, merger or other similar
corporate transaction at a price equal to 50% of the anticipated public offering
price or merger or other consideration, as applicable. The Ohio University
Foundation has agreed to exercise such right to purchase 25,000 shares
immediately prior to the Offering at a price equal to $5.50 per share. The Ohio
University Foundation also has the right to designate two representatives to the
Board of Directors of the Company until the Company consummates an initial
public offering. See "Certain Transactions--The Ohio University Foundation."
ADVANCED TECHNOLOGY PROGRAM GRANT
In November 1994, the Company was awarded a $2.0 million, three-year grant
to study yolk sac-derived endothelial cells for therapeutic applications under
the ATP. The grant specifies the research and development of therapeutics based
on an understanding of the biology of development of endothelial cells. The
research agreements between the Company and its subcontractors under the ATP
grant (the University of Colorado, The University of Wisconsin, Ohio University,
Vanderbilt University and Bio Support, Inc.) require that all parties assign
rights to any inventions made by them under the grant to the Company. The ATP
grant provides that the Company retains full rights to any intellectual property
developed as part of the project.
The ATP grant is administered by United States Department of Commerce. As of
February 28, 1997, the Company had received $1,120,465 under the ATP grant, and
$116,997 in additional funds were payable to the Company. Under the terms of the
grant, the Company is scheduled to receive an additional $292,000 payable in two
installments for the period from February 28, 1997 through May 31, 1997. The
balance of the grant, $518,000, is payable in equal quarterly installments
during the period from June 1, 1997 to May 31, 1998. The grant is subject to
yearly appropriations by the United States Congress for the ATP program, and
legislation has been introduced to eliminate the program. The National Institute
of Standards and Technology has informed the Company that, although it could not
comment on the availability of funds for the Company's grant for the year ending
May 31, 1998, there are sufficient funds in the ATP grant program's current
budget to support grant payments for currently funded grants for the year ending
May 31, 1997, and that therefore it is likely that the Company will receive
grant payments expected through May 31, 1997. There can be no assurance,
however, that funding for the ATP program will not be reduced or eliminated at
any time.
51
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
Patents and licenses are important to the Company's businesses. The
Company's policy is to file patent applications to protect technology,
inventions and improvements to inventions that are considered important to the
development of its business. The Company also relies on trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain its competitive position. To date, the Company has filed or exclusively
licensed a number of pending patent applications in the USPTO relating to its
various technologies and discoveries, as well as foreign counterparts of certain
of these applications in Europe, Japan and certain other countries. At the
present time, Progenitor owns, or has exclusively licensed a number of pending
U.S. patent applications, and certain corresponding foreign applications,
relating to its various technologies and discoveries. These pending patent
applications include the following: eight U.S. applications, owned by
Progenitor, relating to certain leptin receptors (including various isoforms of
the leptin receptor), including two patent applications filed in September and
December 1994 relating to nucleic acid molecules that encode the B219 leptin
receptor, for which the USPTO issued two notices of allowance, one in September
1996, and one in January 1997; two U.S. patent applications, co-owned with and
licensed from Vanderbilt, relating to DEL-1; one U.S. application, licensed from
Ohio University, relating to the T7T7 gene delivery system; and one allowed U.S.
application, licensed from Ohio University, relating to yolk sac stem cells. No
U.S. or foreign patent has issued to Progenitor to date. However, Progenitor has
an exclusive license from Ohio University to one issued U.S. patent covering a
method of providing tissue-specific expression of exogenous genetic material in
a mammal by genetically transformed embryonic carrier cells such as yolk sac
cells, and one issued U.S. patent relating to the T7T7 gene delivery system.
Progenitor also has licensed, on a nonexclusive basis, from Associated
Universities, Inc. and the Wisconsin Alumni Research Foundation, respectively,
two issued U.S. patents relating to the T7T7 gene delivery program.
Through its pending acquisition of Mercator, Progenitor will obtain
Mercator's patent and proprietary rights. Mercator presently has pending seven
U.S. patent applications and certain corresponding foreign applications. These
patent applications relate to the following four basic inventions: (i) a method
for conducting large-scale genomic sequencing, for which Mercator has received a
notice of allowance from the USPTO; (ii) a method for diagnosing HH utilizing
genetic markers associated with the HH gene region, for which Mercator has
received a notice of allowance from the USPTO; (iii) HH diagnostic markers and
methods; and (iv) an HH gene, cloned versions of the gene, expression of the
gene product in recombinant form, and various uses of the gene in the
development of research tools, diagnostics and therapeutics. Also, among the
seven pending applications, Mercator has a patent application relating to a
transcript map of all genes in the region of the HH gene. In addition, Mercator
has an exclusive license from Stanford for a provisional U.S. patent application
relating to the EPM1 epilepsy gene.
Mercator also has developed a number of research methods and tools that
currently are held as trade secrets. Examples of these technologies are an
improved, integrated approach to clone coverage and physical mapping,
high-throughput genotyping systems, proprietary screening probes that allow
improved gene isolation across a given genomic region, a large-scale method for
evaluating DNA sequence variation across many individuals, and computer software
to speed the finding of sequence differences in genomic DNA.
The Company's success will depend to a significant extent on its ability to
obtain and enforce patents, maintain trade secret protection and operate without
infringing on the proprietary rights of third parties. Because the patent
positions of biotechnology and pharmaceutical companies can be highly uncertain
and frequently involve complex legal and factual questions, the breadth of
claims allowed in biotechnology and pharmaceutical patents or their
enforceability cannot be predicted with certainty. Commercialization of
pharmaceutical products can be subject to substantial delays as a result of the
time required for product development, testing and regulatory approval. The
value of any patents issued or licensed to the Company may depend upon the
remaining term of patent protection available at the time products that utilize
the patented technology are commercialized.
52
<PAGE>
In March 1996, Progenitor's international patent application disclosing
certain aspects of its leptin receptor technology was published. The Company
believes that there may be significant litigation regarding patent and other
intellectual property rights relating to leptin and leptin receptors. The
Company is aware that Millennium has filed a patent application relating to a
receptor for leptin and its use in obesity applications, and has licensed to
Hoffmann-La Roche Inc. rights to develop certain therapeutics for obesity using
Millennium's discovery of a leptin receptor. There can be no assurance that
Millennium's patent application, or additional patent applications filed by
Millennium or others, will not result in issued patents covering a leptin
receptor, the leptin protein or other ligands, or any of their respective uses
including obesity. There can be no assurance that the invention by Millennium
will be accorded an invention date later than Progenitor's invention date, that
any patent will issue to Progenitor or that any such patent issued to Progenitor
would be broad enough to cover leptin receptors of Millennium or others.
Progenitor's failure to obtain a patent on a leptin receptor, or its failure to
obtain a patent that covers the leptin receptors of Millennium or others, or the
issuance of a patent to a third party covering a leptin receptor, the leptin
protein or other ligands, or any of their respective uses, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
A number of other groups are attempting to identify partial gene sequences
and full-length genes, the functions of which have not been characterized. The
public availability of partial gene sequence information before the Company
applies for patent protection on a corresponding full-length gene could
adversely affect the Company's ability to obtain patent protection with respect
to such gene. To the extent any patents issue to other parties on such partial
or full-length genes, and as other patents issue with the expansion of the
biotechnology industry, the risk increases that the potential products and
processes of the Company or its collaborators or licensees may give rise to
claims of patent infringement.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to human therapeutic uses. Substantial periods of time pass before the USPTO
responds to patent applications. In addition, the coverage claimed in a patent
application can be significantly reduced before a patent is issued.
Consequently, the Company does not know whether any of its pending or future
patent applications will result in the issuance of patents or, if any patents
are issued, whether the patents will be subjected to further proceedings
limiting their scope, and whether they will provide significant proprietary
protection or competitive advantage, or will be circumvented or invalidated.
Because patent applications in the United States are maintained in secrecy until
patents issue and patent applications in certain other countries generally are
not published until more than 18 months after they are filed, and since
publication of discoveries in scientific or patent literature often lags behind
actual discoveries, the Company cannot be certain that it or any licensor was
the first creator of inventions covered by pending patent applications or that
it or such licensor was the first to file patent applications on such
inventions.
There can be no assurance that the Company's patents, if issued, would not
be held invalid or unenforceable by a court or that such patents would cover
products or technologies of the Company's competitors. Competitors or potential
competitors may have filed applications for or received patents, and may obtain
additional patents and proprietary rights relating to compounds or processes
competitive with those of the Company. To protect its proprietary rights, the
Company may be required to participate in interference proceedings declared by
the USPTO to determine priority of invention, which could result in substantial
cost to the Company. Moreover, even if the Company's patents issue, there can be
no assurance that they will provide sufficient proprietary protection or will
not be later limited, circumvented or invalidated. Accordingly, there can be no
assurance that the Company will develop proprietary technologies that are
patentable, that the Company's patent applications will result in patents being
issued or that, if issued, patents will afford protection against competitors
with similar technology or products, nor can there be any assurance that the
Company's patents will not be held invalid by a court of competent jurisdiction.
In addition to patent protection, the Company also relies to a significant
extent upon trade secret protection for its unpatented confidential and
proprietary information including many of the Company's
53
<PAGE>
key discovery technologies. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology. To protect its trade secrets, the Company requires its
employees, consultants, scientific advisors and parties to collaboration and
licensing agreements to execute confidentiality agreements upon the commencement
of employment, the consulting relationship or the collaboration or licensing
arrangement with the Company. In the case of employees, the agreements also
provide that all inventions resulting from work performed by them while employed
by the Company will be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection of
the Company's trade secrets or adequate remedies in the event of unauthorized
use or disclosure of such information, that the Company can meaningfully protect
its rights in such unpatented proprietary technology through other means, that
any obligation to maintain the confidentiality of such proprietary technology
will not be breached by employees, consultants, advisors, collaborators or
licensees or others, or that others will not independently develop substantially
equivalent technology. The loss of trade secret protection of any of the
Company's key discovery technologies would materially and adversely affect the
Company's competitive position and could have a material adverse effect on the
Company's business, financial condition and results of operations. Finally,
disputes may arise as to the ownership of proprietary rights to the extent that
outside collaborators, licensees or consultants apply technological information
developed independently by them or others to Company projects or apply Company
technology to other projects and, if adversely determined, such disputes could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company may incur substantial costs if it is required to defend itself
in patent suits brought by third parties or if the Company initiates such a suit
to enforce the Company's patents or to determine the validity, scope or
enforceability of other parties' proprietary rights. Any legal action against
the Company or its collaborators or licensees claiming damages and seeking to
enjoin commercial activities relating to the affected products and processes
could, in addition to subjecting the Company to potential liability for damages,
require the Company or its collaborators or licensees to obtain a license or
licenses in order to continue to manufacture or market the affected products and
processes or require the Company or its collaborators or licensees to cease
doing so. There can be no assurance that the Company or its collaborators or
licensees would prevail in any such action or that any license required under
any such patents would be made available on commercially acceptable terms, if at
all. Any adverse outcome of such litigation could have a material adverse effect
on the Company's business, financial position and results of operations. In
addition, if the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's managerial and financial resources. The
Company is unable to predict how courts will resolve any future issues relating
to the validity, scope or enforceability of its patents should they be
challenged.
It is uncertain whether any third-party patents will require the Company to
alter its products or processes, obtain licenses, cease certain activities or
pay substantial damages. If any licenses are required, there can be no assurance
that the Company will be able to obtain any such license on commercially
acceptable terms, if at all. Failure by the Company or its collaborators and
licensees to obtain a license to any technology required to commercialize the
Company's discoveries may have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Uncertainty of Patents and Proprietary Rights."
COMPETITION
Research in the field of genomics is highly competitive. Competitors of the
Company in the genomics area include, among others, public companies such as
Genome Therapeutics Corporation, Human Genome Sciences, Inc., Incyte
Pharmaceuticals, Inc., Microcide Pharmaceuticals, Inc., Millennium, Myriad
Genetics, Inc. and Sequana Therapeutics, Inc., as well as private companies and
major pharmaceutical companies and universities and other research institutions,
including those receiving funding from the federally funded Human Genome
Project. The Company's competitors may discover, characterize or develop
important genes in advance of the Company, which could have a material adverse
effect on any
54
<PAGE>
related Company discovery program. The Company expects competition to intensify
in genomics research as technical advances in the field are made and become more
widely known.
In addition, the Company faces, and will continue to face, intense
competition from pharmaceutical and biotechnology companies, as well as academic
and research institutions and governmental agencies. The Company is subject to
significant competition from organizations that are pursuing the same or similar
technologies as those which constitute the Company's discovery approaches, and
from organizations that are pursuing pharmaceutical or diagnostic products that
are competitive with the Company's or its collaborators' potential products.
Many of the organizations competing with the Company have greater capital
resources, larger research and development staffs and facilities, greater
experience in drug discovery and development, obtaining regulatory approvals and
pharmaceutical product manufacturing, and greater marketing capabilities than
the Company. See "Risk Factors--Intense Competition; Rapid Technological
Change."
The Company is and will continue to be reliant on its collaborators and
licensees for support of its programs, including preclinical and clinical
development, manufacturing and marketing of its initial products. The Company's
present and future collaborators and licensees are now conducting or in the
future are expected to conduct, multiple product development efforts within
disease or technology areas that are the subject of their respective alliances
with the Company. Any product candidate or technology of the Company, therefore,
may be subject to internal competition with a potential product under
development or technology platform under evaluation by a collaborator or
licensee. See "Risk Factors-- Dependence on Collaborators and Licensees."
GOVERNMENT REGULATION
Prior to marketing, any new drug or other product developed by the Company
or its collaborators or licensees must undergo an extensive regulatory approval
process in the U.S. and other countries. This regulatory process, which includes
preclinical studies and clinical trials, and also may include post-marketing
studies, of each product candidate to establish its safety and efficacy, usually
takes many years and requires the expenditure of substantial resources.
Preclinical tests include laboratory evaluations and will require animal studies
conducted in accordance with the FDA's cGLP regulations to assess the product's
potential safety and efficacy. Data obtained from preclinical studies and
clinical trials are susceptible to varying interpretations that could delay,
limit or prevent regulatory approval. Delays or rejections also may be
encountered based upon changes in the FDA's policies for drug or biologic
approval during the period of product development and FDA regulatory review of
each NDA submitted in the case of new pharmaceutical agents, or PLA in the case
of biologics. Product development of new pharmaceuticals is highly uncertain,
and unanticipated developments, clinical or regulatory delays, unexpected
adverse side effects or inadequate therapeutic efficacy could slow or prevent
the product development efforts of the Company and its collaborators or
licensees, and have a materially adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
regulatory approval will be obtained for any drugs or other products developed
by the Company or its collaborators or licensees. Furthermore, regulatory
approval may entail limitations on the indicated use of a drug or other product.
Because certain of the products likely to result from the Company's discovery
programs involve the application of new technologies and may be based upon a new
therapeutic approach, such products may be subject to substantial additional
review by various government regulatory authorities other than the FDA and, as a
result, regulatory approvals may be obtained more slowly than for products using
conventional technologies. Under current guidelines, proposals to conduct
clinical research involving gene therapy at institutions supported by the NIH
must be approved by the RAC and the NIH. Furthermore, gene therapies are
relatively new technologies and have not been tested extensively in humans. The
regulatory requirements governing these products and related clinical procedures
for their use are uncertain and are subject to change. The NIH has proposed
revised rules with respect to the RAC that would, among other things, remove the
RAC's authority over the approval of individual gene therapy experiments. There
can be no assurance, however, that such proposed rules will be adopted.
55
<PAGE>
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continuing review. Among the conditions for product
approval and continued marketing approval is that the quality control and
manufacturing procedures of the Company or its collaborators or licensees
conform to the FDA's cGMP regulations which must be followed at all times. In
complying with cGMP requirements, manufacturers must expend time, money and
effort on a continuing basis in production, record keeping and quality control.
Manufacturing establishments, both domestic and foreign, are subject to
inspection by or under the authority of the FDA and by other federal, state and
local agencies. Failure to pass such inspections may subject the manufacturer to
possible FDA actions such as the suspension of manufacturing, seizure of the
product, withdrawal of approval or other regulatory sanctions. The FDA also may
require the manufacturer to recall a product from the market.
Discovery of previously unknown problems with a product may have adverse
effects on the Company's business, including withdrawal of the product from the
market. Violations of regulatory requirements at any stage, including
preclinical studies and clinical trials, the approval process or post-approval,
may result in various adverse consequences to the Company, including the FDA's
delay in approval or refusal to approve a product, withdrawal of an approved
product from the market or the imposition of criminal penalties against the
manufacturer and NDA or PLA holder. The Company has not submitted an IND for any
product candidate, and no product candidate has been approved for
commercialization in the U.S. or elsewhere. The Company intends to rely
primarily on its collaborators or licensees to file INDs and generally direct
the regulatory approval process. No assurance can be given that the Company or
any of its collaborators or licensees will be able to conduct clinical testing
or obtain the necessary approvals from the FDA or other regulatory authorities
for any products. Failure to obtain required governmental approvals will delay
or preclude the Company's collaborators or licensees from marketing drugs or
other products developed by the Company or limit the commercial use of such
products and could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other federal, state and local regulations. The Company's
research and development activities involve the controlled use of hazardous
materials, chemicals, biological materials and radioactive compounds. Although
the Company believes that its safety procedures for handling and disposing of
such materials comply with the current standards prescribed by state and federal
laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any resulting damages and any such liability
could exceed the Company's resources. See "Risk Factors--Government Regulation"
and "--Hazardous and Radioactive Materials; Environmental Matters."
PRODUCT LIABILITY INSURANCE
The testing, manufacture, marketing and sale of pharmaceutical and other
products entail the inherent risk of liability claims or product recalls and
associated adverse publicity. Clinical trials and sales by the Company or its
collaborators or licensees of potential products incorporating the Company's
discoveries may expose the Company to potential liability resulting from the use
of such products. Such liability might result from claims made directly by
consumers or by regulatory agencies, pharmaceutical companies or others selling
such products. The Company currently has a limited amount of clinical trial and
product liability insurance coverage through Interneuron. The Company will seek
to obtain its own coverage upon the closing of the Offering and to maintain and
appropriately increase such coverage as clinical development of any product
candidates progresses and if and when its products are ready to be
commercialized. There can be no assurance that the Company will be able to
obtain such insurance or, if obtained, that such insurance can be acquired at a
reasonable cost or in sufficient amounts to protect the Company against such
liability. Certain of the Company's license agreements require the Company to
indemnify licensors against product liability claims arising from products
developed using the licensed technology. Also, certain of these agreements and
other collaborative and license agreements require the Company to maintain
minimum levels of insurance coverage. The failure to maintain product liability
56
<PAGE>
coverage, or the occurrence of any product liability claim, or a recall of any
products of the Company or its collaborators or licensees, if developed, could
inhibit or prevent commercialization of products being developed by the Company
and could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, to the extent any product
liability claim exceeds the amount of any insurance coverage, the Company's
business, financial condition and results of operations could be materially and
adversely affected. See "Risk Factors--Risk of Product Liability."
HUMAN RESOURCES
As of February 28, 1997, the Company had 68 full-time employees, of whom 22
hold Ph.D. or M.D. degrees. Of the Company's full-time employees, 56 are engaged
in research and development activities and 12 are engaged in business
development, finance and administration. None of the Company's employees is
covered by a collective bargaining agreement, and the Company has never
experienced any strike or work stoppage. The Company believes its relations with
its employees to be good.
In order to support the Company's operations, it will be required to hire
and retain additional research, management, administrative and financial
personnel. In addition, in connection with the acquisition of Mercator and the
potential relocation of the Company's facilities, the Company may be required to
expend substantial additional resources to create a combined personnel base. The
Company's success will depend in large part on its ability to attract and retain
key employees and scientific advisors. Competition among biotechnology and
pharmaceutical and other companies for highly skilled scientific and management
personnel is intense. There can be no assurance that the Company will be
successful in retaining its existing personnel or advisors, or in attracting
additional qualified employees. See "Risk Factors-- Dependence on Collaborators
and Licensees," "--Dependence on Research Collaborators and Scientific
Advisors," "--Dependence on Key Personnel" and "Risks Associated with the
Acquisition of Mercator."
FACILITIES
The Company currently occupies approximately 19,000 square feet of
laboratory and office space in a single facility in Columbus, Ohio. Total lease
payments for fiscal 1996 were $154,175. Payments for the quarter ended December
31, 1996 were $37,548. In addition, the Company leases a separate facility for
laboratory animals with approximately 7,000 square feet of space from The Ohio
State University. Space in this facility is leased on the basis of a per diem
for each animal housed. Total lease payments to The Ohio State University in
fiscal 1996 were $132,822. Payments for the quarter ended December 31, 1996 were
$27,549. The current lease on the laboratory and office facility expires on
December 31, 1997. The Company also leases and occupies facilities consisting of
approximately 25,000 square feet of research laboratory and office space located
in Menlo Park, California. The lease expires in 1998 and contains provisions for
two one-year renewal options and an option to lease an additional 10,000 square
feet. In the event that the Company does not exercise its option to lease the
additional space and the space remains vacant, the Company retains a reoccurring
right of first refusal. Total base payments for fiscal 1996 were $176,040.
Payments for the quarter ended December 31, 1996 were $48,690. The Company
expects that, with these expansion rights, its current facilities will be
adequate to serve its needs for the foreseeable future. Although the Company
believes that these facilities will be adequate to meet its projected needs for
the next two years, it may be required to locate additional or alternative
facilities within this time frame.
In connection with the acquisition of Mercator, the Company is considering
relocating its facilities in whole or in part to the San Francisco Bay Area.
Such a relocation could involve substantial nonrecurring charges including lease
termination costs, costs of moving records and equipment and employee severance
and relocation payments. These and related charges could have a material adverse
effect on the Company's results of operations. See "Risk Factors--Risks
Associated with the Acquisition of Mercator" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
57
<PAGE>
MERCATOR ACQUISITION
Progenitor and Mercator entered into the Acquisition Agreement, pursuant to
which a subsidiary of Progenitor will be merged with and into Mercator, with
Mercator as the surviving corporation.
In the Acquisition, the aggregate purchase price will be paid in shares of
Common Stock, based on the initial public offering price. The aggregate value of
the Common Stock issued for all shares of Mercator capital stock (including
shares of Common Stock issuable upon exercise of all options and warrants to
purchase Mercator capital stock assumed by Progenitor) will be an amount equal
to (i) $22.0 million, less (ii) both (a) the total amount, if any, by which
Total Mercator Reorganization Expenses (as defined in the Acquisition Agreement)
exceed $800,000 and (b) the total amount, if any, by which Total Mercator IPO
Expenses (as defined in the Acquisition Agreement) exceed $50,000, and further
less (iii) the amount (not to exceed $2.2 million), if any, of certain claims by
Progenitor and various indemnitees for certain breaches of the covenants,
representations and warranties of Mercator in the Acquisition Agreement (the
value of such Common Stock, as so adjusted, the "Final Acquisition
Consideration"). The allocation of the Final Acquisition Consideration among the
shares of the various classes and series of Mercator capital stock and
outstanding options and warrants will be determined in accordance with a formula
set forth in the Acquisition Agreement.
The representations and warranties of Mercator in the Acquisition Agreement
do not survive the closing of the Acquisiton and the Company will not have any
remedy for breaches of representations and warranties indentified after the
closing. See "Risk Factors--Risks Associated with the Acquisition of Mercator."
The shares of Common Stock to be issued in the Acquisition are subject to a
separate registration statement on Form S-4. Progenitor expects to issue
1,679,255 shares of Common Stock to the Mercator stockholders, and Replacement
Options to acquire 293,022 shares of Common Stock to the optionholders of
Mercator assuming Final Acquisition Consideration of $22.0 million and an
initial public offering price of $11.00 per share.
In connection with the Acquisition, the Company has committed an aggregate
maximum amount of $6.6 million to fund Mercator's interim working capital needs
(the "Mercator Bridge Financing"), estimated to be $800,000 per month. Upon the
closing of the Offering, the Mercator Bridge Financing would become part of
Progenitor's purchase price consideration.
In order to provide funding for the Mercator Bridge Financing, Interneuron
has agreed to provide Progenitor a line of credit of up to an aggregate maximum
amount of $6.6 million bearing interest at 10% per annum. The outstanding
principal and accrued interest on the Interneuron Bridge Loan will be repaid
upon the closing of the Offering from the net proceeds of the Offering. See "Use
of Proceeds" and "Certain Transactions--Relationship with Interneuron."
58
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company following the
consummation of the Acquisition and the Offering are anticipated to be:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Douglass B. Given, M.D., Ph.D................ 45 President, Chief Executive Officer and Director
Elliott Sigal, M.D., Ph.D.................... 45 Senior Vice President, Research and Development
Mark N.K. Bagnall............................ 40 Vice President, Finance and Chief Financial Officer
H. Ralph Snodgrass, Ph.D..................... 47 Vice President, Research and Chief Scientific Officer
Stephen J. Williams, Ph.D.................... 42 Vice President, Corporate Development
Glenn L. Cooper, M.D. (1).................... 44 Chairman of the Board
Robert P. Axline (2)......................... 61 Director
Alexander. M. Haig, Jr....................... 72 Director
Morris Laster, M.D........................... 32 Director
Robert R. Momsen............................. 50 Director
Jerry P. Peppers (2)......................... 50 Director
David B. Sharrock (1)........................ 60 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
DOUGLASS B. GIVEN, M.D., PH.D. has served as President, Chief Executive
Officer and a Director of the Company since June 1994 and served as Executive
Vice President and Chief Operating Officer from January 1993 to June 1994. Prior
to joining the Company, Dr. Given was Vice President at the Schering Plough
Research Institute, a pharmaceutical research facility, from March 1989 to
December 1992. Dr. Given also serves as a Director of the Edison BioTechnology
Center, is on the Dean's Advisory Council of the University of Chicago and is on
the Dean's Advisory Council of The Ohio State University. Dr. Given received an
M.D. and Ph.D. in Biological Sciences from the University of Chicago, performed
his postdoctoral training in Internal Medicine and Infectious Diseases at
Harvard Medical School and Massachusetts General Hospital and received an M.B.A.
from the Wharton School of Business at the University of Pennsylvania.
ELLIOTT SIGAL, M.D., PH.D. will serve as Senior Vice President, Research and
Development of the Company upon consummation of the Acquisition. Dr. Sigal
joined Mercator in September 1995 as Vice President of Research and Development
and was named President and Chief Executive Officer in January 1996. In 1992,
Dr. Sigal joined Syntex, Inc. ("Syntex"), a pharmaceutical company, and was its
Executive Director of Cell Biology from 1993 to 1995. At Syntex, Dr. Sigal was
appointed the Program Leader for the Atherosclerosis and COX-2 programs, and
Senior Scientist, Institute of Biochemistry and Cell Biology in 1992, and, in
1995, was appointed Executive Director of the Center for Inflammation Research.
After the acquisition of Syntex by Roche Bioscience, a biopharmaceutical firm,
he served as Vice President of Inflammation and Immunology at Roche Bioscience.
Dr. Sigal is currently an Associate Adjunct Professor of Medicine and Associate
Staff Member of the Cardiovascular Research Institute at the University of
California, San Francisco. Prior to completing medical school at the University
of Chicago, Dr. Sigal studied business and engineering at Purdue University
where he obtained a B.Sc., M.S. and Ph.D. in industrial engineering.
MARK N. K. BAGNALL has served as Vice President, Finance and Chief Financial
Officer of the Company since August 1996. Prior to joining the Company, Mr.
Bagnall served as Vice President of Finance, Chief Financial Officer and
Secretary of Somatix Therapy Corporation ("Somatix"), a biotechnology company,
59
<PAGE>
from July 1992. Previously, he served as Treasurer and Secretary of Somatix from
January 1991 to July 1992, and of its predecessor, Hana Biologics, Inc., from
January 1990 to January 1991. Mr. Bagnall is a Certified Public Accountant.
H. RALPH SNODGRASS, PH.D. has served as Chief Scientific Officer since May
1996 and has served as Vice President, Research since he joined the Company in
July 1993. Prior to joining the Company, Dr. Snodgrass was Assistant Professor
of Microbiology and Immunology at the University of North Carolina, Chapel Hill
from January 1988 to June 1993. From 1982 to 1988 Dr. Snodgrass headed a
research laboratory for the study of T cell development and stem cell biology at
the Basel Institute for Immunology in Switzerland. Dr. Snodgrass has held
appointments at The Ohio State University as Clinical Associate Professor,
Division of Bone Marrow Transplantation, Department of Internal Medicine since
July 1994, and as Adjunct Associate Professor, Department of Medical
Microbiology and Immunology since July 1995. Dr. Snodgrass received his Ph.D. in
Immunology from the University of Pennsylvania and performed his postdoctoral
training at The Fox Chase Cancer Center, Philadelphia.
STEPHEN J. WILLIAMS, PH.D. has served as Vice President, Corporate
Development since May 1996 and previously served as Vice President, Business
Development from June 1994 to May 1996. Prior to joining the Company, Dr.
Williams was Medical Director, Strategic Product Planning at Bristol-Myers
Squibb, a pharmaceutical company, from March 1993 to June 1994; and Associate
Director, New Product Planning at DuPont Merck Pharmaceutical Company from
January 1991 to March 1993. Dr. Williams received his Ph.D. in Pharmacology from
Duke University.
GLENN L. COOPER, M.D. has served as Chairman of the Board of Directors of
the Company since June 1994, and has been a director since December 1992. Dr.
Cooper has been President, Chief Executive Officer and a director of Interneuron
since May 1993 and served as President and Chief Executive Officer of the
Company from September 1992 until June 1994. Prior to joining the Company in
1992, Dr. Cooper was Executive Vice President and Chief Operating Officer of
Sphinx Pharmaceuticals Corporation from August 1990. Dr. Cooper serves as
Chairman of the Boards of Directors of Intercardia, Inc. and Transcell
Technologies, Inc., and is a director of InterNutria, Inc., each of which is a
subsidiary of Interneuron. Dr. Cooper received his M.D. from Tufts University
School of Medicine and performed his postdoctoral training in Internal Medicine
and Infectious Diseases at the New England Deaconess Hospital and Massachusetts
General Hospital.
ROBERT P. AXLINE has been a Director of the Company since June 1992 as a
designee of The Ohio University Foundation. Mr. Axline has been President of
Image Data Systems Inc. since 1995 and Chairman of Plastic Card Systems Inc.
since 1987. Both companies are engaged in the manufacture and sale of plastic
identification card machines and supplies.
ALEXANDER M. HAIG, JR. has been a Director of the Company since December
1992. General Haig has served as Chairman and President of Worldwide Associates,
Inc., a marketing consulting firm, since 1984. Previously, General Haig served
as Secretary of State of the United States from January 1981 to July 1982, and
President and Chief Operating Officer of United Technologies Corporation from
November 1979 to January 1981, where he remains a Senior Consultant. General
Haig also has served as Supreme Allied Commander of NATO and White House Chief
of Staff under the Nixon and Ford Administrations. General Haig also serves on
the Board of Directors of Interneuron, MGM Grand, Inc. and America Online, Inc.
MORRIS LASTER, M.D. has served as a Director of the Company since its
inception and served as Chief Executive Officer from its inception to September
1992. Dr. Laster has been Vice President of The Castle Group, Ltd. since
February 1990. He also has served as Chief Executive Officer of Synpro, Ltd., a
biotechnology firm, since November 1995. Previously, he was interim Chief
Executive Officer of Xenograft Technologies, Ltd., a biopharmaceuticals firm,
from January 1993 to September 1993. Dr. Laster received his M.D. from Downstate
Medical Center, New York, and received postdoctoral training in surgery at Case
Western Reserve University Hospital.
60
<PAGE>
ROBERT R. MOMSEN has served as a Director of Mercator since February 1995.
Mr. Momsen has been a General Partner at InterWest Partners, a group of venture
capital management funds, since August 1982. Mr. Momsen also serves as a
Director of several public companies, including ArthroCare Corp. (a medical
equipment supply company), COR Therapeutics, Inc. (a pharmaceutical company),
Coulter Pharmaceutical Inc. (a biotechnology products and services company),
Innovative Devices, Inc. (a pharmaceutical consultancy), Urologix, Inc. (a
medical device company) and Ventritex, Inc. (a medical device company). He
received his B.S. and M.B.A. degrees from Stanford University.
JERRY P. PEPPERS joined the Company's Board of Directors in June 1992 as a
designee of The Ohio University Foundation. He is a partner in the law firm of
Winthrop, Stimson, Putnam & Roberts, where he has served as an attorney since
1971. Mr. Peppers received his J.D. from Duke University.
DAVID B. SHARROCK has been a Director of the Company since January 1994 and
a Director of Interneuron since January 1995. Mr. Sharrock has been associated
with Marion Merrell Dow, a pharmaceutical company, or its predecessors since
1958, most recently as Executive Vice President and Chief Operating Officer and
Director from January 1990 until his retirement in December 1993. Since that
time he has served as an independent consultant. Mr. Sharrock also serves as a
Director of Cincinnati Bell Inc., Unitog Company, Inc. and Intercardia, Inc.
KEY SCIENTIFIC PERSONNEL
The Company employs the following key scientific personnel:
KAREN J. BRUNKE, PH.D. will serve as Vice President of Scientific Affairs of
the Company upon consummation of the Acquisition. Dr. Brunke has served as Vice
President of Clinical Research at Mercator since July 1996 and was Director of
Clinical Research since she joined Mercator in February 1995. Dr. Brunke was in
Research Management at Sandoz Agro, Inc., an agricultural and biological
products company, from 1985 to 1994, most recently as Director of Plant
Biotechnology. Dr. Brunke was an NCI postdoctoral fellow at the Institute for
Cancer Research at The Fox Chase Cancer Center. Dr. Brunke received her Ph.D. in
Microbiology from the University of Pennsylvania.
RICHARD S. BRODY, PH.D. has served as Senior Scientist and Head of Protein
Chemistry at the Company since October 1996. From March 1995 to October 1996,
Dr. Brody was the Research Leader, Biotechnology Department at Battelle Memorial
Institute ("Battelle"), and from 1990 to 1995, he served as Senior Research
Scientist, Immunology Department at Battelle. Dr. Brody received his Ph.D. in
Chemistry from Harvard University and performed his postdoctoral training in
Biochemistry at The Ohio State University.
JOSEPH A. CIOFFI, PH.D. has served as Director, Genomics of the Company
since September 1996, and previously served as Manager, Department of Molecular
Biology and Project Leader of the Company's Novel Hematopoietic Receptor
Discovery Program. Dr. Cioffi joined Progenitor in December 1992 as a Research
Scientist. Prior to joining the Company, Dr. Cioffi held positions at the Edison
Biotechnology Institute at Ohio University, first as a Postdoctoral Fellow and
then as a Staff Scientist. Dr. Cioffi received B.S. and M.S. degrees in Animal
Science from Cornell University and a Ph.D. in Physiology from the University of
Illinois, Urbana-Champaign.
ANDREAS GNIRKE, PH.D. joined Mercator in 1994 as a Scientist and has served
as Head, Genomic Technology and Senior Scientist of Mercator since July 1996.
Prior to joining Mercator, Dr. Gnirke held postdoctoral positions in genome
analysis at Washington University in St. Louis and at the University of
Washington in Seattle. Dr. Gnirke received his Ph.D. in Biochemistry from the
Free University of Berlin.
ADEL A. MIKHAIL, PH.D. has served as Director, Biology of the Company since
September 1996. Dr. Mikhail joined Progenitor at its inception in 1992 as a
Research Scientist. Previously, Dr. Mikhail served as Project Director at Ohio
University for contract research sponsored by the United States Army Medical
Research Institute of Infectious Diseases. Dr. Mikhail received an M.S. in
Neurobiology and a Ph.D. in Biology from Ohio University.
RANDALL SCHATZMAN, PH.D. has served as Executive Director, Biology of
Mercator since July, 1996 and was Director of Molecular Biology at Mercator from
March 1996. Prior to joining Mercator, Dr. Schatzman served as Head of Vascular
Biology at Roche Bioscience from 1994 to 1996 and headed the Cancer Biology
Department at Syntex from 1986 to 1994. Dr. Schatzman did postdoctoral training
at the
61
<PAGE>
University of California, San Francisco. He received his Ph.D. in Molecular
Pharmacology from Emory University.
YANNICK POULIOT, PH.D. has recently been hired as Director of Bioinformatics
of the Company. Prior to joining the Company, Dr. Pouliot served as Senior
Product Development Scientist, Bioinformatics, at Molecular Simulations Inc., a
developer of scientific software. From February 1994 to July 1996, Dr. Pouliot
served as Biocomputational Scientist at Sequana Therapeutics, Inc., a genomics
company. From September 1992 to December 1993, Dr. Pouliot was a
Biocomputational Scientist at the Genethon human genome laboratory near Paris,
France. Dr. Pouliot received his B.Sc., M.Sc. and Ph.D. degrees from the
Department of Biology of McGill University, Montreal, Canada.
ROGER K. WOLFF, PH.D. has served as Director of Genetics at Mercator since
July 1996. Dr. Wolff joined Mercator in 1993 and served as Project Leader for
the HH gene discovery program. Dr. Wolff trained as a postdoctoral fellow at the
University of California, San Francisco and received his Ph.D. in Human Genetics
from the University of Utah.
THOMAS J. ZUPANCIC, PH.D. has served as Director, Gene Discovery of the
Company since September 1996 and previously served as a Senior Research
Scientist, having joined the Company in February 1994. Prior to joining the
Company, Dr. Zupancic was a Principal Research Scientist in the Biotechnology
Department at Battelle Memorial Institute. Previously, he was a Research
Associate at Eli Lilly & Co, a pharmaceutical company. Dr. Zupancic received a
B.S. in Genetics from The Ohio State University, and a Ph.D. in Molecular and
Developmental Biology from Indiana University, where he was a National Science
Foundation Graduate Fellow.
EMPLOYMENT AGREEMENTS
DOUGLASS B. GIVEN. The Company intends to enter into a new employment
agreement (the "Revised Given Employment Agreement") with Dr. Given. The Revised
Given Employment Agreement will replace the employment agreement entered into on
January 3, 1993.
Pursuant to the Revised Given Employment Agreement, Dr. Given would receive
(i) a base salary of $300,000 per annum, (ii) an annual bonus of up to 40% of
his base salary upon the achievement of certain performance goals determined by
the Board of Directors, (iii) executive disability benefits providing for
payment of 60% of his base salary, and the ability to purchase coverage for an
additional 20% of his base salary, (iv) a term life insurance policy of $1.0
million, and (v) additional stock options to purchase 310,000 shares of Common
Stock at an exercise price per share equal to the initial public offering price.
See "Certain Transactions--Transactions with Directors and Executive Officers."
Under the Revised Given Employment Agreement, if Dr. Given's employment is
terminated without cause or upon forced resignation, death or disability, the
Company would pay Dr. Given a lump sum equal to 12 months base salary, 12 months
bonus payments, 18 months COBRA premiums and 18 months executive disability
premiums. In addition, all of the stock options granted to Dr. Given which are
to vest over the two years immediately following termination of his employment
would accelerate and vest immediately.
If Dr. Given's employment is terminated with cause, the Company would pay
Dr. Given a lump sum equal to six months base salary, six months bonus payments,
nine months COBRA premiums and nine months executive disability plan premiums.
In addition, all of the stock options granted to Dr. Given which are to vest
over the one year immediately following termination of his employment would
accelerate and vest immediately.
Upon a "change in control" (as defined in the Revised Given Employment
Agreement) of the Company, Dr. Given would receive a lump sum equal to 12 months
base salary and 12 months bonus payments. In addition, all unvested stock
options granted to Dr. Given would accelerate and vest immediately.
ELLIOTT SIGAL. The Company signed an employment agreement (the "Revised
Sigal Employment Agreement") with Dr. Sigal on February 14, 1997, effective upon
the consummation of the Acquisition (the "Effective Date"), to serve as the
Senior Vice President of Research and Development of the
62
<PAGE>
Company. Dr. Sigal has agreed to supervise and manage the preclinical and
clinical development areas of the Company and oversee its research function,
which will be headed by Dr. Snodgrass.
Pursuant to the Revised Sigal Employment Agreement, Dr. Sigal will receive
(i) a base salary of $225,000 per annum, (ii) annual bonuses based upon
achievement of reasonable objectives established by the Board or its
Compensation Committee in the range of up to 30% of his base salary, (iii)
certain additional benefits, including life insurance benefits in the amount of
$450,000, and (iv) stock options to purchase shares of Common Stock equal to 1%
of the outstanding Common Stock of the Company on a fully-diluted basis on the
Effective Date, which options will be exercisable at the initial public offering
price and will be granted in addition to the Replacement Options to be issued to
Dr. Sigal in connection with the Acquisition. The options to be granted upon the
closing of the Offering will have an exercise price equal to the initial public
offering price with 25% vesting one year after the date of grant and 6.25%
vesting each quarter thereafter until fully vested four years after the date of
grant. Such options are subject to accelerated vesting upon a change of control
of the Company in the event that other options granted to a senior manager of
the Company (other than the President and Chief Executive Officer) are provided
with similar accelerated vesting upon a change of control, and are subject to
partial vesting upon termination of Dr. Sigal's employment by the Company other
than for "cause" (or death or disability) or upon termination of employment by
Dr. Sigal for "good reason" (in each case as defined in the Revised Sigal
Employment Agreement). Options granted to Drs. Snodgrass and Williams, as well
as Mr. Bagnall, will become subject to accelerated vesting commitments in
connection with a change of control that also would then be available to Dr.
Sigal by the terms of the Revised Sigal Employment Agreement.
The Revised Sigal Employment Agreement provides that, from and after the
Effective Date, the Company will replace Mercator as the lender under a
Promissory Note dated September 7, 1995 (the "Sigal Note"), pursuant to which
Mercator loaned $150,000 to Dr. Sigal for a downpayment on the purchase price of
his principal residence (the "Property"). The Sigal Note is secured by the
Property. The Sigal Note accrues interest at a rate equal to the lesser of (i)
28.2% of the capital gains realized upon a sale of the Property (a different
calculation applies if the Sigal Note becomes payable prior to a sale of the
Property) and (ii) the cumulative interest on the unpaid principal balance of
the Sigal Note accruing at 7.65% compounded annually. The interest paid by Dr.
Sigal to Mercator as a result of Dr. Sigal's retirement or termination of
employment with Mercator shall be deducted from such interest calculation. The
outstanding balance due on the Sigal Note is due on the earlier of: (a) any sale
or transfer of the Property; (b) the refinancing of any loan secured by a first
mortgage on the Property; (c) the first anniversary of Dr. Sigal's retirement or
termination of employment with the Company; (d) the date on which Dr. Sigal
ceases to be the holder of record of title to the Property; (e) any sale or
transfer by Dr. Sigal of any or all of Mercator capital stock owned by him; and
(f) the occurrence of an "acceleration event," as defined therein.
The Revised Sigal Employment Agreement provides generally that if his period
of employment is terminated without "cause", the Company shall: (i) pay to Dr.
Sigal all accrued compensation and continue his benefits through the last
business day of the 30 days' notice period; (ii) pay to Dr. Sigal on the last
business day of such notice period a lump sum equal to six months salary; (iii)
pay Dr. Sigal's COBRA premiums for six months following the last business day of
such notice period ("Benefit Continuation Period"); and (iv) to the extent
permitted by the applicable plans, continue Dr. Sigal's life insurance and
disability insurance coverage during the Benefit Continuation Period (items (i)
through (iv) collectively referred to as "Separation Benefits"). If the Company
terminates Dr. Sigal's employment for "cause", the Company shall pay Dr. Sigal
all accrued compensation through the date of termination. Dr. Sigal may
terminate his employment for any reason, with or without cause, by providing the
Company 30 days' advance written notice. The Company shall have the option, in
its complete discretion, to make Dr. Sigal's termination effective at any time
prior to the end of such notice period. In either event, the Company shall pay
Dr. Sigal all accrued compensation through the last day of the notice period,
not to exceed 30 days. Dr. Sigal may terminate his employment for "good reason"
(as defined in the Revised Sigal Employment Agreement), provided Dr. Sigal gives
the Company 30 days' advance written notice of the reason for termination and
his intent to terminate. During this period, the Company shall have an
opportunity to
63
<PAGE>
correct the condition constituting good reason. If not remedied, the Company
shall provide Dr. Sigal the Separation Benefits.
In August 1995, Mercator entered into an employment contract with Dr. Sigal,
pursuant to which Dr. Sigal agreed to serve as Vice President of Research and
Development of Mercator. In January 1996, Dr. Sigal was promoted to President
and Chief Executive Officer of Mercator. In February 1996, Mercator entered into
a letter agreement with Dr. Sigal setting forth Dr. Sigal's compensation package
(the "Compensation Letter"). The Compensation Letter superseded portions of the
prior Sigal employment agreement and provides that all of Dr. Sigal's stock
options will accelerate vesting upon a change of control involving Mercator
which as defined would include the Acquisition. All such options will be
converted into Replacement Options as a result of the Acquisition. In connection
with the completion of the Acquisition, Dr. Sigal will receive fully vested
Replacement Options under the 1997 Plan to purchase 4,949 and 91,733 shares of
the Company's Common Stock with exercise prices of $12.34 and $1.42,
respectively, assuming an initial public offering price of $11.00 per share of
the Company's Common Stock and Final Acquisition Consideration of $22.0 million.
The Compensation Letter and, to the extent still operative, the prior Sigal
employment agreement, will terminate upon consummation of the Acquisition,
pursuant to the terms of the Revised Sigal Employment Agreement. Pursuant to the
Revised Sigal Employment Agreement, Dr. Sigal has released all prior contractual
and compensation claims he has or may have against Mercator and the Company and
their respective affiliates.
On March 5, 1997, the Compensation Committee approved certain change of
control and severance provisions for Drs. Snodgrass and Williams and Mr.
Bagnall. Such provisions will provide that upon termination of the executive's
employment without cause, he will receive a severance payment equal to nine
months of his base rate of compensation, and acceleration of all outstanding
options that would have vested during the nine-month period after such
termination of employment. In addition, such provisions provide that the
executive would be entitled to full acceleration of all outstanding stock
options upon certain events defined as a change of control of the Company and a
severance payment equal to one year of his base salary and the maximum annual
bonus payment applicable to such executive upon any termination of such
executive's employment by the Company following a change of control.
The Company currently has no employment agreements with other employees.
BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION
At present, all directors are elected annually and serve until the next
meeting of stockholders or until the election and qualification of their
successors. In addition, The Ohio University Foundation is entitled to designate
two directors. Messrs. Axline and Peppers currently serve as the designees of
The Ohio University Foundation. The rights of The Ohio University Foundation to
designate two members of the Board of Directors will terminate upon the closing
of the Offering. Pursuant to the intercompany services agreement to be entered
into by the Company with Interneuron, Interneuron will have the right to
nominate one designee for election to the Company's Board of Directors, for so
long as Interneuron reports the Company's financial results on a consolidated
basis, on an equity basis or otherwise on a basis pursuant to which a portion of
the Company's results of operations appears in the financial results of
operations of Interneuron. See "Certain Transactions--Relationship with
Interneuron" and "--The Ohio University Foundation." Pursuant to the Acquisition
Agreement, the Company will cause Robert R. Momsen to be elected to its Board of
Directors effective on or prior to consummation of the Acquisition.
Effective August 9, 1996, the Board of Directors established an Audit
Committee and a Compensation Committee. The Audit Committee, which consists of
Messrs. Axline and Peppers, is responsible for overseeing the actions by the
Company's independent auditors and reviewing the Company's internal financial
and accounting controls and policies. The Compensation Committee, which consists
of Dr. Cooper and Mr. Sharrock, is responsible for determining salaries,
incentives and other forms of compensation for officers and other employees of
the Company and will administer various incentive compensation and benefit
plans.
64
<PAGE>
All executive officers serve at the discretion of the Board of Directors,
subject to the terms of any employment agreements. The Company has entered into
employment agreements with Dr. Given and Dr. Sigal, which will be effective upon
the closing of the Offering. There are no family relationships among the
Company's directors and executive officers. See "--Employment Agreements."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently is composed of Dr. Cooper and Mr.
Sharrock, neither of whom is an executive officer of the Company. Dr. Cooper
serves as Chairman of the Board of Directors. On February 1, 1994, Mr. Sharrock
entered into a consulting agreement with Progenitor, Interneuron and Transcell
Technologies, Inc., a subsidiary of Interneuron ("Transcell"), pursuant to which
Mr. Sharrock agreed to provide consulting services on the development and
commercialization of each company's technology. Such agreement was amended
effective as of December 31, 1996 with Progenitor. See "-- Directors'
Compensation" and "Certain Transactions--Transactions with Directors and
Executive Officers."
DIRECTORS' COMPENSATION
Effective after the Offering, the Company's non-employee directors (other
than those who are employees of Interneuron) will receive cash compensation in
the amount of $2,000 for attendance at meetings of the Board of Directors and
any committee thereof, and directors may be reimbursed for certain expenses in
connection with attendance at Board of Directors and committee meetings. A total
of 300,000 shares of Common Stock under the Company's 1996 Stock Incentive Plan
have been reserved for issuance to non-employee directors of the Company (other
than those who are employees of Interneuron) pursuant to compensation policies
for such directors to be adopted by the Company in the future. To date none of
such shares has been granted.
Pursuant to a letter agreement dated January 26, 1994, Progenitor has paid
Mr. Sharrock $2,000 for each meeting of the Board that he attends. Upon
execution of this agreement, Progenitor also granted Mr. Sharrock options to
purchase 2,500 shares of Common Stock, at an exercise price of $4.00 per share,
one-third of which vests each January 21 beginning January 21, 1995. During
fiscal 1996, the Company paid Mr. Sharrock $8,000 pursuant to this arrangement
and accrued an additional $2,000 in fees.
Progenitor, along with Interneuron and Transcell, is a party to a consulting
agreement with Mr. Sharrock, entered into on February 1, 1994, pursuant to which
Mr. Sharrock receives $2,000 per day in exchange for his service as a consultant
on the development and commercialization of each company's technology.
Collectively, the three companies must use Mr. Sharrock's services for a minimum
of 20 days per year during the term of the agreement. Progenitor paid Mr.
Sharrock $10,500 during fiscal 1996 under this arrangement. The agreement
provides that Mr. Sharrock will not compete with Progenitor during the term of
the agreement and for a period of one year thereafter. This agreement terminates
on February 1, 1998, and provides for automatic one-year extensions with respect
to each company unless Mr. Sharrock or such company gives notice at least sixty
days prior to expiration of the then-current term. Progenitor has amended such
agreement effective as of December 31, 1996 with Mr. Sharrock such that cash
compensation paid to him for attendance of meetings of the Board of Directors or
any committee thereof pursuant to the Company's director compensation policy
will be in lieu of such consulting fees and will be credited towards the
aggregate 20 days of consulting per year required to be granted to Mr. Sharrock
under the consulting agreement.
During fiscal 1996, Progenitor was party to a consulting agreement with Dr.
Laster, pursuant to which Progenitor paid him $500 per month for his services as
a scientific advisor. Dr. Laster received $6,000 pursuant to this agreement in
fiscal 1996.
On March 7, 1997, the Compensation Committee approved grants to each of the
non-employee directors of the Company, effective upon the closing of the
Offering, of additional options to acquire 25,000 shares of Common Stock of the
Company at the initial public offering price. In addition, the
65
<PAGE>
Compensation Committee also approved acceleration of vesting of previously
granted stock options to such non-employee directors, effective upon the closing
of the Offering.
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended September 30, 1996
the compensation paid by Progenitor for services rendered in all capacities with
respect to its Chief Executive Officer and each of its other executive officers
with annual compensation in excess of $100,000 (the Chief Executive Officer and
such other executive officers are hereinafter referred to as the "Named
Executive Officers"). It is expected that Dr. Sigal will serve as the Company's
Senior Vice President of Research and Development following the Acquisition. See
"--Directors and Executive Officers." Information regarding the compensation
paid by Mercator to Dr. Sigal in the fiscal year ended December 31, 1996 is
provided in footnote (6) to the following table:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#) COMPENSATION
- -------------------------------------------------------------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Douglass B. Given, M.D., Ph.D. .............................. $ 219,231 $ -- 100,000(1) $ 31,065(2)
President and Chief Executive Officer
Doros Platika, M.D. .......................................... 110,769 -- -- 146,424(3)
Executive Vice President, Research and Development
H. Ralph Snodgrass, Ph.D. ................................... 150,385 -- 100,000(1) --
Vice President, Research and Chief Scientific Officer
Stephen J. Williams, Ph.D. .................................. 149,615 -- 75,000(1) 50,743(4)
Vice President, Corporate Development
Mark N.K. Bagnall(5) ........................................ 18,404 25,000 110,000(1) --
Vice President, Finance and Chief Financial Officer
</TABLE>
- ------------------------
(1) All of the options granted during fiscal 1996 were cancelled and regranted
at new exercise prices. Such cancellation and regrant of options was
effected as of December 30, 1996. Drs. Given, Snodgrass and Williams also
had 95,000, 30,000 and 17,500 options, respectively, which were originally
granted as of September 14, 1995, cancelled and regranted with an exercise
price of $5.50 per share from an original exercise price of $6.00 per share.
See "--Cancellation and Regrant of Options."
(2) Consists of (i) $1,065 in premiums paid by the Company on a term life
insurance policy for Dr. Given and (ii) an aggregate amount of $30,000 of
indebtedness which was forgiven by the Company effective in fiscal 1996. See
"Certain Transactions--Transactions with Directors and Executive Officers."
(3) Dr. Platika's employment with the Company terminated effective as of May 24,
1996, pursuant to a Separation Agreement and Release. Prior to termination,
the Company had forgiven loans as of July 23, 1996 in the amount of $26,424,
out of an outstanding balance of $242,850, including accrued interest. In
connection with such Release, the Company agreed to forgive an additional
$120,000 of such indebtedness, provided that Dr. Platika repaid the balance
of $96,426 to the Company, which was paid as of July 23, 1996. See "Certain
Transactions--Transactions with Directors and Executive Officers."
(4) Consists of an aggregate principal amount of $28,000, including interest of
$1,295, of indebtedness which was forgiven effective in fiscal 1996 and
$21,448 of indebtedness which was repaid by Dr. Williams to the Company
effective in fiscal 1996 in lieu of a bonus. See "Certain Transactions--
Transactions with Directors and Executive Officers."
(5) Represents the salary received by Mr. Bagnall from August 20, 1996, the date
of commencement of his employment with the Company, until September 30,
1996. Mr. Bagnall currently receives a salary of $165,000 per year. Upon
joining the Company, (i) Mr. Bagnall was paid a signing bonus of $25,000,
66
<PAGE>
and was granted options to purchase 110,000 shares, with options to purchase
27,500 shares vesting immediately and the balance of options to purchase
82,500 shares vesting equally over three years on each anniversary of the
date of grant, with an original exercise price of $9.00 per share, and (ii)
Mr. Bagnall was provided an interest-free loan in the principal amount of
$50,000.
(6) For the fiscal year ended December 31, 1996, Mercator paid a salary to Dr.
Sigal of $225,000, a bonus of $75,000, and awarded options to purchase
871,310 shares of Mercator common stock at an exercise price of $0.15 per
share. Upon the consummation of the Acquisition, Replacement Options
representing the right to acquire 91,733 shares of Common Stock will be
granted to Dr. Sigal, in replacement of such Mercator options previously
granted, with an exercise price of $1.42 per share, assuming Final
Acquisition Consideration of $22.0 million. See "--Employment
Agreements--Elliott Sigal."
STOCK PLANS
1992 STOCK OPTION PLAN
The 1992 Stock Option Plan was adopted and approved by the Board of
Directors in December 1992 and by the stockholders of the Company in February
1993. The plan was amended with the approval of the Board of Directors and the
stockholders in September 1995 to increase the number of shares of Common Stock
available for grant. A total of 500,000 shares of Common Stock have been
reserved for issuance under the 1992 Stock Option Plan, as amended. As of
February 28, 1997, options to purchase 41,113 shares of Common Stock granted
under the 1992 Stock Option Plan had been exercised, options to purchase 310,962
shares of Common Stock were outstanding and options to purchase 147,925 shares
of Common Stock remained available for grant. The outstanding options were held
by 45 individuals and were exercisable at a weighted average exercise price of
$4.68 per share. Outstanding options to purchase an aggregate of 70,963 shares
were held by employees who are not officers or directors of the Company. The
1992 Stock Option Plan will terminate in 2002, unless sooner terminated by the
Board of Directors.
The Board of Directors currently administers the 1992 Stock Option Plan. The
Board has designated a Compensation Committee and intends to delegate to it the
administration of the 1992 Stock Option Plan. Awards under the 1992 Stock Option
Plan may consist of (i) options to purchase Common Stock that are designed to
qualify, under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), as "incentive stock options" ("Incentive Stock Options") or (ii)
options to purchase Common Stock that are not described in Sections 422 or 423
of the Code ("Non-Qualified Stock Options" and, collectively with Incentive
Stock Options, "Options").
The Board of Directors has discretion to grant Incentive Stock Options to
employees and officers (including officers who are directors) of the Company and
Non-Qualified Stock Options to employees, officers (including officers who are
directors), directors, independent contractors and consultants of the Company.
The Board may set the terms of such grants, subject to applicable restrictions
in the 1992 Stock Option Plan. Incentive Stock Option grants are subject to the
following limitations: (i) the term of any Incentive Stock Option may not be
longer than ten years, provided that the term of any Incentive Stock Option
granted to an individual possessing more than 10% of the combined voting power
of the Company or an affiliate (a "10% Holder") may not be longer than five
years; (ii) the aggregate fair market value of all shares underlying Incentive
Stock Options granted to an individual that first become exercisable in any
calendar year may not exceed $100,000; and (iii) the exercise price of Incentive
Stock Options may not be less than the fair market value of the underlying
shares on the grant date, provided that the exercise price of any Incentive
Stock Option granted to a 10% Holder may not be less than 110% of the fair
market value of the underlying shares on the grant date. With respect to
Non-Qualified Stock Options, the Board has discretion to grant such Options with
an exercise price below the fair market value of the Common Stock. As of October
31, 1996, no such below-market grants had been made.
During an optionee's lifetime, an Option is exercisable only by the optionee
and no Option may be transferred by the optionee other than by will or the laws
of descent and distribution. An optionee whose relationship with the Company or
any related corporation ceases for any reason (other than termination because of
death or total disability) may exercise, in the three-month period following
such cessation (unless such Options terminate or expire sooner by their terms),
or such longer period as determined by
67
<PAGE>
the Board, that portion of the optionee's Options that is exercisable at the
time of such cessation. In the event the optionee dies or becomes totally
disabled, the Options vested as of the date of death or total disability may be
exercised prior to the earlier of such Option's specified expiration date or one
year from the date of the optionee's death or disability.
Unexercised Options granted under the 1992 Stock Option Plan terminate upon
the occurrence of certain events, including a dissolution, liquidation or merger
or consolidation of the Company in which the Company is not the surviving
corporation. All outstanding Options vest and become immediately exercisable
prior to the effective time of any such event. In a merger or consolidation in
which the Company is the surviving corporation, Options will be deemed to apply
to the numbers of shares to which the holders thereof prior to such merger would
be entitled. The converted Options would continue to vest in accordance with the
vesting schedule set by the Board for such Options.
The Board of Directors may amend the 1992 Stock Option Plan, insofar as
permitted by law, with respect to any shares of Common Stock reserved for
issuance but not yet subject to Options. Shares subject to Options granted under
the 1992 Stock Option Plan that have lapsed or terminated may again be subject
to Options granted under the 1992 Stock Option Plan. Furthermore, the Board may
offer to exchange new Options for existing Options, with the shares subject to
the existing Options being again available for grant under the 1992 Stock Option
Plan.
1996 STOCK INCENTIVE PLAN
The 1996 Stock Incentive Plan was adopted and approved by the Board of
Directors in May 1996 and by the stockholders of the Company in December 1996.
The 1996 Stock Incentive Plan was amended in March 1997 (as so amended, the
"1996 Plan") to increase the number of shares available for the grant of options
thereunder. A total of 2,850,000 shares of Common Stock have been reserved for
issuance under the 1996 Plan. As of February 28, 1997, no options issued under
the 1996 Plan had been exercised, options to purchase 385,000 shares of Common
Stock were outstanding and options to purchase 2,465,000 shares of Common Stock
remained available for grant, of which options to purchase 926,150 shares of
Common Stock at the initial public offering price will be granted upon the
closing of the Offering. Currently outstanding options under the 1996 Plan were
held by four Named Executive Officers and were exercisable at an exercise price
of $5.50 per share. A total of 300,000 shares of Common Stock under the 1996
Plan have been reserved for issuance to non-employee directors of the Company
(other than those who are employees of Interneuron) pursuant to director
compensation policies to be adopted by the Company in the future. The 1996 Plan
will terminate in May 2006, unless sooner terminated by the Board of Directors.
Effective upon the adoption and approval of the 1996 Plan by the
stockholders of the Company, the Board of Directors has delegated administration
of the 1996 Plan to the Compensation Committee (the "Committee"). Awards under
the 1996 Plan may consist of (i) Incentive Stock Options, (ii) Non-Qualified
Stock Options, (iii) the sale or bonus grant of restricted shares of Common
Stock ("Restricted Stock"), (iv) the grant of stock appreciation rights
("SARs"), either alone or together with Options, (v) the grant of dividend
equivalent rights measured by dividends paid with respect to the Common Stock
("DERs"), and (vi) the grant of any of the abovementioned options, rights or
shares based upon attainment of certain performance criteria ("Performance
Shares").
The Committee has discretion to grant Options, Restricted Stock, SARs, DERs
and Performance Shares to employees, officers (including officers who are
directors of the Company), directors and consultants of the Company, provided
that only employees and officers of the Company may receive Incentive Stock
Options. The Committee may set the terms of such grants, subject to applicable
restrictions in the 1996 Plan. Incentive Stock Option and Non-Qualified Stock
Option grants are subject to the same limitations under the 1996 Plan as those
discussed above for the 1992 Stock Option Plan. With respect to Non-Qualified
Stock Options, the Committee has discretion to grant such Options with an
exercise price below the fair market value of the Common Stock. As of October
31, 1996, no such below-market grants had been made.
68
<PAGE>
Upon certain changes in control of the Company (as defined in the 1996
Plan), or upon the merger or consolidation, reverse merger, dissolution,
liquidation or sale of all or substantially all of the assets of the Company,
all outstanding Options, SARs, Restricted Stock, DERs and Performance Shares
will, unless otherwise determined by the plan administrator, become fully
vested, nonforfeitable and exercisable, and any Restricted Stock will be
released from all restrictions on transfer and all repurchase and forfeiture
restrictions. Each Option, SAR or DER shall remain exercisable for the remaining
term of the Option, SAR or DER, except that each Option, SAR or DER shall
terminate as of the effective date of a merger or consolidation, reverse merger,
dissolution, liquidation or sale of all or substantially all of the assets of
the Company.
The Board of Directors may amend the 1996 Plan, and any agreements
evidencing awards granted thereunder, at any time and for any reason, subject to
certain restrictions on the ability to adversely affect awards previously
granted thereunder and to any legal requirement to obtain stockholder approval.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan"),
was approved by the Board of Directors and stockholders in August, 1996, and is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code in order to provide employees of the Company with an opportunity to
purchase Common Stock through payroll deductions. An aggregate of 100,000 shares
of the Company's Common Stock has been reserved for issuance under the Stock
Purchase Plan and available for purchase thereunder, subject to adjustment in
the event of a stock split, stock dividend or other similar change in the Common
Stock or the capital structure of the Company. All employees of the Company (and
employees of "subsidiary corporations" and "parent corporations" of the Company
(as defined by the Code) designated by the administrator of the Stock Purchase
Plan) whose customary employment is for more than five months in any calendar
year and more than 20 hours per week are eligible to participate in the Stock
Purchase Plan. Employees of Interneuron are not expected to participate in the
Stock Purchase Plan. Non-employee directors, consultants, and employees subject
to the rules or laws of a foreign jurisdiction that prohibit or make impractical
the participation of such employees in the Stock Purchase Plan are not eligible
to participate in the Stock Purchase Plan.
The Stock Purchase Plan designates Purchase Periods, Accrual Periods and
Exercise Dates. Purchase Periods are generally overlapping periods of 24 months.
A Purchase Period will initiate and additional Purchase Periods will commence
each subsequent April 1 and October 1. The initial Purchase Period will begin on
the effective date of the Stock Purchase Plan, which is the date on which the
Company and the Underwriters agree as to the pricing with respect to the
Offering, and end on March 31, 1999. Accrual Periods are generally six month
periods, with the initial Accrual Period commencing on the effective date of the
Stock Purchase Plan and ending on September 30, 1997. Thereafter, Accrual
Periods will commence each April 1 and October 1. Exercise Dates are the last
day of each Accrual Period. In the event of a merger of the Company with or into
another corporation, the sale of all or substantially all of the assets of the
Company, or certain other transactions in which the stockholders of the Company
before the transaction own less than 50% of the total combined voting power of
the Company's outstanding securities following the transaction, the
administrator of the Stock Purchase Plan may elect to shorten the Purchase
Period then in progress.
On the first day of each Purchase Period, a participating employee is
granted a purchase right which is a form of option to be automatically exercised
on the forthcoming Exercise Dates within the Purchase Period during which
deductions are to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan.
When the purchase right is exercised, the participant's withheld salary is used
to purchase shares of Common Stock of the Company. The price per share at which
shares of Common Stock are to be purchased under the Stock Purchase Plan during
any Accrual Period is the lesser of (a) 85% of the fair market value of the
Common Stock on the date of the grant of the option (the commencement of the
Purchase Period) or (b) 85% of the fair market value of the Common Stock on the
Exercise Date (the last day of an Accrual Period). The participant's purchase
right is exercised in this manner on all four Exercise Dates arising in the
Purchase Period unless,
69
<PAGE>
on the first day of any Accrual Period, the fair market value of the Common
Stock is lower than the fair market value of the Common Stock on the first day
of the Purchase Period. If so, the participant's participation in the original
Purchase Period is terminated, and the participant is automatically enrolled in
the new Purchase Period effective the same date.
Payroll deductions may range from 1% to 10% (in whole percentage increments)
of a participant's regular base pay, exclusive of overtime, bonuses,
shift-premiums or commissions. Participants may not make direct cash payments to
their accounts. The maximum number of shares of Common Stock which any employee
may purchase under the Stock Purchase Plan during an Accrual Period is 5,000
shares. Certain additional limitations on the amount of Common Stock which may
be purchased during any calendar year are imposed by the Code.
The Stock Purchase Plan will be administered by the Board of Directors or a
committee designated by the Board, which will have the authority to terminate or
amend the Stock Purchase Plan (subject to specified restrictions) and otherwise
to administer the Stock Purchase Plan and to resolve all questions relating to
the administration of the Stock Purchase Plan.
1997 STOCK OPTION PLAN
In March 1997, the Board of Directors of the Company approved the 1997 Stock
Option Plan (the "1997 Plan"). The purpose of the 1997 Plan is to allow the
Company to comply with its obligations under the Acquisition Agreement to issue
the Replacement Options to those who held options to purchase Mercator's common
stock ("Mercator Options") prior to the Acquisition. The intent and effect of
the 1997 Plan is to give holders of Mercator Options the right to acquire shares
of the Company's Common Stock in lieu of, but not in addition to, the shares of
Mercator's common stock underlying unexercised Mercator Options held by them
immediately prior to the closing of the Acquisition. The 1997 Plan will provide
Replacement Options for holders of Mercator Options under Mercator's 1993 and
1996 Stock Option Plans (the "Mercator Plans").
ADMINISTRATION. The 1997 Plan shall be administered by the Company's Board
of Directors unless and until the Board delegates administration to the
Compensation Committee. Subject to the provisions of the 1997 Plan, the Board
shall have the power to construe and interpret the 1997 Plan and Replacement
Options granted thereunder, and to establish, amend and revoke rules and
regulations for its administration. The Board, in the exercise of this power,
may correct any defect, omission or inconsistency in the 1997 Plan or in any
option agreement thereunder, in a manner and to the extent it shall deem
necessary or expedient to make the 1997 Plan fully effective, and may amend the
1997 Plan as provided therein.
TYPES OF AWARDS. Awards under the 1997 Plan will consist solely of the
issuance of Replacement Options to each holder of Mercator Options. With respect
to all Mercator Options that are designed to qualify as Incentive Stock Options,
the corresponding Replacement Options also shall be designed to qualify as
Incentive Stock Options. With respect to all Mercator Options that are
Non-Qualified Stock Options, the corresponding Replacement Options also shall be
Non-Qualified Stock Options. Incentive Stock Options shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Replacement Options
are granted only by such person. Non-Qualified Stock Options shall not be
transferable except by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order, and shall be exercisable
during the lifetime of the person to whom such options are granted only by such
person or any transferee pursuant to a qualified domestic relations order. No
Replacement Options will be issued under the 1997 Plan to any holder of a
Mercator Option unless and until such holder has either (i) returned the
agreement evidencing such Mercator Option to the Company for cancellation, or
(ii) delivered to the Company (a) evidence reasonably satisfactory to the
Company the loss, theft or destruction of such option agreement and (b)
indemnity or security reasonably satisfactory to the Company.
AVAILABLE SHARES. A total of up to 550,000 shares of the Company's Common
Stock have been reserved for issuance under the 1997 Plan. Assuming an initial
public offering price of $11.00 per share, and Final Acquisition Consideration
for Mercator of $22.0 million, 293,022 shares of Common Stock
70
<PAGE>
would be reserved for issuance upon exercise of the Replacement Options under
the 1997 Plan. The number of shares actually covered by Replacement Options may
be less than the number of shares reserved under the 1997 Plan to the extent
that Mercator Options are exercised prior to the closing of the Acquisition. The
number of shares of the Company that correspond to Mercator Options also will
depend upon the price at which the Company's Common Stock is offered to the
public in the Offering. See "Capitalization" and "Business--Mercator
Acquisition."
ELIGIBLE INDIVIDUALS. Only holders of Mercator Options are eligible to
receive Replacement Options under the 1997 Plan. All such holders of Incentive
Stock Options were, at the time their Mercator Options were awarded, employees
of Mercator. All such holders of Non-Qualified Stock Options were, at the time
their Mercator Options were awarded, employees, consultants or directors of
Mercator.
TERMS OF REPLACEMENT OPTIONS
The Terms of Replacement Options granted under the 1997 Plan will be as set
forth below:
a) NUMBER OF SHARES COVERED. Each Replacement Option will cover a number
of shares of the Company's Common Stock (rounded up to the nearest whole
share) equal to the number of shares of Mercator common stock covered by
the corresponding Mercator Option multiplied by the exchange ratio
applicable to the Mercator common stock in the Acquisition (the "Exchange
Ratio").
b) EXERCISE PRICE. The exercise price per share of the Company's Common
Stock (rounded down to the nearest penny) covered by each Replacement
Option will equal the per share exercise price of the corresponding
Mercator Option divided by the Exchange Ratio.
c) OPTION TERM. The term of each Replacement Option will be the same as
the remaining term of the corresponding Mercator Option. The maximum term
of the Mercator Options is ten years from the date of initial grant of
such Mercator Options.
d) VESTING. The vesting restrictions contained in each Replacement Option
will be the same as the vesting restrictions contained in the
corresponding Mercator Options. Replacement Options are subject to
accelerated vesting for any optionee terminated within one year of the
date of the Acquisition other than for "cause."
e) EARLY PURCHASE RIGHTS. Holders of Replacement Options have the right
(the "Early Purchase Right") to purchase all or part of the Common Stock
of the Company subject to their options prior to full vesting. Shares
purchased pursuant to the Early Purchase Right are subject to a
repurchase option in favor of the Company (the "Repurchase Option") that
expires in accordance with the same schedule as Replacement Options would
have vested had the option holder not exercised the Early Purchase Right.
The Repurchase Option is exercisable (i) within 90 days of the
termination of the optionholder's relationship with the Company or (ii)
upon a dissolution of the Company.
f) CERTAIN ADJUSTMENTS. The number of shares covered by, and the exercise
price of, each Replacement Option may, in the Board's discretion, be
adjusted appropriately to reflect any change in the capitalization of the
Company resulting from any acquisition, recapitalization, stock split-up
or combination of shares, or the payment of a stock dividend or other
increase or decrease in the the Company's Common Stock effected without
receipt of consideration by the Company.
g) CONSIDERATION. The purchase price of stock acquired pursuant to a
Replacement Option shall be paid, to the extent permitted by applicable
statutes and regulations, either (1) in cash at the time the Replacement
Option is exercised, or (2) at the discretion of the Board or the
Committee, either at the time of the grant or exercise of the Replacement
Option (but in the case of an Incentive Stock Option, only at the time of
grant), (a) by delivery to the Company of other Common Stock of the
Company, (b) according to a deferred payment or other arrangement (which
may include, without limiting the generality of the foregoing, the use of
other Common
71
<PAGE>
Stock of the Company) with the person to whom the Replacement Option is
granted or to whom the Replacement Option is transferred pursuant to the
1997 Plan, or (c) in any form of legal consideration that may be
acceptable to the Board.
h) EXERCISE OF OPTIONS. In the event of termination of continuous status
as employee, director or consultant otherwise than by reason of death or
disability, the optionee may exercise his or her Replacement Option (to
the extent that the optionee was entitled to exercise it at the date of
termination) within such period of time ending on the earlier of (i)
three (3) months after termination of optionee's continuous status as
employee, director or consultant (or such longer or shorter period, but
in no event less than 30 days, specified in the written agreement
evidencing the terms of an individual option grant ("Option Agreement")),
or (ii) the expiration of the term of the option as set forth in the
Option Agreement.
i) DISABILITY OR DEATH OF OPTIONEE. In the event of termination of
continuous status as employee, director or consultant by reason of
disability, the optionee may exercise his or her Replacement Option (to
the extent that the optionee was entitled to exercise it at the date of
termination) within such period of time ending on the earlier of (i)
twelve (12) months after termination of optionee's continuous status as
employee, director or consultant (or such longer or shorter period, but
in no event less than six (6) months, specified in Option Agreement), or
(ii) the expiration of the term of the option as set forth in the Option
Agreement. In the event of termination of continuous status as employee,
director or consultant by reason of death, the optionee's estate or
person who acquired the right to exercise the option may exercise the
Replacement Option (to the extent that the optionee was entitled to
exercise it at the date of death) within such period of time ending on
the earlier of (i) eighteen (18) months after termination of optionee's
continuous status as employee, director or consultant (or such longer or
shorter period, but in no event less than six (6) months, specified in
Option Agreement), or (ii) the expiration of the term of the option as
set forth in the Option Agreement.
j) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the optionee may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such Replacement
Option by any of the following means or by a combination of such means:
(i) tendering a cash payment; (ii) authorizing the Company to withhold
shares from the shares of the Company's Common Stock otherwise issuable
to the participant as a result of the exercise of the Option; or (iii)
delivering to the Company owned and unencumbered shares of the Common
Stock of the Company.
k) ADJUSTMENTS UPON CHANGES IN STOCK. If any change is made in the stock
subject to the 1997 Plan, or subject to any Replacement Option (through
merger, consolidation, acquisition, recapitalization, stock dividend,
dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure
or otherwise), the 1997 Plan and outstanding Replacement Options will be
appropriately adjusted in the class(es) and maximum number of shares
subject to the 1997 Plan and the class(es) and number of shares and price
per share of stock subject to outstanding Replacement Options. In the
event of: (i) a merger or consolidation in which the Company is not the
surviving corporation, or (ii) a reverse merger in which the Company is
the surviving corporation but the shares of the Company's Common Stock
outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash
or otherwise, then to the extent permitted by applicable law: (a) any
surviving corporation shall assume any Replacement Options outstanding
under the 1997 Plan or shall substitute similar options for those
outstanding under the 1997 Plan, or (b) such Replacement Options shall
continue in full force and effect. In the event any surviving corporation
refuses to assume or continue such Replacement Options, or to substitute
similar options for those outstanding under the 1997 Plan, then such
Replacement Options shall be terminated if not exercised prior to such
event. In the event of a dissolution or liquidation of the Company, any
Replacement Options outstanding under the 1997 Plan shall terminate if
not exercised prior to such event.
72
<PAGE>
AMENDMENT. The Company's Board may amend the 1997 Plan at any time, subject
to any requirement under law or the 1997 Plan to obtain stockholder approval.
SECTION 424(A) COMPLIANCE. Replacement Options issued under the 1997 Plan
are intended to comply with all applicable conditions of Section 424(a) of the
Code. To the extent any provision of the 1997 Plan, or any action of the Board,
fails to so comply, such provision or action will be deemed null and void to the
extent that is permitted by applicable law and the Board deems reasonable.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options by Progenitor to the Named Executive Officers during the fiscal year
ended September 30, 1996. Information regarding the stock option grants by
Mercator to Dr. Sigal during the fiscal year ended December 31, 1996 is provided
in footnote (6) to the following table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM($)(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SHARE)(2) DATE 5% 10%
- --------------------------------------------- ------------ --------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Douglass B. Given, M.D., Ph.D................ 100,000(4) 25.0% $ 5.50 5/13/06 $ 345,892 $ 876,558
H. Ralph Snodgrass, Ph.D..................... 100,000(4) 25.0 5.50 5/13/06 345,892 876,558
Stephen J. Williams, Ph.D.................... 75,000(4) 18.8 5.50 5/13/06 259,419 657,419
Mark N.K. Bagnall............................ 110,000(5) 27.5 5.50 8/20/06 380,481 964,214
</TABLE>
- ------------------------
(1) Based on an aggregate of 400,000 options granted to employees in fiscal
1996.
(2) All options were granted at an exercise price of $9.00 per share equal to
the fair market value of the Common Stock on the date of grant, as
determined by the Board of Directors. Such options were cancelled and
regranted on December 30, 1996, at the exercise price of $5.50 per share.
See "--Cancellation and Regrant of Options."
(3) The potential realizable value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of the options,
assuming that the stock appreciates in value from the date of grant
compounded annually until the end of the option term at the rate specified
(5% or 10%) and that the option is exercised and sold on the last day of the
option term for the appreciated stock price. Potential realizable value is
net of the option exercise price. The assumed rates of appreciation are
specified in the rules and regulations of the Commission and do not
represent the Company's estimate or projection of future stock price. Actual
gains, if any, resulting from stock option exercises and Common Stock
holdings are dependent on the future performance of the Common Stock and
overall stock market conditions. There can be no assurance that the amounts
reflected in this table will be achieved.
(4) Consists of options that vest equally over three years on each anniversary
of the date of grant, May 13, 1996.
(5) Consists of options that were granted on the date of employment, August 20,
1996, with options to purchase 27,500 shares vesting immediately and the
balance of options to purchase 82,500 shares vesting equally over three
years on each anniversary of the date of grant.
(6) For the fiscal year ended December 31, 1996, Mercator awarded Dr. Sigal
options to purchase 871,310 shares of Mercator common stock at an exercise
price of $0.15 per share. All such options will become vested upon
consummation of the Acquisition and will be converted into Replacement
Options to acquire 91,733 shares of the Company's Common Stock at $1.42 per
share assuming consummation of the Acquisition for Final Acquisition
Consideration of $22.0 million. In connection with the Acquisition, the
Company has entered into an employment agreement with Dr. Sigal pursuant to
which he will be granted options to purchase an aggregate of 1% of the
Company's
73
<PAGE>
Common Stock on a fully-diluted basis after giving effect to the Acquisition
and the Offering. Such options will have an exercise price equal to the
initial public offering price and will be subject to vesting in the amount
of 25% on the first anniversary of the date of grant and 6.25% each quarter
thereafter until fully vested after four years. Based upon an assumed
initial public offering price of $11.00 per share, such options would
entitle Dr. Sigal to acquire 143,761 shares of Common Stock.
FISCAL YEAR-END OPTION VALUES
For each of the Named Executive Officers, the following table shows
information about the value of unexercised options of Progenitor as of September
30, 1996. No options were exercised by the Named Executive Officers during
fiscal 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END(#) FISCAL YEAR-END($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Douglass B. Given, M.D., Ph.D............................. 39,916 171,584 $ 12,375 $ 12,375
H. Ralph Snodgrass, Ph.D.................................. 19,583 130,417 47,125 11,875
Stephen J. Williams, Ph.D................................. 15,833 96,667 15,000 15,000
Mark N.K. Bagnall......................................... 27,500 82,500 0 0
</TABLE>
- ------------------------
(1) Based on the fair market value of the Common Stock as of September 30, 1996
($5.50 per share), minus the exercise price, multiplied by the number of
shares underlying the option after giving effect to the subsequent repricing
of the options. See "--Cancellation and Regrant of Options."
CANCELLATION AND REGRANT OF OPTIONS
On December 30, 1996, the Compensation Committee approved the cancellation
and regrant of options previously granted to certain executive officers,
directors and key employees. The Compensation Committee concluded that the
relationship between the exercise price of those options and the recent fair
market value of the Company's Common Stock did not provide effective equity
incentives for such executive officers, directors and key employees. Equity
incentives are a significant component of the total compensation package of the
Company's employees and play a substantial role in the Company's ability to
retain the services of individuals essential to the Company's long-term success.
The Compensation Committee concluded that the Company's ability to retain key
employees would be impaired significantly unless value was restored to their
options. Accordingly, the Compensation Committee determined it was necessary to
cancel and regrant the options at exercise prices that reflect current fair
market value to provide realistic incentives for the executive officers,
directors and employees to whom such options had been granted. All stock options
with exercise prices of $5.50 or more were cancelled and regranted at an
exercise price of $5.50 per share, the fair market value on December 30, 1996,
as determined by the Compensation Committee. The vesting periods applicable to
these cancelled options relate back to the dates of the prior grants.
With respect to the Named Executive Officers, all of the Company's options
granted during fiscal 1996 were cancelled and regranted at an exercise price of
$5.50 per share. Drs. Given, Snodgrass and Williams also had 95,000, 30,000 and
17,500 options, respectively, originally granted as of September 14, 1995, which
were cancelled and regranted at an exercise price of $5.50 per share from an
original exercise price of $6.00 per share. In addition, the 7,500 options
granted to each of Messrs. Axline, Haig, Peppers and Sharrock in fiscal 1996
were cancelled and regranted at an exercise price of $5.50 per share from an
original exercise price of $6.00 per share. The 110,000 options granted to Mr.
Bagnall in fiscal 1996 were cancelled and regranted at an exercise price of
$5.50 per share from an original exercise price of $9.00 per share.
74
<PAGE>
CERTAIN TRANSACTIONS
RELATIONSHIP WITH INTERNEURON
Progenitor was incorporated in February 1992 as a majority-owned subsidiary
of Interneuron and assumed all rights and obligations of Scimark Corp. under the
January 1992 research and licensing agreement with Ohio University. See
"Business--License Agreements--Ohio University." Upon Progenitor's organization,
Interneuron purchased 2,081,250 shares of Common Stock for $0.002 per share.
Progenitor also issued 112,500 and 56,250 shares of Common Stock, respectively,
to Morris Laster, M.D., a director of the Company, and Steven Kanzer, then
Assistant Secretary of the Company, for a purchase price of $0.002 per share.
Lindsay Rosenwald, M.D., the Chairman of the Board and a principal stockholder
of Interneuron, was the Company's President until September 1992, and was a
director of the Company until May 1996. Dr. Rosenwald also owns the Castle Group
Ltd. ("Castle"), a venture capital firm. Dr. Laster was the Company's Chief
Executive Officer until September 1992, and Dr. Laster and Mr. Kanzer were and
continue to be employees of Castle.
From Progenitor's inception through December 1994, Interneuron funded
Progenitor's operations through advances evidenced by promissory notes payable
on demand and bearing interest at 1% over the prime rate. In December 1994, upon
the initial closing of the private placement referred to below, the aggregate
amount of such advances of approximately $11.5 million, plus accrued interest of
approximately $1.1 million, was converted by Interneuron into an aggregate of
2,020,496 shares of Series A Preferred Stock of the Company at a conversion
price of $6.25 per share. These shares will convert into an estimated 1,851,164
shares of Common Stock upon the closing of the Offering based upon an assumed
initial public offering price of $11.00 per share. See "Description of Capital
Stock--Preferred Stock."
Between December 1994 and July 1995, Progenitor issued and sold an aggregate
of 349,000 shares of Series B Preferred Stock in a private placement. These
shares will convert into an estimated 319,729 shares of Common Stock upon the
closing of the Offering based upon an assumed initial public offering price of
$11.00 per share. See "Description of Capital Stock--Preferred Stock." The
private placement was a sale of units, each unit consisting of shares of Series
B Preferred Stock of the Company, shares of preferred stock of Transcell, a
subsidiary of Interneuron, a put protection right from Interneuron and warrants
to purchase Interneuron's common stock. The put protection right provides that
on the third anniversary of the final closing date of the private placement,
holders of such Series B Preferred Stock have the right to sell to Interneuron
their Series B Preferred Stock of Progenitor at a purchase price equal to the
purchase price of such shares in the private placement. The put protection right
will expire upon the closing of the Offering. Of the approximately $4.4 million
gross proceeds of the private placement, Progenitor received approximately $1.6
million, net of placement agent fees, and Interneuron received approximately
$833,000 as its consideration for the issuance of warrants for its Common Stock
and the put protection right. Of this amount, Interneuron loaned approximately
$417,000 to Progenitor in exchange for a convertible debenture dated March 31,
1995, bearing interest at 1% over the prime rate. The principal amount of this
debenture and accrued interest thereon (approximately $492,000 as of February
28, 1997), automatically will be converted at the closing of the Offering into
shares of Common Stock at a conversion price equal to the initial public
offering price for the Common Stock. See "Description of Capital
Stock--Convertible Debenture and Promissory Note."
Paramount Capital, Inc. ("Paramount") acted as the placement agent for the
private placement and D.H. Blair & Co., Inc. ("Blair") was a selected dealer.
Paramount is owned by Dr. Rosenwald. Progenitor paid Paramount approximately
$129,000 as its share of placement agent fees. Pursuant to Paramount's rights
under its placement agent agreement, designees of Paramount received in the
private placement warrants to purchase an aggregate of 22,201 shares of Series B
Preferred Stock (representing the right to purchase 20,317 shares of Common
Stock following the closing of the Offering based upon an assumed initial public
price of $11.00 per share). Dr. Rosenwald received warrants to purchase 12,274
of these shares of Series B Preferred Stock (representing the right to purchase
an estimated 11,245 shares of Common Stock upon the closing of the Offering
based upon an assumed initial public offering price of $11.00 per share). Blair
is owned substantially by family members of J. Morton Davis (including members
75
<PAGE>
of Dr. Rosenwald's family), a principal stockholder of Interneuron. Blair
received fees for acting as selected dealer, aggregating $45,094. Designees of
Blair also received in the private placement warrants to purchase an aggregate
of 12,700 shares of Series B Preferred Stock (representing the right to purchase
11,635 shares of Common Stock upon the closing of the Offering based upon an
assumed initial public offering price of $11.00 per share). All of these
warrants are exercisable until five years after the closing of the Offering at
an exercise price of $7.50 per share of Common Stock, and pursuant to a cashless
exercise provision may be exercised without the need to pay any cash. The
Company also agreed to indemnify Paramount and Blair against certain
liabilities, including liabilities under the Securities Act in connection with
the private placement. See "Description of Capital Stock--Stock Purchase Right
and Warrants."
Since March 1996, Interneuron has continued to provide advances to
Progenitor. These advances are evidenced by a promissory note dated March 31,
1996, in the principal amount of approximately $525,000, as updated from time to
time, payable on the earlier of five years from the date of the note or the
closing of the Offering. Interneuron has agreed to convert a portion of the
indebtedness evidenced by the note (approximately $6.1 million from an
outstanding balance of approximately $6.2 million as of February 28, 1997),
including additional advances from April 1, 1996, and all accrued interest (an
aggregate of approximately $85,000 of principal and accrued interest as of
February 28, 1997) into shares of the Company's Common Stock at a conversion
price equal to the initial public offering price for the Common Stock except
that advances for costs of the Offering incurred from October 1, 1996 will be
repaid from the net proceeds of the Offering. See "Use of Proceeds" and
"Description of Capital Stock--Convertible Debenture and Promissory Note."
Based on the amount owed by Progenitor to Interneuron under the promissory
note as of February 28, 1997, and as a result of the conversion upon the closing
of the Offering of the Series A Preferred Stock, convertible debenture and
promissory note held by Interneuron (assuming an initial public offering price
of $11.00 per share of Common Stock), Interneuron is expected to own
approximately 4,529,745 shares, or approximately 43% of the outstanding Common
Stock (approximately 41% if the Underwriters' over-allotment option is exercised
in full) after the closing of the Offering and the Acquisition. The actual
ownership percentage of Interneuron will depend upon a variety of factors,
including: (i) the amount of the Final Acquisition Consideration payable with
respect to the Acquisition; (ii) the outstanding balances of loans from
Interneuron to the Company that will be converted into Common Stock upon the
closing of the Offering; (iii) the initial public offering price which will
determine the number of shares of Common Stock to be issued in the Acquisition,
to be issued upon conversion of outstanding balances of loans from Interneuron
to the Company, to be issued in respect of the Amgen Purchase Agreement, and to
be issued to Interneuron in connection with the conversion provisions of its
Series A Preferred Stock upon the closing of the Offering; and (iv) the
recognition of guaranteed quarterly returns earned by the holders of the Series
A Preferred Stock on each of April 7, July 7, October 7, and January 7. The
number of shares of Common Stock issuable to Interneuron upon conversion of such
Preferred Stock and indebtedness will increase to the extent that the initial
public offering price is less than the anticipated price of $11.00 per share.
The number of Amgen Shares issuable to Amgen pursuant to the Amgen Purchase
Agreement and the number of shares issuable to the stockholders of Mercator in
the Acquisition also will increase to the extent the per share price of the
initial public offering is less than $11.00 per share. At an initial public
offering price of $9.00 per share, Interneuron would own 5,073,856 shares upon
the closing of the Offering and the Acquisition or approximately 43% of the
outstanding Common Stock at such time (approximately 42% if the Underwriters'
over-allotment option is exercise in full).
During fiscal 1995, Interneuron paid for certain expenses of Progenitor
which were reimbursed by Progenitor at cost. In addition, Interneuron guaranteed
the Company's office lease (which guarantee will be released upon the closing of
the Offering as to obligations arising after the closing of the Offering) and
its equipment leases. Prior to the closing of the Offering, the Company and
Interneuron intend to enter into a tax allocation agreement to provide, among
other things, for the payment of tax liabilities, the entitlement to tax
refunds, and the allocation of responsibility and cooperation in the filing of
tax returns. In addition, the Company and Interneuron intend to enter into an
intercompany services agreement which will provide, among other things, for: the
participation of the Company and its employees in certain
76
<PAGE>
programs administered by Interneuron, at cost, such as certain insurance
programs; and the provision of certain services by Interneuron at the Company's
request at agreed upon prices in areas such as clinical and regulatory affairs,
quality control, finance, administration, human resources and management
information systems. The intercompany services agreement also will provide that
in the event of any future equity offering by the Company, Interneuron will have
the right to purchase (at the same price and on the same terms as such equity
offering) a portion of the shares being offered so as to maintain its
fully-diluted interest in the Company immediately prior to such equity offering,
subject to certain limitations. The intercompany services agreement also will
provide that all future transactions between the Company and Interneuron must be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties and must be approved or ratified by a majority of the
independent members of the Company's Board of Directors. As defined in the
intercompany services agreement, independent directors are those who are not
employees, officers, directors or affiliates of, or persons with other material
financial interests involving Interneuron, the Company or any of their
respective affiliates.
The intercompany services agreement also will provide to Interneuron the
right to nominate one designee for election to the Company's Board of Directors,
for so long as Interneuron reports the Company's financial results on a
consolidated basis, on an equity basis or otherwise on a basis pursuant to which
a portion of the Company's results of operations appear in the financial results
of operations of Interneuron. After the Offering, Interneuron will continue to
have substantial influence in the election of directors of the Company and
voting with respect to matters submitted to stockholders, including
extraordinary corporate transactions such as a merger or sale of substantially
all of the Company's assets. Interneuron's ownership of a substantial block of
the Company's voting stock could have the effect of delaying or preventing sales
of additional securities of the Company or a sale of the Company or other change
of control supported by the other stockholders of the Company. In addition, the
Company may be subject to various risks arising from Interneuron's influence
over the Company, including conflicts of interest relating to new business
opportunities that could be pursued by the Company or by Interneuron and its
other affiliates, and significant corporate transactions for which stockholder
approval is required. See "Risk Factors--Control of Company By, and Potential
Conflicts of Interest With, Interneuron."
In connection with the Mercator Bridge Financing prior to the closing of the
Acquisition, Interneuron has agreed to loan to the Company up to an aggregate of
$6.6 million pursuant to a promissory note secured by the Company's assets. The
Interneuron Bridge Loan bears interest at a rate of 10% per annum and is
repayable in full on maturity at January 15, 1999 in the event there is no
initial public offering. The principal and accrued interest on the Interneuron
Bridge Loan will be repaid out of the proceeds of the Offering. The outstanding
principal balance of the Interneuron Bridge Loan outstanding at consummation of
the Offering will depend upon the timing of the Offering's completion. The
principal balance outstanding at February 28, 1997 was $400,000 and is expected
to increase by approximately $800,000 per month in order to fund the operations
of Mercator pending completion of the Acquisition. See "Use of Proceeds."
Interneuron has no obligation to invest any further funds in the Company or
otherwise provide funding to the Company after the Offering, and the Company
does not expect Interneuron to do so. The Company intends to seek additional
funding through public or private equity or debt financing and collaborative
arrangements. There can be no assurance that additional financing will be
available when needed, or that, if available, such financing will be available
on terms acceptable to the Company. See "Risk Factors--Need for Additional
Capital; Uncertainty of Additional Funding."
Interneuron has entered into a lock-up agreement which limits its ability to
sell shares of the Company's Common Stock during the 365-day period following
the date of this Prospectus. See "Shares Eligible for Future Sale" and
"Underwriting."
THE OHIO UNIVERSITY FOUNDATION
Upon the Company's formation in February 1992, The Ohio University
Foundation purchased 125,000 shares of Common Stock at a purchase price of
$0.002 per share, and Dr. Thomas Wagner, an employee of Ohio University and an
affiliate of The Ohio University Foundation, purchased 125,000
77
<PAGE>
shares of Common Stock at $0.002 per share. Pursuant to certain anti-dilution
rights, The Ohio University Foundation was issued an additional 53,750 shares of
Common Stock from fiscal 1992 through fiscal 1994. Also, in December 1994, Dr.
Wagner received an additional 53,750 shares of Common Stock pursuant to similar
antidilution provisions contained in a related stock purchase agreement. In
February 1996, The Ohio University Foundation purchased an additional 58,333
shares of Common Stock for a purchase price of $6.00 per share pursuant to a
stock purchase agreement. In the event that the initial public offering price
for the Common Stock is less than $12.00 per share, pursuant to such stock
purchase agreement, The Ohio University Foundation will be entitled to receive
additional shares of Common Stock such that the effective price per share paid
by The Ohio University Foundation under the agreement is equal to 50% of the
initial public offering price for the Common Stock. Assuming an initial public
offering price of $11.00 per share, 5,303 additional shares of Common Stock will
be issued to The Ohio University Foundation pursuant to such stock purchase
agreement. In connection with the February 1996 issuance of 58,333 shares, the
Company and The Ohio University Foundation amended certain provisions of the
1992 stock purchase agreement in exchange for which Progenitor granted The Ohio
University Foundation the right to purchase 25,000 shares of the Company's
Common Stock at a price equal to 50% of the initial public offering price. The
Ohio University Foundation has agreed to exercise such right to purchase 25,000
shares immediately prior to the Offering at a price equal to $5.50 per share.
Ohio University entered into license and sponsored research agreements with
the Company (or its predecessor) in January 1992 and April 1993. The April 1993
sponsored research agreement terminated as of June 30, 1996 upon completion of
the research thereunder. Pursuant to the initial license agreement, The Ohio
University Foundation has the right to designate two members of the Board of
Directors until the completion of the Company's initial public offering. Messrs.
Axline and Peppers are Trustees of The Ohio University Foundation and serve as
The Ohio University Foundation's designees to the Company's Board of Directors.
Under the Ohio University license and sponsored research agreements, Progenitor
paid Ohio University an aggregate of approximately $570,000, $246,000, $397,000,
$109,000 and $41,000 in fiscal 1993, 1994, 1995, 1996 and for the three months
ended December 31, 1996, respectively. Ohio University also is entitled to
receive royalties based on any sales of licensed products resulting from such
arrangements. Under a consulting agreement with Dr. Wagner entered into in
February 1992, Progenitor paid Dr. Wagner consulting fees of approximately
$93,000, $93,000, $113,000, $60,000 and $15,000 during fiscal 1993, 1994, 1995,
1996 and for the three months ended December 31, 1996, respectively. See
"Business--License Agreements."
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
On January 3, 1993, the Company entered into an employment agreement with
Dr. Given. Under the agreement, Dr. Given received the right to a $100,000 loan
bearing interest at 7% annually for the purchase of a home in Ohio. Upon the
granting of the loan, the Company waived the charging of interest on the loan,
and certain other provisions of the agreement relating to the loan, and received
from Dr. Given an interest-free promissory note in the amount of $100,796
secured by the property purchased. The note requires Dr. Given to repay at least
$60,796 of the loan on or before April 1, 1997. Of this portion, $20,000 was
forgiven effective in fiscal 1996 at the approval of the Board of Directors. The
$40,000 second portion of the promissory note is payable on or before April 15,
1997 or upon the termination of Dr. Given's employment and is subject to
forgiveness in increments upon the achievement of certain performance
milestones, including a successful initial public offering of the Company's
Common Stock. As of February 28, 1997, the Company had forgiven, effective in
fiscal 1996, $10,000 of the loan pursuant to this provision. In December 1996
and January 1997, an aggregate income tax gross-up payment of $19,636 was made
to Dr. Given in respect of such prior loan forgiveness. On January 17, 1997, an
additional $35,398 was forgiven in connection with the completion of the license
agreement with Amgen. An income tax gross-up payment of $27,198 was made in
connection with such forgiveness. Upon completion of the Offering, the remaining
balance of the promissory note is subject to forgiveness and will also be
subject to such gross-up payments. Dr. Given's employment agreement terminated
on January 3, 1997 except with respect to these loan provisions.
78
<PAGE>
Effective as of May 24, 1996, Dr. Doros Platika's employment terminated
pursuant to a Separation Agreement and Release (the "Release") among the
Company, Dr. Platika and Interneuron. The Release obligates Dr. Platika to
provide services to the Company in a consulting capacity for a minimum of twenty
hours per month for the six-month period following May 24, 1996. Dr. Platika
also agreed not to compete with the Company for a period of two years after his
termination. The Release also contains arrangements with respect to loans made
by the Company to Dr. Platika and certain stock options to acquire securities of
the Company and Interneuron. Prior to termination, the Company had made loans to
Dr. Platika that had a balance of $242,850, including accrued interest as of
July 23, 1996, which amount reflects the forgiveness effective in fiscal 1996 of
$26,424 of such loans previously approved by the Board of Directors. Pursuant to
the Release, an additional $120,000 of this balance was forgiven subject to Dr.
Platika's payment to the Company of withholding payments required with respect
thereto and with respect to the loans to Dr. Platika previously forgiven by the
Company effective in fiscal 1996. The remaining balance of $96,426, along with
applicable withholding payments, was paid by Dr. Platika as of July 23, 1996.
The Company will incur a charge to operations equal to the amount of loan
forgiveness in connection with the Release. Prior to the Release, the Company
had granted Dr. Platika options to purchase a total of 77,500 shares of Common
Stock, at exercise prices ranging from $0.20 to $6.00 per share. Of these,
options to purchase a total of 23,750 shares of Common Stock had previously
vested. The Release provides for the vesting as of June 1, 1996 of options to
purchase 6,875 shares of Common Stock at $0.20 per share and the vesting as of
June 15, 1996 of options to acquire 2,500 shares of Common Stock at $4.00 per
share. All of Dr. Platika's other unvested options were canceled pursuant to the
Release. As of August 23, 1996, Dr. Platika had exercised all of his 33,125
vested options. In connection with the Release, Interneuron agreed to accelerate
vesting of stock options to purchase 2,500 shares of Interneuron Common Stock at
a price per share of $8.75, which options were exercisable by Dr. Platika on or
prior to August 24, 1996. As of August 15, 1996, Dr. Platika had exercised all
of these Interneuron options.
The Revised Sigal Employment Agreement provides for the grant to Dr. Sigal
of options to acquire the Company's Common Stock in the amount of 1% of the
outstanding shares of Common Stock on a fully diluted basis after the closing of
the Offering. See "Management--Employment Agreements--Elliott Sigal."
The Company has granted stock options to its directors and executive
officers on several occasions since the beginning of fiscal 1993, all of which
vest over a four-year period from the date of grant, except as indicated below.
In fiscal 1993, Dr. Snodgrass received options to purchase 5,000 shares of
Common Stock at an exercise price of $0.20 per share, and options to purchase
5,000 shares of Common Stock at an exercise price of $2.00 per share.
During fiscal 1994, Mr. Sharrock received options to purchase 2,500 shares
of Common Stock at an exercise price of $4.00 per share, which vest over three
years. Also in fiscal 1994, the Company granted Drs. Cooper, Given, Snodgrass
and Williams options to purchase 8,500, 16,500, 10,000 and 20,000 shares of
Common Stock, respectively, at an exercise price of $4.00 per share.
In September 1995, the Company granted options to Drs. Given, Snodgrass and
Williams to purchase 45,000, 17,500 and 17,500 shares, respectively, at an
exercise price of $6.00 per share, which originally were intended to vest on
September 14, 2002. These options were amended by the Board of Directors on May
13, 1996, so that one-third of such options vest on each anniversary date of the
date of grant. In September 1995, the Company granted to Dr. Given options to
purchase an additional 50,000 shares at an exercise price of $6.00 per share,
which also vest over three years from the date of grant. In September 1995 the
Company also granted to Dr. Snodgrass options to purchase 12,500 shares of
Common Stock, all of which vest upon the earliest of the achievement of
performance milestones relating to the leptin receptor program or the BFU-e
growth factor program, or September 14, 2002.
On February 21, 1996, each of Messrs. Axline, Haig, Peppers and Sharrock
received options to purchase 7,500 shares of Common Stock at an exercise price
of $6.00 per share.
All of the option grants described above were made pursuant to the 1992
Stock Option Plan.
79
<PAGE>
Certain options previously granted to Named Executive Officers and directors
of the Company were cancelled and regranted on December 30, 1996. See
"Management--Cancellation and Regrant of Options."
On March 7, 1997, the Board of Directors approved an amendment to the 1996
Stock Incentive Plan to increase by 2,000,000 the number of shares of Common
Stock reserved and available for issuance pursuant to stock options granted
thereunder.
Upon the closing of the Offering, Drs. Given, Snodgrass and Williams, and
Mr. Bagnall will be granted options to purchase 310,000, 70,000, 70,000 and
70,000 shares of the Company's Common Stock, respectively, at an exercise price
equal to the initial public offering price. Such options will vest quarterly
over a period of three years from the date of grant.
The Compensation Committee also approved on December 30, 1996 an incentive
bonus program for executive officers of the Company providing for bonus payments
based upon a percentage of base salary based upon various performance milestones
primarily related to the Acquisition and the Offering. The amount of such bonus
payments to Drs. Given, Snodgrass and Williams and to Mr. Bagnall will be
approximately $150,000, $95,000, $95,000 and $95,000, respectively, assuming an
initial public offering price of $11.00 per share and an aggregate offering of
2,750,000 shares.
INSIDER TRANSACTIONS
The Company has adopted a policy that all future transactions between the
Company and its executive officers, directors and other affiliates must be
approved by a majority of the disinterested members of the Company's Board of
Directors, and must be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties. In addition, this policy requires that
any loans by the Company to its executive officers, directors or other
affiliates be for bona fide business purposes only. A determination of which
directors are disinterested with respect to a particular transaction will depend
upon the totality of circumstances including whether the directors possess a
direct or indirect material interest in the transaction or in another party
involved in the transaction.
80
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 28, 1997, (assuming the
consummation of the Acquisition for Final Acquisition Consideration of $22.0
million and the sale of Amgen Shares to Amgen), and as adjusted to reflect the
sale of the 2,750,000 shares of Common Stock being offered hereby, by (i) each
stockholder who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock; (ii) each director and Named Executive
Officer of the Company; and (iii) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
NUMBER OF OWNED(2)
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
Glenn L. Cooper, M.D.(3) .................................... 4,595,409 62.6% 43.3%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Interneuron Pharmaceuticals, Inc. ........................... 4,529,745 61.7 42.7
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Entities affiliated with Robertson, Stephens & Co. Group, 718,146 9.8 6.8
L.L.C.(4) .................................................
c/o Robertson, Stephens & Co.
555 California Street, Suite 2600
San Francisco, CA 94104
Entities affiliated with InterWest Partners(5) .............. 490,956 6.7 4.6
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Robert R. Momsen(6) ......................................... 490,956 6.7 4.6
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Entities affiliated with Oak Investment Partners(7) ......... 441,021 6.0 4.2
c/o Oak Investment Partners
One Gorham Island
Westport, CT 06880
Douglass B. Given, M.D., Ph.D.(8)............................ 122,823 1.7 1.2
Morris Laster, M.D........................................... 112,500 1.5 1.1
Elliott Sigal, M.D., Ph.D.(9)................................ 96,682 1.3 *
Mark N.K. Bagnall(10)........................................ 27,500 * *
H. Ralph Snodgrass, Ph.D.(11)................................ 19,583 * *
Stephen J. Williams, Ph.D.(12)............................... 15,833 * *
David B. Sharrock(13)........................................ 4,375 * *
Robert P. Axline(14)......................................... 1,875 * *
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
NUMBER OF OWNED(2)
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------- ----------- ------------ ------------
Alexander M. Haig, Jr.(15)................................... 1,875 * *
<S> <C> <C> <C>
Jerry P. Peppers(16)......................................... 1,875 * *
4,903,648 65.7 45.7
All executive officers and directors as a group
(11 persons)(17)...........................................
</TABLE>
- --------------------------
* Less than one percent.
(1) To the Company's knowledge, except as indicated in the footnotes to this
table and subject to applicable community property laws, each of the persons
named in this table has sole voting and investment power with respect to all
shares of Common Stock indicated opposite such person's name.
(2) Percentage of beneficial ownership is based on 7,339,998 shares of Common
Stock outstanding as of February 28, 1997, assuming (i) the conversion of a
convertible debenture and a portion of the promissory note held by
Interneuron and all outstanding shares of Progenitor's Preferred Stock into
Common Stock (based on outstanding balances of $6.6 million as of February
28, 1997), (ii) the issuance of 1,679,255 shares of Common Stock to the
Mercator stockholders pursuant to the Acquisition (assuming Final
Acquisition Consideration of $22.0 million for Mercator), (iii) the issuance
of 5,303 shares of Common Stock to The Ohio University Foundation, pursuant
to certain anti-dilution adjustment rights, and (iv) 10,614,998 shares of
Common Stock outstanding after completion of the Offering, reflecting (a)
the sale of 2,750,000 shares of Common Stock being offered hereby, (b) the
purchase by The Ohio University Foundation of 25,000 shares of Common Stock,
pursuant to a stock purchase right, and (c) the issuance to Amgen of the
Amgen Shares. See "Capitalization" and "Description of Capital Stock."
Shares of Common Stock subject to options, warrants (including the Mercator
Warrants) and convertible notes and other purchase rights currently
exercisable or convertible, or exercisable or convertible within 60 days of
February 28, 1997 are deemed outstanding for computing the percentage of the
person or entity holding such securities but are not deemed outstanding for
computing the percentage of any other person or entity.
(3) Includes 4,529,745 shares held by Interneuron, options exercisable for
4,250 shares of Common Stock held by Dr. Cooper and options exercisable for
2,000 shares of Common Stock held by Dr. Cooper's wife. Dr. Cooper is
President, Chief Executive Officer and a director of Interneuron. Dr. Cooper
disclaims beneficial ownership of the shares held by Interneuron.
(4) Consists of 497,743 shares held by RS & Co. IV, L.P. ("RS"), 132,566 shares
held by The Robertson, Stephens Orphan Fund ("RSOF") and 87,837 shares held
by Bayview Investors, Ltd. ("Bayview"). The General Partner of RS is RS &
Co. Venture Partners IV, L.P., the General Partners of which consist of
individuals including M. Kathleen Behrens, a director of Mercator, that
share voting and investment power over securities held by RS. The General
Partners of RSOF are Bayview and Robertson, Stephens & Company Investment
Management, L.P., the General Partners of which are Robertson, Stephens
Private Equity Group, L.L.C. and RS & Co. Inc., respectively. The Managing
Member of Robertson, Stephens Private Equity Group, L.L.C. is RS & Co. Inc.,
the shareholders of which are a group of individuals. All of the individuals
described above disclaim beneficial ownership of the securities held by RS,
RSOF and Bayview.
(5) Consists of 487,722 shares held by InterWest Partners V, L.P. ("Partners")
and 3,234 shares held by InterWest Investors V ("Investors"). The General
Partner of Partners is InterWest Management Partners V, L.P., the General
Partners of which consist of individuals including Robert R. Momsen, a
director of Mercator (who has also agreed to become a director of the
Company), that share voting and investment power over securities held by
Partners. The General Partners of Investors consist of individuals including
Robert R. Momsen that share voting and investment power over securities held
by Investors. All of the individuals described above disclaim beneficial
ownership of the securities held by Partners and Investors, except to the
extent of their pro rata partnership interests therein.
(6) Consists of 487,722 shares held by Partners and 3,234 shares held by
Investors. Mr. Momsen is a General Partner of both Partners and Investors.
Mr. Momsen disclaims beneficial ownership of the securities held by Partners
and Investors except to the extent of his pro rata partnership interests
therein.
(7) Consists of 431,319 shares held by Oak Investment Partners V, Limited
Partnership ("Oak Investment") and 9,702 shares held by Oak V Affiliates
Fund ("Oak Affiliates"). Oak Associates V, L.L.C. is the General Partner of
Oak Investment. The managing members of Oak Associates V, L.L.C. consist of
individuals including Ann H. Lamont, a director of Mercator, that share
voting and investment power over the
82
<PAGE>
securities held by Oak Investment. The General Partners of Oak Affiliates
consist of a group of individuals, including Ann H. Lamont, a director of
Mercator, that have shared voting and investment power over the securities
held by Oak Affiliates. All of the individuals described above disclaim
beneficial ownership of the securities held by Oak Investment and Oak
Affiliates.
(8) Includes 82,907 shares held by a limited partnership of which Dr. Given is
a general partner and options exercisable for 39,916 shares of Common Stock.
(9) Includes options exercisable for 96,682 shares of Common Stock. Dr. Sigal
has agreed to become an executive officer of the Company upon the closing of
the Offering.
(10) Includes options exercisable for 27,500 shares of Common Stock
(11) Includes options exercisable for 19,583 shares of Common Stock.
(12) Includes options exercisable for 15,833 shares of Common Stock.
(13) Includes options exercisable for 4,375 shares of Common Stock.
(14) Includes options exercisable for 1,875 shares of Common Stock.
(15) Includes options exercisable for 1,875 shares of Common Stock.
(16) Includes options exercisable for 1,875 shares of Common Stock.
(17) Includes options exercisable for 119,082 shares of Common Stock. See
footnotes 3, 8 and 10-16 above. Does not include shares beneficially owned
by Mr. Momsen or Dr. Sigal.
83
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation") currently authorizes 44,000,000 shares of capital stock,
consisting of 39,000,000 shares of Common Stock, Class A, $0.001 par value, and
5,000,000 shares of Preferred Stock, $0.01 par value. In connection with the
Offering, the Company's Certificate of Incorporation will be restated (the
"Restated Certificate of Incorporation"). Upon the closing of the Offering, the
Restated Certificate of Incorporation will authorize the issuance of 44,000,000
shares of capital stock, consisting of 39,000,000 shares of Common Stock, par
value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value
$0.001 per share. Set forth below is a description of the capital stock of the
Company.
COMMON STOCK
As of February 28, 1997, assuming the conversion of all outstanding shares
of Progenitor's Preferred Stock and a convertible debenture and a portion of the
promissory note held by Interneuron into Common Stock, the exercise of the stock
purchase right described below, the sale of the Amgen Shares pursuant to the
Amgen Purchase Agreement and the issuance of 1,679,255 shares of Common Stock
pursuant to the Acquisition, there were 7,864,998 shares of Common Stock issued
and outstanding held of record by 118 stockholders, 988,984 shares of Common
Stock issuable upon the exercise of outstanding stock options (including
Replacement Options) and 59,675 shares of Common Stock issuable upon the
exercise of outstanding warrants (including the Mercator Warrants).
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders and are not entitled to cumulative
voting rights with respect to the election of directors. Accordingly, holders of
a majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor,
subject to preferences that may be applicable to any outstanding Preferred
Stock. In the event of liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all net assets
remaining after payment of liabilities and the liquidation preference of
anyoutstanding Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption, conversion or other subscription rights, and there are
no sinking fund provisions applicable to the Common Stock. All currently
outstanding shares of Common Stock are, and the shares of Common Stock being
issued and sold in the Offering will be, duly authorized, validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Company currently has outstanding 2,020,496 shares of Series A Preferred
Stock and 349,000 shares of Series B Preferred Stock. Such shares will
automatically convert into Common Stock upon consummation of the Offering. Both
the Series A and Series B Preferred Stock have antidilution and conversion
adjustment provisions that will increase or decrease the number of shares of
Common Stock outstanding as of February 28, 1997 above or below the number of
shares set forth herein and will increase or decrease the number of shares used
in calculations for purposes of, among other things, dilution to new investors,
shares held by certain principal stockholders, shares subject to registration
rights and shares eligible for future sale, in the event that the initial public
offering price of the Common Stock is less than or greater than $11.00 per
share, as the case may be. See "Dilution," "Principal Stockholders,"
"--Registration Rights" and "Shares Eligible for Future Sale."
The actual number of shares of Common Stock issuable to each holder of
Preferred Stock upon conversion of the Series A and Series B Preferred Stock
will equal the product of (a) the number of shares of Preferred Stock held by
such holder and (b) the greater of (x) one or (y) a fraction, the numerator of
which is $12.50 and the denominator of which is 1.2403 multiplied by the initial
public offering price. At the assumed initial public offering price of $11.00
per share of Common Stock, 2,170,893 shares of Common Stock will issue upon
conversion of the Preferred Stock. The number of shares issuable upon conversion
of such Preferred Stock will increase pursuant to a guaranteed quarterly return
available to holders of the Series A and Series B Preferred Stock that is
determined on each of April 7, July 7, October 7 and January 7.
84
<PAGE>
On March 7, 1997, the Board of Directors authorized the designation of
2,000,000 shares of Series C Preferred Stock. In the event that the Offering is
not consummated, Interneuron has the option to convert the convertible debenture
and a portion of the promissory note held by Interneuron into such Series C
Preferred Stock.
Following completion of the Offering and the conversion of all outstanding
shares of Preferred Stock, the Board of Directors will have the authority to
issue from time to time up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the powers, designations, preferences and relative,
participating, optional or other rights thereof, including dividend rights,
conversion rights, voting rights, redemption terms, liquidation preferences and
the number of shares constituting each such series, without any further vote or
action by the Company's stockholders. The issuance of Preferred Stock could
adversely affect the rights of holders of Common Stock and could have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
STOCK PURCHASE RIGHT AND WARRANTS
Pursuant to a Stock Purchase Agreement entered into on March 27, 1992, as
amended on February 26, 1996, the Company granted The Ohio University Foundation
the right to purchase up to 25,000 shares of Common Stock in the event of an
initial public offering, merger or other similar corporate transaction involving
the Company, at a price equal to 50% of the assumed initial public offering
price per share or other per share consideration. The Ohio University Foundation
has agreed to exercise such right at a price per share of $5.50 prior to the
closing of the Offering. See "Certain Transactions--The Ohio University
Foundation."
As of February 28, 1997, there were warrants outstanding to purchase an
aggregate of 31,952 shares of Series B Preferred Stock at an exercise price of
$7.50 per share. The warrants also contain a cashless exercise right that allows
the holder to receive the number of shares of Series B Preferred Stock subject
to the warrant multiplied by a fraction, the numerator of which is the
difference between the then current per share market price of the Common Stock
and $7.50 and the denominator of which is the then current per share market
price of the Series B Preferred Stock. These warrants were issued in connection
with a private placement of Preferred Stock for which Paramount, an affiliate of
Interneuron, acted as placement agent. See "Certain Transactions--Relationship
with Interneuron." The warrants expire five years from the date of the Offering.
Upon automatic conversion of the outstanding Preferred Stock in connection with
the closing of the Offering, all such warrants will be converted into warrants
to purchase shares of Common Stock. The number of shares of Common Stock for
which such warrants are exercisable is subject to adjustment if the initial
public offering price for the Common Stock is less than or greater than $11.00
per share in the same manner and according to the same formula described above
for the conversion of the Company's currently outstanding Preferred Stock. See
"--Preferred Stock." The warrants do not confer upon the holder thereof any
voting or preemptive rights, or any other rights as a stockholder of the Company
prior to exercise. Upon exercise of such warrants, holders of the underlying
shares of Common Stock will be entitled to certain registration rights with
respect to such shares. See "--Registration Rights."
On August 1, 1993, Mercator issued a warrant (the "Series A Warrant") to
purchase up to 17,850 shares of its Series A Preferred Stock to Phoenix Leasing
Incorporated ("Phoenix") at an initial exercise price of $2.80 per share (as
such price may be adjusted pursuant to the Series A Warrant). The Series A
Warrant also contains a cashless conversion right that allows the holder to
receive a number of shares of Series A Preferred Stock equal to the number of
Series A Preferred Stock purchasable pursuant to the Series A Warrant multiplied
by a fraction, the numerator of which is the difference between the current per
share Fair Market Value (as defined in the Series A Warrant) and the exercise
price, and the denominator of which is the current per share Fair Market Value.
The Series A Warrant expires on the later of August 31, 2003 and the fifth
anniversary of the closing of an initial public offering of Mercator's capital
stock.
On October 28, 1994, Mercator issued a warrant (the "Series B Warrant," and
together with the Series A Warrant, the "Mercator Warrants") to purchase up to
46,800 shares of its Series B Preferred Stock to Phoenix at an initial exercise
price of $2.50 per share (as such price may be adjusted pursuant to the Series B
Warrant). The Series B Warrant also contains a cashless conversion right that
allows the
85
<PAGE>
holder to receive a number of shares of Series B Preferred Stock equal to the
number of Series B Preferred Stock purchasable pursuant to the Series B Warrant
multiplied by a fraction, the numerator of which is the difference between the
current per share Fair Market Value (as defined in the Series B Warrant) and the
exercise price, and the denominator of which is the current per share Fair
Market Value. The Series B Warrant expires on the later of October 28, 2004 and
the fifth anniversary of the closing of an initial public offering of Mercator's
capital stock.
The Mercator Warrants do not confer upon the holder any voting or preemptive
rights, or any other rights as a shareholder of the Company prior to exercise.
The Acquisition Agreement provides that Mercator will use commercially
reasonable efforts to cause all holders of Mercator Warrants to exercise such
Mercator Warrants on or prior to the closing of the Acquisition. Any Mercator
Warrants that are outstanding as of February 14, 1997 and not expired as of the
closing of the Acquisition will be assumed by the Company and converted into
warrants to purchase the number of shares of Common Stock which the holder would
have been entitled to receive had the Mercator Warrants been exercised
immediately prior to the closing of the Acquisition at an aggregate exercise
price equal to the former aggregate exercise price and subject to the same terms
and conditions as were applicable to such Mercator Warrants prior to the
Acquisition. Pursuant to the Acquisition, to the extent they are not exercised,
the Series A Warrant will be converted into a warrant to purchase 16,488 shares
of Common Stock at an exercise price of $3.03 per share, and the Series B
Warrant will be converted into a warrant to purchase 11,235 shares of Common
Stock at an exercise price of $10.41 per share, in each case assuming Final
Acquisition Consideration of $22.0 million for Mercator.
REGISTRATION RIGHTS
The holders of shares of Common Stock (the "Registrable Securities")
issuable, after completion of the Offering, upon exercise of outstanding
warrants to purchase an aggregate of 31,952 shares of Common Stock (assuming an
initial public offering price of $11.00 per share of Common Stock) are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. Pursuant to the registration rights, subject to certain
exceptions and limitations, the holders of at least 50% of the Registrable
Securities may require, on one occasion during the four-year period commencing
12 months after the closing of the Offering (the "Registration Period"), that
the Company use its best efforts to register the Registrable Securities for
public resale. In addition, in the event the Company elects to register any
Common Stock under the Securities Act, either for its own account or for the
account of any other stockholders, the Company is required to notify, and
subject to certain marketing and other limitations, is required to include in
such registration the Registrable Securities of holders requesting registration.
All registration expenses of any such registration are to be borne by the
Company and all selling expenses relating to Registrable Securities are to be
borne by the holders of the securities being registered. See "Certain
Transactions--Relationship with Interneuron."
Pursuant to the Amgen Purchase Agreement, the Company has granted certain
demand registration rights to Amgen which become operative six months after the
Offering. In addition, the Company has granted certain "piggy-back" registration
rights to Amgen at any time the Company determines to register any shares of
Common Stock, other than pursuant to an initial public offering or in certain
other circumstances. Under the Amgen Purchase Agreement, the Company is required
to use reasonable efforts to effect such registration of all or a portion of the
Amgen Shares as may be requested by Amgen subject to certain limitations,
including underwriter's cutback provisions. The registration expenses of any
such registration are to be borne by the Company subject to certain limitations.
CONVERTIBLE DEBENTURE AND PROMISSORY NOTE
On March 31, 1995, the Company issued a convertible debenture in the amount
of $387,968 to Interneuron, and procured an additional advance of $28,651 under
such debenture on June 30, 1995. The debenture is convertible immediately prior
to the closing of the Offering into a number of shares of Common Stock equal to
the outstanding principal amount and any accrued interest divided by the initial
public offering price for the Common Stock, plus a cash payment in lieu of
fractional shares.
86
<PAGE>
Interneuron has provided and continues to provide advances to the Company
through a promissory note dated March 31, 1996, in the principal amount of
approximately $525,000, which has increased to approximately $6.2 million as of
February 28, 1997, payable on the earlier of five years from the date of the
note or the closing of the Offering. Interneuron has agreed to convert a portion
of the indebtedness evidenced by the note (approximately $6.1 million from an
outstanding balance of approximately $6.2 million as of February 28, 1997),
including additional advances from April 1, 1996 through to October 1, 1996 and
accrued interest thereon, into shares of Common Stock upon the closing of the
Offering at a conversion price equal to the initial public offering price. All
additional advances from October 1, 1996 through the closing of the Offering
that relate to the costs of the Offering will be repaid from the net proceeds of
the Offering (an aggregate of approximately $85,000 of principal and accrued
interest as of February 28, 1997). See "Use of Proceeds" and "Certain
Transactions--Relationship with Interneuron."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"), an anti-takeover law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is, or the transaction in which the
person became an interested stockholder was, approved in a prescribed manner or
another prescribed exemption applies. For purposes of Section 203, a "business
combination" is defined broadly to include a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. In
general, an "interested stockholder" is a person who, together with affiliates
and associates, owns (or within the three years prior to such transaction, did
own) 15% or more of the corporation's voting stock.
In addition, certain provisions of the Company's Restated Certificate of
Incorporation may have the effect of preventing, discouraging or delaying any
change in control of the Company. The authorization of undesignated Preferred
Stock makes it possible for the Board of Directors to issue Preferred Stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of the Company. See "--Preferred Stock."
LIMITATION OF LIABILITY
Section 145 ("Section 145") of the DGCL provides a detailed statutory
framework covering indemnification of officers and directors against liabilities
and expenses arising out of legal proceedings brought against them by reason of
their being or having been directors or officers. Section 145 generally provides
that a director or officer of a corporation (i) shall be indemnified by the
corporation for all expenses of such legal proceedings when he is successful on
the merits, (ii) may be indemnified by the corporation for the expenses,
judgments, fines and amounts paid in settlement of such proceedings (other than
a derivative suit), even if he is not successful on the merits, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, and
(iii) may be indemnified by the corporation for the expenses of a derivative
suit (a suit by a stockholder alleging a breach by a director or officer of a
duty owed to the corporation), even if he is not successful on the merits, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. No indemnification may be made
under clause (iii) above, however, if the director or officer is adjudged liable
for negligence or misconduct in the performance of his duties to the
corporation, unless a corporation determines that, despite such adjudication,
but in view of all the circumstances, he is entitled to indemnification. The
indemnification described in clauses (ii) and (iii) above may be made only upon
a determination that indemnification is proper because the applicable standard
of conduct has been met. Such a determination may be made by a majority of a
quorum of disinterested directors, independent legal counsel, the stockholders
or a court of competent jurisdiction.
The Company's Restated Certificate of Incorporation will provide that the
Company shall indemnify to the fullest extent permitted by Section 145, as it
now exists or as amended, all persons whom it may indemnify pursuant thereto.
The Company has entered into agreements to indemnify its directors and
87
<PAGE>
executive officers, in addition to indemnification provided for in the Company's
charter documents. These agreements, among other things, provide for the
indemnification of the Company's directors and executive officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action by
or in the right of the Company, arising out of such person's services as a
director or executive officer of the Company, any subsidiary of the Company or
any other company or enterprise to which such person provides services at the
request of the Company to the fullest extent permitted by applicable law. The
Company believes that these provisions and agreements will assist the Company in
attracting and retaining qualified persons to serve as directors and executive
officers.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit. The Company's Restated Certificate of Incorporation will provide for
the elimination of personal liability of a director for breach of fiduciary
duty, as permitted by Section 102(b)(7) of the DGCL.
The Underwriting Agreement provides for indemnification by the Underwriters
under certain circumstances of directors, officers and controlling persons of
the Company against certain liabilities, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions contained in the Certificate of Incorporation and
Bylaws of the Company, the DGCL, the Underwriting Agreement, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer or controlling person in connection with the
Common Stock being registered hereunder, the Company will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Prior to the closing of the Offering, the Company intends to obtain
liability insurance insuring the Company's officers and directors against
liabilities that they may incur in such capacities.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar for the Company's Common Stock.
88
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for the Common
Stock and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after the Offering. Sales of
substantial amounts of Common Stock in the public market after the Offering, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities.
After the Offering, the Company will have outstanding 10,614,998 shares of
Common Stock (11,027,498 shares if the Underwriters' over-allotment option is
exercised in full), including the shares of Common Stock to be issued to
Mercator stockholders in the Acquisition, the Amgen Shares and the 25,000 shares
to be purchased by The Ohio University Foundation. Of these shares, the
2,750,000 shares of Common Stock offered hereby will be freely tradeable without
restriction in the public market under the Securities Act of 1933, as amended
(the "Securities Act"), unless such shares are held by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act. The
shares of the Company's Common Stock to be issued in connection with the
Acquisition will be registered under the Company's Registration Statement on the
Form S-4. However, 1,650,123 of such shares issued to "affiliates" of Mercator
within the meaning of Rule 145 under the Securities Act will be subject to
certain volume, manner of sale and other limitations under Rules 144 and 145.
The remaining 6,185,743 shares of Common Stock outstanding upon completion
of the Offering will be "restricted securities" as that term is defined in Rule
144 ("Restricted Shares"). The Restricted Shares were issued and sold by the
Company in private transactions in reliance upon exemptions from registration
under the Securities Act. Restricted Shares may not be sold in the public market
unless they are registered under the Securities Act or are sold pursuant to Rule
144 or another exemption from registration.
Pursuant to "lockup" agreements, all of the Company's executive officers and
directors and certain stockholders, who collectively hold 1,007,581 of such
Restricted Shares, have agreed not to offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any such shares for a period of 180
days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. Interneuron will hold 4,529,745 Restricted Shares and has
agreed pursuant to a lockup agreement not to offer, sell or otherwise dispose of
any of its Restricted Shares for a period of 365 days from the date of this
Prospectus without the prior written consent of Lehman Brothers Inc. The Company
also has agreed that it will not offer, sell or otherwise dispose of Common
Stock for a period of 180 days from the date of this Prospectus, other than
pursuant to existing stock option plans, without the prior written consent of
Lehman Brothers Inc. In addition, Amgen has agreed not to offer, sell or
otherwise dispose of, for a period of 180 days from the date of this Prospectus,
any of the Amgen Shares without the prior written consent of the Company, and
the Company has agreed in the Underwriting Agreement that it will not grant such
consent without the prior written consent of Lehman Brothers Inc. To date,
substantially all stockholders and optionholders of Mercator have entered into
Mercator Lockup Agreements with Progenitor, pursuant to which they have agreed
not to offer, sell or otherwise dispose of shares of the Company's Common Stock
acquired in the Acquisition (including upon the exercise of any Replacement
Options after the Acquisition) without the prior written consent of Lehman
Brothers Inc. Such restrictions lapse as to one-third of all shares beneficially
owned by a holder after each of 180 days, 270 days and 365 days following
completion of the Acquisition. It is a condition to the closing of the
Acquisition that all stockholders and optionholders of Mercator enter into such
Mercator Lockup Agreements, although there can be no assurance that such persons
will do so.
Upon termination of the agreements described above, approximately 692,362,
550,041 and 5,579,786 of such shares will be eligible for immediate sale in the
public market beginning 181 days, 271 and 366 days, respectively, after the date
of this Prospectus, subject to certain volume, manner of sale and other
limitations under Rules 144 and 145 and approximately 843,360, 9,711 and 40,014
of such shares will be eligible for immediate sale in the public market
beginning 181, 271 and 366 days after the date of this Prospectus without
limitation under Rule 144(k). Lehman Brothers Inc. may, at any time without
notice, release all or any portion of the shares subject to such agreements. See
"Underwriting."
89
<PAGE>
As of February 28, 1996, options to purchase a total of 988,984 shares were
outstanding under the Company's stock option plans (including the 1997 Stock
Option Plan). Of such shares, approximately 730,112, 97,674 and 97,674 shares
are subject to lockup agreements for a period of 180 days, 270 days and 365 days
from the date of this Prospectus, and the remaining 63,524 shares will be
available for sale in the public market 90 days after the date of this
Prospectus pursuant to Rule 701. As of February 28, 1996, 1,786,775 shares were
available or were to be reserved for future option grants under such plans, and
options to purchase 926,150 shares of Common Stock were to be granted under the
1996 Stock Incentive Plan upon the closing of the Offering.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares of the Company are aggregated) who
has beneficially owned Restricted Shares for at least one year (including the
holding period of any prior owner who is not an affiliate of the Company) would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (approximately 106,150 shares immediately after the Offering), or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner who is not an affiliate of the
Company) is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701 under the Securities
Act, which permit non-affiliates to sell their Rule 701 shares without having to
comply with the public information, holding period, volume limitation or notice
provisions of Rule 144 and permit affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding period restrictions, in each
case commencing 90 days after the date of this Prospectus.
After the effective date of the Offering, the Company intends to file
registration statements on Form S-8 to register an aggregate of 695,962 shares
of Common Stock reserved for issuance upon exercise of outstanding options, an
aggregate of 926,150 shares of Common Stock reserved for issuance pursuant to
options to be granted upon the closing of the Offering with an exercise price
equal to the initial public offering price, an aggregate of 1,786,775 shares of
Common Stock to be reserved for grants or awards under its 1992 Stock Option
Plan, 1996 Stock Incentive Plan and 1996 Employee Stock Purchase Plan and an
aggregate of 293,022 shares of Common Stock subject to Replacement Options that
are reserved for issuance under its 1997 Stock Option Plan. Such registration
statements will become effective automatically upon filing. Shares issued under
the foregoing plans after the filing of the registration statements on Form S-8
may be sold in the open market subject, in the case of certain holders, to the
Rule 144 limitations applicable to affiliates, the above-referenced lockup
agreements and vesting restrictions imposed by the Company.
After the closing of the Offering, 31,952 shares of Common Stock issuable
upon exercise of outstanding warrants will be entitled to certain rights with
respect to the registration of such shares under the Securities Act. Certain
registration rights also have been granted to Amgen in connection with the
purchase of the Amgen Shares. See "Description of Capital Stock--Registration
Rights."
90
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement, of which this Prospectus is a part, the Underwriters named below (the
"Underwriters"), for whom Lehman Brothers Inc. and Genesis Merchant Group
Securities are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company, and the Company has agreed to sell to each
Underwriter, the number of shares of Common Stock set forth opposite the name of
each such Underwriter below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Lehman Brothers Inc........................................................
Genesis Merchant Group Securities..........................................
-----------------
Total...................................................................... 2,750,000
-----------------
-----------------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock directly to the public initially at
the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such initial public offering price less a
selling concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other brokers and dealers. After the initial offering to the
public, the offering price and other selling terms may be changed by the
Representatives.
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions, including the condition that no stop order suspending the
effectiveness of the Registration Statement is in effect and no proceedings for
such purpose are pending or threatened by the Securities and Exchange Commission
and that there has been no material adverse change or any development involving
a prospective material adverse change in the condition of the Company from that
set forth in the Registration Statement otherwise than as set forth or
contemplated in this Prospectus, and that certain certificates, opinions and
letters have been received from the Company, its counsel and independent
auditors. The Underwriters are obligated to take and pay for all of the above
shares of Common Stock if any such shares are taken.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 412,500 shares of Common Stock exercisable solely to cover
over-allotments at the initial public offering price, less the underwriting
discounts and commissions shown on the cover page of the Prospectus. Such option
may be exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that the option is exercised, each Underwriter will be
committed to purchase a number of the additional shares of Common Stock
proportionate to each Underwriter's initial commitment as indicated in the
preceding table.
At the request of the Company, the Underwriters have reserved 100,000 shares
of Common Stock for sale to employees, directors and other persons and entities
associated with the Company. The number of shares of Common Stock available for
sale to the general public will be reduced to the extent that the reserved
shares of Common Stock are purchased by persons or entities designated by the
Company. Any reserved shares of Common Stock that are not purchased by persons
or entities designated by the
91
<PAGE>
Company will be offered by the Underwriters to the general public on the same
basis as other shares of Common Stock offered hereby.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Company, its executive officers, directors and certain employees of the
Company and other stockholders of the Company have agreed, with certain limited
exceptions and except for the shares of Common Stock to be sold in the Offering
by the Company, not to sell or otherwise dispose of (or enter into any
transaction that is designed to result in the disposition of) directly or
indirectly, other than to the Underwriters pursuant to the Underwriting
Agreement, shares of Common Stock, or any security convertible into or
exchangeable or exercisable for Common Stock, for a period of 180 days (365 days
in the case of Interneuron) after the date of this Prospectus without the prior
written consent of Lehman Brothers Inc.
Amgen has agreed not to offer, sell or otherwise dispose of, for a period of
180 days from the date of this Prospectus, any of the Amgen Shares without the
prior written consent of the Company. The Company has agreed in the Underwriting
Agreement not to waive the sale restrictions imposed on Amgen without the prior
written consent of Lehman Brothers Inc.
As a condition to consummation of the Acquisition and receipt of the Common
Stock or options resulting from the transaction, all stockholders and
optionholders of Mercator must enter into the Mercator Lockup Agreements with
the Company pursuant to which they will agree not to sell or otherwise dispose
of, directly or indirectly, any shares of Common Stock (or any security
convertible into or exercisable for Common Stock) for a period of 365 days after
the date of the Acquisition without the prior written consent of Lehman Brothers
Inc., except that such restriction shall lapse as to one-third of the shares
after 180 days and as to an additional one-third of the shares after 270 days.
Shares or options held by any Mercator employee who is terminated other than for
"cause" will be subject to such restrictions only for the initial 180 day period
after the Acquisition.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between the
Company and the Representatives. The material factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions will be the Company's historical performance,
capital structure, estimates of the business potential and the earnings
prospects of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market values of companies in
related businesses.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives also may elect to reduce any short position by exercising
all or part of the over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such
92
<PAGE>
purchases. The imposition of a penalty bid might have an effect on the price of
a security to the extent that it were to discourage resales of the security by
purchasers in the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Lehman Brothers Inc. acted as financial advisor to Mercator in connection
with the sale of Mercator to Progenitor. Pursuant to the terms of its engagement
by Mercator, Lehman Brothers Inc. received a retainer fee of $75,000 and is due
to receive 51,884 shares of Mercator common stock and will receive an additional
fee of $510,000 upon consummation of the Acquisition.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
and certain matters relating to the Offering will be passed upon for the Company
by Morrison & Foerster LLP, San Francisco, California. Certain legal matters
relating to the Offering will be passed upon for the Underwriters by Skadden,
Arps, Slate, Meagher & Flom (Illinois).
EXPERTS
The financial statements of Progenitor, Inc. (a Development Stage Company)
as of September 30, 1995 and 1996 and for each of the three years in the period
ended September 30, 1996, and for the period from May 8, 1992 (date of
inception) to September 30, 1996, appearing in this Prospectus and Registration
Statement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon appearing elsewhere herein and
in this Registration Statement, which includes an explanatory paragraph
regarding Progenitor's ability to continue as a going concern, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Mercator Genetics, Inc. (a development stage
company) at December 31, 1995 and 1996, and for each of the three years in the
period ended December 31, 1996, and for the period from inception (October 9,
1992) to December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon (which contains an explanatory paragraph with
respect to Mercator's ability to continue as a going concern described in Note 1
to the financial statements) appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The statements in this Prospectus under the captions "Risk
Factors--Uncertainty of Patents and Proprietary Rights"; "Business--The
Company's Genomics System"; "Business--Discovery Programs"; and
"Business--Patents and Proprietary Rights", relating to U.S. patent matters,
have been reviewed and approved by Pennie & Edmonds LLP, New York, New York,
patent counsel to Progenitor, and have been included herein in reliance upon the
review and approval by such firm as experts in U.S. patent law.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-1, including amendments thereto, under the
Securities Act with respect to the Securities offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules filed therewith. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement, including
the exhibits and schedules thereto, may be inspected without charge at the
principal office of the Securities
93
<PAGE>
and Exchange Commission at 450 Fifth Street, N.W, Room 1024, Washington, D.C.
20549, and at the following regional offices of the Securities and Exchange
Commission: Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, Seven World Trade
Center, New York, New York 10048. Copies can be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W,
Room 1024, Washington, D.C. 20549. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent public accountants
and will make available copies of quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.
94
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Progenitor Financial Statements as of September 30, 1995 and 1996 and December 31, 1996 (unaudited) and for
the Years Ended September 30, 1994, 1995 and 1996 and the three months ended December 31, 1995 and 1996
(unaudited)
Report of Independent Accountants........................................................................ F-2
Balance Sheets........................................................................................... F-3
Statements of Operations................................................................................. F-4
Statements of Stockholders' Deficit...................................................................... F-5
Statements of Cash Flows................................................................................. F-6
Notes to the Financial Statements........................................................................ F-7
Mercator Financial Statements as of December 31, 1995 and 1996 and for the Years Ended December 31, 1994,
1995 and 1996
Report of Independent Auditors........................................................................... F-15
Balance Sheets........................................................................................... F-16
Statements of Operations................................................................................. F-17
Statement of Redeemable Preferred Stock, Common Stock and Accumulated Deficit............................ F-18
Statements of Cash Flows................................................................................. F-19
Notes to Financial Statements............................................................................ F-20
</TABLE>
F-1
<PAGE>
When the stock split referred to in footnote 1.j. to the financial statements
has been consummated, we will be in a position to render the following report.
COOPERS & LYBRAND L.L.P.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
Progenitor, Inc.
We have audited the accompanying balance sheets of Progenitor, Inc. (a
Development Stage Company) as of September 30, 1995 and 1996, and the related
statements of operations, stockholders' deficit, and cash flows for the years
ended September 30, 1994, 1995 and 1996, and for the period from May 8, 1992
(date of inception) to September 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 Progenitor, Inc. (a Development
Stage Company) as of September 30, 1995 and 1996, and the results of its
operations and its cash flows for the years ended September 30, 1994, 1995 and
1996, and for the period from May 8, 1992 (date of inception) to September 30,
1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company is in the development stage. The Company's lack of
revenues and its need for additional financing to fund its operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Columbus, Ohio
March 10, 1997
F-2
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------ DECEMBER 31,
1995 1996 1996
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents........................................ $ 1,173,743 $ 22,315 $ 197,444
Accounts receivable.............................................. 193,898 175,498 675,498
Accounts receivable--parent...................................... 131,600 -- --
Prepaid expenses and other current assets........................ 22,618 120,827 210,687
-------------- -------------- --------------
Total current assets........................................... 1,521,859 318,640 1,083,629
-------------- -------------- --------------
Property and equipment, at cost:
Equipment........................................................ 1,063,602 1,216,219 1,384,136
Less accumulated depreciation.................................. (409,120) (674,847) (748,509)
-------------- -------------- --------------
654,482 541,372 635,627
Notes receivable from officers, net................................ 218,734 59,645 109,645
-------------- -------------- --------------
Total assets................................................... $ 2,395,075 $ 919,657 $ 1,828,901
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................. $ 232,656 $ 446,915 $ 273,053
Accrued expenses................................................. 1,343,718 1,361,615 1,489,413
Capital lease obligations--current............................... 214,485 265,155 265,155
-------------- -------------- --------------
Total current liabilities...................................... 1,790,859 2,073,685 2,027,621
-------------- -------------- --------------
Note payable--parent............................................... -- 3,443,050 5,406,648
Convertible debenture--parent...................................... 436,740 475,677 485,390
Capital lease obligations.......................................... 268,382 91,706 28,880
-------------- -------------- --------------
Total liabilities............................................ 2,495,981 6,084,118 7,948,539
-------------- -------------- --------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, Series A, $.01 par value: 2,120,000 shares
authorized; 2,020,496 shares issued and outstanding as of
September 30, 1995 and 1996 and December 31, 1996.............. 20,205 20,205 20,205
Preferred stock, Series B, $.01 par value: 880,000 shares
authorized; 349,000 shares issued and outstanding as of
September 30, 1995 and 1996 and December 31, 1996.............. 3,490 3,490 3,490
Common stock, Class A, $.001 par value: 39,000,000 shares
authorized; 2,789,271, 2,885,904 and 2,885,904 shares issued
and outstanding as of September 30, 1995 and 1996 and December
31, 1996, respectively......................................... 2,789 2,886 2,886
Additional paid-in capital....................................... 14,546,640 14,966,792 14,966,792
Deficit accumulated during development stage..................... (14,674,030) (20,157,834) (21,113,011)
-------------- -------------- --------------
Total stockholders' deficit.................................... (100,906) (5,164,461) (6,119,638)
-------------- -------------- --------------
Total liabilities and stockholders' deficit.................... $ 2,395,075 $ 919,657 $ 1,828,901
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MAY 8, 1992
(DATE OF
YEARS ENDED SEPTEMBER 30, INCEPTION) TO
---------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
---------- ---------- ---------- ------------- THREE MONTHS ENDED MAY 8, 1992
DECEMBER 31, (DATE OF
------------------------ INCEPTION)
1995 1996 TO DECEMBER
----------- ----------- 31, 1996
(UNAUDITED) (UNAUDITED) ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ -- $2,821,386 $1,332,366 $ 4,153,752 $ 201,612 $ 675,505 $4,829,257
Operating expenses:
Research and development... 4,112,991 4,227,959 3,872,891 16,104,790 808,864 1,066,143 17,170,933
General and
administrative........... 1,274,896 1,116,652 1,791,050 5,786,483 354,883 444,383 6,230,866
---------- ---------- ---------- ------------- ----------- ----------- ------------
Total operating
expenses............... 5,387,887 5,344,611 5,663,941 21,891,273 1,163,747 1,510,526 23,401,799
---------- ---------- ---------- ------------- ----------- ----------- ------------
Nonrecurring expense......... -- -- 973,525 973,525 -- -- 973,525
Interest expense:
Capital lease.............. 44,257 62,945 59,087 166,289 13,320 9,440 175,729
Debt to parent............. 603,581 289,297 119,617 1,280,499 10,643 110,716 1,391,215
---------- ---------- ---------- ------------- ----------- ----------- ------------
Net loss................. $(6,035,725) $(2,875,467) $(5,483,804) $(20,157,834) $(986,098) $(955,177) ($21,113,011)
---------- ---------- ---------- ------------- ----------- ----------- ------------
---------- ---------- ---------- ------------- ----------- ----------- ------------
Supplemental net loss per
share (unaudited).......... $ (0.95) $ (0.17)
---------- -----------
---------- -----------
Shares used in computing
supplemental net loss per
share (unaudited).......... 5,758,615 5,784,327
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
FROM MAY 8, 1992 (DATE OF INCEPTION) TO SEPTEMBER 30, 1996
AND (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------------- -----------------------------------
SERIES A SERIES B CLASS A CLASS B ADDITIONAL
------------------ --------------- ----------------- ---------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------- ------- ------ --------- ------ -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 8, 1992 (Date of inception)
Issued in May 1992 at $.002 per share... -- $ -- -- $-- 2,412,950 $2,413 -- $-- $ 2,413
Issued in May 1992 at $.001 per share... -- -- -- -- -- -- 250,000 250 --
Issued in December 1992 and January 1993
at $.000 per share under anti-dilution
provisions............................ -- -- -- -- 13,397 13 -- -- (13)
Issued in December 1992 and January 1993
at $.02 per share..................... -- -- -- -- 216,588 217 -- -- 4,105
Repurchased at $.02 per share........... -- -- -- -- (74,267) (74 ) -- -- (1,411)
Cumulative net loss (May 8, 1992 through
September 30, 1993)................... -- -- -- -- -- -- -- -- --
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Balance, September 30, 1993............... -- -- -- -- 2,568,668 2,569 250,000 250 5,094
Net loss................................ -- -- -- -- -- -- -- -- --
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Balance, September 30, 1994............... -- -- -- -- 2,568,668 2,569 250,000 250 5,094
--------- ------ -------- ------ -----------
Issued preferred stock at $6.25 for
conversion of debt to equity.......... 2,020,496 20,205 -- -- -- -- -- -- 12,607,895
Conversion of Class B common to Class A
common under anti-dilution
provisions............................ -- -- -- -- 178,750 179 (250,000) (250) 161,751
Issued in December 1994 at $.000 per
share under anti-dilution
provisions............................ -- -- -- -- 40,353 40 -- -- 214,960
Stock options exercised at $.20 per
share................................. -- -- -- -- 1,500 1 -- -- 299
Issued preferred stock in December-April
at $4.47 per share, net of offering
costs................................. -- -- 349,000 3,490 -- -- -- -- 1,556,641
Net loss................................ -- -- -- -- -- -- -- -- --
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Balance, September 30, 1995............... 2,020,496 20,205 349,000 3,490 2,789,271 2,789 -- -- 14,546,640
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Stock options exercised at $.20-$6.00
per share............................. -- -- -- -- 38,300 39 -- -- 70,212
Issued common stock in February 1996 at
$6.00 per share....................... -- -- -- -- 58,333 58 -- -- 349,940
Net loss................................ -- -- -- -- -- -- -- -- --
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Balance, September 30, 1996............... 2,020,496 20,205 349,000 3,490 2,885,904 2,886 -- -- 14,966,792
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Net loss (unaudited).................... -- -- -- -- -- -- -- -- --
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Balance, December 31, 1996 (unaudited).... 2,020,496 $20,205 349,000 $3,490 2,885,904 $2,886 -- $-- $14,966,792
--------- ------- ------- ------ --------- ------ -------- ------ -----------
--------- ------- ------- ------ --------- ------ -------- ------ -----------
<CAPTION>
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE TOTAL
------------ ------------
<S> <C> <C>
Balance, May 8, 1992 (Date of inception)
Issued in May 1992 at $.002 per share... $ -- $ 4,826
Issued in May 1992 at $.001 per share... -- 250
Issued in December 1992 and January 1993
at $.000 per share under anti-dilution
provisions............................ -- --
Issued in December 1992 and January 1993
at $.02 per share..................... -- 4,322
Repurchased at $.02 per share........... -- (1,485)
Cumulative net loss (May 8, 1992 through
September 30, 1993)................... (5,762,838 ) (5,762,838)
------------ ------------
Balance, September 30, 1993............... (5,762,838 ) (5,754,925)
Net loss................................ (6,035,725 ) (6,035,725)
------------ ------------
Balance, September 30, 1994............... (11,798,563 ) (11,790,650)
------------ ------------
Issued preferred stock at $6.25 for
conversion of debt to equity.......... -- 12,628,100
Conversion of Class B common to Class A
common under anti-dilution
provisions............................ -- 161,680
Issued in December 1994 at $.000 per
share under anti-dilution
provisions............................ -- 215,000
Stock options exercised at $.20 per
share................................. -- 300
Issued preferred stock in December-April
at $4.47 per share, net of offering
costs................................. -- 1,560,131
Net loss................................ (2,875,467 ) (2,875,467)
------------ ------------
Balance, September 30, 1995............... (14,674,030 ) (100,906)
------------ ------------
Stock options exercised at $.20-$6.00
per share............................. -- 70,251
Issued common stock in February 1996 at
$6.00 per share....................... -- 349,998
Net loss................................ (5,483,804 ) (5,483,804)
------------ ------------
Balance, September 30, 1996............... (20,157,834 ) (5,164,461)
------------ ------------
Net loss (unaudited).................... (955,177 ) (955,177)
------------ ------------
Balance, December 31, 1996 (unaudited).... $(21,113,011) $ (6,119,638)
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MAY 8, 1992
(DATE OF
YEARS ENDED SEPTEMBER 30, INCEPTION) TO
---------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
---------- ---------- ---------- ------------- THREE MONTHS ENDED MAY 8, 1992
DECEMBER 31, (DATE OF
------------------------ INCEPTION)
1995 1996 TO DECEMBER
----------- ----------- 31,
1996
(UNAUDITED) (UNAUDITED) ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $(6,035,725) $(2,875,467) $(5,483,804) $(20,157,834) $(986,098) $(955,177) ($21,113,011)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 289,340 262,263 292,086 1,041,754 68,967 73,662 1,115,416
Gain on sale of equipment.... -- -- (23,247) (23,247) -- -- (23,247)
Noncash expense for anti-
dilution stock issuances... -- 376,680 -- 376,680 -- -- 376,680
Changes in operating assets
and liabilities:
Notes receivable officers,
net...................... (66,146) (16,638) 159,089 (59,645) 19,806 (50,000) (109,645)
Accounts receivable........ -- (193,898) 18,400 (175,498) -- (500,000) (675,498)
Accounts
receivable--parent....... -- (131,600) 131,600 -- 34,610 -- --
Prepaid expenses and other
current assets........... 7,000 (19,618) (98,209) (120,827) (13,537) (89,860) (210,687)
Accounts payable........... 59,847 59,490 87,998 320,654 6,860 (47,601) 273,053
Accrued expenses........... 274,529 664,324 17,897 1,361,615 (210,776) 127,798 1,489,413
Accrued interest--parent... 603,581 261,350 119,617 1,252,552 10,644 110,736 1,363,288
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash used in operating
activities................. (4,867,574) (1,613,114) (4,778,573) (16,183,796) (1,069,524) (1,330,442) (17,514,238)
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash flows from investing
activities:
Purchase of property and
equipment.................... (294,623) (154,814) (83,467) (1,487,617) (31,908) (294,178) (1,781,795)
Proceeds from sale of
equipment.................... -- -- 54,000 54,000 -- -- 54,000
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash used in investing
activities................. (294,623) (154,814) (29,467) (1,433,617) (31,908) (294,178) (1,727,795)
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from note payable--
parent....................... 4,570,771 1,041,972 3,362,369 14,857,534 -- 1,862,575 16,720,109
Proceeds from convertible
debenture--parent............ -- 436,740 -- 436,740 -- -- 436,740
Proceeds from issuance of
stock, net................... -- 1,560,431 420,250 1,988,594 101 -- 1,988,594
Proceeds from sale leaseback... 662,602 87,771 117,325 867,698 -- -- 867,698
Principal payments on capital
lease obligation............. (72,719) (194,787) (243,332) (510,838) (51,354) (62,826) (573,664)
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash provided by (used in)
financing activities....... 5,160,654 2,932,127 3,656,612 17,639,728 (51,253) 1,799,749 19,439,477
---------- ---------- ---------- ------------- ----------- ----------- ------------
Net (decrease) increase in
cash and cash
equivalents................ (1,543) 1,164,199 (1,151,428) 22,315 (1,152,685) 175,129 197,444
Cash and cash equivalents,
beginning of period............ 11,087 9,544 1,173,743 -- 1,173,743 22,315 --
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash and cash equivalents,
end of period.............. $ 9,544 $1,173,743 $ 22,315 $ 22,315 $ 21,058 $ 197,444 $ 197,444
---------- ---------- ---------- ------------- ----------- ----------- ------------
---------- ---------- ---------- ------------- ----------- ----------- ------------
Supplemental disclosure of cash
flow information:
Cash paid for interest, net.... $ 22,937 $ 84,265 $ 59,087 $ 166,289
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Supplemental schedule of noncash
investing and financing
activities:
</TABLE>
In 1995, the parent company converted debt of $11,495,165 and accrued
interest of $1,132,935 into 2,020,496 shares of Series A preferred stock
(see Note 9). In 1996, the Company purchased fixed assets with accounts
payable in the amount of $126,261. As of September 30, 1996, the amount
was included in accounts payable.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. ORGANIZATION: Progenitor, Inc. (the "Company"), a Delaware Corporation,
is a functional genomics company engaged in the discovery and functional
characterization of genes to identify therapeutic targets for the treatment of
major diseases.
B. BASIS OF PRESENTATION: The accompanying financial statements have been
prepared on a going-concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
During the year ended September 30, 1996, the Company arranged for the
financing of its operating activities by borrowing approximately $3,443,000 from
its parent company, Interneuron Pharmaceuticals, Inc. ("Interneuron"), by
raising approximately $420,000 from the issuance of common stock, and receiving
approximately $1,250,000 from government grants and licensing fees. Significant
additional research and development activities, clinical testing, and regulatory
approvals must be completed before commercial sales, if any, will commence. The
Company is actively pursuing research and development grants and negotiating
equity and corporate partnership arrangements to fund its research and
development activities.
C. PROPERTY AND EQUIPMENT: Depreciation is computed using the
straight-line method over the estimated useful lives of the depreciable assets.
Equipment leased under capital leases is amortized using the straight-line
method over the lease term. Maintenance and repairs are charged to expense as
incurred, while renewals and improvements are capitalized. The asset cost and
accumulated depreciation is removed for assets sold or retired, and any
resulting gain or loss is reflected in the statement of operations. Equipment
includes $795,743 and $865,540 of equipment under capital lease and accumulated
amortization of $298,741 and $516,551 as of September 30, 1995 and 1996,
respectively.
D. REVENUE RECOGNITION: The Company recognizes revenue under strategic
alliances as certain agreed upon milestones are achieved or license fees are
earned.
E. RESEARCH AND DEVELOPMENT COSTS: All costs related to research and
development are expensed as incurred.
F. CASH AND CASH EQUIVALENTS: For purposes of the statements of cash
flows, cash and cash equivalents consist of cash in banks, highly liquid debt
instruments and money market funds with original maturities of three months or
less.
G. INTERIM FINANCIAL STATEMENTS (UNAUDITED): The interim financial
statements reflect all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of the Company's management, necessary for a
fair presentation of the financial position and results of operations for the
periods presented. Revenues and expenses for any interim period are not
necessarily indicative of results for a full year.
H. RECLASSIFICATIONS: Certain reclassifications have been made to the
prior year's financial statements to conform to the current year presentation.
I. 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 reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
J. STOCK SPLIT: In May 1996, the Board of Directors authorized a 1-for-2
reverse stock split on Class A common shares effective prior to the effective
date of an initial public offering ("Offering"). All references to Class A
common shares, underlying stock options, warrants and per share data have been
restated to reflect the reverse stock split.
K. NET LOSS PER SHARE:
HISTORICAL
Net loss per share is computed using the weighted average number of
shares of common shares outstanding. Common equivalent shares from stock options
and warrants are excluded from the computation as their effect is anti-dilutive,
except that, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin, common and common equivalent shares issued at prices below the
anticipated Offering price during the 12 months immediately preceding the filing
date of an Offering have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method and the
anticipated Offering price).
The following table depicts the net loss per share and the shares used in
computing net loss per share on a historical basis:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
THREE MONTHS ENDED
DECEMBER 31
--------------------------
1995 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss per share......................... $ (1.97) $ (0.95) $ (1.79) $ (0.33) $ (.31)
Shares used in computing net loss per
share...................................... 3,057,396 3,016,817 3,065,795 3,027,999 3,091,507
</TABLE>
SUPPLEMENTAL (UNAUDITED)
Supplemental unaudited net loss per share is based upon the historical
net loss per share adjusted for (i) the automatic conversion of all outstanding
shares of preferred stock into common stock upon closing of an Offering (ii) the
conversion of a convertible debenture and a portion of the promissory note held
by Interneuron into common stock upon closing of an Offering and (iii) the
issuance of additional shares of common stock to The Ohio University Foundation
in connection with anti-dilution provisions pursuant to a stock purchase right.
All conversions were made assuming an Offering price of $11.00 per share.
2. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Sponsored research - Ohio University.............................. $ 298,641 $ 342,506
Sponsored research - other........................................ 140,153 199,853
Chiron Corporation................................................ 701,296 --
Initial public offering expenses.................................. -- 249,363
Accrued license fees.............................................. -- 112,883
Other............................................................. 203,628 457,010
------------ ------------
$ 1,343,718 $ 1,361,615
------------ ------------
------------ ------------
</TABLE>
F-8
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES:
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of September 30,
1996, net deferred tax assets totaled approximately $7,988,000 on total net
operating loss carryforwards of approximately $18,425,000 and tax credits of
approximately $618,000 that expire on various dates through 2010. Due to the
uncertainty surrounding the realization of these favorable tax attributes in
future tax returns, all of the net deferred tax assets have been fully offset by
a valuation allowance.
4. STOCK OPTIONS AND WARRANTS:
A. STOCK OPTIONS: Under the Company's Stock Option Plan adopted in 1992,
incentive stock options and nonqualified stock options may be granted. The
number of common shares authorized and reserved for issuance is 500,000. The
outstanding options vest over a period of three to four years. As of September
30, 1995 and 1996, stock options covering 81,695 and 116,042 shares were
exercisable, respectively. Options granted to stockholders with 10% or greater
ownership expire after five years; all other options expire after 10 years.
In May 1996, the Company adopted the 1996 Stock Incentive Plan (the "Plan").
The number of common shares authorized and available for issuance is 850,000.
Under the Plan, incentive stock options, nonqualified stock options, stock
appreciation rights and stock grants may be granted.
Stock option activity is summarized below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OPTION PRICE
----------- -------------
<S> <C> <C>
Outstanding at September 30, 1993.................................. 104,450 $ 0.20-$4.00
Granted.......................................................... 75,875 4.00
Forfeited........................................................ (1,700) 0.20-4.00
-----------
Outstanding at September 30, 1994.................................. 178,625 0.20-4.00
Granted.......................................................... 192,250 4.00-6.00
Forfeited........................................................ (20,472) 0.20-4.00
Exercised........................................................ (1,500) 0.20
-----------
Outstanding at September 30, 1995.................................. 348,903 0.20-6.00
Granted.......................................................... 432,250 6.00-9.00
Forfeited........................................................ (55,353) 0.20-6.00
Exercised........................................................ (38,300) 0.20-6.00
-----------
Outstanding at September 30, 1996.................................. 687,500 $ 0.20-$9.00
-----------
-----------
</TABLE>
In May 1996, the Company amended the terms of stock options covering 80,000
shares by changing the vesting period to three years and stock options covering
12,500 shares by changing the vesting period to four years.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which changes the measurement, recognition and
disclosure standards for stock-based compensation. The Company will adopt the
disclosure requirements of SFAS No. 123 in fiscal year 1997, but will elect to
continue to measure compensation cost following present accounting rules.
In December 1996, the Company cancelled all stock options with exercise
prices of $5.50 or more (stock options covering 581,750 shares) and regranted an
equal number of stock options with an exercise price of $5.50, the estimated
fair value at the time of the regrant.
F-9
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTIONS AND WARRANTS: (CONTINUED)
B. WARRANTS: In June 1995, the Company issued to designees of an affiliate
of the parent company, warrants to purchase a total of 34,901 shares of Series B
convertible preferred stock. The warrants were issued in conjunction with the
private placement offering discussed in Note 8. The warrants are exercisable at
a price of $6.875 per share and expire on the earlier of (i) five years from an
Offering of the Company's common stock, or (ii) June 30, 2005. The Company paid
the affiliate approximately $129,000 as its share of placement agent fees.
5. COMMITMENTS:
The Company has entered into various operating leases for furniture,
fixtures, and equipment which expire through the year 2000.
In April 1994, the Company entered into a sale-lease back equipment lease
financing agreement with a leasing company providing for funding of up to an
aggregate of $2.2 million for equipment purchased prior to September 30, 1996.
During the year ended September 30, 1994, the Company recorded and deferred a
loss on the leased assets of $45,370, which it is amortizing over the life of
the lease. The lease is being treated as a capital lease and is guaranteed by
Interneuron.
In November 1994, the Company entered into a one-year lease for laboratory
and administrative space that expired in December 1995. The lease provides for
monthly rental payments of approximately $11,700. The Company has extended the
lease through 1997. The minimum rental commitments under these agreements are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL LEASE
YEARS ENDING SEPTEMBER 30, LEASES OBLIGATION
- ------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
1997............................................................... $ 155,444 $ 291,921
1998............................................................... 11,909 67,081
1999............................................................... 10,331 32,983
2000............................................................... 3,444 --
---------- -------------
Total lease payments............................................... $ 181,128 391,985
----------
----------
Less amount representing interest.................................. (35,124)
-------------
Present value of future lease payments............................. 356,861
Less current portion............................................... (265,155)
-------------
Noncurrent portion of capital lease obligation..................... $ 91,706
-------------
-------------
</TABLE>
Rent expense approximated $140,000, $186,000 and $263,000 during 1994, 1995
and 1996, respectively, and $777,000 for the period May 8, 1992 (date of
inception) through September 30, 1996.
Subsequent to December 31, 1996, the Company entered into a commitment to
purchase $920,000 of equipment.
6. RELATED-PARTY TRANSACTIONS AND OTHER AGREEMENTS:
A. LOANS TO EXECUTIVES: Under employment agreements with certain
executives, the Company advanced loans to assist in purchasing new homes. As of
September 30, 1995, there were loans to three executives for a total of
$359,744. The first loan of $100,796 is interest-free, with $60,796 due upon the
earlier of April 1997 or the termination of the officer's employment. During
fiscal year 1996, $20,000 of this amount was forgiven at the approval of the
Board of Directors. An additional $10,000 of the remaining balance was forgiven
pursuant to a provision of the promissory note agreement. Of the $70,796 balance
remaining at September 30, 1996, $10,000 will be forgiven upon the completion of
a successful Offering of
F-10
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. RELATED-PARTY TRANSACTIONS AND OTHER AGREEMENTS: (CONTINUED)
the Company's common stock. The second loan of $182,500 bears interest at 7% per
annum, with $142,500 due upon the earlier of the sale of the officer's existing
home, June 1997, or termination of the officer's employment. During 1996, an
additional $25,000 was loaned to this executive. Effective May 1996, this
executive's employment with the Company terminated. Pursuant to the executive's
termination agreement with the Company, $120,000 of the balance of $242,850
(including $35,350 in accrued interest) was forgiven. Additionally, the Board of
Directors forgave $26,424 of the amount, and the remaining balance of $96,426
was repaid by the former executive prior to September 30, 1996. Loans totaling
$76,448 were made to a third executive during 1995. Of this amount, $21,448 is
non-interest-bearing and was repaid by the executive in May 1996. Additionally,
$21,295 (including accrued interest) of the remaining balance was forgiven
during fiscal year 1996 upon the achievement of specified milestones. The Board
of Directors also approved the forgiveness of $8,000 of this loan. The $31,292
balance remaining at September 30, 1996, includes accrued interest of
approximately $5,000 at a rate of 9% per annum.
The Company has recorded $141,000 and $42,000 as of September 30, 1995 and
1996, respectively, as a note receivable reserve in anticipation of the expected
forgiveness of certain remaining loan amounts.
B. CONSULTING AGREEMENTS: The Company has entered into various consulting
agreements which range from one to three years and are subject to renewals,
whereby outside consultants provide scientific advice and administrative
services to the Company. Payments to consultants made during 1994, 1995 and
1996, totaled approximately $309,000, $243,000 and $190,000, respectively, and
$1,104,000 for the period May 8, 1992 (date of inception) through September 30,
1996. Of these amounts, approximately $190,000, $177,000 and $112,000
represented payments to certain stockholders in 1994, 1995 and 1996,
respectively, and $819,000 for the period May 8, 1992 (date of inception)
through September 30, 1996.
C. LICENSE AND RESEARCH AGREEMENTS: The Company entered into a license
agreement and a sponsored research agreement with Ohio University in January
1992, certain terms of which were amended in October 1993. The license agreement
grants the Company the exclusive worldwide license to patent and other rights to
yolk sac stem cells and related technologies in exchange for royalties based on
sales. The research agreement requires the Company to fund specified minimum
levels of research and related expenses, as well as any additional costs
approved in advance by the Company.
In addition, the Company agreed to issue 5% of its equity to The Ohio
University Foundation and agreed to preserve this percentage ownership position
until the parent company's total investment in the Company is at least $10.0
million or the date of an Offering by the Company. The $10.0 million investment
was achieved during 1995, thus the percentage ownership position no longer needs
to be preserved. Until an Offering of the Company is consummated, The Ohio
University Foundation was entitled to increase its interest to 6.25% by
purchasing additional equity at a price equal to 50% of the Offering price of
common stock in any such Offering. This provision was canceled in February 1996,
at which time The Ohio University Foundation entered into a stock purchase
agreement with the Company pursuant to which The Ohio University Foundation
purchased 58,333 shares of common stock for $350,000 ($6.00 per share). If, upon
the consummation of an Offering, the Offering price is less than $12.00 per
share, additional shares of common stock will be issued until The Ohio
University Foundation has paid a maximum of 50% of the Offering price.
Additionally, a stock purchase right was issued to The Ohio University
Foundation to purchase 25,000 shares of the common stock at 50% of the Offering
price.
The license agreement also contains certain requirements related to the
management and operation of the Company, including the nomination of two
designees of The Ohio University Foundation to the Board of Directors of the
Company. The Castle Group, Ltd. ("Castle"), which is controlled by a former
director of the Company and a principal stockholder of Interneuron, has
unconditionally guaranteed to Ohio University the performance of the Company's
obligations under the license agreement until the
F-11
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. RELATED-PARTY TRANSACTIONS AND OTHER AGREEMENTS: (CONTINUED)
earlier of five years or an Offering by the Company. Certain employees of Castle
own common stock of the Company.
In April 1993, the Company entered into a second license agreement and a
sponsored research agreement with Ohio University pursuant to which the Company
agreed to fund research relating to the T7T7 gene delivery system, developing an
active cell membrane transport system. The license agreement grants the Company
the exclusive worldwide license to all patent and other rights derived from this
and related technologies in exchange for royalties based on sales.
In February 1994, the Company entered into a license agreement with Albert
Einstein College of Medicine of Yeshiva University ("AECOM"). The agreement
grants the Company the exclusive worldwide license to all patent and other
rights from research done on retroviral vectors by AECOM in exchange for a
license fee and royalties based on sales.
In September 1994, the Company entered into a license agreement with
Wisconsin Alumni Research Foundation ("WARF"). The agreement grants the Company
a nonexclusive license to certain patents developed by WARF in exchange for a
license fee, maintenance fees, and royalties based on sales.
In November 1994, the Company was awarded a competitive grant of $2.0
million through the Advanced Technology Program ("ATP") of the U.S. Department
of Commerce. The funds will be received over a three-year period commencing June
1, 1995. As of September 30, 1995 and 1996, the Company recorded revenue of
$258,532 and $751,064, respectively and a receivable of $193,898 and $175,498,
respectively, related to this grant.
In March 1995, the Company entered into a license and collaboration
agreement with Chiron Corporation ("Chiron"). As required by the agreement, an
initial cash payment of $2.5 million was paid by Chiron to the Company in April
1995 as a license fee and reimbursement of past research and development
expenses. In addition, the Company reimbursed Chiron the start-up manufacturing
costs incurred related to this agreement of $750,000 through September 30, 1996.
Chiron paid $500,000 to the Company in January 1996, for continued research
funding. The agreement also calls for future payments contingent upon the
achievement of certain milestones.
In May 1995, the Company entered into a sponsored research and license
agreement with Novo Nordisk through its subsidiary, ZymoGenetics, Inc. The
agreement calls for research and license fees to be paid to the Company,
contingent upon certain conditions and the meeting of certain milestones.
Additionally, the Company has entered into various sponsored research
agreements with varying terms up to two years in length. The total sponsored
research expense was $890,000, $601,103 and $544,079 for 1994, 1995 and 1996,
respectively, and $3,234,759 for the period from May 8, 1992 (date of inception)
through September 30, 1996. Payments to Ohio University for sponsored research
totaled $245,888, $398,064 and $108,624, for 1994, 1995 and 1996, respectively,
and $1,389,756 for the period May 8, 1992 (date of inception) through September
30, 1996. In addition, at September 30, 1996, the Company had commitments to
fund additional sponsored research of approximately $420,000.
7. COMMON STOCK:
The Company was authorized to issue two classes of shares of common stock,
designated Class A and Class B. Shares of the Company's Class B common stock
were convertible, at any time at the option of the holder, into shares of Class
A common stock. The conversion ratio was subject to adjustment based on several
factors, including the issuance of additional Class A shares.
Holders of Class B shares were entitled to pro rata dividend, liquidation,
and voting rights based on the number of Class A shares into which such Class B
shares were convertible. Class B shares were automatically converted to Class A
shares upon the receipt by the Company of capital contributions of
F-12
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK: (CONTINUED)
$10.0 million in aggregate amount from the date of incorporation. When this was
achieved in 1995, all Class B shares were converted into a total of 357,500
Class A common shares and the Class B shares were removed from the Company's
authorized shares.
8. PREFERRED STOCK:
In December 1994, the Company's Board of Directors approved the
authorization of 2,120,000 shares of Series A and 880,000 shares of Series B
preferred stock. These preferred shares are convertible into shares of Class A
common stock and have preferential rights in terms of dividends and liquidation
over common stock. Shares of preferred stock have voting rights equal to the
number of shares of their common stock equivalent.
Shares of Series A preferred stock are convertible, at any time at the
option of the holder, into shares of Class A common stock. The initial
conversion ratio is based on a Series A price of $6.25, subject to adjustment
based on several factors. Series A preferred shares are automatically converted
upon an Offering.
Through July 7, 1995, the Company has issued 349,000 shares of Series B
preferred stock in connection with private placements. These private placements
consisted of the sale of units, each unit consisting of shares of preferred
stock of the Company, shares of preferred stock of another subsidiary of
Interneuron, Transcell Technologies, Inc., and a put protection right from
Interneuron. The put protection right provides that on the third anniversary of
the final closing date of the private placement, the owner has the right to sell
to Interneuron a percentage of the preferred stock of the Company that is deemed
to be illiquid, as defined in the agreement. The Company received approximately
$1,560,000, net of offering costs, as its share of the proceeds from the private
placement. Shares of Series B preferred stock are convertible, at any time at
the option of the holder, into shares of Class A common stock. The initial
conversion ratio is based on a Series B price of $6.25, subject to adjustment
based on several factors. Series B preferred shares are automatically converted
upon an Offering.
Shares of authorized common stock have been reserved for the exercise of all
convertible preferred stock outstanding.
9. NOTE PAYABLE TO THE PARENT COMPANY:
The note payable to the parent company, Interneuron, bore interest at a rate
of 1% over the prime lending rate (7 3/4% prime plus 1% at September 30, 1994)
and was payable on demand. Periodic advances were made available under this note
at the discretion of Interneuron. In January 1995, the outstanding balance on
the note payable--parent of $11,495,165 and accrued interest of $1,132,935 was
converted into 2,020,496 shares of Series A preferred stock.
In March 1996, the Company entered into a promissory note with Interneuron,
bearing interest at a rate of 1% over the prime lending rate. The original
amount of this note was $525,473 and has increased to $3,443,050 as of September
30, 1996 which includes accrued interest of $80,680. The note is due on the
earlier of March 31, 2001, or the closing of an Offering.
Since the inception of the Company, Interneuron has paid for certain Company
expenses which were reimbursed by the Company at cost.
10. CONVERTIBLE DEBENTURE-PARENT:
In March 1995, the Company entered into a convertible debenture agreement
with Interneuron, at a rate of 1% over the prime lending rate. The prime lending
rate was 8.75% and 8.25% as of September 30, 1995 and 1996, respectively.
Principal and interest are due at the earlier of five years from the final
closing date or upon an Offering as defined in the agreement. The debenture is
convertible, at any time at the option of the holder, into shares of Class A
common stock. The conversion price is equal to the fair market
F-13
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
10. CONVERTIBLE DEBENTURE-PARENT: (CONTINUED)
value of the common stock at the time of the conversion. The debenture is
automatically converted upon an Offering. As of September 30, 1995 and 1996, the
outstanding convertible debenture balance included accrued interest of $20,121
and $59,058, respectively.
11. EMPLOYEE BENEFITS:
Employees of the Company are eligible to participate in the Interneuron
Pharmaceuticals, Inc. 401(k) Savings Plan under which employees may defer a
portion of their annual compensation. Company contributions to the 401(k)
Savings Plan may be made on a discretionary basis. As of September 30, 1996, no
Company contributions have been made.
12. NONRECURRING EXPENSE:
During fiscal 1996, the Company incurred $973,525 of costs related to an
Offering which was filed on a Form S-1 Registration Statement with the
Securities and Exchange Commission on June 6, 1996. Such costs were expensed in
accordance with accounting requirements during fiscal 1996.
13. SUBSEQUENT EVENTS:
In December 1996, the Company entered into a license agreement with Amgen
Inc. (Amgen). Progenitor recorded revenue of $500,000 in December, 1996, in
consideration for the licenses granted. The agreement also provides for a
license maintenance fee as well as milestone and royalty payments to be received
contingent upon the achievement of certain milestone driven events.
Additionally, in December 1996, the Company entered into a stock purchase
agreement with Amgen. Under the agreement, Amgen has committed to purchase $5.5
million of the Company's stock concurrently with the closing of the Offering,
with $4.5 million paid in cash and $1 million in the form of a non interest
bearing promissory note. The promissory note will become due in two payments,
with $500,000 due in December 1997, and $500,000 due in December 1998.
On February 14, 1997, the Company entered into an agreement to purchase
Mercator Genetics, Inc. ("Mercator") for approximately $22 million in common
stock (valued at a price per share equal to the price paid by the public in
connection with the Offering). The acquisition will occur simultaneously in
connection with an Offering of the Company. In addition, the Company will
provide additional bridge loan financing to Mercator in the form of a
Convertible Bridge Promissory Note in the aggregate amount of up to $6.6
million, funded in stages based upon a plan sufficient to meet the working
capital obligations of Mercator. The Convertible Bridge Promissory Note will
bear interest at a fixed rate of 10% per annum and would be payable on January
15, 1999, or on such earlier date as provided in the agreement. The Convertible
Bridge Promissory Note is convertible into Mercator's Series D Preferred Stock,
at the option of the Company, at a price of $1.34 per share, subject to certain
restrictions. Upon closing of an Offering, the bridge loan would become part of
the purchase price consideration for Mercator.
In connection with the Company's bridge financing to Mercator prior to the
closing of the acquisition, the Company has entered into a Bridge Line of Credit
Letter Agreement with Interneuron dated February 14, 1997, providing for loans
of up to an aggregate of $6.6 million pursuant to a promissory note (the
"Interneuron Bridge Loan"), secured by the Company's assets including its
security interest in the assets of Mercator pursuant to the Mercator Convertible
Bridge Promissory Note. The Interneuron Bridge Loan bears interest at a fixed
rate of 10% per annum and the outstanding principal and accrued interest will be
repaid at the earlier of (1) the closing of an Offering (to be repaid out of the
proceeds therefrom), or (2) January 15, 1999. The Interneuron Bridge Loan is
convertible, upon certain conditions and at the option of Interneuron, into
Progenitor Preferred Stock at a conversion price equal to the lessor of (i)
$6.25 per share or (ii) such lesser price per share at which the Company shall
issue any shares of any series of preferred stock of the Company, provided that
such conversion shall be in an amount representing not less than 10% of the
principal balance then outstanding.
F-14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Mercator Genetics, Inc.
We have audited the accompanying balance sheets of Mercator Genetics, Inc. (a
development stage company) as of December 31, 1995 and 1996, and the related
statements of operations, cash flows and statement of redeemable preferred
stock, common stock and accumulated deficit for each of the three years in the
period ended December 31, 1996 and for the period from inception (October 9,
1992) to December 31, 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 Mercator Genetics, Inc. (a
development stage company) at December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the period from inception (October 9, 1992) to
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. Management's plans as to these matters are also described in
Note 1. The 1996 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Palo Alto, California
February 14, 1997
F-15
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 1,446,222 $ 438,859
Short-term investments............................................................ 486,676 --
Current portion of notes receivable from officers................................. -- 174,606
Deferred interest expense......................................................... -- 750,000
Other current assets.............................................................. 115,460 241,416
------------- -------------
Total current assets................................................................ 2,048,358 1,604,881
Property and equipment, net......................................................... 1,150,657 1,316,377
Notes receivable from officers...................................................... 351,645 150,000
Other assets........................................................................ 22,165 12,165
------------- -------------
$ 3,572,825 $ 3,083,423
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 573,382 $ 670,683
Convertible notes payable......................................................... -- 2,250,000
Current portion of equipment financing obligations................................ 362,823 474,272
------------- -------------
Total current liabilities........................................................... 936,205 3,394,955
Long-term portion of equipment financing obligations................................ 969,279 685,874
Commitments and contingencies
Redeemable preferred stock, $0.001 par value, 20,474,251 shares authorized
(15,000,000 shares in 1995), issuable in series:
Redeemable Series A, 320,000 shares authorized, 301,500 shares issued and
outstanding -- amount paid in................................................... 3,015,000 3,015,000
Redeemable Series B, 3,254,800 shares authorized, 3,207,996 shares issued and
outstanding -- amount paid in................................................... 8,019,999 8,019,999
Redeemable Series C, 4,526,317 shares authorized (no shares in 1995), 4,526,317
shares issued and outstanding (no shares in 1995) -- amount paid in............. -- 4,526,319
Redeemable Series D, 12,373,134 shares authorized, no shares issued and
outstanding (no shares in 1995)................................................. -- --
Common stock, $0.001 par value, 27,000,000 shares authorized (25,000,000 shares in
1995):............................................................................
Shares issued and outstanding -- 174,056 (110,304 shares in 1995) -- amount paid
in.............................................................................. 33,671 42,861
Shares to be issued -- 51,884 (no shares in 1995) -- amount to be paid in......... -- 7,783
Deficit accumulated during the development stage.................................... (9,401,329) (16,609,368)
------------- -------------
$ 3,572,825 $ 3,083,423
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-16
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 9,
YEARS ENDED DECEMBER 31, 1992) TO
------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues............................................ $ -- $ 375,000 $ 500,000 $ 875,000
Operating costs and expenses:
Research and development.......................... 2,330,100 4,182,836 6,049,081 13,783,966
General and administrative........................ 638,200 1,524,386 1,592,840 3,935,914
------------- ------------- ------------- --------------
Total operating costs and expenses.................. 2,968,300 5,707,222 7,641,921 17,719,880
------------- ------------- ------------- --------------
Loss from operations................................ (2,968,300) (5,332,222) (7,141,921) (16,844,880)
Interest income..................................... 228,761 290,551 114,293 687,163
Interest expense.................................... (95,033) (155,640) (180,411) (451,651)
------------- ------------- ------------- --------------
Net loss............................................ $ (2,834,572) $ (5,197,311) $ (7,208,039) $ (16,609,368)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Net loss per share (Note 2)......................... $ (28.62) $ (48.70) $ (55.27)
------------- ------------- -------------
------------- ------------- -------------
Shares used in computing net loss per share (Note
2)................................................ 99,043 106,731 130,423
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes
F-17
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF REDEEMABLE PREFERRED STOCK, COMMON STOCK AND ACCUMULATED DEFICIT
PERIOD FROM INCEPTION (OCTOBER 9, 1992) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
------------------------------------------------------ DEFICIT
ACCUMULATED
SERIES A SERIES B SERIES C COMMON STOCK DURING THE
------------------ --------------- ----------------- ---------------- DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STAGE
--------- ------- ------- ------ --------- ------ -------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders at $0.20 per share in
March 1993 for cash.............. -- $ -- -- $ -- -- $ -- 84,000 1$6,800 $ --
Issuance of common stock to
scientific advisors at $0.20 per
share in March 1993 for cash..... -- -- -- -- -- -- 12,500 2,500 --
Issuance of common stock to an
employee at $0.20 per share in
March 1993 for cash.............. -- -- -- -- -- -- 2,000 400 --
Issuance of Series A redeemable
convertible preferred stock at
$10.00 per share in March 1993
for cash......................... 301,500 3,015,000 -- -- -- -- -- -- --
Net loss from inception (October 9,
1992) to December 31, 1993....... -- -- -- -- -- -- -- -- (1,369,446 )
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Balances at December 31, 1993...... 301,500 3,015,000 -- -- -- -- 98,500 19,700 (1,369,446 )
Issuance of Series B redeemable
convertible preferred stock at
$2.50 per share in June 1994 for
cash............................. -- -- 3,207,996 8,019,999 -- -- -- -- --
Issuance of common stock upon
exercise of stock options for
cash at $0.50 to $1.00 per share,
net of repurchases at $0.50 per
share in May through September
1994............................. -- -- -- -- -- -- 850 800 --
Net loss........................... -- -- -- -- -- -- -- -- (2,834,572 )
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Balances at December 31, 1994...... 301,500 3,015,000 3,207,996 8,019,999 -- -- 99,350 20,500 (4,204,018 )
Issuance of common stock upon
exercise of stock options for
cash at $0.50 to $1.30 per share
in March through October 1995.... -- -- -- -- -- -- 10,954 13,171 --
Net loss........................... -- -- -- -- -- -- -- -- (5,197,311 )
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Balances at December 31, 1995...... 301,500 3,015,000 3,207,996 8,019,999 -- -- 110,304 33,671 (9,401,329 )
Issuance of Series C redeemable
convertible preferred stock at
$1.00 per share in April 1996 for
cash............................. -- -- -- -- 4,526,317 4,526,319 -- -- --
Issuance of common stock to
employees for services at $0.15
per share in September 1996...... -- -- -- -- -- -- 60,000 9,000 --
Issuance of common stock upon
exercise of stock options for
cash at $0.15 to $1.30 per share,
net of repurchases at $0.20 to
$1.30 per share in March through
December 1996.................... -- -- -- -- -- -- 3,752 190 --
Common stock to be issued at $0.15
per share for services........... -- -- -- -- -- -- 51,884 7,783 --
Net loss........................... -- -- -- -- -- -- -- -- (7,208,039 )
--------- ------- ------- ------ --------- ------ -------- ------ -----------
Balances at December 31, 1996...... 301,500 $3,015,000 3,207,996 $8,019,999 4,526,317 $4,526,319 225,940 5$0,644 $(16,609,368)
--------- ------- ------- ------ --------- ------ -------- ------ -----------
--------- ------- ------- ------ --------- ------ -------- ------ -----------
</TABLE>
See accompanying notes.
F-18
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 9,
YEARS ENDED DECEMBER 31, 1992) TO
------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss................................................... $ (2,834,572) $ (5,197,311) $ (7,208,039) $ (16,609,368)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 208,863 377,649 496,564 1,148,992
Stock to be issued for services.......................... -- -- 7,783 7,783
Stock issued to employees................................ -- -- 9,000 9,000
Changes in operating assets and liabilities:
Notes receivable from officers......................... (654,376) 302,731 27,039 (324,606)
Other current assets................................... (152,724) 88,058 (125,956) (241,416)
Other assets........................................... (15,600) 3,435 10,000 (12,165)
Accounts payable and accrued liabilities............... 143,213 305,338 97,301 670,683
------------- ------------- ------------- --------------
Net cash used in operating activities...................... (3,305,196) (4,120,100) (6,686,308) (15,351,097)
------------- ------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities................. (4,589,279) (4,871,197) -- (10,149,989)
Sales of available-for-sale securities..................... 689,513 489,967 -- 1,179,480
Maturities of available-for-sale securities................ 495,163 7,988,670 486,676 8,970,509
Capital expenditures....................................... (484,212) (674,247) (662,284) (2,465,369)
------------- ------------- ------------- --------------
Net cash (used in) provided by investing activities........ (3,888,815) 2,933,193 (175,608) (2,465,369)
------------- ------------- ------------- --------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of preferred stock.................. 8,019,999 -- 4,526,319 15,561,318
Proceeds from issuance of common stock..................... 800 13,171 190 33,861
Proceeds from convertible notes payable.................... -- -- 1,500,000 1,500,000
Principal payments of equipment financing obligations...... (118,657) (236,236) (372,481) (749,542)
Proceeds from equipment financings......................... 435,520 854,163 200,525 1,909,688
------------- ------------- ------------- --------------
Net cash provided by financing activities.................. 8,337,662 631,098 5,854,553 18,255,325
------------- ------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents....... 1,143,651 (555,809) (1,007,363) 438,859
Cash and cash equivalents at beginning of period........... 858,380 2,002,031 1,446,222 --
------------- ------------- ------------- --------------
Cash and cash equivalents at end of period................. $ 2,002,031 $ 1,446,222 $ 438,859 $ 438,859
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 95,033 $ 155,640 $ 180,411 $ 451,651
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
See accompanying notes.
F-19
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BASIS OF PRESENTATION
ORGANIZATION AND BUSINESS
Mercator Genetics, Inc. (the "Company" or "Mercator"), was incorporated in
the State of Delaware on October 9, 1992 to engage in the discovery and
development of therapeutics and diagnostics for genetic-based diseases through
the understanding of the genes involved in these diseases. The Company's
activities since incorporation have primarily consisted of establishing its
offices and research facilities, recruiting personnel, conducting research and
development, performing business and financial planning and raising capital.
Accordingly, the Company is considered to be in the development stage, and
expects to incur increasing losses and require additional financial resources to
achieve commercialization of its products.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. At December 31, 1996, cumulative
operating losses since inception amount to $16,609,368 and management
anticipates incurring additional losses for the next several years. The Company
is working on several long-term development projects which involve experimental
and unproven technology, which may require many years and substantial
expenditures to complete, and which may be unsuccessful. Therefore, the
Company's ability to continue as a going concern depends on its ability to raise
additional financing to meet its business plan objectives and, ultimately, to
fund its operations from revenues. Management believes that it will be able to
obtain additional funds through public or private equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources. If adequate funds are not available, the Company may be required to
reduce its level of spending or eliminate one or more of its research or
development programs or obtain funds through arrangements with corporate
partners or others which may require the Company to relinquish certain rights to
its technologies or product candidates.
From time to time, the Company may enter into licensing agreements with
third parties. To the extent the Company commercializes products using the
technology covered by the licenses, the Company may be required to pay royalties
on the revenue from these products.
ACCOUNTING 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. Actual
results could differ from these estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents; investments with
maturities between three and twelve months are considered to be short-term
investments.
The Company invests its excess cash primarily in deposits with banks and
short-term securities. These securities consist of money market instruments,
U.S. corporate securities and U.S. Treasury bills that mature or are redeemable
within 180 days and, therefore, bear minimal risk.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such determination as of each balance sheet
date. Through December 31, 1996, the Company has classified its entire
investment portfolio as available-for-sale. Available-for-sale securities are
carried at amortized cost which approximates fair value at December 31, 1995 and
1996. The estimated fair value
F-20
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts have been determined by the Company using available market information
and commonly used valuation methodologies. Management exercises judgment in
interpreting market data to develop the estimates of fair value.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary are included in interest income or expense. The cost of
securities sold is based on the specific identification method. Interest and
dividends are included in interest income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally four years. Leasehold improvements are amortized over the
lesser of the lease term or the estimated useful lives of the related assets
whichever is shorter.
REVENUE RECOGNITION
The Company recognizes revenues from research contracts as earned based upon
the performance requirements of the contracts.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). In accordance with the provisions of SFAS 123, the
Company measures stock-based compensation expense using the intrinsic-value
method as prescribed by Accounting Principle Board Opinion No. 25 and related
interpretations and, accordingly, recognizes no compensation expense for stock
option grants to employees and directors with an exercise price equal to the
fair-market value of the shares at the date of grant. Note 7 contains a summary
of the pro forma impact to the reported net loss for 1996 and 1995 on the basis
that the Company had elected to recognize compensation expense based on the
fair-value method as described in SFAS 123. There was no effect of adopting SFAS
123 on the Company's financial position or results of operations.
PER SHARE DATA
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares from stock
options, convertible preferred stock, convertible notes and warrants are
excluded from the computation as their effect is antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1994 and 1995
financial statements to conform with the fiscal 1996 presentation.
F-21
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. FINANCIAL INSTRUMENTS
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the amortized cost of available-for-sale
securities, which approximates fair value:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
------------ -----------
<S> <C> <C>
U.S. Treasury securities........................................... $ 486,676 $ --
Repurchase agreements.............................................. 132,000 480,000
U.S. corporate securities.......................................... 1,161,026 90,000
------------ -----------
Total.............................................................. $ 1,779,702 $ 570,000
------------ -----------
------------ -----------
Above amounts are included in the following:
Cash and cash equivalents........................................ $ 1,293,026 $ 570,000
Short-term investments........................................... 486,676 --
------------ -----------
Total.............................................................. $ 1,779,702 $ 570,000
------------ -----------
------------ -----------
Cash and cash equivalents:
Available-for-sale securities.................................... $ 1,293,026 $ 570,000
Cash and bank accounts........................................... 153,196 (131,141)
------------ -----------
Total cash and cash equivalents.................................... $ 1,446,222 $ 438,859
------------ -----------
------------ -----------
</TABLE>
As of December 31, 1996, the average duration of the portfolio is less than one
year and no individual contractual maturity exceeds one year. No material gains
or losses have been realized on the sale of available-for-sale securities.
EQUIPMENT FINANCING OBLIGATIONS
In August 1993, the Company entered into a $1,000,000 equipment lease line
of credit. In October 1994, the Company entered into a $2,000,000 equipment loan
agreement. The equipment lease line of credit and the equipment loan were
terminated in May 1996.
Included in property and equipment are assets with a cost of approximately
$1,666,000 and $1,851,000 at December 31, 1995 and 1996, respectively, acquired
pursuant to equipment financing obligations. These obligations have interest
rates ranging from 14% to 18%. The carrying value of the obligations
approximates fair value based on a discounted cash flow analysis using the
Company's incremental borrowing rate for similar obligations. Accumulated
amortization of assets acquired pursuant to these obligations was approximately
$634,000 and $1,065,000 at December 31, 1995 and 1996, respectively. Assets
acquired under these arrangements secure the related obligations.
F-22
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. FINANCIAL INSTRUMENTS (CONTINUED)
At December 31, 1996, the Company's aggregate future minimum payments under
such obligations, including 10% to 20% buyout options at maturity are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 609,210
1998............................................................................ 450,714
1999............................................................................ 312,829
2000............................................................................ 11,372
2001............................................................................ 5,555
------------
Total minimum payments.......................................................... 1,389,680
Less amount representing interest............................................... (229,534)
------------
Present value of minimum payments............................................... 1,160,146
Less current portion............................................................ (474,272)
------------
$ 685,874
------------
------------
</TABLE>
NOTES RECEIVABLE FROM OFFICERS
In November 1994, the Company loaned $650,000 to an officer of the Company.
The related note bears interest at 7.45% per annum and is secured by real
property. At December 31, 1996, subsequent to the officer's separation from the
Company, the remaining principal balance of the note of $162,500 and $12,106 of
related accrued interest was paid in January 1997.
In September 1995, the Company loaned $150,000 to an officer of the Company.
The related note bears interest at the lesser of 28.2% of the capital gain upon
the sale of the secured property or the Fannie Mae Rate, compounded annually and
so may be zero. As of December 31, 1996, no interest has been accrued on the
loan. The balance is due no later than the first anniversary of the officer's
termination from the Company.
CONVERTIBLE NOTES PAYABLE
In October and December, the Company entered into a bridge financing
agreement with its current investor group whereby the Company issued convertible
demand notes in the aggregate amount of $1,500,000. The intent of the parties
was that this financing was to bridge the Company to either a permanent equity
round of financing or a significant merger transaction with another company. In
lieu of a stated interest rate, the agreement provides that these notes are
convertible at the option of the holder at the time of the next equity
transaction at a price that reflects a discount from the indicated market price
at that time. The time frame for the next equity financing is uncertain and, as
such, the note conversion date is indeterminable. Incremental interest expense
inherent in the notes' discounted conversion feature, which is currently
deferred on the balance sheet, will be charged to operations when the notes
become convertible at the discounted rate. In connection with the merger
transaction discussed in Note 9, the investor group agreed to modify the bridge
financing agreement to eliminate their right to a discount on conversion in
connection with the proposed transaction.
F-23
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
------------ -------------
<S> <C> <C>
Laboratory equipment............................................. $ 1,401,228 $ 1,870,155
Office equipment, furniture and fixtures......................... 335,319 509,710
Leasehold improvements........................................... 66,538 85,504
------------ -------------
1,803,085 2,465,369
Less accumulated depreciation and amortization................... (652,428) (1,148,992)
------------ -------------
Property and equipment, net...................................... $ 1,150,657 $ 1,316,377
------------ -------------
------------ -------------
</TABLE>
5. FACILITY LEASE AND OTHER COMMITMENTS
In April 1995, the Company extended through September 1998 its facility
operating lease which originally expired in June 1995. At December 31, 1996,
future noncancelable minimum payments under the operating lease are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------------------------
<S> <C>
1997......................................................................... $ 214,800
1998......................................................................... 161,100
----------
Total minimum payments required................................................ $ 375,900
----------
----------
</TABLE>
The Company has the option to extend the lease for two years and to expand
the facilities leased for a 12-month term ending on September 30, 1999.
Rent expense was approximately $126,000, $135,000, $191,000 and $539,000 for
the years ended December 31, 1994, 1995 and 1996 and for the period from
inception (October 9, 1992) to December 31, 1996, respectively.
The Company sponsors research programs and blood sample collection services
at universities and other research institutions from time to time. The amounts
incurred on the contracted research programs for the years ended December 31,
1995 and 1996, and for the period from inception (October 3, 1992) to December
31, 1996 were approximately $60,000, $1,069,000 and $1,129,000, respectively
(none in 1994). At December 31, 1996, the Company has committed to fund
approximately $887,000 in 1997.
6. RESEARCH COLLABORATION AND LICENSE AGREEMENT
During fiscal 1995, the Company commenced efforts under a research
collaboration and license agreement with Agene Research Institute ("Agene"), in
which Agene agreed to fund certain research and development efforts in the area
of aging in an amount of $1 million over a two-year period through April 1997.
Revenue recognized under the agreement was $375,000 and $500,000 for the years
ended December 31, 1995 and 1996, respectively (none in 1994). Costs incurred
under this agreement of approximately $170,000 and $298,000 for the years ended
December 31, 1995 and 1996, respectively (none in 1994) are included in research
and development expenses. On December 27, 1996, the agreement and associated
research was terminated by mutual agreement between the two parties.
F-24
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED AND COMMON STOCK
REDEEMABLE PREFERRED STOCK
On April 3, 1996, the Company's stockholders' approved a 5.2-for-one split
of Series B preferred stock. On May 30, 1996, the Company's board of directors
approved a one-for-10 reverse stock split of the outstanding shares of the
Company's common and preferred stock. The share and per share amounts included
in these financial statements are presented on a post-split basis and have been
adjusted to reflect these stock splits.
Series A, B, C and D preferred stockholders are entitled to noncumulative
dividends at an annual rate of $0.70, $0.18, $0.07 and $0.09 per share,
respectively. Dividends will be paid only when declared by the board of
directors out of legally available funds. No dividends have been declared as of
December 31, 1996.
At any time after October 31, 2001 for Series A, B, C and D preferred stock,
upon receipt of the consent of holders of at least 50% of the outstanding shares
of the series of preferred stock, the Company is required to redeem all shares
of the series of preferred stock at $10.00, $2.50, $1.00 and $1.34 per share for
Series A, B, C and D, respectively, plus all declared but unpaid dividends. If
the Company has insufficient funds to redeem all such shares, redemption using
all funds legally available shall be done pro rata among such series of
preferred stockholders based on the number of such shares held at that date.
Series D preferred stockholders are entitled to receive, upon liquidation, a
distribution of $1.34 per share (subject to adjustment for a recapitalization)
plus all declared but unpaid dividends. After payment of the full liquidation
preference of the Series D stockholders, the Series C preferred stockholders are
entitled to receive, upon liquidation, a distribution of $1.00 per share
(subject to adjustment for a recapitalization) plus all declared but unpaid
dividends.
After payment of the full liquidation preference of the Series C and D
stockholders, the Series A and B preferred stockholders are entitled to receive,
upon liquidation, a distribution of $10.00 and $2.50 per share, respectively
(subject to adjustment for a recapitalization) plus all declared but unpaid
dividends. Thereafter, the remaining assets and funds, if any, shall be
distributed among the Series A, B, C and D preferred and common stockholders,
pro rata on an as-converted basis. If, upon liquidation, the assets and funds
distributed among the Series A and B preferred stockholders are insufficient to
permit the entitled payment, the entire assets and funds of the Company legally
available for distribution shall be distributed among these stockholders in
proportion to the relative liquidation rights of each such series.
Each share of Series A, B, C and D preferred stock is, at the option of the
holder, convertible into shares of common stock on a one-for-one basis, subject
to certain adjustments for dilution, if any, resulting from future stock
issuances. Upon the approval of the holders of at least 66 2/3% of the
outstanding shares of each series of preferred stock, the preferred shares will
automatically convert into common stock. Additionally, the preferred shares
automatically convert into common stock concurrent with the closing of an
underwritten public offering of common stock under the Securities Act of 1933 in
which the Company receives at least $10,000,000 in gross proceeds and the price
per share is at least $4.00 (subject to adjustment for a recapitalization or
certain other stock adjustments).
The Series A, B, C and D preferred stockholders have voting rights equal to
the common shares they would own upon conversion.
F-25
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
COMMON STOCK
The Company has issued 174,056 common shares to the founders, advisors and
employees of the Company, of which certain shares are subject to repurchase
rights which generally expire ratably over four years from the date of issuance.
At December 31, 1996, there were 4,812 shares subject to repurchase.
Included in the common shares outstanding at December 31, 1996 are 84,000
shares of founders common stock. Under a co-sale agreement, which was amended in
April 1996, if any founder proposes to sell or transfer any shares of founders
common stock, holders of Series A, B, C and D redeemable convertible preferred
stock shall have the right to participate as a seller in such sale on the same
terms and conditions offered to the founder.
At December 31, 1996, the Company has reserved a total of 12,083,555 shares
of common stock: 195,500 for issuance under the 1993 Stock Option Plan,
3,787,592 for issuance under the 1996 Stock Option Plan, 319,350, 3,254,796 and
4,526,317 for issuance upon conversion of the Series A, B and C preferred stock
and warrants, respectively.
STOCK OPTION PLANS
The 1993 Stock Option Plan was adopted in July 1993, with subsequent
amendments in November 1993 and December 1994, and provides for the issuance of
options for up to 208,000 shares of common stock to employees, consultants and
directors.
During 1996, the Company's board of directors approved the adoption of the
1996 Stock Option Plan with terms and conditions the same as those of the 1993
Stock Option Plan (collectively, the "Plans"). The 1996 Stock Option Plan
provides for the issuance of options for up to 3,792,000 shares of common stock
to employees, consultants and directors.
Stock options granted under the Plans may be either incentive stock options
or nonqualified stock options. Incentive stock options may be granted to
employees with exercise prices of no less than the fair value and nonqualified
options may be granted to employees, directors or consultants at exercise prices
of no less than 85% of the fair value of the common stock on the grant date, as
determined by the board of directors. If, at the time the Company grants an
option, the optionee directly or by attribution owns stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
the option price shall be at least 110% of the fair value and shall not be
exercisable more than five years after the date of grant. The options expire no
more than 10 years after the date of grant or earlier if employment or
relationship as director or consultant is terminated. The board of directors
shall determine the times during the term when the options may be exercised and
the number of shares for which an option may be granted. Options may be granted
with different vesting terms from time to time but will provide for vesting of
at least 20% of the total number of shares subject to the option per year. The
options may include provisions to exercise the option prior to full vesting. Any
unvested shares so purchased shall be subject to repurchase by the Company at
the original exercise price of the option. Such repurchase rights shall lapse at
a minimum rate of 20% per year over five years from the date the option was
granted.
On August 9, 1996, the Company granted options under both the 1993 and 1996
plans to purchase 1,406,739 shares of the Company's common stock to founders,
advisors and employees. These founders, advisors and employees held options
granted prior to the issuance of the Company's Series C preferred stock. The new
options vest over the remaining vesting period of the original options.
Generally, options vest over a four-year period.
F-26
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
A summary of 1993 Stock Option Plan activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
-------------------------------------------------------
WEIGHTED AGGREGATE
NUMBER OF EXERCISE AVERAGE PURCHASE
SHARES PRICE EXERCISE PRICE PRICE
----------- ------------- --------------- ----------
<S> <C> <C> <C> <C>
Options granted................................ 14,642 $0.50-$1.00 $ $ 10,071
Options canceled............................... (2,200) 0.50- 1.00 (1,200)
----------- ------------- ----- ----------
Balance at December 31, 1993..................... 12,442 0.50- 1.00 8,871
Options exercised.............................. (1,000) 0.50- 1.00 (875)
Options granted................................ 116,369 1.00- 1.30 149,735
Options canceled............................... (150) 0.50 (75)
----------- ------------- ----- ----------
Balance at December 31, 1994..................... 127,661 0.50- 1.30 1.23 157,656
Options exercised.............................. (10,954) 0.50- 1.30 1.20 (13,171)
Options granted................................ 75,050 1.30 1.30 97,565
Options canceled............................... (70,605) 0.50- 1.30 1.30 (91,718)
----------- ------------- ----- ----------
Balance at December 31, 1995..................... 121,152 0.50- 1.30 1.24 150,332
Options exercised.............................. (546) 0.15- 1.30 0.29 (160)
Options granted................................ 19,150 0.15- 1.30 0.68 12,993
Options canceled............................... (57,069) 0.15- 1.30 1.07 (61,237)
----------- ------------- ----- ----------
Balance at December 31, 1996..................... 82,687 $0.50-$1.30 $ 1.23 $ 101,928
----------- ------------- ----- ----------
----------- ------------- ----- ----------
</TABLE>
A summary of 1996 Stock Option Plan activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
------------------------------------------------------------
WEIGHTED AGGREGATE
NUMBER OF AVERAGE PURCHASE
SHARES EXERCISE PRICE EXERCISE PRICE PRICE
---------- --------------- ------------------- ----------
<S> <C> <C> <C> <C>
Options granted........................... 2,726,495 $ 0.15 $ 0.15 $ 408,974
Options exercised......................... (4,408) 0.15 0.15 (661)
Options canceled.......................... (13,605) 0.15 0.15 (2,041)
---------- ----- ----- ----------
Balance at December 31, 1996................ 2,708,482 $ 0.15 $ 0.15 $ 406,272
---------- ----- ----- ----------
---------- ----- ----- ----------
</TABLE>
At December 31, 1996, outstanding options for 1,343,517 shares were
exercisable at a weighted average price of $0.18. Shares of common stock
available for future grants under the 1993 and 1996 Stock Option Plans are
112,813 and 1,079,110, respectively. The weighted average remaining contractual
life of options outstanding at December 31, 1996 is 9.58 years.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, computed as if the Company had accounted for its employee stock
options granted or otherwise modified subsequent to December 31, 1994 under the
fair-value-based accounting method of that Statement. The value for these
F-27
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
options was estimated at the date of grant using the minimum-value method with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Expected dividend yield..................................................... 0.00% 0.00%
Risk-free interest rate..................................................... 6.15% 6.29%
Expected life............................................................... 5.36 years 3.96 years
</TABLE>
The weighted average fair value of options granted in 1995 and 1996 was
$0.35 and $0.03 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
effect of applying SFAS 123 was not material to the Company's reported net loss
or loss per share in 1995 or 1996. Because Statement 123 is applicable only to
options granted subsequent to December 31, 1994, its pro forma effect will not
be fully reflected until 1999.
WARRANTS
In August 1993, in connection with a lease line, the Company issued a
warrant that entitles the holder to purchase 17,850 shares of Series A preferred
stock at an exercise price of $2.80 per share on or before August 31, 2003. In
October 1994, in connection with the equipment loan agreement, the Company
issued a warrant that entitles the holder to purchase 46,800 shares of Series B
preferred stock at an exercise price of $2.50 per share on or before October 28,
2004. The warrants are subject to acceleration upon the occurrence of certain
events. Both warrants were outstanding at December 31, 1996. The Company has
reserved 17,850 shares of Series A preferred stock and 46,800 shares of Series B
preferred stock for issuance under the stock warrants.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes are as
follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................ $ 600,000 $ 1,500,000
Research credits........................................................ 400,000 600,000
Capitalized research and development costs.............................. 2,900,000 4,700,000
------------- -------------
3,900,000 6,800,000
Valuation allowance....................................................... (3,900,000) (6,800,000)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets at December 31,
1995 and 1996 has been established to reflect these uncertainties. The change in
the valuation allowance was a net increase of $1,200,000, $2,200,000 and
$2,900,000 for the years ended 1994, 1995 and 1996, respectively.
F-28
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $3,800,000. The net operating loss carryforwards
will expire at various dates through 2011, if not utilized. Utilization of the
net operating losses may be subject to a substantial annual limitation due to
the "change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
net operating losses before utilization.
9. SUBSEQUENT EVENTS
On February 14, 1997, the Company entered into an agreement and plan of
reorganization with Progenitor, Inc. ("Progenitor") whereby Progenitor may
purchase the Company through July 31, 1997. The acquisition will occur
simultaneously with the completion of Progenitor's initial public offering
("IPO"). If the IPO is not completed, Progenitor is under no obligation to
purchase Mercator. To support Mercator's research prior to the effective date,
Mercator will receive up to $6.6 million in a convertible bridge promissory note
from Progenitor. The bridge note will bear interest at a fixed rate of 10% per
annum and is payable on January 15, 1999 subject to earlier repayment on a
change of control of the Company. The bridge note is convertible into Mercator's
Series D preferred stock at the option of Progenitor under certain circumstances
at a price of $1.34 per share. In order to provide funding to Progenitor for the
bridge financing, Interneuron Pharmaceuticals, Inc. has agreed to provide
Progenitor a line of credit of up to an aggregate maximum amount of $6.6
million.
If the acquisition becomes effective as contemplated, the principal amount
of Mercator's convertible notes payable as of December 31, 1996 of $1,500,000
will convert into Mercator Series D preferred stock at a price of $1.34 per
share, and Mercator's preferred and common stockholders together with Mercator's
outstanding options and warrant holders will receive approximately $22 million
of Progenitor common stock or options or warrants to purchase Progenitor common
stock (valued at a price per share equal to the price paid by the public in
Progenitor's IPO). Alternatively, Progenitor has the option to consummate the
acquisition through the payment of the purchase price in cash, or prior to the
IPO date, in unregistered shares of Progenitor's capital stock or in shares of
another public company on terms to be agreed upon between the parties. The
purchase price will be allocated to the preferred and common stockholders and
outstanding warrant and option holders on a basis specified in the agreement.
The replacement options and warrants to purchase Progenitor common stock will be
subject to similar terms and conditions as were applicable to the original
options and warrants.
F-29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 20
Dividend Policy........................................................... 21
Capitalization............................................................ 22
Dilution.................................................................. 23
Unaudited Pro Forma Financial Statements.................................. 25
Progenitor Selected Historical Financial Data............................. 31
Mercator Selected Historical Financial Data............................... 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 33
Business.................................................................. 38
Management................................................................ 59
Certain Transactions...................................................... 75
Principal Stockholders.................................................... 81
Description of Capital Stock.............................................. 84
Shares Eligible for Future Sale........................................... 89
Underwriting.............................................................. 91
Legal Matters............................................................. 93
Experts................................................................... 93
Additional Information.................................................... 93
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,750,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
, 1997
------------------------
LEHMAN BROTHERS
GENESIS MERCHANT GROUP
SECURITIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates except
for the SEC registration fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 13,933
NASD Filing Fee................................................... 4,295
Nasdaq National Market Listing Fee................................ 44,038
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Transfer agent and registrar fees................................. *
Miscellaneous..................................................... *
---------
Total......................................................... $ 950,000
---------
---------
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 ("Section 145") of the Delaware General Corporation Law ("DGCL")
provides a detailed statutory framework covering indemnification of officers and
directors against liabilities and expenses arising out of legal proceedings
brought against them by reason of their being or having been directors or
officers. Section 145 generally provides that a director or officer of a
corporation (i) shall be indemnified by the corporation for all expenses of such
legal proceedings when he is successful on the merits, (ii) may be indemnified
by the corporation for the expenses, judgments, fines and amounts paid in
settlement of such proceedings (other than a derivative suit), even if he is not
successful on the merits, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, and (iii) may be
indemnified by the corporation for the expenses of a derivative suit (a suit by
a stockholder alleging a breach by a director or officer of a duty owed to the
corporation), even if he is not successful on the merits, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. No indemnification may be made under clause (iii)
above, however, if the director or officer is adjudged liable for negligence or
misconduct in the performance of his duties to the corporation, unless a
corporation determines that, despite such adjudication, but in view of all the
circumstances, he is entitled to indemnification. The indemnification described
in clauses (ii) and (iii) above may be made only upon a determination that
indemnification is proper because the applicable standard of conduct has been
met. Such a determination may be made by a majority of a quorum of disinterested
directors, independent legal counsel, the stockholders or a court of competent
jurisdiction. The Certificate of Incorporation and Bylaws of the Registrant
provides that the Registrant shall indemnify to the fullest extent permitted by
Section 145, as it now exists or as amended, all persons whom it may indemnify
pursuant thereto.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
Certificate of Incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit. The
II-1
<PAGE>
Certificate of Incorporation and Bylaws of the Registrant provides for the
elimination of personal liability of a director for breach of fiduciary duty, as
permitted by Section 102(b)(7) of the DGCL.
Section 7 of the Form of Underwriting Agreement, filed as Exhibit 1.1
hereto, contains certain provisions relating to indemnification.
Prior to the closing of the Offering, the Company intends to obtain
liability insurance insuring the Company's officers and directors against
liabilities that they may incur in such capacities.
The Registrant has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in its charter
documents. These agreements, among other things, provide for the indemnification
of the Registrant's directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of the Registrant, arising out of such person's services as a director or
executive officer of the Registrant, any subsidiary of the Registrant or any
other company or enterprise to which such person provides services at the
request of the Registrant to the fullest extent permitted by applicable law. The
Registrant believes that these provisions and agreements will assist it in
attracting and retaining qualified persons to serve as directors and executive
officers.
The Investors' Agreements provide for cross-indemnification of stockholders
of the Company whose shares with registration rights are included in a
registration under the Securities Act, and of the Company, its officers and
directors for certain liabilities arising in connection with such registration.
See also the undertakings set out in response to Item 17 herein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1993, the Registrant has issued and sold the following
unregistered securities:
(1) In 1993, the Registrant (a) sold 82,907 shares of Common Stock to Dr.
Given for $0.02 per share pursuant to the terms of his employment
agreement, (b) issued 11,400 shares of Common Stock to The Ohio
University Foundation without additional consideration pursuant to
certain antidilution rights contained in a stock purchase agreement with
the Registrant and (c) issued a certificate for 14,854 shares of Common
Stock to Dr. Cooper in exchange for certificates for 89,121 shares of
Common Stock pursuant to a repurchase of Common Stock in connection with
the termination of Dr. Cooper's employment agreement with the Registrant.
(2) In 1994, the Registrant (a) issued 178,750 shares of Common Stock to Dr.
Thomas Wagner upon the conversion of the shares of Class B Common Stock
held by Dr. Wagner and (b) issued 40,353 shares of Common Stock to The
Ohio University Foundation without additional consideration pursuant to
certain antidilution rights contained in a stock purchase agreement with
the Registrant.
(3) Between December 1994 and July 1995, the Registrant issued and sold an
aggregate of 349,000 shares of Series B Preferred Stock to certain
persons and entities for $4.48 per share. In connection with such
transaction, the Registrant issued warrants to purchase 22,627 shares of
Series B Preferred Stock to designees of Paramount Capital, Inc., the
placement agent for such transaction, and warrants to purchase 12,274
shares of Series B Preferred Stock to designees of D.H. Blair & Co.,
Inc., selected dealer for such transaction, pursuant to rights of such
entities under agreements with the Registrant.
(4) In December 1994, upon the initial closing of the issuance and sale of
Series B Preferred Stock described in paragraph (3) above, in exchange
for the cancellation of an aggregate of approximately $12.6 million of
debt owed by the Registrant to Interneuron, the Registrant issued and
sold 2,020,496 shares of Series A Preferred Stock to Interneuron for
$6.25 per share.
(5) In 1996, the Registrant issued (a) 58,333 shares of Common Stock to The
Ohio University Foundation pursuant to a Stock Purchase Agreement dated
as of February 26, 1996, for $6.00 per share, (b) issued and sold 6,625
shares of Common Stock for $0.20 per share to certain former
II-2
<PAGE>
employees pursuant to the exercise of stock options granted under the
1992 Stock Option Plan and (c) issued and sold 50 shares of Common Stock
for $2.00 per share to a former employee pursuant to the exercise of
stock options granted under the 1992 Stock Option Plan.
(6) Since January 1, 1993, the Registrant granted stock options to
employees, consultants, directors, officers and affiliates of the
Registrant as described below. From February 1 to June 1, 1993, the
Registrant granted stock options under the 1992 Stock Option Plan
covering an aggregate of 82,450 shares of Common Stock at an exercise
price of $0.20 per share. On June 21, 1993, the Registrant granted stock
options under the 1992 Stock Option Plan covering an aggregate of 14,250
shares of Common Stock at an exercise price of $2.00 per share. From June
2, 1993 to December 31, 1994, the Registrant granted stock options under
the 1992 Stock Option Plan covering an aggregate of 84,375 shares of
Common Stock at an exercise price of $4.00 per share. From March 1, 1995
to February 21, 1996, the Registrant granted stock options under the 1992
Stock Option Plan covering an aggregate of 235,000 shares of Common Stock
at an exercise price of $6.00 per share. On May 13, 1996, the Registrant
granted stock options under the 1996 Stock Incentive Plan covering an
aggregate of 275,000 shares of Common Stock at an exercise price of $9.00
per share. On August 20, 1996, the Registrant granted stock options under
the 1996 Stock Incentive Plan covering an aggregate of 110,000 shares of
Common Stock at an exercise price of $9.00 per share. On September 10,
1996, the Registrant granted stock options under the 1992 Stock Option
Plan covering an aggregate of 1,750 shares of Common Stock at an exercise
price of $9.00 per share. On December 30, 1996, the Registrant granted
stock options under the 1992 Stock Option Plan covering an aggregate of
12,025 shares of Common Stock at an exercise price of $5.50 per share.
Also on December 30, 1996, the Registrant cancelled all stock options
granted from March 1, 1995 to September 10, 1996, and regranted the same
number of options under the same plans under which such options had been
previously granted, at an exercise price of $5.50 per share.
The sales and issuances of Common Stock in the transactions described in
paragraphs (1), (2) and (5) above other than pursuant to the exercise of stock
options were deemed to be exempt from registration under the Securities Act
pursuant to Section 4(2) thereof.
The issuance and sale of the Series B Preferred Stock in the transactions
described in paragraph (3) were deemed to be exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act and/or Regulation
D promulgated thereunder.
The issuance of the warrants in the transactions described in paragraph (3)
was deemed to be exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
The issuance and sale of the Series A Preferred Stock in the transaction
described in paragraph (4) were deemed to be exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.
The issuances and sales of Common Stock pursuant to the exercise of stock
options described in paragraph (5) were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder, or were
deemed to be exempt pursuant to Section 4(2) thereof.
With respect to the grant of stock options described in paragraph (6),
exemption from registration under the Securities Act was unnecessary in that
none of such transactions involved a "sale" of securities as such term is used
in Section 2(3) of the Securities Act.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<C> <S>
+1.1 Form of Underwriting Agreement.
2.1 Amended and Restated Agreement and Plan of Reorganization, dated as of February
14, 1997 (filed as Exhibit 2.1 to the Registration Statement on Form S-4 filed
by the Company and incorporated herein by reference).
3.1 Form of Restated Certificate of Incorporation of the Company.
**3.2 Amended and Restated Bylaws of the Company.
+4.1 Specimen Stock Certificate of the Company.
**4.2 Reference is made to Exhibits 3.1 and 3.2.
4.3 Warrant Agreement for Series A Preferred Stock issued by Mercator Genetics, Inc.
to Phoenix Leasing Incorporated, dated August 31, 1993.
4.4 Warrant Agreement for Series B Preferred Stock issued by Mercator Genetics, Inc.
to Phoenix Leasing Incorporated, dated October 28, 1994.
5.1 Opinion of Morrison & Foerster LLP.
**10.1 Form of Indemnification Agreement entered into between the Company and its
directors and executive officers.
**10.2 The Company's 1992 Stock Option Plan.
**10.3 Form of Incentive Stock Option Agreement under the 1992 Stock Option Plan.
**10.4 Form of Non-Qualified Stock Option Agreement under the 1992 Stock Option Plan.
10.5 The Company's 1996 Stock Incentive Plan, as amended and restated as of March 7,
1997, and form of Stock Option Agreement.
**10.6 Form of Investors' Rights Agreement, entered into among the Company, Interneuron
Pharmaceuticals, Inc., Transcell Technologies, Inc., and the holders of the
Company's Preferred Stock, Series B.
*/**10.7 License Agreement, dated as of January 28, 1992, by and between Scimark Corp.,
The Castle Group Ltd. and Ohio University, as amended October 15, 1993.
*/**10.8 Sponsored Research Agreement, dated January 31, 1992, by and between Scimark
Corp. and Ohio University, as amended October 15, 1993, February 16, 1994,
November 16, 1994 and November 22, 1995.
*/**10.9 License Agreement, dated as of April 1, 1993, by and between the Company and Ohio
University.
**10.11 License Agreement, dated as of June 8, 1994, by and between the Company and
Associated Universities, Inc.
*/**10.12 Standard License Agreement, dated as of September 1, 1994, by and between the
Company and the Wisconsin Alumni Research Foundation, as amended June 2, 1995.
*/**10.13 License and Collaboration Agreement, dated as of March 31, 1995, by and between
the Company and Chiron Corporation, as amended April 10, 1996.
*/**10.14 Sponsored Research and License Agreement, dated as of May 1, 1995, by and between
the Company and Novo Nordisk A/S, as amended January 17, 1996 and March 17,
1996.
*/**10.15 License Agreement, dated as of July 17, 1995, by and between the Company and
Vanderbilt University.
*/**10.16 License Agreement, dated as of May 30, 1996, by and between the Company and AMRAD
Developments PTY Ltd.
**10.17 Lease Agreement, dated as of November 1994, by and between the Company and Thomas
R. Eggers.
**10.18 Lease, Service and Affiliation Agreement, entered into as of February 1995, by
and between the Company and The Ohio State University.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
**10.19 Employment Agreement, dated January 3, 1993, by and between the Company and
Douglass B. Given.
**10.20 Form of Intercompany Services Agreement, dated as of , 1997, by and
between the Company and Interneuron Pharmaceuticals, Inc.
**10.21 Form of Tax Allocation Agreement, dated as of , 1997, by and between
the Company and Interneuron Pharmaceuticals, Inc.
**10.22 The Company's 1996 Employee Stock Purchase Plan.
*10.23 License Agreement, dated as of December 31, 1996, by and between the Company and
Amgen Inc.
*10.24 Stock Purchase Agreement, dated as of December 31, 1996, by and between the
Company and Amgen Inc.
*10.25 License Agreement, dated as of January 8, 1997, by and between the Company and
Associated Universities, Inc., operator of Brookhaven National Laboratory.
*10.26 Amended and Restated Sponsored Research and License Agreement, dated as of
February 21, 1997, by and between the Company and Novo Nordisk A/S.
10.27 The Company's 1997 Stock Option Plan.
*10.28 License Agreement, dated as of February 1, 1997, by and between Mercator
Genetics, Inc. and the Board of Trustees of The Leland Stanford Junior
University.
10.29 Lease Agreement, dated July 29, 1993, by and between Mercator Genetics, Inc. and
WVP Income Plus, III, as amended August 11, 1993, February 7, 1994, October 10,
1994 and April 27, 1995.
10.30 Form of Indemnification Agreement entered into between Mercator Genetics, Inc.
and its directors and executive officers.
10.31 Employment Agreement, dated as of February 14, 1997, by and between the Company
and Elliott Sigal.
10.32 Loan Agreement, dated as of February 14, 1997, by and between Mercator Genetics,
Inc. and the Company (filed as Exhibit 10.25 to the Registration Statement on
S-4 filed by the Company and incorporated herein by reference).
*10.33 Scientific Collaboration Agreement, dated February 21, 1997, by and between
Mercator Genetics, Inc. and Affymetrix, Inc.
*10.34 Scientific Collaboration Agreement, dated March 3, 1997, by and between Mercator
Genetics, Inc. and Affymetrix, Inc.
*10.35 Progenitor--Pangea Collaboration Agreement, dated as of March 13, 1997, by and
between the Company and Pangea Systems, Inc.
+10.36 Employment Agreement, dated as of , 1997, by and between the Company
and Douglass B. Given.
21.1 List of subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
23.2 Consent of Ernst & Young LLP, independent auditors.
23.3 Consent of Pennie & Edmonds LLP.
23.4 Consent of Morrison & Foerster LLP (included in Exhibit 5.1).
23.5 Consent of Robert R. Momsen.
24.1 Power of Attorney of the Company (see II-7).
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Documents for which confidential treatment has been requested.
** Exhibit previously filed.
+ To be filed by amendment.
II-5
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES.
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates for the Securities in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Certificate of
Incorporation and Bylaws of the Registrant, the DGCL, the Underwriting
Agreement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer or
controlling person in connection with the Securities being registered hereunder,
the Registrant will, unless in the opinion of their respective counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be in the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Amendment to the Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Columbus, State of Ohio, on March 14, 1997.
PROGENITOR, INC.
By: /s/ DOUGLASS B. GIVEN
-----------------------------------
Douglass B. Given, M.D., Ph.D.
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Douglass B. Given, H. Ralph Snodgrass, Stephen J.
Williams and Mark N.K. Bagnall with full power to act alone, his true and lawful
attorneys-in-fact, with the power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact full power and authority to do and perform
each and every act and thing requisite and necessary to be done as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- -----------------
<C> <S> <C>
/s/ DOUGLASS B. GIVEN President, Chief Executive Officer and
------------------------------------------- Director (Principal Executive March 14, 1997
Douglass B. Given, M.D., Ph.D. Officer)
/s/ MARK N. K. BAGNALL Vice President, Finance and Chief
------------------------------------------- Financial Officer (Principal March 14, 1997
Mark N. K. Bagnall Financial and Accounting Officer)
/s/ ROBERT P. AXLINE
------------------------------------------- Director March 14, 1997
Robert P. Axline
/s/ GLENN L. COOPER
------------------------------------------- Director March 14, 1997
Glenn L. Cooper M.D.
/s/ ALEXANDER M. HAIG, JR.
------------------------------------------- Director March 14, 1997
Alexander M. Haig, Jr.
/s/ MORRIS LASTER
------------------------------------------- Director March 14, 1997
Morris Laster, M.D.
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- -----------------
<C> <S> <C>
/s/ JERRY P. PEPPERS
------------------------------------------- Director March 14, 1997
Jerry P. Peppers
/s/ DAVID B. SHARROCK
------------------------------------------- Director March 14, 1997
David B. Sharrock
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT PAGE
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
+1.1 Form of Underwriting Agreement................................................................
2.1 Amended and Restated Agreement and Plan of Reorganization, dated as of February 14, 1997
(filed as Exhibit 2.1 to the Registration Statement on Form S-4 filed by the Company and
incorporated herein by reference).
3.1 Form of Restated Certificate of Incorporation of the Company..................................
**3.2 Amended and Restated Bylaws of the Company....................................................
+4.1 Specimen Stock Certificate of the Company.....................................................
**4.2 Reference is made to Exhibits 3.1 and 3.2.....................................................
4.3 Warrant Agreement for Series A Preferred Stock issued by Mercator Genetics, Inc. to Phoenix
Leasing Incorporated, dated August 31, 1993.................................................
4.4 Warrant Agreement for Series B Preferred Stock issued by Mercator Genetics, Inc. to Phoenix
Leasing Incorporated, dated October 28, 1994................................................
5.1 Opinion of Morrison & Foerster LLP............................................................
**10.1 Form of Indemnification Agreement entered into between the Company and its directors and
executive officers..........................................................................
**10.2 The Company's 1992 Stock Option Plan..........................................................
**10.3 Form of Incentive Stock Option Agreement under the 1992 Stock Option Plan.....................
**10.4 Form of Non-Qualified Stock Option Agreement under the 1992 Stock Option
Plan........................................................................................
10.5 The Company's 1996 Stock Incentive Plan, as amended and restated as of March 7, 1997, and form
of Stock Option Agreement...................................................................
**10.6 Form of Investors' Rights Agreement, entered into among the Company, Interneuron
Pharmaceuticals, Inc., Transcell Technologies, Inc., and the holders of the Company's
Preferred Stock, Series B...................................................................
*/**10.7 License Agreement, dated as of January 28, 1992, by and between Scimark Corp., The Castle
Group Ltd. and Ohio University, as amended October 15, 1993.................................
*/**10.8 Sponsored Research Agreement, dated January 31, 1992, by and between Scimark Corp. and Ohio
University, as amended October 15, 1993, February 16, 1994, November 16, 1994 and November
22, 1995....................................................................................
*/**10.9 License Agreement, dated as of April 1, 1993, by and between the Company and Ohio
University..................................................................................
**10.11 License Agreement, dated as of June 8, 1994, by and between the Company and Associated
Universities, Inc...........................................................................
*/**10.12 Standard License Agreement, dated as of September 1, 1994, by and between the Company and the
Wisconsin Alumni Research Foundation, as amended June 2, 1995...............................
*/**10.13 License and Collaboration Agreement, dated as of March 31, 1995, by and between the Company
and Chiron Corporation, as amended April 10, 1996...........................................
*/**10.14 Sponsored Research and License Agreement, dated as of May 1, 1995, by and between the Company
and Novo Nordisk A/S, as amended January 17, 1996 and March 17, 1996........................
*/**10.15 License Agreement, dated as of July 17, 1995, by and between the Company and Vanderbilt
University..................................................................................
*/**10.16 License Agreement, dated as of May 30, 1996, by and between the Company and AMRAD Developments
PTY Ltd.....................................................................................
**10.17 Lease Agreement, dated as of November 1994, by and between the Company and Thomas R.
Eggers......................................................................................
**10.18 Lease, Service and Affiliation Agreement, entered into as of February 1995, by and between the
Company and The Ohio State University.......................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT PAGE
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
**10.19 Employment Agreement, dated January 3, 1993, by and between the Company and Douglass B.
Given.......................................................................................
**10.20 Form of Intercompany Services Agreement, dated as of , 1997, by and between the
Company and Interneuron Pharmaceuticals, Inc................................................
**10.21 Form of Tax Allocation Agreement, dated as of , 1997, by and between the Company
and Interneuron Pharmaceuticals, Inc........................................................
**10.22 The Company's 1996 Employee Stock Purchase Plan...............................................
*10.23 License Agreement, dated as of December 31, 1996, by and between the Company and Amgen Inc....
*10.24 Stock Purchase Agreement, dated as of December 31, 1996, by and between the Company and Amgen
Inc.........................................................................................
*10.25 License Agreement, dated as of January 8, 1997, by and between the Company and Associated
Universities, Inc., operator of Brookhaven National Laboratory..............................
*10.26 Amended and Restated Sponsored Research and License Agreement, dated as of February 21, 1997,
by and between the Company and Novo Nordisk A/S.............................................
10.27 The Company's 1997 Stock Option Plan..........................................................
*10.28 License Agreement, dated as of February 1, 1997, by and between Mercator Genetics, Inc. and
the Board of Trustees of The Leland Stanford Junior University..............................
10.29 Lease Agreement, dated July 29, 1993, by and between Mercator Genetics, Inc. and WVP Income
Plus, III, as amended August 11, 1993, February 7, 1994, October 10, 1994 and April 27,
1995........................................................................................
10.30 Form of Indemnification Agreement entered into between Mercator Genetics, Inc. and its
directors and executive officers............................................................
10.31 Employment Agreement, dated as of February 14, 1997, by and between the Company and Elliott
Sigal.......................................................................................
10.32 Loan Agreement, dated as of February 14, 1997, by and between Mercator Genetics, Inc. and the
Company (filed as Exhibit 10.25 to the Registration Statement on S-4 filed by the Company
and incorporated herein by reference).......................................................
*10.33 Scientific Collaboration Agreement, dated February 21, 1997, by and between Mercator Genetics,
Inc. and Affymetrix, Inc....................................................................
*10.34 Scientific Collaboration Agreement, dated March 3, 1997, by and between Mercator Genetics,
Inc. and Affymetrix, Inc....................................................................
*10.35 Progenitor--Pangea Collaboration Agreement, dated as of March 13, 1997, by and between the
Company and Pangea Sytems Inc...............................................................
+10.36 Employment Agreement, dated as of , 1997, by and between the Company and Douglass B.
Given.......................................................................................
21.1 List of subsidiaries of the Company...........................................................
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants..................................
23.2 Consent of Ernst & Young LLP., independent auditors...........................................
23.3 Consent of Pennie & Edmonds LLP...............................................................
23.4 Consent of Morrison & Foerster LLP (included in Exhibit 5.1)..................................
23.5 Consent of Robert R. Momsen...................................................................
24.1 Power of Attorney of the Company (see II-7)...................................................
27.1 Financial Data Schedule.......................................................................
</TABLE>
- ------------------------
* Documents for which confidential treatment has been requested.
** Exhibit previously filed.
+ To be filed by amendment.
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION OF
PROGENITOR, INC.
Douglass B. Given hereby certifies that:
1. The name of this corporation is Progenitor, Inc. and the date of
filing of the original Certificate of Incorporation of this corporation with the
Secretary of State of the State of Delaware is February 25, 1992.
2. He is the duly elected and acting President of Progenitor, Inc., a
Delaware corporation.
3. This Restated Certificate of Incorporation has been duly approved and
adopted by the Stockholders of this Corporation in accordance with the
provisions of Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware.
4. The Certificate of Incorporation of this corporation is hereby
restated to read as follows:
"I
The name of the corporation is Progenitor, Inc. (the "Corporation").
II
The address of the registered office of the Corporation in the State of
Delaware is the Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, and the name of its registered agent at that
address is The Corporation Trust Company.
III
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
IV
The total number of shares of all classes of stock that the Corporation is
authorized to issue is Forty-Nine Million (49,000,000) shares, consisting of
Thirty-Nine Million (39,000,000) shares of Common Stock with a par value of
$.001 per share, Five Million (5,000,000) shares of Preferred Stock, with a par
value of $.01 per share, and Five Million (5,000,000) shares of Preference Stock
("Additional Preferred Stock") with a par value of $.001 per share. The rights,
preferences, privileges and restrictions granted to and imposed upon such
classes of shares are set forth below in this Article.
1
<PAGE>
A. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding
up of the Corporation, the assets of the Corporation shall be distributed
ratably among holders of Common Stock in proportion to the amount of such stock
owned by each such holder, subject to any liquidation rights of any then
outstanding Preference Shares (as defined in Article IV(C) below).
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS. The holder of each share of Common Stock shall
have the right to one vote, shall be entitled to notice of any shareholders'
meeting in accordance with the Bylaws of this Corporation, except as otherwise
provided herein, and shall be entitled to vote upon such matters and in such
manner as may be provided by law.
B. PREFERRED STOCK. The Preferred Stock shall be divided into three
series, designated Series A Convertible Preferred Stock (the "Series A
Preferred Stock"), Series B Convertible Preferred Stock (the "Series B
Preferred Stock") and Series C Convertible Preferred Stock (the "Series C
Convertible Preferred Stock"). The number of shares of Series A Preferred
Stock and the rights, preferences, privileges and restrictions granted to and
imposed thereon shall be as set forth in Exhibit A attached hereto; the
number of shares of Series B Preferred Stock and the rights, preferences,
privileges and restrictions granted to and imposed thereon shall be as set
forth in Exhibit B attached hereto; and the number of shares of Series C
Preferred Stock and the rights, preferences, privileges and restrictions
granted to and imposed thereon shall be as set forth in Exhibit C attached
hereto; PROVIDED, HOWEVER, that upon the conversion of the shares of such
series of Preferred Stock into shares of Common Stock in accordance with the
terms of such Exhibits, no share or shares of Series A, Series B and Series C
Preferred Stock shall be reissued, and all such shares shall be canceled,
retired and eliminated from the shares that the Corporation shall be
authorized to issue.
C. ADDITIONAL PREFERRED STOCK. The Additional Preferred Stock authorized
by this Certificate of Incorporation may be issued from time to time in series.
The Board of Directors is hereby authorized to fix or alter the rights,
preferences, privileges, and restrictions granted to or imposed upon any series
of Additional Preferred Stock (including the dividend rights, conversion rights,
voting rights, terms of redemption, liquidation preferences and sinking fund
terms thereof), and the number of shares constituting any such series and the
designation thereof. Subject to compliance with applicable protective voting
rights which have been or may be granted to the Series A, Series B and Series C
Preferred Stock, or Additional Preferred Stock or series thereof (collectively,
"Preference Shares") in Certificates of Designation or the Corporation's
Certificate of Incorporation ("Protective Provisions"), but notwithstanding any
other rights of the Preference Shares or any series thereof, the rights,
privileges, preferences, and restrictions of any such additional series may be
subordinated to, PARI PASSU with (including, without limitation, inclusion in
provisions with respect to liquidation and acquisition preferences, redemption,
and/or approval of matters by vote or written consent) or senior to any of those
of any present or
2
<PAGE>
future class or series of Preference Shares or Common Stock. Subject to the
compliance with applicable Protective Provisions, the Board of Directors is also
authorized to increase or decrease the number of shares of any series prior or
subsequent to the issue of that series, but not below the number of shares of
such series then outstanding. In case the number of shares of any series shall
be so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
Upon restatement of the Certificate of Incorporation as set forth herein,
each authorized share of Common Stock of the Corporation issued and outstanding
prior to such restatement shall be automatically reclassified, without any
action by the holder thereof, into one-half (1/2) of one share of fully-paid and
nonassessable Common Stock. No fractional shares of Common Stock shall be issued
upon such reclassification. Instead of any fractional share of Common Stock
that would otherwise be issuable upon such reclassification, the Corporation
shall pay cash to the holder thereof equal to the product of such fraction
multiplied by the fair market value of one share of Common Stock after such
reclassification, as determined by the Board of Directors of the Corporation in
good faith exercising reasonable business judgment.
V
A. To the fullest extent permitted by Delaware statutory or decisional
law, as amended or interpreted, no director of the Corporation shall be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director. This Article V does not affect the
availability of equitable remedies for breach of fiduciary duties.
B. Any repeal or modification of this Article V shall be prospective and
shall not affect the rights under this Article V in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
VI
The Corporation shall, to the fullest extent permitted by Section 145 of
the General Corporation Law of the State of Delaware, as amended from time to
time, indemnify all persons whom it may indemnify pursuant thereto.
VII
For the management of the business and for the conduct of the affairs of
the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by the Board
of Directors in the manner provided in the Bylaws.
B. The Board of Directors may from time to time make, amend, supplement
or repeal the Bylaws.
3
<PAGE>
C. The directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
VIII
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof, or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing three-
fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
IX
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon the stockholders
herein are granted subject to this right."
****
IN WITNESS WHEREOF, Progenitor, Inc. has caused this Restated Certificate
of Incorporation to be signed by the President on this ______ day of
______________, 1997.
PROGENITOR, INC.
By:________________________________
Douglass B. Given, President
4
<PAGE>
EXHIBIT A
DESCRIPTION OF SERIES A PREFERRED STOCK
This Exhibit A sets forth the number of shares of the Corporation's Series
A Convertible Preferred Stock, par value $.01 per share, and the rights,
preferences, privileges and restrictions granted to and imposed thereon.
Capitalized terms used herein but not defined shall have the meanings given them
in the Corporation's Restated Certificate of Incorporation, to which this
Exhibit A is an exhibit.
SECTION 1. DESIGNATION OF SERIES; RANK.
(a) 2,120,000 shares of Preferred Stock shall be designated "Series A
Convertible Preferred Stock" (the "SERIES A PREFERRED STOCK").
(b) With respect to the payments of dividends, the Series A Preferred
Stock shall rank on a parity with the Series B Preferred Stock and senior to the
Common Stock. With respect to the distribution of assets upon liquidation,
dissolution, or winding up, the Series A Preferred Stock shall rank on a parity
with the Series B Preferred Stock and senior to the Common Stock.
SECTION 2. DIVIDENDS. The holders of the shares of Series A Preferred
Stock shall be entitled to receive dividends out of funds legally available
therefor, when, as and if declared by the Board of Directors of the Corporation
in its discretion; provided, however, that no dividends shall be declared or
paid on the Common Stock during any final year unless the Board of Directors
during such fiscal year shall have declared and set aside for payment a dividend
on the Series A Preferred Stock.
SECTION 3. CONVERSION. The holders of the shares of the Series A
Preferred Stock shall have conversion rights as follows:
(a) CONVERSION PRIVILEGE. Subject to Section 3(b), each share of
Series A Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such shares, into such number
of duly authorized, fully paid and non-assessable shares of Common Stock at the
Series A Conversion Price at the time in effect for such shares (the "SERIES A
CONVERSION PRICE"). The initial Series A Conversion Price shall be $6.25,
subject to adjustment as set forth in Sections 3(d) and 3(e).
(b) AUTOMATIC CONVERSION. In the event of (A) a Qualified Public
Offering (hereinafter defined) of the Corporation; or (B) the receipt by the
Corporation of notice from a majority of the holders of Series A Preferred Stock
electing to convert their shares, each share of Series A Preferred Stock shall
be automatically converted at the closing of the Qualified Public Offering or
upon receipt of such notice, without any action by the holder thereof, into duly
authorized, fully paid and non-assessable shares of Common Stock at the then
applicable Series A Conversion Price, subject to adjustment as provided in
Sections 3(d) and 3(e), plus cash in lieu of fractional shares. The Corporation
shall
1
<PAGE>
make no payment or adjustment on the account of any accrued and unpaid dividends
on the Series A Preferred Stock upon surrender for conversion. A "QUALIFIED
PUBLIC OFFERING" means an underwritten public offering of Common Stock
registered under the Securities Act of 1933, as amended, in which the aggregate
proceeds to the Corporation, net of underwriting discounts and commissions,
equal or exceed $7,500,000.
(c) MECHANICS OF CONVERSION. Before any holder of shares of Preferred
Stock shall be entitled to convert such shares into Common Stock, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
principal executive offices of the Corporation or of the transfer agent
therefor, if any, and shall give written notice to the Corporation that such
holder elects to convert all or part of the shares represented by the
certificate or certificates and shall state in writing therein the name or names
in which such holder wishes the certificate or certificates for Common Stock to
be issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver to such holder or to such holder's nominee or nominees, a certificate or
certificates for the number of full shares of Common Stock to which such holder
shall be entitled as aforesaid, together with cash in lieu of any fraction of a
share as provided in Section 3(h). If surrendered certificates for Preferred
Stock are converted only in part, the Corporation will issue and deliver to the
holder, or to such holder's nominee or nominees, a new certificate or
certificates representing the remaining unconverted shares of Preferred Stock.
Shares of Preferred Stock shall be deemed to have been converted as of the date
of the surrender of such shares for conversion as provided above, and the person
or persons entitled to receive the Common Stock issuable upon conversion shall
be treated for all purposes as the record holder or holders of such Common Stock
as of the date of conversion.
(d) CONVERSION PRICE ADJUSTMENTS FOR SERIES A PREFERRED STOCK. The
Series A Conversion Price shall be subject to adjustment from time to time as
follows (the adjustments referred to in Subsections 3(d)(i) and (ii) shall be
referred to as a "MINIMUM RETURN ADJUSTMENT"):
(i) If at any time after the last closing of the offering and sale of
shares of Series B Preferred Stock pursuant to the Corporation's Confidential
Term Sheet dated November 7, 1994, as supplemented (the "Final Closing Date"),
the Corporation:
(A) completes an underwritten initial public offering of its
securities (a "Terminating IPO") in which it issues any shares of Common
Stock or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional shares of
Common Stock ("Common Stock Equivalents"), or
(B) consummates a merger or consolidation in which more than fifty
percent (50%) of the voting power of the Corporation is transferred, or a
sale or other disposition of all or substantially all of the assets of the
Corporation (a "Corporate Transaction"),
2
<PAGE>
and, in the event of a Terminating IPO, the effective price per Common
Stock Equivalent issued, or in the event of a Corporate Transaction, the
fair market value of the stock, securities or other property to be received
by the holders of Common Stock of the Corporation on a per share as-
converted basis (including the Common Stock issuable to the holders of
Series A Preferred Stock electing to convert and taking into account any
Minimum Return Adjustment effected as a result of such transaction) (the
"Per Share Price"), is less than (X) during the first year following the
Final Closing Date, 135% of the then applicable Series A Conversion Price,
(Y) during the second year following the Final Closing Date, subject to
Quarterly Allocation (as defined in Subsection 3(d)(iii)), 170% of the then
applicable Series A Conversion Price or (Z) after the second year following
the Final Closing Date, subject to Quarterly Allocation, 205% of the then
applicable Series A Conversion Price, then the Series A Conversion Price
will be reduced (but not increased) to equal (A) 74.07% of the Per Share
Price for issuances made during the first year following the Final Closing
Date, (B) 58.82% of the Per Share Price for issuances made during the
second year following the Final Closing Date and (C) 48.78% of the Per
Share Price for issuances made after the second year following the Final
Closing Date.
(ii) In the event that in connection with a Terminating IPO, the Per
Share Price is not readily ascertainable, the determination of the Per Share
Price of any Common Stock Equivalent shall be determined in good faith by the
Corporation's Board of Directors based upon an allocation of the proceeds of the
Terminating IPO among the Common Stock Equivalents, considering the special
terms, rights or privileges or other securities incorporated or included in such
Terminating IPO. In the event that any holder of Series A Preferred Stock
disagrees with the determination of the Board of Directors, then for a period
commencing no earlier than 60 days and ending no later than 30 days prior to
commencement of the Terminating IPO, such holder shall have the right to convert
their shares of Series A Preferred Stock into the same type and class of
securities or other consideration comprising the Terminating IPO at a discount
to the per security offering price of the Terminating IPO equal to (i) 74.07%
for a Terminating IPO consummated during the first year following the Final
Closing Date, (ii) 58.82% for a Terminating IPO consummated during the second
year following the Final Closing Date, and (iii) 48.78% for a Terminating IPO
consummated after the second year following the Final Closing Date. Such right
of conversion shall represent the sole and exclusive remedy of such holder with
respect to such Terminating IPO.
(iii) Minimum Return Adjustments will not be made after the conversion of
the Series A Preferred Stock (a "Termination Event"). Minimum Return
Adjustments may be made more than once, but will never serve to increase the
Series A Preferred Conversion Price. Commencing during the second year
following the Final Closing Date, Minimum Return Adjustments will be allocated
8.75% per quarter to reflect the quarter of the year in which the transaction
causing such Minimum Return Adjustment occurs ("Quarterly Allocation").
3
<PAGE>
(iv) In no event shall the Series A Conversion Price be reduced to less
than $1.00, as adjusted for any stock splits, recapitalizations or similar
events.
(e) ADDITIONAL ADJUSTMENTS TO THE SERIES A CONVERSION PRICE. The
Series A Conversion Price shall be adjusted from time to time as follows:
(i) If, at any time after the Final Closing Date, the Corporation shall
(A) pay a dividend or make a distribution on its outstanding shares of Common
Stock in shares of its capital stock (whether shares of its Common Stock or
capital stock of any other class), (B) subdivide its outstanding shares of
Common Stock, (C) combine its outstanding shares of Common Stock into a smaller
number of shares or (D) issue by reclassification of its shares of Common Stock
any shares of capital stock of the Corporation, the Series A Conversion Price in
effect immediately prior to such action shall be adjusted so that the holder of
any shares of Series A Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of capital stock of the
Corporation which such holder would have owned immediately following such action
had such shares of Preferred Stock been converted immediately prior thereto.
Upon the effective date of any such dividend, distribution, subdivision,
combination or reclassification, an adjustment made pursuant to this Section
3(e)(i) shall become effective retroactively as of the record date for any such
dividend, distribution, subdivision, combination or reclassification.
(ii) If, at any time after the Final Closing Date, the Corporation shall
issue to holders of shares of its outstanding Common Stock generally any rights,
options or warrants entitling them to subscribe for or purchase (A) shares of
its Common Stock, (B) any assets of the Corporation, (C) any securities of the
Corporation (except its Common Stock) or of any corporation other than the
Corporation or (D) any rights, options or warrants entitling them to subscribe
for or to purchase any of the foregoing securities, whether or not such rights,
options or warrants are immediately exercisable (collectively, a "DISTRIBUTION
ON COMMON STOCK"), the Corporation shall issue to the holders of its outstanding
shares of Series A Preferred Stock the Distribution on Common Stock to which
they would have been entitled if they had converted such shares of Series A
Preferred Stock immediately prior to the record date for the purpose of
determining stockholders entitled to receive such Distribution on Common Stock.
(f) DE MINIMIS CHANGES. No adjustment in the Series A Conversion Price
shall be required unless such adjustment would require an increase or decrease
of at least $.05 in such Series A Conversion Price; provided, however, that any
adjustments which by reason of this Section 3(f) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 3(f) shall be made to the nearest cent or
the nearest one hundredth of a share, as the case may be.
(g) NOTICE OF ADJUSTMENT. Upon the occurrence of each adjustment or
readjustment of the Series A Conversion Price pursuant to this Section 3, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance
4
<PAGE>
with the terms hereof and prepare and furnish to each holder of shares of Series
A Preferred Stock a certificate setting forth such adjustment or readjustment
and the computations upon which it is based. The Corporation shall, upon the
written request at any time of any holder of Series A Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting forth
(A) such adjustment and readjustment, (B) the Series A Conversion Price in
effect at such time and (C) the number of shares of Common Stock and the amount,
if any, of other property which at the time would be received upon the
conversion of a share of the Preferred Stock held by such holder.
(h) NO FRACTIONAL SHARES TO BE ISSUED. No fractional shares or script
representing fractional shares of Common Stock shall be issued upon conversion
of shares of Preferred Stock. Instead of any fractional share of Common Stock
that would otherwise be issuable upon conversion of shares of Series A Preferred
Stock (or specified portions thereof), the Corporation shall pay in cash to the
holders of such Preferred Stock in respect of such fraction of a share an amount
equal to the same fraction of the fair market value per share of the amount of
Common Stock into which such shares of Preferred Stock would otherwise be
convertible, as determined by the Board of Directors of the Corporation in good
faith exercising reasonable business judgment.
(i) EFFECT OF SALE, MERGER OR CONSOLIDATION. In the event of any
capital reorganization of the Corporation (other than a subdivision or
combination of shares of Common Stock set forth in Section 3(e)(i)),
reclassification (other than a change in par value) of the Common Stock,
conversion of the Common Stock into securities of another corporation, or a
Corporate Transaction (each such event being referred to as a "CAPITAL CHANGE"),
a share of Series A Preferred Stock shall be convertible after such Capital
Change, upon the terms and conditions specified herein, for the number of shares
of stock or other securities or property of the Corporation or of the
corporation into which shares of Common Stock are converted or resulting from
such consolidation or surviving such merger or to which such sale shall be made,
as the case may be, to which, at the time of such Capital Change, the shares of
Common Stock issuable upon conversion of such shares of Series A Preferred Stock
would have been entitled upon such Capital Change. In any case, if necessary,
the provisions set forth in Section 3 with respect to the rights and interests
of the holders of Series A Preferred Stock shall be appropriately adjusted so as
to be reasonably applicable to any shares of stock or other securities or
property thereafter deliverable on the conversion of each such series. The
Corporation shall not effect any consolidation, merger or sale resulting in a
Capital Change unless, prior to or simultaneously with the consummation thereof,
any successor corporation or corporation purchasing such assets shall assume, by
written instrument, the obligation to deliver to the holders of Series A
Preferred Stock such shares of stock, securities or assets as the holders of
each Preferred Stock may be entitled to receive upon conversion of the such
stock in accordance with the foregoing provisions and all the other obligations
of the Corporation hereunder.
(j) RESERVATION OF SHARES FOR ISSUANCE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of
5
<PAGE>
Common Stock, solely for the purpose of issuance upon conversion of Series A
Preferred Stock as provided herein, such number of shares of Common Stock as
shall then be issuable upon the conversion of all outstanding shares of
Preferred Stock. All shares of Common Stock which shall be so issuable upon
conversion of the Series A Preferred Stock as herein provided shall, when
issued, be duly authorized, validly issued, fully paid and non-assessable, free
of all liens, claims and changes and not subject to preemptive rights.
(k) PAYMENT OF TAXES ON SHARES ISSUED UPON CONVERSION. The issuance of
certificates of Common Stock upon conversion of shares of the Series A Preferred
Stock shall be made without charge to the converting holders for any tax in
respect of the issuance of such certificates and such certificates shall be
issued in the respective names of, or in such names as may be directed by, the
holders of the shares of the Preferred Stock so converted; provided, however,
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any such
certificate in a name other than the name in which the shares of the Series A
Preferred Stock so converted were registered, and the Corporation shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Corporation the
amount of such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
(l) OTHER EVENTS. If any event occurs as to which in the opinion of
the Board of Directors the provisions of this Section 3 would not fairly protect
the conversion rights of the holders of Series A Preferred Stock and/or the
rights of other stockholders of the Corporation in accordance with the intent
and principles of such provisions, then the Corporation's Board of Directors
may, in its discretion, adjust the application of such provisions, in accordance
with such intent and principles, so as to protect such conversion rights and/or
the rights of other stockholders of the Corporation, if applicable.
(m) NO IMPAIRMENT. The Corporation will not, by amendment of this
Exhibit A or the Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation with regard to the Series A Preferred Stock, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series A Preferred Stock against impairment.
SECTION 4. PREFERENCE ON LIQUIDATION.
(a) LIQUIDATION TRANSACTION; LIQUIDATION PREFERENCES. In the event of
any voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation or upon a Corporate Transaction (any such event being referred to as
a "LIQUIDATION TRANSACTION"), the holders of the Series A Preferred Stock shall
have the option to either
6
<PAGE>
(i) convert their shares into Common Stock of the Corporation immediately prior
to the Liquidation Transaction, or (ii) be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders (whether
capital or surplus), or out of the proceeds thereof, an amount in cash equal to
$6.25 per share plus any accrued and unpaid dividends on the Series A Preferred
Stock (the "SERIES A LIQUIDATION PREFERENCE"), as provided in this Section 4.
(b) ORDER OF PREFERENCE AND AMOUNT. In the event of a Liquidation
Transaction, any payment or distribution of the assets of the Corporation
(whether capital or surplus) or the proceeds thereof, shall be made to set apart
in the following order of preference and amounts after payment or provision for
payment of the debts and other liabilities of the Corporation:
(i) the holders of the issued and outstanding shares of the Series A
Preferred Stock and the Series B Preferred Stock shall be entitled to receive
payment of the Series A Liquidation Preference and the Series B Liquidation
Preference (as defined in Exhibit B to the Corporation's Restated Certificate of
Incorporation) on a PARI PASSU basis, as described below; and
(ii) if the amounts available to the holders of the issued and
outstanding shares of Series A Preferred Stock and Series B Preferred Stock are
not sufficient to pay the holders thereof in full the applicable preferential
amounts set forth in Section 4(a), then the amounts available for payment to
such holders shall be paid proportionately to the holders of each such series of
Preferred Stock as a group.
(c) ADDITIONAL DISTRIBUTIONS. In the event the Liquidation Transaction
is not a Corporate Transaction, then after payment in full of the preferential
amounts set forth in Section 4(a), the remaining assets of the Corporation
legally available for distribution shall be distributed ratably on a per share
basis among the holders of shares of Common Stock, the Series A Preferred Stock
and the Series B Preferred Stock.
(d) CONSOLIDATION, MERGER OR SALE OF ASSETS. Notwithstanding
anything to the contrary stated herein, a consolidation or merger of the
Corporation with or into any other corporation or corporations, or a sale,
conveyance or disposition of all or substantially all of the assets of the
Corporation or the effectuation by transactions in which the Corporation is
not the surviving corporation or in which more than 50% of the voting power
of the Corporation is disposed of, shall not be deemed to be a liquidation,
dissolution or winding up within the meaning of this Section 4, but shall
instead be treated pursuant to Subsection 3(d) hereof.
SECTION 5. VOTING.
(a) GENERAL. The holders of Series A Preferred Stock shall be entitled
to vote on all matters submitted to a vote of the holders of Common Stock
generally and to receive notice of all meetings of the stockholders. Unless
otherwise required by applicable law, the holders of shares of Series A
Preferred Stock shall vote together with
7
<PAGE>
the holders of the Common Stock as though part of that class and shall have the
right to that number of votes equal to the number of shares of Common Stock into
which the shares of Series A Preferred Stock are convertible on the applicable
record date.
(b) PROTECTIVE PROVISIONS.
(i) So long as any shares of Series A Preferred Stock are outstanding,
this Corporation shall not without first obtaining the approval (by vote or
written consent, as provided by law) of the holders of at least a majority of
the then outstanding shares of Series A Preferred Stock, voting separately as a
class, (A) alter or change the rights, preferences or privileges of the shares
of such Series A Preferred Stock so as to affect adversely the shares or
(B) increase the authorized number of shares of Series A Preferred Stock.
SECTION 6. NOTICE. Any notice required by these provisions to be given to
the holders of shares of Series A Preferred Stock shall be deemed given if sent
U.S. certified mail, return receipt requested and postage prepaid, or by
overnight courier and addressed to each holder of record at its address
appearing on the books of the Corporation. The date of any such notice shall be
deemed to be the date of which it is received.
8
<PAGE>
EXHIBIT B
DESCRIPTION OF SERIES B PREFERRED STOCK
This Exhibit B sets forth the number of shares of the Corporation's Series
B Convertible Preferred Stock, par value $.01 per share, and the rights,
preferences, privileges and restrictions granted to and imposed thereon.
Capitalized terms used herein but not defined shall have the meanings given them
in the Corporation's Restated Certificate of Incorporation, to which this
Exhibit B is an exhibit.
SECTION 1. DESIGNATION OF SERIES; RANK.
(a) 880,000 shares of Preferred Stock shall be designated "Series B
Convertible Preferred Stock" (the "SERIES B PREFERRED STOCK").
(b) With respect to the payments of dividends, the Series B
Preferred Stock shall rank on a parity with the Series A Preferred Stock and
senior to the Common Stock. With respect to the distribution of assets upon
liquidation, dissolution, or winding up, the Series B Stock shall rank on a
parity with the Series A Preferred Stock and senior to the Common Stock.
SECTION 2. DIVIDENDS. The holders of the shares of Series B
Preferred Stock shall be entitled to receive dividends out of funds legally
available therefor, when, as and if declared by the Board of Directors of the
Corporation in its discretion; provided, however, that no dividends shall be
declared or paid on the Common Stock during any final year unless the Board of
Directors during such fiscal year shall have declared and set aside for payment
a dividend on the Series B Preferred Stock.
SECTION 3. CONVERSION. The holders of the shares of the Series B
Preferred Stock shall have conversion rights as follows:
(a) CONVERSION PRIVILEGE. Subject to Section 3(b), each share of
Series B Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such shares, into such number
of duly authorized, fully paid and non-assessable shares of Common Stock at the
Series B Conversion Price at the time in effect for such shares (the "SERIES B
CONVERSION PRICE"). The initial Series B Conversion Price shall be $6.25,
subject to adjustment as set forth in Sections 3(d) and 3(e).
(b) AUTOMATIC CONVERSION. In the event of (A) a Qualified Public
Offering (hereinafter defined) of the Corporation; or (B) the receipt by the
Corporation of notice from a majority of the holders of Series B Preferred Stock
electing to convert their shares, each share of Series B Preferred Stock shall
be automatically converted at the closing of the Qualified Public Offering or
upon receipt of such notice, without any action by the holder thereof, into duly
authorized, fully paid and non-assessable shares of Common Stock at the then
applicable Series B Conversion Price, subject to adjustment as provided in
Sections 3(d) and 3(e), plus cash in lieu of fractional shares. The Corporation
shall
1
<PAGE>
make no payment or adjustment on the account of any accrued and unpaid dividends
on the Series B Preferred Stock upon surrender for conversion. A "QUALIFIED
PUBLIC OFFERING" means an underwritten public offering of Common Stock
registered under the Securities Act of 1933, as amended, in which the aggregate
proceeds to the Corporation, net of underwriting discounts and commissions,
equal or exceed $7,500,000.
(c) MECHANICS OF CONVERSION. Before any holder of shares of
Preferred Stock shall be entitled to convert such shares into Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the principal executive offices of the Corporation or of the transfer agent
therefor, if any, and shall give written notice to the Corporation that such
holder elects to convert all or part of the shares represented by the
certificate or certificates and shall state in writing therein the name or names
in which such holder wishes the certificate or certificates for Common Stock to
be issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver to such holder or to such holder's nominee or nominees, a certificate or
certificates for the number of full shares of Common Stock to which such holder
shall be entitled as aforesaid, together with cash in lieu of any fraction of a
share as provided in Section 3(h). If surrendered certificates for Preferred
Stock are converted only in part, the Corporation will issue and deliver to the
holder, or to such holder's nominee or nominees, a new certificate or
certificates representing the remaining unconverted shares of Preferred Stock.
Shares of Preferred Stock shall be deemed to have been converted as of the date
of the surrender of such shares for conversion as provided above, and the person
or persons entitled to receive the Common Stock issuable upon conversion shall
be treated for all purposes as the record holder or holders of such Common Stock
as of the date of conversion.
(d) CONVERSION PRICE ADJUSTMENTS FOR SERIES B PREFERRED STOCK. The
Series B Conversion Price shall be subject to adjustment from time to time as
follows (the adjustments referred to in Subsections 3(d)(i) and (ii) shall be
referred to as a "MINIMUM RETURN ADJUSTMENT"):
(i) If at any time after the last closing of the offering and sale
of shares of Series B Preferred Stock pursuant to the Corporation's Confidential
Term Sheet dated November 7, 1994, as supplemented (the "Final Closing Date"),
the Corporation:
(A) completes an underwritten initial public offering of
its securities (a "Terminating IPO") in which it issues any shares of
Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly,
additional shares of Common Stock ("Common Stock Equivalents"), or
(B) consummates a merger or consolidation in which more
than fifty percent (50%) of the voting power of the Corporation is
transferred, or a sale or other disposition of all or substantially
all of the assets of the Corporation (a "Corporate Transaction"),
2
<PAGE>
and, in the event of a Terminating IPO, the effective price per Common
Stock Equivalent issued, or in the event of a Corporate Transaction,
the fair market value of the stock, securities or other property to be
received by the holders of Common Stock of the Corporation on a per
share as-converted basis (including the Common Stock issuable to the
holders of Series B Preferred Stock electing to convert and taking
into account any Minimum Return Adjustment effected as a result of
such transaction) (the "Per Share Price"), is less than (X) during the
first year following the Final Closing Date, 135% of the then
applicable Series B Conversion Price, (Y) during the second year
following the Final Closing Date, subject to Quarterly Allocation (as
defined in Subsection 3(d)(iii)), 170% of the then applicable Series B
Conversion Price or (Z) after the second year following the Final
Closing Date, subject to Quarterly Allocation, 205% of the then
applicable Series B Conversion Price, then the Series B Conversion
Price will be reduced (but not increased) to equal (A) 74.07% of the
Per Share Price for issuances made during the first year following the
Final Closing Date, (B) 58.82% of the Per Share Price for issuances
made during the second year following the Final Closing Date and
(C) 48.78% of the Per Share Price for issuances made after the second
year following the Final Closing Date.
(ii) In the event that in connection with a Terminating IPO, the Per
Share Price is not readily ascertainable, the determination of the Per Share
Price of any Common Stock Equivalent shall be determined in good faith by the
Corporation's Board of Directors based upon an allocation of the proceeds of the
Terminating IPO among the Common Stock Equivalents, considering the special
terms, rights or privileges or other securities incorporated or included in such
Terminating IPO. In the event that any holder of Series B Preferred Stock
disagrees with the determination of the Board of Directors, then for a period
commencing no earlier than 60 days and ending no later than 30 days prior to
commencement of the Terminating IPO, such holder shall have the right to convert
their shares of Series B Preferred Stock into the same type and class of
securities or other consideration comprising the Terminating IPO at a discount
to the per security offering price of the Terminating IPO equal to (i) 74.07%
for a Terminating IPO consummated during the first year following the Final
Closing Date, (ii) 58.82% for a Terminating IPO consummated during the second
year following the Final Closing Date, and (iii) 48.78% for a Terminating IPO
consummated after the second year following the Final Closing Date. Such right
of conversion shall represent the sole and exclusive remedy of such holder with
respect to such Terminating IPO.
(iii) Minimum Return Adjustments will not be made after the
conversion of the Series B Preferred Stock (a "Termination Event"). Minimum
Return Adjustments may be made more than once, but will never serve to increase
the Series B Preferred Conversion Price. Commencing during the second year
following the Final Closing Date, Minimum Return Adjustments will be allocated
8.75% per quarter to reflect the quarter of the year in which the transaction
causing such Minimum Return Adjustment occurs ("Quarterly Allocation").
3
<PAGE>
(iv) In no event shall the Series B Conversion Price be reduced to
less than $1.00, as adjusted for any stock splits, recapitalizations or similar
events.
(e) ADDITIONAL ADJUSTMENTS TO THE SERIES B CONVERSION PRICE. The
Series B Conversion Price shall be adjusted from time to time as follows:
(i) If, at any time after the Final Closing Date, the Corporation
shall (A) pay a dividend or make a distribution on its outstanding shares of
Common Stock in shares of its capital stock (whether shares of its Common Stock
or capital stock of any other class), (B) subdivide its outstanding shares of
Common Stock, (C) combine its outstanding shares of Common Stock into a smaller
number of shares or (D) issue by reclassification of its shares of Common Stock
any shares of capital stock of the Corporation, the Series B Conversion Price in
effect immediately prior to such action shall be adjusted so that the holder of
any shares of Series B Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of capital stock of the
Corporation which such holder would have owned immediately following such action
had such shares of Preferred Stock been converted immediately prior thereto.
Upon the effective date of any such dividend, distribution, subdivision,
combination or reclassification, an adjustment made pursuant to this Section
3(e)(i) shall become effective retroactively as of the record date for any such
dividend, distribution, subdivision, combination or reclassification.
(ii) If, at any time after the Final Closing Date, the Corporation
shall issue to holders of shares of its outstanding Common Stock generally any
rights, options or warrants entitling them to subscribe for or purchase
(A) shares of its Common Stock, (B) any assets of the Corporation, (C) any
securities of the Corporation (except its Common Stock) or of any corporation
other than the Corporation or (D) any rights, options or warrants entitling them
to subscribe for or to purchase any of the foregoing securities, whether or not
such rights, options or warrants are immediately exercisable (collectively, a
"DISTRIBUTION ON COMMON STOCK"), the Corporation shall issue to the holders of
its outstanding shares of Series B Preferred Stock the Distribution on Common
Stock to which they would have been entitled if they had converted such shares
of Series B Preferred Stock immediately prior to the record date for the purpose
of determining stockholders entitled to receive such Distribution on Common
Stock.
(f) DE MINIMIS CHANGES. No adjustment in the Series B Conversion
Price shall be required unless such adjustment would require an increase or
decrease of at least $.05 in such Series B Conversion Price; provided, however,
that any adjustments which by reason of this Section 3(f) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 3(f) shall be made to the
nearest cent or the nearest one hundredth of a share, as the case may be.
(g) NOTICE OF ADJUSTMENT. Upon the occurrence of each adjustment
or readjustment of the Series B Conversion Price pursuant to this Section 3, the
Corporation,
4
<PAGE>
at its expense, shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each holder of
shares of Series B Preferred Stock a certificate setting forth such adjustment
or readjustment and the computations upon which it is based. The Corporation
shall, upon the written request at any time of any holder of Series B Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (A) such adjustment and readjustment, (B) the Series B Conversion
Price in effect at such time and (C) the number of shares of Common Stock and
the amount, if any, of other property which at the time would be received upon
the conversion of a share of the Preferred Stock held by such holder.
(h) NO FRACTIONAL SHARES TO BE ISSUED. No fractional shares or
script representing fractional shares of Common Stock shall be issued upon
conversion of shares of Preferred Stock. Instead of any fractional share of
Common Stock that would otherwise be issuable upon conversion of shares of
Series B Preferred Stock (or specified portions thereof), the Corporation shall
pay in cash to the holders of such Preferred Stock in respect of such fraction
of a share an amount equal to the same fraction of the fair market value per
share of the amount of Common Stock into which such shares of Preferred Stock
would otherwise be convertible, as determined by the Board of Directors of the
Corporation in good faith exercising reasonable business judgment.
(i) EFFECT OF SALE, MERGER OR CONSOLIDATION. In the event of any
capital reorganization of the Corporation (other than a subdivision or
combination of shares of Common Stock set forth in Section 3(e)(i)),
reclassification (other than a change in par value) of the Common Stock,
conversion of the Common Stock into securities of another corporation, or a
Corporate Transaction (each such event being referred to as a "CAPITAL CHANGE"),
a share of Series B Preferred Stock shall be convertible after such Capital
Change, upon the terms and conditions specified herein, for the number of shares
of stock or other securities or property of the Corporation or of the
corporation into which shares of Common Stock are converted or resulting from
such consolidation or surviving such merger or to which such sale shall be made,
as the case may be, to which, at the time of such Capital Change, the shares of
Common Stock issuable upon conversion of such shares of Series B Preferred Stock
would have been entitled upon such Capital Change. In any case, if necessary,
the provisions set forth in Section 3 with respect to the rights and interests
of the holders of Series B Preferred Stock shall be appropriately adjusted so as
to be reasonably applicable to any shares of stock or other securities or
property thereafter deliverable on the conversion of each such series. The
Corporation shall not effect any consolidation, merger or sale resulting in a
Capital Change unless, prior to or simultaneously with the consummation thereof,
any successor corporation or corporation purchasing such assets shall assume, by
written instrument, the obligation to deliver to the holders of Series B
Preferred Stock such shares of stock, securities or assets as the holders of
each Preferred Stock may be entitled to receive upon conversion of the such
stock in accordance with the foregoing provisions and all the other obligations
of the Corporation hereunder.
5
<PAGE>
(j) RESERVATION OF SHARES FOR ISSUANCE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of issuance upon
conversion of Series B Preferred Stock as provided herein, such number of shares
of Common Stock as shall then be issuable upon the conversion of all outstanding
shares of Preferred Stock. All shares of Common Stock which shall be so
issuable upon conversion of the Series B Preferred Stock as herein provided
shall, when issued, be duly authorized, validly issued, fully paid and non-
assessable, free of all liens, claims and changes and not subject to preemptive
rights.
(k) PAYMENT OF TAXES ON SHARES ISSUED UPON CONVERSION. The
issuance of certificates of Common Stock upon conversion of shares of the
Series B Preferred Stock shall be made without charge to the converting holders
for any tax in respect of the issuance of such certificates and such
certificates shall be issued in the respective names of, or in such names as may
be directed by, the holders of the shares of the Preferred Stock so converted;
provided, however, that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate in a name other than the name in which the
shares of the Series B Preferred Stock so converted were registered, and the
Corporation shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Corporation the amount of such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid.
(l) OTHER EVENTS. If any event occurs as to which in the opinion
of the Board of Directors the provisions of this Section 3 would not fairly
protect the conversion rights of the holders of Series B Preferred Stock and/or
the rights of other stockholders of the Corporation in accordance with the
intent and principles of such provisions, then the Corporation's Board of
Directors may, in its discretion, adjust the application of such provisions, in
accordance with such intent and principles, so as to protect such conversion
rights and/or the rights of other stockholders of the Corporation, if
applicable.
(m) NO IMPAIRMENT. The Corporation will not, by amendment of this
Exhibit B or the Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation with regard to the Series B Preferred Stock, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series B Preferred Stock against impairment.
SECTION 4. PREFERENCE ON LIQUIDATION.
(a) LIQUIDATION TRANSACTION; LIQUIDATION PREFERENCES. In the event
of any voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation or
6
<PAGE>
upon a Corporate Transaction (any such event being referred to as a "LIQUIDATION
TRANSACTION"), the holders of the Series B Preferred Stock shall have the option
to either (i) convert their shares into Common Stock of the Corporation
immediately prior to the Liquidation Transaction, or (ii) be entitled to be paid
out of the assets of the Corporation available for distribution to its
stockholders (whether capital or surplus), or out of the proceeds thereof, an
amount in cash equal to $6.25 per share plus any accrued and unpaid dividends on
the Series B Preferred Stock (the "SERIES B LIQUIDATION PREFERENCE"), as
provided in this Section 4.
(b) ORDER OF PREFERENCE AND AMOUNT. In the event of a Liquidation
Transaction, any payment or distribution of the assets of the Corporation
(whether capital or surplus) or the proceeds thereof, shall be made to set apart
in the following order of preference and amounts after payment or provision for
payment of the debts and other liabilities of the Corporation:
(i) the holders of the issued and outstanding shares of the
Series A Preferred Stock and the Series B Preferred Stock shall be entitled to
receive payment of the Series A Liquidation Preference (as defined in Exhibit A
to the Corporation's Restated Certificate of Incorporation) and the Series B
Liquidation Preference on a PARI PASSU basis, as described below; and
(ii) if the amounts available to the holders of the issued and
outstanding shares of Series A Preferred Stock and Series B Preferred Stock are
not sufficient to pay the holders thereof in full the applicable preferential
amounts set forth in Section 4(a), then the amounts available for payment to
such holders shall be paid proportionately to the holders of each such series of
Preferred Stock as a group.
(c) ADDITIONAL DISTRIBUTIONS. In the event the Liquidation
Transaction is not a Corporate Transaction, then after payment in full of the
preferential amounts set forth in Section 4(a), the remaining assets of the
Corporation legally available for distribution shall be distributed ratably on a
per share basis among the holders of shares of Common Stock, the Series A
Preferred Stock and the Series B Preferred Stock.
(d) CONSOLIDATION, MERGER OR SALE OF ASSETS. Notwithstanding
anything to the contrary stated herein, a consolidation or merger of the
Corporation with or into any other corporation or corporations, or a sale,
conveyance or disposition of all or substantially all of the assets of the
Corporation or the effectuation by transactions in which the Corporation is not
the surviving corporation or in which more than 50% of the voting power of the
Corporation is disposed of, shall not be deemed to be a liquidation, dissolution
or winding up within the meaning of this Section 4, but shall instead be treated
pursuant to Subsection 3(d) hereof.
SECTION 5. VOTING.
(a) GENERAL. The holders of Series B Preferred Stock shall be
entitled to vote on all matters submitted to a vote of the holders of Common
Stock generally and to
7
<PAGE>
receive notice of all meetings of the stockholders. Unless otherwise required
by applicable law, the holders of shares of Series B Preferred Stock shall vote
together with the holders of the Common Stock as though part of that class and
shall have the right to that number of votes equal to the number of shares of
Common Stock into which the shares of Series B Preferred Stock are convertible
on the applicable record date.
(b) PROTECTIVE PROVISIONS.
(i) So long as any shares of Series B Preferred Stock are
outstanding, this Corporation shall not without first obtaining the approval (by
vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series B Preferred Stock, voting
separately as a class, (A) alter or change the rights, preferences or privileges
of the shares of such Series B Preferred Stock so as to affect adversely the
shares or (B) increase the authorized number of shares of Series B Preferred
Stock.
SECTION 6. NOTICE. Any notice required by these provisions to be
given to the holders of shares of Series B Preferred Stock shall be deemed given
if sent U.S. certified mail, return receipt requested and postage prepaid, or by
overnight courier and addressed to each holder of record at its address
appearing on the books of the Corporation. The date of any such notice shall be
deemed to be the date of which it is received.
8
<PAGE>
EXHIBIT C
DESCRIPTION OF SERIES C PREFERRED STOCK
This Exhibit C sets forth the number of shares of the Corporation's Series
C Convertible Preferred Stock, par value $.01 per share, and the rights,
preferences, privileges and restrictions granted to and imposed thereon.
Capitalized terms used herein but not defined shall have the meanings given them
in the Corporation's Restated Certificate of Incorporation, to which this
Exhibit C is an exhibit.
SECTION 1. DESIGNATION OF SERIES; RANK.
(a) 2,000,000 shares of Preferred Stock shall be designated "Series C
Convertible Preferred Stock" (the "SERIES C PREFERRED STOCK").
(b) With respect to the payments of dividends, the Series C Preferred
Stock shall rank on a parity with the Series A Preferred Stock and the Series B
Preferred Stock, and shall be senior to the Common Stock. With respect to the
distribution of assets upon liquidation, dissolution, or winding up, the Series
C Stock shall rank on a parity with the Series A Preferred Stock and Series B
Preferred Stock, and shall be senior to the Common Stock.
SECTION 2. DIVIDENDS. The holders of the shares of Series C Preferred
Stock shall be entitled to receive dividends out of funds legally available
therefor, when, as and if declared by the Board of Directors of the Corporation
in its discretion; provided, however, that no dividends shall be declared or
paid on the Common Stock during any final year unless the Board of Directors
during such fiscal year shall have declared and set aside for payment of a
dividend on the Series C Preferred Stock.
SECTION 3. CONVERSION. The holders of the shares of the Series C
Preferred Stock shall have conversion rights as follows:
(a) CONVERSION PRIVILEGE. Subject to Section 3(b), each share of
Series C Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such shares, into such number
of duly authorized, fully paid and non-assessable shares of Common Stock at the
Series C Conversion Price at the time in effect for such shares (the "SERIES C
CONVERSION PRICE"). The initial Series C Conversion Price shall be $6.25,
subject to adjustment as set forth in Sections 3(d) and 3(e).
(b) AUTOMATIC CONVERSION. In the event of (A) a Qualified Public
Offering (hereinafter defined) of the Corporation; or (B) the receipt by the
Corporation of notice from a majority of the holders of Series C Preferred Stock
electing to convert their shares, each share of Series C Preferred Stock shall
be automatically converted at the closing of the Qualified Public Offering or
upon receipt of such notice, without any action by the
1
<PAGE>
holder thereof, into duly authorized, fully paid and non-assessable shares of
Common Stock at the then applicable Series C Conversion Price, subject to
adjustment as provided in Sections 3(d) and 3(e), plus cash in lieu of
fractional shares. The Corporation shall make no payment or adjustment on the
account of any accrued and unpaid dividends on the Series C Preferred Stock upon
surrender for conversion. A "QUALIFIED PUBLIC OFFERING" means an underwritten
public offering of Common Stock registered under the Securities Act of 1933, as
amended, in which the aggregate proceeds to the Corporation, net of underwriting
discounts and commissions, equal or exceed $7,500,000.
(c) MECHANICS OF CONVERSION. Before any holder of shares of Preferred
Stock shall be entitled to convert such shares into Common Stock, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
principal executive offices of the Corporation or of the transfer agent
therefor, if any, and shall give written notice to the Corporation that such
holder elects to convert all or part of the shares represented by the
certificate or certificates and shall state in writing therein the name or names
in which such holder wishes the certificate or certificates for Common Stock to
be issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver to such holder or to such holder's nominee or nominees, a certificate or
certificates for the number of full shares of Common Stock to which such holder
shall be entitled as aforesaid, together with cash in lieu of any fraction of a
share as provided in Section 3(h). If surrendered certificates for Preferred
Stock are converted only in part, the Corporation will issue and deliver to the
holder, or to such holder's nominee or nominees, a new certificate or
certificates representing the remaining unconverted shares of Preferred Stock.
Shares of Preferred Stock shall be deemed to have been converted as of the date
of the surrender of such shares for conversion as provided above, and the person
or persons entitled to receive the Common Stock issuable upon conversion shall
be treated for all purposes as the record holder or holders of such Common Stock
as of the date of conversion.
(d) CONVERSION PRICE ADJUSTMENTS FOR SERIES C PREFERRED STOCK. The
Series C Conversion Price shall be subject to adjustment from time to time as
follows (the adjustments referred to in Subsections 3(d)(i) and (ii) shall be
referred to as a "MINIMUM RETURN ADJUSTMENT"):
(i) If at any time after the first issuance of shares of Series C
Preferred Stock (the "First Issuance Date"), the Corporation:
(A) completes an underwritten initial public offering of its
securities (a "Terminating IPO") in which it issues any shares of Common
Stock or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional shares of
Common Stock ("Common Stock Equivalents"), or
(B) consummates a merger or consolidation in which more than
fifty percent (50%) of the voting power of the Corporation is transferred,
or a sale or
2
<PAGE>
other disposition of all or substantially all of the assets of the
Corporation (a "Corporate Transaction"), and, in the event of a
Terminating IPO, the effective price per Common Stock Equivalent issued,
or in the event of a Corporate Transaction, the fair market value of the
stock, securities or other property to be received by the holders of
Common Stock of the Corporation on a per share as-converted basis
(including the Common Stock issuable to the holders of Series C
Preferred Stock electing to convert and taking into account any Minimum
Return Adjustment effected as a result of such transaction) (the "Per
Share Price"), is less than (X) during the first year following the
First Issuance Date, 135% of the then applicable Series C Conversion
Price, (Y) during the second year following the First Issuance Date,
subject to Quarterly Allocation (as defined in Subsection 3(d)(iii)),
170% of the then applicable Series C Conversion Price or (Z) after the
second year following the First Issuance Date, subject to Quarterly
Allocation, 205% of the then applicable Series C Conversion Price, then
the Series C Conversion Price will be reduced (but not increased) to
equal (A) 74.07% of the Per Share Price for issuances made during the
first year following the First Issuance Date, (B) 58.82% of the Per
Share Price for issuances made during the second year following the
First Issuance Date and (C) 48.78% of the Per Share Price for issuances
made after the second year following the First Issuance Date.
(ii) In the event that in connection with a Terminating IPO, the Per
Share Price is not readily ascertainable, the determination of the Per Share
Price of any Common Stock Equivalent shall be determined in good faith by the
Corporation's Board of Directors based upon an allocation of the proceeds of the
Terminating IPO among the Common Stock Equivalents, considering the special
terms, rights or privileges or other securities incorporated or included in such
Terminating IPO. In the event that any holder of Series C Preferred Stock
disagrees with the determination of the Board of Directors, then for a period
commencing no earlier than 60 days and ending no later than 30 days prior to
commencement of the Terminating IPO, such holder shall have the right to convert
their shares of Series C Preferred Stock into the same type and class of
securities or other consideration comprising the Terminating IPO at a discount
to the per security offering price of the Terminating IPO equal to (i) 74.07%
for a Terminating IPO consummated during the first year following the First
Issuance Date, (ii) 58.82% for a Terminating IPO consummated during the second
year following the First Issuance Date, and (iii) 48.78% for a Terminating IPO
consummated after the second year following the First Issuance Date. Such right
of conversion shall represent the sole and exclusive remedy of such holder with
respect to such Terminating IPO.
(iii) Minimum Return Adjustments will not be made after the conversion of
the Series C Preferred Stock (a "Termination Event"). Minimum Return
Adjustments may be made more than once, but will never serve to increase the
Series C Preferred Conversion Price. Commencing during the second year
following the First Issuance Date, Minimum Return Adjustments will be allocated
8.75% per quarter to reflect the
3
<PAGE>
quarter of the year in which the transaction causing such Minimum Return
Adjustment occurs ("Quarterly Allocation").
(iv) In no event shall the Series C Conversion Price be reduced to less
than $1.00, as adjusted for any stock splits, recapitalizations or similar
events.
(e) ADDITIONAL ADJUSTMENTS TO THE SERIES C CONVERSION PRICE. The
Series C Conversion Price shall be adjusted from time to time as follows:
(i) If the Corporation shall (A) pay a dividend or make a distribution
on its outstanding shares of Common Stock in shares of its capital stock
(whether shares of its Common Stock or capital stock of any other class),
(B) subdivide its outstanding shares of Common Stock, (C) combine its
outstanding shares of Common Stock into a smaller number of shares or (D) issue
by reclassification of its shares of Common Stock any shares of capital stock of
the Corporation, the Series C Conversion Price in effect immediately prior to
such action shall be adjusted so that the holder of any shares of Series C
Preferred Stock thereafter surrendered for conversion shall be entitled to
receive the number of shares of capital stock of the Corporation which such
holder would have owned immediately following such action had such shares of
Preferred Stock been converted immediately prior thereto. Upon the effective
date of any such dividend, distribution, subdivision, combination or
reclassification, an adjustment made pursuant to this Section 3(e)(i) shall
become effective retroactively as of the record date for any such dividend,
distribution, subdivision, combination or reclassification.
(ii) If the Corporation shall issue to holders of shares of its
outstanding Common Stock generally any rights, options or warrants entitling
them to subscribe for or purchase (A) shares of its Common Stock, (B) any assets
of the Corporation, (C) any securities of the Corporation (except its Common
Stock) or of any corporation other than the Corporation or (D) any rights,
options or warrants entitling them to subscribe for or to purchase any of the
foregoing securities, whether or not such rights, options or warrants are
immediately exercisable (collectively, a "DISTRIBUTION ON COMMON STOCK"), the
Corporation shall issue to the holders of its outstanding shares of Series C
Preferred Stock the Distribution on Common Stock to which they would have been
entitled if they had converted such shares of Series C Preferred Stock
immediately prior to the record date for the purpose of determining stockholders
entitled to receive such Distribution on Common Stock.
(f) DE MINIMIS CHANGES. No adjustment in the Series C Conversion Price
shall be required unless such adjustment would require an increase or decrease
of at least $.05 in such Series C Conversion Price; provided, however, that any
adjustments which by reason of this Section 3(f) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 3(f) shall be made to the nearest cent or
the nearest one hundredth of a share, as the case may be.
4
<PAGE>
(g) NOTICE OF ADJUSTMENT. Upon the occurrence of each adjustment or
readjustment of the Series C Conversion Price pursuant to this Section 3, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of shares of Series C Preferred Stock a certificate setting forth such
adjustment or readjustment and the computations upon which it is based. The
Corporation shall, upon the written request at any time of any holder of Series
C Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (A) such adjustment and readjustment, (B) the Series C
Conversion Price in effect at such time and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of the Preferred Stock held by such
holder.
(h) NO FRACTIONAL SHARES TO BE ISSUED. No fractional shares or script
representing fractional shares of Common Stock shall be issued upon conversion
of shares of Preferred Stock. Instead of any fractional share of Common Stock
that would otherwise be issuable upon conversion of shares of Series C Preferred
Stock (or specified portions thereof), the Corporation shall pay in cash to the
holders of such Preferred Stock in respect of such fraction of a share an amount
equal to the same fraction of the fair market value per share of the amount of
Common Stock into which such shares of Preferred Stock would otherwise be
convertible, as determined by the Board of Directors of the Corporation in good
faith exercising reasonable business judgment.
(i) EFFECT OF SALE, MERGER OR CONSOLIDATION. In the event of any
capital reorganization of the Corporation (other than a subdivision or
combination of shares of Common Stock set forth in Section 3(e)(i)),
reclassification (other than a change in par value) of the Common Stock,
conversion of the Common Stock into securities of another corporation, or a
Corporate Transaction (each such event being referred to as a "CAPITAL CHANGE"),
a share of Series C Preferred Stock shall be convertible after such Capital
Change, upon the terms and conditions specified herein, for the number of shares
of stock or other securities or property of the Corporation or of the
corporation into which shares of Common Stock are converted or resulting from
such consolidation or surviving such merger or to which such sale shall be made,
as the case may be, to which, at the time of such Capital Change, the shares of
Common Stock issuable upon conversion of such shares of Series C Preferred Stock
would have been entitled upon such Capital Change. In any case, if necessary,
the provisions set forth in Section 3 with respect to the rights and interests
of the holders of Series C Preferred Stock shall be appropriately adjusted so as
to be reasonably applicable to any shares of stock or other securities or
property thereafter deliverable on the conversion of each such series. The
Corporation shall not effect any consolidation, merger or sale resulting in a
Capital Change unless, prior to or simultaneously with the consummation thereof,
any successor corporation or corporation purchasing such assets shall assume, by
written instrument, the obligation to deliver to the holders of Series C
Preferred Stock such shares of stock, securities or assets as the holders of
each Preferred Stock may be entitled to receive upon conversion of the such
stock in accordance with the foregoing provisions and all the other obligations
of the Corporation hereunder.
5
<PAGE>
(j) RESERVATION OF SHARES FOR ISSUANCE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of issuance upon
conversion of Series C Preferred Stock as provided herein, such number of shares
of Common Stock as shall then be issuable upon the conversion of all outstanding
shares of Preferred Stock. All shares of Common Stock which shall be so
issuable upon conversion of the Series C Preferred Stock as herein provided
shall, when issued, be duly authorized, validly issued, fully paid and non-
assessable, free of all liens, claims and changes and not subject to preemptive
rights.
(k) PAYMENT OF TAXES ON SHARES ISSUED UPON CONVERSION. The issuance of
certificates of Common Stock upon conversion of shares of the Series C Preferred
Stock shall be made without charge to the converting holders for any tax in
respect of the issuance of such certificates and such certificates shall be
issued in the respective names of, or in such names as may be directed by, the
holders of the shares of the Preferred Stock so converted; provided, however,
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any such
certificate in a name other than the name in which the shares of the Series C
Preferred Stock so converted were registered, and the Corporation shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Corporation the
amount of such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.
(l) OTHER EVENTS. If any event occurs as to which in the opinion of
the Board of Directors the provisions of this Section 3 would not fairly protect
the conversion rights of the holders of Series C Preferred Stock and/or the
rights of other stockholders of the Corporation in accordance with the intent
and principles of such provisions, then the Corporation's Board of Directors
may, in its discretion, adjust the application of such provisions, in accordance
with such intent and principles, so as to protect such conversion rights and/or
the rights of other stockholders of the Corporation, if applicable.
(m) NO IMPAIRMENT. The Corporation will not, by amendment of this
Certificate of Designation or the Certificate of Incorporation or through any
reorganization, recapitalization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Corporation with regard to the Series C Preferred
Stock, but will at all times in good faith assist in the carrying out of all the
provisions of this Section 3 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series C Preferred Stock against impairment.
SECTION 4. PREFERENCE ON LIQUIDATION.
(a) LIQUIDATION TRANSACTION; LIQUIDATION PREFERENCES. In the event of
any voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation or
6
<PAGE>
upon a Corporate Transaction (any such event being referred to as a "LIQUIDATION
TRANSACTION"), the holders of the Series C Preferred Stock shall have the option
to either (i) convert their shares into Common Stock of the Corporation
immediately prior to the Liquidation Transaction, or (ii) be entitled to be paid
out of the assets of the Corporation available for distribution to its
stockholders (whether capital or surplus), or out of the proceeds thereof, an
amount in cash equal to $6.25 per share plus any accrued and unpaid dividends on
the Series C Preferred Stock (the "SERIES C LIQUIDATION PREFERENCE"), as
provided in this Section 4.
(b) ORDER OF PREFERENCE AND AMOUNT. In the event of a Liquidation
Transaction, any payment or distribution of the assets of the Corporation
(whether capital or surplus) or the proceeds thereof, shall be made to or set
apart in the following order of preference and amounts after payment or
provision for payment of the debts and other liabilities of the Corporation:
(i) the holders of the issued and outstanding shares of the Series A
Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock
shall be entitled to receive payment of the Series A Liquidation Preference, the
Series B Liquidation Preference and the Series C Liquidation Preference on a
PARI PASSU basis, as described below; and
(ii) if the amounts available to the holders of the issued and
outstanding shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock are not sufficient to pay the holders thereof in full
the applicable preferential amounts set forth in Section 4(a), then the amounts
available for payment to such holders shall be paid proportionately to the
holders of each such series of Preferred Stock as a group.
(c) ADDITIONAL DISTRIBUTIONS. In the event the Liquidation Transaction
is not a Corporate Transaction, then after payment in full of the preferential
amounts set forth in Section 4(a), the remaining assets of the Corporation
legally available for distribution shall be distributed ratably on a per share
basis among the holders of shares of Common Stock, the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock.
(d) CONSOLIDATION, MERGER OR SALE OF ASSETS. Notwithstanding anything
to the contrary stated herein, a consolidation or merger of the Corporation with
or into any other corporation or corporations, or a sale, conveyance or
disposition of all or substantially all of the assets of the Corporation or the
effectuation by transactions in which the Corporation is not the surviving
corporation or in which more than 50% of the voting power of the Corporation is
disposed of, shall not be deemed to be a liquidation, dissolution or winding up
within the meaning of this Section 4, but shall instead be treated pursuant to
Subsection 3(d) hereof.
SECTION 5. VOTING.
7
<PAGE>
(a) GENERAL. The holders of Series C Preferred Stock shall be entitled
to vote on all matters submitted to a vote of the holders of Common Stock
generally and to receive notice of all meetings of the stockholders. Unless
otherwise required by applicable law, the holders of shares of Series C
Preferred Stock shall vote together with the holders of the Common Stock as
though part of that class and shall have the right to that number of votes equal
to the number of shares of Common Stock into which the shares of Series C
Preferred Stock are convertible on the applicable record date.
(b) PROTECTIVE PROVISIONS.
(i) So long as any shares of Series C Preferred Stock are outstanding,
this Corporation shall not without first obtaining the approval (by vote or
written consent, as provided by law) of the holders of at least a majority of
the then outstanding shares of Series C Preferred Stock, voting separately as a
class, (A) alter or change the rights, preferences or privileges of the shares
of such Series C Preferred Stock so as to affect adversely the shares or
(B) increase the authorized number of shares of Series C Preferred Stock.
NOTICE. Any notice required by these provisions to be given to the holders
of shares of Series C Preferred Stock shall be deemed given if sent U.S.
certified mail, return receipt requested and postage prepaid, or by overnight
courier and addressed to each holder of record at its address appearing on the
books of the Corporation. The date of any such notice shall be deemed to be the
date of which it is received.
8
<PAGE>
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION
OF SUCH SECURITIES MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE
REGISTRATION STATEMENT RELATING THERETO, (ii) AN OPINION OF COUNSEL
FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER FROM
THE SECURITIES AND EXCHANGE COMMISSION, OR (iv) OTHERWISE COMPLYING
WITH THE PROVISIONS OF ARTICLE III OF THIS WARRANT.
WARRANT
TO PURCHASE SHARES OF SERIES A PREFERRED STOCK
AS HEREIN DESCRIBED
Dated August 31, 1993
This certifies that for value received:
PHOENIX LEASING INCORPORATED
or registered assigns, is entitled, subject to the terms set forth herein, to
purchase from Mercator Genetics, Inc., a Delaware corporation (the "COMPANY"),
up to Fifty Thousand (50,000) fully paid and non-assessable shares of the
Company's Series A Preferred Stock, at the price of One Dollar ($1.00) per
share. The initial purchase price of One Dollar ($1.00) per share, and the
number of shares purchasable hereunder, are subject to adjustment in certain
events, all as more fully set forth under Article IV herein.
ARTICLE I
DEFINITIONS
"ADDITIONAL SHARES OF COMMON STOCK" has the meaning specified in the
Certificate of Incorporation.
"CERTIFICATE OF INCORPORATION" means the Certificate of Incorporation of
the Company, as filed with the Delaware Secretary of State on October 9, 1992,
as amended by Certificate of Amendment of the Certificate of Incorporation of
the Company, as filed with the Delaware Secretary of State on February 26, 1993
and by Certificate of Amendment of
1
<PAGE>
the Certificate of Incorporation of the Company, as filed with the Delaware
Secretary of State on August _, 1993.
"CLOSING DATE" means August 31, 1993.
"COMMISSION" means the Securities and Exchange commission, or any other
federal agency then administering the Exchange Act or the Securities Act, as
defined herein.
"COMMON STOCK" means the Company's Common Stock, any stock into which such
stock shall have been changed or any stock resulting from any reclassification
of such stock, and any other capital stock of the Company of any class or series
now or hereafter authorized having the right to share in distributions either of
earnings or assets of the Company without limit as to amount or percentage.
"COMPANY" means Mercator Genetics, Inc., a Delaware corporation, and any
successor corporation.
"CONVERSION PRICE" means the Conversion Price for Series A Preferred Stock,
as determined in accordance with the Certificate of Incorporation.
"CONVERTIBLE SECURITIES" means evidences of indebtedness, shares of stock
or other securities which are convertible into or exchangeable for, with or
without payment of additional consideration, shares of Common Stock, either
immediately or upon the arrival of a specified date or the happening of a
specified event or both.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor federal statute, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect from time to time.
"EXERCISE PERIOD" means the period commencing on the Closing Date and
terminating at the later to occur of: (i) 5:00 p.m., Pacific Time on the tenth
(10th) anniversary of the Closing Date, or (ii) 5:00 p.m., Pacific Time on the
fifth (5th) anniversary of the closing of the Company's initial sale and
issuance of shares of Common Stock in an underwritten public offering, pursuant
to a Registration.
"EXERCISE PRICE" means the price per share of Series A Preferred Stock set
forth in the Preamble to this Warrant, as such price may be adjusted pursuant to
Article IV hereof.
"FAIR MARKET VALUE" means
(i) If shares of Series A Preferred Stock or Common Stock, as the
case may be, are being sold pursuant to a public offering under an effective
registration statement under the Securities Act which has been declared
effective by the Commission and Fair
2
<PAGE>
Market Value is being determined as of the closing of the public offering, the
"price to public" specified for such shares in the final prospectus for such
public offering;
(ii) If shares of Series A Preferred Stock or Common Stock, as the
case may be, are then listed or admitted to trading on any national securities
exchange or traded on any national market system and Fair Market Value is not
being determined as of the date described in clause (i) of this definition, the
average of the daily closing prices for the thirty (30) trading days before such
date, excluding any trades which are not bona fide, arm's-length transactions.
The closing price for each day shall be the last sale price on such date or, if
no such sale takes place on such date, the average of the closing bid and asked
prices on such date, in each case as officially reported on the principal
national securities exchange or national market system on which such shares are
then listed, admitted to trading or traded;
(iii) If no shares of Series A Preferred Stock or Common Stock, as
the case may be, are then listed or admitted to trading on any national
securities exchange or traded on any national market system or being offered to
the public pursuant to a registration described in clause (i) of this
definition, the average of the reported closing bid and asked prices thereof on
such date in the over-the-counter market as shown by the National Association of
Securities Dealers automated quotation system or, if such shares are not then
quoted in such system, as published by the National Quotation Bureau,
Incorporated or any similar successor organization, and in either case as
reported by any member firm of the New York Stock Exchange selected by the
Holder;
(iv) If no shares of Series A Preferred Stock or Common Stock, as the
case may be, are then listed or admitted to trading on any national exchange or
traded on any national market system, if no closing bid and asked prices
thereof are then so quoted or published in the over-the-counter market and if
no such shares are being offered to the public pursuant to a registration
described in clause (i) of this definition, the fair value of a share of Series
A Preferred Stock or Common Stock, as the case may be, shall be as mutually
agreed by the Company and the Holder; PROVIDED, HOWEVER, that if the Company
and the Holder are unable to mutually agree upon the fair value, and the value
asserted by the Holder is not greater than one hundred ten percent (110%) of
the value asserted by the Company, then the fair value shall be the sum of (1)
the value asserted by the Company and (2) fifty percent (50%) of the difference
between the value asserted by the Company and, the value asserted by the
Holder; PROVIDED FURTHER, HOWEVER, that if the Company and the Holder are
unable to mutually agree upon the fair value and the immediately preceding
proviso is not operative, the Company and such Holder shall, within five (5)
days from the date that either party determines that they cannot agree or the
value asserted by the Holder is greater than one hundred ten percent (110%) of
the value asserted by the Company, jointly retain an investment banking firm,
or a nationally recognized accounting firm or other firm providing similar
valuation services, satisfactory to each of them. If the Company and the
Holder are unable to agree on the selection of such a firm within such
3
<PAGE>
five (5) day period, the Company and the Holder shall, within twenty (20) days
after expiration of such five day period, each retain a separate independent
investment banking firm (which firm, in either case, shall not be the investment
banking firm regularly retained by the Company or the Holder). If either the
Company or the Holder fail to retain such an investment banking firm during such
twenty (20) day period, then the independent investment banking firm retained by
the Holder or the Company, as the case may be, shall alone take the actions
described below. Such firms shall determine within thirty (30) days of being
retained the fair value of a share of Series A Preferred Stock or Common Stock,
as the case may be, and deliver their opinion in writing to the Company and to
the Holder as to the fair value. If such firms cannot jointly agree upon the
fair value, then, unless otherwise directed in writing by both the Company and
the Holder, such firms, in their sole discretion, shall choose another
investment banking firm independent of the Company and the Holder, which firm
shall make such determination and render such an opinion as promptly as
practicable. In either case, the determination so made shall be conclusive and
binding on the Company and the Holder. The fees and expenses for such
determination made by any and all such investment banking or other firms shall
be paid by the Company. In the determination of the fair value of a share of
Series A Preferred Stock or Common Stock, as the case may be, there shall not be
taken into consideration any premium for shares representing control of the
Company or any discount related to shares representing a minority interest
therein or related to any illiquidity or lack of marketability of shares arising
from restrictions on transfer under federal and applicable state securities laws
or otherwise.
"FISCAL YEAR" means the fiscal year of the Company.
"HOLDER" means the person in whose name this Warrant is registered on the
books of the Company maintained for such purpose.
"OPTION" means any right, warrant or option to subscribe for or purchase
shares of Common Stock or Convertible Securities.
"PERSON" means and includes natural persons, corporations, limited
partnerships, general partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts, business
trusts, government entities and authorities and other organizations, whether or
not legal entities.
"PREFERRED STOCK" means the Preferred Stock of the Company, as defined in
the Certificate of Incorporation.
4
<PAGE>
"PRINCIPAL EXECUTIVE OFFICE" means the Company's office at 4040 Campbell
Avenue, Menlo Park, California 94025, or such other office as designated in
writing to the Holder by the Company.
"REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement in compliance with
the Securities Act, and the declaration or ordering of the effectiveness of
such registration statement.
"RIGHTS AGREEMENT" means the Series A Preferred Stock Purchase Agreement,
dated as of March 1, 1993, by and among the Company and the stockholders of the
Company named therein, attached hereto as EXHIBIT "E."
"RULE 144" means Rule 144 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that the Commission may promulgate.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect from time to time.
"SERIES A PREFERRED STOCK" means the Series A Preferred Stock of the
Company, as defined in the Certificate of Incorporation.
"STOCKHOLDER" means a holder of one or more Warrant Shares or shares of
Common Stock acquired upon conversion of Warrant Shares.
"WARRANT" means the warrant dated as of Closing Date issued to Holder and
all warrants issued upon the partial exercise, transfer or division of or in
substitution for any Warrant.
"WARRANT SHARES" means the shares of Series A Preferred Stock issuable upon
the exercise of this Warrant provided that if under the terms hereof there shall
be a change such that the securities purchasable hereunder shall be issued by an
entity other than the Company or there shall be a change in the type or class of
securities purchasable hereunder, then the term shall mean the securities
issuable upon the exercise of the rights granted hereunder.
ARTICLE II
EXERCISE
2.1 EXERCISE RIGHT; MANNER OF EXERCISE. The purchase rights represented
by this Warrant may be exercised by the Holder, in whole or in part, at any time
and from time to time during the Exercise Period upon (i) surrender of this
Warrant, together with an executed
5
<PAGE>
Notice of Exercise, substantially in the form of EXHIBIT "A" attached hereto, at
the Principal Executive Office, and (ii) payment to the Company of the aggregate
Exercise Price for the number of Warrant Shares specified in the Notice of
Exercise (such aggregate Exercise Price the "TOTAL EXERCISE PRICE") . The Total
Exercise Price shall be paid by check; PROVIDED, HOWEVER, that if the Warrant
Shares are acquired in conjunction with a Registration of such Warrant Shares or
the Common Stock acquirable upon conversion of such Warrant Shares, then Holder
may arrange for the aggregate Exercise Price for such Warrant Shares to be paid
to the Company from the proceeds of the sale of such Warrant Shares or the
Common Stock acquirable upon conversion of such Warrant Shares pursuant to such
Registration. The Person or Person(s) in whose name(s) any certificate(s)
representing the Warrant Shares which are issuable upon exercise of this Warrant
shall be deemed to become the holder(s) of, and shall be treated for all
purposes as the record holder(s) of, such Warrant Shares, and such Warrant
Shares shall be deemed to have been issued, immediately prior to the close of
business on the date on which this Warrant and Notice of Exercise are presented
and payment made for such Warrant Shares, notwithstanding that the stock
transfer books of the company shall then, be closed or that certificates
representing such Warrant Shares shall not then be actually delivered to such
Person or Person(s). Certificates for the Warrant Shares so purchased shall be
delivered to the Holder within a reasonable time, not exceeding fifteen (15)
days after this Warrant is exercised. If this Warrant is exercised in part
only, the Company shall, upon surrender of this Warrant for cancellation,
deliver a new Warrant evidencing the rights of the Holder to purchase the
balance of the Warrant Shares which Holder is entitled to purchase hereunder.
The issuance of Warrant Shares upon exercise of this Warrant shall be made
without charge to the Holder for any issuance tax with respect thereto or any
other cost incurred by the Company in connection with the exercise of this
Warrant and the related issuance of Warrant Shares.
2.2 CONVERSION OF WARRANT.
(a) RIGHT TO CONVERT. In addition to, and without limiting, the
other rights of the Holder hereunder, the Holder shall have the right (the
"CONVERSION RIGHT") to convert this Warrant or any part hereof into Warrant
Shares at any time and from time to time during the term hereof. Upon exercise
of the Conversion Right, the Company shall deliver to the Holder, without
payment by the Holder of any Exercise Price or any cash or other consideration,
that number of Warrant Shares computed using the following formula:
X= Y (A-B)
-------
A
Where: X= The number of Warrant Shares to be issued to the Holder
6
<PAGE>
Y= The number of Warrant Shares purchasable pursuant to this
Warrant
A= The Fair Market Value of one Warrant Share as of the
Conversion Date
B= The Exercise Price
(b) METHOD OF EXERCISE. The Conversion Right may be exercised by the
Holder by the surrender of this Warrant at the Principal Executive Office,
together with a written statement (the "CONVERSION STATEMENT") specifying that
the Holder intends to exercise the Conversion Right and indicating the number of
Warrant Shares to be acquired upon exercise of the Conversion Right. Such
conversion shall be effective upon the Company's receipt of this Warrant,
together with the Conversion Statement, or on such later date as is specified in
the Conversion Statement (the "CONVERSION DATE") and, at the Holder's election,
may be made contingent upon the closing of the consummation of the sale of
Common Stock pursuant to a Registration. Certificates for the Warrant Shares so
acquired shall be delivered to the Holder within a reasonable time, not
exceeding fifteen (15) days after the Conversion Date. If applicable, the
Company shall, upon surrender of this Warrant for cancellation, deliver a new
Warrant evidencing the rights of the Holder to purchase the balance of the
Warrant Shares which Holder is entitled to purchase hereunder. The issuance of
Warrant Shares upon exercise of this Warrant shall be made without charge to the
Holder for any issuance tax with respect thereto or any other cost incurred by
the company in connection with the conversion of this Warrant and the related
issuance of Warrant Shares.
2.3 FRACTIONAL SHARES. The Company shall not issue fractional shares of
Series A Preferred Stock or scrip representing fractional shares of Series A
Preferred Stock upon any exercise or conversion of this Warrant. As to any
fractional share of Series A Preferred Stock which the Holder would otherwise
be entitled to purchase from the Company upon such exercise or conversion, the
Company shall purchase from the Holder such fractional share at a price equal
to an amount calculated by multiplying such fractional share (calculated to the
nearest 1/100th of a share) by the fair market value of a share of Series A
Preferred Stock on the date of the Notice of Exercise or the Conversion Date,
as applicable, as determined in good faith by the Company's Board of Directors.
Payment of such amount shall be made in cash or by check payable to the order
of the Holder at the time of delivery of any certificate or certificates
arising upon such exercise or conversion.
2.4 CONTINUED VALIDITY. A Stockholder shall be entitled to all rights
which a Holder of this Warrant is entitled pursuant to the provisions of this
Warrant, except rights which by their terms apply only to a Warrant. The
Company shall, at the time of the
7
<PAGE>
exercise of this Warrant, in whole or in part, upon the request of a
Stockholder, acknowledge in writing, in form reasonably satisfactory to the
Stockholder, its continuing obligation to afford to the Stockholder all
rights to which "he Stockholder is entitled in accordance with the
provisions of this Warrant; PROVIDED, HOWEVER, that if the Stockholder fails
to make any such request, such failure shall not affect the continuing
obligation of the Company to afford to the Stockholder all such rights.
ARTICLE III
REGISTRATION, TRANSFER, EXCHANGE AND REPLACEMENT
3.1 MAINTENANCE OF REGISTRATION BOOKS. The Company shall keep at the
Principal Executive Office a register in which, subject to such reasonable
regulations as it may prescribe, it shall provide for the registration, transfer
and exchange of this Warrant. The Company and any Company agent may treat the
Person in whose name this Warrant is registered as the owner of this Warrant for
all purposes whatsoever and neither the Company nor any Company agent shall be
affected by any notice to the contrary.
3.2 RESTRICTIONS ON TRANSFERS.
(a) COMPLIANCE WITH SECURITIES ACT. The Holder, by acceptance
hereof, agrees that this Warrant, the Series A Preferred Stock to be issued upon
exercise hereof and the shares of Common Stock to be issued upon conversion of
such shares of Series A Preferred Stock are being acquired for investment,
solely for the Holder's own account and not as a nominee for any other Person,
and that the Holder will not offer, sell or otherwise dispose of this Warrant,
any such shares of Series A Preferred Stock or any such shares of Common Stock
except under circumstances which will not result in a violation of the
Securities Act. Upon exercise of this Warrant, the Holder shall confirm in
writing, by executing the form attached as EXHIBIT "B" hereto, that the shares
of Series A Preferred Stock or Common Stock purchased thereby are being acquired
for investment, solely for the Holder's own account and not as a nominee for any
other Person, and not with a view toward distribution or resale.
(b) CERTIFICATE LEGENDS. This Warrant, all shares of Series A
Preferred Stock issued upon exercise of this Warrant (unless Registered under
the Securities Act), and all shares of Common Stock issued upon conversion of
such shares of Series A Preferred Stock (unless Registered under the Securities
Act) shall be stamped or imprinted with a legend in substantially the following
form (in addition to any legends required by applicable state securities laws):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. NO
8
<PAGE>
SALE OR DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT (i) AN
EFFECTIVE REGISTRATION STATEMENT RELATING THERETO, (ii) AN OPINION OF
COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER FROM THE
SECURITIES AND EXCHANGE COMMISSION, OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF ARTICLE III OF THE WARRANT UNDER WHICH THIS SECURITY WAS
ISSUED.
(c) DISPOSITION OF WARRANT OR SHARES. With respect to any offer,
sale or other disposition of this Warrant, any shares of Series A Preferred
Stock issued upon exercise of this Warrant or shares of Common Stock acquired
pursuant to conversion of such shares of Series A Preferred Stock prior to
Registration of such shares, the Holder or the Stockholder, as the case may be,
agrees to give written notice to the Company prior thereto, describing briefly
the manner thereof, together with a written opinion of the Holder's or
Stockholder's counsel, if reasonably requested by the Company, to the effect
that such offer, sale or other disposition may be effected without Registration
under the Securities Act or qualification under any applicable state securities
laws of this Warrant or such shares, as the case may be, and indicating whether
or not under the Securities Act certificates for this Warrant or such shares, as
the case may be, to be sold or otherwise disposed of require any restrictive
legend as to applicable restrictions on transferability in order to insure
compliance with the Securities Act. Promptly upon receiving such written notice
and reasonably satisfactory opinion, if so requested, the Company, as promptly
as practicable, shall notify the Holder or the Stockholder, as the case may be,
that it may sell or otherwise dispose of this Warrant or such shares, as the
case may be, all in accordance with the terms of the notice delivered to the
Company. If a determination has been made pursuant to this subsection (c) that
the opinion of counsel for the Holder or the Stockholder, as the case may be, is
not reasonably satisfactory to the Company, the Company shall so notify the
Holder or the Stockholder, as the case may be, promptly after such determination
has been made and shall specify the legal analysis supporting any such
conclusion. Notwithstanding the foregoing, this Warrant or such shares, as the
case may be, may be offered, sold or otherwise disposed of in accordance with
Rule 144, provided that the Company shall have been furnished with such
information as the Company may reasonable request to provide reasonable
assurance that the provisions of Rule 144 have been satisfied. Each certificate
representing this Warrant or the shares thus transferred (except a transfer
pursuant to Rule 144) shall bear a legend as to the applicable restrictions on
transferability in order to insure compliance with the Securities Act, unless in
the aforesaid reasonably satisfactory opinion of counsel for the Holder or the
Stockholder, as the case may be, such legend is not necessary in order to insure
compliance with the Securities Act. The Company may issue stop transfer
instructions to its transfer agent in connection with such restrictions.
9
<PAGE>
(d) WARRANT TRANSFER PROCEDURE. Transfer of this Warrant to a third
party, following compliance with the preceding subsections of this Section 3.2,
shall be effected by execution of the Assignment Form attached hereto as
EXHIBIT "C", and surrender for registration of transfer of this Warrant at the
Principal Executive Office, together with funds sufficient to pay any
applicable transfer tax. Upon receipt of the duly executed Assignment Form and
the necessary transfer tax funds, if any, the Company, at its expense, shall
execute and deliver, in the name of the designated transferee or transferees,
one or more new Warrants representing the right to purchase a like aggregate
number of shares of Series A Preferred Stock.
(e) TERMINATION OF RESTRICTIONS. The restrictions imposed under this
Section 3.2 upon the transferability of the Warrant, the shares of Series A
Preferred Stock acquired upon the exercise of this Warrant and the shares of
Common Stock issuable upon conversion of such shares of Series A Preferred Stock
shall cease when (i) a registration statement covering all shares of Common
Stock issued or issuable upon conversion of the Series A Preferred Stock becomes
effective under the Securities Act, (ii) the Company is presented with an
opinion of counsel reasonably satisfactory to the Company that such restrictions
are no longer required in order to insure compliance with the Securities Act or
with a Commission "no-action" letter stating that future transfers of such
securities by the transferor or the contemplated transferee would be exempt from
registration under the Securities Act, or (iii) such securities may be
transferred in accordance with Rule 144 (k). When such restrictions terminate,
the Company shall, or shall instruct its transfer agent to, promptly, and
without expense to the Holder or the Stockholder, as the case may be, issue new
securities in the name of the Holder and/or the Stockholder, as the case may be,
not bearing the legends required under subsection (b) of this Section 3.2. In
addition, new securities shall be issued without such legends if such legends
may be properly removed under the terms of Rule 144(k).
3.3 EXCHANGE. At the Holder's option, this Warrant may be exchanged for
other Warrants representing the right to purchase a like aggregate number of
shares of Series A Preferred Stock upon surrender of this Warrant at the
Principal Executive Office. Whenever this Warrant is so surrendered to the
Company at the Principal Executive Office for exchange, the Company shall
execute and deliver the Warrants which the Holder is entitled to receive. All
Warrants issued upon any registration of transfer or exchange of Warrants shall
be the valid obligations of the Company, evidencing the same rights, and
entitled to the same benefits, as the Warrants surrendered upon such
registration of transfer or exchange. No service charge shall be made for any
exchange of this Warrant.
3.4 REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant and (i) in
the case of any such loss theft or destruction, upon delivery of indemnity
reasonably satisfactory to the company in form and amount, or (ii) in the case
of any such mutilation, upon surrender of
10
<PAGE>
such Warrant for cancellation at the Principal Executive Office, the Company, at
its expense, shall execute and deliver, in lieu thereof, a new Warrant.
ARTICLE IV
ANTIDILUTION PROVISIONS
4.1 CONVERSION OF SERIES A PREFERRED STOCK. If all of the Series A
Preferred Stock is converted into shares of Common Stock in connection with a
Registration, then this Warrant shall automatically become exercisable for that
number of shares of Common Stock equal to the number of shares of Common Stock
that would have been received if this Warrant had been exercised in full and the
shares of Series A Preferred Stock received thereupon had been simultaneously
converted into shares of Common Stock immediately prior to such event, and the
Exercise Price shall be automatically adjusted to equal the amount obtained by
dividing (i) the aggregate Exercise Price of the shares of Series A Preferred
Stock for which this Warrant was exercisable immediately prior to such
conversion, by (ii) the number of shares of Common Stock for which this Warrant
is exercisable immediately after such conversion.
4.2 REORGANIZATION, RECLASSIFICATION OR RECAPITALIZATION OF THE COMPANY.
In case of (1) a capital reorganization, reclassification or recapitalization of
the Company's capital stock (other than in the cases referred to in of Section
4.4 hereof) , (2) the Company's consolidation or merger with or into another
corporation in which the Company is not the surviving entity, or a reverse
triangular merger in which the Company is the surviving entity but the shares of
the Company's capital stock outstanding immediately prior to the merger are
converted, by virtue of the merger, into other property, whether in the form of
securities, cash or otherwise, or (3) the sale or transfer of the Company's
property as an entirety or substantially as an entirety, then, as part of such
reorganization, reorganization, recapitalization, merger, consolidation, sale or
transfer, lawful provision shall be made so that there shall thereafter be
deliverable upon the exercise of this Warrant or any portion thereof (in lieu of
or in addition to the number of shares of Series A Preferred Stock theretofore
deliverable, as appropriate), and without payment of any additional
consideration, the number of shares of stock or other securities or property to
which the holder of the number of shares of Series A Preferred Stock which would
otherwise have been deliverable upon the exercise of this Warrant or any portion
thereof at the time of such reorganization, reclassification, recapitalization,
consolidation, merger, sale or transfer would have been entitled to receive in
such reorganization, reclassification, recapitalization, consolidation, merger,
sale or transfer. This Section 4.2 shall apply to successive reorganizations,
reclassifications, recapitalizations, consolidations, mergers, sales and
transfers and to the stock or securities of any other corporation that are at
the time receivable upon the exercise of this Warrant. If the per-share
consideration payable to the Holder for shares of Series A Preferred Stock in
connection with any transaction described in this
11
<PAGE>
Section 4.2 is in a form other than cash or marketable securities, then the
value of such consideration shall be determined in good faith by the Company's
Board of Directors.
4.3 SPLITS AND COMBINATIONS. If the Company at any time subdivides any of
its outstanding shares of Series A Preferred Stock into a greater number of
shares, the Exercise Price in effect immediately prior to such subdivision shall
be proportionately reduced, and, conversely if the outstanding shares of Series
A Preferred Stock are combined into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination shall be proportionately
increased. Upon any adjustment of the Exercise Price under this Section 4.3,
the number of shares of Series A Preferred Stock issuable upon exercise of this
Warrant shall equal the number of shares determined by dividing (i) the
aggregate Exercise Price payable for the purchase of all shares issuable upon
exercise of this Warrant immediately prior to such adjustment by (ii) the
Exercise Price per share in effect immediately after such adjustment.
4.4 RECLASSIFICATIONS. If the Company changes any of the securities as to
which purchase rights under this Warrant exist into the same or a different
number of securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted. No adjustment shall be made
pursuant to this Section 4.4 upon any conversion described in Section 4.1
hereof.
4.5 DIVIDENDS AND DISTRIBUTIONS. If the Company declares a dividend or
other distribution on the Series A Preferred Stock or if a dividend or other
distribution on the Series A Preferred Stock occurs pursuant to the Certificate
of Incorporation (other than a cash dividend or distribution), then, as part of
such dividend or distribution, lawful provision shall be made so that there
shall thereafter be deliverable upon the exercise of this Warrant or any portion
thereof, in addition to the number of shares of Series A Preferred Stock
receivable thereupon and without payment of any additional consideration, the
amount of the dividend or other distribution to which the holder of the number
of shares of Series A Preferred Stock obtained upon exercise hereof would have
been entitled to receive had the exercise occurred as of the record date for
such dividend or distribution.
4.6 LIQUIDATION; DISSOLUTION. If the company shall dissolve, liquidate or
wind up its affairs, the Holder shall have the right, but not the obligation, to
exercise this warrant effective as of the date of such dissolution, liquidation
or winding up. If any such dissolution, liquidation or winding up results in
any cash distribution to the Holder in excess of the aggregate Exercise Price
for the shares of Series A Preferred Stock for which this warrant is exercised,
then the Holder may, at its option, exercise this Warrant without making payment
of such aggregate Exercise Price and, in such case, the Company shall,
12
<PAGE>
upon distribution to the Holder, consider such aggregate Exercise Price to have
been paid in full, and in making such settlement to the Holder, shall deduct an
amount equal to such aggregate Exercise Price from the amount payable to the
Holder.
4.7 ADJUSTMENT OF EXERCISE PRICE AND SHARES PURCHASABLE.
(a) ADJUSTMENT OF EXERCISE PRICE. If the Company issues any
Additional Shares of Common Stock for no consideration or for a consideration
per share less than the Exercise Price in effect immediately prior to the time
of such issuance (the "CURRENT EXERCISE PRICE") but greater than or equal to the
Conversion Price in effect immediately prior to the time of such issuance, then
the Exercise Price shall be reduced to the price (calculated to the nearest
cent) determined by multiplying the Current Exercise Price by a fractions the
numerator of which shall be the total number of shares of Common Stock
outstanding (as determined in accordance with Article IV, Section 4(d) of the
Certificate of Incorporation) plus the number of shares of Common Stock which
the aggregate consideration received by the Company for the total number of
Additional Shares of Common Stock so issued would purchase at the Current
Exercise Price and the denominator of which shall be the number of shares of
Common Stock outstanding prior to such issuance (as determined in accordance
with Article IV, Section 4(d) of the Certificate of incorporation) plus the
number of such Additional Shares of Common Stock so issued. For purposes of
this subsection (a), the provisions of Article IV, Section 4(d) of the
Certificate of Incorporation shall be applicable and are incorporated herein by
this reference, MUTATIS MUTANDIS.
(b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE. Upon any adjustment
of the Exercise Price under subsection (a) of this Section 4.7, the number of
shares of Series A Preferred Stock issuable upon exercise of this Warrant shall
equal the number of shares determined by dividing (i) the aggregate Exercise
Price payable for the purchase of all shares issuable upon exercise of this
Warrant immediately prior to such adjustment by (ii) the Exercise Price per
share in effect immediately after such adjustment.
4.8 MAXIMUM EXERCISE PRICE. At no time shall the Exercise Price exceed
the amount set forth in the Preamble to this Warrant, unless the Exercise Price
is adjusted pursuant to Section 4.3 hereof.
4.9 OTHER DILUTIVE EVENTS. If any event occurs as to which the other
provisions of this Article IV are not strictly applicable but the failure to
make any adjustment would not fairly protect the purchase rights represented by
this Warrant in accordance with the essential intent and principles hereof,
then, in each such case, the Company shall appoint a firm of independent public
accountants of recognized national standing (which may be the Company's regular
auditors) which shall give their opinion upon the adjustment, if any, on a basis
consistent with the essential intent and principles established in this Article
IV, necessary to preserve, without dilution, the purchase rights represented by
this Warrant.
13
<PAGE>
Upon receipt of such opinion, the Company shall promptly mail a copy thereof to
the Holder and shall make the adjustments described therein.
4.10 AMENDMENT OF CERTIFICATE OF INCORPORATION. So long as the Warrant is
outstanding and no shares of Series A Preferred Stock are issued and
outstanding, the Company shall not amend, or otherwise take any action that
would affect, Article IV, Section 4 (d) , or Article IV, Section 4 (m) of the
Certificate of Incorporation, without the prior written consent of the Holder,
given in its sole discretion. If the Certificate of Incorporation are amended
in violation of this Section 4.10, then the provisions of this Article IV shall
be adjusted so that the Holder shall receive with respect to the shares of
Common Stock received upon conversion of the shares of Series A Preferred Stock
obtained upon exercise of this Warrant thereafter, what would have been received
had the Certificate of Determination not been so amended, upon payment of the
same amount as would have been required had the Certificate of Incorporation not
been so amended.
4.11 CERTIFICATES AND NOTICES.
(a) ADJUSTMENT CERTIFICATES. Upon any adjustment of the Exercise
Price and/or the number of shares of Series A Preferred Stock purchasable upon
exercise of this Warrant, a certificate, signed by (i) the Company's President
and Chief Financial Officer, or (ii) any independent firm of certified public
accountants of recognized national standing the Company selects at its own
expense, setting forth in reasonable detail the events requiring the adjustment
and the method by which such adjustment was calculated, shall be mailed to the
Holder and shall specify the adjusted Exercise Price and the number of shares of
Series A Preferred Stock purchasable upon exercise of the Warrant after giving
effect to the adjustment.
(b) EXTRAORDINARY CORPORATE EVENTS. If the Company, after the date
hereof, proposes to effect (i) any transaction described in Sections 4.2 or 4.4
hereof, (ii) a liquidation, dissolution or winding up of the Company described
in Section 4.6 hereof, or (iii) any payment of a dividend or distribution with
respect to Series A Preferred Stock or Common Stock, then, in each such case,
the Company shall mail to the Holder a notice describing such proposed action
and specifying the date on which the Company's books shall close, or a record
shall be taken, for determining the holders of Series A Preferred Stock or
Common Stock, as appropriate, entitled to participate in such action, or the
date on which such reorganization, reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution or winding up shall take place or
commence, as the case may be, and the date as of which it is expected that
holders of Series A Preferred Stock and Common Stock of record shall be entitled
to receive securities and/or other property deliverable upon such action, if any
such date is to be fixed. Such notice shall be mailed to the Holder at least
thirty (30) days prior to the record date for such action in the case of any
action described in clause (i) or clause (iii) above, and in the case of any
action described in clause (ii) above, at
14
<PAGE>
least thirty (30) days prior to the date on which the action described is to
take place and at least thirty (30) days prior to the record date for
determining holders of Series A Preferred Stock or Common Stock, as appropriate,
entitled to receive securities and/or other property in connection with such
action.
4.12 NO IMPAIRMENT. The Company shall not, by amendment of the Certificate
of Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Company, but
shall at all times in good faith assist in the carrying out of all the
provisions of this Article IV and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder against
impairment.
4.13 APPLICATION. Except as otherwise provide herein, all sections of this
Article V are intended to operate independently of one another. If an event
occurs that requires the application of more than one section, all applicable
sections shall be given independent effect.
ARTICLE V
REGISTRATION RIGHTS
Concurrent with the execution and delivery of this Warrant, the Company
shall cause the Holder to become a party to the Rights Agreement and the Holder
shall be deemed a "Holder", as defined in Section 6.5(a) of the Rights
Agreement, for purposes of Section 6.5 of the Rights Agreement and shall be
entitled to all the rights, and be subject to all the obligations, of a Holder
under the Rights Agreement", the Warrant Shares shall be deemed "Series A
Preferred Stock," as defined in the Rights Agreement, and the Common Stock
issuable upon conversion of the Warrant Shares shall be deemed "Registrable
Securities", as defined in the Rights Agreement, for purposes of Section 6.5 of
the Rights Agreement. Such actions shall be effected by the execution and
delivery to the Holder of a fully executed Consent to Grant of Information and
Registration Rights substantially in the form of EXHIBIT "G" hereto (the
"RIGHTS AGREEMENT AMENDMENT"). The Rights Agreement Amendment also shall amend
Section 6.5(k) of the Rights Agreement to provide that any Holder shall have
the right to transfer registration rights to an affiliate of the Holder.
ARTICLE VI
FINANCIAL INFORMATION
6.1 FINANCIAL STATEMENTS. The Company shall deliver to the Holder,
concurrent with delivery to the Purchasers and/or the Holders, as defined in
the Rights Agreement, all information delivered to the Purchasers and/or the
Holders pursuant to Sections 6.6(a),
15
<PAGE>
6.6(b), 6.6(c) (but excluding the comparison to budget with respect to the
monthly financial statements), 6.6(d) and 6.6(e) of the Rights Agreement and all
other information delivered to the Purchasers and/or the Holders from time to
time pursuant to the Rights Agreement as in effect from time to time during the
term hereof. If the Rights Agreement is terminated for any reason, and for so
long as the Company is not a Reporting Company under the Exchange Act, the
Company shall deliver to the Holder all information that was required to be
delivered to the Purchasers and/or the Holders, as defined in the Rights
Agreement, pursuant to Sections 6.6(a), 6.6 (b), 6.6(c) (but excluding the
comparison to budget with respect to the monthly financial statements), 6.6(d),
and 6.6(e) of the Rights Agreement, as in effect on the date hereof.
6.2 INSPECTION. The Company shall permit the Holder, at the Holder's
expense, to visit and inspect the Company's properties, to examine its books of
account and records and to discuss the Company's affairs, finances and accounts
with its officers, all at such reasonable times as may be requested by the
Holder.
ARTICLE VII
REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY
7.1 REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
that:
(a) LEGAL STATUS; QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is qualified or licensed to do business in all other countries,
states and provinces in which the laws thereof require the Company to qualify
and/or be licensed, except where failure to qualify or be licensed would not
have a material adverse effect on the business or assets of the Company taken as
a whole;
(b) CAPITALIZATION. The Company's authorized capital stock consists
of: (i) Eight Million (8,000,000) shares of Preferred Stock, of which Three
Million Two Hundred Thousand (3,200,000) shares are designated as Series A
Preferred Stock, of which series Three Million Fifteen Thousand (3,015,000)
shares are issued and outstanding; and (ii) Fifteen Million (15,000,000) shares
of Common Stock, of which Eight Hundred Forty Thousand (840,000) shares are
issued and outstanding;
(c) OPTIONS. Except as described in EXHIBIT "D" hereto there are no
options, warrants or similar rights to acquire from the Company, or agreements
or other obligations by the Company, absolute or contingent, to issue or sell
Common Stock, whether on conversion or exchange of Convertible Securities or
otherwise;
16
<PAGE>
(d) PREEMPTIVE RIGHTS. Except as described in EXHIBIT "D", no
shareholder of the company has any preemptive rights to subscribe for shares of
Common Stock;
(e) AUTHORITY. The Company has the right and power, and is duly
authorized and empowered, to enter into, execute, deliver and perform this
Warrant;
(f) BINDING EFFECT. This Warrant has been duly authorized, executed
and delivered and constitutes a valid and binding obligation of the Company
enforceable in accordance with its terms;
(g) NO CONFLICT. The execution, delivery and/or performance by the
Company of this Warrant shall not, by the lapse of time, the giving of notice or
otherwise, constitute a violation of any applicable law or a breach of any
provision contained in the Company's Certificate of Incorporation or By-laws or
contained in any agreement, instrument, or document to which the Company is a
party or by which it is bound;
(h) CONSENTS. No consent, approval, authorization or other order of
any court, regulatory body, administrative agency or other governmental body is
required for the valid issuance of the Warrant or for the performance of any of
the Company's obligations hereunder, except for the filing pursuant to Section
25102(f) of the California Corporate Securities Law of 1968, as amended, and the
rules promulgated thereunder, which filing will be effected in accordance with
such section and rules;
(i) OFFERING. Neither the Company nor any agent acting on its behalf
has, either directly or indirectly, sold, offered for sale or disposed of, or
attempted or offered to dispose of, this Warrant or any part hereof, or any
similar obligation of the Company, to, or has solicited any offers to buy any
thereof from, any person or persons other than the Holder. Neither the Company
nor any agent acting on its behalf will sell or offer for sale or dispose of, or
attempt or offer to dispose of, this Warrant or any part thereof to, or solicit
any offers to buy any warrant of like tenor from, or otherwise approach or
negotiate in respect thereof, with, any Person or Persons so as thereby to bring
the issuance of this Warrant within the provisions of Section 5 of the
Securities Act;
(j) REGISTRATION. It is not necessary in connection with the
issuance and sale of this Warrant to the Holder to Register this Warrant under
the Securities Act; and
(k) OVERALL REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in this Warrant, and the other provisions of
this Warrant, do not contain any untrue statement of material fact or omit any
material fact necessary to make the statements contained herein, in view of the
circumstances under which they were made, not misleading.
17
<PAGE>
7.2 COVENANTS. The Company covenants that:
(a) AUTHORIZED SHARES. The Company will at all times have
authorized, and reserved for the purpose of issue or transfer upon exercise of
the rights evidenced by this Warrant, a sufficient number of shares of Series A
Preferred Stock to provide for the exercise of the rights represented by this
Warrant (for purposes of determining compliance with this covenant, the shares
of Series A Preferred Stock issuable upon exercise of all other options and
warrants shall be deemed issued and outstanding), and a sufficient number of
shares of Common Stock to provide for the conversion into Common Stock of all
the shares of Series A Preferred Stock issued and issuable upon the exercise of
this Warrant but theretofore unconverted (for purposes of determining compliance
with this covenant, the shares of Common Stock issuable upon exercise of all
options and warrants to acquire Common Stock and upon conversion of all
instruments convertible into Common Stock shall be deemed issued and
outstanding);
(b) PROPER ISSUANCE. The Company, at its expense, will take all such
action as may be necessary to assure that the Series A Preferred Stock issuable
upon the exercise of this Warrant, and the Common Stock issuable upon the
conversion of such Series A Preferred Stock, may be so issued without violation
of any applicable law or regulation, or of any requirements of any domestic
securities exchange upon which any capital stock of the Company may be listed.
Such action may include, but not be limited to, causing such shares to be duly
registered or approved or listed on relevant domestic securities exchanges; and
(c) FULLY PAID SHARES. The Company will take all actions necessary
or appropriate to validly and legally issue (i) fully paid and non-assessable
shares of Series A Preferred Stock upon exercise of this Warrant and (ii) fully
paid and non-assessable shares of Common Stock upon conversion of such shares of
Series A Preferred Stock. All such shares will be free from all taxes, liens
and charges with respect to the issuance thereof, other than any stock transfer
taxes in respect to any transfer occurring contemporaneously with such issuance.
ARTICLE VIII
MISCELLANEOUS
8.1 CERTAIN EXPENSES. The Company shall pay all expenses in connection
with, and all taxes (other than stock transfer taxes) and other governmental
charges that may be imposed in respect of, the issuance, sale and delivery of
the Warrant, the Warrant Shares and the shares of Common Stock issuable upon
conversion of the Warrant Shares.
8.2 HOLDER NOT A STOCKHOLDER. Prior to the exercise of this Warrant as
hereinbefore provided, the Holder shall not be entitled to any of the rights of
a shareholder
18
<PAGE>
of the Company including, without limitation, the right as a shareholder (i) to
vote on or consent to any proposed action of the Company or (ii) except as
provided herein, to receive (a) dividends or any other distributions made to
shareholders, (b) notice of or attend any meetings of shareholders of the
Company, or (c) notice of any other proceedings of the Company. Notwithstanding
the foregoing, the Company shall provide to the Holder the information delivered
to shareholders as required pursuant to Section 6.1(d) hereof.
8.3 LIKE TENOR. All Warrants shall at all times be substantially
identical except as to the Preamble.
8.4 REMEDIES. The Company stipulates that the remedies at law of the
Holder in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate to the fullest extent permitted by law, and that such terms
may be specifically enforced by a decree for the specific performance of any
agreement contained herein or by an injunction against a violation of any of the
terms hereof or otherwise.
8.5 ENFORCEMENT COSTS. If any party to, or beneficiary of, this Warrant
seeks to enforce its rights hereunder by legal proceedings or otherwise, then
the non-prevailing party shall pay all reasonable costs and expenses incurred by
the prevailing party, including, without limitation, all reasonable attorneys'
fees (including the allocable costs of in-house counsel).
8.6 NONWAIVER; CUMULATIVE REMEDIES. No course of dealing or any delay or
failure to exercise any right hereunder on the part of the Holder and/or any
Stockholder shall operate as a waiver of such right or otherwise prejudice the
rights, powers or remedies of the Holder or such Stockholder. No single or
partial waiver by the Holder and/or any Stockholder of any provision of this
Warrant or of any breach or default hereunder or of any right or remedy shall
operate as a waiver of any other provision, breach, default right or remedy or
of the same provision, breach, default, right or remedy on a future occasion.
The rights and remedies provided in this Warrant are cumulative and are in
addition to all rights and remedies which the Holder and each Stockholder may
have in law or in equity or by statute or otherwise.
8.7 NOTICES. Any notice, demand or delivery to be made pursuant to this
Warrant will be sufficiently given or made if sent by first class mail, postage
prepaid, addressed to (a) the Holder and the Stockholders at their last known
addresses appearing on the books of the Company maintained for such purpose or
(b) the Company at its Principal Executive Office. The Holder, the
Stockholders and the Company may each designate a different address by notice
to the other pursuant to this Section 8.7. A notice shall be deemed
19
<PAGE>
effective upon the earlier of (i) receipt or (ii) the third day after mailing in
accordance with the terms of this Section 8.7.
8.8 SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon, the
Company and any Person succeeding the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets, and all of the
obligations of the Company with respect to the shares of Series A Preferred
Stock issuable upon exercise, of this Warrant and the shares of Common Stock
issuable upon the conversion of such shares of Series A Preferred Stock, shall
survive the exercise, expiration or termination of this Warrant and all of the
covenants and agreements of the Company shall inure to the benefit of the
Holder, each Stockholder and their respective successors and assigns. The
Company shall, at the time of exercise of this Warrant, in whole or in part,
upon request of the Holder or any Stockholder but at the Company's expense,
acknowledge in writing its continuing obligations hereunder with respect to
rights of the Holder or such Stockholder to which it shall continue to be
entitled after such exercise in accordance with the terms hereof; provided that
the failure of the Holder or any Stockholder to make any such request shall not
affect the continuing obligation of the Company to the Holder or such
Stockholder in respect of such rights.
8.9 MODIFICATION; SEVERABILITY.
(a) If, in any action before any court or agency legally empowered to
enforce any term, any term is found to be unenforceable, then such term shall be
deemed modified to the extent necessary to make it enforceable by such court or
agency.
(b) If any term is not curable as set forth in subsection (a) above,
the unenforceability of such term shall not affect the other provisions of this
Warrant but this Warrant shall be construed as if such unenforceable term had
never been contained herein.
8.10 INTEGRATION. This Warrant replaces all prior and contemporaneous
agreements and supersedes all prior and contemporaneous negotiations between the
parties with respect to the transactions contemplated herein and constitutes the
entire agreement of the parties with respect to the transactions contemplated
herein.
8.11 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company in this Warrant shall survive the execution and
delivery of this Warrant and the consummation of the transactions contemplated
hereby, notwithstanding any investigation by the Holder or its agents.
8.12 AMENDMENT. This Warrant may not be modified or amended except by
written agreement of the Company, the Holder and the Stockholder(s), if any.
20
<PAGE>
8.13 HEADINGS. The headings of the Articles and Sections of this Warrant
are for the convenience of reference only and shall not, for any purpose, be
deemed a part of this Warrant.
8.14 MEANINGS. Whenever used in this Warrant, any noun or pronoun shall be
deemed to include both the singular and plural and to cover all genders; and the
words "herein," "hereof" and "hereunder" and words of similar import shall refer
to this instrument as a whole, including any amendments hereto.
8.15 GOVERNING LAW. This Warrant shall be governed by, and construed in
accordance with, the laws of the State of California applicable to contracts
entered into and to be performed wholly within California by California
residents.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its duly authorized officer this August 31, 1993.
MERCATOR GENETICS, INC.
By: /s/ M. Kathleen Behrens
--------------------------------------
Title: Acting President
----------------------------------
21
<PAGE>
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO
SALE OR DISPOSITION OF SUCH SECURITIES MAY BE EFFECTED WITHOUT
(i) AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO,
(ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY
SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT
REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER FROM THE
SECURITIES AND EXCHANGE COMMISSION, OR (iv) OTHERWISE COMPLYING
WITH THE PROVISIONS OF ARTICLE III OF THIS WARRANT.
WARRANT
TO PURCHASE SHARES OF SERIES B PREFERRED STOCK AS HEREIN DESCRIBED
Dated October 28, 1994
This certifies that for value received:
PHOENIX LEASING INCORPORATED
or registered assigns, is entitled, subject to the terms set forth herein, to
purchase from Mercator Genetics, Inc., a Delaware corporation (the "COMPANY"),
up to Ninety Thousand (90,000) fully paid and nor-assessable shares of the
Company's Series B Preferred Stock, at the price of One Dollar and Thirty Cents
($1.30) per share. The initial purchase price of one Dollar and Thirty Cents
($1.30) per share, and the number of shares purchasable hereunder, are subject
to adjustment in certain events, all as more fully set forth under Article IV
herein.
ARTICLE I
DEFINITIONS
"ADDITIONAL SHARES OF COMMON STOCK" has the meaning specified in the
Certificate of Incorporation.
CERTIFICATE OF INCORPORATION" means the Certificate of Incorporation of
the Company, as filed with the Delaware Secretary of State on October 9, 1992,
as amended by Certificate of Amendment of the Certificate of Incorporation of
the Company, as filed with the Delaware Secretary of State on February 26, 1993,
by Certificate of Amendment of the Certificate of Incorporation of the Company,
as filed with the Delaware Secretary of State on August 23, 1993, and by
Certificate of Amendment of the Certificate of Incorporation of the Company, as
filed with the Delaware Secretary of State on June 8, 1994 and by Certification
of Amendment of the Certificate of Incorporation of the Company, as filed with
the Delaware Secretary of State on October 26, 1994.
1
<PAGE>
"CLOSING DATE" means October 28, 1994.
"COMMISSION" means the Securities and Exchange Commission, or any other
federal agency then administering the Exchange Act or the Securities Act, as
defined herein.
"COMMON STOCK" means the Company's Common Stock, any stock into which
such stock shall have been changed or any stock resulting from any
reclassification of such stock, and any other capital stock of the Company of
any class or series now or hereafter authorized having the right to share in
distributions either of earnings or assets of the Company without limit as to
amount or percentage.
"COMPANY" means Mercator Genetics, Inc., a Delaware corporation, and any
successor corporation.
"CONVERSION PRICE" means the Conversion Price for Series B Preferred
Stock, as determined in accordance with the Certificate of Incorporation.
"CONVERTIBLE SECURITIES" means evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable for, with
or without payment of additional consideration, shares of Common Stock, either
immediately or upon the arrival of a specified date or the happening of a
specified event or both.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor federal statute, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect from time to time.
"EXERCISE PERIOD" means the period commencing on the Closing Date and
terminating at the later to occur of: (i) 5:00 p.m., Pacific Time on the tenth
(10th) anniversary of the Closing Date, or (ii) 5:00 p.m., Pacific Time on the
fifth (5th) anniversary of the closing of the company's initial sale and
issuance of shares of Common Stock in an underwritten public offering, pursuant
to a Registration.
"EXERCISE PRICE" means the price per share of Series B Preferred Stock
set forth in the Preamble to this Warrant, as such price may be adjusted
pursuant to Article IV hereof.
"FAIR MARKET VALUE" means
(i) If shares of Series B Preferred Stock or Common Stock,
as the case may be, are being sold pursuant to a public offering under an
effective registration statement under the Securities Act which has been
declared effective by the Commission and Fair Market Value is being determined
as of the closing of the public offering, the "price to public" specified for
such shares in the final prospectus for such public offering;
(ii) If shares of Series B Preferred stock or common stock,
as the case may be, are then listed or admitted to trading on any national
securities exchange or traded on any
2
<PAGE>
national market system and Fair Market Value is not being determined as of
the date described in clause (i) of this definition, the average of the daily
closing prices for the thirty (30) trading days before such date, excluding
any trades which are not bona fide, arm's length transactions. The closing
price for each day shall be the last sale price on such date or, if no such
sale takes place on such date, the average of the closing bid and asked
prices on such date, in each case as officially reported on the principal
national securities exchange or national market system on which such shares
are then listed, admitted to trading or traded;
(iii) If no shares of Series B Preferred Stock or Common
Stock, as the case may be, are then listed or admitted to trading on any
national securities exchange or traded an any national market system or being
offered to the public pursuant to a registration described in clause (i) of this
definition, the average of the reported closing bid and asked prices thereof on
such date in the over-the-counter market as shown by the National Association of
Securities Dealers automated quotation system or, if such shares are not then
quoted in such system, as published by the National Quotation Bureau,
Incorporated or any similar successor organization, and in either case as
reported by any member firm of the New York Stock Exchange selected by the
Holder;
(iv) If no shares of Series B Preferred Stock or Common
Stock, as the case may be, are then listed or admitted to trading on any
national exchange or traded on any national market system, if no closing bid and
asked prices thereof are then so quoted or published in the over-the-counter
market and if no such shares are being offered to the public pursuant to a
registration described in clause (i) of this definition, the fair value of a
share of Series B Preferred Stock or Common Stock, as the case may be, shall be
as mutually agreed by the Company and the Holder; PROVIDED, HOWEVER, that if the
Company and the Holder are unable to mutually agree upon the fair value, and the
value asserted by the Holder is not greater than one hundred ten percent (110%)
of the value asserted by the Company, then the fair value shall be the sum of
(1) the value asserted by the Company and (2) fifty percent (50%) of the
difference between the value asserted by the Company and the value asserted by
the Holder; PROVIDED FURTHER, HOWEVER, that if the Company and the Holder are
unable to mutually agree upon the fair value and the immediately preceding
proviso is not operative, the Company and such Holder shall, within five (5)
days from the date that either party determines that they cannot agree or the
value asserted by the Holder is greater than one hundred ten percent (110%) of
the value asserted by the Company, jointly retain an investment banking firm, or
a nationally recognized accounting firm or other firm providing similar
valuation services, satisfactory to each of them. If the Company and the Holder
are unable to agree on the selection of such a firm within such five (5) day
period, the Company and the Holder shall, within twenty (20) days after
expiration of such five day period, each retain a separate independent
investment banking firm (which firm, in either case, shall not be the investment
banking firm regularly retained by the Company or the Holder). If either the
Company or the Holder fail to retain such an investment banking firm during such
twenty (20) day period, then the independent investment banking firm retained by
the Holder or the Company, as the case may be, shall alone take the actions
described below. Such firms shall determine within thirty (30) days of being
retained the fair value of a share
3
<PAGE>
of Series B Preferred Stock or Common Stock, as the case may be, and deliver
their opinion in writing to the Company and to the Holder as to the fair value.
If such firms cannot jointly agree upon the fair value, then, unless otherwise
directed in writing by both the Company and the Holder, such firms, in their
sole discretion, shall choose another investment banking firm independent of the
Company and the Holder, which firm shall make such determination and render such
an opinion as promptly as practicable. In either case, the determination so
made shall be conclusive and binding on the Company and the Holder. The fees
and expenses for such determination made by any and all such investment banking
or other firms shall be paid by the Company. In the determination of the fair
value of a share of Series B Preferred Stock or Common Stock, as the case may
be, there shall not be taken into consideration any premium for shares
representing control of the Company or any discount related to shares
representing a minority interest therein or related to any illiquidity or lack
of marketability of shares arising from restrictions on transfer under federal
and applicable state securities laws or otherwise.
"FISCAL YEAR" means the fiscal year of the Company.
"HOLDER" means the person in whose name this Warrant is registered on
the books of the Company maintained for such purpose.
"OPTION" means any right, warrant or option to subscribe for or purchase
shares of Common Stock or Convertible Securities.
"PERSON" means and includes natural persons, corporations, limited
partnerships, general partnerships, joint stock companies, joint ventures,
associations, companies, trusts, banks, trust companies, land trusts, business
trusts, government entities and authorities and other organizations, whether or
not legal entities.
"PREFERRED STOCK" means the Preferred Stock of the Company, as defined
in the Certificate of Incorporation.
"PRINCIPAL EXECUTIVE OFFICE" means the Company's office at 4040 Campbell
Avenue, Menlo Park, California 94025, or such other office as designated in
writing to the Holder by the Company.
"REGISTER," "REGISTERED" and "REGISTRATION" refer to a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act, and the declaration or ordering of the effectiveness of such
registration statement.
"RIGHTS AGREEMENT" means the Series B Preferred Stock Purchase
Agreement, dated as of June 10, 1994, as amended, by and among the Company and
the stockholders of the Company named therein, attached hereto as EXHIBIT "E".
4
<PAGE>
"RULE 144" means Rule 144 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar
successor rule that the Commission may promulgate.
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Commission
promulgated thereunder, all as the same shall be in effect from time to time.
"SERIES B PREFERRED STOCK" means the Series B Preferred Stock of the
Company, as defined in the Certificate of Incorporation.
"STOCKHOLDER" means a holder of one or more Warrant Shares or shares of
Common Stock acquired upon conversion of warrant Shares.
"WARRANT" means the warrant dated as of Closing Date issued to Holder
and all warrants issued upon the partial exercise, transfer or division of or in
substitution for any Warrant.
"WARRANT SHARES" means the shares of Series B Preferred Stock issuable
upon the exercise of this Warrant provided that if under the terms hereof there
shall be a change such that the securities purchasable hereunder shall be issued
by an entity other than the Company or there shall be a change in the type or
class of securities purchasable hereunder, then the term shall mean the
securities issuable upon the exercise of the rights granted hereunder.
ARTICLE II
EXERCISE
2.1 EXERCISE RIGHT; MANNER OF EXERCISE. The purchase rights
represented by this Warrant may be exercised by the Holder, in whole or in part,
at any time and from time to time during the Exercise Period upon (i) surrender
of this Warrant, together with an executed Notice of Exercise, substantially in
the form of EXHIBIT "A" attached hereto, at the Principal Executive Office, and
(ii) payment to the Company of the aggregate Exercise Price for the number of
Warrant Shares specified in the Notice of Exercise (such aggregate Exercise
Price the "TOTAL EXERCISE PRICE"). The Total Exercise Price shall be paid by
check; PROVIDED, HOWEVER, that if the Warrant Shares are acquired in conjunction
with a Registration of such Warrant Shares or the Common Stock acquirable upon
conversion of such Warrant Shares, then Holder may arrange for the aggregate
Exercise Price for such Warrant Shares to be paid to the company from the
proceeds of the sale of such Warrant Shares or the Common Stock acquirable upon
conversion of such Warrant Shares pursuant to such Registration. The Person or
Person(s) in whose name(s) any certificate(s) representing the Warrant Shares
which are issuable upon exercise of this Warrant shall be deemed to become the
holder(s) of, and shall be treated for all purposes as the record holder(s) of,
such Warrant Shares, and such Warrant Shares shall be deemed to have been
issued, immediately prior to the close of business on the date on which this
Warrant and Notice of Exercise are presented and payment made for such Warrant
Shares, notwithstanding that the stock transfer books of the
5
<PAGE>
Company shall then be closed or that certificates representing such Warrant
Shares shall not then be actually delivered to such Person or Person(s).
Certificates for the Warrant Shares so purchased shall be delivered to the
Holder within a reasonable time, not exceeding fifteen (15) days after this
Warrant is exercised. If this Warrant is exercised in part only, the Company
shall, upon surrender of this Warrant for cancellation, deliver a new Warrant
evidencing the rights of the Holder to purchase the balance of the Warrant
Shares which Holder is entitled to purchase hereunder. The issuance of Warrant
Shares upon exercise of this Warrant shall be made without charge to the Holder
for any issuance tax with respect thereto or any other cost incurred by the
Company in connection with the exercise of this Warrant and the related issuance
of Warrant Shares.
2.2 CONVERSION OF WARRANT.
(a) RIGHT TO CONVERT. In addition to, and without limiting,
the other rights of the Holder hereunder, the Holder shall have the right (the
"Conversion Right") to convert this Warrant or any part hereof into Warrant
Shares at any time and from time to time during the term hereof. Upon exercise
of the Conversion Right, the Company shall deliver to the Holder, without
payment by the Holder of any Exercise Price or any cash or other consideration,
that number of Warrant Shares computed using the following formula:
X= Y (A-B)
-------
A
Where: X= The number of Warrant Shares to be issued to the Holder
Y= The number of Warrant Shares purchasable pursuant to this
Warrant
A= The Fair Market Value of one Warrant Share as of the
Conversion Date
B= The Exercise Price
(b) METHOD OF EXERCISE. The Conversion Right may be
exercised by the Holder by the surrender of this Warrant at the Principal
Executive Office, together with a written statement (the "CONVERSION STATEMENT")
specifying that the Holder intends to exercise the Conversion Right and
indicating the number of Warrant Shares to be acquired upon exercise of the
Conversion Right. Such conversion shall be effective upon the Company's receipt
of this Warrant, together with the Conversion Statement, or on such later date
as is specified in the Conversion Statement (the "CONVERSION DATE") and, at the
Holder's election, may be made contingent upon the closing of the consummation
of the sale of Common Stock pursuant to a Registration. Certificates for the
Warrant Shares so acquired shall be delivered to the Holder within a reasonable
time, not exceeding fifteen (15) days after the Conversion Date. If applicable,
the Company shall, upon surrender of this Warrant for cancellation, deliver a
new Warrant evidencing the rights of the Holder to purchase the balance of the
Warrant Shares which Holder is entitled to purchase hereunder. The issuance of
Warrant
6
<PAGE>
Shares upon exercise of this Warrant shall be made without charge to the Holder
for any issuance tax with respect thereto or any other cost incurred by the
Company in connection with the conversion of this Warrant and the related
issuance of Warrant Shares.
2.3 FRACTIONAL SHARES. The Company shall not issue fractional
shares of Series B Preferred Stock or scrip representing fractional shares of
Series B Preferred Stock upon any exercise or conversion of this Warrant. As to
any fractional share of Series B Preferred Stock which the Holder would
otherwise be entitled to purchase from the Company upon such exercise or
conversion, the Company shall purchase from the Holder such fractional share at
a price equal to an amount calculated by multiplying such fractional share
(calculated to the nearest 1/100th of a share) by the fair market value of a
share of Series B Preferred Stock on the date of the Notice of Exercise or the
Conversion Date, as applicable, as determined in good faith by the Company's
Board of Directors. Payment of such amount shall be made in cash or by check
payable to the order of the Holder at the time of delivery of any certificate or
certificates arising upon such exercise or conversion.
2.4 CONTINUED VALIDITY. A Stockholder shall be entitled to all
rights which a Holder of this Warrant is entitled pursuant to the provisions of
this Warrant, except rights which by their terms apply only to a Warrant. The
Company shall, at the time of the exercise of this Warrant, in whole or in part,
upon the request of a Stockholder, acknowledge in writing, in form reasonably
satisfactory to the Stockholder, its continuing obligation to afford to the
Stockholder all rights to which the Stockholder is entitled in accordance with
the provisions of this Warrant; PROVIDED, HOWEVER, that if the stockholder fails
to make any such request, such failure shall not affect the continuing
obligation of the Company to afford to the Stockholder all such rights.
ARTICLE III
REGISTRATION, TRANSFER, EXCHANGE AND REPLACEMENT
3.1 MAINTENANCE OF REGISTRATION BOOKS. The Company shall keep at
the Principal Executive Office a register in which, subject to such reasonable
regulations as it may prescribe, it shall provide for the registration, transfer
and exchange of this Warrant. The Company and any Company agent may treat the
Person in whose name this Warrant is registered as the owner of this Warrant for
all purposes whatsoever and neither the Company nor any Company agent shall be
affected by any notice to the contrary.
3.2 RESTRICTIONS ON TRANSFERS.
(a) COMPLIANCE WITH SECURITIES ACT. The Holder, by
acceptance hereof, agrees that this Warrant, the Series B Preferred Stock to be
issued upon exercise hereof and the shares of Common Stock to be issued upon
conversion of such shares of Series B Preferred Stock are being acquired for
investment, solely for the Holder's own account and not as a nominee for any
other Person, and that the Holder will not offer, sell or otherwise dispose of
this Warrant, any such shares of Series B Preferred Stock or any such shares of
Common Stock except under circumstances which will not result in a violation of
the
7
<PAGE>
Securities Act. Upon exercise of this Warrant, the Holder shall confirm in
writing, by executing the form attached as EXHIBIT "B" hereto, that the shares
of Series B Preferred Stock or Common Stock purchased thereby are being acquired
for investment, solely for the Holder's own account and not as a nominee for any
other Person, and not with a view toward distribution or resale.
(b) CERTIFICATE LEGENDS. This Warrant, all shares of
Series B Preferred Stock issued upon exercise of this Warrant (unless Registered
under the Securities Act), and all shares of Common Stock issued upon conversion
of such shares of Series B Preferred Stock (unless Registered under the
Securities Act) shall be stamped or imprinted with a legend in substantially the
following form (in addition to any legends required by applicable state
securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT. COPIES OF THE WARRANT COVERING THE
PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION.
(c) DISPOSITION OF WARRANT OR SHARES. With respect to any
offer, sale or other disposition of this Warrant, any shares of Series B
Preferred Stock issued upon exercise of this Warrant or shares of Common Stock
acquired pursuant to conversion of such shares of Series B Preferred Stock prior
to Registration of such shares, the Holder or the Stockholder, as the case may
be, agrees to give written notice to the Company prior thereto, describing
briefly the manner thereof, together with a written opinion of the Holder's or
Stockholder's counsel, if reasonably requested by the Company, to the effect
that such offer, sale or other disposition may be effected without Registration
under the Securities Act or qualification under any applicable state securities
laws of this Warrant or such shares, as the case may be, and indicating whether
or not under the Securities Act certificates for this Warrant or such shares, as
the case may be, to be sold or otherwise disposed of require any restrictive
legend as to applicable restrictions on transferability in order to insure
compliance with the Securities Act. Promptly upon receiving such written notice
and reasonably satisfactory opinion, if so requested, the Company, as promptly
as practicable, shall notify the Holder or the Stockholder, as the case may be,
that it may sell or otherwise dispose of this Warrant or such shares, as the
case may be, all in accordance with the terms of the notice delivered to the
Company. If a determination has been made pursuant to this subsection (c) that
the opinion of counsel for the Holder or the Stockholder, as the case may be, is
not reasonably satisfactory to the Company, the Company shall so notify the
Holder or the Stockholder, as the case may be, promptly after such determination
has been made and shall specify the legal
8
<PAGE>
analysis supporting any such conclusion. Notwithstanding the foregoing, this
Warrant or such shares, as the case may be, may be offered, sold or otherwise
disposed of in accordance with Rule 144, provided that the Company shall have
been furnished with such information as the Company may reasonable request to
provide reasonable assurance that the provisions of Rule 144 have been
satisfied. Each certificate representing this Warrant or the shares thus
transferred (except a transfer pursuant to Rule 144) shall bear a legend as to
the applicable restrictions on transferability in order to insure compliance
with the Securities Act, unless in the aforesaid reasonably satisfactory opinion
of counsel for the Holder or the Stockholder, as the case may be, such legend is
not necessary in order to insure compliance with the Securities Act. The
Company may issue stop transfer instructions to its transfer agent in connection
with such restrictions.
(d) WARRANT TRANSFER PROCEDURE. Transfer of this Warrant to
a third party, following compliance with the preceding subsections of this
Section 3.2, shall be effected by execution of the Assignment Form attached
hereto as EXHIBIT "C", and surrender for registration of transfer of this
Warrant at the Principal Executive Office, together with funds sufficient to pay
any applicable transfer tax. Upon receipt of the duly executed Assignment Form
and the necessary transfer tax funds, if any, the Company, at its expense, shall
execute and deliver, in the name of the designated transferee or transferees,
one or more new Warrants representing the right to purchase a like aggregate
number of shares of Series B Preferred Stock.
(e) TERMINATION OF RESTRICTIONS. The restrictions imposed
under this Section 3.2 upon the transferability of the Warrant, the shares of
Series B Preferred Stock acquired upon the exercise of this Warrant and the
shares of Common Stock issuable upon conversion of such shares of Series B
Preferred Stock shall cease when (i) a registration statement covering all
shares of Common Stock issued or issuable upon conversion of the Series B
Preferred Stock becomes effective under the Securities Act, (ii) the Company is
presented with an opinion of counsel reasonably satisfactory to the Company that
such restrictions are no longer required in order to insure compliance with the
Securities Act or with a Commission "no-action" letter stating that future
transfers of such securities by the transferor or the contemplated transferee
would be exempt from registration under the Securities Act, or (iii) such
securities may be transferred in accordance with Rule 144(k). When such
restrictions terminate, the Company shall, or shall instruct its transfer agent
to, promptly, and without expense to the Holder or the Stockholder, as the case
may be, issue new securities in the name of the Holder and/or the Stockholder,
as the case may be, not bearing the legends required under subsection (b) of
this Section 3.2. In addition, new securities shall be issued without such
legends if such legends may be properly removed under the terms of Rule 144(k).
3.3 EXCHANGE. At the Holder's option, this Warrant may be exchanged
for other Warrants representing the right to purchase a like aggregate number of
shares of Series B Preferred Stock upon surrender of this Warrant at the
Principal Executive Office. Whenever this Warrant is so surrendered to the
Company at the Principal Executive Office for
9
<PAGE>
exchange, the Company shall execute and deliver the Warrants which the Holder is
entitled to receive. All Warrants issued upon any registration of transfer or
exchange of Warrants shall be the valid obligations of the Company, evidencing
the same rights, and entitled to the same benefits, as the Warrants surrendered
upon such registration of transfer or exchange. No service charge shall be made
for any exchange of this Warrant.
3.4 REPLACEMENT. Upon receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant and
(i) in the case of any such loss, theft or destruction, upon delivery of
indemnity reasonably satisfactory to the Company in form and amount, or (ii) in
the case of any such mutilation, upon surrender of such Warrant for cancellation
at the Principal Executive Office, the Company, at its expense, shall execute
and deliver, in lieu thereof, a new Warrant.
ARTICLE IV
ANTIDILUTION PROVISIONS
4.1 CONVERSION OF SERIES B PREFERRED STOCK. If all of the Series B
Preferred Stock is converted into shares of Common Stock in connection with a
Registration, then this Warrant shall automatically become exercisable for that
number of shares of Common Stock equal to the number of shares of Common Stock
that would have been received if this Warrant had been exercised in full and the
shares of Series B Preferred Stock received thereupon had been simultaneously
converted into shares of Common Stock immediately prior to such event, and the
Exercise Price shall be automatically adjusted to equal the amount obtained by
dividing (i) the aggregate Exercise Price of the shares of Series B Preferred
Stock for which this Warrant was exercisable immediately prior to such
conversion, by (ii) the number of shares of Common Stock for which this Warrant
is exercisable immediately after such conversion.
4.2 REORGANIZATION, RECLASSIFICATION OR RECAPITALIZATION OF THE
COMPANY. In case of (1) a capital reorganization, reclassification or
recapitalization of the Company's capital stock (other than in the cases
referred to in of Section 4.4 hereof), (2) the Company's consolidation or merger
with or into another corporation in which the Company is not the surviving
entity, or a reverse triangular merger in which the Company is the surviving
entity but the shares of the Company's capital stock outstanding immediately
prior to the merger are converted, by virtue of the merger, into other property,
whether in the form of securities, cash or otherwise, or (3) the sale or
transfer of the Company's property as an entirety or substantially as an
entirety, then, as part of such reorganization, reorganization,
recapitalization, merger, consolidation, sale or transfer, lawful provision
shall be made so that there shall thereafter be deliverable upon the exercise of
this Warrant or any portion thereof (in lieu of or in addition to the number of
shares of Series B Preferred Stock theretofore deliverable, as appropriate), and
without payment of any additional consideration, the number of shares of stock
or other securities or property to which the holder of the number of shares of
Series B Preferred Stock which would otherwise have been deliverable upon the
exercise of this Warrant or any portion thereof at the time of such
10
<PAGE>
reorganization, reclassification, recapitalization, consolidation, merger, sale
or transfer would have been entitled to receive in such reorganization,
reclassification, recapitalization, consolidation, merger, sale or transfer.
This Section 4.2 shall apply to successive reorganizations, reclassifications,
recapitalizations, consolidations, mergers, sales and transfers and to the stock
or securities of any other corporation that are at the time receivable upon the
exercise of this Warrant. If the per-share consideration payable to the Holder
for shares of Series B Preferred Stock in connection with any transaction
described in this Section 4.2 is in a form other than cash or marketable
securities, then the value of such consideration shall be determined in good
faith by the Company's Board of Directors.
4.3 SPLITS AND COMBINATIONS. If the Company at any time subdivides
any of its outstanding shares of Series B Preferred Stock into a greater number
of shares, the Exercise Price in effect immediately prior to such subdivision
shall be proportionately reduced, and, conversely if the outstanding shares of
Series B Preferred Stock are combined into a smaller number of shares, the
Exercise Price in effect immediately prior to such combination shall be
proportionately increased. Upon any adjustment of the Exercise Price under this
Section 4.3, the number of shares of Series B Preferred Stock issuable upon
exercise of this Warrant shall equal the number of shares determined by dividing
(i) the aggregate Exercise Price payable for the purchase of all shares issuable
upon exercise of this Warrant immediately prior to such adjustment by (ii) the
Exercise Price per share in effect immediately after such adjustment.
4.4 RECLASSIFICATIONS. If the Company changes any of the securities
as to which purchase rights under this Warrant exist into the same or a
different number of securities of any other class or classes, this Warrant shall
thereafter represent the right to acquire such number and kind of securities as
would have been issuable as the result of such change with respect to the
securities that were subject to the purchase rights under this Warrant
immediately prior to such reclassification or other change and the Exercise
Price therefor shall be appropriately adjusted. No adjustment shall be made
pursuant to this Section 4.4 upon any conversion described in Section 4.1
hereof.
4.5 DIVIDENDS AND DISTRIBUTIONS. If the Company declares a dividend
or other distribution on the Series B Preferred Stock or if a dividend or other
distribution on the Series B Preferred Stock occurs pursuant to the Certificate
of Incorporation (other than a cash dividend or distribution), then, as part of
such dividend or distribution, lawful provision shall be made so that there
shall thereafter be deliverable upon the exercise of this Warrant or any portion
thereof, in addition to the number of shares of Series B Preferred Stock
receivable thereupon and without payment of any additional consideration, the
amount of the dividend or other distribution to which the holder of the number
of shares of Series B Preferred Stock obtained upon exercise hereof would have
been entitled to receive had the exercise occurred as of the record date for
such dividend or distribution.
4.6 LIQUIDATION; DISSOLUTION. If the Company shall dissolve,
liquidate or wind up its affairs, the Holder shall have the right, but not the
obligation, to exercise this Warrant
11
<PAGE>
effective as of the date of such dissolution, liquidation or winding up. If any
such dissolution, liquidation or winding up results in any cash distribution to
the Holder in excess of the aggregate Exercise Price for the shares of Series B
Preferred Stock for which this Warrant is exercised, then the Holder may, at its
option, exercise this Warrant without making payment of such aggregate Exercise
Price and, in such case, the Company shall, upon distribution to the Holder,
consider such aggregate Exercise Price to have been paid in full, and in making
such settlement to the Holder, shall deduct an amount equal to such aggregate
Exercise Price from the amount payable to the Holder.
4.7 ADJUSTMENT OF EXERCISE PRICE AND SHARES PURCHASABLE.
(a) ADJUSTMENT OF EXERCISE PRICE. If the Company issues any
Additional Shares of Common Stock for no consideration or for a consideration
per share less than the Exercise Price in effect immediately prior to the time
of such issuance (the "CURRENT EXERCISE PRICE") but greater than or equal to the
Conversion Price in effect immediately prior to the time of such issuance, then
the Exercise Price shall be reduced to the price (calculated to the nearest
cent) determined by multiplying the Current Exercise Price by a fraction, the
numerator of which shall be the total number of shares of Common Stock
outstanding (as determined in accordance with Article IV, Section 4(d) of the
Certificate of Incorporation) plus the number of shares of Common Stock which
the aggregate consideration received by the Company for the total number of
Additional Shares of Common Stock so issued would purchase at the Current
Exercise Price and the denominator of which shall be the number of shares of
Common Stock outstanding prior to such issuance (as determined in accordance
with Article IV, Section 4(d) of the Certificate of Incorporation) plus the
number of such Additional Shares of Common Stock so issued. For purposes of
this subsection (a), the provisions of Article IV, Section 4(d) of the
Certificate of Incorporation shall be applicable and are incorporated herein by
this reference, MUTATIS MUTANDIS.
(b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE. Upon any
adjustment of the Exercise Price under subsection (a) of this Section 4.7, the
number of shares of Series B Preferred Stock issuable upon exercise of this
Warrant shall equal the number of shares determined by dividing (i) the
aggregate Exercise Price payable for the purchase of all shares issuable upon
exercise of this Warrant immediately prior to such adjustment by (ii) the
Exercise Price per share in effect immediately after such adjustment.
4.8 MAXIMUM EXERCISE PRICE. At no time shall the Exercise Price
exceed the amount set forth in the Preamble to this Warrant, unless the Exercise
Price is adjusted pursuant to Section 4.3 hereof.
4.9 OTHER DILUTIVE EVENTS. If any event occurs as to which the
other provisions of this Article IV are not strictly applicable but the failure
to make any adjustment would not fairly protect the purchase rights represented
by this Warrant in accordance with the essential intent and principles hereof,
then, in each such case, the Company shall appoint a firm of independent public
accountants of recognized national standing (which may be the
12
<PAGE>
Company's regular auditors) which shall give their opinion upon the adjustment,
if any, on a basis consistent with the essential intent and principles
established in this Article IV, necessary to preserve, without dilution, the
purchase rights represented by this Warrant. Upon receipt of such opinion, the
Company shall promptly mail a copy thereof to the Holder and shall make the
adjustments described therein.
4.10 AMENDMENT OF CERTIFICATE OF INCORPORATION. So long as the
Warrant is outstanding and no shares of Series B Preferred Stock are issued and
outstanding, the Company shall not amend, or otherwise take any action that
would affect, Article IV, Section 4(d), or Article IV, Section 4(m) of the
Certificate of Incorporation, without the prior written consent of the Holder,
given in its sole discretion. If the Certificate of Incorporation are amended
in violation of this Section 4.10, then the provisions of this Article IV shall
be adjusted so that the Holder shall receive with respect to the shares of
Common Stock received upon conversion of the shares of Series B Preferred Stock
obtained upon exercise of this Warrant thereafter, what would have been received
had the Certificate of Incorporation not been so amended, upon payment of the
same amount as would have been required had the Certificate of Incorporation not
been so amended.
4.11 CERTIFICATES AND NOTICES.
(a) ADJUSTMENT CERTIFICATES. Upon any adjustment of the
Exercise Price and/or the number of shares of Series B Preferred Stock
purchasable upon exercise of this Warrant, a certificate, signed by (i) the
Company's President and Chief Financial Officer, or (ii) any independent firm of
certified public accountants of recognized national standing the Company selects
at its own expense, setting forth in reasonable detail the events requiring the
adjustment and the method by which such adjustment was calculated, shall be
mailed to the Holder and shall specify the adjusted Exercise Price and the
number of shares of Series B Preferred Stock purchasable upon exercise of the
Warrant after giving effect to the adjustment.
(b) EXTRAORDINARY CORPORATE EVENTS. If the Company, after
the date hereof, proposes to effect (i) any transaction described in
Sections 4.2 or 4.4 hereof, (ii) a liquidation, dissolution or winding up of the
Company described in Section 4.6 hereof, or (iii) any payment of a dividend or
distribution with respect to Series B Preferred Stock or Common Stock, then, in
each such case, the Company shall mail to the Holder a notice describing such
proposed action and specifying the date on which the Company's books shall
close, or a record shall be taken, for determining the holders of Series B
Preferred Stock or Common Stock, as appropriate, entitled to participate in such
action, or the date on which such reorganization, reclassification,
consolidation, merger, sale, transfer, liquidation, dissolution or winding up
shall take place or commence, as the case may be, and the date as of which it is
expected that holders of Series B Preferred Stock and Common Stock of record
shall be entitled to receive securities and/or other property deliverable upon
such action, if any such date is to be fixed. Such notice shall be mailed to
the Holder at least thirty (30) days prior to the record date for such action in
the case of any action described in clause (i) or
13
<PAGE>
clause (iii) above, and in the case of any action described in clause (ii)
above, at least thirty (30) days prior to the date on which the action described
is to take place and at least thirty (30) days prior to the record date for
determining holders of Series B Preferred Stock or Common Stock, as appropriate,
entitled to receive securities and/or other property in connection with such
action.
4.12 NO IMPAIRMENT. The Company shall not, by amendment of the
Certificate of Incorporation or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Company, but shall at all times in good faith assist in the carrying out of all
the provisions of this Article IV and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder against
impairment.
4.13 APPLICATION. Except as otherwise provide herein, all sections
of this Article IV are intended to operate independently of one another. If an
event occurs that requires the application of more than one section, all
applicable sections shall be given independent effect.
ARTICLE V
REGISTRATION RIGHTS
Concurrent with the execution and delivery of this Warrant, the Company
shall cause the Holder to become a party to the Rights Agreement and the Holder
shall be deemed a "Holder", as defined in Section 6.4(a) of the Rights
Agreement, for purposes of Section 6.4 of the Rights Agreement. Holder shall be
entitled to all the rights, and be subject to all the obligations, of a Holder
under the Rights Agreement, the Warrant Shares shall be deemed "Series B
Preferred Stock", as defined in the Rights Agreement, and the Common Stock
issuable upon conversion of the Warrant Shares shall be deemed "Registrable
Securities", as defined in the Rights Agreement, for purposes of Section 6.4 of
the Rights Agreement. Such actions shall be effected by the execution and
delivery to the Holder a fully-executed First Amendment to Series B Preferred
Stock Purchase Agreement substantially in the form of EXHIBIT "F" hereto (the
"RIGHTS AGREEMENT AMENDMENT").
ARTICLE VI
FINANCIAL INFORMATION
6.1 FINANCIAL STATEMENTS. The Company shall deliver to the Holder,
concurrent with delivery to the Purchasers and/or the Holders, as defined in the
Rights Agreement, all information delivered to the Purchasers and/or the Holders
pursuant to Sections 6.5(a), 6.5(b) , 6.5(c) (but excluding the comparison to
budget with respect to the monthly financial statements), 6.5(d) and 6.5(e) of
the Rights Agreement and all other information delivered to the Purchasers
and/or the Holders from time to time pursuant to the Rights Agreement as in
effect from time to time during the term hereof. If the Rights Agreement is
terminated for
14
<PAGE>
any reason, and for so long as the Company is not a Reporting Company under the
Exchange Act, the Company shall deliver to the Holder all information that was
required to be delivered to the Purchasers and/or the Holders, as defined in the
Rights Agreement, pursuant to Sections 6.5(a), 6.5(b), 6.5(c) (but excluding the
comparison to budget with respect to the monthly financial statements), 6.5(d),
and 6.5(e) of the Rights Agreement, as in effect on the date hereof.
6.2 INSPECTION. The Company shall permit the Holder, at the
Holder's expense, to visit and inspect the Company's properties, to examine its
books of account and records and to discuss the Company's affairs, finances and
accounts with its officers, all at such reasonable times as may be requested by
the Holder.
ARTICLE VII
REPRESENTATIONS, WARRANTIES AND COVENANTS OF COMPANY
7.1 REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants that:
(a) LEGAL STATUS; QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and is qualified or licensed to do business in all
other countries, states and provinces in which the laws thereof require the
Company to qualify and/or be licensed, except where failure to qualify or be
licensed would not have a material adverse effect on the business or assets of
the Company taken as a whole;
(b) CAPITALIZATION. The Company's authorized capital stock
consists of: (i) Fifteen Million (15,000,000) shares of Preferred Stock, of
which Three Million Two Hundred Thousand (3,200,000) shares are designated as
Series A Preferred Stock, of which series Three Million Fifteen Thousand
(3,015,000) shares are issued and outstanding and Six Million Two Hundred Fifty-
Nine Thousand Two Hundred Thirty (6,259,230) shares are designated as Series B
Preferred Stock, of which series Six Million One Hundred Sixty-Nine Thousand Two
Hundred Thirty (6,169,230) shares are issued and outstanding; and (ii) Twenty-
Five Million (25,000,000) shares of Common Stock, of which Nine Hundred Ninety-
Four Thousand Five Hundred (994,500) shares are issued and outstanding;
(c) OPTIONS. Except as described in EXHIBIT "D" hereto
there are no options, warrants or similar rights to acquire from the Company, or
agreements or other obligations by the Company, absolute or contingent, to issue
or sell Common Stock, whether on conversion or exchange of Convertible
Securities or otherwise;
(d) PREEMPTIVE RIGHTS. Except as described in EXHIBIT "D",
no shareholder of the Company has any preemptive rights to subscribe for shares
of Common Stock;
(e) AUTHORITY. The Company has the right and power, and is
duly authorized and empowered, to enter into, execute, deliver and perform this
Warrant;
15
<PAGE>
(f) BINDING EFFECT. This Warrant has been duly authorized,
executed and delivered and constitutes a valid and binding obligation of the
Company enforceable in accordance with its terms;
(g) NO CONFLICT. The execution, delivery and/or performance
by the Company of this Warrant shall not, by the lapse of time, the giving of
notice or otherwise, constitute a violation of any applicable law or a breach of
any provision contained in the Company's Certificate of Incorporation or By-laws
or contained in any agreement, instrument, or document to which the Company is a
party or by which it is bound;
(h) CONSENTS. No consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other governmental
body is required for the valid issuance of the Warrant or for the performance of
any of the Company's obligations hereunder, except for the filing pursuant to
Section 25102(f) of the California Corporate Securities Law of 1968, as amended,
and the rules promulgated thereunder, which filing will be effected in
accordance with such section and rules;
(i) OFFERING. Neither the Company nor any agent acting on
its behalf has, either directly or indirectly, sold, offered for sale or
disposed of, or attempted or offered to dispose of, this Warrant or any part
hereof, or any similar obligation of the Company, to, or has solicited any
offers to buy any thereof from, any person or persons other than the Holder.
Neither the Company nor any agent acting on its behalf will sell or offer for
sale or dispose of, or attempt or offer to dispose of, this Warrant or any part
thereof to, or solicit any offers to buy any warrant of like tenor from, or
otherwise approach or negotiate in respect thereof, with, any Person or Persons
so as thereby to bring the issuance of this Warrant within the provisions of
Section 5 of the Securities Act;
(j) REGISTRATION. It is not necessary in connection with
the issuance and sale of this Warrant to the Holder to Register this Warrant
under the Securities Act; and
(k) OVERALL REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company contained in this Warrant, and the
other provisions of this Warrant, do not contain any untrue statement of
material fact or omit any material fact necessary to make the statements
contained herein, in view of the circumstances under which they were made, not
misleading.
7.2 COVENANTS. The Company covenants that:
(a) AUTHORIZED SHARES. The Company will at all times have
authorized, and reserved for the purpose of issue or transfer upon exercise of
the rights evidenced by this Warrant, a sufficient number of shares of Series B
Preferred Stock to provide for the exercise of the rights represented by this
Warrant (for purposes of determining compliance with this covenant, the shares
of Series B Preferred Stock issuable upon exercise of all other options and
warrants shall be deemed issued and outstanding), and a sufficient number of
shares of Common Stock to provide for the conversion into Common Stock of all
the shares of
16
<PAGE>
Series B Preferred Stock issued and issuable upon the exercise of this Warrant
but theretofore unconverted (for purposes of determining compliance with this
covenant, the shares of Common Stock issuable upon exercise of all options and
warrants to acquire Common Stock and upon conversion of all instruments
convertible into Common Stock shall be deemed issued and outstanding);
(b) PROPER ISSUANCE. The Company, at its expense, will take
all such action as may be necessary to assure that the Series B Preferred Stock
issuable upon the exercise of this Warrant, and the Common Stock issuable upon
the conversion of such Series B Preferred Stock, may be so issued without
violation of any applicable law or regulation, or of any requirements of any
domestic securities exchange upon which any capital stock of the Company may be
listed. Such action may include, but not be limited to, causing such shares to
be duly registered or approved or listed on relevant domestic securities
exchanges; and
(c) FULLY PAID SHARES. The Company will take all actions
necessary or appropriate to validly and legally issue (i) fully paid and non-
assessable shares of Series B Preferred Stock upon exercise of this Warrant and
(ii) fully paid and non-assessable shares of Common Stock upon conversion of
such shares of Series B Preferred Stock. All such shares will be free from all
taxes, liens and charges with respect to the issuance thereof, other than any
stock transfer taxes in respect to any transfer occurring contemporaneously with
such issuance.
ARTICLE VIII
MISCELLANEOUS
8.1 CERTAIN EXPENSES. The Company shall pay all expenses in
connection with, and all taxes (other than stock transfer taxes) and other
governmental charges that may be imposed in respect of, the issuance, sale and
delivery of the Warrant, the Warrant Shares and the shares of Common Stock
issuable upon conversion of the Warrant Shares.
8.2 HOLDER NOT A STOCKHOLDER. Prior to the exercise of this Warrant
as hereinbefore provided, the Holder shall not be entitled to any of the rights
of a shareholder of the Company including, without limitation, the right as a
shareholder (i) to vote on or consent to any proposed action of the Company or
(ii) except as provided herein, to receive (a) dividends or any other
distributions made to shareholders, (b) notice of or attend any meetings of
shareholders of the Company, or (c) notice of any other proceedings of the
Company. Notwithstanding the foregoing, the Company shall provide to the Holder
the information delivered to shareholders as required pursuant to Section 6.1(d)
hereof.
8.3 LIKE TENOR. All Warrants shall at all times be substantially
identical except as to the Preamble.
8.4 REMEDIES. The Company stipulates that the remedies at law of
the Holder in the event of any default or threatened default by the Company in
the performance of or
17
<PAGE>
compliance with any of the terms of this Warrant are not and will not be
adequate to the fullest extent permitted by law, and that such terms may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
8.5 ENFORCEMENT COSTS. If any party to, or beneficiary of, this
Warrant seeks to enforce its rights hereunder by legal proceedings or otherwise,
then the non-prevailing party shall pay all reasonable costs and expenses
incurred by the prevailing party, including, without limitation, all reasonable
attorneys' fees (including the allocable costs of in-house counsel).
8.6 NONWAIVER; CUMULATIVE REMEDIES. No course of dealing or any
delay or failure to exercise any right hereunder on the part of the Holder
and/or any Stockholder shall operate as a waiver of such right or otherwise
prejudice the rights, powers or remedies of the Holder or such Stockholder. No
single or partial waiver by the Holder and/or any Stockholder of any provision
of this Warrant or of any breach or default hereunder or of any right or remedy
shall operate as a waiver of any other provision, breach, default right or
remedy or of the same provision, breach, default, right or remedy on a future
occasion. The rights and remedies provided in this Warrant are cumulative and
are in addition to all rights and remedies which the Holder and each Stockholder
may have in law or in equity or by statute or otherwise.
8.7 NOTICES. Any notice, demand or delivery to be made pursuant to
this Warrant will be sufficiently given or made if sent by first class mail,
postage prepaid, addressed to (a) the Holder and the Stockholders at their last
known addresses appearing on the books of the Company maintained for such
purpose or (b) the Company at its Principal Executive Office. The Holder, the
Stockholders and the Company may each designate a different address by notice to
the other pursuant to this Section 8.7. A notice shall be deemed effective upon
the earlier of (i) receipt or (ii) the third day after mailing in accordance
with the terms of this Section 8.7.
8.8 SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon, the
Company and any Person succeeding the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets, and all of the
obligations of the Company with respect to the shares of Series B Preferred
Stock issuable upon exercise of this Warrant and the shares of Common Stock
issuable upon the conversion of such shares of Series B Preferred Stock, shall
survive the exercise, expiration or termination of this Warrant and all of the
covenants and agreements of the Company shall inure to the benefit of the
Holder, each Stockholder and their respective successors and assigns. The
Company shall, at the time of exercise of this Warrant, in whole or in part,
upon request of the Holder or any Stockholder but at the Company's expense,
acknowledge in writing its continuing obligations hereunder with respect to
rights of the Holder or such Stockholder to which it shall continue to be
entitled after such exercise in accordance with the terms hereof; provided that
the failure of the Holder or any Stockholder to make any such request shall not
18
<PAGE>
affect the continuing obligation of the Company to the Holder or such
Stockholder in respect of such rights.
8.9 MODIFICATION; SEVERABILITY.
(a) If, in any action before any court or agency legally
empowered to enforce any term, any term is found to be unenforceable, then such
term shall be deemed modified to the extent necessary to make it enforceable by
such court or agency.
(b) If any term is not curable as set forth in
subsection (a) above, the unenforceability of such term shall not affect the
other provisions of this Warrant but this Warrant shall be construed as if such
unenforceable term had never been contained herein.
8.10 INTEGRATION. This Warrant replaces all prior and
contemporaneous agreements and supersedes all prior and contemporaneous
negotiations between the parties with respect to the transactions contemplated
herein and constitutes the entire agreement of the parties with respect to the
transactions contemplated herein.
8.11 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties of the Company in this Warrant shall survive the execution and
delivery of this Warrant and the consummation of the transactions contemplated
hereby, notwithstanding any investigation by the Holder or its agents.
8.12 AMENDMENT. This Warrant may not be modified or amended except
by written agreement of the Company, the Holder and the Stockholder(s), if any.
8.13 HEADINGS. The headings of the Articles and Sections of this
Warrant are for the convenience of reference only and shall not, for any
purpose, be deemed a part of this Warrant.
8.14 MEANINGS. Whenever used in this Warrant, any noun or pronoun
shall be deemed to include both the singular and plural and to cover all
genders; and the words "herein," "hereof" and "hereunder" and words of similar
import shall refer to this instrument as a whole, including any amendments
hereto.
8.15 GOVERNING LAW. This Warrant shall be governed by, and construed
in accordance with, the laws of the State of California applicable to contracts
entered into and to be performed wholly within California by California
residents.
19
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officer as of October 28, 1994.
MERCATOR GENETICS, INC.
By: /s/ Colleen Prince
--------------------------------
Title: DIRECTOR, FINANCE: ADMIN.
--------------------------------
20
<PAGE>
EXHIBIT 5.1
[LETTERHEAD]
, 1997
Progenitor, Inc.
1507 Chambers Road
Columbus, Ohio 43212
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
filed by Progenitor, Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission on June 6, 1996 (the "Registration
Statement"), relating to the registration under the Securities Act of 1933, as
amended, of up to 3,162,500 shares of the Company's Common Stock, $0.001 par
value (the "Common Stock"), all of which are shares of authorized but unissued
stock to be offered and sold by the Company (including 412,500 shares of Common
Stock subject to the underwriters' over-allotment option). The Common Stock is
to be sold to the underwriters named in the Registration Statement for resale to
the public.
As counsel to the Company, we have examined the proceedings taken by the
Company in connection with the issuance and sale by the Company of up to
3,162,500 shares of Common Stock.
We are of the opinion that the shares of Common Stock to be offered and sold
by the Company have been duly authorized and, when issued and sold by the
Company in the manner described in the Registration Statement and the related
Prospectus and in accordance with the resolutions adopted by the Board of
Directors of the Company, will be validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the Prospectus constituting a part thereof and any amendments
thereto.
Very truly yours,
<PAGE>
PROGENITOR, INC.
1996 STOCK INCENTIVE PLAN
(amended and restated as of March 7, 1997)
1. PURPOSES OF THE PLAN. The purposes of this Stock Incentive Plan are
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants of the Company and its Subsidiaries and to promote the success of
the Company's business.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of the Committees
appointed to administer the Plan.
(b) "AFFILIATE" and "ASSOCIATE" shall have the respective meanings
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
(c) "APPLICABLE LAWS" means the legal requirements relating to the
administration of stock incentive plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, and the
rules of any applicable stock exchange or national market system.
(d) "AWARD" means the grant of an Option, SAR, Dividend Equivalent
Right, Restricted Stock, Performance Unit, Performance Share, or other right or
benefit under the Plan.
(e) "AWARD AGREEMENT" means the written agreement evidencing the
grant of an Award executed by the Company and the Grantee, including any
amendments thereto.
(f) "BOARD" means the Board of Directors of the Company.
(g) "CHANGE IN CONTROL" shall mean a change in ownership or control
of the Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person or related
group of persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities pursuant to
a tender or exchange offer made directly to the Company's stockholders which a
majority of the Continuing Directors who are not Affiliates or Associates of the
offeror do not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole
1
<PAGE>
number) ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who are Continuing Directors.
(h) "CODE" means the Internal Revenue Code of 1986, as amended.
(i) "COMMITTEE" means any committee appointed by the Board to
administer the Plan.
(j) "COMMON STOCK" means the common stock of the Company, as adjusted
in accordance with the provisions of Section 10, below.
(k) "COMPANY" means Progenitor, Inc., a Delaware corporation.
(l) "CONSULTANT" means any person who is engaged by the Company or
any Parent or Subsidiary to render consulting or advisory services and is
compensated for such services.
(m) "CONTINUING DIRECTORS" shall mean members of the Board who either
(i) have been Board members continuously for a period of at least thirty-six
(36) months or (ii) have been Board members for less than thirty-six (36) months
and were elected or nominated for election as Board members by at least a
majority of the Board members described in clause (i) who were still in office
at the time such election or nomination was approved by the Board.
(n) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
that the employment, director or consulting relationship with the Company, any
Parent, or Subsidiary, is not interrupted or terminated. Continuous Status as
an Employee, Director or Consultant shall not be considered interrupted in the
case of (i) any leave of absence approved by the Company or (ii) transfers
between locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. A leave of absence approved by the Company shall
include sick leave, military leave, or any other personal leave approved by an
authorized representative of the Company. For purposes of Incentive Stock
Options, no such leave may exceed 90 days, unless reemployment upon expiration
of such leave is guaranteed by statute or contract.
(o) "CORPORATE TRANSACTION" means any of the following stockholder-
approved transactions to which the Company is a party:
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital stock of
the Company's subsidiary corporations) in connection with complete liquidation
or dissolution of the Company, or
2
<PAGE>
(iii) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding securities
are transferred to a person or persons different from those who held such
securities immediately prior to such merger.
(p) "DIRECTOR" means a member of the Board.
(q) "DIVIDEND EQUIVALENT RIGHT" means a right entitling the Grantee
to compensation measured by dividends paid with respect to Common Stock.
(r) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(s) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(t) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) Where there exists a public market for the Common Stock, the
Fair Market Value shall be (A) the closing sales price for a Share for the last
market trading day prior to the time of the determination (or, if no sales were
reported on that date, on the last trading date on which sales were reported) on
the New York Stock Exchange, the Nasdaq National Market or the principal
securities exchange on which the Common Stock is listed for trading, whichever
is applicable or (B) if the Common Stock is not traded on any such exchange or
national market system, the average of the closing bid and asked prices of a
Share on the Nasdaq Small Cap Market, in each case, as reported in THE WALL
STREET JOURNAL or such other source as the Administrator deems reliable; or
(ii) In the absence of an established market of the type
described in (i), above, for the Common Stock, the Fair Market Value thereof
shall be determined by the Administrator in good faith, and such determination
shall be conclusive and binding on all persons.
(u) "GRANTEE" means an Employee, Director or Consultant who receives
an Award under the Plan.
(v) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
(w) "NON-QUALIFIED STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
3
<PAGE>
(x) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(y) "OPTION" means a stock option granted pursuant to the Plan.
(z) "OPTIONED STOCK" means the Common Stock subject to an Option or
other Award.
(aa) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(bb) "PERFORMANCE SHARES" means Shares or an Award denominated in
Shares which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
(cc) "PERFORMANCE UNITS" means monetary awards which may be earned in
whole or in part upon attainment of performance criteria established by the
Administrator.
(dd) "PLAN" means this 1996 Stock Incentive Plan.
(ee) "RESTRICTED STOCK" means the date of the closing of the first
sale of Common Stock to the general public pursuant to a registration
statement filed with and declared effective by the Securities and Exchange
Commission under the Securities Act of 1933, as amended.
(ff) "RESTRICTED STOCK" means Shares issued under the Plan to the
Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
(gg) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act
or any successor thereto.
(hh) "SAR" means a stock appreciation right entitling the Grantee to
Shares or cash compensation measured by appreciation in the value of Common
Stock.
(ii) "SHARE" means a share of the Common Stock.
(jj) "SUBSIDIARY" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(kk) "SUBSIDIARY DISPOSITION" means the disposition by the Company of
its equity holdings in any subsidiary corporation effected by a merger or
consolidation involving that subsidiary corporation, the sale of all or
substantially all of the assets of that subsidiary corporation or the Company's
sale or distribution of substantially all of the outstanding capital stock of
such subsidiary corporation.
3. STOCK SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10, below, the maximum
aggregate number of Shares which may be issued pursuant to all Awards (including
Incentive Stock
4
<PAGE>
Options), prior to Registration Date, 1,700,000, of which 150,000 shares are
allocated exclusively for Awards to Directors (such numbers of shares in both
cases determined as of May 13, 1996, the date approval of the Plan by the
Board), or, effective the Registration Date, 2,850,000 shares, of which
300,000 shares are allocated exclusively for Awards to Directors (such
numbers of Shares in both cases determined as of the Registration Date and
reflecting the one-for-two reverse stock split effected as of the
Registration Date pursuant to the Amended and Restated Certificate of
Incorporation of the Company effective on such date). The Shares may be
authorized, but unissued, or reacquired Common Stock.
(b) If an Award expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Award exchange program, or
if any unissued Shares are retained by the Company upon exercise of an Award in
order to satisfy the exercise price for such Award or any withholding taxes due
with respect to such Award, such unissued or retained Shares shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that actually have been issued under the Plan pursuant to
an Award shall not be returned to the Plan and shall not become available for
future distribution under the Plan, except that if unvested Shares are
forfeited, or repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PLAN ADMINISTRATOR.
(i) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS.
With respect to grants of Awards to Directors or Employees who are also Officers
or Directors of the Company, the Plan shall be administered by (A) the Board or
(B) a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws and to permit such grants and
related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee
shall continue to serve in its designated capacity until otherwise directed by
the Board.
(ii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER
EMPLOYEES. With respect to grants of Awards to Employees or Consultants who are
neither Directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a Committee designated by the Board, which committee shall
be constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. The Board may authorize one or more
Officers to grant such Awards and may limit such authority by requiring that
such Awards must be reported to and ratified by the Board or a Committee within
six (6) months of the grant date, and if so ratified, shall be effective as of
the grant date.
(b) POWERS OF THE ADMINISTRATOR. Subject to Applicable Laws, the
provisions of the Plan (including any other powers given to the Administrator
hereunder) and except as otherwise provided by the Board, the Administrator
shall have the authority, in its discretion:
(i) to select the Employees, Directors and Consultants to whom
Awards may from time to time be granted hereunder;
(ii) to determine whether and to what extent Awards are granted
hereunder;
5
<PAGE>
(iii) to determine the number of Shares to be covered by each
Award granted hereunder;
(iv) to approve forms of Award Agreement for use under the Plan;
(v) to determine the terms and conditions of any Award granted
hereunder;
(vi) to amend the terms of any outstanding Award granted under
the Plan including a reduction in the exercise price (or base amount on which
appreciation is measured) of any Award to reflect a reduction in the Fair Market
Value of the Common Stock since the grant date of the Award, provided that any
amendment that would adversely affect the Grantee's rights under an outstanding
Award shall not be made without the Grantee's written consent;
(vii) to construe and interpret the terms of the Plan and
Awards granted pursuant to the Plan; and
(viii) to take such other action, not inconsistent with the
terms of the Plan, as the Administrator deems appropriate.
(c) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on the Grantees and any other holders of Awards intended by the
Administrator to be affected thereby.
5. ELIGIBILITY. Awards other than Incentive Stock Options may be granted
to Employees, Directors and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee, Director or Consultant who has been granted an
Award may, if otherwise eligible, be granted additional Awards. Awards may be
granted to such Employees of the Company and its subsidiaries who are residing
in foreign jurisdictions as the Administrator in its sole discretion may
determine from time to time. The Administrator may establish additional terms,
conditions, rules or procedures to accommodate the rules or laws of applicable
foreign jurisdictions and to afford Grantees favorable treatment under such
laws; provided, however, that no Award shall be granted under any such
additional terms, conditions, rules or procedures with terms or conditions which
are inconsistent with the provisions of the Plan.
6. TERMS AND CONDITIONS OF AWARDS.
(a) TYPE OF AWARDS. The Administrator is authorized under the Plan
to award any type of arrangement to an Employee, Director or Consultant that is
not inconsistent with the provisions of the Plan and that by its terms involves
or might involve the issuance of (i) Shares, (ii) an Option, a SAR or similar
right with an exercise or conversion privilege at a fixed or variable price
related to the Common Stock and/or the passage of time, the occurrence of one or
more events, or the satisfaction of performance criteria or other conditions, or
(iii) any other security with the value derived from the value of the Common
Stock. Such awards include, without limitation, Options, SARs, sales or bonuses
of Restricted Stock, Dividend Equivalent
6
<PAGE>
Rights, Performance Units or Performance Shares, and an Award may consist of one
such security or benefit, or two or more of them in any combination or
alternative.
(b) DESIGNATION OF AWARD. Each Award shall be designated in the
Award Agreement. In the case of an Option, the Option shall be designated as
either an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options, to the extent of the Shares covered thereby in excess of
the foregoing limitation, shall be treated as Non-Qualified Stock Options. For
this purpose, Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the date the Option with respect to such Shares is granted.
(c) CONDITIONS OF AWARD. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price, earnings per share, total shareholder
return, return on equity, return on assets, return on investment, net operating
income, cash flow, revenue, economic value added, personal management
objectives, or other measure of performance selected by the Administrator.
Partial achievement of the specified criteria may result in a payment or vesting
corresponding to the degree of achievement as specified in the Award Agreement.
(d) TERM OF AWARD. The term of each Award shall be the term stated
in the Award Agreement, provided, however, that the term of an Incentive Stock
Option shall be no more than ten (10) years from the date of grant thereof.
However, in the case of an Incentive Stock Option granted to a Grantee who, at
the time the Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Incentive Stock Option shall be five (5) years
from the date of grant thereof or such shorter term as may be provided in the
Award Agreement.
(e) TRANSFERABILITY OF AWARDS. Incentive Stock Options may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee. Other
Awards shall be transferable to the extent provided in the Award Agreement.
(f) TIME OF GRANTING AWARDS. The date of grant of an Award shall for
all purposes be the date on which the Administrator makes the determination to
grant such Award, or such other date as is determined by the Administrator.
Notice of the grant determination shall
7
<PAGE>
be given to each Employee, Director or Consultant to whom an Award is so granted
within a reasonable time after the date of such grant.
7. AWARD EXERCISE OR PURCHASE PRICE, CONSIDERATION, TAXES AND RELOAD
OPTIONS.
(a) EXERCISE OR PURCHASE PRICE. The exercise or purchase price, if
any, for an Award shall be as follows:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option owns stock representing more than 10% of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be not less than 110% of the Fair Market Value
per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share exercise price shall be not
less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Non-Qualified Stock Option, the per Share
exercise price shall be not less than 85% of the Fair Market Value per Share on
the date of grant unless otherwise determined by the Administrator.
(iii) In the case of other Awards, such price as is determined
by the Administrator.
(b) CONSIDERATION. Subject to Applicable Laws, the consideration to
be paid for the Shares to be issued upon exercise or purchase of an Award
including the method of payment, shall be determined by the Administrator (and,
in the case of an Incentive Stock Option, shall be determined at the time of
grant). In addition to any other types of consideration the Administrator may
determine, the Administrator is authorized to accept as consideration for Shares
under the Plan the following:
(i) cash;
(ii) check;
(iii) delivery of Grantee's promissory note with such recourse,
interest, security, and redemption provisions as the Administrator in its
discretion determines as appropriate;
(iv) surrender of Shares (including withholding of Shares
otherwise deliverable upon exercise of the Award) which have a Fair Market Value
on the date of surrender equal to the aggregate exercise price of the Shares as
to which said Award shall be exercised (but only to the extent that such
exercise of the Award would not result in an accounting compensation charge with
respect to the Shares used to pay the exercise price unless otherwise determined
by the Administrator);
8
<PAGE>
(v) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Award and delivery to the
Company of the sale or loan proceeds required to pay the exercise price; or
(vi) any combination of the foregoing methods of payment.
In making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
(c) TAXES. No Shares shall be delivered under the Plan to any
Grantee or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of federal, state, and
local income and employment tax withholding obligations, including, without
limitation, obligations incident to the receipt of Shares or the disqualifying
disposition of Shares received on exercise of an Incentive Stock Option. Upon
exercise of an Award, the Company shall withhold from Grantee an amount
sufficient to satisfy such tax obligations.
(d) RELOAD OPTIONS. In the event the exercise price or tax
withholding of an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise deliverable to the Grantee, the Administrator may
issue the Grantee an additional Option, with terms identical to the Award
Agreement under which the Option was exercised, but at an exercise price as
determined by the Administrator in accordance with the Plan.
8. EXERCISE OF AWARD.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER.
(i) Any Award granted hereunder shall be exercisable at such
times and under such conditions as determined by the Administrator under the
terms of the Plan and specified in the Award Agreement.
(ii) An Award shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Award by the person entitled to exercise the Award and full payment
for the Shares with respect to which the Award is exercised has been received by
the Company. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) of
the stock certificate evidencing such Shares, no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to
Optioned Stock, notwithstanding the exercise of an Option or other Award. The
Company shall issue (or cause to be issued) such stock certificate promptly upon
exercise of the Award. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the stock certificate is issued,
except as provided in the Award Agreement or Section 10, below.
9
<PAGE>
(b) EXERCISE OF AWARD FOLLOWING TERMINATION OF EMPLOYMENT, DIRECTOR
OR CONSULTING RELATIONSHIP.
(i) An Award may not be exercised after the termination date
of such Award set forth in the Award Agreement and may be exercised following
the termination of a Grantee's Continuous Status as an Employee, Director or
Consultant only to the extent provided in the Award Agreement.
(ii) Where the Award Agreement permits a Grantee to exercise an
Award following the termination of the Grantee's Continuous Status as an
Employee, Director or Consultant for a specified period, the Award shall
terminate to the extent not exercised on the last day of the specified period or
the last day of the original term of the Award whichever occurs first.
(iii) Any Award designated as an Incentive Stock Option to the
extent not exercised within the time permitted by law for the exercise of
Incentive Stock Options following the termination of a Grantee's Continuous
Status as an Employee, Director or Consultant shall convert automatically to a
Non-Qualified Stock Option and thereafter shall be exercisable as such to the
extent exercisable by its terms for the period specified in the Award Agreement.
(c) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Award previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Grantee at the time that such offer is made.
9. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Shares shall not be issued pursuant to the exercise of an Award unless
the exercise of such Award and the issuance and delivery of such Shares pursuant
thereto shall comply with all Applicable Laws, and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
(b) As a condition to the exercise of an Award, the Company may require
the person exercising such Award to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
Applicable Laws.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any required
action by the shareholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, as well as the price per share of Common Stock
covered by each such outstanding Award, shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the
10
<PAGE>
Common Stock, or any other similar event resulting in an increase or decrease in
the number of issued shares of Common Stock. Such adjustment shall be made by
the Administrator, and its determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason hereof shall be made
with respect to, the number or price of Shares subject to an Award.
11. CORPORATE TRANSACTIONS/CHANGES IN CONTROL/SUBSIDIARY DISPOSITIONS.
(a) Should any Corporate Transaction occur while an Grantee's
Continuous Status as an Employee, Director or Consultant has not terminated,
then each outstanding Award held by such Grantee, shall become fully vested
and exercisable and be released from any restrictions on transfer and
repurchase or forfeiture rights, immediately prior to the specified effective
date of such Corporate Transaction, for all of the Shares at the time
represented by such Award and may be exercised with respect to any or all of
such Shares represented by such Award. Effective upon the consummation of the
Corporate Transaction, all outstanding Awards under the Plan shall terminate
unless assumed by the successor company or its Parent.
(b) Should a Change in Control (other than a Change in Control which
is also a Corporate Transaction) occur while an Grantee's Continuous Status as
an Employee, Director or Consultant has not terminated, then each outstanding
Award held by such Grantee, unless otherwise determined by the Administrator,
shall become fully vested and exercisable and be released from any restrictions
on transfer and repurchase or forfeiture rights, immediately prior to the
specified effective date of such Change in Control, for all of the Shares at the
time subject to such Award and may be exercised with respect to any or all of
such Shares represented by such Award. Each such Award shall remain so
exercisable until the expiration or sooner termination of the applicable Award
term.
(c) Should a Subsidiary Disposition occur while an Grantee's
Continuous Status as an Employee, Director or Consultant with the subsidiary
corporation involved in such Subsidiary Disposition has not terminated, then
each outstanding Award held by such Grantee, unless otherwise determined by the
Administrator, shall become fully vested and exercisable and be released from
any restrictions on transfer and repurchase or forfeiture rights, immediately
prior to the specified effective date of such Subsidiary Disposition, for all of
the Shares at the time subject to such Award and may be exercised with respect
to any or all of such Shares represented by such Award. Each such Award shall
remain so exercisable until the expiration or sooner termination of the Award
term.
(d) The portion of any Incentive Stock Option accelerated under this
Section 11 in connection with a Corporate Transaction, Change in Control or
Subsidiary Disposition shall remain exercisable as an Incentive Stock Option
under the Code only to the extent the $100,000 dollar limitation of
Section 422(d) of the Code is not exceeded. To the extent such dollar
limitation is exceeded, the accelerated excess portion of such Option shall be
exercisable as a Non-Qualified Stock Option.
11
<PAGE>
12. TERM OF PLAN. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the shareholders of the
Company. It shall continue in effect for a term of ten (10) years unless sooner
terminated.
13. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
(a) The Board may at any time amend, suspend or terminate the Plan.
To the extent necessary and desirable to comply with Applicable Laws, the
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) No Award may be granted during any suspension or after
termination of the Plan.
(c) Any amendment, suspension or termination of the Plan shall not
affect Awards already granted, and such Awards shall remain in full force and
effect as if the Plan had not been amended, suspended or terminated, unless
mutually agreed otherwise between the Grantee and the Administrator, which
agreement must be in writing and signed by the Grantee and the Company.
14. RESERVATION OF SHARES.
(a) The Company, during the term of the Plan, will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
15. NO EFFECT ON TERMS OF EMPLOYMENT. The Plan shall not confer upon any
Grantee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
16. SHAREHOLDER APPROVAL. The Plan became effective when adopted by the
Board on May 13, 1996. On March 7, 1997, the Board adopted and approved an
amendment and restatement of the Plan to increase, effective on the
Registration Date, the maximum aggregate number of Shares which may be issued
pursuant to all Awards under the Plan (the "Amendment"), subject to
shareholder approval of the Amendment within twelve (12) months of the date
of approval by the Board. Awards may be granted in reliance on the
Amendment, but no Award issued in reliance on the Amendment shall be
exercisable unless and until the Amendment has been approved by the Company's
shareholders. If such Shareholder approval is not obtained within twelve
(12) months after the date of the Board's approval of the Amendment, then all
Awards previously issued in reliance on the Amendment shall terminate. Such
shareholder approval shall be obtained in the degree and manner required
under Applicable Laws.
12
<PAGE>
PROGENITOR, INC. 1996 STOCK INCENTIVE PLAN
STOCK OPTION AGREEMENT
I. NOTICE OF STOCK OPTION GRANT
Optionee's Name and Address:
-----------------------------------
-----------------------------------
-----------------------------------
You have been granted an option to purchase shares of Common Stock of
the Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
Grant Number
-----------------------------------
Date of Grant
-----------------------------------
Vesting Commencement Date
-----------------------------------
Exercise Price per Share $
----------------------------------
Total Number of Shares Granted
-----------------------------------
Total Exercise Price $
-----------------------------------
Type of Option: Incentive Stock Option
------
Non-Qualified Stock Option
------
Term/Expiration Date:
-----------------------------------
VESTING SCHEDULE:
Subject to other limitations set forth in this Agreement, this Option
may be exercised, in whole or in part, in accordance with the following
schedule:
TERMINATION PERIOD:
This Option may be exercised for THREE (3) months after termination of
the Optionee's employment or consulting relationship, or such longer period as
may be applicable upon death or disability of Optionee as provided in the
Agreement. In the event of the Optionee's change in status from Employee to
Consultant or Consultant to Employee, this Option Agreement shall remain in
effect; provided, however, that in the event of a change in status from Employee
to Consultant, Optionee's Incentive Stock Option shall cease to be treated as an
Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on
the ninety-first (91st) day
1
<PAGE>
following such change in status. In no event shall this Option be exercised
later than the Term/Expiration Date as provided above.
2
<PAGE>
II. AGREEMENT
1. GRANT OF OPTION. Progenitor, Inc., a Delaware corporation (the
"Company"), hereby grants to the Optionee named in the Notice of Stock Option
Grant (the "Optionee"), an option (the "Option") to purchase the total number of
shares of Common Stock (the "Shares") set forth in the Notice of Stock Option
Grant, at the exercise price per share set forth in the Notice of Stock Option
Grant (the "Exercise Price") subject to the terms, definitions and provisions of
the Company's 1996 Stock Incentive Plan (the "Plan") adopted by the Company,
which is incorporated herein by reference. Unless otherwise defined herein, the
terms defined in the Plan shall have the same defined meanings in this Option
Agreement.
If designated in the Notice of Stock Option Grant as an Incentive Stock
Option, this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Section 422(d) of the Code, this Option shall be treated as
a Non-Qualified Stock Option.
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option shall be exercisable
during its term in accordance with the Vesting Schedule set out in the Notice of
Stock Option Grant and with the applicable provisions of the Plan and this
Option Agreement. In the event of termination of Optionee's Continuous Status
as an Employee, Director or Consultant, this Option shall be exercisable in
accordance with the applicable provisions of the Plan and this Option Agreement.
This Option shall be subject to the provisions of Section 11 of the Plan
relating to the exercisability or termination of the Option in the event of a
Corporate Transaction, Change in Control or Subsidiary Disposition.
(b) METHOD OF EXERCISE. This Option shall be exercisable
only by delivery of an Exercise Notice (attached as Exhibit A) which shall state
the election to exercise the Option, the whole number of Shares in respect of
which the Option is being exercised, such other representations and agreements
as to the holder's investment intent with respect to such Shares and such other
provisions as may be required by the Administrator. Such Exercise Notice shall
be signed by the Optionee and shall be delivered in person or by certified mail
to the Secretary of the Company accompanied by payment of the Exercise Price.
The Option shall be deemed to be exercised upon receipt by the Company of such
written notice accompanied by the Exercise Price.
No Shares will be issued pursuant to the exercise of the Option
unless such issuance and such exercise shall comply with all Applicable Laws.
Assuming such compliance, for income tax purposes, the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
(c) TAXES. No Shares will be issued to the Optionee or
other person pursuant to the exercise of the Option until the Optionee or other
person has made arrangements
3
<PAGE>
acceptable to the Administrator for the satisfaction of foreign, federal, state
and local income and employment tax withholding obligations.
3. METHOD OF PAYMENT. Payment of the Exercise Price shall be by
any of the following, or a combination thereof, at the election of the Optionee;
provided, however, that such exercise method does not then violate an Applicable
Law:
(a) cash;
(b) check;
(c) [SURRENDER OF SHARES OF COMMON STOCK OF THE COMPANY
(INCLUDING WITHHOLDING OF SHARES OTHERWISE DELIVERABLE UPON EXERCISE OF THIS
OPTION) WHICH HAVE A FAIR MARKET VALUE ON THE DATE OF SURRENDER EQUAL TO THE
EXERCISE PRICE OF THE SHARES AS TO WHICH THE OPTION IS BEING EXERCISED (BUT ONLY
TO THE EXTENT THAT SUCH EXERCISE OF THE OPTION WOULD NOT RESULT IN AN ACCOUNTING
COMPENSATION CHARGE WITH RESPECT TO THE SHARES USED TO PAY THE EXERCISE PRICE
UNLESS OTHERWISE DETERMINED BY THE ADMINISTRATOR); OR
(d) DELIVERY OF A PROPERLY EXECUTED EXERCISE NOTICE TOGETHER
WITH SUCH OTHER DOCUMENTATION AS THE ADMINISTRATOR AND THE BROKER, IF
APPLICABLE, SHALL REQUIRE TO EFFECT AN EXERCISE OF THE OPTION AND DELIVERY TO
THE COMPANY OF THE SALE OR LOAN PROCEEDS REQUIRED TO PAY THE EXERCISE PRICE].
[ADD ANY ADDITIONAL EXERCISE METHODS, SUCH AS RECOURSE LOAN]
4. RESTRICTIONS ON EXERCISE. This Option, if an Incentive Stock
Option, may not be exercised until such time as the Plan has been approved by
the stockholders of the Company. In addition, this Option may not be exercised
if the issuance of the Shares subject to the Option upon such exercise would
constitute a violation of any Applicable Laws.
5. TERMINATION OF RELATIONSHIP. In the event the Optionee's
Continuous Status as an Employee, Director or Consultant terminates, the
Optionee may, to the extent otherwise so entitled at the date of such
termination (the "Termination Date"), exercise this Option during the
Termination Period set out in the Notice of Stock Option Grant. Except as
provided in Sections 6 and 7, below, to the extent that the Optionee was not
entitled to exercise this Option on the Termination Date, or if the Optionee
does not exercise this Option within the Termination Period, the Option shall
terminate.
6. DISABILITY OF OPTIONEE. In the Optionee's Continuous Status as
an Employee, Director or Consultant terminates as a result of his or her
disability, the Optionee may, but only within twelve (12) months from the
Termination Date (and in no event later than the Term/Expiration Date), exercise
the Option to the extent otherwise entitled to exercise it on the Termination
Date; provided, however, that if such disability is not a "disability" as such
term is defined in Section 22(e)(3) of the Code and the Option is an Incentive
Stock Option, such Incentive Stock Option shall cease to be treated as an
Incentive Stock Option and shall be treated as a Non-Qualified Stock Option on
the ninety-first (91st) day following the Termination Date. To the extent that
the Optionee was not entitled to exercise the Option on the Termination Date,
4
<PAGE>
or if the Optionee does not exercise such Option to the extent so entitled
within the time specified herein, the Option shall terminate.
7. DEATH OF OPTIONEE. In the event of the Optionee's death, the
Option may be exercised at any time within twelve (12) months following the date
of death (and in no event later than the Term/Expiration Date), by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent the Optionee could exercise
the Option at the date of death.
8. TRANSFERABILITY OF OPTION. This Option, if an Incentive Stock
Option, may not be transferred in any manner otherwise than by will or by the
laws of descent or distribution and may be exercised during the lifetime of the
Optionee only by the Optionee. This Option, if a Non-Qualified Stock Option,
may be transferred by the Optionee in a manner and to the extent acceptable to
the Administrator as evidenced by a writing signed by the Company and the
Optionee. The terms of this Option shall be binding upon the executors,
administrators, heirs and successors of the Optionee.
9. TERM OF OPTION. This Option may be exercised only within the
term set out in the Notice of Stock Option Grant, and may be exercised during
such term only in accordance with the Plan and the terms of this Option
Agreement.
10. TAX CONSEQUENCES. Set forth below is a brief summary as of the
date of this Option Agreement of some of the federal tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION
OR DISPOSING OF THE SHARES.
(a) EXERCISE OF INCENTIVE STOCK OPTION. If this Option
qualifies as an Incentive Stock Option, there will be no regular federal income
tax liability upon the exercise of the Option, although the excess, if any,
of the Fair Market Value of the Shares on the date of exercise over the
Exercise Price will be treated as an adjustment to the alternative minimum
tax for federal tax purposes and may subject the Optionee to the alternative
minimum tax in the year of exercise.
(b) EXERCISE OF INCENTIVE STOCK OPTION FOLLOWING DISABILITY.
If the Optionee's Continuous Status as an Employee, Director or Consultant
terminates as a result of disability that is not total and permanent disability
as defined in Section 22(e)(3) of the Code, to the extent permitted on the date
of termination, the Optionee must exercise an Incentive Stock Option within 90
days of such termination for the Incentive Stock Option to be qualified as an
Incentive Stock Option.
(c) EXERCISE OF NON-QUALIFIED STOCK OPTION. There may be a
regular federal income tax liability upon the exercise of a Non-Qualified
Stock Option. The Optionee will be treated as having received compensation
income (taxable at ordinary income tax rates) equal to the excess, if any, of
the Fair Market Value of the Shares on
5
<PAGE>
the date of exercise over the Exercise Price. If Optionee is an Employee or a
former Employee, the Company will be required to withhold from Optionee's
compensation or collect from Optionee and pay to the applicable taxing
authorities an amount in cash equal to a percentage of this compensation income
at the time of exercise, and may refuse to honor the exercise and refuse to
deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(d) DISPOSITION OF SHARES. In the case of a Non-Qualified
Stock Option, if Shares are held for at least one year, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. In the case of an Incentive Stock Option, if Shares
transferred pursuant to the Option are held for at least one year after
receipt of the Shares and are disposed of at least two years after the Date
of Grant, any gain realized on disposition of the Shares also will be treated
as long-term capital gain for federal income tax purposes. If Shares
purchased under an Incentive Stock Option are disposed of within such
one-year or two-year periods, any gain realized on such disposition will be
treated as compensation income (taxable at ordinary income rates) to the
extent of the difference between the Exercise Price and the lesser of (i) the
Fair Market Value of the Shares on the date of exercise, or (ii) the sale
price of the Shares.
11. ENTIRE AGREEMENT: GOVERNING LAW. The Plan is incorporated
herein by reference. The Plan and this Option Agreement constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and the
Optionee with respect to the subject matter hereof, and may not be modified
adversely to the Optionee's interest except by means of a writing signed by the
Company and Optionee. This agreement is governed by Delaware law except for
that body of law pertaining to conflict of laws.
12. HEADINGS. The captions used in this Option are inserted for
convenience and shall not be deemed a part of this Option for construction or
interpretation.
6
<PAGE>
13. INTERPRETATION. Any dispute regarding the interpretation of
this Option Agreement shall be submitted by the Optionee or by the Company
forthwith to the Board or the Administrator that administers the Plan, which
shall review such dispute at its next regular meeting. The resolution of such
dispute by the Board or the Administrator shall be final and binding on all
persons.
Progenitor, Inc.,
a Delaware corporation
By:
-----------------------------------
Its:
----------------------------------
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S 1996 STOCK INCENTIVE PLAN WHICH
IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that
he is familiar with the terms and provisions thereof, and hereby accepts this
Option Agreement subject to all of the terms and provisions thereof. Optionee
has reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions arising under the
Plan or this Option Agreement. Optionee further agrees to notify the Company
upon any change in the residence address indicated below.
Dated: Signed:
----------------------------- -------------------------------
Optionee
Residence Address:
--------------------------------------
--------------------------------------
--------------------------------------
7
<PAGE>
EXHIBIT A
PROGENITOR, INC. 1996 STOCK INCENTIVE PLAN
EXERCISE NOTICE
Progenitor, Inc.
1507 Chambers Road
Columbus, OH 43212
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of today, ______________,
________________________________, the undersigned ("Optionee") hereby elects to
exercise Optionee's option to purchase ___________ shares of the Common Stock
(the "Shares") of Progenitor, Inc. (the "Company") under and pursuant to the
Company's 1996 Stock Incentive Plan (the "Plan") and the [ ] Incentive
[ ] Non-Qualified Stock Option Agreement dated ______________, ________ (the
"Option Agreement").
2. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
3. RIGHTS AS STOCKHOLDER. Until the stock certificate evidencing
such Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a stockholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 10 of the Plan.
4. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company
the full Exercise Price for the Shares.
5. TAX CONSULTATION. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice
6. TAXES. Optionee agrees to satisfy all applicable federal, state
and local income and employment tax withholding obligations and [HEREWITH
DELIVERS TO THE COMPANY THE FULL AMOUNT OF SUCH OBLIGATIONS] OR [HAS MADE
ARRANGEMENTS ACCEPTABLE TO THE COMPANY TO SATISFY SUCH OBLIGATIONS.] [OPTIONEE
ALSO AGREES, AS PARTIAL CONSIDERATION FOR THE DESIGNATION
1
<PAGE>
OF THE OPTION AS AN INCENTIVE STOCK OPTION, TO NOTIFY THE COMPANY IN WRITING
WITHIN THIRTY (30) DAYS OF ANY DISPOSITION OF ANY SHARES ACQUIRED BY EXERCISE OF
THE OPTION IF SUCH DISPOSITION OCCURS WITHIN TWO (2) YEARS FROM THE GRANT DATE
OR WITHIN ONE (1) YEAR FROM THE DATE THE SHARES WERE TRANSFERRED TO OPTIONEE.
IF THE COMPANY IS REQUIRED TO SATISFY ANY FEDERAL, STATE OR LOCAL INCOME OR
EMPLOYMENT TAX WITHHOLDING OBLIGATIONS AS A RESULT OF SUCH AN EARLY DISPOSITION,
OPTIONEE AGREES TO SATISFY THE AMOUNT OF SUCH WITHHOLDING IN A MANNER THAT THE
ADMINISTRATOR PRESCRIBES.]
7. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
under this Exercise Notice to single or multiple assignees, and this Agreement
shall inure to the benefit of the successors and assigns of the Company. This
Exercise Notice shall be binding upon Optionee and his or her heirs, executors,
administrators, successors and assigns.
8. HEADINGS. The captions used in this Agreement are inserted for
convenience and shall not be deemed a part of this Agreement for construction or
interpretation.
9. INTERPRETATION. Any dispute regarding the interpretation of this
Exercise Notice shall be submitted by Optionee or by the Company forthwith to
the Company's Board of Directors or the Administrator that administers the Plan,
which shall review such dispute at its next regular meeting. The resolution of
such a dispute by the Board or Administrator shall be final and binding on all
persons.
10. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by
and construed in accordance with the laws of the State of Delaware excluding
that body of law pertaining to conflicts of law. Should any provision of this
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
11. NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal delivery or
upon deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
12. FURTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
2
<PAGE>
13. ENTIRE AGREEMENT. The Plan and the Option Agreement are
incorporated herein by reference. This Exercise Notice, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.
Submitted by: Accepted by:
OPTIONEE: PROGENITOR, INC.
By:
-----------------------------------
- ----------------------------------- Its:
(Signature) ----------------------------------
ADDRESS: ADDRESS:
___________________________________ 1507 Chambers Road
___________________________________ Columbus, OH 43212
3
<PAGE>
THE INFORMATION BELOW MARKED * AND [ ] HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN
SEPARATELY FILED WITH THE COMMISSION.
LICENSE AGREEMENT
DATED DECEMBER 31, 1996
BETWEEN
PROGENITOR, INC.
AND
AMGEN INC.
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
ARTICLE 1 - DEFINITIONS
1.1 Active Component. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Combined Product. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.5 Confidential Information. . . . . . . . . . . . . . . . . . . . . . 2
1.6 Controls/Controlled . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.8 Effective Date. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.9 FDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.10 Field of Use. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.11 First Commercial Sale . . . . . . . . . . . . . . . . . . . . . . . 2
1.12 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.13 GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.14 IND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.15 Licensed Patents. . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.16 Licensed Product(s) . . . . . . . . . . . . . . . . . . . . . . . . 3
1.17 Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.18 New Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.19 Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.20 Patent Right. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.21 Person. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.22 Phase III Licensing Trial . . . . . . . . . . . . . . . . . . . . . 3
1.23 Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.24 Progenitor Ancillary Patents. . . . . . . . . . . . . . . . . . . . 4
1.25 Progenitor Receptor Patents . . . . . . . . . . . . . . . . . . . . 4
1.26 Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.27 Third Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.28 Third Party Royalties . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 2 - REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of Progenitor. . . . . . . . . . . . 4
2.2 Representations and Warranties of Amgen . . . . . . . . . . . . . . 5
ARTICLE 3 - LICENSE GRANT
3.1 Technology Ownership. . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 License Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.3 Retained Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 6
i
<PAGE>
ARTICLE 4 - DEVELOPMENT AND COMMERCIALIZATION
4.1 Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.2 Commercialization . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.3 Annual Statement. . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE 5 - CONSIDERATION
5.1 License Fee and Equity Purchases. . . . . . . . . . . . . . . . . . 7
5.2 License Maintenance Fee . . . . . . . . . . . . . . . . . . . . . . 7
5.3 Milestones. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.4 Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.5 Credits Against Royalties and Milestone Payments. . . . . . . . . . 10
5.6 Payment of Royalties. . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE 6 - RECORDS; AUDIT
6.1 Record Retention. . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.2 Royalty Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.3 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 7 - PATENTS
7.1 Patent Prosecution. . . . . . . . . . . . . . . . . . . . . . . . . 12
7.2 Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.3 Third Party Claims. . . . . . . . . . . . . . . . . . . . . . . . . 13
7.4 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 8 - CONFIDENTIALITY
8.1 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.2 This Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.3 Authorized Disclosure . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 9 - INDEMNIFICATION
9.1 Indemnification by Amgen. . . . . . . . . . . . . . . . . . . . . . 15
9.2 Indemnification by Progenitor . . . . . . . . . . . . . . . . . . . 16
9.3 Indemnification Procedure . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 10 - TERMINATION
10.1 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.2 Discontinuation of Development. . . . . . . . . . . . . . . . . . . 16
10.3 Termination of Licenses . . . . . . . . . . . . . . . . . . . . . . 16
10.4 Termination for Default . . . . . . . . . . . . . . . . . . . . . . 16
ii
<PAGE>
10.5 Insolvency or Bankruptcy. . . . . . . . . . . . . . . . . . . . . . 17
10.6 Accrued Rights, Surviving Obligations . . . . . . . . . . . . . . . 18
ARTICLE 11 - MISCELLANEOUS PROVISIONS
11.1 Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
11.2 Further Actions . . . . . . . . . . . . . . . . . . . . . . . . . . 18
11.3 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
11.4 Public Announcements. . . . . . . . . . . . . . . . . . . . . . . . 18
11.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.6 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.7 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.8 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.9 Descriptive Headings. . . . . . . . . . . . . . . . . . . . . . . . 19
11.10 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
11.11 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
11.12 Entire Agreement of the Parties . . . . . . . . . . . . . . . . . . 20
11.13 Dispute Resolution. . . . . . . . . . . . . . . . . . . . . . . . . 20
11.14 Independent Contractors . . . . . . . . . . . . . . . . . . . . . . 20
11.15 Use of Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
11.16 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
EXHIBITS
Exhibit A Progenitor Receptor Patents
iii
<PAGE>
LICENSE AGREEMENT
LICENSE AGREEMENT (this "Agreement") dated December 31, 1996 by and
between Progenitor, Inc., a Delaware corporation with principal offices located
at 1507 Chambers Road, Columbus, Ohio 43212 ("Progenitor") and Amgen Inc., a
Delaware corporation with principal offices located at Amgen Center, 1840
DeHavilland Drive, Thousand Oaks, California 91320 ("Amgen").
W I T N E S S E T H:
WHEREAS, Progenitor has filed certain patent applications relating to the
leptin receptor including patent applications describing the receptor itself,
antibody to the receptor and methods and uses relating thereto.
WHEREAS, Amgen is engaged in the research, development and
commercialization of human pharmaceutical products.
WHEREAS, Progenitor has agreed to license to Amgen the Progenitor leptin
receptor patent applications and patents issuing therefrom for human
pharmaceutical uses under the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing and the covenants and
promises contained in this Agreement, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "ACTIVE COMPONENT" shall mean any proprietary substance or device (other
than a Product) which performs an identifiable therapeutic, prophylactic,
diagnostic or delivery function in combination with a Product.
1.2 "AFFILIATE" shall mean a Person or entity that, directly or indirectly,
through one or more intermediates, controls, is controlled by, or is under
common control with the Person or entity specified. For the purposes of this
definition, control shall mean the direct or indirect ownership of at least
fifty percent (50%) of (i) the stock shares entitled to vote for the election of
directors or (ii) ownership interest.
1.3 "AGREEMENT" shall mean this Agreement.
1.4 "COMBINED PRODUCT" shall mean any product made, used or sold by or on
behalf of Amgen, its Affiliates and/or its sublicensees which consists of a
Product in combination with one or more Active Components.
1
<PAGE>
1.5 "CONFIDENTIAL INFORMATION" shall mean information, which, if written, is
marked confidential by the disclosing Party or, if oral, is reduced to writing
and marked confidential by the disclosing Party, within thirty (30) days of the
oral disclosure.
1.6 "CONTROLS" or "CONTROLLED" shall mean possession of the ability to grant
licenses or sublicenses without violating the terms of any agreement or other
arrangement with, or the rights of, any Third Party.
1.7 "DEFAULT" shall mean with respect to either Party (i) that any
representation or warranty of such Party set forth herein shall have been untrue
in any material respect when made and/or (ii) such Party shall have failed to
perform any material obligation set forth herein within sixty (60) days after
receipt of written notice from the other Party specifying in detail the material
obligation which has not been performed and requesting that the failure to
perform be remedied within sixty (60) days.
1.8 "EFFECTIVE DATE" shall mean the date first written above.
1.9 "FDA" shall mean the Federal Food and Drug Administration of the United
States Department of Health and Human Services and successor agencies.
1.10 "FIELD OF USE" shall mean all human therapeutic, prophylactic and
diagnostic uses of Licensed Products. Without limiting the foregoing, the Field
of Use will specifically include all human therapeutic, diagnostic and
prophylactic uses of both proteins and DNAs encoding Licensed Products.
1.11 "FIRST COMMERCIAL SALE" shall mean the initial transfer of a Licensed
Product to a Third Party in exchange for cash or some equivalent to which value
can be assigned for purposes of determining Net Sales.
1.12 "FORCE MAJEURE" shall mean any occurrence beyond the reasonable control
of a Party that prevents or substantially interferes with the performance by the
Party of any of its obligations hereunder, if such occurs by reason of any act
of God, flood, fire, explosion, breakdown of plant, earthquake, strike, lockout,
labor dispute, casualty or accident, or war, revolution, civil commotion, acts
of public enemies, blockage or embargo, or any injunction, law order,
proclamation, regulation, ordinance, demand or requirement of any government or
of any subdivision, authority or representative or any such government,
inability to procure or use materials, labor, equipment, transportation, or
energy sufficient to meet manufacturing needs without the necessity of
allocation, or any other cause whatsoever, whether similar or dissimilar to
those above enumerated, beyond the reasonable control of such Party, if and only
if the Party affected shall have used reasonable efforts to avoid such
occurrence and to remedy it promptly if it shall have occurred.
1.13 "GAAP" shall mean United States generally accepted accounting principles
2
<PAGE>
consistently applied.
1.14 "IND" shall mean an Investigational New Drug application filed with the
FDA.
1.15 "LICENSED PATENTS" shall mean the Progenitor Receptor Patents and
Progenitor Ancillary Patents.
1.16 "LICENSED PRODUCT(S)" shall mean Products and Combined Products.
1.17 "NET SALES" shall mean all revenues recognized in accordance with GAAP
from the sale or other disposition of a Licensed Product by Amgen, an Affiliate
or a sublicensee of Amgen to Third Parties, less returns and allowances
(actually paid or allowed, including, but not limited to, prompt payment and
volume discounts, chargebacks from wholesalers and other allowances granted to
customers or wholesalers of products, whether in cash or trade), freight,
shipping, packing, freight and shipping insurance, rebates, and sales and other
taxes based on sales prices when included in gross sales, but not including
taxes when assessed on income derived from such sales.
1.18 "NEW PRODUCT" shall mean a Product (i) which requires a Phase III
Licensing Trial in the United States, United Kingdom, France, Italy, Germany or
Japan in order to obtain marketing approval, (ii) which is chemically distinct
from all other Products which have been approved for marketing in the United
States, United Kingdom, France, Italy, Germany and Japan, (iii) which has a
different mode of action or biological activity from all other Products which
have been approved for marketing in the United States, United Kingdom, France,
Italy, Germany and Japan, and (iv) which is being developed for an indication
for which no other Product is approved for marketing in the United States,
United Kingdom, France, Italy, Germany or Japan. A Combined Product will
contain a New Product only if the Product component of the Combined Product
meets the definition of New Product set forth in this Section 1.18.
1.19 "PARTY" shall mean Amgen or Progenitor, as the case may be, and "PARTIES"
shall mean Amgen and Progenitor collectively.
1.20 "PATENT RIGHT" shall mean patent applications, patents issuing thereon
and any extensions or restorations by existing or future extension or
restoration mechanisms, including without limitation Supplementary Protection
Certificates or the equivalent thereof, renewals, continuations, continuations-
in-part, divisions, patents-of-addition, and/or reissues of any patent.
1.21 "PERSON" shall mean an individual, a partnership, a joint venture, a
corporation, a trust, an estate, an unincorporated organization, or any other
entity, or a government or any department or agency thereof.
1.22 "PHASE III LICENSING TRIAL" shall mean a clinical trial which, if the
defined
3
<PAGE>
end-points are met, is intended by Amgen as of the start of such trial to be a
pivotal clinical trial that would constitute sufficient basis for receipt of
marketing approval in the United States, United Kingdom, France, Germany, Italy
or Japan, as the case may be.
1.23 "PRODUCT" shall mean a Patented Product and/or a Patent Pending Product
as defined in Sections 5.4(a) and (b), respectively.
1.24 "PROGENITOR ANCILLARY PATENTS" shall mean any and all Patent Rights owned
or Controlled by Progenitor during the term of this Agreement which are
necessary or useful to make, use, sell, offer for sale or import Licensed
Products. Notwithstanding the foregoing, Progenitor Ancillary Patents will not
include any Patent Rights owned or Controlled by Progenitor that are directed
solely to uses of leptin protein.
1.25 "PROGENITOR RECEPTOR PATENTS" shall mean the Patent Rights owned or
Controlled by Progenitor relating to the leptin receptor and antibodies to the
leptin receptor. The Progenitor Receptor Patents are listed on Exhibit A
hereto.
1.26 "ROYALTIES" shall mean those royalties payable by Amgen to Progenitor
pursuant to Article 5 of this Agreement.
1.27 "THIRD PARTY" shall mean any Person other than Progenitor and Amgen.
1.28 "THIRD PARTY ROYALTIES" shall mean royalties payable by Amgen, an
Affiliate or sublicensee of Amgen to a Third Party (or multiple Third Parties)
to make, use, sell, offer to sell or import Licensed Products.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
2.1 REPRESENTATIONS AND WARRANTIES OF PROGENITOR.
(a) CORPORATE POWER. As of the Effective Date, Progenitor is duly
organized and validly existing under the laws of Delaware and has full corporate
power and authority to enter into this Agreement and to carry out the provisions
hereof.
(b) DUE AUTHORIZATION. As of the Effective Date, Progenitor is duly
authorized to execute and deliver this Agreement and to perform its obligations
hereunder. The Person executing this Agreement on Progenitor's behalf has been
duly authorized to do so by all requisite corporate action.
(c) BINDING AGREEMENT. This Agreement is a legal and valid obligation
binding upon Progenitor and enforceable in accordance with its terms. As of the
4
<PAGE>
Effective Date, the execution, delivery and performance of this Agreement by
Progenitor does not conflict with any agreement, instrument or understanding,
oral or written, to which it is a party or by which it may be bound, nor violate
any material law or regulation of any court, governmental body or administrative
or other agency having jurisdiction over it.
(d) GRANT OF RIGHTS. Progenitor has not, and will not during the term of
this Agreement, grant any right to any Third Party which would conflict with the
rights granted to Amgen hereunder.
(e) VALIDITY. As of the Effective Date, Progenitor is aware of no action,
suit or inquiry or investigation instituted by any United States federal or
state governmental agency which questions or threatens the validity of this
Agreement or the Progenitor Receptor Patents.
(f) PROGENITOR RECEPTOR PATENTS. As of the Effective Date, the Patent
Rights listed on Exhibit A hereto include all Patents Rights owned or Controlled
by Progenitor which claim or describe the leptin receptor and/or antibodies to
the leptin receptor.
2.2 REPRESENTATIONS AND WARRANTIES OF AMGEN.
(a) CORPORATE POWER. As of the Effective Date, Amgen is duly organized
and validly existing under the laws of Delaware and has full corporate power and
authority to enter into this Agreement and carry out the provisions hereof.
(b) DUE AUTHORIZATION. As of the Effective Date, Amgen is duly authorized
to execute and deliver this Agreement and to perform its obligations hereunder.
The Person executing this Agreement on Amgen's behalf has been duly authorized
to do so by all requisite corporate action.
(c) BINDING AGREEMENT. This Agreement is a legal and valid obligation
binding upon Amgen, and enforceable in accordance with its terms. As of the
Effective Date, the execution, delivery and performance of this Agreement by
Amgen does not conflict with any agreement, instrument or understanding, oral or
written, to which it is a party or by which it may be bound, nor violate any
material law or regulation of any court, governmental body or administrative or
other agency having jurisdiction over it.
(d) VALIDITY. As of the Effective Date, Amgen is aware of no action, suit
or inquiry or investigation instituted by any United States federal or state
governmental agency which questions or threatens the validity of this Agreement.
ARTICLE 3
LICENSE GRANT
3.1 TECHNOLOGY OWNERSHIP. Progenitor shall retain sole right and title,
5
<PAGE>
subject only to the licenses granted to Amgen in Section 3.2, to the Licensed
Patents.
3.2 LICENSE GRANT.
(a) PROGENITOR RECEPTOR PATENTS. Subject to Section 3.3, Progenitor
hereby grants to Amgen and its Affiliates an exclusive worldwide license, with
the right to grant sublicenses, under the Progenitor Receptor Patents to make,
use, sell, offer for sale and import Licensed Products in the Field of Use.
(b) PROGENITOR ANCILLARY PATENTS. Progenitor hereby grants to Amgen and
its Affiliates a non-exclusive worldwide license, with the right to grant
sublicenses, under the Progenitor Ancillary Patents to make, use, sell, offer
for sale and import Licensed Products in the Field of Use.
(c) SUBLICENSES. Amgen will provide Progenitor with copies of all
sublicense agreements entered into by Amgen and/or its Affiliates which grant
sublicenses under the Licensed Patents ("Sublicense Agreements"). Amgen may
redact or delete the provisions in each Sublicense Agreement which, in Amgen's
judgment, disclose information which is confidential or proprietary to Amgen
and/or its Affiliates. Amgen will provide Progenitor with copies of each
Sublicense Agreement within sixty (60) days after the execution date of such
Sublicense Agreement.
3.3 RETAINED RIGHTS.
(a) EXCLUSIVE RIGHTS. Progenitor and its Affiliates will retain an
exclusive right, with the right to grant licenses, under the Progenitor Receptor
Patents to make, use, sell, offer for sale and import Licensed Products for the
following uses (i) any ex vivo uses of Licensed Products for ligand and small
molecule drug screening, (ii) any ex vivo uses of Licensed Products for cell
sorting, (iii) any anti-sense uses of Licensed Products for human therapeutic,
prophylactic and/or diagnostic applications, and (iv) any in vivo human
therapeutic, prophylactic and/or diagnostic applications of antibodies to the
leptin receptor (collectively, the "Progenitor Retained Rights").
(b) NON-EXCLUSIVE RIGHTS. Progenitor and its Affiliates shall retain (i)
a non-exclusive right, with the right to grant licenses, to make, use, sell,
offer for sale and import Licensed Products for human diagnostic uses, the
exercise of such license to be limited to use only to the extent necessary for
Progenitor to develop and commercialize products under the Progenitor Retained
Rights, and (ii) a non-exclusive right, with no right to grant licenses, under
the Progenitor Receptor Patents in the Field of Use for internal research and
development purposes only.
6
<PAGE>
ARTICLE 4
DEVELOPMENT AND COMMERCIALIZATION
4.1 DEVELOPMENT. Amgen, in its sole discretion, will make all decisions
relating to the development of Licensed Products including, but not limited to,
all decisions relating to the research, pre-clinical development and clinical
development of Licensed Products.
4.2 COMMERCIALIZATION. Amgen, in its sole discretion, will make all decisions
relating to the commercialization of Licensed Products including, but not
limited to, all decisions relating to the promotion, advertising, marketing and
pricing of Licensed Products.
4.3 ANNUAL STATEMENT. On an annual basis, for so long as Amgen is continuing
development and commercialization activities with respect to Licensed Products,
Amgen will provide Progenitor with a written statement confirming that such
activities are on-going (the "Annual Statement"). The Annual Statement will be
limited to a recitation by Amgen that Amgen is continuing development and
commercialization activities with respect to Licensed Products. Under no
circumstances will Amgen be obligated to provide Progenitor with reports
describing Amgen's progress in development of Licensed Products, describe in any
way the status of any Licensed Product development programs or provide any data
collected in the conduct of Amgen's development programs for Licensed Products
to Progenitor.
ARTICLE 5
CONSIDERATION
5.1 LICENSE FEE AND EQUITY PURCHASES.
(a) FEE. In consideration for the licenses to the Licensed Patents
granted by Progenitor to Amgen and its Affiliates herein, on the business day
immediately following the Effective Date, Amgen shall pay to Progenitor a
license fee equal to five hundred thousand dollars ($500,000).
(b) EQUITY PURCHASE. Amgen and Progenitor have entered into a Stock
Purchase Agreement of even date herewith (the "Stock Purchase Agreement")
contemplating an investment by Amgen in Progenitor in the amount of five million
five hundred thousand dollars ($5,500,000) by means of the purchase of Common
Stock.
5.2 LICENSE MAINTENANCE FEE. If, on or before the [***] of the
Effective Date, Amgen shall not have filed an IND or initiated human clinical
trials with respect to at least one Licensed Product, Amgen will, within thirty
(30) days
7
<PAGE>
after the [***] of the Effective Date, pay to Progenitor a one-time
license maintenance fee equal to [***] .
5.3 MILESTONES. In consideration for the licenses to the Licensed Patents
granted by Progenitor to Amgen and its Affiliates herein, within thirty (30)
days after the first occurrence of each of the following events, Amgen will make
the following milestone payments ("Milestone Payments") to Progenitor:
[* * *]
5.4 ROYALTIES.
(a) PATENTED PRODUCTS. Amgen will pay to Progenitor a Royalty on
cumulative annual worldwide Net Sales by Amgen, its Affiliates and sublicensees
of products, the making, using, selling or importing of which would, but for the
8
<PAGE>
licenses to the Licensed Patents granted to Amgen by Progenitor herein, infringe
one or more valid, issued claims included within the Licensed Receptor Patents
in the country of sale ("Patented Products") as set forth below.
- Net Sales of less than or equal to [***][***] of Net Sales
- Net Sales greater than [***][***] of Net Sales
(b) PATENT PENDING PRODUCTS. Amgen will pay to Progenitor a Royalty on
cumulative annual worldwide Net Sales by Amgen, its Affiliates and sublicensees
of products the making, using, selling or importing of which would, but for the
licenses to the Licensed Patents granted to Amgen by Progenitor herein and
assuming such pending claims were to be validly issued, infringe one or more
valid, issued claims included within the Licensed Receptor Patents in the
country of sale ("Patent Pending Products") as set forth below.
- Net Sales of less than or equal to [***][***] of Net Sales
- Net Sales greater than [***][***] of Net Sales
(c) COMBINED PRODUCTS. Amgen will pay to Progenitor a Royalty on
cumulative annual worldwide Net Sales by Amgen, its Affiliates and sublicensees
of Combined Products incorporating Patented Products or Patent Pending Products
as set forth below.
A. In the event each of the Active Components and the Product are
sold separately, the Royalty on sales of Combined Products shall be
equal to [***]
- [***]
- [***]
B. In the event one or more of the components of a Combined Product
are not sold separately, the Royalty shall be equal to [***]
- [***]
9
<PAGE>
[***]
- [***]
(d) PRODUCT BY PRODUCT. Royalties shall be payable pursuant to this
Section 5.4 on a Licensed Product by Licensed Product basis, and shall be
imposed only once with respect to any sale of the same unit of Licensed Product.
(e) TERMINATION. Amgen's obligation to pay Royalties to Progenitor on
Patented Products will expire on a Licensed Product by Licensed Product and
country by country basis upon the expiration of the last to expire of the
Licensed Receptor Patents claiming a Licensed Product in a given country.
Amgen's obligation to pay Royalties to Progenitor on Patent Pending Products
will expire on a Licensed Product by Licensed Product and country by country
basis upon the fifth anniversary of the First Commercial Sale of the Licensed
Product in a given country.
5.5 CREDITS AGAINST ROYALTIES AND MILESTONE PAYMENTS.
(a) THIRD PARTY ROYALTY REDUCTION. In the event Amgen shall be obligated
to pay a Third Party Royalty on sales of a Licensed Product, [***]
of such royalty actually paid shall be creditable by Amgen against Royalties
payable to Progenitor on sales of that Licensed Product.
(b) LICENSE MAINTENANCE FEE. In the event Amgen shall pay to Progenitor a
license maintenance fee in accordance with Section 5.2, that fee shall be
creditable against Milestone Payments thereafter payable by Amgen to Progenitor
hereunder.
(c) PATENT EXPENSES. Amgen shall be entitled to credit all costs,
expenses, fees, settlements and the like actually paid by Amgen in the
enforcement and defense of the Licensed Receptor Patents as set forth in Article
7 against Royalties and Milestone Payments payable to Progenitor hereunder.
(d) LIMITATION. In no event will Amgen reduce any Royalty or
Milestone Payment to Progenitor hereunder by more than [***] by reason of the
credits provided for in this Section 5.5.
5.6 PAYMENT OF ROYALTIES.
(a) STATEMENTS. Amgen shall deliver to Progenitor within sixty (60) days
after the end of each calendar quarter, a statement setting forth the Net Sales
of Licensed Products during the previous quarter and the Royalty due hereunder.
The statement shall be accompanied by a remittance of the Royalty due for such
10
<PAGE>
quarter. Net Sales and Royalty computations contained in any such statement
shall be certified by Amgen as accurate to the best of its ability consistent
with Amgen standard practices in performing such computations.
(b) CURRENCY. If Net Sales are in a currency other than United States
Dollars, the Net Sales for the purpose of calculating payments hereunder shall
be determined in the applicable foreign currency and then converted into its
equivalent in United States Dollars at the average rate of exchange for buying
funds as published by the Wall Street Journal for the corresponding calendar
quarter.
(c) LEGAL RESTRICTIONS. If at any time legal restrictions prevent the
prompt remittance by Amgen of all or any part of Royalties on Net Sales of
Licensed Products in any country, Amgen shall have the right and option to make
such payment by depositing the amount thereof in local currency to an account in
the name of Progenitor in a bank or other depository in such country. Amgen
will consult with Progenitor and promptly notify Progenitor of any such
arrangements.
(d) TAXES. All taxes levied on account of Royalties accruing under this
Agreement shall be paid by Progenitor. If laws or regulations require
withholding of taxes from any payment to Progenitor, the taxes will be deducted
by Amgen from remittable Royalty to Progenitor and will be paid by Amgen to the
proper taxing authority. Amgen will furnish Progenitor with the original copies
of all official receipts for such taxes. In the event of any such withholding,
the Parties agree to confer regarding other measures to minimize such
withholding.
ARTICLE 6
RECORDS; AUDIT
6.1 RECORD RETENTION. Amgen shall keep complete and accurate records in
sufficient detail to permit Progenitor to confirm the accuracy of calculations
of all payments hereunder. Such records shall be retained by Amgen for no less
than a four (4) year period following the year in which any such payments were
made hereunder.
6.2 ROYALTY AUDIT. Once per calendar year, Progenitor shall have the option to
engage at its own expense, an independent certified public accountant reasonably
acceptable to Amgen, to examine, in confidence, such Amgen records as may be
necessary to determine, with respect to any calendar year, the correctness of
any payment of Royalties hereunder. The report of such accountant shall be
limited to a certificate verifying any report made or payment submitted by Amgen
during such period but may include, in the event the accountant shall be unable
to verify the correctness of any such payment, information relating to why such
payment is unverifiable. All information contained in any such certificate
shall be deemed to be Amgen Confidential Information hereunder. If any audit
performed under this
11
<PAGE>
Section 6.2 shall indicate that any payment due hereunder was underpaid,
Amgen shall pay to Progenitor the amount of any underpayment promptly. If
any audit performed under this Section 6.2 shall indicate that any payment
hereunder was in error to Progenitor's detriment by more than [***], Amgen
shall pay the cost of the audit.
6.3 SURVIVAL. This Article 6 shall survive any termination of this Agreement
for a period of four (4) years.
ARTICLE 7
PATENTS
7.1 PATENT PROSECUTION.
(a) COUNSEL. During the term of this Agreement, Progenitor will retain
outside counsel, reasonably acceptable to Amgen, to prosecute and maintain the
Progenitor Receptor Patents in the major market countries. Progenitor will keep
Amgen fully informed on the progress and status of prosecution of the Progenitor
Receptor Patents.
(b) CORRESPONDENCE AND FILINGS. Progenitor will provide Amgen with copies
of all Progenitor filings with and correspondence submitted to the United States
Patent and Trademark Office and comparable foreign offices which relate to the
Progenitor Receptor Patents and will provide Amgen with a reasonable opportunity
to comment on all such correspondence and filings prior to submission.
Progenitor will consider Amgen's comments relating to such filings and
correspondence and, where appropriate, incorporate such comments, but the final
decision with respect to content of Progenitor's filings and correspondence
shall be at Progenitor's option and discretion. Upon receipt by Progenitor,
Progenitor will promptly provide Amgen with copies of all correspondence from
the United States Patent and Trademark Office and comparable foreign offices
which relate to the Progenitor Receptor Patents.
(c) EXPENSES. All expenses in connection with prosecution and maintenance
of the Licensed Patents will be borne by Progenitor.
7.2 ENFORCEMENT.
(a) NOTIFICATION OF INFRINGEMENT. If either Party learns of an
infringement by a Third Party of a Patent Right included in the Licensed Patents
in the Field of Use, such Party shall promptly notify the other Party and shall
provide such other Party with available evidence of such infringement.
(b) ENFORCEMENT BY PROGENITOR. Progenitor shall have the first right to
elect to enforce the Progenitor Receptor Patents in the Field of Use against
Third
12
<PAGE>
Parties worldwide. In the event Progenitor shall so elect, Progenitor shall
determine the worldwide strategy and Amgen shall assist and cooperate with
Progenitor in any such enforcement. Progenitor shall consult with Amgen and
keep Amgen regularly advised of Progenitor's strategies, plans, progress and
results of any such enforcement action. Progenitor shall bear all associated
costs and expenses (including attorneys' fees). In the event damages or
recoveries shall be awarded in such action, such amounts shall be applied first
to reimburse Progenitor for any costs incurred in bringing such action.
Remaining amounts will be paid to Amgen and treated as Net Sales in the year in
which such amounts are received by Amgen for purposes of determination of
Royalties payable by Amgen to Progenitor.
(c) ENFORCEMENT BY AMGEN. In the event Progenitor elects not to enforce
the Progenitor Receptor Patents against any Third Party in the Field of Use,
Amgen shall have the right, but not the obligation, to elect to enforce the
Licensed Receptor Patents against such Third Party worldwide in the Field of
Use. In the event Amgen shall so elect, Amgen shall determine the worldwide
strategy and Progenitor shall assist and cooperate with Amgen in any such
enforcement. Amgen shall consult with Progenitor and keep Progenitor regularly
advised of Amgen's strategies, plans, progress and results of any such
enforcement action. Amgen shall bear all associated costs and expenses
(including attorneys' fees). In the event damages or recoveries shall be
awarded in such action, such amounts shall be applied first to reimburse Amgen
for any costs incurred in bringing such action. Remaining amounts will be
retained by Amgen and treated as Net Sales in the year in which such amounts are
received by Amgen for purposes of determination of Royalties payable by Amgen to
Progenitor.
7.3 THIRD PARTY CLAIMS.
(a) DEFENSE BY AMGEN. Amgen (i) may, but shall not be obligated to, elect
to defend the Licensed Receptor Patents against Third Party claims that the
Licensed Receptor Patents in the Field of Use are invalid or unenforceable and
(ii) will defend any action naming Amgen or Amgen and Progenitor and claiming
the infringement of any Third Party Patent Right through the making, using or
selling of Licensed Products. Amgen shall consult with Progenitor and keep
Progenitor regularly advised of Amgen's strategies, plans, progress and results
of any such defense. Progenitor may, at its expense, select counsel of its
choice to assist Amgen's counsel in connection with such defense and shall
assist and cooperate with Amgen in any such defense. Amgen shall bear all
associated costs and expenses (including attorneys' fees) and pay all damages
and settlement amounts, PROVIDED, HOWEVER, that all costs and expenses actually
incurred by Amgen in connection with Amgen's defense of the Licensed Patents and
all damages and settlements actually paid by Amgen as a result thereof shall be
creditable against Royalties and Milestone Payments payable by Amgen to
Progenitor.
(b) DEFENSE BY PROGENITOR. In the event Amgen does not elect to defend
the Progenitor Receptor Patents as set forth in (a) above, Progenitor shall
defend the Progenitor Receptor Patents and shall bear all associated costs and
expenses
13
<PAGE>
(including attorneys' fees) and pay all damages and settlement amounts.
Progenitor shall consult with Amgen and keep Amgen regularly advised of
Progenitor's strategies, plans, progress and results of any such defense.
(c) ACTIONS TO THE DETRIMENT OF LICENSED PATENTS. (i) Amgen will not
enter into any settlement action or agree to any settlement arrangement that may
negatively impact the Licensed Patents without the express prior written consent
of Progenitor, such consent not to be unreasonably withheld. A settlement
action or arrangement which provides for the payment of royalties to a Third
Party but does not specifically address the validity or enforceability of the
Licensed Patents shall not be deemed to negatively impact the Licensed Patents
and may be entered into by Amgen at Amgen's discretion. (ii) Progenitor will
not enter into any settlement action or agree to any settlement that may
negatively impact the Licensed Patents in the Field of Use without the express
prior written consent of Amgen, such consent not to be unreasonably withheld.
7.4 NOTICE. Each Party will promptly notify the other upon becoming aware of
(i) any Third Party claim or action against Progenitor and/or Amgen for
infringement of Third Party Patent Rights through the making, using, selling or
importing of Licensed Products, (ii) any Third Party claim or action against
Progenitor for infringement of Third Party Patent Rights through the making,
using, selling or importing of products under the Licensed Patents, or (iii) any
Third Party infringement of the Licensed Patents.
ARTICLE 8
CONFIDENTIALITY
8.1 CONFIDENTIALITY. Except to the extent expressly authorized by this
Agreement or otherwise agreed in writing by the Parties, the Parties agree to
keep confidential and not publish or otherwise disclose or use for any purpose,
other than as provided for this Agreement, any Confidential Information except
to the extent that it can be established by the receiving Party by competent
proof that such Confidential Information:
(a) was already known to the receiving Party, other than under an
obligation of confidentiality, at the time of disclosure by the other Party;
(b) was generally available to the public or otherwise part of the public
domain at the time of its disclosure to the receiving Party;
(c) became generally available to the public or otherwise part of the
public domain after its disclosure and other than through any act or omission of
the receiving Party in breach of this Agreement;
14
<PAGE>
(d) was disclosed to the receiving Party, other than under an obligation
of confidentiality to a Third Party, by a Third Party who had no obligation to
the disclosing Party not to disclose such information to others; or
(e) was independently discovered or developed by the receiving Party
without the use of Confidential Information belonging to the disclosing Party.
8.2 THIS AGREEMENT. The Parties agree that the material terms of the Agreement
shall be considered Confidential Information of both Parties. The Parties will
consult with one another and agree on the provisions of the Agreement to be
redacted in any filings made by the Parties with the Securities and Exchange
Commission or as otherwise required by law or regulation. Notwithstanding the
foregoing, each Party shall have the right to disclose in confidence the
material terms of the Agreement to parties retained by such Party to perform
legal, accounting or similar services and who have a need to know such terms in
order to provide such services.
8.3 AUTHORIZED DISCLOSURE. Each Party may disclose Confidential Information
belonging to the other Party to the extent such disclosure is reasonably
necessary in the following:
(a) filing or prosecuting the Licensed Patents;
(b) regulatory filings;
(c) prosecuting or defending litigation;
(d) complying with applicable regulations of governmental authorities;
(e) conducting pre-clinical or clinical trials of Licensed Products; and
(f) medical education, marketing and sales of Licensed Products.
Notwithstanding the foregoing, in the event a Party is required to make a
disclosure of the other Party's Confidential Information pursuant to this
Section 8.3, it will, except where impracticable, give reasonable advance
notice to the other Party of such disclosure and use best efforts to secure
confidential treatment of such information. In any event, the Parties agree to
take all reasonable action to avoid disclosure of Confidential Information
hereunder.
ARTICLE 9
INDEMNIFICATION
9.1 INDEMNIFICATION BY AMGEN. Amgen shall indemnify and hold Progenitor
harmless from any claims of any nature, other than claims by Third Parties
relating
15
<PAGE>
to patent infringement, arising out of the research, development, marketing
and/or sale of Licensed Products by, on behalf of, or under the authority of
Amgen. Notwithstanding the foregoing, Progenitor shall not be entitled to
indemnification under this Section 9.1 against any liability, damage, cost
(including reasonable attorneys' fees) or expense arising out of Progenitor's
negligence or misconduct.
9.2 INDEMNIFICATION BY PROGENITOR. Progenitor shall indemnify and hold Amgen
harmless from claims of any nature arising out of the making, using, selling or
importing of products claimed in the Licensed Patents by, on behalf of, or under
the authority of Progenitor. Notwithstanding the foregoing, Amgen shall not be
entitled to indemnification under this Section 9.2 against any liability,
damage, cost (including reasonable attorneys' fees) or expense arising out of
Amgen's negligence or misconduct.
9.3 INDEMNIFICATION PROCEDURE. In the event that either Party shall receive
notice of a claim for which indemnification may be sought under Section 9.1 or
9.2 above, such Party shall promptly inform the indemnifying Party and the
indemnifying Party shall decide how to respond to the claim and how to handle
the claim in an efficient manner.
ARTICLE 10
TERMINATION
10.1 TERM. The Agreement will terminate upon the expiration of the last to
expire of the Licensed Patents worldwide.
10.2 DISCONTINUATION OF DEVELOPMENT. In the event Amgen shall at any time
elect to discontinue all development and commercialization activities relating
to Licensed Products, Amgen will notify Progenitor in writing of such election
and upon Progenitor's receipt of such notification, this Agreement will
terminate and all licenses under the Licensed Patents granted to Amgen and its
Affiliates hereunder will revert to Progenitor.
10.3 TERMINATION OF LICENSES. Amgen shall have the right, at any time, upon
[***], to terminate, in whole or in part, any of the licenses under the
Licensed Patents granted to Amgen and its Affiliates hereunder. Upon Amgen's
termination of all licenses under the Licensed Patents granted to Amgen and
its Affiliates hereunder all such licenses will revert to Progenitor and this
Agreement will terminate.
10.4 TERMINATION FOR DEFAULT.
(a) AMGEN. Upon the Default by Amgen under this Agreement, Progenitor
16
<PAGE>
may terminate this Agreement by written notice to Amgen and upon Amgen's receipt
of such notice, all licenses under the Licensed Patents granted to Amgen and its
Affiliates hereunder will revert to Progenitor.
(b) PROGENITOR. Upon the Default by Progenitor under this Agreement,
Amgen shall be relieved of its obligations to pay Royalties and Milestone
Payments to Progenitor hereunder for any events occurring during the period in
which the Default shall remain uncured.
10.5 INSOLVENCY OR BANKRUPTCY.
(a) INSOLVENT PARTY. Either Party may, in addition to any other remedies
available to it by law or in equity, terminate this Agreement, in whole or in
part, by written notice to the other Party (the "Insolvent Party") in the event
the Insolvent Party shall have become insolvent or bankrupt, or shall have made
an assignment for the benefit of its creditors, or there shall have been
appointed a trustee or receiver of the Insolvent Party or for all or a
substantial part of its property, or any case or proceeding shall have been
commenced or other action taken by or against the Insolvent Party in bankruptcy
or seeking reorganization, liquidation, dissolution, winding-up arrangement,
composition or readjustment of its debts or any other relief under any
bankruptcy, insolvency, reorganization or other similar act or law of any
jurisdiction now or hereafter in effect, or there shall have been issued a
warrant of attachment, execution, distraint or similar process against any
substantial part of the property of the Insolvent Party, and any such event
shall have continued for sixty (60) days undismissed, unbonded and undischarged.
(b) RIGHTS IN BANKRUPTCY. All rights and licenses granted under or
pursuant to this Agreement by Progenitor are, and shall otherwise be deemed to
be, for purposes of Section 365 (n) of the United States Bankruptcy Code,
licenses of rights to "intellectual property" as defined under Section 101 of
the United States Bankruptcy Code. The Parties agree that the Parties, as
licensor and licensee of such rights under this Agreement, shall retain and may
fully exercise all of their rights and elections under the United States
Bankruptcy Code. The Parties further agree that, in the event of the
commencement of a bankruptcy proceeding by or against either Party under the
United States Bankruptcy Code, the Party hereto which is not a Party to such
proceeding shall be entitled to a complete duplicate of (or complete access to,
as appropriate) any such intellectual property and all embodiments of such
intellectual property, and same, if not already in the their possession, shall
be promptly delivered to them (i) upon any such commencement of a bankruptcy
proceeding upon their written request therefor, unless the Party subject to such
proceeding elects to continue to perform all of their obligations under this
Agreement, or (ii) if not delivered under (i) above, upon the rejection of this
Agreement by or on behalf of the Party subject to such proceeding upon written
request therefor by any non-subject Party.
(c) LICENSES UPON BANKRUPTCY. Upon the termination of this Agreement by
Progenitor pursuant to this Section 10.5, all of the Parties' rights and
obligations
17
<PAGE>
set forth in this Agreement will terminate and all licenses under the Licensed
Patents granted to Amgen and its Affiliates hereunder will revert to Progenitor.
Upon the termination of this Agreement by Amgen pursuant to this Section 10.5,
(i) Amgen will retain all licenses to the Licensed Patents granted to Amgen and
its Affiliates hereunder, subject to the payment by Amgen to Progenitor of all
fees, Milestone Payments and Royalties as set forth in Article 5, and (ii)
except as set forth in (i) above, all of the Parties' rights and obligations set
forth in this Agreement shall terminate.
10.6 ACCRUED RIGHTS, SURVIVING OBLIGATIONS. Termination, relinquishment or
expiration of this Agreement for any reason shall be without prejudice to any
rights which shall have accrued to the benefit of either Party prior to such
termination, relinquishment or expiration. Such termination, relinquishment or
expiration shall not relieve either Party from obligations accrued under
Articles 8 and 9.
ARTICLE 11
MISCELLANEOUS PROVISIONS
11.1 ASSIGNMENT. Neither this Agreement nor any interest hereunder shall be
assignable by either Party without the prior written consent of the other Party.
This Agreement shall be binding upon the successors and permitted assigns of the
Parties and the name of a Party appearing herein shall be deemed to include the
names of such Party's successors and permitted assigns to the extent necessary
to carry out the intent of this Agreement. Any assignment not in accordance
with this Section 11.1 shall be void.
11.2 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and deliver
such further instruments, and to do all such other acts, as may be necessary or
appropriate in order to carry out the purposes and intent of the Agreement.
11.3 FORCE MAJEURE. Neither Party shall be liable to the other for loss or
damages or shall have any right to terminate this Agreement for any default or
delay attributable to any Force Majeure, if the Party affected shall give prompt
notice of any such cause to the other Party. The Party giving such notice shall
thereupon be excused from such of its obligations hereunder as it is thereby
disabled from performing for so long as it is so disabled, PROVIDED, HOWEVER,
that such affected Party commences and continues to take reasonable and diligent
actions to cure such cause.
11.4 PUBLIC ANNOUNCEMENTS. If either Party desires to, or is required by law
to, make a public announcement concerning this Agreement, the Licensed Patents
and/or Licensed Products, such Party shall give reasonable prior advance notice
of the proposed text of such announcement to the other Party for its prior
review and approval. The Parties agree to make no public announcement regarding
this
18
<PAGE>
Agreement other than those required by law. The text of all public
announcements regarding this Agreement shall be mutually agreed by the Parties,
PROVIDED, HOWEVER, that neither Party shall be prohibited from making any
announcements required by law so long as the other Party shall have had an
opportunity to comment on the text of such announcement.
11.5 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by facsimile
transmission (receipt verified), telexed, mailed by registered or certified mail
(return receipt requested), postage prepaid, or sent by express courier service,
to the parties at the following addresses (or at such other address for a Party
as shall be specified by like notice, PROVIDED, HOWEVER, that notices of a
change of address shall be effective only upon receipt thereof):
If to Amgen, addressed to:
Amgen Inc.
Amgen Center
1840 DeHavilland Drive
Thousand Oaks, California 91320
Attention: Secretary
With a copy to: Vice President, Product Licensing
Facsimile: (805) 499-8011
If to Progenitor, addressed to:
Progenitor, Inc.
1507 Chambers Road
Columbus, Ohio 43212-1566
Attention: Vice President, Corporate Development
With a copy to: Chief Executive Officer
Facsimile: (614) 488-0404
11.6 AMENDMENT. No amendment, modification or supplement of any provision of
this Agreement shall be valid or effective unless made in writing and signed by
a duly authorized officer of each Party.
11.7 WAIVER. No provision of the Agreement shall be waived by any act,
omission or knowledge of any Party or its agents or employees except by an
instrument in writing expressly waiving such provision and signed by a duly
authorized officer of the waiving Party.
11.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which need not contain the signature of more than one
Party but all such counterparts taken together shall constitute one and the same
19
<PAGE>
agreement.
11.9 DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are for
convenience only, and shall be of no force or effect in construing or
interpreting any of the provisions of this Agreement.
11.10 GOVERNING LAW. This Agreement shall be governed by and interpreted in
accordance with the substantive laws of the State of California and the Parties
hereby submit to the exclusive jurisdiction of the California courts, both state
and federal.
11.11 SEVERABILITY. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of this
Agreement.
11.12 ENTIRE AGREEMENT OF THE PARTIES. This Agreement and the Stock Purchase
Agreement of even date herewith will constitute and contain the complete, final
and exclusive understanding and agreement of the Parties and cancels and
supersedes any and all prior negotiations, correspondence, understandings and
agreements, whether oral or written, between the Parties respecting the subject
matter thereof.
11.13 DISPUTE RESOLUTION. The Parties agree that in the event of a dispute
between them arising from, concerning or in any way relating to this Agreement,
the Parties shall undertake good faith efforts to resolve any such dispute in
good faith. In the event the Parties shall be unable to resolve any such
dispute, the matter shall be referred to the Chief Executive Officer of Amgen
and the Chief Executive Officer of Progenitor for further review and resolution.
If after such efforts, the Parties are unable to resolve such dispute, a Party
may seek any remedy available under applicable law.
11.14 INDEPENDENT CONTRACTORS. The relationship between Amgen and Progenitor
created by this Agreement is one of independent contractors and neither Party
shall have the power or authority to bind or obligate the other except as
expressly set forth in this Agreement.
11.15 USE OF NAME. No right, express or implied, is granted to either Party by
this Agreement to use in any manner any trademark or trade name of the other
Party including the names "Amgen" and "Progenitor" without the prior written
consent of the owning Party.
11.16 DAMAGES. In no event shall either Party be responsible for any
consequential damages incurred by the other Party in connection with this
Agreement, including, without limitation, lost profits or opportunities or
injury to
20
<PAGE>
Person or property resulting from the termination of this Agreement.
21
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
AMGEN INC.
/s/ George A. Vandeman
By: George A. Vandeman
Title: Senior Vice President,
General Counsel and Secretary
PROGENITOR, INC.
/s/ Douglass B. Given
By: Douglass B. Given
Title: President and
Chief Executive Officer
22
<PAGE>
Exhibit "A"
- [***]
- [***]
- [***]
- [***]
- [***]
- [***]
- [***]
- [***]
- [***]
- [***]
- [***]
- [***]
- [***]
<PAGE>
THE INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROGENITOR, INC.,
A DELAWARE CORPORATION
AND
AMGEN INC.,
A DELAWARE CORPORATION
STOCK PURCHASE AGREEMENT
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
1. Purchase and Sale of Stock. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Sale and Issuance of Stock . . . . . . . . . . . . . . . . . . . . . 1
1.2. Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3. No Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4. Registration of Common Stock . . . . . . . . . . . . . . . . . . . . 2
1.5. Procedures at Closing Date . . . . . . . . . . . . . . . . . . . . . 3
2. Representations and Warranties of the Company . . . . . . . . . . . . . . . 3
2.1. Organization, Good Standing and Qualification. . . . . . . . . . . . 3
2.2. Capitalization and Voting Rights . . . . . . . . . . . . . . . . . . 3
2.3. Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4. Valid Issuance of Stock. . . . . . . . . . . . . . . . . . . . . . . 4
2.5. Governmental Consents. . . . . . . . . . . . . . . . . . . . . . . . 4
2.6. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.7. Proprietary Information and Inventions Agreements. . . . . . . . . . 5
2.8. Compliance with Other Instruments. . . . . . . . . . . . . . . . . . 5
2.9. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.10. Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . 6
2.11. Corporate Documents . . . . . . . . . . . . . . . . . . . . . . . . 6
2.12. Title to Property and Assets. . . . . . . . . . . . . . . . . . . . 6
2.13. Tax Returns, Payments and Elections . . . . . . . . . . . . . . . . 6
2.14. Absence of Changes. . . . . . . . . . . . . . . . . . . . . . . . . 7
2.15. SEC Filings; Financial Statements . . . . . . . . . . . . . . . . . 7
i
<PAGE>
2.16. Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . 8
3. Representations and Warranties of the Investor. . . . . . . . . . . . . . . 8
3.1. Authorization, Etc.. . . . . . . . . . . . . . . . . . . . . . . . . 8
3.2. Purchase Entirely for Own Account. . . . . . . . . . . . . . . . . . 8
3.3. Disclosure of Information. . . . . . . . . . . . . . . . . . . . . . 9
3.4. Investment Experience. . . . . . . . . . . . . . . . . . . . . . . . 9
3.5. Accredited Investor. . . . . . . . . . . . . . . . . . . . . . . . . 9
3.6. Restricted Securities. . . . . . . . . . . . . . . . . . . . . . . . 9
3.7. Further Limitations on Disposition . . . . . . . . . . . . . . . . .10
4. Certain Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . .10
4.1. Right of First Purchase. . . . . . . . . . . . . . . . . . . . . . .10
4.2. Lock-Up Agreement. . . . . . . . . . . . . . . . . . . . . . . . . .10
4.3. Stop Transfer Instructions . . . . . . . . . . . . . . . . . . . . .11
5. Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
5.1. Termination of Registration Rights . . . . . . . . . . . . . . . . .11
5.2. Demand Registration. . . . . . . . . . . . . . . . . . . . . . . . .11
5.3. Piggy-Back Registrations . . . . . . . . . . . . . . . . . . . . . .13
5.4. Obligations of the Company . . . . . . . . . . . . . . . . . . . . .14
5.5. Certain Holder Obligations . . . . . . . . . . . . . . . . . . . . .16
5.6. Expenses of Registration . . . . . . . . . . . . . . . . . . . . . .17
5.7. Adjustments for Stock Splits . . . . . . . . . . . . . . . . . . . .17
5.8. Delay of Registration. . . . . . . . . . . . . . . . . . . . . . . .17
5.9. Certain Reports. . . . . . . . . . . . . . . . . . . . . . . . . . .18
5.10. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . .18
ii
<PAGE>
5.11. Assignment of Registration Rights . . . . . . . . . . . . . . . . .21
5.12. "Market Stand-Off" Agreement. . . . . . . . . . . . . . . . . . . .21
5.13. Restrictions on Certain Sales by the Company. . . . . . . . . . . .22
6. Conditions of the Investor's Obligations at Closing . . . . . . . . . . . .22
6.1. Representations and Warranties . . . . . . . . . . . . . . . . . . .22
6.2. Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
6.3. Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . .23
6.4. License Agreement. . . . . . . . . . . . . . . . . . . . . . . . . .23
6.5. Opinion of Company Counsel . . . . . . . . . . . . . . . . . . . . .23
6.6. Units Offering . . . . . . . . . . . . . . . . . . . . . . . . . . .23
7. Conditions of the Company's Obligations at Closing. . . . . . . . . . . . .23
7.1. Representations and Warranties . . . . . . . . . . . . . . . . . . .23
7.2. Performance of Obligations . . . . . . . . . . . . . . . . . . . . .23
7.3. Payment of Purchase Price. . . . . . . . . . . . . . . . . . . . . .23
7.4. License Agreement. . . . . . . . . . . . . . . . . . . . . . . . . .24
7.5. Units Offering . . . . . . . . . . . . . . . . . . . . . . . . . . .24
8. Standstill Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
8.1. Standstill Agreement . . . . . . . . . . . . . . . . . . . . . . . .24
8.2. Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
9. Certain Initial Public Offering Matters . . . . . . . . . . . . . . . . . .27
9.1. Registration of Stock. . . . . . . . . . . . . . . . . . . . . . . .27
9.2. Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . .27
9.3. Common Stock Purchase. . . . . . . . . . . . . . . . . . . . . . . .27
iii
<PAGE>
10. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
10.1. Survival of Warranties. . . . . . . . . . . . . . . . . . . . . . .27
10.2. Public Announcements. . . . . . . . . . . . . . . . . . . . . . . .27
10.3. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . .28
10.4. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . .28
10.5. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . .28
10.6. Titles and Subtitles. . . . . . . . . . . . . . . . . . . . . . . .28
10.7. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
10.8. Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . .28
10.9. Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
10.10. Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . .29
10.11. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . .29
10.12. Breach; Status of License Agreement. . . . . . . . . . . . . . . .29
10.13. Specific Enforcement . . . . . . . . . . . . . . . . . . . . . . .30
10.14. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . .30
10.15. Further Assurances . . . . . . . . . . . . . . . . . . . . . . . .30
10.16. Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . .30
10.17. Legends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
11. Certain Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . .31
EXHIBIT A Promissory Note
EXHIBIT B Opinion of Counsel for the Company
iv
<PAGE>
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (this "Agreement") is made as of
December 31, 1996, by and between PROGENITOR, INC., a Delaware corporation (the
"Company"), and AMGEN INC., a Delaware corporation (the "Investor"). Certain
capitalized terms not otherwise defined herein shall have the meanings as
defined in Section 11.
RECITALS
Whereas, the Company and the Investor are entering into that certain
License Agreement (the "License Agreement") of even date herewith; and
WHEREAS, in connection with the License Agreement, the Company desires
to sell to the Investor and the Investor desires to purchase from the Company,
shares of the Company's Common Stock, Class A, par value $.001 per share (the
"Common Stock").
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK
1.1 SALE AND ISSUANCE OF STOCK
The Investor shall subject to the terms and conditions of this
Agreement, purchase, and the Company agrees to issue and sell to the Investor on
the Closing Date (as defined below), (i) in connection with the Company's
Initial Public Offering shares of the Common Stock with an aggregate Fair Market
Value (as defined below) of $4,500,000 for a purchase price payable in cash of
$4,500,000 (the "Cash Common Stock"), and (ii) in connection with the Company's
Initial Public Offering or as contemplated in Section 1.2 below shares of the
Common Stock with an aggregate Fair Market Value of $1,000,000 (the "Note Common
Stock") for a purchase price payable in cash of $.001 per share and a promissory
note in the amount of $1,000,000 (subject to the provisions of Section 1.2
hereof) in the form attached hereto as EXHIBIT A (the "Promissory Note").
1.2 CLOSING DATE
The purchase and sale of the Common Stock shall take place at the
offices of Morrison & Foerster LLP, 425 Market Street, San Francisco,
California, at 10:00 a.m., on the closing date of the Company's Initial Public
Offering (the "Closing Date"). The Company may elect to require the Investor to
purchase one-half of the Note Common Stock on December 31, 1997 and may elect to
require the Investor to purchase the remaining unpurchased Note Common Stock on
December 31, 1998 in each case only if the Initial Public Offering has not
occurred prior to such date. To the extent that the Company makes an election
to require the Investor's purchase of Note Common Stock on either of such dates
then the date in question shall be deemed the Closing Date for all purposes of
this Agreement with respect to the Note Common Stock required to be purchased on
such date, including the determination of the Fair Market Value of such Note
Common Stock and the satisfaction of the applicable closing conditions,
1
<PAGE>
including the delivery of closing certificates and legal opinions as required by
Sections 6 and 7 hereof. To the extent that the Company elects to require the
purchase of Note Common Stock on either or both of such dates, (and either or
both of such dates is prior to the Initial Public Offering), then the obligation
of the Investor to purchase Note Common Stock from the Company in connection
with the Company's Initial Public Offering shall be proportionately reduced and
the principal amount of the Promissory Note required to be delivered in
connection with the purchase thereof shall also be proportionately reduced
(I.E., $500,000 in the event that one installment of Note Common Stock with a
Fair Market Value of $500,000 has been purchased) prior to the Initial Public
Offering. The purchase price for any Note Common Stock required to be purchased
on December 31, 1997 or December 31, 1998 shall be payable entirely in cash in
the amount of $500,000. The Company may defer the election to require purchase
of either or both such installments of Note Common Stock until the Initial
Public Offering in which case any such deferred installment shall also be
purchased for cash in the amount of $500,000. The obligation of the Investor to
purchase the Cash Common Stock shall arise only in connection with the
occurrence of the Company's Initial Public Offering. To the extent that the
Initial Public Offering has not yet occurred, the Investor shall have no
obligation to purchase the Cash Common Stock.
1.3 NO FRACTIONAL SHARES
No fractional shares shall be issued upon the sale of any Common Stock
to the Investor pursuant to this Agreement, and the number of shares of Common
Stock to be issued to the Investor shall be rounded to the nearest whole share.
1.4 REGISTRATION OF COMMON STOCK
The Company will use its reasonable efforts to cause the sale of
shares of Common Stock to the Investor in connection with the Initial Public
Offering to be registered in the registration statement applicable to the
Initial Public Offering or to be registered in a separate registration statement
at the time of such Initial Public Offering. If the Company is not able to
register the issuance to the Investor of such shares of Common Stock, in whole
or in part, for any reason in connection with such Initial Public Offering
notwithstanding such reasonable efforts, the Investor's obligation to purchase
shares of Common Stock in connection with the Initial Public Offering will not
be diminished and all shares for which the issuance may not be registered will
instead be issued in a private placement to the Investor at the same price that
would have been applicable in a direct purchase as part of the Initial Public
Offering (as soon as such a private placement may be consummated under
applicable law) and such privately placed shares shall be subject to the
registration rights provided in Section 5 hereof such that the full $5,500,000
in Fair Market Value of Common Stock contemplated to be purchased hereunder is
purchased by the Investor either simultaneously with the Initial Public Offering
or as soon thereafter as may be practicable. Any Note Common Stock required to
be purchased prior to the Company's Initial Public Offering shall be issued in a
private placement to the Investor and shall be subject to the registration
rights provided in Section 5.
2
<PAGE>
1.5. PROCEDURES AT CLOSING DATE
On the Closing Date, the Company shall deliver to the Investor,
certificates for the Common Stock in such denominations as the Investor has
requested, dated the date thereof, against (i) payment by the Investor of the
cash portion of the purchase price by cashier's check, wire transfer or any
combination thereof, and (ii) execution and delivery by the Investor of the
Promissory Note (to the extent that the Note Common Stock is being purchased in
connection with the Company's Initial Public Offering). The specific procedures
outlined in Section 1.2 shall also be applicable in the event of any Closing
Date not involving the purchase of all of the Cash Common Stock and Note Common
Stock. The specific procedures outlined in the last sentence of the definition
of "Initial Public Offering" shall also be applicable in the event of a Closing
Date in connection with an Initial Public Offering involving the sale of units.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Investor that, except as
set forth on a Schedule of Exceptions (the "Schedule of Exceptions") furnished
to the Investor:
2.1. ORGANIZATION, GOOD STANDING AND QUALIFICATION
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has all requisite
corporate power and authority to carry on its business as now conducted and as
proposed to be conducted. The Company is duly qualified to transact business
and is in good standing in Ohio and each other jurisdiction in which the failure
to so qualify would have a material adverse effect on its business or
properties.
2.2. CAPITALIZATION AND VOTING RIGHTS
(a) The authorized capital stock of the Company as of the date of
this Agreement consists of:
(i) PREFERRED STOCK. 3,000,000 shares of Preferred Stock, $.01 par
value per share (the "Preferred Stock") of which 2,120,000 shares have been
designated Series A Preferred Stock (the "Series A Preferred Stock") and 880,000
shares have been designated Series B Preferred Stock (the "Series B Preferred
Stock," and together with the Series A Preferred Stock, the "Preferred Stock").
The rights, privileges and preferences of the Preferred Stock are as stated in
the Company's Certificate of Incorporation, as amended to date; and
(ii) COMMON STOCK. 39,000,000 shares of the Common Stock, of which
5,771,808 shares are issued and outstanding.
(b) In addition, as of the date of this Agreement: except as set
forth in Schedule 2.2(b) to the Schedule of Exceptions, (i) there are 2,700,000
shares of the Common Stock reserved for issuance under the Company's 1992 Stock
Option Plan and 1996 Stock Incentive Plan, under which options to purchase
1,394,550 shares of Common Stock are
3
<PAGE>
outstanding; (ii) an additional 200,000 shares of Common Stock are available for
issuance under the Company's 1996 Employee Stock Purchase Plan; (iii) the
Company has outstanding warrants to purchase 34,901 shares of Series B Preferred
Stock; (iv) there is not, (a) any subscription, warrant, option, convertible
security or other right (contingent or otherwise) to purchase or acquire any
shares of capital stock of the Company, (b) any commitment of the Company to
issue any subscription, warrant, option, convertible security or other such
right to issue or distribute to holders of any shares of its capital stock any
evidences of indebtedness or assets of the Company or (c) any obligation of the
Company (contingent or otherwise) to purchase, redeem or otherwise acquire any
shares of its capital stock or any interest therein or to pay any dividend or
make any other distribution in respect thereof; and (v) no Person is entitled to
any preemptive or similar right with respect to the issuance of any capital
stock of the Company.
(c) All outstanding shares of the Company's Common Stock and
Preferred Stock as of the date of this Agreement are duly and validly authorized
and issued, fully paid and nonassessable, and were issued in accordance with the
registration or qualification provisions of the Securities Act and any relevant
state securities laws or pursuant to valid exemptions therefrom.
2.3. AUTHORIZATION
All corporate action on the part of the Company, its officers,
directors and stockholders necessary for the authorization, execution and
delivery of this Agreement and the License Agreement, the performance of all
obligations of the Company hereunder and thereunder and the authorization, sale
and delivery of the Common Stock being sold hereunder has been taken and this
Agreement and the License Agreement constitute valid and legally binding
obligations of the Company enforceable in accordance with their respective
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights, (ii) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies, and (iii) to the extent the enforceability of the indemnification
provisions contained in this Agreement may be limited by applicable laws.
2.4. VALID ISSUANCE OF STOCK
Except as set forth in Schedule 2.4 to the Schedule of Exceptions, the
Common Stock that is purchased by the Investor hereunder, when issued, sold and
delivered in accordance with the terms of this Agreement for the consideration
expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and not subject to preemptive or any other similar rights of the
stockholders of the Company or others, and free, at the time of issuance, of all
restrictions on transfer other than restrictions on transfer imposed under this
Agreement and under applicable state and federal securities laws.
2.5. GOVERNMENTAL CONSENTS
No consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any federal, state or
local governmental authority on the
4
<PAGE>
part of the Company is required in connection with the consummation of the
transactions contemplated by this Agreement, except for such filings as may be
required to be made pursuant to applicable federal or state securities laws or
with any stock exchange (or the Nasdaq National Market or other quotation system
of the National Association of Securities Dealers, Inc.) on which the Common
Stock may be listed, and except consents, approvals, authorizations or orders
the absence of which, either individually or in the aggregate, would not have a
material adverse effect on the business, properties, operations or financial
condition of the Company taken as a whole.
2.6. LITIGATION
There is no action, suit, proceeding or investigation pending or
threatened against the Company as of the date of this Agreement that questions
the validity of this Agreement or the License Agreement, or the right of the
Company to enter into such agreements, or to consummate the transactions
contemplated hereby or thereby, or that might result, either individually or in
the aggregate, in any material adverse changes in the assets, condition, affairs
or prospects of the Company, financially or otherwise, nor is the Company aware
that there is any basis for the foregoing. The Company is not as of the date of
this Agreement a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality.
2.7. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENTS
Each key employee, officer and consultant of the Company with access
to the Company's proprietary information has executed an agreement concerning
invention assignment, nondisclosure and proprietary information. The Company,
after reasonable investigation, is not aware as of the date of this Agreement
that any of its employees, officers or consultants are in violation thereof.
2.8. COMPLIANCE WITH OTHER INSTRUMENTS
The Company is not as of the date of this Agreement in violation or
default of any provision of its Certificate of Incorporation or Bylaws (each as
amended to date), or of any instrument, judgment, order, writ, decree or
contract to which it is a party or by which it is bound, or, to the best of its
knowledge as of the date of this Agreement, of any provision of any federal or
state statute, rule or regulation applicable to the Company, which violation or
default would materially and adversely affect the business, assets, liabilities,
financial condition, operations or prospects of the Company. The execution,
delivery and performance of this Agreement and the License Agreement, and the
consummation of the transactions contemplated hereby and thereby will not result
in any such material violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument, judgment, order, writ, decree or contract or an
event that results in the creation of any lien, charge or encumbrance upon any
assets of the Company or the suspension, revocation, impairment, forfeiture, or
non-renewal of any material permit, license, authorization, or approval
applicable to the Company, its business or operations or any of its assets or
properties. There is no such violation or default as of the date of this
Agreement which,
5
<PAGE>
with the passage of time or giving of notice or both, would constitute a
violation or default that materially and adversely affects the business, assets,
liabilities, financial condition, operations or prospects of the Company.
2.9. DISCLOSURE
The Company has fully provided the Investor with all the information
that the Investor has requested for deciding whether to purchase the Common
Stock and all information that the Company believes is reasonably necessary to
enable the Investor to make such decision.
2.10. REGISTRATION RIGHTS
Except as set forth in Schedule 2.10 to the Schedule of Exceptions or
as provided in this Agreement, the Company has not as of the date of this
Agreement granted or agreed to grant any registration rights, including
piggyback rights, to any Person.
2.11. CORPORATE DOCUMENTS
The Certificate of Incorporation and Bylaws of the Company in effect
as of the date of this Agreement are in the form attached hereto as
Schedule 2.11 to the Schedule of Exceptions.
2.12. TITLE TO PROPERTY AND ASSETS
As of the date of this Agreement, except as set forth in Schedule
2.12 to the Schedule of Exceptions, the Company owns its property and assets
free and clear of all mortgages, liens, loans and encumbrances, except such
encumbrances and liens that arise in the ordinary course of business and do not
materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in compliance
as of the date of this Agreement with such leases and, to the best of its
knowledge, holds as of the date of this Agreement a valid leasehold interest
free of any liens, claims or encumbrances.
2.13. TAX RETURNS, PAYMENTS AND ELECTIONS
The Company has filed all tax returns and reports as required by law
as of the date of this Agreement. These returns and reports are true and
correct in all material respects. The Company has paid all taxes and other
assessments due as of the date of this Agreement. The provision for taxes of
the Company is adequate for taxes due or accrued as of the date of this
Agreement. No controversy with any government or government agency regarding
tax of any type is pending as of the date of this Agreement as to which the
Company has received notice or, to the best of the Company's knowledge, is
threatened as of the date of this Agreement.
6
<PAGE>
2.14. ABSENCE OF CHANGES
Between September 30, 1995 and the date of this Agreement, there has
been no material adverse change in the business, assets, liabilities, financial
condition, operations or prospects of the Company.
2.15. SEC FILINGS; FINANCIAL STATEMENTS
(a) The Company's registration statement on Form S-1
(File No. 333-05369) with respect to its proposed Initial Public Offering
(the "Form S-1 Registration Statement") (i) was prepared as of the date of
its filing in all material respects in accordance with the requirements of
the Securities Act and (ii) did not as of the date of its filing (or if
amended or superseded by a filing prior to the date of this Agreement, then
on the date of such filing) contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) The Company's registration statement with respect to its Initial
Public Offering (i) will be prepared as of the date it is declared effective by
the SEC in all material respects in accordance with the requirements of the
Securities Act and (ii) will not as of the date it is declared effective by the
SEC (or if amended or superseded by a filing subsequent to its effectiveness,
then on the date of such filing) contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements, in light of the circumstances under which they
were made, not misleading.
(c) The Company has provided to the Investor the unaudited balance
sheet of the Company as of September 30, 1996, and the related unaudited
statements of operations, changes in stockholders' equity and cash flows of the
Company for the fiscal year ended September 30, 1996 (the "Unaudited Financial
Statements"). The Company has presented to the Investor the audited balance
sheet of the Company as of September 30, 1995, and the related audited
statements of operations, changes in stockholders' equity and cash flows of the
Company for the fiscal year ended September 30, 1995 (the "Audited Financial
Statements"). Each of the Audited Financial Statements (including the notes
thereto) and the Unaudited Financial Statements fairly presents the financial
position of the Company as of their respective dates and the results of
operations and changes in cash flows for the respective periods set forth
therein and has been prepared in accordance with generally accepted accounting
principles consistently applied except as otherwise noted therein and subject in
the case of the Unaudited Financial Statements to any normal adjustments which
would not in the aggregate be material in amount or effect arising as a result
of the audit thereof including in connection with the finalization of the
footnotes thereto. As of the date of this Agreement, there has been no material
adverse change in the financial condition or results of operation of the Company
since September 30, 1996 other than as set forth in Schedule 2.15 to the
Schedule of Exceptions.
(d) As of the date of this Agreement, there has been no material
change in the Company's business or operations from the information presented in
the Form S-1 Registration Statement other than (i) as set forth in Schedule 2.15
to the Schedule of Exceptions, or (ii) any
7
<PAGE>
changes that are merely of a prospective nature such as possible material
business transactions that have not been consummated.
2.16. INTELLECTUAL PROPERTY
To the knowledge of the Company, except as set forth in Schedule 2.16
to the Schedule of Exceptions, it has as of the date of this Agreement
sufficient title and ownership interest with respect to patents, patent
applications, trademarks, service marks, trade names, copyrights, trade secrets,
proprietary rights and proprietary processes as may be necessary to conduct its
business as proposed to be conducted after the date hereof without conflict with
or infringement of the right of others.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
The Investor understands the Common Stock to be received by the Investor
under this Agreement may be deemed to be "restricted securities" under the
Securities Act. The Investor also understands that to the extent that the
Common Stock to be received by the Investor does so constitute "restricted
securities" it is being offered and sold pursuant to an exemption from
registration contained in the Securities Act based in part upon the Investor's
representations contained in the Agreement. The Investor hereby represents and
warrants to the Company that (as of the date of this Agreement with respect to
Section 3.1):
3.1. AUTHORIZATION, ETC.
The Investor is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. The Investor has all
necessary power and authority under all applicable provisions of law to execute
and deliver this Agreement and the License Agreement and to carry out and
perform its obligations hereunder and thereunder. All corporate action on the
Investor's part required for the authorization, execution and delivery of this
Agreement and the License Agreement has been taken prior to the date hereof.
This Agreement and the License Agreement each constitutes the legal, valid and
binding obligation of the Investor, enforceable in accordance with its terms,
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors' rights, (ii) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies, and
(iii) to the extent that the enforceability of the indemnification provisions
contained in this Agreement may be limited by applicable laws.
3.2. PURCHASE ENTIRELY FOR OWN ACCOUNT
This Agreement is made with the Investor in reliance upon the
Investor's representation to the Company, which by the Investor's execution of
this Agreement the Investor hereby confirms, that any Common Stock being
acquired by the Investor is being acquired for investment for the Investor's own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that the Investor has no present intention
of selling, granting any participation in, or otherwise distributing the same.
By executing this Agreement, the Investor further represents that the Investor
does not have any contract, undertaking,
8
<PAGE>
agreement or arrangement with any person to sell, transfer or grant
participations to any third person, with respect to any of the Common Stock
being acquired under this Agreement.
3.3. DISCLOSURE OF INFORMATION
Assuming the accuracy in all material respects of the representations
and warranties made by the Company hereunder, the Investor believes it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Common Stock. The Investor further represents that it
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the Common Stock that may be issued to it
under this Agreement and the business, properties, prospects and financial
condition of the Company.
3.4. INVESTMENT EXPERIENCE
The Investor has substantial experience in evaluating and investing
in securities in development stage companies so that it is capable of evaluating
the merits and risks of its investment in the Company and has the capacity to
protect its own interests. The Investor has reviewed the "Risk Factors" set
forth in the Company's Form S-1 Registration Statement. The Investor
understands that its investment in the Common Stock is speculative and involves
a high degree of risk of loss of a substantial portion or all of the Investor's
investment. The Investor must bear the economic risk of this investment
indefinitely with respect to any Common Stock that constitutes "restricted
securities", except if the sale thereof is subsequently registered or an
exemption from registration is available. The Investor understands that with
respect to any Common Stock that constitutes "restricted securities", there is
no assurance that any exemption from registration for the resale thereof under
the Securities Act will be available and that, even if available, the exemption
may not allow the Investor to transfer all or any portion of such Common Stock
under the circumstances, in the amounts or at the times the Investor might
propose.
3.5. ACCREDITED INVESTOR
The Investor is an "accredited investor" within the meaning of
Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as
presently in effect.
3.6. RESTRICTED SECURITIES
The Investor understands that the shares of Common Stock it is
purchasing, unless the sale thereof is made in a "public offering" registered
under the Securities Act within the meaning of Rule 144 under the Securities
Act, are characterized as "restricted securities" under the federal securities
laws inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the Securities Act only
in certain limited circumstances. In this connection, the Investor represents
that it is familiar with SEC Rule 144, as presently in effect, and understands
the resale limitations imposed hereby and by the Securities Act.
9
<PAGE>
3.7. FURTHER LIMITATIONS ON DISPOSITION
Without in any way limiting the representations set forth above, the
Investor further agrees not to make any disposition of all or any portion of the
Common Stock that constitutes "restricted securities" unless and until the
Investor shall have complied with the right of first purchase set forth in
Section 4 hereof and any transfer restrictions contained in this Agreement and
any permitted transferee has agreed in writing for the benefit of the Company to
be bound by this Agreement; and
(a) There is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement; or
(b) (i) The Investor shall have notified the Company of the proposed
disposition, and (ii) if reasonably requested by the Company, the Investor shall
have furnished the Company with an opinion of counsel, reasonably satisfactory
to the Company that such disposition will not require registration of such
shares under the Securities Act. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
4. CERTAIN TRANSFER RESTRICTIONS
4.1. RIGHT OF FIRST PURCHASE
In the event, at any time after the date of this Agreement, the
Investor or any Holder proposes to sell shares of Common Stock pursuant to
the registration rights contained in Section 5, the Company shall, for a
period of no longer than [***] thereafter, have the option, in lieu of
registering such shares of Common Stock, to give written notice to the
Investor or Holder that it will purchase such shares for the Fair Market
Value thereof. The Company may assign its right of purchase to a third
Person. In the event that the Company or such third Person has not completed
the purchase of such shares of Common Stock pursuant to the terms of such
purchase right within [***] of giving notice under this Section 4.1, the
Investor or Holder, as the case may be, shall be permitted to sell such
shares of Common Stock in accordance with the registration rights granted
hereunder.
4.2. LOCK-UP AGREEMENT
Notwithstanding the terms of Sections 4.1, the Investor hereby agrees
that for a period of [***] after the Company's Initial Public Offering, it will
not directly or indirectly, sell, offer, contract to sell, grant any option
to sell, transfer the economic risk of ownership in, make any short sale,
pledge or otherwise dispose of, any shares of Common Stock, or any securities
convertible into or exchangeable or exercisable for or any other rights to
purchase or acquire Common Stock, without the prior written consent of the
Company. The Investor further agrees to enter into a lock-up agreement with
the managing underwriters for the Company's Initial Public Offering that is
consistent with the Investor's commitment made pursuant to the immediately
preceding sentence of this Section 4.2.
10
<PAGE>
4.3. STOP TRANSFER INSTRUCTIONS
In order to enforce any transfer restriction or lock-up agreement
contemplated by this Agreement, the Company may impose stop transfer
instructions restricting transfers in violation thereof. Any attempted transfer
made in violation of any such restrictions shall be void and without effect.
5. REGISTRATION RIGHTS
5.1. TERMINATION OF REGISTRATION RIGHTS
The right of any Holder to request registration or inclusion in any
registration pursuant to this Section 5 shall terminate at such time as all
shares of Registrable Securities held by such Holder may immediately be sold
under Rule 144 (or any similar provision then in force) within a three (3) month
period (whether or not Rule 144(k) is then applicable).
5.2. DEMAND REGISTRATION
(a) If at any time commencing [***] after the Initial Public
Offering, any Holder shall notify the Company in writing that it intends to
offer or cause to be offered for public sale Registrable Securities held by
it which shares have an anticipated aggregate offering price, net of
underwriting discounts and commissions, equal to more than [***], based on
the market price of the shares of Common Stock at the time the Holder so
notifies the Company (a "Demand Registration"), then the Company will:
(i) promptly give written notice of the proposed registration or
qualification to all other Holders of Registrable Securities, which Holders
may request in writing within [***] after receipt of such notice that
Registrable Securities held by them be included in such Demand Registration,
and the number of Registrable Securities requested to be so included shall be
deemed a part of such Demand Registration; and
(ii) as soon as practicable use reasonable efforts to effect such
registration or qualification (including, without limitation, the execution
of an undertaking to file post-effective amendments, and appropriate
compliance with any other governmental requirements or regulations) as may be
so requested and as is reasonably necessary to permit or facilitate the sale
and distribution of all or such portion of such Holder's or Holders'
Registrable Securities as is specified in such request; PROVIDED THAT the
Company will not be obligated to effect [***] Demand Registrations pursuant to
a request under this Section; provided, further, however, that a registration
shall not count as a Demand Registration pursuant to Section 5.2 unless [***]
are sold pursuant to such registration statement.
(b) The Company shall not be required to file a registration
statement with the SEC pursuant to this Section 5.2 at any time during the
period beginning when it has commenced registration procedures (whether by means
of holding discussions with an underwriter or commencing preparation of the
registration statement) with respect to the filing of another
11
<PAGE>
registration statement (other than on Form S-8 or S-4) of the Company with
the SEC which it in good faith expects to file within [***] and ending the
earliest of (A) the abandonment of such other offering, (B) [***] after the
effective date of such other registration statement relating to the other
offering or, (C) the termination of any market stand-off time period agreed
to pursuant to Section 5.12(b). The Company shall have the right to defer
the filing of a registration statement (the "Delay Right") with the SEC for
up to [***] after such filing would otherwise be required hereunder if the
Company shall furnish to the Holder a certificate signed by the President of
the Company stating that, in the good faith judgment of the Company, it would
be materially detrimental to the interests of the Company for such
registration statement to be filed at such time, and if the Company shall
have furnished such certificate then the Company shall have the right to
defer the filing of such registration statement for an additional period of
up to [***] if the Company shall furnish to the Holder a copy of a resolution
of the Board of Directors, certified by the Secretary of the Company, to the
effect that, in the good faith judgment of the Board of Directors, it would
be materially detrimental to the interests of the Company for such
registration statement to be filed at such time because: (A) the filing of
registration statement could jeopardize or delay any contemplated material
transaction other than a financing plan involving the Company or would
require the disclosure of material information that the Company has a bona
fide business purpose for preserving as confidential; or (B) the Company is
then not able to comply with SEC requirements applicable to the requested
registration (notwithstanding its reasonable efforts to so comply).
Notwithstanding the foregoing, the Company shall not be permitted to exercise
a Delay Right more than [***] and the Company shall not impose a Delay Right
for any period that is longer than necessary to address the circumstance or
circumstances that exist during the period in which the Delay Right is
invoked which cause the Company to require the Delay Right. The Company
shall not be required to effect more than [***] during any [***] period
pursuant to this Section 5.2.
(c) If the Holder or Holders of a majority in number of the
Registrable Securities to be registered in a Demand Registration under this
Section 5 so elect, the offering of such Registered Securities pursuant to such
Demand Registration shall be in the form of an underwritten offering. The
underwriter will be selected by the Company and shall be reasonably acceptable
to a majority in interest of the participating Holders. In such event, the
right of any Holder to include Registrable Securities in such registration shall
be conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company as provided in subsection 5.4(e)) enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting. Subject to subsection 5.2(d), the Company and at the option of
the Company any other holder of Common Stock may include in any registration
pursuant to this Section 5.2 additional shares of Common Stock.
(d) Notwithstanding any other provision of this Section 5.2, if the
underwriters determine, in good faith, that marketing factors require a
limitation of the number of shares to be underwritten, the underwriters may
limit in their sole discretion the number of
12
<PAGE>
Registrable Securities and other shares of Common Stock to be included in the
registration and underwriting subject to the terms of this subsection 5.2(d).
The Company shall so advise all holders of the Company's securities that would
otherwise be registered and underwritten pursuant to such registration, and the
number of shares of such securities, including Registrable Securities, that may
be included in the registration and underwriting shall be allocated in the
following manner: shares, other than Registrable Securities and other
securities requested to be included in such registration by stockholders
pursuant to other registration rights shall be excluded, and, if a limitation on
the number of shares is still required, the number of securities that may be
included shall be allocated,
[***]
If any Holder disapproves of the terms of the underwriting, it may elect to
withdraw therefrom by written notice to the Company and the underwriter. The
Registrable Securities so withdrawn shall also be withdrawn from registration.
5.3. PIGGY-BACK REGISTRATIONS
(a) If at any time the Company shall determine to register for
its own account or the account of others under the Securities Act any shares
of Common Stock (other than (i) pursuant to the Initial Public Offering, (ii)
on Form S-4 or Form S-8 or their then equivalents relating to shares of
Common Stock to be issued in connection with any acquisition of any entity or
business or shares of Common Stock issuable in connection with stock option
or other employee benefit plans, or (iii) a registration in which the only
Common Stock being registered is Common Stock issuable upon conversion of
debt securities), it shall send to the Holders written notice of such
determination and, if within [***] after receipt of such notice, any Holder
shall so request in writing, the Company shall use its best efforts to
include in such registration statement all or any part of the Registrable
Shares such Holder requests to be registered. Any Registrable Securities
shall be included subject to the same terms and conditions as the other
Common Stock proposed to be registered.
(b) The Company's obligation to use its reasonable efforts to
include Registrable Securities in a registration pursuant to this Section 5.3 is
subject to the following limitations, conditions and qualifications:
(i) If, at any time after giving such written notice of its
intention to effect a registration, and prior to the effective date of any
registration statement filed in connection with such notice, the Company shall
determine for any reason in its sole discretion not to register such
13
<PAGE>
securities, the Company may, at its election and in its sole discretion, delay
such registration or cease any further pursuit thereof, in which case the
Company shall provide notice of its decision to any Holders that elected to
participate in such registration.
(ii) Notwithstanding any other provision of this Section 5.3, if the
underwriters determine, in good faith, that marketing factors require a
limitation of the number of shares to be underwritten, the underwriters may
limit in their sole discretion the number of Registrable Securities and other
shares of Common Stock to be included in the registration and underwriting, or
may exclude Registrable Securities or other securities entirely from such
registration and underwriting subject to the terms of this subsection 5.3(b).
The Company shall so advise all holders of the Company's securities that would
otherwise be registered and underwritten pursuant to such registration, and the
number of shares of such securities, including Registrable Securities, that may
be included shall be allocated in accordance with the following priorities:
[***]
The respective ownership percentages of any Person for purposes of prorating
any underwriting cutback or participation under this Section 5.3 shall be
measured as of the date of the effectiveness of the registration statement
for which such ownership percentages are being calculated. [***]
(iii) In connection with any offering involving an underwriting under
this Section 5.3, the Company shall not be required to include any Holder's
securities in such underwriting unless such Holder accepts the pricing and other
terms of the underwriting as agreed upon between the Company and the
underwriters selected by it (or by other Persons entitled to select the
underwriters).
(c) Subject to the terms and conditions of this Agreement, Holders
of Registrable Securities may exercise piggy-back registration rights under this
Section 5.3 at any time or from time to time, so long as such Holders continue
to hold Registrable Securities.
5.4. OBLIGATIONS OF THE COMPANY
Whenever required under this Section 5 to effect the registration of
any Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
14
<PAGE>
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use reasonable 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 a period of up to [***] or,
if earlier, until the distribution contemplated in the registration statement
has been completed; provided, that the Company shall have no obligation to
pursue a registration statement pursuant to Section 5.3 if it elects in its
sole discretion to delay or abandon pursuit of such registration statement;
provided further that such [***] period shall be extended one day for each
day that Holders are unable to sell Common Stock due to the operation of
Section 5.5(c).
(b) 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
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(c) Before filing a registration statement or prospectus or any
amendments or supplements thereto, (i) furnish to the counsel for Holders of the
Registrable Securities covered by such registration statement and the
underwriters, if any, copies of such registration statement, prospectus,
amendment or supplement thereto proposed to be filed; and (ii) furnish to the
Holders and the underwriters, if any, such number of copies of the prospectus
(including each preliminary prospectus), and such other documents as the Holders
may reasonably request in order to facilitate the disposition of the Registrable
Securities.
(d) Use its reasonable 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 or the underwriters, if any; provided that the Company shall not be
required in connection therewith or as a condition thereto (i) to qualify to do
business, (ii) to file a general consent to service of process, or (iii) subject
itself to taxation in any such states or jurisdictions for which it is not
already qualified to do business, subject to taxation and subject to a
previously filed consent to service of process.
(e) 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(s) of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) 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 Securities 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.
(g) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange (or listed for quotation on
the Nasdaq National Market or the
15
<PAGE>
Nasdaq Stock Market) on which similar securities issued by the Company are then
listed or to be listed in connection with such registration statement.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
(i) Upon receipt of such confidentiality agreements as the Company
may request, make available for inspection by representatives of the Holders of
a majority of the Registrable Securities being sold, any underwriter
participating in any disposition pursuant to such registration statement, and
any attorney or accountant retained by the Holders or any such underwriter, all
financial and other records and pertinent corporate documents and properties of
the Company, and cause the Company's officers, directors and employees to supply
all information reasonably requested by any such representative, underwriter,
attorney or accountant in connection with the registration statement.
5.5. CERTAIN HOLDER OBLIGATIONS
(a) It shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Section 5 with respect to the
Registrable Securities of any selling Holder that such Holder, upon a reasonable
request in writing by the Company, shall promptly furnish to the Company in
writing (and signed by the Holder and stated to be specifically for use in the
related registration statement, preliminary prospectus, prospectus or other
document incident thereto), such requisite information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall be required to effect the registration of such Holder's
Registrable Securities and to permit the Company to comply with all applicable
requirements of the SEC, any blue sky laws or other legal requirements including
as may be necessary to accelerate the effectiveness of the registration
statement.
(b) The Company shall have no obligation with respect to any Demand
Registration requested pursuant to Section 5.2 if, due to the operation of
subsection 5.5(a), the number of shares or the anticipated aggregate offering
price of the Registrable Securities to be included in the registration does not
equal or exceed the number of shares or the anticipated aggregate offering price
required to originally trigger the Company's obligation to initiate such
registration as specified in subsection 5.2(a).
(c) Upon receipt of any notice from the Company that the Company
has become aware that the prospectus (or any preliminary prospectus) included in
any registration statement filed pursuant to Section 5.2 or 5.3 hereto, as then
in effect, contains any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, each Holder shall forthwith discontinue
disposition of Registrable Securities pursuant to the registration statement
covering the same until receipt of a supplemental or amended prospectus from the
Company, and, if so directed by the Company, deliver to the Company at the
Company's expense all copies in such Holder's possession of the prospectus
covering the Registrable Securities that was in effect prior to such amendment
or supplement.
16
<PAGE>
5.6. EXPENSES OF REGISTRATION
All registration expenses incident to the Company's performance of
its obligations in connection with any registration of a Holder's Registrable
Securities under this Section 5 including, without limitation, (i) printing
expenses, fees and disbursements of counsel for the Company, (ii) amounts
payable to the National Association of Securities Dealers, Inc. in connection
with its review of any offering contemplated in any registration statement,
(iii) all registration and filing fees under federal and state securities laws,
(iv) expenses of complying with the securities or blue sky laws of any
jurisdiction pursuant to Section 5.4(d), (v) reasonable fees and disbursements
of no more than one counsel for the Holders, and (vi) reasonable fees and
disbursements of all independent certified accountants of the Company including
expenses of any special audits or "cold comfort" letters in connection with any
such registration; provided, however, that the Company shall not pay any
underwriting discounts and commissions or stock transfer taxes relating to the
Registrable Securities. The Company shall not be required to pay for any
expenses of any registration proceeding begun pursuant to Section 5.2 if the
registration request is subsequently withdrawn at the request of the Holders of
a majority of the Registrable Securities to be registered and such withdrawal is
not the result of the Company's exercise of a Delay Right pursuant to the terms
of Section 5.2(b) (in which case all participating Holders shall bear such
expenses), unless the Holders of a majority of the Registrable Securities agree
to forfeit their right to one demand registration pursuant to Section 5.2 (in
which event such right shall be forfeited by all Holders); provided further,
however, that if at the time of such withdrawal, the Holders have learned of a
material adverse change in the condition, business, or prospects of the Company
from that known to the Holders at the time of their request and have withdrawn
the request with reasonable promptness following disclosure by the Company of
such material adverse change, then the Holders shall not be required to pay any
of such expenses and shall retain their rights pursuant to Section 5.2.
5.7. ADJUSTMENTS FOR STOCK SPLITS
All share numbers included in this Section 5, as well as in Section 2
and Section 11, are presented as of the date of this Agreement. The Company has
approved a Restated Certificate of Incorporation that it may file immediately
prior to the Company's Initial Public Offering, that will, among other things,
effect a one-for-two reverse split of the Common Stock. To the extent that such
reverse stock split is effected at any relevant time for purposes of this
Agreement, or in the event that such reverse split is effected on different
terms, or any other stock split, reverse stock split, stock dividend,
recapitalization or reclassification with respect to the Company's Common Stock
is made, then the share numbers set forth in Section 5 and Section 11 shall be
appropriately adjusted upward or downward, as the case may be.
5.8. DELAY OF REGISTRATION
No Holder shall have any right to obtain or seek an injunction
restraining or otherwise delaying any registration under this Section 5 as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 5.
17
<PAGE>
5.9. CERTAIN REPORTS
(a) Prior to the Initial Public Offering, the Company will deliver to the
Investor and each other Holder of Registrable Securities that so requests, as
soon as practicable after the end of each fiscal year and each quarter, audited
annual and unaudited quarterly consolidated financial statements of the Company,
including a balance sheet of the Company, a statement of operations and a
statement of sources and application of funds of the Company for such year or
quarter, all prepared in accordance with generally accepted accounting
principles.
(b) With a view to making available to the Holders after the Initial
Public Offering the benefits of Rule 144 promulgated under the Securities Act
and any other rule or regulation of the SEC that may at any time permit a Holder
to sell securities of the Company to the public without registration, the
Company covenants that it will after the Initial Public Offering:
(i) make and keep public information available, as those terms are
understood and defined in Rule 144 at all times from and after ninety (90) days
after the Initial Public Offering;
(ii) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(iii) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (A) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 (at any time after
ninety (90) days after the Initial Public Offering), the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), (B) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and
(C) 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.
5.10. INDEMNIFICATION
In the event any Registrable Securities are included in a
registration statement under this Section 5:
(a) The Company will, and does hereby undertake to, indemnify and
hold harmless each Holder of Registrable Securities, each of such Holder's
officers, directors, employees and each Person controlling such Holder within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, with respect to any registration, qualification, compliance or
other matters effected pursuant to this Section 5, against all claims, losses,
damages, and liabilities (or actions in respect thereto) to which they may
become subject under the Securities Act, the Exchange Act, or other federal or
state law based upon any of the following statements, omissions, allegations or
violations (collectively, a "Violation"): (i) any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus (whether
preliminary or final, if any), registration statement or based on any omission
(or alleged
18
<PAGE>
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any violation
or alleged violation by the Company of any federal, state or common law rule or
regulation applicable to the Company in connection with any such registration,
qualification or compliance. The Company will reimburse, as incurred, each such
Holder, and each such director, officer, employee, and controlling Person, for
any legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense, arises out of or is based on
any untrue statement or omission based upon written information furnished to the
Company by an instrument duly executed by such Holder or underwriter and stated
to be specifically for use therein. This indemnity will be in addition to any
liability which the Company may otherwise have. The Company shall also
indemnify underwriters participating in a distribution covered by a registration
statement, their officers and directors and each Person who controls such
Persons to the same extent as provided above with respect to the indemnification
of the Holders of Registrable Securities.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, officers and
employees, each Person, if any, who controls the Company within the meaning of
either Section 15 of the Securities Act or Section 20 of the Exchange Act, any
underwriter, any other Holder selling securities in such registration statement
and any controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Securities Act, the Exchange 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 pay, as incurred, any legal or other expenses
reasonably incurred by any Person intended to be indemnified pursuant to this
subsection 5.10(b), in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this subsection 5.10(b) 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 subsection 5.10(b) exceed the gross proceeds from the
offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 5.10 of notice of the commencement of any action, claim or proceeding
(including any governmental investigation or inquiry), such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying party
under this Section 5.10, 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 (whether
alone or jointly with any other indemnifying party similarly noticed), to assume
the defense thereof with counsel selected by the indemnifying party (but subject
to the reasonable approval of the indemnified party); provided, however, that
the indemnified party may participate in the defense with separate
19
<PAGE>
counsel at its own expense, and provided further that if representation of an
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to an actual conflict of interest between such indemnified
party and the indemnifying party in such proceeding, then such indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses thereof to be paid by the indemnifying
party. 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 5.10, 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 thereunder this
Section 5.10. The indemnified party shall not be liable for any settlement of
any such action or proceeding effected without its written consent, which
consent shall not be unreasonably withheld.
(d) If the indemnification provided for in this Section 5.10 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 each applicable 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. The Company and the Investor agree that it would not be
just and equitable if contribution pursuant to this Section 5.10 were determined
solely by pro rata allocation or by any other method of allocation which does
not take account of the equitable considerations referred to in this paragraph.
Notwithstanding the provisions of this subsection 5.10(d), an indemnified party
shall not be required to contribute any amount in excess of the amount by which
the total price at which the securities sold by such indemnified party or its
affiliated indemnified party and distributed to the public were offered to the
public exceeds the amount of any damages which such indemnified party, or its
affiliated indemnified party, has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
(e) 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.
20
<PAGE>
(f) The obligations of the Company and Holders under this
Section 5.10 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Section 5.
5.11. ASSIGNMENT OF REGISTRATION RIGHTS
The rights to cause the Company to register Registrable Securities
pursuant to this Section 5 may be assigned (but only with all related
obligations) by a Holder to a transferee or assignee of such securities who
(a) receives such Registrable Securities pursuant to a transfer made in
compliance with the right of first purchase contained in Section 4 of this
Agreement and any other restrictions on transfer contained herein or imposed by
law and (b)(i) after such assignment or transfer, holds [***]
of Registrable Securities (subject to adjustment in accordance with
Section 5.7), (ii) is a subsidiary, parent, general partner, limited partner or
retired partner of a Holder or (iii) is a Holder's family member or trust for
the benefit of an individual Holder; provided that in each case: (x) the
Company is, within a reasonable time after such transfer, furnished with 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; (y) such
transferee or assignee agrees in writing to be bound by and subject to the terms
and conditions of this Agreement, including without limitation the provisions of
Section 5.12 below; and (z) such assignment of registration rights shall be
effective only if immediately following such transfer the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act. For the purposes of determining the number of shares of Registrable
Securities held by a transferee or assignee, the holdings of transferees and
assignees of a partnership who are partners or retired partners of such
partnership (including spouses and ancestors, lineal descendants and siblings of
such partners or spouses who acquire Registrable Securities by gift, will or
intestate succession) shall be aggregated together and with the partnership;
provided that all assignees and transferees who would not qualify individually
for assignment of registration rights shall have a single attorney-in-fact for
the purpose of exercising any rights, receiving notices or taking any action
under this Section 5.
5.12. "MARKET STAND-OFF" AGREEMENT
Except as set forth in Section 4.1 in connection with the Company's
Initial Public Offering, the Investor hereby agrees that, and each assignee of
registration rights hereunder shall agree that, during the period of duration
specified by the Company and an underwriter of Common Stock or other securities
of the Company following the effective date of a registration statement of the
Company filed under the Securities Act, it shall not, to the extent requested by
the Company and such underwriter, directly or indirectly sell, offer, contract
to sell, grant any option to sell, transfer the economic risk of ownership in,
make any short sale, pledge or otherwise dispose of, any shares of Common Stock
(except any Registrable Securities included in such registration), or any
securities convertible into or exchangeable or exercisable for or any other
rights to purchase or acquire Common Stock, without the prior written consent of
the Company (other than to donees who agree to be similarly bound); provided,
however, that:
21
<PAGE>
(a) such market stand-off agreement shall be applicable only to
registration statements of the Company that cover Common Stock to be sold in
an underwritten offering;
(b) such market stand-off time period shall not exceed [***] or
such shorter period of time as may be applicable to similar lock-up
agreements signed by the executive officers of the Company and/or all holders
of greater than [***] of the then issued and outstanding shares of the Common
Stock with respect to the offering in question; and
(c) such market stand-off agreement shall be applicable only to
those Holders (and their respective affiliates) whose aggregate beneficial
ownership interest in the shares of the Common stock exceeds [***] of the then
issued and outstanding shares of the Common Stock.
5.13. RESTRICTIONS ON CERTAIN SALES BY THE COMPANY
If requested to by the underwriters in connection with a
registration statement filed pursuant to Section 5.2 of this Agreement, the
Company will not file a registration statement under the Securities Act with
respect to any offering of additional shares of Common Stock (other than on
Form S-8 or Form S-4) for a period of up to [***] from the effectiveness of the
registration statement filed under such Section 5.2 unless the Company is
required to file a registration statement during the time pursuant to
registration rights of a third party outstanding as of the date of this
Agreement, but in no event will the Company cause such registration statement
to be declared effective by the SEC prior to the end of such [***] period.
6. CONDITIONS OF THE INVESTOR'S OBLIGATIONS AT CLOSING
The obligations of the Investor under this Agreement are subject to the
fulfillment on or before the Closing Date (except as otherwise noted below) of
each of the following conditions, the waiver of which shall not be effective
unless the Investor consents in writing thereto:
6.1. REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Company contained in
Section 2 shall remain true in all material respects on and as of the Closing
Date with the same effect as though such representations and warranties had been
made on and as of the Closing Date.
6.2. PERFORMANCE
The Company shall have performed and complied in all material
respects with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or before
the Closing Date.
22
<PAGE>
6.3. COMPLIANCE CERTIFICATE
The President of the Company shall deliver to the Investor on the
Closing Date a certificate stating that the conditions specified in Section 6.1
and 6.2 have been fulfilled.
6.4. LICENSE AGREEMENT
The Investor and the Company shall have executed and delivered the
License Agreement.
6.5. OPINION OF COMPANY COUNSEL
The Investor shall have received from Morrison & Foerster LLP,
counsel for the Company, an opinion, dated as of the Closing Date, in the form
attached hereto as EXHIBIT B.
6.6. UNITS OFFERING
In the event of an Initial Public Offering involving the sale of
units, the applicable condition specified in the last sentence of the definition
of "Initial Public Offering" shall have been satisfied.
7. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING
The obligations of the Company to the Investor under this Agreement are
subject to the fulfillment on or before the Closing Date of each of the
following conditions by the Investor:
7.1. REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Investor contained in
Section 3 shall remain true in all material respects on and as of the Closing
Date with the same effect as though such representations and warranties had been
made on and as of the Closing Date.
7.2. PERFORMANCE OF OBLIGATIONS
The Investor shall have performed and complied with all agreements
and conditions herein required to be performed or complied with by the Investor
on or before the Closing Date.
7.3. PAYMENT OF PURCHASE PRICE
Pursuant to the Closing Date in connection with the Company's Initial
Public Offering, the Investor shall have delivered the cash portion of the
purchase price specified in Section 1.1 and the Promissory Note.
23
<PAGE>
7.4. LICENSE AGREEMENT
The Investor and the Company shall have executed and delivered the
License Agreement.
7.5. UNITS OFFERING
In the event of an Initial Public Offering involving the sale of
units, the applicable condition specified in the last sentence of the definition
of "Initial Public Offering" shall have been satisfied.
8. STANDSTILL COVENANT
8.1. STANDSTILL AGREEMENT
The Investor agrees that, except as specifically permitted by this
Agreement (including the purchase of the Common Stock contemplated to be issued
to the Investor under this Agreement) or unless specifically requested in
writing in advance by the Company (without any prior solicitation or request (or
other act encouraging the delivery of such a writing) having been made to the
Company's Board of Directors), upon the approval of the Company's Board of
Directors, the Investor and each of its Affiliates ("Affiliates" shall mean any
Person that controls, is controlled by, or is under common control of the
Investor) will not in any manner, directly or indirectly:
(a) in any manner acquire, or offer or agree to acquire,
directly or indirectly, any securities or property of the Company or any of
its successors or subsidiaries (or any direct or indirect rights, options or
interests therein), provided that the Investor may acquire securities if
after the acquisition thereof the Investor and its affiliates would hold in
the aggregate less than [***] of the then total voting power of the Company
(calculated in accordance with Rule 13d-3 under the Exchange Act) (such
percentage limitation being the "Percentage Limitation"); provided, however,
that the Investor shall not be required to dispose of those shares of capital
stock held in excess of the Percentage Limitation solely because the Company
has purchased and retired shares of its outstanding capital stock;
(b) solicit proxies or consents or become a "participant" in a
"solicitation" (as such terms are defined or used in Regulation 14A under the
Exchange Act) of proxies or consents with respect to securities of the Company
or any of its successors or subsidiaries in opposition to the recommendation of
the majority of the Board of Directors of the Company or initiate any
stockholder proposal or "election contest" (as such term is defined or used in
Rule 14a-11 of the Exchange Act) with respect to the Company or any of its
successors or subsidiaries or induce others to initiate the same;
(c) take any action for the purpose of convening a stockholders'
meeting of the Company or any of its successors or subsidiaries;
24
<PAGE>
(d) make any proposal or any public announcement relating to, or
submit to the Company or any of its directors, officers, representatives,
trustees, employees, attorneys, advisors, agents or affiliates any proposal for,
a tender or exchange offer for securities of the Company or any of its
successors or subsidiaries, the acquisition of securities that would result in
the Investor exceeding the Percentage Limitation or a merger, business
combination, sale of assets, liquidation, restructuring, recapitalization or
other extraordinary corporate transaction relating to the Company or any of its
successors of subsidiaries (other than the establishment of joint ventures,
licenses or other transactions in the ordinary course of business) or take any
action that might require the Company or any of its successors or subsidiaries
to make any public announcement regarding any of the foregoing;
(e) deposit securities held by it into a voting trust or subject
the securities to voting agreements, or grant any proxy with respect to any
securities to any person not designated by the Company;
(f) form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the Exchange Act) for the purpose of acquiring,
holding, voting or disposing of securities of the Company or any of its
successors or subsidiaries or taking any other actions restricted or prohibited
under clauses (a) through (e) above;
(g) disclose any intention, plan or arrangement inconsistent with
the foregoing;
(h) advise, assist or encourage any other person in connection with
any of the foregoing;
(i) enter into any discussions, negotiations, arrangements or
understandings with any third party with respect to, or aid, abet or encourage
any action prohibited by, any of the foregoing; or
(j) make (publicly or to the Company or any of its directors,
officers, representatives, trustees, employees, attorneys, advisors, agents,
affiliates or security holders, directly or indirectly) any request or proposal
to amend, waive or terminate any provision of this Section 8.1 or any inquiry or
statement relating thereto.
8.2. EXCEPTIONS
Notwithstanding any provision of this Section to the contrary, the
preceding provisions shall terminate on the following events:
(a) the expiration of the [***] commencing on the date
of this Agreement;
(b) any person or 13D Group (other than an Affiliate of the
Investor) shall have announced or commenced a tender offer or exchange offer for
more than [***] of the then
25
<PAGE>
outstanding shares of Common Stock (including any other outstanding voting
securities) of the Company;
(c) the date upon which a person acquires more than [***] of the
voting power of the Company whether by way of tender or exchange offer or
otherwise;
(d) in the event the Company hereafter issues to a third party
(other than a public offering for the account of the Company in which other
third parties also purchase shares of capital stock pursuant to substantially
the same terms and conditions) more than [***] of its then outstanding capital
stock without requiring such third party to enter into a standstill agreement
with provisions substantially as restrictive as those set forth in this
Section 8;
(e) in the event that the Investor and its Affiliates cease to
own more than [***] of the then outstanding voting securities of the Company; or
(f) in the event that the Company or any third party initiates any
transaction of the type described in Section 8.1(d) above.
Notwithstanding anything to the contrary contained herein, the
provisions of this Section 8 shall only be applicable at such time as
Interneuron Pharmaceuticals Inc. does not beneficially own more than [***] of
the voting power of the Company.
For purposes of this Section, a "13D Group" means any group of
persons formed for the purpose of acquiring, holding, voting or disposing of
securities of the Company that would be required under the Exchange Act, and the
rules and regulations promulgated thereunder, to file a statement on
Schedule 13D with the SEC as a person within the meaning of section 13(d)(3) of
the Exchange Act if such group beneficially owns sufficient securities to
require such a filing.
All of the provisions of Section 8.1 shall be reinstated and shall
apply in full force according to their terms in the event that: (x) if the
preceding provisions of Section 8.1 shall be terminated as a result of a tender
offer, such tender offer (as originally made or as extended or modified) shall
have terminated without closing prior to the commencement of a tender offer by
the Investor or any of its Affiliates that would have been permitted to be made
pursuant to the preceding provisions of this paragraph as a result of such third
party tender offer or (y) any tender offer by the Investor or any of its
Affiliates (as originally made or as extended or modified) that was permitted to
be made pursuant to the preceding provisions of this paragraph shall have
terminated without closing. Upon the closing of any tender offer for or
acquisition by the Investor or its affiliates of any securities of Company or
rights or options to acquire under such securities that would have been
prohibited by the preceding provisions but for the provisions of this section,
all provisions of this section shall terminate.
26
<PAGE>
9. CERTAIN INITIAL PUBLIC OFFERING MATTERS
9.1. REGISTRATION OF STOCK
The Investor shall review the terms and disclosure contained in any
registration statement applicable to the Company's Initial Public Offering and
the Company shall provide the Investor with copies of such registration
statement and give the Investor reasonable opportunity to review such
registration statement. The disclosure contained in any such registration
statement shall be deemed incorporated by reference in this Agreement and made a
part hereof. Company shall give the Investor reasonable notice of the
anticipated Closing Date in connection with the Initial Public Offering.
9.2. USE OF PROCEEDS
The Company shall use the proceeds of any sale of Common Stock to the
Investor pursuant to a registration statement in connection with an Initial
Public Offering for the purposes set forth in the "Use of Proceeds" section of
such registration statement.
9.3. COMMON STOCK PURCHASE
The Investor acknowledges that the Company's Initial Public Offering
may consist of an offering of Units consisting of Common Stock of the Company
and other securities of the Company or Interneuron Pharmaceuticals Inc. In the
event of such an Initial Public Offering, the Investor's participation (upon the
Company's election for the Investor to participate) in connection with the
Initial Public Offering shall apply solely to shares of the Company's Common
Stock and not to any other securities that constitute a portion of such Unit
offering.
10. MISCELLANEOUS
10.1. SURVIVAL OF WARRANTIES
All representations and warranties contained herein shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the party benefiting from any such representation or warranty,
and shall survive the Closing Date to the extent of applicable statutes of
limitations; PROVIDED, HOWEVER, that the representations and warranties of this
Agreement shall not be construed so as to constitute representations and
warranties concerning circumstances existing after any date specifically
referred to therein, or the Closing Date, as the case may be. All covenants and
agreements contained herein shall survive indefinitely until, by their
respective terms, they are no longer operative.
10.2. PUBLIC ANNOUNCEMENTS
Except as required by applicable law or regulations, the Company and
the Investor shall jointly approve any public announcements relating to the
transactions described herein or the relationship between the parties. Each
party agrees to cooperate with the other in
27
<PAGE>
the preparation of any governmental filing relating to the transactions
contemplated hereby and to use reasonable efforts to disclose to the other
information to be contained in any such governmental listing that relates to
this Agreement.
10.3. SUCCESSORS AND ASSIGNS
Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including transferees of any of the
Common Stock). Nothing in this Agreement, express or implied, is intended to
confer upon any party other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations, or liabilities under
or by reason of this Agreement, except as expressly provided in this Agreement.
Neither the Company nor the Investor shall assign this Agreement or any rights
hereunder without the prior written consent of the other.
10.4. GOVERNING LAW
This Agreement shall be governed by and construed and enforced under
the laws of the State of California.
10.5. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
10.6. TITLES AND SUBTITLES
The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
10.7. NOTICES
All notices required or permitted hereunder shall be in writing and
shall be deemed effectively given: (i) upon personal delivery to the party to
be notified; (ii) when sent by confirmed telex or confirmed facsimile if sent
during normal business hours of the recipient; if not sent during such normal
business hours, then on the next business day; (iii) five (5) days after having
been sent by registered or certified mail, return receipt requested, postage
prepaid; or (iv) one (1) day after deposit with a nationally recognized
overnight courier, specifying next day delivery, with written verification of
receipt. All communications shall be sent to the Company and the Investor at
their addresses as set forth on and with copies as designated on the signature
page hereof or at such other addresses as the Company or the Investor may
designate by ten (10) days' advance written notice to the other parties hereto.
10.8. FINDER'S FEES
Each party represents and warrants that it neither is nor will be
obligated for any finders' fee or commission in connection with the transactions
contemplated by this Agreement.
28
<PAGE>
The Investor agrees to indemnify and to hold harmless the Company from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Investor or any of its officers, partners, employees,
or representatives is responsible.
The Company agrees to indemnify and hold harmless the Investor from
any liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
10.9. EXPENSES
Each party hereto shall pay all of its own costs and expenses
incurred in connection with the negotiation, preparation, execution, delivery
and performance of this Agreement and the transactions contemplated herein,
whether or not such transactions are consummated.
10.10. AMENDMENTS AND WAIVERS
Any term of this Agreement may be amended and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Investor. Any amendment or waiver effected in
accordance with this Section 10.10 shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding, each future
holder of all such securities, and the Company. No delay or omission to
exercise any right, power or remedy accruing to any party, upon any breach,
default or noncompliance by another party under this Agreement shall impair any
such right, power or remedy, nor shall it be construed to be a waiver of any
such breach, default or noncompliance, or any acquiescence therein, or of or in
any similar breach, default or noncompliance thereafter occurring.
10.11. SEVERABILITY
If one or more provisions of this Agreement are held to be
unenforceable under applicable law, then (i) such provision shall be excluded
from this Agreement, (ii) the parties shall make reasonable efforts to negotiate
such alternative provisions in lieu of the excluded term of this Agreement in
order to carry out the purpose and intentions of this Agreement, and (iii) the
balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
10.12. BREACH; STATUS OF LICENSE AGREEMENT
Any default by the Investor of its obligation to purchase any Common
Stock pursuant to this Agreement, shall constitute a material breach of the
License Agreement and shall be grounds for termination thereof. Notwithstanding
the foregoing, no termination of the License Agreement, except a termination by
the Investor as a result of a material breach thereof by the Company, will in
any way affect the Investor's obligations hereunder.
29
<PAGE>
10.13. SPECIFIC ENFORCEMENT
The Company and the Investor acknowledge and agree that if any of
the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur and it
would be extremely impracticable and difficult to measure damages. Accordingly,
in addition to any other rights and remedies to which the parties may be
entitled by law or equity, the parties shall be entitled to an injunction or
injunctions to prevent or cure breached of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof, and the parties
expressly waive (i) the defense that a remedy in damages will be adequate and
(ii) any requirement, in an action for specific performance, for the posting of
a bond.
10.14. ENTIRE AGREEMENT
This Agreement, the License Agreement and the documents referred
to herein and therein constitute the entire agreement among the parties and
supersede any prior term sheets, discussions, commitments or writings of any
kind with respect to the subject matter hereof. No party shall be liable or
bound to any other party in any manner by any warranties, representations, or
covenants except as specifically set forth herein or therein.
10.15. FURTHER ASSURANCES
Each party shall execute and deliver such additional instruments,
documents or other writings as may be reasonably requested by the other party in
order to confirm and carry out and to effectuate fully the intent and purposes
of this Agreement.
10.16. ATTORNEYS' FEES
If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
10.17. LEGENDS
It is understood that the certificates evidencing any Common Stock
that constitutes "restricted securities" may bear, if applicable, one or all of
the following legends:
(a) "These securities have not been registered under the Securities
Act of 1933, as amended. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in effect with respect
to the securities under the Securities Act or an opinion of counsel satisfactory
to the Company that such registration is not required or unless sold pursuant to
Rule 144 of such Act."
(b) "The shares represented by this certificate may be transferred
only in accordance with the terms of a Stock Purchase Agreement, dated as of
December 31, 1996,
30
<PAGE>
between the Company and the stockholder, a copy of which is on file with the
Secretary of the Company."
(c) Any legend required by the laws of the State of California,
including any legend required by the California Department of Corporations.
11. CERTAIN DEFINITIONS
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" per share of the Common Stock, on any given
date, shall be calculated as follows:
(i) If the Common Stock is purchased other than in connection with
the Initial Public Offering, the Fair Market Value per share shall equal the
average of the daily market prices of the Common Stock for the twenty (20)
consecutive trading days immediately preceding the fifth day prior to such date.
The daily market price for each such trading day shall be: (x) if the Common
Stock is listed or admitted to trading on any securities exchange in the United
States, the closing price, regular way, on such day on the principal securities
exchange in the United States on which the Common Stock is traded, and (y) if
the Common Stock is not then listed or admitted to trading on any such
securities exchange, the last reported sale price on such day or, if no sale
takes place on such day, the average of the closing bid and asked prices in the
United States on such day, as reported by a reputable quotation source
designated by the Company. If the Common Stock is not registered under the
Exchange Act, the Company and the Investor shall attempt in good faith to reach
agreement regarding the fair market value thereof based upon, among other
factors, any recent prices for Common Stock sold by the Company to independent
third parties in arm's length transactions and there shall be no discount
applied by reason of the illiquidity of the Common Stock in question. If the
Investor and the Company are not able to reach an agreement, the Investor and
the Company shall either agree on a single independent investment bank of
recognized national standing to determine the Fair Market Value of the Common
Stock or, if the Investor and the Company cannot agree on a single investment
bank, each of the Investor and the Company shall appoint an independent
investment bank of recognized national standing with experience involving
development stage biotechnology companies and the Fair Market Value of the
Common Stock shall be mutually determined by the two investment banks. If the
two investment banks are not able to reach agreement on the Fair Market Value,
then they shall appoint a third independent investment bank of recognized
national standing with experience involving development stage biotechnology
companies and the Fair Market Value shall be determined as follows: The
investment banks appointed by the Investor and the Company shall each submit a
final proposed Fair Market Value for the Common Stock after consultation with
their respective clients and if the valuations differ by less than 10% (based
upon the higher valuation), then the Fair Market Value shall be the mid point of
the two proposals and if the valuations differ by more than 10%, then the
independent investment bank shall select whichever Fair Market Value better
approximates what such independent investment bank determines is the Fair Market
Value of the Common Stock. Each party shall pay the costs,
31
<PAGE>
fees, and expenses of its respective investment bankers and the parties shall
split the costs of the third investment banker.
(ii) If the Common Stock is purchased in connection with the Initial
Public Offering, the Fair Market Value per share shall equal the "Price to
Public" established for such Initial Public Offering in the case of an
underwritten Initial Public Offering of Common Stock, or that portion of the
Price to the Public attributable to the Common Stock as determined in good faith
by the Company's Board of Directors (after consultation with its financial
advisors) in the case of an underwritten Initial Public Offering of Units or
other combinations of securities that includes more than solely shares of the
Company's Common Stock. If the Initial Public Offering occurs other than by
means of an underwritten offering, the Fair Market Value of the Common Stock
shall be determined by agreement between the Company and the Investor based upon
the market price for such Common Stock (or anticipated market price in the event
of an agreement prior to trading of such Common Stock). If the parties fail to
reach agreement regarding such Fair Market Value they shall follow the
procedures outlined in clause (i) above of this definition of "Fair Market
Value" by selecting one or more investment banks to facilitate resolution of the
valuation dispute except that the valuation principles applicable to such
dispute resolution procedure shall be based upon, among other factors, the
market price of the Common Stock as well as any anticipated changes in market
prices based upon how securities of companies in similar circumstances have
traded and there shall be no discount applied by reason of the illiquidity of
the Common Stock in question.
"Holder" or "Holders" shall mean (i) the Investor, and (ii) a holder
of [***] Registrable Shares (subject to adjustment as provided in
Section 5.7) to whom registration rights have been assigned pursuant to
Section 5.11 hereof.
"Initial Public Offering" shall mean (i) an underwritten initial
public offering of the Common Stock by the Company registered under the
Securities Act of which the aggregate offering price attributable to the
Common Stock is [***] (not including the Common Stock to be issued to the
Investor under this Agreement), (ii) a merger, spin-off or other transaction
(including a series of financings) as a result of which the Company becomes
subject to the reporting requirements of Section 12 or 15(d) of the Exchange
Act and after which the Company has a minimum public float [***] shares of the
Common Stock (subject to adjustment as provided in Section 5.7) having a
value [***] (not including the Common Stock to be issued to the Investor under
this Agreement), or (iii) any other series of transactions which meet the
requirements of (i) or (ii) above. In the event that an Initial Public
Offering is structured as an offering of units that include securities other
than solely shares of Common Stock of the Company, the terms of such offering
must contemplate that the Common Stock will trade separately in the public
markets not later than the [***] and one of the following three conditions
shall be satisfied prior to the Investor's purchase of the Common Stock in
connection with the Initial Public Offering (the Company may elect which of
such conditions it chooses to satisfy): [***]
32
<PAGE>
[***]
"Person" shall mean any individual, corporation, firm or other
enterprise, association, organization, or other legal entity.
"prospectus" shall mean the prospectus included in any
registration statement (including, without limitation, a prospectus that
discloses information previously omitted from a prospectus filed as part of
an effective registration statement in reliance upon Rule 430A under the
Act), as amended or supplemented by any prospectus supplement, with respect
to the terms of the offering of any portion of the Registrable Securities
covered by such registration statement and all other amendments and
supplements to the prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference
in such prospectus.
"register," "registered" and "registration" refer to a registration
effected by filing with the SEC a registration statement in compliance with the
Act and the declaration or ordering by the SEC of the effectiveness of such
registration statement.
"Registrable Securities" shall mean any shares of the Common Stock
originally sold to the Investor under this Agreement that constitute "restricted
securities" under the Securities Act upon completion of such sale and any Common
Stock issued or issuable in respect of such shares of Common Stock pursuant to
any split, reverse stock split, stock dividend, recapitalization or
reclassification or similar transaction.
"Securities Act" shall mean the Securities Act of 1933, as amended.
33
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
THE COMPANY: PROGENITOR, INC.,
a Delaware corporation
By: /s/ Douglass B. Given
------------------------------------------
Name: Douglass B. Given
---------------------------------------
Title: President & Chief Executive Officer
---------------------------------------
ADDRESS: 1507 Chambers Road
Columbus, OH 43212-1566
Attention: Chief Executive
Officer
Fax: (614) 488-0404
WITH A COPY TO: Morrison & Foerster LLP
425 Market Street
Sa n Francisco, CA 94105-2482
Attention: Gavin B. Grover, Esq.
Fax: (415) 268-7522
THE INVESTOR: AMGEN INC.,
a Delaware corporation
By: /s/ George A. Vandeman
------------------------------------------
Name: George A. Vandeman
----------------------------------------
Title: Sr. V.P., General Counsel and Secretary
---------------------------------------
ADDRESS: 1840 DeHavilland Drive
Thousand Oaks, CA 91320
Attention: Corporate Secretary
Fax: (805) 499-6058
WITH A COPY TO: Latham & Watkins
633 W. Fifth Street, Suite 4000
Los Angeles, CA 90071
Attention: Gary Olson, Esq.
Fax: (213) 891-8763
34
<PAGE>
THIS INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
LICENSE AGREEMENT
This Agreement is effective as of the latest date of signing below and is
by and between Associated Universities, Inc. ("Licensor"), operator of
Brookhaven National Laboratory, Upton, New York 11973, under contract with the
U.S. Department of Energy, and Progenitor, Inc., which has a principal place of
business at 1507 Chambers Road, Columbus, Ohio 43212-1566 ("Licensee").
Licensor represents that it is the owner of the Patent Properties defined
in Article III(a)(1) and has the right to grant the license herein granted;
Licensee desires to secure a non-exclusive license under the aforesaid
Patent Properties to produce expression vectors to express a gene product or
products ("Designated Vectors") which vectors, modifications or derivatives
thereof the Licensee will sell or use commercially;
Licensor is willing to grant the same on the terms and conditions set
forth herein;
Accordingly, in consideration of the premises and the mutual covenants of
this Agreement, the parties hereto agree as follows:
I. GRANT
(a) Subject to the rights of the U.S. Government, for the T7 Autogene
Patent Properties as defined in PL98-620 and the related implementing
regulations of 37 CFR Part 401 and for the T7 Expression System Patent
Properties as set forth more fully in the waiver document entitled "Statement of
Considerations", attached hereto as ATTACHMENT A, and in the assignment from the
U.S. Government to Licensor, "License, Assignment and Agreement", attached
hereto as ATTACHMENT B, Licensor hereby grants
1
<PAGE>
and agrees to grant to Licensee, for the life of this Agreement, a non-exclusive
license under the aforesaid Patent Properties to make, use and sell or dispose
of Licensed Product (as defined in Article III(a)).
(b) Licensee's license includes the right to grant to its Affiliates (as
defined in Article III) sublicenses of the same scope as that of Licensee's
license, provided that all such sublicenses are made to include terms that cause
them to be automatically terminated by termination of Licensee's license for any
reason or cause.
(c) Further, Licensee's license includes the right to grant written,
nonexclusive sublicenses to third parties ("Sublicensees") subject to the
following provisions:
(i) Sublicenses granted by Licensee shall be a grant under
intellectual property rights owned or otherwise controlled by Licensee together
with a grant under the Patent Properties where the Patent Properties are
reasonably required for commercially exploiting the intellectual property rights
owned or otherwise controlled by Licensee;
(ii) Sublicenses granted by Licensee shall be subject to the terms
and conditions of this Agreement, including without limiting effect the
insurance requirement in Article V hereof, and shall contain an express
provision to that effect;
(iii) Licensee guarantees that the Net Sales Proceeds reported and
used in the calculation of the royalties due from the sale or commercial use or
disposition of Licensed Products shall include all billing for each Licensed
Product sold, commercially used or disposed of by Sublicensees;
2
<PAGE>
(iv) Sublicenses granted by Licensee shall be made to include terms
that cause the Sublicense to be automatically terminated by termination of
Licensee's license for any reason or cause;
(v) Sublicenses granted by Licensee shall be made to include terms
that prohibit the assignment or transfer of the Sublicense without the prior
written consent of Licensor; and
(vi) Sublicenses granted by Licensee shall be made to include terms
that exclude the right of the Sublicensee to grant sublicenses.
(d) Nothing herein shall be construed to prevent Licensor from licensing
any invention covered by the Patent Properties licensed hereunder to any other
for the purpose of manufacturing, using or selling any such invention.
II. INITIAL LICENSE FEE
Licensee agrees to pay, as a license issuance fee for this License Grant,
the sum of [***], payable by Licensee to Licensor upon execution of this
Agreement by both parties, which sum shall not be applied against additional
royalties required by Article III, below.
III. ROYALTIES AND REPORTS
(a) Definitions:
1) "Patent Properties" means:
(i) United States Patent No. 4,952,496 issued August 28, 1990
in the names of F. William Studier, Parichehre Davanloo,
Alan H. Rosenberg, Barbara Moffatt and John J. Dunn
3
<PAGE>
entitled, "Cloning and Expression of the Gene for
Bacteriophage T7 RNA Polymerase", any continuation, C.I.P
application(s) or divisional application(s) filed
therefrom, and any patent(s) that issue thereon ("T7
Expression System Patent Properties"); and
(ii) United States Patent Application Serial No. [***] any
continuation, C.I.P. application(s) or divisional
application(s) filed therefrom, and any patent(s) that
issue thereon ("T7 Autogene Patent Properties").
2) "Valid Claim" means and includes any claim contained in an
issued Patent within the Patent Properties which has not expired, which has not
been held invalid or unenforceable by final decision of a court or other
governmental agency of competent jurisdiction, unappealable or unappealed within
the time allowed for appeal, and which has not been admitted to be invalid or
unenforceable through reissue, disclaimer or otherwise.
3) "Licensed Product" means and includes Designated Vectors and any
derivatives or modifications thereof and any product produced by use of the
Designated Vectors or by use of any invention covered by an issued patent within
the
4
<PAGE>
Patent Properties the manufacture, use or sale of which, but for the license
granted hereunder, would constitute an infringement of one or more Valid Claims.
4) "Net Sales Proceeds" means the accumulated total billing for
each Licensed Product, less the following sums actually paid or credited by
Licensee:
(i) discounts allowed in amount customary in the trade;
(ii) sales or use taxes directly imposed with reference to the
particular sales;
(iii) transportation or insurance charges prepaid or allowed;
and
(iv) amounts allowed or credited on returns.
5) "Affiliate" as used herein means any corporation or other
business entity controlled by Licensee, with "control" meaning ownership of more
than fifty percent (50%) of the voting stock, or receipt of more than fifty
percent (50%) interest in the income, of such corporation or other business
entity.
(b) Licensee, as further consideration for this License Grant, agrees to
pay royalties, as provided for in this Article, on all Licensed Products which
are sold or otherwise commercially used or disposed of by it, its Affiliates, or
Sublicensees during the life of this Agreement.
(c) Commencing in the calendar year 1996, Licensee agrees to make written
reports to Licensor biannually, within sixty (60) days after the first day of
each January and July after the effective date of this Agreement and during the
life of this Agreement and, as of such dates, stating in each such report the
Tradename or other description it, its Affiliates or Sublicensees use in selling
any Licensed Product, and the total Net Sales
5
<PAGE>
Proceeds collected by it, its Affiliates or Sublicensees during the preceding
six calendar months and the total royalty due on said Net Sales Proceeds. Each
such report will contain individual sales, commercial use or disposal figures
and royalty figures for each Licensed Product involved. The first such report
shall include all such Net Sales Proceeds billed by Licensee, its Affiliates, or
Sublicensees prior to the date of that report.
(d) Licensee will pay to Licensor royalties on each Licensed Product
according to the following schedule:
1) A royalty of [***] of the Net Sales Proceeds (NSP) of Licensed
Products covered by the T7 Autogene Patent Properties AND the T7 Expression
System Patent Properties.
2) A royalty of [***] of the Net Sales Proceeds (NSP) of Licensed
Products covered by either the T7 Autogene Patent Properties OR the T7
Expression System Patent Properties.
(e) Licensee will pay to Licensor the royalty amounts due at the same
time each biannual sales report is submitted, as required by paragraph (c) above
of this Article.
(f) Licensee further agrees to pay a minimum royalty of [***] for each
calendar year beginning with the calendar year ending December 31, 1996. In the
event that the actual earned royalties for a calendar year exceed this minimum
royalty figure of [***], it is understood that no minimum royalties are to be
paid for that year. In the event that the actual earned royalties paid for a
calendar year are less than this minimum royalty of [***], Licensee shall be
obligated to pay within sixty (60) days after the end of each year the
6
<PAGE>
difference between the actual earned royalties it paid during said year and the
minimum royalty of [***], thereby to satisfy this minimum royalty requirement.
(g) Licensee agrees to make a written report to Licensor within sixty
(60) days after the date of any termination of this Agreement, stating in such
report the total Net Sales Proceeds on Licensed Products and the total royalties
due thereon. Concurrently with the making of this report, Licensee will pay to
Licensor the royalties due, including any minimum royalty due.
(h) In the event Licensee is required, as determined by a written legal
opinion from a U.S. patent attorney who is acceptable to Licensor, to pay a
royalty or royalties to any other party or parties for the right to make, use
and sell certain Licensed Product(s) under an issued U.S. patent, Licensee may
offset against the royalties due to Licensor pursuant to III(d) [***] of the
total running royalty or royalties payable to such other party or parties for
the use or sale of said certain Licensed Product(s) during the applicable
accounting period; provided, however, that in no event shall the royalty payable
to Licensor be less than [***] under Article III(d)(1) and no less than [***]
under Article III(d)(2). If the attorney rendering said legal opinion is
unacceptable to Licensor, then before any such offset is applied it will be
necessary for Licensee to obtain a second written legal opinion from a U.S.
patent attorney who is independent from Licensee, except for rendering said
second opinion, and said second legal opinion must fully confirm the first legal
opinion in order to permit such an offset to be applied.
IV. AUDITING
7
<PAGE>
(a) Licensee agrees to keep records for a period of three years showing
the sale, commercial disposition or use of Licensed Products by it, its
Affiliates, or Sublicensees under this License Agreement. Licensee shall ensure
that each Affiliate and Sublicensee shall keep full records of Net Sales
Proceeds from its sales of Licensed Products to its customers. Such records
shall be in sufficient detail to enable the royalties payable hereunder by
Licensee to be clearly and fully determined. Licensee further agrees to permit
its, its Affiliates' and Sublicensees' books and records to be examined from
time to time to the extent necessary to verify the reports provided for in
Article III hereof, such examination to be made at the expense of Licensor by an
auditor appointed by Licensor, or at the option and expense of Licensee, by an
independent Certified Public Accountant who may be appointed by Licensor and who
shall be acceptable to Licensee.
(b) Licensor agrees to maintain in confidence the information reported to
it in Licensee's biannual sales reports and any confidential information it
obtains through its audit rights. Licensor will neither disclose this
information outside of its organization nor use this information for any purpose
other than collection of royalties from Licensee under this Agreement.
Licensee agrees that the confidentiality and use provisions of this
Agreement shall not apply to the following:
(i) any information which appears in printed publications or which
otherwise is or becomes generally known in the trade other than through the
fault of Licensor;
8
<PAGE>
(ii) any information which Licensor can show by written records was
in its possession prior to the disclosure hereunder; or
(iii) any information which comes into the possession of Licensor
without covenants of secrecy from another party who is under no obligation to
Licensee to maintain the confidentiality of the information.
V. DISCLAIMER, INDEMNIFICATION, AND HOLD HARMLESS AND INSURANCE
(a) Licensor neither makes nor extends any representation or warranty,
either expressed or implied, and no representation or warranty shall be implied
with respect to the Patent License herein granted other than that Licensor has
the right to grant this license. Nothing herein shall be construed as granting
expressly, by implication, estoppel or otherwise any license or rights under
patents of Licensor other than under said Patent Properties.
(b) Licensor shall not be liable for:
1) the adequacy of the patent license granted hereunder; or
2) claims that the use of the T7 expression system, or the
manufacture, use or sale of Licensed Products constitute an infringement of any
property right or patent right of any third party.
(c) Licensor shall not be liable for any injury, losses or damages,
including special or consequential damages or losses incurred by Licensee, nor
for claims for such damages, losses or other injuries asserted or levied against
Licensee, arising out of Licensee's practice of the grant set forth in Article I
of this Agreement. Licensee shall indemnify and hold harmless Licensor and the
U.S. Government from any claims,
9
<PAGE>
actions, judgements or awards arising out of Licensee's practice of the grant
set forth in Article I, or out of Licensee's or its Affiliates' or Sublicensees'
manufacture, use, sale or disposition of Licensed Products.
(d) Licensor shall not be obligated to bring, defend or prosecute against
any third party any action or suit for, or arising out of, infringement, or
alleged infringement, of the aforesaid Patent Properties, licensed by it under
this Agreement.
(e) Licensee shall at the time of signing this Agreement have in effect
and shall maintain throughout the life of this Agreement, and for [***] after
this Agreement is terminated, a liability insurance policy in an amount of at
least [***] coverage for claims arising out of the manufacture, use or sale of
Licensed Products by it, its Affiliates, or Sublicensees and Licensee shall have
Licensor and the U.S. Government designated as additional insureds in said
policy, at no expense to Licensor. Licensee shall at the time of signing this
Agreement deliver to Licensor a Certificate of Insurance evidencing such
liability insurance policy and showing Licensor and the U.S. Government as
additional insureds. At each [***] of the effective date of this Agreement,
Licensor shall review the insurance coverage required by this Article and adjust
the coverage, as necessary, to maintain the face value of the coverage within
[***] of the stated [***] adjusted in constant dollars using the effective date
of this Agreement as the starting base for any such adjustment.
VI. SUCCESSOR RIGHTS
(a) The obligations of Licensee hereunder shall run in favor of the
successors, assigns or other legal representatives of Licensor.
10
<PAGE>
(b) Licensee's rights under this Agreement and the license herein granted
shall not be assigned for the benefit of creditors of Licensee, or otherwise,
nor shall such rights or license pass to any receiver of Licensee's assets,
except for a person or corporation succeeding to the entire business and good
will of Licensee with respect to the subject matter hereof as the result of a
sale, consolidation, reorganization or otherwise, provided such person or
corporation shall, without delay, accept in writing the provisions of this
Agreement and agree to become in all respects bound thereby in the place and
stead of Licensee. Such rights or license shall not be otherwise transferred or
sub-licensed without the written consent of Licensor.
VII. TERMINATION
(a) If Licensee shall default in the timely payment of the License Fee or
any portion of the royalties, or shall fail to provide biannual sales reports,
or shall make any materially false report, or shall commit any material breach
of any covenant herein contained, and shall fail to remedy any such default or
breach within thirty (30) days after written notice thereof by Licensor, then
Licensor may, at its option, terminate this License Agreement and all other
rights herein granted, by giving notice in writing to such effect.
(b) In the event that Licensee no longer commercially makes, uses or
markets Licensed Products, the Licensee can terminate this Agreement by
providing Licensor with written notice sixty (60) days in advance of
termination. Upon such termination by Licensee, Licensee will submit the report
and pay any royalties due as required in Article III, paragraph (g) hereof.
11
<PAGE>
(c) Unless previously terminated in accordance with the foregoing
provisions of this Article VII, this Agreement, the license granted to Licensee
under the aforesaid Patent Properties and all of the rights granted to Licensee
shall become effective as of the date set forth at the outset of this Agreement
and shall run to the full end of the term of the patent(s) that are a part of
said Patent Properties licensed hereunder, and shall thereupon terminate.
VIII. ADVERTISING
Neither the granting of the license or the rights herein granted nor the
acceptance of the license fee or royalty payments hereunder, shall constitute an
approval of, or acquiescence in, advertising or other business practices of
Licensee, its Affiliates or Sublicensees, nor an approval of or acquiescence in,
any use of the corporate name of Licensor, or any use of the name Brookhaven
National Laboratory, or any use of the names of any of the inventors on the
Patent Properties licensed hereunder, or any use of names of any agencies of the
U.S. Government, in connection with the manufacture, advertising, use or sale of
Licensee's products, or services, and Licensor hereby expressly reserves all
rights of actions with respect thereto.
Notwithstanding the above, Licensee may indicate that it is a Licensee of
Licensor of the Patent Properties.
IX. NOTICES
All notices provided for in this License Agreement shall be by letter sent
by certified mail and shall be directed by one party to the other at its
respective address, as follows, and shall be deemed to be given when mailed:
12
<PAGE>
Margaret C. Bogosian
Patent Counsel
Brookhaven National Laboratory
Building No. 902C
Upton, New York 11973
Progenitor, Inc.
1507 Chambers Road
Columbus, Ohio 43212-1566
Attn: President
Alternatively, such notices may be delivered to such other address or
addresses as either Licensor or Licensee, respectively, may later establish by
written notice to the other.
X. APPLICABLE LAW
This Agreement shall be construed, interpreted and applied in accordance
with the laws of the United States and of the State of New York.
XI. UNITED STATES GOVERNMENT EXPORT CONTROL REGULATIONS
(a) The Export Control Regulations of the U.S. Department of Commerce
prohibit, except under a special validated license, the exportation from the
United States of technical data relating to certain commodities listed in the
Regulations, unless the exporter has received certain written assurance from the
foreign importer. In order to facilitate the exchange of technical information
under this Agreement, Licensee hereby gives its assurance to Licensor that it
will comply with all of the requirements of the U.S. Export Control Regulations.
(b) Violation of the U.S. Export Control laws or regulations by Licensee,
its Affiliates, or Sublicensees shall constitute grounds for Licensor, in its
sole discretion, to
13
<PAGE>
terminate this license agreement. Failure to obtain any needed export control
license may result in criminal liability under United States law.
XII. INTEGRATION CLAUSE
This Agreement contains the entire and only agreement between the parties
respecting the subject matter hereof; and this Agreement supersedes all
pre-existing agreements between such parties respecting the commercial use of
the subject matter hereof; and any representation, promise or condition in
connection therewith not incorporated herein shall not be binding upon either
party. Notwithstanding the previous sentence, this Agreement does not modify or
affect any pre-existing or subsequent separate formal written agreement between
the parties hereto concerning the in-house, non-commercial research use of the
T7 autogene or the in-house, non-commercial research use of the T7 gene
expression system.
The parties hereto have duly executed this Agreement.
LICENSOR:
ASSOCIATED UNIVERSITIES, INC.
By: /s/ Mark Sakitt
------------------
Mark Sakitt
Title: Assistant Director - Planning & Policy
Date: 1/8/97
14
<PAGE>
LICENSEE:
PROGENITOR, INC.
By: /s/ Stephen J. Williams
-------------------------
Stephen J. Williams
Title: Vice President, Corporate Development
Date: 11/21/96
15
<PAGE>
ATTACHMENT A
STATEMENT OF CONSIDERATIONS
WAIVER REQUEST BY ASSOCIATED UNIVERSITIES INC. (AUI) OPERATOR OF
BROOKHAVEN NATIONAL LABORATORY (BNL) FOR AN IDENTIFIED INVENTION ENTITLED
"CLONING AND EXPRESSION OF THE GENE FOR BACTERIOPHAGE T7 RNA POLYMERASE"
DOE CASE NO. S-64,618 W(I)-86-027
Associated Universities' request is for a waiver of domestic rights to the above
identified invention for which a patent application has been filed by DOE. A
copy of AUI's waiver petition is attached hereto. As set forth in their
petition of May 13, 1985, Associated Universities has had ongoing negotiations
with several companies directed towards the exclusive licensing of this
invention in particular fields of use. These licenses are intended to take the
basic technology from the laboratory to practical application which will require
substantial private investment. The willingness of private companies to develop
the invention in a particular field is demonstrated by their investing in
examining the clones at their own expense by obtaining the test package made
available by BNL as set forth in the attached letter of February 12.
By the attached letter of April 7, 1986, AUI has set forth procedures it will
utilize to assure that each licensee will pursue development of this invention.
This will include providing in each license a certification of intent to develop
the invention. AUI has an interest in assuring development by the licensee
because of its own financial investment and its desire to receive royalties.
A patent application on this invention was filed on March 26, 1984. In order to
include new work covered by disclosure S-60,863 within the application, a
continuation-in-part application S-64,618 has been filed with the original case
abandoned. The waiver request as set forth in the attached letter of March 14,
1986 is for the invention claimed in the new application.
AUI has agreed that this waiver shall be subject to any terms and conditions
included within their contract in the future to implement Public Law 98-620.
This will make the rights obtained in this invention consistent with those to be
obtained in inventions under P.L. 98-620. Reimbursement to DOE for all costs
related to patent prosecution of the above invention shall be provided by AUI.
The subject matter of these inventions is not classified or sensitive under
section 148 of the Atomic Energy Act of 1954 (42 U.S.C. 2168) as amended, or
under Directive 5230.25, nor were the inventions made under the Uranium
Enrichment or Civilian High Level Nuclear Waste and Spent Fuels Programs.
Accordingly, in view of the statutory objectives to be obtained and the factors
to be considered under DOE statutory waiver policy, all of which have been
considered, it is
<PAGE>
concluded that a waiver to the invention identified above will best serve the
interest of the United States and general public and that the waiver should be
granted.
In view of the considerations and objectives for waiver set forth in DOE
PR 9-9.109-6, all of which have been considered, it is believed that a waiver to
the identified invention described above will best serve the United States and
general public and is therefore recommended that the waiver be granted.
/s/ Paul A. Gottlieb
-----------------------
Paul A. Gottlieb
Assistant Chief
Office of Patent Counsel
Date: 4-8-86
Based on the foregoing Statement of Considerations, it is determined that the
interest of the United States and the general public will best be served by a
waiver of patent rights in the invention described above and therefore the
waiver is granted.
CONCURRENCE: APPROVAL:
/s/ Antoinette Joseph /s/ Richard E. Constant
- ------------------------ --------------------------
Ms. Antoinette Joseph Richard E. Constant
Director of Office of Field Assistant General Counsel for Patents, HO
Operations Management
Office of Energy Research
Date: 4/17/86 Date: 4/17/86
2
<PAGE>
ATTACHMENT B
LICENSE, ASSIGNMENT AND AGREEMENT
Title: CLONING AND EXPRESSION OF THE GENE FOR BACTERIOPHAGE T7 RNA
POLYMERASE
Inventors: F. William Studier, et al.
Serial No.: 002,408 Filing Date: (U.S.): December 29, 1986
Contractor: Associated Universities
DOE Contract No.: DE-AC02-76CH00016
Foreign Applications filed in or intended to be filed at Contractor's expense in
(countries): None
(1) Whereas the Associated Universities, Inc. (herein called "AUI") has
requested a waiver of title by the Government of the United States of America,
and the Government has granted such waiver by the attached waiver instrument
dated April 17, 1986 with respect to the invention entitled "Cloning and
Expression of the Gene For Bacteriophage T7 RNA Polymerase" identified by DOE
Case No. S-64,618, on which U.S. Patent Application, Serial No. 002,408 was
filed on 12/29/86 and in which the Government has rights pursuant to Contract
No. DE-AC02-76CH00016; and
(2) Whereas such waiver provides that the waiver shall be subject to any
terms and conditions to be included in Contract No. DE-AC02-76CH00016 in the
future to implement Public Law 98-620;
(3) Whereas the United States Department of Energy has the right and
authority to assign and transfer to AUI the entire right, title, and interest in
and to said invention, patent(s) and patent application(s) as herein set forth;
(4) Whereas the Government desires to confirm, of record, certain license
and other rights in and to the said invention and any patent(s) or patent
application(s) thereon;
(5) Now, therefore, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Government of the United States,
as represented by the United States Department of Energy, hereby assigns and
transfers to AUI the entire right, title, and interest in and to said invention
patent(s) and patent application(s) retaining for the Government of the United
States of America and its agencies and instrumentalities a nonexclusive,
nontransferable, irrevocable paid-up license in each patent application filed in
any country on said invention and any resulting patent, including each patent
claiming the filing date priority of the aforesaid patent application, to
practice and have practiced, for or on behalf of the Government of the United
States of America any invention covered by such patent application or patent.
1
<PAGE>
(6) AUI hereby confirms the Government's rights in so far as they are set
forth in the aforesaid waiver instrument and as they are to be included in said
contract to implement Public Law 98-620, and agrees that any license,
assignment, or other conveyance made by AUI of a right or interest with respect
to said invention(s) or said patent application(s) or patent(s) shall be subject
thereto.
Approved and granted on behalf of the Government of the United States.
UNITED STATES DEPARTMENT OF ENERGY
By
--------------------------------
Title
-----------------------------
Date
------------------------------
Witness:
- -----------------------------------
Approved, accepted and consented to this 9th day of March, 1987.
(SEAL)
ATTEST: ASSOCIATED UNIVERSITIES, INC.
By
--------------------------------
Its Its
------------------------------- -------------------------------
2
<PAGE>
STATEMENT OF CONSIDERATIONS
WAIVER REQUEST BY ASSOCIATED UNIVERSITIES INC. (AUI) OPERATOR OF
BROOKHAVEN NATIONAL LABORATORY (BNL) FOR AN IDENTIFIED INVENTION ENTITLED
"CLONING AND EXPRESSION OF THE GENE FOR BACTERIOPHAGE T7 RNA POLYMERASE"
DOE CASE NO. S-64,618 W(I)-86-027
Associated Universities' request is for a waiver of domestic rights to the above
identified invention for which a patent application has been filed by DOE. A
copy of AUI's waiver petition is attached hereto. As set forth in their
petition of May 13, 1985, Associated Universities has had ongoing negotiations
with several companies directed towards the exclusive licensing of this
invention in particular fields of use. These licenses are intended to take the
basic technology from the laboratory to practical application which will require
substantial private investment. The willingness of private companies to develop
the invention in a particular field is demonstrated by their investing in
examining the clones at their own expense by obtaining the test package made
available by BNL as set forth in the attached letter of February 12.
By the attached letter of April 7, 1986, AUI has set forth procedures it will
utilize to assure that each licensee will pursue development of this invention.
This will include providing in each license a certification of intent to develop
the invention. AUI has an interest in assuring development by the licensee
because of its own financial investment and its desire to receive royalties.
A patent application on this invention was filed on March 26, 1984. In order to
include new work covered by disclosure S-60,863 within the application, a
continuation-in-part application S-64,618 has been filed with the original case
abandoned. The waiver request as set forth in the attached letter of March 14,
1986 is for the invention claimed in the new application.
AUI has agreed that this waiver shall be subject to any terms and conditions
included within their contract in the future to implement Public Law 98-620.
This will make the rights obtained in this invention consistent with those to be
obtained in inventions under P.L. 98-620. Reimbursement to DOE for all costs
related to patent prosecution of the above invention shall be provided by AUI.
The subject matter of these inventions is not classified or sensitive under
section 148 of the Atomic Energy Act of 1954 (42 U.S.C. 2168) as amended, or
under Directive 5230.25, nor were the inventions made under the Uranium
Enrichment or Civilian High Level Nuclear Waste and Spent Fuels Programs.
Accordingly, in view of the statutory objectives to be obtained and the factors
to be considered under DOE statutory waiver policy, all of which have been
considered, it is concluded that a waiver to the invention identified above will
best serve the interest of the United States and general public and that the
waiver should be granted.
<PAGE>
In view of the considerations and objectives for waiver set forth in DOE
PR 9-9.109-6, all of which have been considered, it is believed that a waiver to
the identified invention described above will best serve the United States and
general public and is therefore recommended that the waiver be granted.
/s/ Paul A. Gottlieb
-----------------------
Paul A. Gottlieb
Assistant Chief
Office of Patent Counsel
Date: 4-8-86
Based on the foregoing Statement of Considerations, it is determined that the
interest of the United States and the general public will best be served by a
waiver of patent rights in the invention described above and therefore the
waiver is granted.
CONCURRENCE: APPROVAL:
/s/ Antoinette Joseph /s/ Richard E. Constant
- ------------------------ --------------------------
Ms. Antoinette Joseph Richard E. Constant
Director of Office of Field Assistant General Counsel for Patents, HO
Operations Management
Office of Energy Research
Date: 4/17/86 Date: 4/17/86
2
<PAGE>
THE INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
AMENDED AND RESTATED
SPONSORED RESEARCH AND LICENSE AGREEMENT
THIS AGREEMENT, entered into as of the 1st day of May, 1995 by and
between Progenitor, Inc., 1507 Chambers Road, Columbus, Ohio 43212-1566
("Progenitor"), and Novo Nordisk A/S, c/o ZymoGenetics, Inc., 1201 Eastlake
Avenue East, Seattle, Washington 98102 ("Novo Nordisk"),, is amended and
restated in its entirety as stated herein as of the 21 day of February, 1997
(the "date of this Restated Agreement").
A. Progenitor has rights in technology related to: (a) a
hematopoietic receptor homologue referred to as Hu-B1.219, and (b) an activity
present in the supernatant of the murine yolk-sac-derived cell line YS-4,
referred to as Mu-YSDF-l. Novo Nordisk and its Affiliates have experience in
isolating and cloning ligands to receptors and cloning growth factors and in
developing products therefrom.
B. The parties have terminated their prior collaborative research
effort with respect to the Hu-B1.219 receptor, as stated in a letter from
Progenitor to Novo Nordisk dated March 17, 1996. This termination ended the
Ligand Research Phase and occurred prior to any "Ligand Stage 2" and,
accordingly, all references to Ligand Stage 2 have been omitted from this
Restated Agreement. The parties acknowledge that no "Ligand" was discovered or
developed, and no "Ligand" arose in or from such Ligand Research Phase, as the
Ligand to the Receptor had been separately discovered to be leptin, and this was
disclosed in publications of third parties. Nevertheless, certain work and
technologies were performed and developed during the "Ligand Research Phase,"
all of which relate solely to the Receptor.
C. Novo Nordisk and its Affiliates desire to obtain, and Progenitor
desires to grant to Novo Nordisk and its Affiliates, a license under
Progenitor's rights with respect to the YSDF-1 growth factor, on the terms and
conditions set forth in this Agreement, and the parties desire to collaborate in
a research effort as described in this Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
1. DEFINITIONS.
1.1 AFFILIATE of a party shall mean any entity that controls, is
controlled by or is under common control with such party or such party's
Affiliates.
1.2 FIELD shall mean any and all human therapeutic uses and all small
molecule drug design uses, but excluding all non-therapeutic uses (including but
not limited to diagnostic and cell-sorting uses).
1.3 GROWTH FACTOR shall mean any protein molecule which is identified
from the supernatant of the murine yolk-sac-derived cell line YS-4 or any human
homologe (Hu-YSDF-1) of Mu-YSDF-1, wherein such protein molecule is stimulatory
to any hematopoietic
1
<PAGE>
stem cell, hematopoietic blast cell or any hematopoietic progenitor cell found
in the bone marrow, including without limitation any erythrocyte progenitors,
megakaryocyte progenitors and/or macrophage progenitors, and any nucleic acid
molecule corresponding to such protein molecule, including but not limited to
cDNA, genomic DNA and RNA in both the sense and anti-sense orientations, any
homologous nucleic acid and/or protein sequence and any small molecular weight
mimetic, as well as any functional equivalents of any of the foregoing.
1.4 JOINT COMMITTEE shall mean the committee described in Section 2.4
of this Agreement.
1.5 JOINT TECHNOLOGY shall mean either the "Receptor Joint
Technology," which is, as to information, data, property and rights existing at
or prior to March 17, 1996, any partial or complete sequence information, data,
property and rights describing or covering the Receptor and any other
information, data, property and rights, as well as any inventions, whether
patentable or not, developed from the materials provided to Novo Nordisk by
Progenitor pursuant to this Agreement and arising from the research conducted
pursuant to this Agreement in the course of the Receptor Research Phase at or on
behalf of Novo Nordisk, Progenitor or any Affiliate of either, or the "Growth
Factor Joint Technology," which is any partial or complete sequence information,
data, property and rights describing or covering any Growth Factor and any other
information, data, property and rights, as well as any inventions, whether
patentable or not, developed from the materials provided to Novo Nordisk by
Progenitor pursuant to this Agreement and arising from the research conducted
pursuant to this Agreement in the course of the Growth Factor Research Phase at
or on behalf of Novo Nordisk, Progenitor or any Affiliate of either. Work done
by or on behalf of Novo Nordisk and/or its Affiliates pursuant to Section 2.2
shall not be considered to be done in the course of the Growth Factor Research
Phase. The parties agree that any and all Joint Technology shall be jointly
owned by Novo Nordisk and Progenitor.
1.6 LICENSED JOINT PATENT RIGHTS shall mean those Licensed Patent
Rights arising under patents and patent applications covering any Growth Factor
Joint Technology.
1.7 LICENSED PATENT RIGHTS shall mean all of Progenitor's rights in
and to Licensed Technology that is covered at any time by any patent or patent
application in any country worldwide, and all divisions, continuations,
continuations-in-part, reissues, reexaminations or extensions thereof and any
period of marketing exclusivity relating thereto. Licensed Patent Rights shall
also include, without limitation, Progenitor's rights arising under patents and
patent applications covering any Growth Factor Joint Technology.
1.8 LICENSED PRODUCT shall mean any material, the relevant
manufacture, use, sale, offer for sale or import of which by Novo Nordisk or an
Affiliate of Novo Nordisk would, in the absence of the licenses granted herein,
infringe one or more Valid Claims of Licensed Patent Rights, treating, for this
purpose only, all patents covering any Growth Factor Joint Technology as if they
were solely owned by Progenitor.
1.9 LICENSED TECHNOLOGY shall mean any and all material, information,
property and rights in or coming into the possession or control of Progenitor or
any Affiliate of
2
<PAGE>
Progenitor or any licensee or collaborator of any of them which has received the
YS-4 cell line or any rights therein from Progenitor or its Affiliate (other
than Novo Nordisk and its Affiliates) that is necessary or useful in the
discovery, isolation, development, production or use of any Growth Factor in the
Field, including without limitation the Growth Factor(s) themselves and the
materials or information referred to in Exhibit 2.1.1.
1.10 NET SALES shall mean the gross proceeds actually received by Novo
Nordisk or an Affiliate of Novo Nordisk, or a sublicensee of either, pursuant to
sales of a Licensed Product (except sales by Novo Nordisk or one of its
Affiliates or sublicensees to Novo Nordisk or one of its Affiliates or
sublicensees other than for end use), less, to the extent included in such gross
proceeds, sales and/or use taxes, income taxes withheld at the source, import
and/or export duties, outbound transportation and insurance, wholesaler and cash
discounts, sales commissions and incentives, returns and allowances, and third
party royalties.
1.11 NOVO NORDISK GROWTH FACTOR PATENT RIGHTS shall mean Novo
Nordisk's rights in and to Growth Factor Joint Technology arising from the
research conducted pursuant to this Agreement in the course of Stage 1 and
Stage 2 of the Growth Factor Research Phase that is covered at any time by any
patent or patent application in any country worldwide, and all divisions,
continuations, continuations-in-part, reissues, reexaminations or extensions
thereof, and any period of marketing exclusivity relating thereto.
1.12 NOVO NORDISK RECEPTOR PATENT RIGHTS shall mean Novo Nordisk's
rights in and to Receptor Joint Technology that arose from the research
conducted pursuant to this Agreement in the course of the Receptor Research
Phase that is covered at any time by any patent or patent application in any
country worldwide, and all divisions, conditions, continuations-in-part,
reissues, reexaminations or extensions thereof, and any period of marketing
exclusivity relating thereto.
1.13 NOVO NORDISK PATENT RIGHTS shall mean Novo Nordisk's rights in
and to Joint Technology that is covered at any time by any patent or patent
application in any country worldwide, and all divisions, continuations,
continuations-in-part, reissues, reexaminations or extensions thereof, and any
period of marketing exclusivity relating thereto. Novo Nordisk Patent Rights
shall include, without limitation, all Novo Nordisk Growth Factor Patent Rights
and all Novo Nordisk Receptor Patent Rights.
1.14 PROGENITOR GROWTH FACTOR NET SALES shall mean the gross proceeds
actually received by Progenitor or an Affiliate of Progenitor, or a sublicensee
of either, pursuant to sales of Progenitor Growth Factor Product (except sales
by Progenitor or one of its Affiliates or sublicensees to Progenitor or one of
its Affiliates or sublicensees other than for end use), less, to the extent
included in such gross proceeds, sales and/or use taxes, income taxes withheld
at the source, import and/or export duties, outbound transportation and
insurance, wholesaler and cash discounts, sales commissions and incentives,
returns and allowances, and third party royalties.
1.15 PROGENITOR GROWTH FACTOR PRODUCT shall mean any material, the
relevant manufacture, use, sale, offer for sale or import of which by Progenitor
or an Affiliate of Progenitor would, in the absence of the licenses granted in
Section 8.6 hereof, infringe one or
3
<PAGE>
more Valid Claims of Novo Nordisk Growth Factor Patent Rights, treating, for
this purpose only, all patents covering Growth Factor Joint Technology arising
from the research conducted pursuant to this Agreement in the course of Stage 1
and Stage 2 of the Growth Factor Research Phase as if they were owned solely by
Novo Nordisk.
1.16 PROGENITOR RECEPTOR PRODUCT shall mean any material, the relevant
manufacture, use, sale, offer for sale or import of which by Progenitor or an
Affiliate of Progenitor would, in the absence of the licenses granted in
Section 8.5 hereof, infringe one or more Valid Claims of Novo Nordisk Receptor
Patent Rights, treating, for this purpose only, all patents covering Receptor
Joint Technology arising from the research conducted pursuant to this Agreement
in the course of the Receptor Research Phase as if they were owned solely by
Novo Nordisk.
1.17 RECEPTOR shall mean the protein molecule [***] and any nucleic
acid molecule corresponding to such protein molecule, including, but not
limited to, cDNA, genomic DNA, and RNA in both the sense and anti-sense
orientations, any homologous nucleic acid and/or protein sequence and any
small molecular weight mimetic, as well as any functional equivalents of any
of the foregoing.
1.18 RESEARCH PHASE shall mean either the "Receptor Research Phase"
which was the initial phase of the term of this Agreement prior to March 17,
1996, when the parties were actively conducting research regarding the Receptor,
or the "Growth Factor Research Phase", which will be the initial phase of the
term of this Agreement, beginning with the date of this Restated Agreement, when
the parties are actively conducting research regarding Growth Factors. (The
Receptor Research Phase was formerly called the "Ligand Research Phase," but
because no Ligand resulted therefrom, the parties have renamed it herein.) The
Growth Factor Research Phase will consist of two stages, which are described in
Section 2.1 below. The Growth Factor Research Phase shall continue until
termination of the final stage thereof or the earlier termination of this
Agreement.
1.19 ROYALTIES shall mean all royalties payable by Novo Nordisk to
Progenitor hereunder.
1.20 TARGET GROWTH FACTOR shall mean a Growth Factor, as defined in
Section 1.3, and which is more specifically described in Exhibit 1.20.
1.21 VALID CLAIM shall mean: (i) a claim of an unexpired patent, or
one whose expiration date has been extended by law, so long as such claim shall
not have been held invalid in an unappealed or an unappealable decision, in a
court of competent jurisdiction; or (ii) any subsisting right of market
exclusivity granted on the basis of any of the claims described in clause (i).
4
<PAGE>
2. RESEARCH.
2.1 The Growth Factor Research Phase will consist of one or two
stages, as described below:
2.1.1 (i) During Stage 1 of the Growth Factor Research Phase,
Novo Nordisk and/or one or more of its Affiliates will attempt to clone and
sequence a Growth Factor, and more specifically a Target Growth Factor, pursuant
to the work plan attached as Exhibit 2.1.1. Also during such Stage 1, Progenitor
will promptly provide to Novo Nordisk any Licensed Technology in the form of any
Growth Factor (and any related material, information, property and rights) not
previously provided to Novo Nordisk by Progenitor, and which come into the
possession or control of Progenitor or its Affiliates. Progenitor will exert
all continuing reasonable efforts to obtain the agreement of its or its
Affiliates' licensees and collaborators who have received the YS-4 cell line or
any rights therein from Progenitor or its Affiliate similarly to provide any
such Growth Factor or Growth Factor-related Licensed Technology to Progenitor or
its Affiliate in support of Progenitor's compliance with this Agreement.
(ii) As required by Novo Nordisk, and at no additional
charge, Progenitor will provide Novo Nordisk with samples of the materials or
assistance described in Exhibit 2.1.l and will exert all commercially reasonable
efforts as may be required to enable Novo Nordisk to carry out Novo Nordisk's
obligations during Stage 1. During Stage 1, Novo Nordisk will limit its use of
all Growth Factors and any related tools and reagents provided to it by
Progenitor to carrying out the tasks contemplated by this Section 2.1. Novo
Nordisk will not screen any Growth Factor provided to Novo Nordisk by Progenitor
against any material, or commingle any such Growth Factor with any material,
that is the property of any person or entity other than Novo Nordisk, Progenitor
and/or any Affiliate of either such party, except with the prior approval of the
Joint Committee. Following the end of Stage 1, Novo Nordisk will not use any
Growth Factor provided to Novo Nordisk by Progenitor except in connection with
any Identified Growth Factor (as defined below).
(iii) The parties anticipate that Stage 1 will continue for
approximately [***]. Stage I will end upon the "Stage 1 Termination Date,"
which shall occur on the earliest of (A) the date Novo Nordisk notifies
Progenitor in writing that Novo Nordisk has successfully completed the tasks of
cloning and sequencing a Target Growth Factor that is Growth Factor Joint
Technology, (B) Progenitor notifies Novo Nordisk that a Target Growth Factor has
been cloned and sequenced that is Licensed Technology, or (C) Stage 1 ends as
described in clause (iv)(B) below.
(iv) If Novo Nordisk has not so cloned and sequenced a
Target Growth Factor within [***] after the date of this Restated Agreement, and
no Target Growth Factor has then been cloned and sequenced that is Licensed
Technology, Progenitor may deliver written notice to Novo Nordisk at any time
after expiration of such [***] period but before Novo Nordisk so clones and
sequences a Target Growth Factor demanding that Novo Nordisk complete such tasks
within 60 days after delivery of such notice. If Novo Nordisk does
5
<PAGE>
not complete such cloning and sequencing of a Target Growth Factor within such
60-day period, then:
(A) if no Growth Factor has been cloned and sequenced that
is Growth Factor Joint Technology or that is Licensed Technology prior to the
end of such 60-day period, Progenitor may terminate the Growth Factor Research
Phase and the license granted to Novo Nordisk pursuant to this Agreement with
respect to all Growth Factors by delivery of written notice to Novo Nordisk,
and, after such termination, Progenitor shall have the rights granted in
Section 8.6, or
(B) if Novo Nordisk notifies Progenitor in writing prior to
the end of such 60-day period that a Growth Factor other than a Target Growth
Factor has theretofore been cloned and sequenced that is Growth Factor Joint
Technology, or that Novo Nordisk will treat as such any Growth Factor(s) that
have been cloned and sequenced that is Licensed Technology (and as Progenitor
has so notified Novo Nordisk), Stage 1 will be deemed completed on the basis of
those Growth Factor(s) so cloned and sequenced, and the date of such notice
shall be the Stage 1 Termination Date. If Novo Nordisk does not give such
notice prior to the end of such 60-day period, clause (iv)(A) above shall apply.
(v) Each determination of whether or not Novo Nordisk has
successfully cloned and sequenced a Target Growth Factor that is Growth Factor
Joint Technology will be made by Novo Nordisk in its sole discretion, based on
the criteria set forth in Exhibit 1.20 having been met. Each determination of
whether or not Novo Nordisk has successfully cloned and sequenced a Growth
Factor other than a Target Growth Factor that is Growth Factor Joint Technology,
or by or for Progenitor that is Licensed Technology, will be made by Novo
Nordisk in its sole discretion, based on the definition in Section 1.3 and on
the recommendation, if any, of the Joint Committee.
(vi) Within 120 days after the Stage 1 Termination Date,
Novo Nordisk will notify Progenitor in writing (the "Identified Growth Factor
Notice") stating whether or not Novo Nordisk desires to go forward with Stage 2
of the Growth Factor Research Phase and what Growth Factor or Growth Factors, if
more than one, (or other result of the work conducted pursuant to Stage 1) Novo
Nordisk desires to go forward with (each is referred to herein as an "Identified
Growth Factor"). If Novo Nordisk states in the Identified Growth Factor Notice
that it does not desire to proceed to Stage 2 with any Growth Factor (or other
result of the work conducted pursuant to Stage 1), there will be no Stage 2 of
the Growth Factor Research Phase, and the licenses granted to Novo Nordisk
pursuant to this Agreement with respect to all Growth Factors will terminate as
of the date of delivery to Progenitor of such Identified Growth Factor Notice,
and, after such termination, Progenitor shall have the rights granted in
Section 8.6. If Novo Nordisk fails to give any Identified Growth Factor Notice,
this will, as of the 180th day after the Stage 1 Termination Date, be treated as
if Novo Nordisk had given an Identified Growth Factor Notice stating that it
does not desire to proceed to Stage 2 with any Growth Factor (or other result of
the work conducted pursuant to Stage 1), and the immediately preceding sentence
shall be applicable.
6
<PAGE>
2.1.2 Stage 2 will begin on the date Novo Nordisk gives
Progenitor an Identified Growth Factor Notice stating that Novo Nordisk desires
to proceed to Stage 2. During at least the initial twenty-five months of Stage 2
of the Growth Factor Research Phase, Progenitor will make itself and its
personnel available to perform the studies described in Exhibit 2.1.2 to Novo
Nordisk's satisfaction and at Novo Nordisk's option. Novo Nordisk may, in its
discretion, perform some or all of such studies itself or engage one or more
third parties to do some or all of such studies on terms to be agreed by Novo
Nordisk and such third party(ies), provided that no such third party terms shall
reduce or impair any of Progenitor's rights under this Agreement. If and to the
extent that Novo Nordisk engages Progenitor to perform one or more of such
studies, Novo Nordisk will be responsible for producing, at no additional
charge, all recombinant Identified Growth Factor protein reasonably required by
Progenitor to complete its tasks during Stage 2. Progenitor will limit its use
of such protein to performance of its obligations under this Agreement.
2.1.3 If Novo Nordisk engages Progenitor to perform all of
the Stage 2 studies described in Exhibit 2.1.2, Progenitor will devote no less
than the equivalent of [***] qualified scientists working full-time on
completion of its obligations throughout the 2nd through the 25th months of
Stage 2, and Novo Nordisk will pay Progenitor a quarterly research fee of U.S.
$500,000 during such portion of Stage 2. Each such research fee shall be due, in
such event, within 60 days after Novo Nordisk's receipt of an invoice therefor,
but no sooner than the tenth day of each January, April, July, and October. If
Novo Nordisk engages Progenitor to perform less than all of such Stage 2
studies, such personnel and research fee commitments shall be proportionately
reduced to equitably reflect the Progenitor work actually engaged and performed.
For purposes of this Agreement, the phrase "full-time" shall mean forty hours
per week, excluding holidays.
2.1.4 Stage 2 will continue until Novo Nordisk is satisfied
that the studies described in Exhibit 2.1.2 have been completed and the results
thereof have been analyzed and understood. Within 120 days after the end of
Stage 2, Novo Nordisk will notify Progenitor in writing (a "Development Notice")
stating whether or not Novo Nordisk desires to go forward with development of a
Licensed Product based on an Identified Growth Factor or any other result of the
work performed pursuant to Stage 2. If Novo Nordisk desires to go forward with
the development of more than one Licensed Product, it will give a separate
Development Notice for each such Licensed Product. If Novo Nordisk states in a
Development Notice that there is no Licensed Product the development of which it
desires to proceed with, the licenses granted to Novo Nordisk pursuant to this
Agreement with respect to all Growth Factors will terminate as of the date of
delivery to Progenitor of the Development Notice, and, after such termination,
Progenitor shall have the rights granted in Section 8.6. If Novo Nordisk fails
to give any Development Notice, this will, as of the 180th day after the end of
Stage 2, be treated as if Novo Nordisk had given a Development Notice stating
that there is no Licensed Product the development of which it desires to proceed
with, and the immediately preceding sentence shall be applicable.
2.2 If Novo Nordisk elects to go forward with development of any
Licensed Product, Novo Nordisk and/or one or more of its Affiliates will attempt
through commercially
7
<PAGE>
reasonable efforts to develop and commercialize such Licensed Product and to
secure all necessary regulatory approvals in connection therewith. Progenitor
acknowledges that Novo Nordisk may, but shall not be required to, begin such
activities before the end of the Growth Factor Research Phase. As between the
parties, all results of such efforts by or on behalf of Novo Nordisk and/or its
Affiliates, regardless of when such efforts are made, shall be owned by Novo
Nordisk, and shall not be deemed to be Joint Technology. Progenitor will exert
all commercially reasonable efforts to assist Novo Nordisk in this effort as and
when reasonably requested by Novo Nordisk. Novo Nordisk does not guarantee that
it will develop, produce or market a Licensed Product or that it will generate
Royalties for Progenitor.
2.3 As requested by Novo Nordisk, Progenitor will share with
personnel of Novo Nordisk, its Affiliates, and their sublicensees and
subcontractors, to the extent it can do so without violating any obligation of
Progenitor and/or any of its Affiliates to any third party (and Progenitor
warrants that any such obligations existing on the date of this Agreement that
would prohibit Progenitor from sharing pertinent materials or information with
Progenitor have been disclosed by Progenitor to Novo Nordisk in writing prior to
the date hereof), all materials and documents in Progenitor's possession, and
all Progenitor's knowledge and know-how, related to the Growth Factors, the
mammalian cells expressing any of the Growth Factors, methods of isolating any
of the foregoing, the Licensed Patent Rights and Licensed Technology, including
without limitation all such materials, documents, knowledge and know-how
obtained by Progenitor from any third party, subject to the applicable
confidentiality provisions contained in this Agreement. As requested by
Progenitor, Novo Nordisk will share with personnel of Progenitor, its
Affiliates, and their sublicensees and subcontractors, to the extent it can do
so without violating any obligation of Novo Nordisk and/or any of its Affiliates
to any third party, all materials and documents in Novo Nordisk's possession,
and all Novo Nordisk's knowledge and know-how, related to the Growth Factors,
the Licensed Patent Rights and Licensed Technology and acquired or developed by
Novo Nordisk and/or its Affiliates in the course of the Growth Factor Research
Phase.
2.4 The parties hereby establish the Joint Committee, to be comprised
of three representatives appointed by Novo Nordisk and three representatives
appointed by Progenitor. The initial representatives of Novo Nordisk to the
Joint Committee shall be Dr. Don Foster, Dr. Si Lok, and Dr. Luciana Simoncini
and the initial representatives of Progenitor to the Joint Committee shall be
Dr. H. Ralph Snodgrass, Dr. Douglass Given, and Dr. Stephen Williams. One
representative from each party shall be that party's project leader for this
Agreement. Each party will promptly notify the other party of any change in its
appointed representatives. In addition, if any designated representative of a
party is unable to attend any meeting of the Joint Committee, such party may
designate a replacement for such designated representative; provided, however,
that if all three designated representatives of either party are unable to
attend any meeting of the Joint Committee, such meeting shall be rescheduled.
2.4.1 Where the Joint Committee is specifically authorized by
this Agreement to make determinations, any such determinations shall be made by
majority vote, and each representative shall have one vote. During Stage 1 of
the Growth Factor Research Phase, the Joint Committee shall meet in person at
least twice each calendar year and by teleconference
8
<PAGE>
at least once each calendar quarter (excluding the calendar quarters in which it
meets in person). Following Stage 1 of the Growth Factor Research Phase, the
Joint Committee shall meet in person or by teleconference at least once each
calendar year. Each party shall bear its own expenses for its personnel
attending such meetings. The representatives of each party shall prepare and
distribute to both parties written minutes of each such meeting, both during and
after Stage 1 of the Growth Factor Research Phase, which minutes will, without
limitation, describe each recommendation and determination made by the Joint
Committee pursuant to Section 2.1. Such minutes of each meeting shall be
reviewed, amended if necessary and approved at the following meeting of the
Joint Committee, and copies of all such final minutes shall immediately be
distributed to both parties.
2.4.2 The purpose of the Joint Committee during Stage 1 of
the Growth Factor Research Phase shall be: (i) to advise the parties regarding
the overall strategy for Stage 1, as contemplated by this Agreement; (ii) to
coordinate the parties' activities hereunder; (iii) to review all results of
work done in Stage I of the Growth Factor Research Phase and suggest
modifications to the scope and goals of such work, if the Joint Committee deems
it necessary; and (iv) to undertake the responsibilities and make the
recommendations and determinations delegated to it pursuant to Section 2.1 of
this Agreement.
2.4.3 Outside the course of Stage 1 of the Growth Factor
Research Phase, the role of the Joint Committee shall be to advise Novo Nordisk
with respect to further development, testing, and commercialization of Licensed
Product, as requested by Novo Nordisk.
2.5 All rights in any partial or complete sequence information
describing or covering any Growth Factor, and other. technology, data,
information and inventions, whether or not patentable, developed from the
materials provided to Novo Nordisk by Progenitor pursuant to this Agreement and
arising from the research conducted by or on behalf of either or both parties
pursuant to this Agreement in the course of the Growth Factor Research
Phase shall be jointly owned by Novo Nordisk and Progenitor. Work performed by
or on behalf of Novo Nordisk and/or its Affiliates pursuant to Section 2.2 shall
not be considered to be conducted in the course of the Growth Factor Research
Phase. Each party will ensure that all third parties that conduct any portion
of the research to be conducted by such party or on such party's behalf pursuant
to this Agreement sign appropriate documents transferring their rights therein
to such party consistent with the terms of this Agreement.
2.6 Novo Nordisk affirms that it has prior to the date of this
Restated Agreement delivered to Progenitor all of the Receptor Joint Technology
arising from the research conducted pursuant to this Agreement in the course of
the Receptor Research Phase. Progenitor acknowledges that Novo Nordisk may, now
or in the future, conduct its own research and/or enter into one or more
agreements with third parties that involve identification and/or
characterization of putative growth factors in general. The parties recognize
that such efforts on behalf of Novo Nordisk may result in identification and/or
characterization of a molecule that is identical or substantially similar to a
Growth Factor. Alternatively, a molecule discovered by Novo Nordisk or obtained
by Novo Nordisk from a third party may be a portion of a Growth
9
<PAGE>
Factor, or a Growth Factor may be a portion of such a molecule. In such case,
Novo Nordisk will have the sole right to determine, in its discretion, which
molecule or molecules (whether a Growth Factor or a molecule discovered by Novo
Nordisk or obtained from a third party), if any, to develop into a product.
Except as set forth in Section 2.5, all technology, data, information and
inventions, whether or not patentable, arising from any research conducted by or
on behalf of Novo Nordisk shall, as between the parties, be the sole property of
Novo Nordisk. Novo Nordisk will not disclose to Progenitor any confidential
information received by Novo Nordisk from a third party, and, as set forth in
Section 5 below, Novo Nordisk will not disclose to any third party any
confidential information received by Novo Nordisk from Progenitor, nor use the
same except as contemplated herein and in such Section 5. Novo Nordisk will not
intentionally seek a collaboration with any third party with respect to any
molecule that is identical or substantially similar to a Growth Factor.
2.7 So long as Novo Nordisk is producing any Identified Growth
Factor, and so long as the Joint Committee determines that supply of such
materials by Novo Nordisk to Progenitor and its Affiliates pursuant to this
Section would not interfere with the development or commercialization of any
Licensed Product pursuant to this Agreement, Novo Nordisk will supply Progenitor
with reasonable quantities of such Identified Growth Factor, in any form
produced by Novo Nordisk for its own purposes, for use only by Progenitor and
its Affiliates solely in conducting research activities outside the Field.
Progenitor shall not provide any such materials to any third party without Novo
Nordisk's prior, written consent in each instance. Any such materials shall be
provided to Progenitor for no additional charge, except that Progenitor will
reimburse Novo Nordisk, as requested by Novo Nordisk, for any expenses incurred
in packaging such materials and shipping them to Progenitor. Any and all such
materials shall be provided by Novo Nordisk AS IS AND WITHOUT WARRANTY OF ANY
KIND.
3. LICENSE.
3.1 Subject to the terms of this Agreement, Progenitor hereby grants
Novo Nordisk and its Affiliates the worldwide license, with right to sublicense,
under the Licensed Patent Rights and Licensed Technology, to make, have made,
use, sell, have sold, offer for sale and import any products or processes for
use in the Field and to otherwise carry out its rights and obligations pursuant
to this Agreement, which license shall be nonexclusive except to the extent
provided in the following sentence. Subject to the terms of this Agreement,
Progenitor hereby grants Novo Nordisk and its Affiliates the worldwide, sole and
exclusive license, with right to sublicense, under the Licensed Patent Rights
and the Licensed Technology describing, covering, constituting, or otherwise
with respect to, any Growth Factor; the Licensed Joint Patent Rights; and the
Growth Factor Joint Technology, to make, have made, use, sell, have sold, offer
for sale and import products or processes for use in the Field and to otherwise
carry out its rights and obligations pursuant to this Agreement.
3.2 Subject to the terms of this Agreement, Novo Nordisk hereby
grants Progenitor and its Affiliates the worldwide, royalty-free, sole and
exclusive license, with right to sublicense, under Novo Nordisk's rights in any
Novo Nordisk Patent Rights, to make, have made, use, sell, have sold, offer for
sale and import products for use outside the Field. SUCH
10
<PAGE>
LICENSE IS GRANTED AS IS, WITHOUT WARRANTY OF ANY KIND, AND PROGENITOR AGREES TO
INDEMNIFY NOVO NORDISK FOR ANY LOSS, DAMAGE, LIABILITY AND EXPENSE, INCLUDING
WITHOUT LIMITATION ATTORNEYS' FEES AND COSTS OF DEFENSE, ARISING OUT OF ANY
EXERCISE OF SUCH RIGHTS, AND/OR OUT OF ANY USE OF MATERIALS PROVIDED BY NOVO
NORDISK TO PROGENITOR HEREUNDER, BY OR ON BEHALF OF PROGENITOR, ITS AFFILIATES
AND/OR ITS OR THEIR LICENSEES AND ASSIGNEES, EXCLUDING ANY SUCH LOSS, DAMAGE,
LIABILITY OR EXPENSE INTENTIONALLY CAUSED BY NOVO NORDISK AND/OR ITS AFFILIATES.
3.3 Except as to filings covering any of the technology exclusively
licensed to Novo Nordisk pursuant to the second sentence of Section 3.1,
Progenitor shall have the sole right to file and prosecute any patent
applications relating to the Licensed Patent Rights and the Licensed Technology,
and to maintain such patent rights. Except as provided in Section 8.5.1 and
8.6.2, Novo Nordisk shall have the sole right to file and prosecute any patent
applications giving rise, in whole or in part, to the Licensed Joint Patent
Rights or any other Licensed Patent Rights exclusively licensed to Novo Nordisk
pursuant to the second sentence of Section 3.1, and to maintain patents under
such Licensed Joint Patent Rights and such other Licensed Patent Rights. Each
party will provide the other party with copies of all such patent applications
and amendments filed by it and all other correspondence between it and the
patent authority of any country regarding such patent applications and
amendments. Each party shall bear all expenses of the patent, filing,
prosecution and maintenance activities undertaken by it. If at any time during
the term of this Agreement either party elects not to file or to abandon any
patent or patent application which such party has the right to file and
prosecute pursuant to this Section or Sections 8.5.1 or 8.6.2, such party shall
notify the other party of that decision at least 30 days prior to any deadline
for the filing of any such patent application or any response or the taking of
any other action necessary to maintain such patent or patent application in
existence. Thereafter, AS ITS SOLE AND EXCLUSIVE REMEDY THEREFOR, such other
party shall have the right to take over responsibility for the maintenance of
such patent or the prosecution of such patent application, at its sole expense
and discretion.
3.4 Except for the rights and licenses explicitly granted as stated
in this Agreement, each party retains all rights and ownership in and to its
technology and intellectual properties, and makes no grant of rights by
implication. It is understood that Progenitor retains the non-exclusive right,
without the right to sublicense, to make, have made, use and import the Licensed
Product and the Licensed Technology for research purposes.
4. FEES AND ROYALTIES.
4.1 If Novo Nordisk elects to go forward with development of one or
more Licensed Product(s) pursuant to Section 2.1.4, Novo Nordisk will pay
Progenitor a license fee of U.S. $2,000,000 within 90 days after the earlier of:
(i) the delivery to Progenitor of the first Development Notice stating that Novo
Nordisk desires to go forward with development of a Licensed Product; or
(ii) the commencement by or on behalf of Novo Nordisk of production of an active
ingredient for any Licensed Product under Good Manufacturing Practices (GMP).
11
<PAGE>
Nothing in this Agreement shall be construed as requiring Novo Nordisk to pay
more than one such license fee.
4.2 In addition, Novo Nordisk will make the following milestone
payments to Progenitor:
4.2.1 Novo Nordisk will pay Progenitor U.S. [***] within 60
days after the earlier of (i) the date that, pursuant to an Investigational New
Drug filing, if any, made by Novo Nordisk or an Affiliate of Novo Nordisk for a
Licensed Product, Novo Nordisk or an Affiliate of Novo Nordisk is permitted for
the first time by the FDA to proceed with clinical testing of a Licensed
Product; or (1i) the date of the first human administration of a Licensed
Product by or on behalf of Novo Nordisk or an Affiliate of Novo Nordisk in any
country. Regardless of the number of Licensed Products, nothing in this
Agreement shall be construed as requiring Novo Nordisk to pay any milestone
payment pursuant to this Section 4.2. 1 more than once.
4.2.2 Novo Nordisk will pay Progenitor U.S. [***] within 60
days after the first initiation of Phase III clinical trials (or the first
initiation of equivalent steps under the laws of any country other than the
United States) for use of each separate Licensed Product to treat any specific
indication.
4.2.3 Novo Nordisk will pay Progenitor U.S. [***] within 60
days after the fire Product License Application ("PLA"), New Drug Application
("NDA") or equivalent filing, if any, made by Novo Nordisk or an Affiliate of
Novo Nordisk for each separate Licensed Product is granted final approval by the
FDA.
4.2.4 Novo Nordisk will pay Progenitor U.S. [***] within 60
days after the first PLA-equivalent filing, if any, made by Novo Nordisk or an
Affiliate of Novo Nordisk for each separate Licensed Product is granted final
approval by the appropriate regulatory authority of Germany, or the United
Kingdom, or any European central drug agency with authority for regulating such
matters in Germany and/or the United Kingdom. One-half of each such payment
[***] shall be deemed to be an advance on Royalties payable on Net Sales in
Europe.
4.2.5 Novo Nordisk will pay Progenitor U.S. [***] within 60
days after the first time final approval is granted by the appropriate
regulatory authority for sale of each separate Licensed Product in Japan. The
entire amount of each such payment shall be deemed to be an advance on Royalties
payable on Net Sales in Japan.
4.2.6 Except as set forth in Sections 4.2.4 and 4.2.5 above,
the milestone payments shall be nonrefundable once paid and noncreditable
against Royalties.
4.3 In addition, Novo Nordisk shall pay to Progenitor a Royalty on
annual Net Sales with respect to each separate Licensed Product (which shall be
calculated separately for each "separate Licensed Product," as defined in
Section 4.4), at the following rates:
12
<PAGE>
4.3.1 Novo Nordisk shall pay Progenitor a Royalty of [***] of
Net Sales with respect to such Licensed Product up to and including $100,000,000
in any calendar year;
4.3.2 Novo Nordisk shall pay Progenitor a Royalty of [***] of
Net Sales with respect to such Licensed Product over $100,000,000 up to and
including $250,000,000 in any calendar year;
4.3.3 Novo Nordisk shall pay Progenitor a Royalty of [***]
of Net Sales with respect to such Licensed Product over $250,000,000 up to
and including $500,000,000 in any calendar year; and
4.3.4 Novo Nordisk shall pay Progenitor a Royalty of [***] of
Net Sales with respect to such Licensed Product over $500,000,000 in any
calendar year.
All such Royalties (after allowing credit for advances on Royalties paid
pursuant to Sections 4.2.4 and 4.2.5 and any reduction of royalties pursuant to
Section 4.5) shall be due and payable within 60 days after the end of each
calendar half year for Net Sales received in such calendar half year, as
follows: Within 60 days after the end of each first and third calendar for which
Royalties are payable hereunder (that is, the calendar quarters ending on March
31 and on September 30 of each such year), Novo Nordisk will submit to
Progenitor a report stating the approximate Net Sales and Royalties due for such
quarter, together with payment of such approximate amount. Within 60 days after
the end of each calendar half year for which Royalties are payable hereunder
(that is, the periods ending on June 30 and on December 31 of each such year),
Novo Nordisk will submit to Progenitor a statement of actual Net Sales for such
half year, separated as to Net Sales within Europe, Japan and all other
countries, and the calculation of Royalties payable hereunder with respect to
such Net Sales, together with payment of all remaining Royalties due with
respect to such Net Sales, as adjusted for any amount previously paid as
approximate Royalties with respect to such Net Sales.
4.4 Whether or not a Licensed Product is considered a "separate
Licensed Product" for purposes of making milestone payments pursuant to
Sections 4.2.2 through 4.2.5 and for purposes of calculating Royalties pursuant
to Section 4.3 will be determined on the basis of whether or not such Licensed
Product contains any active ingredient different than or in addition to the
active ingredient(s) in any other Licensed Product. That is, each Licensed
Product will be considered to be a "separate Licensed Product" for which any
additional milestone payment is due and for which Royalties are calculated
separately only if such Licensed Product contains one or more active ingredients
not also contained in any Licensed Product for which such milestone payment has
then already been made or for which Royalties have then already been calculated,
respectively.
4.5 If subsequent to the date of this Agreement, Novo Nordisk
determines in its sole discretion, which it will exercise in good faith, after
consulting with Progenitor with respect thereto, that royalties must be paid to
one or more third parties in order for Novo Nordisk to exercise the rights
granted in Section 3.1, each party will share such third-party royalty
13
<PAGE>
obligation as follows: the royalty payments by Novo Nordisk under Section 4.3
shall be reduced by one-half of such third party royalties, except that such
reduction shall be limited so that the royalty paid to Progenitor under
Section 4.3 is not reduced by more than one-half.
4.6 All payments to be made by Novo Nordisk to Progenitor under this
Agreement shall be made in United States dollars. Conversion of foreign
currency to United States dollars for payments of Royalties shall be made at the
average of the "buy" and "sell" conversion rates published in the Wall Street
Journal, Eastern edition, on the last business day of the calendar quarter to
which such payments relate.
4.7 If laws or regulations require withholding by Novo Nordisk of any
taxes imposed upon Progenitor on account of any Royalties paid under this
Agreement, such taxes will be deducted by Novo Nordisk as required by law from
such remittable Royalty and shall be paid by Novo Nordisk to the proper taxing
authority. Official receipt of such taxes shall be secured and sent to
Progenitor as evidence of such payment. The parties will use reasonable efforts
to ensure that any withholding taxes imposed are reduced as far as possible
under the provisions of the current or any future double taxation treaties or
agreements between foreign countries and the parties shall cooperate with each
other with respect thereto, with the appropriate party under the circumstances
providing the documentation required under such treaty or agreement to claim
benefits thereunder.
4.8 Novo Nordisk shall keep accurate records in sufficient detail to
enable the amounts of Royalties due to Progenitor to be determined. Upon
Progenitor's request and after reasonable prior notice, Novo Nordisk shall
permit an independent certified public accountant selected by Progenitor to have
access during ordinary business hours to Novo Nordisk's records necessary to
determine the correctness of any report or payment made with respect to any half
year and to obtain information as to the amount payable to Progenitor for any
such period. Such examination shall be at Progenitor's expense and shall not
take place more than once each year. These rights with respect to any year
shall terminate two (2) years after the end of such year. Information supplied
to Progenitor by such independent certified public accountant shall not include
any proprietary information not required to be disclosed to it under other
Sections of this Agreement. If such accounting firm concludes that additional
Royalties are owed for any half year, Progenitor will provide Novo Nordisk with
access to such accounting firm's work product with respect to such conclusion,
and Novo Nordisk shall have a period of up to 60 days after receipt of such work
product in which to review such findings. If, after such 60-day review period,
Novo Nordisk agrees with the conclusion reached by such accounting firm with
respect to such additional Royalties, Novo Nordisk shall promptly pay the
additional Royalties owed. If, after such 60-day review period, the parties are
not in agreement as to the amount of any additional Royalties owed, the parties
will negotiate in good faith for a period of 60 days with respect thereto. If
the parties are unable to agree on the amount of any such additional Royalties
owed after such 60-day period of negotiation, the parties will submit such
question to binding arbitration pursuant to Section 9.9.
14
<PAGE>
5. CONFIDENTIALITY.
5.1 Each party (the "Receiving Party") acknowledges and agrees that
the other party (the "Disclosing Party") may, in the course of performing this
Agreement and the parties' other dealings, disclose confidential information
belonging to the Disclosing Party in writing, orally or by demonstration or
sample. All such confidential information of the Disclosing Party shall be
maintained in confidence by the Receiving Party and will not be used by the
Receiving Party for any purpose except as authorized hereunder. The Receiving
Party shall exercise the same degree of care to preserve the confidentiality of
such information of the Disclosing Party as it uses to protect its own
confidential information of similar nature, and the Receiving Party shall
safeguard such information against disclosure to third parties, including
without limitation employees and persons working or consulting for the Receiving
Party. This obligation of confidentiality does not apply to information and
material that:
(i) were properly in the possession of the Receiving Party,
without any restriction on use or disclosure, prior to receipt from the
Disclosing Party, and such possession can be properly demonstrated by the
Receiving Party;
(ii) are in the public domain by public use, publication, general
knowledge or the like, or after disclosure hereunder become general or public
knowledge through no fault of the Receiving Party;
(iii) are property obtained by the Receiving Party from a third
party not under a confidentiality obligation;
(iv) are independently developed by or on behalf of the Receiving
Party without the assistance of the confidential information of the Disclosing
Party; or
(v) are required to be disclosed by order of any court or
governmental authority.
5.2 The Receiving Party shall not acquire any rights with respect to
confidential information disclosed to it by the Disclosing Party, except as
expressly set forth in this Agreement. The Receiving Party shall not disclose
any confidential information of the Disclosing Party to any third party or to
any employees, officers or directors of the Receiving Party except those who
reasonably require such disclosure for purposes of performing the Receiving
Party's obligations under this Agreement without the prior, written consent of
the Disclosing Party.
5.3 Upon termination of this Agreement, the Receiving Party shall
return to the Disclosing Party or destroy any tangible copies of any
confidential information provided to it hereunder by the Disclosing Party;
provided, however, that the Receiving Party may retain one (1) copy of
confidential information disclosed to it by the Disclosing Party in its
confidential legal files for archival purposes.
15
<PAGE>
5.4 Each party agrees that it will not make any public announcement
or other publication regarding any results of the research conducted hereunder
before a patent application has been filed with respect thereto, except upon the
prior written approval of the other party in each instance. In addition, each
party will refrain from issuing any press release or making any public
announcement or other publication regarding this Agreement or the relationship
of the parties hereto, except for announcements or disclosures which are
required by law to be made, without the prior, written consent of the other
party in each instance, which consent will not be unreasonably withheld.
Progenitor will also refrain from publishing or disclosing any information or
material that is in any way related to this Agreement or any Growth Factor or
Licensed Product without the prior, written consent of Novo Nordisk in each
instance, which consent will not be unreasonably withheld. Each party will
respond to any request for consent pursuant to this Section 5.4 as soon as
reasonably possible.
6. WARRANTIES AND INDEMNIFICATION.
6.1 Each party hereby represents and warrants that, as of the date of
this Restated Agreement:
6.1.1 It has full right and authority to enter into this
Agreement, has taken all corporate action necessary on its part to authorize the
execution and delivery of this Agreement and the performance of its obligations
hereunder, and its respective obligations under this Agreement are not subject
to prior commitments or obligations to any third party.
6.1.2 It had not, on or prior to March 17, 1996, entered into
any contract, agreement, partnership, joint venture or other arrangement,
whether oral or written, with any third party relating to the Receptor that is
inconsistent with the terms of this Agreement. It has not, whether before, on,
or after March 17, 1996, entered into any contract, agreement, partnership,
joint venture or other arrangement, whether oral or written, with any third
party relating to any Growth Factor, Licensed Product, Licensed Patent Rights or
Licensed Technology that is inconsistent with the terms of this Agreement.
6.2 Progenitor represents and warrants that, to the best of
Progenitor's knowledge, the technology developed by or on behalf of Progenitor
covered by the Licensed Patent Rights and Licensed Technology, as it exists on
the date of this Restated Agreement, has been made and developed without the use
of, or infringement upon, the secrets, patents or other proprietary rights or
interests of any third party and without the use of any equipment, supplies or
facilities of any third party that would create any right to any Licensed Patent
Rights, Licensed Technology or Joint Technology in such third party.
6.3 Novo Nordisk assumes all risks of damage or injury to persons and
to property arising out of any manufacture, use or sale of Licensed Product by
or on behalf of Novo Nordisk and its Affiliates and sublicensees, and shall hold
harmless and indemnify Progenitor and its Affiliates from and against any and
all personal injury, property damage, product liability or similar claims,
losses and liabilities arising out of such manufacture, use or sale of Licensed
Product, except for such claims, losses and liabilities caused by a breach of
Progenitor's representations under any other Section of this Agreement and
except as set forth in Section 6.4.
16
<PAGE>
Progenitor assumes all risks of damage or injury to persons and to property
arising out of any manufacture, use or sale of Progenitor Receptor Product
and/or Progenitor Growth Factor Product by or on behalf of Progenitor and its
Affiliates and sublicensees, and shall hold harmless and indemnify Novo Nordisk
and its Affiliates from and against any and all personal injury, property
damage, product liability or similar claims, losses and liabilities arising out
of such manufacture, use or sale of Progenitor Receptor Product and/or
Progenitor Growth Factor Product, except for such claims, losses and liabilities
caused by a breach of Novo Nordisk's representations under any other Section of
this Agreement and except as set forth in Section 6.4.
6.4 Nothing in this Agreement shall be construed as a warranty,
representation or undertaking with respect to the utility, efficacy,
nontoxicity, safety or appropriateness of using any Receptor, Growth Factor,
Licensed Product or any other product; provided, however, that Progenitor
represents and warrants that it has fully disclosed to Novo Nordisk, and
Progenitor covenants that it will fully disclose to Novo Nordisk, to the extent
it can do so without violating any obligation of Progenitor and/or any of its
Affiliates to any third party, all data and information in Progenitor's
possession, knowledge or control relating to the use, manufacture, utility,
efficacy, nontoxicity, safety and appropriateness of each Growth Factor and
Licensed Product. Otherwise, the physical quantities of materials provided by
each party to the other hereunder are provided "as is," and neither party makes
any representation or warranty of any kind, express or implied, written or oral,
including, without limitation, any representation or warranty with respect to
the value, adequacy, freedom from fault, or the quality, efficiency,
suitability, characteristics, usefulness, merchantability or fitness for a
particular purpose of, such physical quantities of materials, except as
otherwise set forth in this Agreement.
6.5 NOVO NORDISK ACKNOWLEDGES THAT, EXCEPT AS OTHERWISE SET FORTH IN
THIS AGREEMENT, THE LICENSES GRANTED BY PROGENITOR IN THIS AGREEMENT ARE GRANTED
WITHOUT WARRANTY OF ANY KIND.
6.6 Each party agrees to indemnify and hold the other party harmless
from and against any loss, damage, liability and expense, including, without
limitation, reasonable attorneys' fees and costs of defense, arising out of any
breach of such party's representations, warranties or covenants under this
Agreement. Progenitor agrees that Novo Nordisk shall have the right to set off
any such amounts owed to Novo Nordisk from fees and Royalties payable to
Progenitor hereunder.
7. INFRINGEMENT.
7.1 Except as set forth in Sections 8.5.2 and 8.6.3, in the event
that any of the Licensed Joint Patent Rights or any other Licensed Patent Rights
exclusively licensed to Novo Nordisk pursuant to the second sentence of
Section 3.1 are infringed or believed to be infringed by a third party, Novo
Nordisk may, at its option, elect to prosecute such infringement claims. If
Novo Nordisk elects to commence such an action, Novo Nordisk shall have control
of such action and shall have the right to settle or compromise the same, and
Progenitor agrees that it shall fully cooperate in every reasonable way with the
prosecution of such action. If Novo
17
<PAGE>
Nordisk elects to commence such an action, Progenitor hereby grants Novo Nordisk
the right to do so in Progenitor's name, and, if Progenitor is a legally
indispensable party to such action, Novo Nordisk may cause it to be joined as a
party in such action at Novo Nordisk's expense. Novo Nordisk shall notify
Progenitor of any action filed by Novo Nordisk pursuant to this Section and
shall keep Progenitor generally informed as to the progress of such action.
7.2 Recoveries or reimbursements from any such action shall first be
applied to reimburse Novo Nordisk for its expenses, costs and fees in connection
with the action. Any remaining recoveries or reimbursements, to the extent they
constitute the equivalent of, or damages or payments in lieu of, reasonable
royalties on the infringer's sales (but not in excess of the amount that would
be payable pursuant to Section 4.3), shall be shared with Progenitor in
accordance with Section 4.3, and otherwise shall be retained by Novo Nordisk as
its own property.
7.3 In the event that Novo Nordisk decides not to commence or
continue prosecution of an infringement of the Licensed Joint Patent Rights, or
of the other Licensed Patent Rights exclusively licensed to Novo Nordisk,
pursuant to the above paragraphs, Novo Nordisk will promptly give written notice
of such decision to Progenitor. Progenitor shall thereafter have the right, but
not the obligation, to commence or continue such action at its own expense,
controlling such action and retaining all recoveries therefrom. If Progenitor
elects to bring an action to prosecute the infringement of any Licensed Joint
Patent Rights or other exclusively-licensed Licensed Patent Rights under this
Section, Progenitor shall have sole control of such action and may settle or
compromise such action in its sole discretion, provided that no such settlement
or compromise conflicts with any provision of this Agreement. If Progenitor
elects to commence such an action, Novo Nordisk hereby grants Progenitor the
right to do so in Novo Nordisk's name, and, if Novo Nordisk is a legally
indispensable party to such action, Progenitor may cause it to be joined as a
party in such action at Progenitor's expense, and Novo Nordisk agrees to
cooperate fully in every reasonable way with the prosecution of such action.
8. TERM AND TERMINATION.
8.1 The term of this Agreement shall begin on the date set forth
above and shall continue until the earlier of the date of termination of Novo
Nordisk's licenses (whether in accordance with Section 8.2 or as provided in
Section 2.1, whereby the license to Progenitor under Section 8.6 will become
effective) or the date of termination of this-Agreement in accordance with
Section 8.3.
8.2 Novo Nordisk may terminate the licenses granted to it pursuant to
this Agreement with respect to all Growth Factors at any time during Stage 1 or
after the end of Stage 2 of the Growth Factor Research Phase upon delivery of 30
days' written notice to Progenitor, or at any time during Stage 2 upon delivery
of 90 days' written notice to Progenitor. Novo Nordisk may also terminate this
Agreement at any time before the commencement of Stage 2 or after termination of
the Growth Factor Research Phase upon delivery of 30 days'
18
<PAGE>
written notice to Progenitor, or at any other time upon delivery of 90 days'
written notice to Progenitor.
8.3 Either party may terminate this Agreement upon 120 days' written
notice to the other party at any time that such other party is in material
breach of any obligation hereunder if such breach is not cured within such 120-
day period. Neither party shall be deemed to be in material breach of this
Agreement during any period in which a good faith dispute between the parties
exists regarding performance or breach of its obligations hereunder.
8.4 The provisions in this Agreement regarding payment of fees and
Royalties accrued as of the date of termination, confidentiality,
indemnification and the revisions set forth in Sections 1, 6, 8.5, 8.6, 8.7,
8.8, and 9 shall survive any expiration or termination of this Agreement. In
addition, Novo Nordisk shall have a continuing, non-exclusive right to use the
Licensed Technology, but not to exercise any Licensed Patent Rights which are
then at any time covered by Valid Claims, following any termination or
expiration of this Agreement.
8.5 Novo Nordisk hereby grants to Progenitor and its Affiliates,
effective as of March 17, 1996, the worldwide, sole and exclusive, royalty-free
license, with right to sublicense, under Novo Nordisk's rights in Novo Nordisk
Receptor Patent Rights and Receptor Joint Technology arising from the research
conducted pursuant to this Agreement in the course of Receptor Stage 1 (which
had previously been called "Ligand Stage 1") to make, have made, use, sell, have
sold, offer for sale and import Progenitor Receptor Product for use in the
Field. The following terms shall apply until expiration of the last to expire
of any Valid Claim of the Novo Nordisk Receptor Patent Rights or until such
license is terminated by Novo Nordisk, which Novo Nordisk may do by delivery of
120 days' written notice to Progenitor at any time that Progenitor is in breach
of any obligation under this Section 8.5, if such breach is not cured within
such 120-day period:
8.5.1 Progenitor shall have the right, at its expense, to file,
prosecute and maintain patent applications and other patent filings in or with
respect to any Novo Nordisk Receptor Patent Rights and Receptor Joint
Technology.
8.5.2 In addition, Progenitor shall have the sole and exclusive
right, as between the parties, to institute suit against any third party for
infringement of Novo Nordisk Receptor Patent Rights and Receptor Joint
Technology.
(i) If Progenitor elects to commence such an action,
Progenitor shall have control of such action and shall have the right to settle
or compromise the same, and Novo Nordisk agrees that it shall fully cooperate in
every reasonable way with the prosecution of such action. If Progenitor elects
to commence such an action, Novo Nordisk hereby grants Progenitor the right to
do so in Novo Nordisk's name, and, if Novo Nordisk is a legally indispensable
party to such action, Progenitor may cause it to be joined as a party in such
action at Progenitor's expense. Progenitor shall notify Novo Nordisk of any
action filed by Progenitor pursuant to this Section and shall keep Novo Nordisk
generally informed as to the progress of such action.
19
<PAGE>
(ii) Recoveries or reimbursements from any such action shall
be retained by Progenitor as its own property.
(iii) In the event that Progenitor decides not to commence or
continue prosecution of an infringement of the Novo Nordisk Receptor Patent
Rights pursuant to the above paragraphs, Progenitor will promptly give written
notice of such decision to Novo Nordisk. Novo Nordisk shall thereafter have the
right, but not the obligation, to commence or continue such action at its own
expense, controlling such action and retaining all recoveries therefrom. If
Novo Nordisk elects to bring any such action, Novo Nordisk shall have sole
control of such action and may settle or compromise such action in its sole
discretion. If Novo Nordisk elects to commence such an action, Progenitor
hereby grants Novo Nordisk the right to do so in Progenitor's name, and, if
Progenitor is a legally indispensable party to such action, Novo Nordisk may
cause it to be joined as a party in such action at Novo Nordisk's expense, and
Progenitor agrees to cooperate fully in every reasonable way with the
prosecution of such action.
8.5.3 Novo Nordisk covenants that it will fully disclose to
Progenitor, to the extent it can do so without violating any obligation of Novo
Nordisk and/or any of its Affiliates to any third party, all data and
information in Novo Nordisk's possession, knowledge or control relating to the
use, manufacture, utility, efficacy, nontoxicity, safety and appropriateness of
the Receptor and each Progenitor Receptor Product.
8.6 Effective only upon any termination of the licenses granted
pursuant to this Agreement with respect to all Growth Factors by Novo Nordisk
pursuant to Section 8.2 or by Progenitor pursuant to Section 2. 1. 1 of this
Restated Agreement, or by Progenitor pursuant to Section 8.3, which termination
becomes effective prior to the payment by Novo Nordisk of the license fee
pursuant to Section 4. 1, Novo Nordisk hereby grants to Progenitor and its
Affiliates the worldwide, sole and exclusive license, with right to sublicense,
under Novo Nordisk's rights in Novo Nordisk Growth Factor Patent Rights and
Growth Factor Joint Technology arising from the research conducted pursuant to
this Agreement in the course of the Growth Factor Research Phase to make, have
made, use, sell, have sold, offer for sale and import Progenitor Growth Factor
Product for use in the Field. Novo Nordisk will deliver to Progenitor, within
90 days after any such termination, all materials constituting Growth Factor
Joint Technology and copies of all data in Novo Nordisk's possession regarding
the Growth Factor Joint Technology. If such a termination occurs, the following
terms shall apply until expiration of the last to expire of any Valid Claim of
the Novo Nordisk Growth Factor Patent Rights or until such license is terminated
by Novo Nordisk, which Novo Nordisk may do by delivery of 120 days' written
notice to Progenitor at any time that Progenitor is in breach of any obligation
under this Section 8.6, if such breach is not cured within such 120-day period:
8.6.1 Progenitor shall pay Novo Nordisk a royalty on annual
Progenitor Growth Factor Net Sales with respect to each separate Progenitor
Growth Factor Product, at the following rates:
20
<PAGE>
(i) Progenitor shall pay Novo Nordisk a royalty of [***] of
Progenitor Growth Factor Net Sales with respect to such Progenitor Growth Factor
Product up to and including $100,000,000 in any calendar year;
(ii) Progenitor shall pay Novo Nordisk a royalty of [***] of
Progenitor Growth Factor Net Sales with respect to such Progenitor Growth Factor
Product over $100,000,000 up to and including $250,000,000 in any calendar year;
(iii) Progenitor shall pay Novo Nordisk a royalty of [***] of
Progenitor Growth Factor Net Sales with respect to such Progenitor Growth Factor
Product over $250,000,000 up to and including $500,000,000 in any calendar year;
and
(iv) Progenitor shall pay Novo Nordisk a royalty of [***] of
Progenitor Growth Factor Net Sales with respect to such Progenitor Growth Factor
Product over $500,000,000 in any calendar year.
Whether or not a product is considered a "separate Progenitor Growth Factor
Product" for the purpose of calculation of the applicable royalty rate will be
determined on the basis of whether or not such Progenitor Growth Factor Product
contains any active ingredient different from or in addition to the active
ingredient(s) in any other Progenitor Growth Factor Product (in which case such
product will be treated as a separate Progenitor Growth Factor Product for such
purpose). All such royalties shall be due and payable within 60 days after the
end of each calendar half year for Progenitor Growth Factor Net Sales received
in the preceding calendar half year, as follows: Within 60 days after the end of
each first and third calendar quarter for which royalties are payable by
Progenitor under this Section 8.6 (that is, the calendar quarters ending on
March 31 and on September 30 of each such year), Progenitor win submit to Novo
Nordisk a report stating the approximate Progenitor Growth Factor Net Sales and
royalties due for such quarter, together with payment of such approximate
amount. Within 60 days after the end of each calendar half year during which
royalties are payable by Progenitor under this Section 8.6 (that is, the periods
ending on June 30 and on December 31 of each such year), Progenitor will submit
to Novo Nordisk a written statement of Progenitor Growth Factor Net Sales for
the half year, separated as to Progenitor Growth Factor Net Sales within Europe,
Japan and an other countries, and the calculation of royalties payable hereunder
with respect to such Progenitor Growth Factor Net Sales, together with payment
of all remaining royalties due with respect to such Progenitor Growth Factor Net
Sales, as adjusted for any amount previously paid as approximate royalties with
respect to such Progenitor Growth Factor Net Sales. Progenitor shall keep, and
shall cause its sublicensees to keep, complete, true and accurate records for
the purpose of showing the derivation of all royalties payable to Novo Nordisk
under this Agreement. During any period in which such royalties are payable by
Progenitor to Novo Nordisk hereunder, the provisions of Sections 4.6, 4.7, and
4.8 above, regarding conversion of foreign currency, withholding and payment of
taxes, and retention and inspection of records, shall apply to Novo Nordisk as
licensor and Progenitor as licensee just as applicable under those Sections to
Progenitor as licensor and Novo Nordisk as licensee.
21
<PAGE>
8.6.2 Following any termination giving rise to the rights
granted in this Section 8.6, Progenitor shall have the right, at its expense, to
file, prosecute and maintain patent applications and other patent filings in or
with respect to any Novo Nordisk Growth Factor Patent Rights and Growth Factor
Joint Technology.
8.6.3 In addition, following any termination giving rise to
the rights granted in this Section 8.6, Progenitor shall have the sole and
exclusive right, as between the parties, to institute suit against any third
party for infringement of Novo Nordisk Growth Factor Patent Rights and Growth
Factor Joint Technology.
(i) If Progenitor elects to commence such an action,
Progenitor shall have control of such action and shall have the right to settle
or compromise the same, and Novo Nordisk agrees that it shall fully cooperate in
every reasonable way with the prosecution of such action. If Progenitor elects
to commence such an action, Novo Nordisk hereby grants Progenitor the right to
do so in Novo Nordisk's name, and, if Novo Nordisk is a legally indispensable
party to such action, Progenitor may cause it to be joined as a party in such
action at Progenitor's expense. Progenitor shall notify Novo Nordisk of any
action filed by Progenitor pursuant to this Section and shall keep Novo Nordisk
generally informed as to the progress of such action.
(ii) Recoveries or reimbursements from any such action shall
first be applied to reimburse Progenitor for its expenses, costs and fees in
connection with the action. Any remaining recoveries or reimbursements, to the
extent they constitute the equivalent of, or damages or payments in lieu of,
reasonable royalties on the infringer's sales (but not in excess of the amount
that would be payable pursuant to Section 8.6.1), shall be shared with Novo
Nordisk in accordance with Section 8.6.1, and otherwise shall be retained by
Progenitor as its own Property.
(iii) In the event that Progenitor decides not to commence or
continue prosecution of an infringement of the Novo Nordisk Growth Factor Patent
Rights pursuant to the above paragraphs, Progenitor will promptly give written
notice of such decision to Novo Nordisk. Novo Nordisk shall thereafter have the
right, but not the obligation, to commence or continue such action at its own
expense, controlling such action and retaining all recoveries therefrom. If
Novo Nordisk elects to bring any such action, Novo Nordisk shall have sole
control of such action and may settle or compromise such action in its sole
discretion. If Novo Nordisk elects to commence such an action, Progenitor
hereby grants Novo Nordisk the right to do so in Progenitor's name, and, if
Progenitor is a legally indispensable party to such action, Novo Nordisk may
cause it to be joined as a party in such action at Novo Nordisk's expense, and
Progenitor agrees to cooperate fully in every reasonable way with the
prosecution of such action.
8.6.4 Following any termination giving rise to the rights
granted in this Section 8.6, Novo Nordisk covenants that it will fully disclose
to Progenitor, to the extent it can do so without violating any obligation of
Novo Nordisk and/or any of its Affiliates to any third party, all data and
information in Novo Nordisk's possession, knowledge or control relating to
22
<PAGE>
the use, manufacture, utility, efficacy, nontoxicity, safety and appropriateness
of each Growth Factor and Progenitor Growth Factor Product.
8.7 Upon Progenitor's request, Novo Nordisk will negotiate with
Progenitor in good faith for a reasonable period of time following any
termination of the licenses granted hereunder and/or of this Agreement, which
termination is effective after the payment by Novo Nordisk of the license fee
pursuant to Section 4. 1, regarding a license to Progenitor of rights under
applicable Novo Nordisk Growth Factor Patent Rights and Growth Factor Joint
Technology, but the parties acknowledge that no agreement for a grant of any
such license is included in the terms of this Agreement, and Novo Nordisk shall
not be required to grant any such license nor to do so on any particular terms.
8.8 PROGENITOR ACKNOWLEDGES THAT THE LICENSES GRANTED IN SECTIONS 8.5
AND 8.6 ARE GRANTED AS IS, WITHOUT WARRANTY OF ANY KIND, AND PROGENITOR AGREES
TO INDEMNIFY NOVO NORDISK FOR ANY LOSS DAMAGE, LIABILITY AND EXPENSE, INCLUDING
WITHOUT LIMITATION ATTORNEYS' FEES AND COSTS OF DEFENSE, ARISING OUT OF ANY
EXERCISE OF SUCH RIGHTS BY OR ON BEHALF OF PROGENITOR, ITS AFFILIATES AND/OR ANY
LICENSEE OR ASSIGNEE OF PROGENITOR OR AN AFFILIATE OF PROGENITOR.
9. MISCELLANEOUS.
9.1 Novo Nordisk shall have complete control, as between the parties,
over the development, manufacture, testing, pricing, marketing, sale and
distribution of any Licensed Product. All trademark and service mark rights and
all goodwill associated with any trademarks and service marks used by Novo
Nordisk and its Affiliates and sublicensees in connection with Licensed Product
shall, as among the parties, belong solely to Novo Nordisk.
9.2 This Restated Agreement constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral, among
the parties hereto with respect to the subject matter hereof, including without
limitation the initial form of this Agreement.
9.3 Neither party shall assign or transfer any of its rights
hereunder, or delegate any of its obligations hereunder, to any third party
(other than an Affiliate of such party) without the prior, written consent of
the other party in each instance; provided, however, that (i) either party may
assign all its rights and obligations hereunder to a third party that acquires
all assets of such party associated with the collaboration established by this
Agreement, so long as such assigning party provides the other party with notice
of such assignment at least 30 days before it becomes effective; and (ii) Novo
Nordisk may delegate any duty arising under this Agreement to any third party so
long as Novo Nordisk remains ultimately responsible, as between the parties, for
performance of such duty. This Agreement shall bind and benefit the parties
hereto and their permitted successors and assigns.
9.4 All notices, requests, reports and other communication provided
for or permitted hereunder shall be given in writing and shall be hand delivered
or sent by facsimile,
23
<PAGE>
reputable courier or by registered or certified mail, postage prepaid, return
receipt requested, to the address set forth on the first page of this Agreement,
or to such other address as a party may inform the others of in writing.
Notices will be deemed delivered on the earliest of transmission by facsimile,
actual receipt or ten days after mailing as set forth herein.
9.5 Any terms of this Agreement may be amended, modified or waived
only in a writing signed by all the parties hereto.
9.6 If any provisions of this Agreement shall be held invalid,
illegal or unenforceable, such provision shall be enforced to the maximum extent
permitted by law and the parties' fundamental intentions hereunder, and the
remaining provisions shall not be affected or impaired.
9.7 Nothing herein contained shall constitute this a joint venture
agreement or constitute either party as the partner, principal or agent of the
other, this being an Agreement between independent contracting parties. Neither
party shall have any authority to bind the other party in any respect
whatsoever.
9.8 This Agreement shall be governed by, and construed and enforced
in accordance with, the laws of the State of Washington, U.S.A., without regard
to its conflict of law rules.
9.9 Any dispute arising between the parties relating to, arising out
of or in any way connected with this Agreement or any term or condition hereof,
or the performance by either party of its obligations hereunder, whether before
or after termination of the Agreement, shall be finally resolved by binding
arbitration. Whenever a party shall decide to institute arbitration proceedings,
it shall give written notice to that effect to the other party. The party
giving such notice shall refrain from instituting the arbitration proceedings
for a period of sixty (60) days following such notice. During such 60-day
period, the parties shall make good faith efforts to amicably resolve the
dispute without arbitration. Any arbitration hereunder shall be conducted under
the Commercial Arbitration Rules of the American Arbitration Association
("AAA"). Each such arbitration shall be conducted by a panel of three
arbitrators: one arbitrator shall be appointed by each of Progenitor and Novo
Nordisk and the third shall be appointed by such two arbitrators, or, if such
two arbitrators are unable to agree on the third arbitrator within a period of
30 days after appointment of the second of them, such third arbitrator shall be
appointed by the AAA. Any such arbitration shall be held in New York, New York.
The arbitrators shall have the authority to grant specific performance and to
allocate between the parties the costs of arbitration in such equitable manner
as they determine. Judgment upon the award so rendered may be entered in any
court having jurisdiction, or application may be made to such court for judicial
acceptance of any award and an order of enforcement, as the case may be. In no
event shall a demand for arbitration be made after the date when institution of
a legal or equitable proceeding based on such claim, dispute or other matter in
question would be barred by the applicable statute of limitations.
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and acknowledge this Agreement as of the day and
year first above written.
Progenitor, Inc. Novo Nordisk A/S
By /s/ Stephen Williams By /s/ Claus Kuhl
-------------------------------- ----------------------------------
Its Dr. Stephen Williams Dr. Claus Kuhl, Corporate Vice
-------------------------------- President of Healthcare Discovery
Vice President of and Development
Corporate Development
[Add appropriate notary blocks for Novo Nordisk and Progenitor.]
25
<PAGE>
LIST OF EXHIBITS
EXHIBIT 1.20 - Description of Target Growth Factor
EXHIBIT 2.1.1 - Work plan for Stage 1
EXHIBIT 2.1.2 - Stage 2 studies
<PAGE>
EXHIBIT 1.20
DESCRIPTION OF TARGET GROWTH FACTOR
[***]
[***]
[***]
[***]
[***]
<PAGE>
EXHIBIT 2.1.1
WORK PLAN FOR STAGE 1
SUMMARY PLAN:
[***]
1
<PAGE>
[***]
2
<PAGE>
EXHIBIT 2.1.2
STAGE 2 STUDIES
[***]
1
<PAGE>
[***]
2
<PAGE>
ACKNOWLEDGMENT
State of Washington
County of King
On February 21, 1997 before me, Jaley D.Stone, Notary Public, personally
appeared Claus Kuhl, proved to me on the basis of satisfactory evidence to be
the person whose name is subscribed to the within instrument and acknowledged to
me that he executed the same in his authorized capacity, and that by his
signature on the instrument the person or the entity upon behalf of which the
person acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Jaley D. Stone
----------------------------------
Jaley D. Stone, Notary Public
<PAGE>
ACKNOWLEDGMENT
State of California
County of San Francisco
On February 18, 1997 before me, Cherrie L. Mahmoud, Notary Public,
personally appeared Stephen J. Williams, proved to me on the basis of
satisfactory evidence to be the person whose name is subscribed to the within
instrument and acknowledged to me that he executed the same in his authorized
capacity, and that by his signature on the instrument the person or the entity
upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
/s/ Cherrie L. Mahmoud
---------------------------------------
Cherrie L. Mahmoud, Notary Public
<PAGE>
PROGENITOR, INC.
1997 STOCK OPTION PLAN
ADOPTED March 7, 1997
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company and
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall, in
the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either Incentive Stock Options or Nonqualified Stock Options. All Options shall
be separately designated Incentive Stock Options or Nonqualified Stock Options
at the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.
2. DEFINITIONS
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means Progenitor, Inc., a Delaware corporation.
(f) "CONSULTANT" means any person, including an advisor or a member of the
Company's Scientific Advisory Board, engaged by the Company or an Affiliate to
render consulting services and who is compensated for such services, provided
that the term
1
<PAGE>
"Consultant" shall not include Directors who are paid only a director's fee by
the Company or who are not compensated by the Company for their services as
Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave, or any other personal leave; or (ii) transfers between
locations of the Company or between the Company, Affiliates, or their
successors.
(h) "DIRECTOR" means a member of the Board.
(i) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(k) "FAIR MARKET VALUE" means, as of any date, the value of the common
stock of the Company determined as follows and in each case in a manner
consistent with Section 260.140.50 of Title 10 of the California Code of
Regulations:
(1) If the common stock is listed on any established stock exchange
or a national market system, including without limitation the NASDAQ National
Market System ("NASDAQ"), the Fair Market Value of a share of common stock shall
be the closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of determination, as reported in the Wall Street Journal or such
other source as the Board deems reliable;
(2) If the common stock is quoted on the NASDAQ System (but not on
the National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a share of common stock shall be the mean between the high bid and high asked
prices for the common stock on the last market trading day prior to the day of
determination, as reported in the Wall Street Journal or such other source as
the Board deems reliable;
(3) In the absence of an established market for the common stock, the
Fair Market Value shall be determined in good faith by the Board.
(l) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
2
<PAGE>
(m) "NONQUALIFIED STOCK OPTION" means an Option not intended to qualify as
an Incentive Stock Option.
(n) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "OPTION" means a stock option granted pursuant to the Plan.
(p) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(q) "OPTIONED STOCK" means the common stock of the Company subject to an
Option.
(r) "OPTIONEE" means an Employee, Director, or Consultant who holds an
outstanding Option.
(s) "PLAN" means this 1997 Stock Option Plan.
(t) "RULE 16B-3" means Rule l6b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(u) "SECURITIES ACT" means the Securities Act of 1933, as amended.
3. ADMINISTRATION
(a) The Plan shall be administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the limitations
of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Options; when and how each Option shall be
granted; whether an Option will be an Incentive Stock Option or a Nonqualified
Stock Option; the provisions of each Option granted (which need not be
identical), including the time or times such Option may be exercised in whole or
in part; and the number of shares for which an Option shall be granted to each
such Person.
(2) To construe and interpret the Plan and Options granted under it,
and to establish, amend and revoke rules and regulations for its administration.
The Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any Option Agreement, in a manner and to the
extent it shall deem necessary or expedient to make the Plan fully effective.
3
<PAGE>
(3) To amend the Plan as provided in Section 11.
(c) The Board may delegate administration of the Plan to a committee
constituted in such a manner as to satisfy applicable laws. If administration
is delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board (and
references in this Plan to the Board shall thereafter be to the Committee),
subject, however, to such resolutions, not inconsistent with the provisions of
the Plan, as may be adopted from time to time by the Board. The Board may
abolish the Committee at any time and revest in the Board the administration of
the Plan.
4. SHARES SUBJECT TO THE PLAN
(a) Subject to the provisions of Section 10 relating to adjustments upon
changes in stock, the stock that may be sold pursuant to Options shall not
exceed in the aggregate Five Hundred Fifty Thousand (550,000) shares of the
Company's common stock. If any Option shall for any reason expire or
otherwise terminate without having been exercised in full, the stock not
purchased under such Option shall revert to and again become available for
issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY
(a) Incentive Stock Options may be granted only to Employees.
Nonqualified Stock Options may be granted only to Employees, Directors or
Consultants.
(b) No person shall be eligible for the grant of an Option if, at the time
of grant, such person owns (or is deemed to own pursuant to Section 424(d) of
the Code) stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or of any of its Affiliates
(a "ten percent (10%) stockholder") unless the exercise price of such Option is
at least one hundred ten percent (110%) of the Fair Market Value of such stock
at the date of grant and the Option is not exercisable after the expiration of
five (5) years from the date of grant.
6. OPTION PROVISIONS
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten (10)
years from the date it was granted.
4
<PAGE>
(b) PRICE. The exercise price of each Incentive Stock Option shall be not
less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. The exercise price of
each Nonqualified Stock Option shall be not less than eighty-five percent (85%)
of the Fair Market Value of the stock subject to the Option on the date the
Option is granted.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the option is exercised, or (ii) at
the discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option (but, in the case of an Incentive Stock Option, only at
the time of grant), (A) by delivery to the Company of other common stock of the
Company, (B) according to a deferred payment or other arrangement (which may
include, without limiting the generality of the foregoing, the use of other
common stock of the Company) with the person to whom the Option is granted or to
whom the Option is transferred pursuant to subsection 6(d), or (C) in any other
form of legal consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be payable
at least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions, of the
Code, of any amounts other than amounts stated to be interest under the deferred
payment arrangement.
(d) TRANSFERABILITY. An Option shall not be transferable except by will
or by the laws of descent and distribution, and shall be exercisable during the
lifetime of the person to whom the Option is granted only by such person.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The vesting provisions of individual Options may vary but in each
case will provide for vesting of at least twenty percent (20%) of the total
number of shares subject to the Option per year. However, in the case of an
Option granted to an Officer, Director or Consultant, the Option Agreement may
provide that the Option may become fully exercisable, subject to reasonable
conditions such as continued employment, at any time or during any period
established in the Option Agreement. During the remainder of the term of the
Option (if its term extends beyond the end of the installment periods), the
option may be exercised from time to time with respect to any shares then
remaining subject to the Option. The provisions of this subsection 6(e) are
subject to any Option provisions governing the minimum number of shares as to
which an Option may be exercised.
5
<PAGE>
(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or
any person to whom an Option is transferred under subsection 6(d), as a
condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the Option; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the Option
for such person's own account and not with any present intention of selling or
otherwise distributing the stock. These requirements, and any assurances given
pursuant to such requirements, shall be inoperative if (i) the issuance of the
shares upon the exercise of the Option has been registered under a then
currently effective registration statement under the Securities Act, or (ii) as
to any particular requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT.
In the event an Optionee's Continuous Status as an Employee, Director or
Consultant terminates (other than upon the Optionee's death or disability), the
Optionee may exercise his or her Option (to the extent that the Optionee was
entitled to exercise it at the date of termination) but only within such period
of time ending on the earlier of (i) the date three (3) months after the
termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer or shorter period, which in no event shall be less
than thirty (30) days, specified in the Option Agreement), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
after termination, the Optionee does not exercise his or her Option within the
time specified in the Option Agreement, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period, which in no
event shall be less than six (6) months, specified in the Option Agreement), or
(ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, at the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified
6
<PAGE>
herein, the Option shall terminate, and the shares covered by such Option shall
revert to and again become available for issuance under the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within three (3) months of the termination of, the Optionee's Continuous
Status as an Employee, Director or Consultant, the Option may be exercised (to
the extent the Optionee was entitled to exercise the Option at the date of
death) by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance or by a person who acquired the
right to exercise the option upon the Optionee's death pursuant to subsection
6(d), but only within the period ending on the earlier of (i) the date eighteen
(18) months following the date of death (or such longer or shorter period, which
in no event shall be less than six (6) months, specified in the Option
Agreement), or (ii) the expiration of the term of such Option as set forth in
the Option Agreement. If, at the time of death, the Optionee was not entitled
to exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after death, the Optionee's estate or a person who acquired
the right to exercise the Option by bequest or inheritance does not exercise the
Option within the time specified herein, the Option shall terminate, and the
shares covered by such Option shall revert to and again become available for
issuance under the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased shall be subject to a repurchase right in favor of the Company, with
the repurchase price to be equal to the original purchase price of the stock, or
to any other restriction the Board determines to be appropriate provided,
however, that the right to repurchase at the original purchase price shall lapse
at a minimum rate of twenty percent (20%) per year over five (5) years from the
date the Option was granted and such right shall be exercisable only within (A)
the ninety (90) day period following the termination of employment or
relationship as a Director or Consultant, or (B) such longer period as may be
agreed to by the Company and the Optionee (for example, for purposes of
satisfying the requirements of Section 1202(c)(3) of the Code (regarding
"qualified small business stock")), and (iii) such right shall be exercisable
only for cash or cancellation of purchase money indebtedness for the shares. In
addition to the above restrictions, the shares held by an Officer, Director or
Consultant of the Company or any Affiliate may be subject to additional or
greater restrictions.
(k) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such Option by any of the following means
or by a combination of such means: (1) tendering a cash payment; (2) authorizing
the Company to withhold shares from the shares of the common stock otherwise
issuable to the
7
<PAGE>
Optionee as a result of the exercise of the Option; or (3) delivering to the
Company owned and unencumbered shares of the common stock of the Company.
7. COVENANTS OF THE COMPANY
(a) During the terms of the Options, the Company shall keep available at
all times the number of shares of stock required to satisfy such Options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act either the Plan, any Option or any stock issued or issuable
pursuant to any such Option. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such Options unless and until
such authority is obtained.
8. USE OF PROCEEDS FROM STOCK
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
9. MISCELLANEOUS
(a) Neither an Optionee nor any person to whom an Option is transferred
under subsection 6(d) shall be deemed to be the holder of, or to have any of the
rights of a holder with respect to, any shares subject to such Option unless and
until such person has satisfied all requirements for exercise of the Option
pursuant to its terms.
(b) Throughout the term of any Option, the Company shall deliver to the
holder of such Option, not later than one hundred twenty (120) days after the
close of each of the Company's fiscal years during the Option term, a balance
sheet and an income statement. This section shall not apply when issuance is
limited to key employees whose duties in connection with the Company assure them
access to equivalent information.
(c) Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Employee, Director, Consultant or
Optionee any right to continue in the employ of the Company or any Affiliate (or
to continue acting as a Director or Consultant) or shall affect the right of the
Company or any Affiliate to terminate the employment or relationship as a
Director or Consultant of any Employee, Director, Consultant or Optionee with or
without cause.
8
<PAGE>
(d) To the extent that the aggregate Fair Market Value (determined at the
time of grant) of stock with respect to which Incentive Stock Options granted
after 1986 are exercisable for the first time by any Optionee during any
calendar year under all plans of the Company and its Affiliates exceeds one
hundred thousand dollars ($100,000), the Options or portions thereof which
exceed such limit (according to the order in which they were granted) shall be
treated as Nonqualified Stock Options.
(e) The Board or the Committee shall have the authority to effect, at any
time and from time to time (i) the repricing of any outstanding Options under
the Plan and/or (ii) with the consent of the affected holders of Options, the
cancellation of any outstanding Options and the grant in substitution therefor
of new Options under the Plan covering the same or different numbers of shares
of Common Stock, but having an exercise price per share not less than
eighty-five percent (85%) of the Fair Market Value (one hundred percent (100%)
of the Fair Market Value in the case of an Incentive Stock Option or, in the
case of a ten percent (10%) stockholder (as defined in subsection 5(b)), not
less than one hundred and ten percent (110%) of the Fair Market Value) per share
of Common Stock on the new grant date.
10. ADJUSTMENTS UPON CHANGES IN STOCK
(a) If any change is made in the stock subject to the Plan, or subject to
any Option (through merger, consolidation, reorganization, recapitalization,
stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or otherwise), the Plan and outstanding Options will be appropriately
adjusted in the class(es) and maximum number of shares subject to the Plan and
the class(es) and number of shares and price per share of stock subject to
outstanding Options.
(b) In the event of: (1) a merger or consolidation in which the Company
is not the surviving corporation or (2) a reverse merger in which the Company is
the surviving corporation but the shares of the Company's common stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then to the extent permitted by applicable law: (i) any surviving
corporation shall assume any Options outstanding under the Plan or shall
substitute similar Options for those outstanding under the Plan, or (ii) such
Options shall continue in full force and effect. In the event any surviving
corporation refuses to assume or continue such Options, or to substitute similar
options for those outstanding under the Plan, then such Options shall be
terminated if not exercised prior to such event. In the event of a dissolution
or liquidation of the Company, any Options outstanding under the Plan shall
terminate if not exercised prior to such event.
11. AMENDMENT OF THE PLAN
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 10 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company
9
<PAGE>
within twelve (12) months before or after the adoption of the amendment, where
the amendment will:
(1) Increase the number of shares reserved for Options under the
Plan;
(2) Modify the requirements as to eligibility for participation in
the Plan (to the extent such modification requires stockholder approval in order
for the Plan to satisfy the requirements of Section 422 of the Code); or
(3) Modify the Plan in any other way if such modification requires
stockholder approval in order for the Plan to satisfy the requirements of
Section 422 of the Code or to comply with the requirements of Rule 16b-3.
(b) The Board may in its sole discretion submit any other amendment to the
Plan for stockholder approval, including, but not limited to, amendments to the
Plan intended to satisfy the requirements of Section 162(m) of the Code and the
regulations promulgated thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide Optionees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Incentive Stock Options
and/or to bring the Plan and/or Incentive Stock Options granted under it into
compliance therewith.
(d) Rights and obligations under any Option granted before amendment of
the Plan shall not be altered or impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Option was
granted and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on the tenth (10th) anniversary of
the earlier to occur of the Plan's adoption by the Board or its approval by the
stockholders of the Company. No Options may be granted under the Plan while the
Plan is suspended or after it is terminated.
(b) Rights and obligations under any Option granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except with the consent of the person to whom the Option was granted.
10
<PAGE>
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Options
granted under the Plan shall be exercised unless and until the Plan has been
approved by the stockholders of the Company within 12 months before or after the
date the Plan is adopted by the Board, and, if required, an appropriate permit
has been issued by the Commissioner of Corporations of the State of California.
11
<PAGE>
THE INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
LICENSE AGREEMENT
Effective as of February 1, 1997 ("Effective Date"), THE BOARD OF TRUSTEES
OF THE LELAND STANFORD JUNIOR UNIVERSITY, a body having corporate powers under
the laws of the State of California ("STANFORD"), and Mercator Genetics, Inc., a
California corporation having a principal place of business at 4040 Campbell
Avenue, Menlo Park, CA 94025-1007 ("LICENSEE"), agree as follows:
1 BACKGROUND
1.1 STANFORD has an assignment of "Mutations in the Cystatin B Gene are
Responsible for Progressive Myoclonus Epilepsy (EPM1)" from the laboratory of
Dr. Richard Myers ("Invention[s]"), as described in Stanford Docket S96-017, and
any Licensed Patent(s), as hereinafter defined, which may issue to such
Invention(s).
1.2 STANFORD has certain technical data and information as herein defined
("Technology") pertaining to Invention(s).
1.3 STANFORD desires to have the Technology and Invention(s) perfected and
marketed at the earliest possible time in order that products resulting
therefrom may be available for public use and benefit.
1.4 LICENSEE desires a license under said Technology, Invention(s), and
Licensed Patent(s) to develop, manufacture, use, and sell Licensed Product(s) in
the field of use of applications related to the discovery that mutations in the
gene encoding cystatin B are involved in Progressive Myoclonus Epilepsy of the
Unverricht-Lundborg type (EPM1) or other forms of epilepsy or neurological
conditions.
1.5 The Technology and Invention(s) were made in the course of research
supported by the National Institutes of Health.
2 DEFINITIONS
2.1 "Licensed Patent(s)" means any U.S. Letters Patent issued upon
STANFORD's U.S. Provisional Patent Application, [***], and/or any divisionals,
continuations, continuations-in-part, re-issues, reexamination certificates, and
any and all foreign equivalent applications and patents.
2.2 "Technology" means existing technical data and information, including
but not limited to the information contained in the Patent Application,
pertaining to the Invention(s) and provided to the LICENSEE whether or not it is
of a confidential nature.
2.3 "Licensed Product(s)" means any product or part thereof in the
Licensed Field of Use, the manufacture, use, or sale of which:
1
<PAGE>
(a) Is covered by a valid claim of an issued, unexpired Licensed
Patent(s) directed to the Invention(s). A claim of an issued, unexpired
Licensed Patent(s) shall be presumed to be valid unless and until it has been
held to be invalid by a final judgment of a court of competent jurisdiction from
which no appeal can be or is taken; or
(b) Is covered by any claim being prosecuted in a pending application
directed to the Invention(s).
2.4 "Net Sales" means the gross revenue derived by LICENSEE through the
sale of Licensed Product(s) by LICENSEE. Gross revenue shall be calculated with
respect to Licensed Product(s), whether or not assembled (and without excluding
therefrom any components or subassemblies thereof, whatever their origin and
whether or not patent impacted), less the following items but only insofar as
they actually pertain to the disposition of such Licensed Product(s) by
LICENSEE.
(a) Import, export, excise and sales taxes, and custom duties;
(b) Costs of insurance, packing, and transportation from the place of
manufacture to the customer's premises or point of installation;
(c) Credit for returns, allowances, or trades.
2.5 "Net Royalties" means the gross revenue derived by LICENSEE as a
royalty based upon Net Sales of a Licensed Product sold by a sublicensee.
2.6 "Licensed Field of Use" means applications related to the discovery
that mutations in the gene encoding cystatin B are involved in Progressive
Myoclonus Epilepsy of the Unverricht-Lundborg type (EPMl) or other forms of
epilepsy or neurological conditions.
2.7 "Licensed Territory" means worldwide.
2.8 "Exclusive" means that, subject to Article 4, STANFORD shall not grant
further licenses in the Licensed Territory in the Licensed Field of Use.
2.9 "Diagnostic Product" means a Licensed Product utilized in vitro or in
vivo diagnostic applications.
2.10 "Therapeutic Product" means a Licensed Product compounded, formulated,
or otherwise designed for in vivo administration and treatment of subjects,
including gene therapeutics, protein replacement therapeutics, and small
molecule therapeutics.
2.11 "Protein Product" shall mean a polypeptide containing a sequence of
not less than fifty (50) amino acids.
2.12 "Non-Protein Product" shall mean any other Therapeutic Product wherein
the biologically active agent in the Therapeutic Product is not a Protein
Product.
2
<PAGE>
2.13 "Priority Application" means [***]."
3 GRANT
3.1 STANFORD hereby grants and LICENSEE hereby accepts a license in the
Licensed Field of Use to make, use, offer to sell, and sell Licensed Product(s)
in the Licensed Territory.
3.2 Said license is Exclusive, including the right to sublicense pursuant
to Article 13, in the Licensed Field of Use for a term commencing as of February
1, 1997, and ending on the later to occur of the following:
(a) [***] from the Effective Date; or
(b) [***] from the date of first commercial sale of a Therapeutic
Product(s) by LICENSEE or sublicensee(s); LICENSEE agrees to promptly inform
STANFORD in writing of the date of first commercial sale.
Thereafter, said license shall be nonexclusive until expiration of the last
to expire of Licensed Patent(s).
3.3 LICENSEE agrees that STANFORD shall have the right to practice the
Invention(s) and use the Technology for its own purposes or in collaboration
with third party academic or not-for-profit research institutions. STANFORD
shall have the right to publish any information included in Technology and
Licensed Patent(s).
4 GOVERNMENT RIGHTS
This Agreement is subject to all of the terms and conditions of Title 35
United States Code Sections 200 through 204, including an obligation that
Licensed Product(s) sold or produced in the United States be "manufactured
substantially in the United States," and LICENSEE agrees to take all reasonable
action necessary on its part as licensee to enable STANFORD to satisfy its
obligation thereunder, relating to Invention(s).
5 DILIGENCE
5.1 As an inducement to STANFORD to enter into this Agreement, LICENSEE
agrees to use all reasonable efforts and diligence to proceed with the
development, manufacture, and sale or lease of Licensed Product(s) and to
diligently develop markets for the Licensed Product(s). Unless (1) [***], (2)
[***], or (3) [***], LICENSEE agrees that STANFORD may terminate this Agreement.
5.2 Progress Report on or before February 1 of each year until LICENSEE
markets a Licensed Product(s), LICENSEE shall make a written annual report to
STANFORD covering the
3
<PAGE>
preceding year ending December 31, regarding the progress of LICENSEE toward
commercial use of Licensed Product(s). Such report shall include, as a minimum,
information sufficient to enable STANFORD to satisfy reporting requirements of
the U.S. Government and for STANFORD to ascertain progress by LICENSEE toward
meeting the diligence requirements of this Article 5.
6 LICENSE ROYALTIES
6.1 LICENSEE agrees to pay to STANFORD a noncreditable, nonrefundable
license issue royalty of [***] upon signing this Agreement.
6.2 Beginning February 1, 1998 and each February 1 thereafter, LICENSEE
also shall pay to STANFORD a yearly royalty of [***]. Said yearly royalty
payments are nonrefundable but they are creditable against earned royalties to
the extent provided in Paragraph 6.5.
6.3 LICENSEE agrees to pay to STANFORD a milestone royalty upon the
issuance of Licensed Patents, as follows:
(a) [***] upon the issuance of the first to issue United States
Patent claiming priority to the Priority Application;
(b) [***] upon the publication for opposition of the first
application to publish for opposition out of the European Patent Office claiming
priority to the Priority Application; and
(c) [***] upon the publication for opposition of the first
application to publish for opposition out of the Japanese Patent Office claiming
priority to the Priority Application,
with the understanding that LICENSEE shall only be required to pay a
maximum of [***] in milestone license royalty payments pursuant to this Section
6.3.
6.4 In addition, during the term of this Agreement, LICENSEE shall pay
STANFORD earned royalties based on Net Sales of LICENSEE and Net Royalties owed
to LICENSEE by a sublicensee as follows:
6.4.1 Diagnostic Products
6.4.1.1 Where LICENSEE sells a Diagnostic Product, LICENSEE shall
pay a royalty to STANFORD of [***] of LICENSEE's Net Sales of the Diagnostic
Product. Provided, however, that if, in the reasonable judgment of LICENSEE, it
becomes necessary for LICENSEE to pay royalties to third parties in connection
with LICENSEE's making, using, or selling such Diagnostic Products, LICENSEE
shall be entitled to a credit against the payments due to STANFORD hereunder by
an amount equal to [***] of the royalty paid to such third parties, with the
proviso that in no event shall the royalty
4
<PAGE>
payment to STANFORD hereunder be less than [***] of LICENSEE's Net Sales of the
Diagnostic Products.
64.1.2 Where LICENSEE sublicenses a right to sell a Diagnostic
Product and LICENSEE receives a Net Royalty based upon Net Sales of a Diagnostic
Product by such sublicensee, LICENSEE shall pay STANFORD an amount equal to
[***] of LICENSEE's Net Royalties from the sublicensee with the proviso that in
no event shall the amount paid under this Section 6.4.1.2 exceed a royalty rate
to STANFORD of [***] based on sublicensee's Net Sales.
6.4.2 Therapeutic Products
6.4.2.1 Protein Products
6.4.2.1.1 Where LICENSEE sells a Therapeutic Product,
wherein the biologically active agent of the Therapeutic Product is a Protein
Product, LICENSEE shall pay a royalty to STANFORD of [***] of LICENSEE's Net
Sales of the Protein Product. Provided, however, that if, in the reasonable
judgment of LICENSEE, it becomes necessary for LICENSEE to pay royalties to
third parties in connection with LICENSEE's making, using, or selling such
Protein Products, and only when LICENSEE's royalty burden to such third parties
is [***] or greater of LICENSEE's Net Sales, LICENSEE shall be entitled to a
credit against the payments due to STANFORD hereunder by an amount equal to the
royalty paid to such third parties, which exceeds [***] of LICENSEE's Net Sales,
with the exception that in no event shall the royalty payment to STANFORD be
less than [***] of LICENSEE's Net Sales of the Protein Product.
6.4.2.1.2 Where LICENSEE sublicenses a right to sell a
Therapeutic Product, wherein the biologically active agent in the Therapeutic
Product is a Protein Product, and LICENSEE receives a Net Royalty based upon Net
Sales of a Protein Product by such sublicensee, LICENSEE shall pay Stanford an
amount equal to [***] of LICENSEE's Net Royalties from the sublicensee with the
proviso that in no event shall the amount paid under this Section 6.4.2.2 be
less than [***] based on sublicensee's Net Sales.
6.4.2.2 Non-Protein Products
6.4.2.2.1 Where LICENSEE sells a Therapeutic Product,
wherein the biologically active agent of the Therapeutic Product is a
Non-Protein Product, LICENSEE shall pay a royalty to STANFORD of [***] of
LICENSEE's Net Sales of the Non-Protein Product. Provided, however, that if, in
the reasonable judgment of LICENSEE, it becomes necessary for LICENSEE to pay
royalties to third parties in connection with LICENSEE's making, using, or
selling such Non-Protein Products, and only when LICENSEE's royalty burden to
such third parties is [***] or greater of LICENSEE's Net Sales, LICENSEE shall
be entitled to a credit against the payments due to STANFORD hereunder by an
amount equal to the royalty paid to such third parties, which exceeds [***] of
5
<PAGE>
LICENSEE's Net Sales, with the exception that in no event shall the royalty
payment to STANFORD be less than [***] of LICENSEE's Net Sales of the
Non-Protein Product.
6.4.2.2.2 Where LICENSEE sublicenses a right to sell a
Therapeutic Product, wherein the biologically active agent of the Therapeutic
Product is a Non-Protein Product, and LICENSEE receives a Net Royalty based upon
Net Sales of a Non-Protein Product by such sublicensee, LICENSEE shall pay
Stanford an amount equal to [***] of LICENSEE's Net Royalties from the
sublicensee with the proviso that in no event shall the amount paid under this
Section 6.4.2.4 be less than [***] based on sublicensee's Net Sales.
6.5 Creditable payments under this Agreement shall be an offset to
LICENSEE against up to [***] of each earned royalty payment which LICENSEE
would be required to pay pursuant to Paragraph 6.4 until the entire credit is
exhausted.
6.6 If this Agreement is not terminated in accordance with other
provisions hereof, LICENSEE's obligation to pay royalties hereunder shall
continue for so long as LICENSEE, by its activities would, but for the license
granted herein, infringe a valid claim of an unexpired Licensed Patent(s) of
STANFORD covering said activity.
6.7 The royalty on Net Sales of, and Net Royalties received by, LICENSEE
in currencies other than U.S. Dollars shall be calculated using the appropriate
foreign exchange rate for such currency quoted by the Bank of America (San
Francisco) foreign exchange desk, on the close of business on the last banking
day of each calendar quarter. Royalty payments to STANFORD shall be in U.S.
Dollars. All non-U.S. taxes related to royalty payments shall be paid by
LICENSEE and are not deductible from the payments due STANFORD.
6.8 After the Effective Date, LICENSEE shall take over responsibility for
and direction of the preparation, filing, and prosecution of all patent
applications and maintenance of patents corresponding to the Invention(s) and
the Priority Application, with the proviso that STANFORD and LICENSEE shall be
kept full apprised by the other, including receiving copies of all
correspondence with U.S. and international patent offices related to U.S. and
foreign patent applications and patents corresponding to the Invention(s) and
the Priority Application. STANFORD shall have the reasonable opportunity to
comment on such correspondence and matters related thereto and, further, in the
event of termination of this Agreement, LICENSEE shall, within thirty (30) days,
ensure the transfer of all matters related to U.S. and foreign patent
applications and patents corresponding to the Invention(s) and the Priority
Application. Within thirty (30) days after receipt of a statement from
STANFORD, LICENSEE shall reimburse STANFORD for all reasonable future costs
incurred by STANFORD in connection with the preparation, filing and prosecution
of all patent applications and maintenance of patents corresponding to the
Invention(s) after the Effective Date.
6
<PAGE>
7 ROYALTY REPORTS, PAYMENTS, AND ACCOUNTING
7.1 Annual Earned Royalty Payment and Report Beginning with the first sale
of a Licensed Product(s), LICENSEE shall make annual written reports (even if
there are no sales) and earned royalty payments to STANFORD by February 1. This
report shall state the number, description, and aggregate Net Sales of Licensed
Products by LICENSEE and Net Royalties received by LICENSEE during such annual
period and a calculation pursuant to Paragraph 6.4 and/or 6.5 of earned royalty
payment due STANFORD for such annual period. Concurrent with the making of each
such report, LICENSEE shall include payment due STANFORD of royalties for the
annual period covered by such report.
7.2 Accounting LICENSEE agrees to keep and maintain records for a period
of three (3) years showing the manufacture, sale, use, and other disposition of
products sold or otherwise disposed of under the license herein granted. Such
records will include general ledger records showing cash receipts and expenses,
and records which include production records, customers, serial numbers and
related information in sufficient detail to enable the royalties payable
hereunder by LICENSEE to be determined. LICENSEE further agrees to permit its
books and records to be examined by STANFORD from time to time to the extent
necessary to verify reports provided for in Paragraph 7.1. Such examination is
to be made by STANFORD or its designee, at the expense of STANFORD, except in
the event the results of the audit reveal an under reporting of royalties due
STANFORD of [***] or more, then the audit costs shall be paid by LICENSEE.
8 NEGATION OF WARRANTIES
8.1 Nothing in this Agreement is or shall be construed as:
(a) A warranty or representation by STANFORD as to the validity
or scope of any Licensed Patent(s),
(b) A warranty or representation that anything made, used, sold,
or otherwise disposed of under any license granted in this Agreement is or will
be free from infringement of patents, copyrights, and other rights of third
parties;
(c) An obligation to bring or prosecute actions or suits against
third parties for infringement, except to the extent and in the circumstances
described in Article 12;
(d) Granting by implication, estoppel, or otherwise any licenses
or rights under patents or other rights of STANFORD or other persons other than
Licensed Patent(s), regardless of whether such patents or other rights are
dominant or subordinate to any Licensed Patent(s); or
(e) An obligation to furnish any technology or technological
information other than the Technology.
8.2 Except as expressly set forth in this Agreement, STANFORD MAKES NO
REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER
7
<PAGE>
EXPRESS OR IMPLIED. THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR THAT THE USE OF THE
LICENSED PRODUCT(S) WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER
RIGHTS OR ANY OTHER EXPRESS OR IMPLIED WARRANTIES.
8.3 LICENSEE agrees that nothing in this Agreement grants LICENSEE any
express or implied license or right under or to:
(a) U.S., Patent No. 4,237,224, "Process for Producing
Biologically Functional Molecular Chimeras"; U.S., Patent No. 4,468,464 and U.S.
Patent No. 4,740,470, both entitled, "Biologically Functional Molecular
Chimeras" (collectively known as the Cohen/Boyer patents), or reissues thereof;
or
(b) U.S. Patent 4,656,134 "Amplification of Eucaryotic Genes" or
any patent application corresponding thereto.
9 INDEMNITY
9.1 LICENSEE agrees to indemnify, hold harmless, and defend STANFORD and
Stanford Health Services and their respective trustees, officers, employees,
students, and agents against any and all claims for death, illness, personal
injury, property damage, and improper business practices arising out of the
manufacture, use, sale, or other disposition of Invention(s), Licensed
Patent(s), Licensed Product(s), or Technology by LICENSEE or sublicensee(s), or
their customers.
9.2 STANFORD shall not be liable for any indirect, special, consequential,
or other damages whatsoever, whether grounded in tort (including negligence),
strict liability, contract or otherwise. STANFORD shall not have any
responsibilities or liabilities whatsoever with respect to Licensed Products(s).
9.3 LICENSEE shall at all times comply, through insurance or
self-insurance, with all statutory workers' compensation and, employers'
liability requirements covering any and all employees with respect to activities
performed under this Agreement.
9.4 In addition to the foregoing, LICENSEE shall maintain, prior to the
first introduction into humans of Licensed Product(s), during the term of this
Agreement, Comprehensive General Liability Insurance, including Products
Liability Insurance, with reputable and financially secure insurance carrier(s)
to cover the activities of LICENSEE and its sublicensee(s). Such insurance
shall provide minimum limits of liability of [***] and shall include STANFORD,
Stanford Health Services, their trustees, directors, officers, employees,
students, and agents as additional insureds. Such insurance shall be written to
cover claims incurred, discovered, manifested, or made during or after the
expiration of this Agreement. At STANFORD's request, LICENSEE shall furnish a
Certificate of Insurance evidencing primary coverage.
8
<PAGE>
10 MARKING
Prior to the issuance of patents on the Invention(s), LICENSEE agrees to
mark Licensed Product(s) (or their containers or Labels) made, sold, or
otherwise disposed of by it under the license granted in this Agreement with the
words "Patent Pending," and following the issuance of one (1) or more patents,
with the numbers of the Licensed Patent(s).
11 STANFORD NAMES AND, MARKS
LICENSEE agrees not to identify STANFORD in any promotional advertising or
other promotional materials to be disseminated to the public or any portion
thereof or to use the name of any STANFORD faculty member, employee, or student
or any trademark, service mark, trade name, or symbol of STANFORD or the
Stanford Health Services, or that is associated with either of them, without
STANFORD's prior written consent. LICENSEE is permitted to include a mention of
this License Agreement in private placement or public offering documents and in
discussions and documents related to partnering of the technology without prior
written consent. LICENSEE will provide STANFORD with a copy for review prior to
the issuance of any press release relating to the execution of this Agreement.
12 INFRINGEMENT BY OTHERS; PROTECTION OF PATENTS
12.1 LICENSEE shall promptly inform STANFORD of any suspected infringement
of any Licensed Patent(s) by a third party. During the Exclusive period of this
Agreement, STANFORD and LICENSEE each shall have the right to institute an
action for infringement of the Licensed Patent(s) against such third party in
accordance with the following:
(a) If STANFORD and LICENSEE agree to institute suit jointly,
the suit shall be brought in both their names, the out-of-pocket costs thereof
shall be borne equally, and any recovery or settlement shall be shared equally.
LICENSEE and STANFORD shall agree to the manner in which they shall exercise
control over such action. STANFORD may, if it so desires, also be represented
by separate counsel of its own selection, the fees for which counsel shall be
paid by STANFORD;
(b) In the absence of agreement to institute a suit jointly,
STANFORD may institute suit, and, at its option, join LICENSEE as a plaintiff.
If STANFORD decides to institute suit, then it shall notify LICENSEE in writing.
LICENSEE's failure to notify STANFORD in writing, within fifteen (15) days after
the date of the notice, that it will join in enforcing the patent pursuant to
the provisions hereof, shall be and be deemed conclusively to be LICENSEE's
Assignment to STANFORD of all rights, causes of action, and damages resulting
from any such alleged infringement. STANFORD shall bear the entire cost of such
litigation and shall be entitled to retain the entire amount of any recovery or
settlement;
(c) In the absence of agreement to institute a suit jointly and
if STANFORD notifies LICENSEE that it has decided not to join in or institute a
suit, as provided in (a) or (b) above, LICENSEE may institute suit and, at its
option, join STANFORD as a plaintiff. LICENSEE shall bear the entire cost of
such litigation and shall be entitled to retain the entire
9
<PAGE>
amount of any recovery or settlement, provided, however, that any recovery in
excess of litigation costs shall be deemed to be Net Sales, and LICENSEE shall
pay STANFORD royalties thereon at the rates specified herein.
12.2 Should either STANFORD or LICENSEE commence a suit under the
provisions of Paragraph 12.1 and thereafter elect to abandon the same, it shall
give timely notice to the other party who may, if it so desires, continue
prosecution of such suit, provided, however, that the sharing of expenses and
any recovery in such suit shall be as agreed upon between STANFORD and LICENSEE.
13 SUBLICENSE(S)
13.1 LICENSEE may grant sublicense(s) during the Exclusive period. Any
such sublicense granted during the Exclusive period hereunder shall remain in
full force and effect even if the license granted hereunder ceases to remain
exclusive under the terms of this Agreement.
13.2 If LICENSEE is unable or unwilling to serve or develop a potential
market or market territory for which there is a willing sublicensee(s), LICENSEE
will, at STANFORD's request, negotiate in good faith a sublicense(s) hereunder.
13.3 Any sublicense(s) granted by LICENSEE under this Agreement shall be
subject and subordinate to terms and conditions of this Agreement, except:
(a) Sublicense terms and conditions shall reflect that any
sublicensee(s) shall not further sublicense; and
(b) The earned royalty rate specified in the sublicense(s) may
be at higher rates than the rates in this Agreement.
Any such sublicense(s) also shall expressly include the provisions of
Articles 7, 8, and 9 for the benefit of STANFORD and provide for the transfer of
all obligations, including the payment of royalties specified in such
sublicense(s), to STANFORD or its designee, in the event that this Agreement is
terminated.
13.4 LICENSEE, agrees to provide STANFORD a copy of any sublicense(s)
granted pursuant to this Article 13.
14 TERMINATION
14.1 LICENSEE may terminate this Agreement by giving STANFORD notice in
writing at least thirty (30) days in advance of the Effective Date of
termination selected by LICENSEE.
14.2 STANFORD may terminate this Agreement if LICENSEE:
(a) Is in default in payment of royalty or providing of reports;
10
<PAGE>
(b) Is in breach of any provision hereof; or
(c) Provides any false report,
and LICENSEE fails to remedy any such default, breach, or false report
within thirty (30) days after written notice thereof by STANFORD.
14.3 Surviving any termination are:
(a) LICENSEE's obligation to pay royalties accrued or accruable;
(b) Any cause of action or claim of LICENSEE or STANFORD,
accrued or to accrue, because of any breach or default by the other party; and
(c) The provisions of Articles 7, 8, and 9.
15 ASSIGNMENT
This Agreement may not be assigned, except upon the prior written consent
of the other party or upon the sale, transfer, or other disposition of all or
substantially all of the assets or stock of the LICENSEE.
16 ARBITRATION
16.1 Any controversy arising under or related to this Agreement, and any
disputed claim by either party against the other under this Agreement excluding
any dispute relating to patent validity or infringement arising under this
Agreement, shall be settled by arbitration in accordance with the Licensing
Agreement Arbitration Rules of the American Arbitration Association.
16.2 Upon request by either party, arbitration will be by a third party
arbitrator mutually agreed upon in writing by LICENSEE and STANFORD within
thirty (30) days of such arbitration request. Judgment upon the award rendered
by the arbitrator shall be final and nonappealable and may be entered in any
court having jurisdiction thereof.
16.3 The parties shall be entitled to discovery in like manner as if the
arbitration were a civil suit in the California Superior Court. The Arbitrator
may limit the scope, time and/or issues involved in discovery.
16.4 Any arbitration shall be held at Stanford, California, unless the
parties hereto mutually agree in writing to another place.
17 NOTICES
All notices under this Agreement shall be deemed to have been fully given
when done in writing and deposited in the United States mail, registered or
certified, and addressed as follows:
11
<PAGE>
To STANFORD:
Office of Technology Licensing
Stanford University
900 Welch Road, Suite 350
Palo Alto, CA 94304-1850
Attention: Director
To LICENSEE:
Mercator Genetics, Inc.
4040 Campbell Road
Menlo Park CA 94025
Attention: Elliott Sigal, M.D., Ph.D.
President and Chief Executive Officer
Either party may change its address upon written notice to the other party.
18 WAIVER
None of the terms of this Agreement can be waived except by the written
consent of the party waiving compliance.
19 APPLICABLE LAW
This Agreement shall be governed by the laws of the State of California
applicable to agreements negotiated, executed and performed wholly within
California.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
duplicate originals by their duly authorized officers or representatives.
THE BOARD OF TRUSTEES OF THE LELAND STANFORD
JUNIOR UNIVERSITY
/S/ KATHARINE KU
----------------------------------------
Signature
KATHERINE KU
----------------------------------------
Name
DIRECTOR, TECHNOLOGY LICENSING
----------------------------------------
Title
12
<PAGE>
FEB. 10, 1997
----------------------------------------
Date
MERCATOR GENETICS, INC.
/S/ ELLIOTT SIGAL M.D.
----------------------------------------
Signature
ELLIOTT SIGAL M.D.
----------------------------------------
Name
PRESIDENT & CEO
----------------------------------------
Title
----------------------------------------
Date
13
<PAGE>
STANDARD INDUSTRIAL LEASE --- MULTI-TENANT
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
1. PARTIES. This Lease, dated, for reference purposes only, July 29, 1993, is
made by and between WVP Income Plus, III (herein called "Lessor") and Mercator
Genetics Inc., a Delaware corporation (herein called "Lessee").
2. PREMISES, PARKING AND COMMON AREAS.
2.1. PREMISES. Lessor hereby leases to Lessee and Lessee leases from
Lessor for the term, at the rental, and upon all of the conditions set forth
herein, real property situated in the County of San Mateo, State of California
commonly known as 4040 Campbell Avenue, Menlo Park and described as 12,000+ Sq.
Ft. of 1st floor space of a larger free-standing two story building consisting
of 48,000+ Sq. Ft. (See Exhibit "A" attached), herein referred to as the
"Premises," as may be outlined on an Exhibit attached hereto, including rights
to the Common Areas as hereinafter specified but not including any rights to the
roof of the Premises or to any Building in the Industrial Center. The Premises
are a portion of a building, herein referred to as the "Building." The
Premises, the Building, the Common Areas, the land upon which the same are
located, along with all other buildings and improvements thereon, are herein
collectively referred to as the "Industrial Center."
2.2. VEHICLE PARKING. Lessee shall be entitled to 30 vehicle parking
spaces, unreserved and unassigned, on those portions of the Common Areas
designated by Lessor for parking. Lessee shall not use more parking spaces than
said number. Said parking spaces shall be used only for parking by vehicles no
larger than full size passenger automobiles or pick-up trucks, herein called
"Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles are
herein referred to as "Oversized Vehicles." Lessee shall park on the left side
of building only and have use of the adjacent rear parking lot.
2.2.1 Lessee shall not permit or allow any vehicles that belong to
or are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, or invitees to be loaded, unloaded, or parked in areas other than
those designated by Lessor for such activities.
2.2.2 If Lessee permits or allows any of the prohibited activities
described in paragraph 2.2 of this Lease, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may have,
to remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
2.3. COMMON AREAS -- DEFINITION. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center that are provided and designated by the Lessor from
time to time for the general non-exclusive use of Lessor, Lessee and of other
lessees of the Industrial Center
1
<PAGE>
and their respective employees, suppliers, shippers, customers and invitees,
including parking areas, loading and unloading areas, trash areas, roadways,
sidewalks, walkways, parkways, driveways and landscaped areas.
2.4. COMMON AREAS -- LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shippers, customers and
invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers, and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Industrial Center. Under no circumstances
shall the right herein granted to use the Common Areas be deemed to include the
right to store any property, temporarily or permanently, in the Common Areas.
Any such storage shall be permitted only by the prior written consent of Lessor
or Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.5. COMMON AREAS -- RULES AND REGULATIONS. Lessor or such other person(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable rules and regulations with respect thereto. Lessee
agrees to abide by and conform to all such rules and regulations, and to cause
its employees, suppliers, shippers, customers, and invitees to so abide and
conform. Lessor shall not be responsible to Lessee for the non-compliance with
said rules and regulations by other lessees of the Industrial Center.
2.6. COMMON AREAS -- CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas and walkways; (b) To close
temporarily any of the Common Areas for maintenance purposes so long as
reasonable access to the Premises remains available; (c) To designate other land
outside the boundaries of the Industrial Center to be a part of the Common
Areas: (d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional improvements,
repairs or alterations to the Industrial Center, or any portion thereof; (f) To
do and perform such other acts and make such other changes in, to or with
respect to the Common Areas and Industrial Center as Lessor may, in the exercise
of sound business judgment, deem to be appropriate.
2
<PAGE>
2.6.1 Lessor shall at all times provide the parking facilities
required by applicable law and in no event shall the number of parking spaces
that Lessee is entitled to under paragraph 2.2 be reduced.
3. TERM.
3.1. TERM. The term of this Lease shall be for Ten (10) months commencing
on October 8, 1993 and ending on August 7, 1994 unless sooner terminated
pursuant to any provision hereof. See Addendum Paragraph 47.
3.2. DELAY IN POSSESSION. Notwithstanding said commencement date, if for
any reason Lessor cannot deliver possession of the Premises to Lessee on said
date, Lessor shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Lessee hereunder
or extend the term hereof, but in such case, Lessee shall not be obligated to
pay rent or perform any other obligation of Lessee under the terms of this
Lease, except as may be otherwise provided in this Lease, until possession of
the Premises is tendered to Lessee; provided, however, that if Lessor shall not
have delivered possession of the Premises within sixty (60) days from said
commencement date, Lessee may, at Lessee's option, by notice in writing to
Lessor within ten (10) days thereafter, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder; provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect.
3.3. EARLY POSSESSION. If Lessee occupies the Premises prior to said
commencement date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not advance the termination date, and Lessee shall
pay rent for such period at the initial monthly rates set forth below.
4. RENT.
4.1. BASE RENT. Lessee shall pay to Lessor, as Base Rent for the Premises,
without any offset or deduction, except as may be otherwise expressly provided
in this Lease, on the 8th day of each month of the term hereof, monthly payments
in advance of $10,200.00, Ten Thousand, Two Hundred Dollars and no/100 Dollars.
Lessee shall pay Lessor upon execution hereof $10,200.00 as Base Rent for
October 8 - November 7, 1993. Rent for any period during the term hereof which
is for less than one month shall be a pro rata portion of the Base Rent. Rent
shall be payable in lawful money of the United States to Lessor at the address
stated herein or to such other persons or at such other places as Lessor may
designate in writing.
4.2. OPERATING EXPENSES. Lessee shall pay to Lessor during the term
hereof, in addition to the Base Rent, Lessee's Share, as hereinafter defined, of
all Operating Expenses, as hereinafter defined, during each calendar year of the
term of this Lease, in accordance with the following provisions:
3
<PAGE>
(a) "Lessee's Share" is defined, for purposes of this Lease, as 25%
percent. See paragraph 54.
(b) "Operating Expenses" is defined, for purposes of this Lease, as
all costs incurred by Lessor, if any, for:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition of the following:
(aa) The Common Areas, including parking areas, loading and
unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers,
irrigation systems, Common Area lighting facilities and;
(bb) Trash disposal services;
(cc) Tenant directories;
(dd) Fire detection systems including sprinkler system
maintenance and repair;
(ee) Security services;
(ff) Any other service to be provided by Lessor that is
elsewhere in this Lease stated to be an "Operating Expense";
(ii) Any deductible portion of an insured loss concerning any of
the items or matters described in this paragraph 4.2;
(iii) The cost of the premiums for the liability and property
insurance policies to be maintained by Lessor under
paragraph 8 hereof;
(iv) The amount of the real property tax to be paid by Lessor
under paragraph 10.1 hereof;
(v) The cost of water, gas and electricity to service the Common
Areas.
(c) The inclusion of the improvements, facilities and services set
forth in paragraph 4.2(b)(i) of the definition of Operating Expenses shall not
be deemed to impose an obligation upon Lessor to either have said improvements
or facilities or to provide those services unless the Industrial Center already
has the same, Lessor already provides the services, or Lessor has agreed
elsewhere in this Lease to provide the same or some of them.
(d) Lessee's Share of Operating Expenses shall be payable by Lessee
within ten (10) days after a reasonably detailed statement of actual expenses is
presented to Lessee by Lessor. At Lessor's option, however, an amount may be
estimated by Lessor
4
<PAGE>
from time to time of Lessee's Share of annual Operating Expenses and the same
shall be payable monthly or quarterly, as Lessor shall designate, during each
twelve-month period of the Lease term, on the same day as the Base Rent is due
hereunder. In the event that Lessee pays Lessor's estimate of Lessee's Share of
Operating Expenses as aforesaid, Lessor shall deliver to Lessee within sixty
(60) days after the expiration of each calendar year a reasonably detailed
statement showing Lessee's Share of the actual Operating Expenses incurred
during the preceding year. If Lessee's payments under this paragraph 4.2(d)
during said preceding year exceed Lessee's Share as indicated on said statement,
Lessee shall be entitled to credit the amount of such overpayment against
Lessee's Share of Operating Expenses next falling due. If Lessee's payments
under this paragraph during said preceding year were less than Lessee's Share as
indicated on said statement, Lessee shall pay to Lessor the amount of the
deficiency within ten (10) days after delivery by Lessor to Lessee of said
statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
$10,200.00, as security for Lessee's faithful performance of Lessee's
obligations hereunder. If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Lessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Lessor may become obligated by reason of Lessee's default, or to
compensate Lessor for any loss or damage which Lessor may suffer thereby. If
Lessor so uses or applies all or any portion of said deposit, Lessee shall
within ten (10) days after written demand therefor deposit cash with Lessor in
an amount sufficient to restore said deposit to the full amount then required of
Lessee. If the monthly rent shall, from time to time, increase during the term
of this Lease, Lessee shall, at the time of such increase, deposit with Lessor
additional money as a security deposit so that the total amount of the security
deposit held by Lessor shall at all times bear the same proportion to the then
current Base Rent as the initial security deposit bears to the initial Base Rent
set forth in paragraph 4. Lessor shall not be required to keep said security
deposit separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Lessor, shall be returned, without payment of interest or other
increment for its use, to Lessee (or, at Lessor's option, to the last assignee,
if any, of Lessee's interest hereunder) at the expiration of the term hereof,
and after Lessee has vacated the Premises. No trust relationship is created
herein between Lessor and Lessee with respect to said Security Deposit.
6. USE.
6.1. USE. The Premises shall be used and occupied only for office,
laboratory, research and development and all other legally approved uses by the
City of Menlo Park, or any other use which is reasonably comparable and for no
other purpose.
5
<PAGE>
6.2. COMPLIANCE WITH LAW.
(a) Lessor warrants to Lessee that the Premises, in the state
existing on the date that the Lease term commences, but without regard to the
use for which Lessee will occupy the Premises, does not violate any covenants or
restrictions of record, or any applicable building code, regulation or ordinance
in effect on such Lease term commencement date. In the event it is determined
that this warranty has been violated, then it shall be the obligation of the
Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and
expense, rectify any such violation. In the event Lessee does not give to
Lessor written notice of the violation of this warranty within six months from
the date that the Lease term commences, the correction of same shall be the
obligation of the Lessee at Lessee's sole cost. The warranty contained in this
paragraph 6.2(a) shall be of no force or effect if, prior to the date of this
Lease, Lessee was an owner or occupant of the Premises and, in such event,
Lessee shall correct any such violation at Lessee's sole cost.
(b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's
expense, promptly comply with all applicable statutes, ordinances, rules,
regulations, orders, covenants and restrictions of record, and requirements of
any fire insurance underwriters or rating bureaus, now in effect or which may
hereafter come into effect, whether or not they reflect a change in policy from
that now existing, during the term or any part of the term hereof, relating in
any manner to the Premises and the occupation and use by Lessee of the Premises
and of the Common Areas. Lessee shall not use nor permit the use of the
Premises or the Common Areas in any manner that will tend to create waste or a
nuisance or shall tend to disturb other occupants of the Industrial Center.
6.3. CONDITION OF PREMISES.
(a) Lessor shall deliver the Premises to Lessee clean and free of
debris on the Lease commencement date (unless Lessee is already in possession)
and Lessor warrants to Lessee that the plumbing, lighting, air conditioning,
heating, and loading doors in the Premises shall be in good operating condition
on the Lease commencement date. In the event that it is determined that this
warranty has been violated, then it shall be the obligation of Lessor, after
receipt of written notice from Lessee setting forth with specificity the nature
of the violation, to promptly, at Lessor's sole cost, rectify such violation.
Lessee's failure to give such written notice to Lessor within thirty (30) days
after the Lease commencement date shall cause the conclusive presumption that
Lessor has complied with all of Lessor's obligations hereunder. The warranty
contained in this paragraph 6.3(a) shall be of no force or effect if prior to
the date of this Lease, Lessee was an owner or occupant of the Premises.
(b) Except as otherwise provided in this Lease, Lessee hereby accepts
the Premises in their condition existing as of the Lease commencement date or
the date that Lessee takes possession of the Premises, whichever is earlier,
subject to all applicable zoning, municipal, county and state laws, ordinances
and regulations governing and
6
<PAGE>
regulating the use of the Premises, and any covenants or restrictions of record,
and accepts this Lease subject thereto and to all matters disclosed thereby and
by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor
Lessor's agent has made any representation or warranty as to the present or
future suitability of the Premises for the conduct of Lessee's business.
MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.
7.1. LESSOR'S OBLIGATIONS. Subject to the provisions of paragraphs 4.2
(Operating Expenses), 6 (Use), 7.2 (Lessee's Obligations) and 9 (Damage or
Destruction) and except for damage caused by any negligent or intentional act or
omission of Lessee, Lessee's employees, suppliers, shippers, customers, or
invitees, in which event Lessee shall repair the damage, Lessor, at Lessor's
expense, subject to reimbursement pursuant to paragraph 4.2, shall keep in good
condition and repair the foundations, exterior walls, structural condition of
interior bearing walls, and roof of the Premises, as well as the parking lots,
walkways, driveways, landscaping, fences, signs and utility installations of the
Common Areas and all parts thereof, as well as providing the services for which
there is an Operating Expense pursuant to paragraph 4.2. Lessor shall not,
however, be obligated to paint the exterior or interior surface of exterior
walls, nor shall Lessor be required to maintain, repair or replace windows,
doors or plate glass of the Premises. Lessor shall have no obligation to make
repairs under this paragraph 7.1 until a reasonable time after receipt of
written notice from Lessee of the need for such repairs. Lessee expressly
waives the benefits of any statute now or hereafter in effect which would
otherwise afford Lessee the right to make repairs at Lessor's expense or to
terminate this Lease because of Lessor's failure to keep the Premises in good
order, condition and repair. Lessor shall not be liable for damages or loss of
any kind or nature by reason of Lessor's failure to furnish any Common Area
Services when such failure is caused by accident, breakage, repairs. strikes,
lockout, or other labor disturbances or disputes of any character, or by any
other cause beyond the reasonable control of Lessor.
7.2. LESSEE'S OBLIGATIONS. See Attached Exhibit "B".
(a) Subject to the provisions of paragraphs 6 (Use), 7.1 (Lessor's
Obligations), and 9 (Damage or Destruction), Lessee, at Lessee's expense, shall
keep in good order, condition and repair the Premises and every part thereof
(whether or not the damaged portion of the Premises or the means of repairing
the same are reasonably or readily accessible to Lessee) including, without
limiting the generality of the foregoing, all plumbing, heating, ventilating and
air conditioning systems (Lessee shall procure and maintain, at Lessee's
expense, a ventilating and air conditioning system maintenance contract),
electrical and lighting facilities and equipment within the Premises, fixtures,
interior walls and interior surfaces of exterior walls, ceilings, windows,
doors, plate glass, and skylights located within the Premises. Lessor reserves
the right to procure and maintain the ventilating and air conditioning system
maintenance contract and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
7
<PAGE>
(b) If Lessee fails to perform Lessee's obligations under this
paragraph 7.2 or under any other paragraph of this Lease, Lessor may enter upon
the Premises after ten (10) days' prior written notice to Lessee (except in the
case of emergency, in which no notice shall be required), perform such
obligations on Lessee's behalf and put the Premises in good order, condition and
repair, and the cost thereof together with interest thereon at the maximum rate
then allowable by law shall be due and payable as additional rent to Lessor
together with Lessee's next Base Rent installment.
(c) On the last day of the term hereof, or on any sooner termination,
Lessee shall surrender the Premises to Lessor in the same condition as received,
ordinary wear and tear excepted, clean and free of debris. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear if the
same could have been prevented by good maintenance practices. Lessee shall
repair any damage to the Premises occasioned by the installation or removal of
Lessee's trade fixtures, alterations, furnishings and equipment.
Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee
shall leave the air lines, power panels, electrical distribution systems,
lighting fixtures, space heaters, air conditioning, plumbing and fencing on the
Premises in good operating condition.
7.3. ALTERATIONS AND ADDITIONS. See Attached Exhibit "B".
(a) Lessee shall not, without Lessor's prior written consent make any
alterations, improvements, additions, or Utility Installations in, on or about
the Premises, or the Industrial Center, except for nonstructural alterations to
the Premises not exceeding $2,500 in cumulative costs, during the term of this
Lease. In any event, whether or not in excess of $2,500 in cumulative cost,
Lessee shall make no change or alteration to the exterior of the Premises nor
the exterior of the Building nor the Industrial Center without Lessor's prior
written consent. As used in this paragraph 7.3 the term "Utility Installation"
shall mean carpeting, window coverings, air lines, power panels, electrical
distribution systems, lighting fixtures, space heaters, air conditioning,
plumbing, and fencing. Lessor may require that Lessee remove any or all of said
alterations, improvements, additions or Utility Installations at the expiration
of the term, and restore the Premises and the Industrial Center to their prior
condition. Lessor may require Lessee to provide Lessor, at Lessee's sole cost
and expense, a lien and completion bond in an amount equal to one and one-half
times the estimated cost of such improvements, to insure Lessor against any
liability for mechanic's and materialmen's liens and to insure completion of the
work. Should Lessee make any alterations, improvements, additions or Utility
Installations without the prior approval of Lessor, Lessor may, at any time
during the term of this Lease, require that Lessee remove any or all of the
same.
(b) Any alterations, improvements, additions or Utility Installations
in or about the Premises or the Industrial Center that Lessee shall desire to
make and which requires the consent of the Lessor shall be presented to Lessor
in written form, with proposed detailed plans. If Lessor shall give its
consent, the consent shall be deemed conditioned upon Lessee acquiring a permit
to do so from appropriate governmental agencies, the furnishing of a copy
thereof to Lessor prior to the commencement of the
8
<PAGE>
work and the compliance by Lessee of all conditions of said permit in a prompt
and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, or the Industrial Center, or any
interest therein. Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in the Premises, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises or the
Building as provided by law. If Lessee shall, in good faith, contest the
validity of any such lien, claim or demand, then Lessee shall, at its sole
expense defend itself and Lessor against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises or the Industrial Center, upon the
condition that if Lessor shall require, Lessee shall furnish to Lessor a surety
bond satisfactory to Lessor in an amount equal to such contested lien claim or
demand indemnifying Lessor against liability for the same and holding the
Premises and the Industrial Center free from the effect of such lien or claim.
In addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs
in participating in such action if Lessor shall decide it is to Lessor's best
interest to do so.
(d) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made on the Premises, shall be the property of
Lessor and shall remain upon and be surrendered with the Premises at the
expiration of the Lease term, unless Lessor requires their removal pursuant to
paragraph 7.3(a). Notwithstanding the provisions of this paragraph 7.3(d),
Lessee's machinery and equipment, other than that which is affixed to the
Premises so that it cannot be removed without material damage to the Premises,
and other than Utility Installations, shall remain the property of Lessee and
may be removed by Lessee subject to the provisions of paragraph 7.2.
7.4. UTILITY ADDITIONS. Lessor reserves the right to install new or
additional utility facilities throughout the Building and the Common Areas for
the benefit of Lessor or Lessee, or any other lessee of the Industrial Center,
including, but not by way of limitation, such utilities as plumbing, electrical
systems, security systems, communication systems, and fire protection and
detection systems, so long as such installations do not unreasonably interfere
with Lessee's use of the Premises.
8. INSURANCE; INDEMNITY.
8.1. LIABILITY INSURANCE -- LESSEE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of Combined
Single Limit Bodily Injury and Property Damage insurance insuring Lessee and
Lessor against any liability arising out of the use, occupancy or maintenance of
the Premises and the Industrial Center. Such insurance shall be in an amount
not less than $500,000.00 per occurrence. The policy shall insure performance
by Lessee of the indemnity provisions of this
9
<PAGE>
paragraph 8. The limits of said insurance shall not, however, limit the
liability of Lessee hereunder.
8.2. LIABILITY INSURANCE LESSOR. Lessor shall obtain and keep in force
during the term of this Lease a policy of Combined Single Limit Bodily Injury
and Property Damage Insurance, insuring Lessor, but not Lessee, against any
liability arising out of the ownership, use, occupancy or maintenance of the
Industrial Center in an amount not less than $500,000.00 per occurrence.
8.2. PROPERTY INSURANCE. Lessor shall obtain and keep in force during the
term of this Lease a policy or policies of insurance covering loss or damage to
the Industrial Center improvements, but not Lessee's personal property,
fixtures, equipment or tenant improvements, in an amount not to exceed the full
replacement value thereof, as the same may exist from time to time, providing
protection against all perils included within the classification of fire,
extended coverage, vandalism, malicious mischief, flood (in the event same is
required by a lender having a lien on the Premises) special extended perils
("all risk", as such term is used in the insurance industry), plate glass
insurance and such other insurance as Lessor deems advisable. In addition,
Lessor shall obtain and keep in force, during the term of this Lease, a policy
of rental value insurance covering a period of one year, with loss payable to
Lessor, which insurance shall also cover all Operating Expenses for said period.
In the event that the Premises shall suffer an insured loss as defined in
paragraph 9.1(g) hereof, the deductible amounts under the casualty insurance
policies relating to the Premises shall be paid by Lessee.
8.4. PAYMENT OF PREMIUM INCREASE.
(a) After the term of this Lease has commenced, Lessee shall not be
responsible for paying Lessee's Share of any increase in the property insurance
premium for the Industrial Center specified by Lessor's insurance carrier as
being caused by the use, acts or omissions of any other lessee of the Industrial
Center, or by the nature of such other lessee's occupancy which create an
extraordinary or unusual risk.
(b) Lessee, however, shall pay the entirety of any increase in the
property insurance premium for the Industrial Center over what it was
immediately prior to the commencement of the term of this Lease if the increase
is specified by Lessor's insurance carrier as being caused by the nature of
Lessee's occupancy or any act or omission of Lessee.
8.5. INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus, or such
other rating as may be required by a lender having a lien on the Premises, as
set forth in the most current issue of "Best's Insurance Guide." Lessee shall
not do or permit to be done anything which shall invalidate the insurance
policies carried by Lessor. Lessee shall deliver to Lessor copies of liability
insurance policies required under paragraph 8.1 or certificates evidencing the
existence and amounts of such insurance within seven (7) days after the
commencement date of this Lease. No such policy shall be cancelable or subject
to
10
<PAGE>
reduction of coverage or other modification except after thirty (30) days prior
written notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with renewals or "binders" thereof.
8.6. WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
which perils occur in, on or about the Premises, whether due to the negligence
of Lessor or Lessee or their agents, employees, contractors and/or invitees.
Lessee and Lessor shall, upon obtaining the policies of insurance required give
notice to the insurance carrier or carriers that the foregoing mutual waiver of
subrogation is contained in this Lease.
8.7. INDEMNITY. Lessee shall indemnify and hold harmless Lessor from and
against any and all claims arising from Lessee's use of the Industrial Center,
or from the conduct of Lessee's business or from any activity, work or things
done, permitted or suffered by Lessee in or about the Premises or elsewhere and
shall further indemnify and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any obligation
on Lessee's part to be performed under the terms of this Lease, or arising from
any act or omission of Lessee, or any of Lessee's agents, contractors, or
employees, and from and against all costs, attorney's fees, expenses and
liabilities incurred in the defense of any such claim or any action or
proceeding brought thereon; and in case any action or proceeding be brought
against Lessor by reason of any such claim, Lessee upon notice from Lessor shall
defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor
and Lessor shall cooperate with Lessee in such defense. Lessee, as a material
part of the consideration to Lessor, hereby assumes all risk of damage to
property of Lessee or injury to persons, in, upon or about the Industrial Center
arising from any cause and Lessee hereby waives all claims in respect thereof
against Lessor.
8.8. EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor
shall not be liable for injury to Lessee's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Lessee, Lessee's employees, invitees, customers, or any other person in or about
the Premises or the Industrial Center, nor shall Lessor be liable for injury to
the person of Lessee, Lessee's employees, agents or contractors, whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether said damage or injury results from
conditions arising upon the Premises or upon other portions of the Industrial
Center, or from other sources or places and regardless of whether the cause of
such damage or injury or the means of repairing the same is inaccessible to
Lessee. Lessor shall not be liable for any damages arising from any act or
neglect of any other lessee, occupant or user of the Industrial Center, nor from
the failure of Lessor to enforce the provisions of any other lease of the
Industrial Center.
11
<PAGE>
9. DAMAGE OR DESTRUCTION.
9.1. DEFINITIONS.
(a) "Premises Partial Damage" shall mean if the Premises are damaged
or destroyed to the extent that the cost of repair is less than fifty percent of
the then replacement cost of the Premises.
(b) "Premises Total Destruction" shall mean if the Premises are
damaged or destroyed to the extent that the cost of repairs is fifty percent or
more of the then replacement cost of the Premises.
(c) "Premises Building Partial Damage" shall mean if the Building of
which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is less than fifty percent of the then replacement cost of the
Building.
(d) "Premises Building Total Destruction" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that the
cost to repair is fifty percent or more of the then replacement cost of the
Building.
(e) "Industrial Center Buildings" shall mean all of the buildings on
the Industrial Center site.
(f) "Industrial Center Buildings Total Destruction" shall mean if the
Industrial Center Buildings are damaged or destroyed to the extent that the cost
of repair is fifty percent or more of the then replacement cost of the
Industrial Center Buildings.
(g) "Insured Loss" shall mean damage or destruction which was covered
by an event required to be covered by the insurance described in paragraph 8.
The fact that an Insured Loss has a deductible amount shall not make the loss an
uninsured loss.
(h) "Replacement Cost" shall mean the amount of money necessary to be
spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring excluding all improvements
made by lessees.
9.2. PREMISES PARTIAL DAMAGE; PROMISES BUILDING PARTIAL DAMAGE.
(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is an
Insured Loss and which falls into the classification of either Premises Partial
Damage or Premises Building Partial Damage, then Lessor shall, at Lessor's
expense, repair such damage to the Premises, but not Lessee's fixtures,
equipment or tenant improvements, as soon as reasonably possible and this Lease
shall continue in full force and effect.
(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is not
an Insured Loss and which falls within the classification of Premises Partial
Damage or Premises Building
12
<PAGE>
Partial Damage, unless caused by a negligent or willful act of Lessee (in which
event Lessee shall make the repairs at Lessee's expense), which damage prevents
Lessee from using the Premises, Lessor may at Lessor's option either (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after the date of the occurrence of such
damage of Lessor's intention to cancel and terminate this Lease as of the date
of the occurrence of such damage. In the event Lessor elects to give such
notice of Lessor's intention to cancel and terminate this Lease, Lessee shall
have the right within ten (10) days after the receipt of such notice to give
written notice to Lessor of Lessee's intention to repair such damage at Lessee's
expense, without reimbursement from Lessor, in which event this Lease shall
continue in full force and effect, and Lessee shall proceed to make such repairs
as soon as reasonably possible. If Lessee does not give such notice within such
10-day period this Lease shall be canceled and terminated as of the date of the
occurrence of such damage.
9.3. PREMISES TOTAL DESTRUCTION; PROMISES BUILDING TOTAL DESTRUCTION;
INDUSTRIAL CENTER BUILDINGS TOTAL DESTRUCTION.
(a) Subject to the provisions of paragraphs 9.4 and 9.5, if at any
time during the term of this Lease there is damage, whether or not it is an
Insured Loss, and which falls into the classifications of either (i) Premises
Total Destruction, or (ii) Premises Building Total Destruction, or
(iii) Industrial Center Buildings Total Destruction, then Lessor may at Lessor's
option either (i) repair such damage or destruction, but not Lessee's fixtures,
equipment or tenant improvements, as soon as reasonably possible at Lessor's
expense, and this Lease shall continue in full force and effect, or (ii) give
written notice to Lessee within thirty (30) days after the date of occurrence of
such damage of Lessor's intention to cancel and terminate this Lease, in which
case this Lease shall be canceled and terminated as of the date of the
occurrence of such damage.
9.4. DAMAGE NEAR END OF TERM.
(a) Subject to paragraph 9.4(b), if at any time during the last six
months of the term of this Lease there is substantial damage, whether or not an
Insured Loss, which falls within the classification of Premises Partial Damage,
Lessor or Lessee may cancel and terminate this Lease as of the date of
occurrence of such damage by giving written notice to the other of such party's
election to do so within 30 days after the date of occurrence of such damage.
(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an
option to extend or renew this Lease, and the time within which said option may
be exercised has not yet expired, Lessee shall exercise such option, if it is to
be exercised at all, no later than twenty (20) days after the occurrence of an
Insured Loss falling within the classification of Premises Partial Damage during
the last six months of the term of this Lease. If Lessee duly exercises such
option during said twenty (20) day period, Lessor shall, at Lessor's expense,
repair such damage, but not Lessee's fixtures, equipment or
13
<PAGE>
tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
during said twenty (20) day period, then Lessor may at Lessor's option terminate
and cancel this Lease as of the expiration of said twenty (20) day period by
giving written notice to Lessee of Lessor's election to do so within ten (10)
days after the expiration of said twenty (20) day period, notwithstanding any
term or provision in the grant of option to the contrary.
9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event Lessor repairs or restores the Premises pursuant to
the provisions of this paragraph 9, the rent payable hereunder for the period
during which such damage, repair or restoration continues shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of rent, if any, Lessee shall have no claim against Lessor
for any damage suffered by reason of any such damage, destruction, repair or
restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this paragraph 9 and shall not commence such repair or
restoration within ninety (90) days after such obligation shall accrue, Lessee
may at Lessee's option cancel and terminate this Lease by giving Lessor written
notice of Lessee's election to do so at any time prior to the commencement of
such repair or restoration. In such event this Lease shall terminate as of the
date of such notice.
9.6. TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
9.7. WAIVER. Lessor and Lessee waive the provisions of any statute which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
10. REAL PROPERTY TAXES.
10.1. PAYMENT OF TAXES. Lessor shall pay the real property tax, as
defined in paragraph 10.3, applicable to the Industrial Center subject to
reimbursement by Lessee of Lessee's Share of such taxes in accordance with the
provisions of paragraph 4.2, except as otherwise provided in paragraph 10.2.
10.2. ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for
paying Lessee's Share of any increase in real property tax specified in the tax
assessor's records and work sheets as being caused by additional improvements
placed upon the Industrial Center by other lessees or by Lessor for the
exclusive enjoyment of such other lessees. Lessee shall, however, pay to Lessor
at the time that Operating Expenses are payable under paragraph 4.2(c) the
entirety of any increase in real property tax if assessed solely
14
<PAGE>
by reason of additional improvements placed upon the Premises by Lessee or at
Lessee's request.
10.3. DEFINITION OF "REAL PROPERTY TAX." As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
Improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Industrial Center or any portion thereof by any
authority having the direct or indirect power to tax, including any city,
county, state or federal government, or any school, agricultural, sanitary,
fire, street, drainage or other improvement district thereof, as against any
legal or equitable interest of Lessor in the Industrial Center or in any portion
thereof, as against Lessor's right to rent or other income therefrom, and as
against Lessor's business of leasing the Industrial Center. The term "real
property tax" shall also include any tax, fee, levy, assessment or charge (i) in
substitution of, partially or totally, any tax, fee, levy, assessment or charge
hereinabove included within the definition of "real property tax," or (ii) the
nature of which was hereinbefore included within the definition of "real
property tax," or (iii) which is imposed for a service or right not charged
prior to June 1, 1978, or, if previously charged, has been increased since June
1, 1978, or (iv) which is imposed as a result of a transfer, either partial or
total, of Lessor's interest in the Industrial Center or which is added to a tax
or charge hereinbefore included within the definition of real property tax by
reason of such transfer, or (v) which is imposed by reason of this transaction,
any modifications or changes hereto, or any transfers hereof.
10.4. JOINT ASSESSMENT. If the Industrial Center is not separately
assessed, Lessee's Share of the real property tax liability shall be an
equitable proportion of the real property taxes for all of the land and
improvements included within the tax parcel assessed, such proportion to be
determined by Lessor from the respective valuations assigned in the assessor's
work sheets or such other information as may be reasonably available. Lessor's
reasonable determination thereof, in good faith, shall be conclusive.
10.5. PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible, Lessee
shall cause said trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Lessee's property.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If
15
<PAGE>
any such services are not separately metered to the Premises, Lessee shall pay
at Lessor's option, either Lessee's Share or a reasonable proportion to be
determined by Lessor of all charges jointly metered with other premises in the
Building.
ASSIGNMENT AND SUBLETTING.
12.1. LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease without the need for notice to Lessee under paragraph 13.1.
12.2. LESSEE AFFILIATE. Notwithstanding the provisions of
paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion
thereof, without Lessor's consent, to any corporation which controls, is
controlled by or is under common control with Lessee, or to any corporation
resulting from the merger or consolidation with Lessee, or to any person or
entity which acquires all the assets of Lessee as a going concern of the
business that is being conducted on the Premises, all of which are referred to
as "Lessee Affiliate," provided that before such assignment shall be effective
said assignee shall assume, in full, the obligations of Lessee under this Lease.
Any such assignment shall not, in any way, affect or limit the liability of
Lessee under the terms of this Lease even if after such assignment or subletting
the terms of this Lease are materially changed or altered without the consent of
Lessee, the consent of whom shall not be necessary.
12.3. TERMS AND CONDITIONS OF ASSIGNMENT. Regardless of Lessor's
consent, no assignment shall release Lessee of Lessee's obligation, hereunder or
alter the primary liability of Lessee to pay the Base Rent and Lessee's Share of
Operating Expenses, and to perform all other obligations to be performed by
Lessee hereunder. Lessor may accept rent from any person other than Lessee
pending approval or disapproval of such assignment. Neither a delay in the
approval or disapproval of such assignment nor the acceptance of rent shall
constitute a waiver or estoppel of Lessor's right to exercise its remedies for
the breach of any of the terms or conditions of this paragraph 12 or this Lease.
Consent to one assignment shall not be deemed consent to any subsequent
assignment. In the event of default by any assignee of Lessee or any successor
of Lessee, in the performance of any of the terms hereof, Lessor may proceed
directly against Lessee without the necessity of exhausting remedies against
said assignee. Lessor may consent to subsequent assignments of this Lease or
amendments or modifications to this Lease with assignees of Lessee, without
notifying Lessee, or any successor of Lessee, and without obtaining its or their
consent thereto and such action shall not relieve Lessee of liability under this
Lease.
16
<PAGE>
12.4. TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. Regardless of
Lessor's consent, the following terms and conditions shall apply to any
subletting by Lessee of all or any part of the Premises and shall be included in
subleases:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease heretofore or
hereafter made by Lessee, and Lessor may collect such rent and income and apply
same toward Lessee's obligations under this Lease; provided, however, that until
a default shall occur in the performance of Lessee's obligations under this
Lease, Lessee may receive, collect and enjoy the rents accruing under such
sublease. Lessor shall not, by reason of this or any other assignment of such
sublease to Lessor nor by reason of the collection of the rents from a
sublessee, be deemed liable to the sublessee for any failure of Lessee to
perform and comply with any of Lessee's obligations to such sublessee under such
sublease. Lessee hereby irrevocably authorizes and directs any such sublessee,
upon receipt of a written notice from Lessor stating that a default exists in
the performance of Lessee's obligations under this Lease, to pay to Lessor the
rents due and to become due under the sublease. Lessee agrees that such
sublessee shall have the right to rely upon any such statement and request from
Lessor, and that such sublessee shall pay such rents to Lessor without any
obligation or right to inquire as to whether such default exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee or Lessor for any such rents
so paid by said sublessee to Lessor.
(b) No sublease entered into by Lessee shall be effective unless and
until it has been approved in writing by Lessor. In entering into any sublease,
Lessee shall use only such form of sublease as is satisfactory to Lessor, and
once approved by Lessor, such sublease shall not be changed or modified without
Lessor's prior written consent. Any sublessee shall, by reason of entering into
a sublease under this Lease, be deemed, for the benefit of Lessor, to have
assumed and agreed to conform and comply with each and every obligation herein
to be performed by Lessee other than such obligations as are contrary to or
inconsistent with provisions contained in a sublease to which Lessor has
expressly consented in writing.
(c) If Lessee's obligations under this Lease have been guaranteed by
third parties, then a sublease, and Lessor's consent thereto, shall not be
effective unless said guarantors give their written consent to such sublease and
the terms thereof.
(d) The consent by Lessor to any subletting shall not release Lessee
from its obligations or alter the primary liability of Lessee to pay the rent
and perform and comply with all of the obligations of Lessee to be performed
under this Lease.
(e) The consent by Lessor to any subletting shall not constitute a
consent to any subsequent subletting by Lessee or to any assignment or
subletting by the sublessee. However, Lessor may consent to subsequent
sublettings and assignments of the sublease or any amendments or modifications
thereto without notifying Lessee or anyone else
17
<PAGE>
liable on the Lease or sublease and without obtaining their consent and such
action shall not relieve such persons from liability.
(f) In the event of any default under this Lease, Lessor may proceed
directly against Lessee, any guarantors or any one else responsible for the
performance of this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.
(g) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of Lessee under such sublease from the time of
the exercise of said option to the termination of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to Lessee or for any other prior defaults of Lessee under
such sublease.
(h) Each and every consent required of Lessee under a sublease shall
also require the consent of Lessor.
(i) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.
(j) Lessor's written consent to any subletting of the Premises by
Lessee shall not constitute an acknowledgment that no default then exists under
this Lease of the obligations to be performed by Lessee nor shall such consent
be deemed a waiver of any then existing default, except as may be otherwise
stated by Lessor at the time.
(k) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within ten (10) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset from
and against Lessee for any such defaults cured by the sublessee.
12.5. ATTORNEY'S FEES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or if
Lessee shall request the consent of Lessor for any act Lessee proposes to do
then Lessee shall pay Lessor's reasonable attorneys fees incurred in connection
therewith, such attorneys fees not to exceed $350.00 for each such request.
13. DEFAULT; REMEDIES.
13.1. DEFAULT. The occurrence of any one or more of the following
events shall constitute a material default of this Lease by Lessee:
18
<PAGE>
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any other
payment required to be made by Lessee hereunder, as and when due, where such
failure shall continue for a period of three (3) days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(c) Except as otherwise provided in this Lease, the failure by Lessee
to observe or perform any of the covenants, conditions or provisions of this
Lease to be observed or performed by Lessee, other than described in
paragraph (b) above, where such failure shall continue for a period of thirty
(30) days after written notice thereof from Lessor to Lessee; provided, however,
that if the nature of Lessee's noncompliance is such that more than thirty (30)
days are reasonably required for its cure, then Lessee shall not be deemed to be
in default if Lessee commenced such cure within said thirty (30) day period and
thereafter diligently prosecutes such cure to completion. To the extent
permitted by law, such thirty (30) day notice shall constitute the sole and
exclusive notice required to be given to Lessee under applicable Unlawful
Detainer statutes.
(d)(i) The making by Lessee of any general arrangement or general
assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as
defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in
the case of a petition filed against Lessee, the same is dismissed within sixty
(60) days); (iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within thirty
(30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days. In the event that any provision of this paragraph 13.1(d) is contrary to
any applicable law, such provision shall be of no force or effect.
(e) The discovery by Lessor that any financial statement given to
Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor
in interest of Lessee or any guarantor of Lessee's obligation hereunder, was
materially false.
13.2. REMEDIES. In the event of any such material default by Lessee,
Lessor may at any time thereafter, with or without notice or demand and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such default:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee all damages incurred
by Lessor by reason of Lessee's default including, but not limited to, the cost
of recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises,
19
<PAGE>
reasonable attorney's fees, and any real estate commission actually paid; the
worth at the time of award by the court having jurisdiction thereof of the
amount by which the unpaid rent for the balance of the term after the time of
such award exceeds the amount of such rental loss for the same period that
Lessee proves could be reasonably avoided; that portion of the leasing
commission paid by Lessor pursuant to paragraph 15 applicable to the unexpired
term of this Lease.
13.3. DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but in
no event later than thirty (30) days after written notice by Lessee to Lessor
and to the holder of any first mortgage or deed of trust covering the Premises
whose name and address shall have theretofore been furnished to Lessee in
writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion.
13.4. LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expenses or other
sums due hereunder will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain. Such
costs include, but are not limited to, processing and accounting charges, and
late charges which may be imposed on Lessor by the terms of any mortgage or
trust deed covering the Property. Accordingly, if any installment of Base Rent,
Operating Expenses, or any other sum due from Lessee shall not be received by
Lessor or Lessor's designee within ten (10) days after written notice that such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to 6% of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, nor prevent Lessor from
exercising any of the other rights and remedies granted hereunder. In the event
that a late charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of any of the aforesaid monetary obligations of Lessee,
then Base Rent shall automatically become due and payable quarterly in advance,
rather than monthly, notwithstanding paragraph 4.1 or any other provision of
this Lease to the contrary.
14. CONDEMNATION. If the Premises or any portion thereof or the Industrial
Center are taken under the power of eminent domain, or sold under the threat of
the exercise of said power (all of which are herein called "condemnation"), this
Lease shall terminate as to the part so taken as of the date the condemning
authority takes title or possession, whichever first occurs. If more than ten
percent of the floor area of the Premises, or more than twenty-five percent of
that portion of the Common Areas designated as parking for the Industrial Center
is taken by condemnation, Lessee may, at Lessee's option, to be exercised in
writing only within ten (10) days after Lessor shall have given Lessee written
20
<PAGE>
notice of such taking (or in the absence of such notice, within ten (10) days
after the condemning authority shall have taken possession) terminate this Lease
as of the date the condemning authority takes such possession. If Lessee does
not terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the premises remaining,
except that the rent shall be reduced in the proportion that the floor area of
the Premises taken bears to the total floor area of the Premises. No reduction
of rent shall occur if the only area taken is that which does not have the
Premises located thereon. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any award for loss of or damage to Lessee's trade fixtures
and removable personal property. In the event that this Lease is not terminated
by reason of such condemnation, Lessor shall to the extent of severance damages
received by Lessor in connection with such condemnation, repair any damage to
the Premises caused by such condemnation except to the extent that Lessee has
been reimbursed therefor by the condemning authority. Lessee shall pay any
amount in excess of such severance damages required to complete such repair.
15. BROKER'S FEE.
(a) Upon execution of this Lease by both parties, Lessor shall pay to
Cornish & Carey Commercial Licensed real estate broker(s), a fee as set forth in
a separate agreement between Lessor and said broker(s), for brokerage services
rendered by said broker(s) to Lessor in this transaction.
(b) Lessor further agrees that if Lessee exercises any Option, as
defined in paragraph 40.l of this Lease, which is granted to Lessee under this
Lease, or any subsequently granted option which is substantially similar to an
Option granted to Lessee under this Lease, or if Lessee acquires any rights to
the Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or if Lessee remains in possession of the Premises after
the expiration of the term of this Lease after having failed to exercise an
Option, or if said broker(s) are the procuring cause of any other lease or sale
entered into between the parties pertaining to the Premises and/or any adjacent
property in which Lessor has an interest, then as to any of said transactions,
Lessor shall pay said broker(s) a fee in accordance with the schedule of said
broker(s) in effect at the time of execution of this Lease.
(c) Lessor agrees to pay said fee not only on behalf of Lessor but
also on behalf of any person, corporation, association, or other entity having
an ownership interest in said real property or any part thereof, when such fee
is due hereunder. Any transferee of Lessor's interests in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this paragraph 15. Said broker shall be a
third party beneficiary of the provisions of this paragraph 15.
21
<PAGE>
16. ESTOPPEL CERTIFICATE.
(a) Each party (as "responding party") shall at any time upon not
less than ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and certifying
that this Lease, as so modified, is in full force and effect) and the date to
which the rent and other charges are paid in advance, if any, and
(ii) acknowledging that there are not, to the responding party's knowledge, any
uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied upon
by any prospective purchaser or encumbrancer of the Premises or of the business
of the requesting party.
(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it shall
be conclusive upon such party that (i) this Lease is in full force and effect,
without modification except as may be represented by the requesting party,
(ii) there are no uncured defaults in the requesting party's performance, and
(iii) if Lessor is the requesting party, not more than one month's rent has been
paid in advance.
(c) If Lessor desires to finance, refinance, or sell the Property, or
any part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender or purchaser. Such statements shall include the past
three (3) years' financial statements of Lessee. All such financial statements
shall be received by Lessor and such lender or purchaser in confidence and shall
be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Industrial Center, and except as expressly
provided in paragraph 15, in the event of any transfer of such title or
interest, Lessor herein named (and in case of any subsequent transfers then the
grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall, subject
as aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.
18. SEVERABILITY. The invalidity of any provision of this Lease as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the
22
<PAGE>
maximum rate then allowable by law from the date due. Payment of such interest
shall not excuse or cure any default by Lessee under this Lease; provided,
however, that interest shall not be payable on late charges incurred by Lessee
nor on any amounts upon which late charges are paid by Lessee.
TIME OF ESSENCE. Time is of the essence with respect to the obligations to be
performed under this Lease.
21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expenses and insurance and tax expenses payable shall be deemed to be rent.
22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This lease may be modified in writing only, signed by the
parties in interest at the time of the modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate broker
listed in paragraph 15 hereof nor any cooperating broker on this transaction nor
the Lessor or any employee or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or use
by Lessee of the Premises or the Property and Lessee acknowledges that Lessee
assumes all responsibility regarding the Occupational Safety Health Act, the
legal use and adaptability of the Premises and the compliance thereof with all
applicable laws and regulations in effect during the term of this Lease except
as otherwise specifically stated in this Lease.
23. NOTICES. Any notice required or permitted to be given hereunder shall be
in writing and may be given by personal delivery or by certified mail, and if
given personally or by mail, shall be deemed sufficiently given if addressed to
Lessee to the attention of Colleen Prince or to Lessor at the address noted
below the signature of the respective parties, as the case may be. Either party
may by notice to the other specify a different address for notice purposes
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall not be deemed to render unnecessary the obtaining of Lessor's consent to
or approval of any subsequent act by Lessee. The acceptance of rent hereunder
by Lessor shall not be a waiver of any preceding breach by Lessee of any
provision hereof, other than the failure of Lessee to pay the particular rent so
accepted, regardless of Lessor's knowledge of such preceding breach at the time
of acceptance of such rent.
23
<PAGE>
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof,
such occupancy shall be a tenancy from month to month upon all the provisions
of this Lease pertaining to the obligations of Lessee, but all Options, if
any, granted under the terms of this Lease shall be deemed terminated and be
of no further effect during said month to month tenancy.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
paragraph 17, this Lease shall bind the parties, their personal representatives,
successors and assigns. This Lease shall be governed by the laws of the State
where the Industrial Center is located and any litigation concerning this Lease
between the parties hereto shall be initiated in the county in which the
Industrial Center is located.
30. SUBORDINATION.
(a) This Lease, and any Option granted hereby, at Lessor's option,
shall be subordinate to any ground lease, mortgage, deed of trust, or any other
hypothecation or security now or hereafter placed upon the Industrial Center and
to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease and any
Options granted hereby prior to the lien of its mortgage, deed of trust or
ground lease, and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed prior to such mortgage, deed of trust or ground
lease, whether this Lease or such Options are dated prior or subsequent to the
date of said mortgage, deed of trust or ground lease or the date of recording
thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease or any Option granted herein
prior to the lien of any mortgage, deed of trust or ground lease, as the case
may be. Lessee's failure to execute such documents within ten (10) days after
written demand shall constitute a material default by Lessee hereunder without
further notice to Lessee or, at Lessor's
24
<PAGE>
option, Lessor shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to
execute such documents in accordance with this paragraph 30(b).
31. ATTORNEY'S FEES. If either party named herein bring an action to enforce
the terms hereof or declare rights hereunder, the prevailing party in any such
action, on trial or appeal, shall be entitled to his reasonable attorney's fees
to be paid by the losing party as fixed by the court.
32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same, showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises or the Building any
ordinary "For Sale" signs and Lessor may at any time during the last 120 days of
the term hereof place on or about the Premises any ordinary "For Lease" signs.
All activities of Lessor pursuant to this paragraph shall be without abatement
of rent, nor shall Lessor have any liability to Lessee for the same.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common Areas
without first having obtained Lessor's prior written consent. Notwithstanding
anything to the contrary in this Lease, Lessor shall not be obligated to
exercise any standard of reasonableness in determining whether to grant such
consent.
34. SIGNS. Lessee shall not place any sign upon the Premises or the Industrial
Center without Lessor's prior written consent. Under no circumstances shall
Lessee place a sign on any roof of the Industrial Center.
35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to Lessor
of any or all of such subtenancies.
36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party such consent shall
not be unreasonably withheld or delayed.
37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The
25
<PAGE>
individuals executing this Lease on behalf of Lessor represent and warrant to
Lessee that they are fully authorized and legally capable of executing this
Lease on behalf of Lessor and that such execution is binding upon all parties
holding an ownership interest in the Property.
39. OPTIONS.
39.1. DEFINITION. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of first
refusal to lease other space within the Industrial Center or other property of
Lessor or the right of first offer to lease other space within the Industrial
Center or other property of Lessor; (3) the right or option to purchase the
Premises or the Industrial Center, or the right of first refusal to purchase the
Premises or the Industrial Center, or the right of first offer to purchase the
Premises or the Industrial Center, or the right or option to purchase other
property of Lessor, or the right of first refusal to purchase other property of
Lessor or the right of first offer to purchase other property of Lessor.
39.2. OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original Lessee
while occupying the Premises who does so without the intent of thereafter
assigning this Lease or subletting the Premises or any portion thereof, and may
not be exercised or be assigned, voluntarily or involuntarily, by or to any
person or entity other than Lessee, provided, however, that an Option may be
exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of
this Lease. The Options, if any, herein granted to Lessee are not assignable
separate and apart from this Lease, nor may any Option be separated from this
Lease in any manner, either by reservation or otherwise.
39.3. MULTIPLE OPTIONS. In the event that Lessee has any multiple
options to extend or renew this Lease a later option cannot be exercised unless
the prior option to extend or renew this Lease has been so exercised.
39.4. EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary, (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph 13.1(b) or 13.1(c) and continuing until the noncompliance alleged in
said notice of default is cured, or (ii) during the period of time commencing on
the date after a monetary obligation to Lessor is due from Lessee and unpaid
(without any necessity for notice thereof to Lessee) and continuing until the
obligation is paid, or (iii) at any time after an event of default described in
paragraph 13.1(a), 13.1(d), or 13.1(e) (without any necessity of Lessor to give
notice of such default to Lessee), nor (iv) in the event that Lessor has given
to Lessee three or more notices of default under paragraph 13.1(b), or paragraph
13.1(c), whether or
26
<PAGE>
not the defaults are cured, during the 12 month period of time immediately prior
to the time that Lessee attempts to exercise the subject Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to
commence to cure a default specified in paragraph 13.1(c) within thirty (30)
days after the date that Lessor gives notice to Lessee of such default and/or
Lessee fails thereafter to diligently prosecute said cure to completion, or
(iii) Lessee commits a default described in paragraph 13.1(a), 13.1(d) or
13.1(e) (without any necessity of Lessor to give notice of such default to
Lessee), or (iv) Lessor gives to Lessee three or more notices of default under
paragraph 13.1(b), or paragraph 13.1(c), whether or not the defaults are cured.
40. SECURITY MEASURES. Lessee hereby acknowledges that Lessor shall have no
obligation whatsoever to provide guard service or other security measures for
the benefit of the Premises or the Industrial Center. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees from acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole
option, from providing security protection for the Industrial Center or any part
thereof, in which event the cost thereof shall be included within the definition
of Operating Expenses, as set forth in paragraph 4.2(b).
41. EASEMENTS. Lessor reserves to itself the right, from time to time, to
grant such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so long
as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure to
do so shall constitute a material default of this Lease by Lessee without the
need for further notice to Lessee.
42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to
27
<PAGE>
recover such sum or so much thereof as it was not legally required to pay under
the provisions of this Lease.
43. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on behalf of said entity. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
44. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions, if any, shall be controlled by the
typewritten or handwritten provisions.
45. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease. This Lease
shall become binding upon Lessor and Lessee only when fully executed by Lessor
and Lessee.
46. ADDENDUM. Attached hereto is an addendum or addenda containing
paragraphs 47 through 54 which constitute a part of this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
28
<PAGE>
THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR
APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS
AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO: THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL
AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
LESSOR - WVP Income Plus III LESSEE - Mercator Genetics Inc.
By Jon Rayden - General Partner By /s/ Colleen Prince
------------------------------
By /s/ John Rayden Its: Director, Finance & Administration
-----------------------
ADDRESS FOR NOTICES AND RENT ADDRESS
19400 Stevens Creek Blvd., 4040 Campbell Avenue, Menlo Park 94025
Suite 200
Cupertino, CA 95014
29
<PAGE>
ADDENDUM TO THAT CERTAIN LEASE AGREEMENT DATED JULY 29,1993 MADE BY AND
BETWEEN WVP INCOME PLUS, III, HEREIN CALLED ("LESSOR") AND MERCATOR
GENETICS INC., A DELAWARE CORPORATION, HEREIN CALLED ("LESSEE")
47. TERM. Effective June 7, 1994, this Lease shall continue on "rolling" sixty
(60) day period. Either party may then terminate the lease at any time, with a
minimum of sixty days prior to written notice.
48. CONDITION OF PREMISES. Lessor shall provide Premises in an "As Is"
condition.
49. HAZARDOUS MATERIALS.
A. DEFINITIONS.
As used herein, the term "Hazardous Materials" shall mean any hazardous
wastes, materials or substances and other pollutants or contaminants, which are
or become regulated by any federal, state or local laws, ordinances,
regulations, rules or requirements, including but not limited to, the Resource
Conservation and Recovery Act, as amended, (42 U.S.C. Sections 6901 ET SEQ.),
the Comprehensive Environmental Response, Compensation and Liability Act, as
amended, (42 U.S.C. Sections 9601 ET SEQ.), the California Hazardous Materials
Control Act, as amended, (Cal. Health & Safety Code Sections 25100 ET SEQ.),
the California Hazardous Substance Account Act, as amended, (Cal. Health &
Safety Code Sections 25300 ET SEQ.,) and the Safe Drinking Water and Toxic
Enforcement Act (Cal. Health & Safety Code Section 25249.8) (Proposition 65).
Without limiting the above, the term "Hazardous Materials" also includes
petroleum (including crude oil and any of its fractions), radioactive materials,
asbestos, pesticides, PCB's, and medical or biologic wastes.
B. COMPLIANCE WITH LAW.
(1) Lessee shall comply with all federal, state and local laws,
ordinances, regulations, rules or requirements relating to the Lessee's use and
occupancy of the Leased Premises, including but not limited to those relating to
worker safety, public health and the environment ("Applicable Laws").
Specifically, but without limiting Lessee's obligations described above, Lessee
shall establish and adhere to any hazardous material management plan (the
"Plan") required by the County of San Mateo, City of Menlo Park or any other
federal, state or local governmental agency having jurisdiction ("Agency"), and
if a Plan is required, Lessee shall, not later then six months from the
commencement of this Lease, allow Lessor and Agency representatives to inspect
the Leased Premises for compliance with the Plan, and correct and item not in
compliance with the Plan, and correct any items not in compliance with
Applicable Laws. Lessor may require that Lessee coordinate its Plan with other
occupants of the Building. Lessee also shall not cause, maintain or permit any
nuisance in, on or about the Premises,
1
<PAGE>
and shall not install any tanks outside or within the Premises, above or below
ground, without the express written consent of Lessor.
(2) If an Agency directs Lessee or Lessor to take any action with
respect to the presence, release or threatened release of any Hazardous
Materials on, under or about the Premises, and that directive arises out of
Lessee's use of Hazardous Materials at the Premises or at any common area,
Lessee shall promptly commence and thereafter diligently prosecute to
completion, at Lessee's sole expense, any and all actions required by the
Agency. Lessor shall retain the right to review and approve any remediation
action proposed by Lessee. Lessee shall notify Lessor prior to taking any
action in response to the directive.
C. LESSEE'S USE OF HAZARDOUS MATERIALS.
(1) Lessee shall not, and Lessee shall not permit its employees,
agents, contractors, subtenants, licensees, customers, invitees or parties
permitted to enter the Premises by any of the foregoing (Lessee and such
persons, collectively, "Lessee Parties") to, manage, handle, store or use in any
way on the Premises any Hazardous Materials other than those necessary or useful
for Lessee's business, and all activity involving Hazardous Materials must be in
full and strict compliance with all Applicable Laws. Lessee parties shall not
spill, leak, pump, pour, emit, empty, discharge, inject, leach, dump or dispose
(hereinafter "Release") any Hazardous Materials onto, into or about the
Premises, except to the extent permitted under Applicable Laws. Upon Lessor's
request, Lessee shall provide Lessor with a list of all Hazardous Materials
managed, handled, stored, used, or located on the Leased Premises at any time
during the Lease Term, together with evidence that Lease has complied will all
Applicable Laws, including obtainment of a state identification number for
Hazardous Materials uses, if Applicable Laws require that Lessee obtain the
same. Lessee shall comply fully, including the completion of any corrective or
remediation action, with any premises closure requirements under Applicable Laws
relating to Lessee's or Lessee Parties use of Hazardous Materials NOT LATER THAN
the end of the Lease Term.
(2) Lessee shall have an individual on staff (on at least a part-time
basis) who is trained and assigned to handle environmental, health and safety
matters, such as, but not limited to, radiation safety and emergency planning.
D. LESSOR'S RIGHT TO INSPECT.
Upon prior written notice to Lessee, Lessor shall have the right at all
times during the Lease Term to conduct a reasonable inspection of the Premises,
including performing reasonable tests and investigations to determine if Lessee
is in compliance with the terms of this Lease. In conducting these inspections,
Lessor shall use its best efforts not to unreasonably disrupt Lessee's business
operations. Lessor shall bear the cost of any tests and/or investigations,
except that the cost of such test and/or investigations shall be borne by Lessee
if (a) the tests and/or investigations indicate that Hazardous Materials are
present on or under the Premises at concentrations exceeding
2
<PAGE>
levels for which remediation is required under any Applicable Law, and
(b) Lessee is responsible for the presence of such Hazardous Materials.
E. NOTICES.
Lessee will immediately notify Lessor orally (with a written follow-up
notice with five days) if Lessee knows or has reasonable cause to believe that a
Release of Hazardous Material has come or will come to be located on, in about
or beneath the Premises in violation of Applicable Laws, provided that such
notification obligation shall not in itself imply the existence of a remediation
obligation on the part of Lessee. Lessee also shall notify Lessor of (a) any
formal or informal correspondence or communication from any Agency concerning
the release of Hazardous Materials on or migrating to or from the Premises, or
the violation or possible violation of any Applicable Law; or (b) any claims
made or threatened by any third party relating to loss, damage or injury claimed
to have been caused by and Lessee Party's handling, storage or use of any kind
of Hazardous Materials on the Premises or any Leased Party's alleged violation
of any Applicable Laws.
F. INDEMNIFICATION.
(1) Lessee shall indemnify, defend (with legal counsel acceptable to
Lessor) and hold Lessor, its shareholders, officers, agents, employees,
successors and assigns harmless from any and all claims, demands, judgments,
damages, liabilities or losses (including diminution in value of the Premises or
damages from loss or restriction on use of the Premises), costs and expenses
(including attorney's fees, consulting fees and expert fees), response and/or
removal costs (including costs associated with site restoration, monitoring,
corrective action, or closure), penalties, fines and punitive damages arising
out of or in connection with the handling, storage, use, generation, treatments,
manufacture, other management or Release of any Hazardous Materials by any
Lessee Party.
(2) Lessor shall indemnify, defend and hold Lessee, its shareholders,
officers, agents, employees, successors and assigns harmless from any and all
claims, demands, judgments, liabilities or losses, penalties, fines and punitive
damages arising out of or in connection with the handling, storage, use,
generation, treatment, manufacture, other management or Release of any Hazardous
Materials in or about the Premises, the Building or Industrial Center caused by
any person or entity other than a Lessee Party. Without limiting the generality
of the foregoing, Lessor acknowledges that the Premise Room 1123 may contain
trace elements of radioactivity which were not caused by Lessee. Lessee shall
have no responsibility or liability for the clean up of such radioactivity.
G. REMEDIATION OF HAZARDOUS MATERIALS.
If a Release of any Hazardous Materials occurs on the Leased Premises
during the term of the Lease as a result of any act or omission of any Lessee
Party, Lessee, at its
3
<PAGE>
sole expense, shall (a) promptly make all reasonable efforts to contain and
mitigate such Release, (b) provide prompt notification to the proper authorities
if required by an Applicable Law, and (c) upon notice to Lessor and with
Lessor's approval, investigate and take all appropriate removal or remedial
actions necessary to comply with any Applicable Law. This provision shall
survive the expiration or termination of this Lease.
50. OPERATING EXPENSES.
A. Notwithstanding the provisions of Paragraph 4.2, the following
shall not be included within Operating Expenses:
(1) Costs of a capital nature, except as provided in Paragraph 52,
including but not limited to capital improvements and alterations, capital
equipment, and capital tools as determined in accordance with generally accepted
accounting principles.
(2) All interest, loan fees, and other carrying costs related to any
mortgage or deed of trust on the Industrial Center or any capital item, and all
rental and other payable due under any ground or underlying lease, or any lease
for any equipment ordinarily considered to be of a capital nature (except
janitorial equipment which is not affixed to the Building).
(3) Costs of repairs and other work occasioned by fire, windstorm, or
other casualty covered or required to be covered by insurance.
(4) Any costs, fined, or penalties incurred due to violations by
Lessor or any governmental rule or authority, this Lease or any other lease in
the Property, or due to Lessor's negligence or willful misconduct.
(5) Management costs (which shall be deemed to include salaries,
benefits, and other compensation to all management personnel) in excess of 5%
per annum of the annual Base Rent.
(6) The cost of monitoring, containing, removing, or otherwise
remediating any contamination of the Industrial Center (including the underlying
land and ground water) by any Hazardous Materials where such contamination was
not caused by Lessee.
(7) Any other expense that under generally accepted accounting
principles and practice consistently applied would not be considered a normal
maintenance or operating expense.
(8) Any insurance deductible to the extent that Lessee's Share
thereof would exceed $1,000.
4
<PAGE>
51. COMPLIANCE WITH LAW.
Notwithstanding anything to the contrary contained in the Lease, including,
without limitation, the provisions of Paragraphs 6.2(a) and (b), Lessee shall
not be responsible for compliance with any laws, codes or ordinances where such
compliance is not related specifically to Lessee's use, occupancy, or alteration
of the Premises. For example, if any governmental authority should require the
building to be structurally strengthened against earthquake, or should require
the removal of asbestos from the building, such compliance shall be performed by
and at the sole cost of Lessor. Without limiting the generality of the
foregoing, Lessor agrees that it shall be responsible at its sole cost and
expense for ensuring that the Industrial Center and all portions thereof comply
with Title III of the Americans with Disabilities Act, except to the extent
compliance is triggered by Lessee's alterations, if any.
52. LESSEE'S MAINTENANCE AND REPAIR OBLIGATIONS.
Notwithstanding the provisions of Paragraph 7.2(a), Lessor, and not Lessee,
shall be responsible for the maintenance and repair of the plumbing, electrical,
and HVAC systems serving the Premises, except for damage caused by Lessee. In
the event the Lessor repairs or replaces any portion of the major systems, as
defined to be electrical, plumbing, HVAC, and/or roof, the cost of such repairs
or replacements shall be amortized over the useful life of the replacement as
defined by generally accepted accounting principles. Lessee shall be obligated
to reimburse Lessor only for that portion of the amortized cost of replacement
applicable to the remaining term of the Lease; provided, however, in no event
shall Lessee's major systems reimbursement obligation exceed, in the aggregate,
the amount of $2500.00.
53. INDEMNITY
Notwithstanding anything to the contrary in the Lease, Lessee shall not be
required to indemnify, defend, or hold Lessor harmless from or against claims,
liability, loss, cost or expense arising out of the breach by Lessor, or
Lessor's agents, employees, licensees, invitees, or independent contractors
(collectively "Lessor's Agents"), of any covenant, representation or warranty
under this Lease, or any negligence or willful misconduct of Lessor or Lessor's
Agents.
54. UTILITIES COST
Lessee shall pay to Lessor its pro-rata share of utilities of the Leased
Premises. For example, should Lessee be the only Tenant within the Premises,
Lessee shall pay to Lessor 100% of the utilities cost. If, however, a second
tenant occupies 10,000 square feet of the Premises, Lessee shall pay to Lessor
.545% of the utilities cost (12,000 square feet divided by 22,000 square feet).
5
<PAGE>
MAP
6
<PAGE>
MERCATOR GENETICS, INC.
MULTI-TENANT LEASE AGREEMENT DATED JULY 29, 1993
BETWEEN WVP INCOME PLUS, III AND MERCATOR GENETICS, INC.
EXHIBIT B
7.2 LESSEE'S OBLIGATIONS.
The following list of items are noted to be damaged or destroyed prior to
Mercator Genetics' sub-lease with Raychem.
o Faucet broken in Room 1043.
o Trace elements of radioactivity on benches in Room 1123.
o Ants surrounding the perimeter of the building causing substantial ant
problem in the interior.
7.3 ALTERATIONS AND ADDITIONS.
The following is a list of the improvements to the facility that Mercator
Genetics would like to initiate at our expense. Upon termination of the lease,
Lessee will allow Lessor to acquire improvements at no cost to Lessor.
o Install sink in Room 1043
o Install sink in Room 1107
o Install sink in Room 1097
o Install lab bench in Room 1043
o Install lab bench in Room 1082
7
<PAGE>
EXHIBIT "C"
MERCATOR GENETICS, INC.
SECTION B. CHEMICAL INVENTORY SUMMARY
Proposed maximum amounts of hazardous materials maintained on-site summarized by
hazard class.
1. FLAMMABLE LIQUIDS
1.2 gal.
2. CORROSIVES
Class A - 0.4 gal.
Class B - 1.0 gal., 0.44 lbs.
3. POISONS
Class B - 0.13 gal., 1.8 lbs.
4. OXIDIZERS
0.02 lbs.
5. RADIOACTIVES
8 mCi
6. OTHER REGULATED MATERIALS
0.26 gal.
<PAGE>
CHEMICAL INVENTORY CHART
<PAGE>
FIRST AMENDMENT OF LEASE
This First Amendment of Lease ("Amendment") is made and entered into this
11th day of August, 1993, by and between WVP Income Plus III, a California
Limited Partnership ("Landlord"), and Mercator Genetics Inc., a Delaware
Corporation ("Tenant").
RECITALS
A. Landlord and Tenant entered into a lease dated July 29, 1993, and an
Addendum attached thereto, wherein Tenant agreed to lease from Landlord
approximately 12,000 square feet of space in the building commonly known as
4040 Campbell Ave., Menlo Park, California ("Premises").
B. Landlord and Tenant now desire to amend the terms of the Lease.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt of which is hereby acknowledged, Landlord
and Tenant agree as follows:
1. Rent shall be due on the first day of each month. The $10,200
received by Landlord with the execution of the lease shall be for the period
October 8, 1993 through November 7, 1993. Rent for the period November 8, 1993
through November 30, 1993 in the pro-rated amount of $7,820 shall be due on
November 1, 1993. Beginning December 1, 1993 and each month thereafter, monthly
rent in the amount of $10,200 shall be due on the first day of each month.
2. Paragraphs #52 and #54 of the Addendum to Lease dated July 29, 1993
shall be deleted.
3. The term "Operating Expenses" as defined in the lease, shall also
include (a) the repair and maintenance of the roof and roof covering to the
building, (b) the repair and maintenance of any HVAC system serving the
building, (c) the repair and maintenance of all plumbing and electrical systems,
(d) any and all other repairs and maintenance costs of any kind attributable to
the Premises or to Common Areas, (e) all costs of utilities to the building, and
the common areas including but not limited to, water, gas, electricity, and
garbage removal, (f) landscape maintenance, and (g) a property management fee
equal to 5% of the total amount of base rent, operating expenses, insurance
premiums, and real property taxes.
4. The term "Operating Expenses" as defined in the lease, shall not
include (a) any and all repairs and maintenance costs of any kind attributable
to any part of the building or Industrial Complex leased to other Tenants and
(b) replacement of either the roof or the HVAC system. If replacement is
required, Landlord shall cause the necessary replacement and Tenant shall pay
its share (25%) of the monthly amortized cost of the replacement with its
monthly rent. The monthly amortized cost of the replacement shall
1
<PAGE>
be determined by dividing the cost of the replacement by the useful life of the
item as determined by the contractor hired by Landlord to do the replacement.
However, in no event shall Tenant's monthly share exceed $250 for all
replacements incurred.
5. All "Operating Expenses" as defined in the lease except for insurance
premiums and property taxes, shall be allocated by Landlord among the Tenants in
the Building and/or Industrial Center which may be multiple Tenants (if there is
more than one Tenant) of the Building and/or the Industrial Center. Landlord
shall allocate these costs on an equitable basis such that all such costs and
charges are paid by Tenants and not by Landlord, whether or not the Building or
the Industrial Center are fully occupied. (If Tenant is the only occupant of
the Building, Tenant shall pay 100% of the operating expenses for the building
and Common Area, except for common area costs allocated to the other Building in
the Industrial Center.) All "Operating Expenses" attributable specifically to
the Premises, shall be allocated and paid 100% by Tenant.
6. All insurance premiums and property taxes shall be allocated by
Landlord as though the Building and/or the Industrial Center were fully leased.
Tenant shall pay its pro-rata share (25%) of insurance premiums and taxes
allocated to the Building. The building's share of these expenses is 80% of the
total for the Industrial Center. Therefore, Tenant's share of insurance
premiums and property taxes for the Industrial Center is 20%.
7. The Premises are a part of the Building which are a part of the
Industrial Center and in this connection, Tenant agrees to abide by, keep and
observe all reasonable rules and regulations which Landlord may make from time
to time for the management, safety, care, and cleanliness of the industrial
center. Without limiting the foregoing, Tenant shall not use, keep or permit to
be kept, any foul or noxious gas or substance in the Premises, or permit or
suffer the Premises to be occupied or used in a manner that unreasonably
interferes in any way with other tenants or those having business in the
Industrial Center.
8. The lease, and the rights and obligations of Landlord and Tenant under
the Lease, is subject to and contingent upon the approval of this lease by
Landlord's first mortgage holder by August 30, 1993.
9. Any claim by Tenant against Landlord shall be limited as described in
the lease, and furthermore, Tenant expressly waives any and all rights to
proceed against the individual partners, General Partners, officers or agents of
Landlord, and shall look solely to the assets of the partnership, WVP Income
Plus III, for any liability that Landlord may have to Tenant.
10. Notwithstanding anything to the contrary, Landlord shall be
responsible for providing all services to the building, including. but not
limited to utilities, repairs, maintenance, and all other items for the use and
operation of the building. However, Tenant shall be responsible for providing
its own janitorial service. This Paragraph is
2
<PAGE>
intended to identify the party who will do the work and Tenant shall still pay
for these items as they are included in operating expenses as provided in the
lease.
11. Notwithstanding anything to the contrary herein, Tenant's pro rata
share of all operating expenses, excluding taxes, insurance, utilities, and
janitorial, shall not exceed more than $1,200.00 ($0.10 per square foot) per
month during the term of this lease. Landlord shall provide quarterly
statements in reasonable detail with supporting documentation for all operating
expenses. The first quarter shall be October 8, 1993 through December 31, 1993
and then the quarters will end March 31, 1994, June 30, 1994, and August 7,
1994.
The parties have signed this Second Amendment of Lease, which for reference
purposes shall be deemed to be dated as of the date first written above.
LANDLORD TENANT
WVP Income Plus III Mercator Genetics, Inc.
A California Limited Partnership A Delaware Corporation
By: /s/ Jon Rayden By: /s/ Colleen Prince
--------------------------- -----------------------------
Its: General Partner Its: Director, Finance: Administration
Date: 8/11/93 Date: August 11, 1993
3
<PAGE>
MAP
<PAGE>
SECOND AMENDMENT OF LEASE
This Second Amendment of Lease ("Amendment") is made and entered into this
7th day of February, 1994, by and between WVP Income Plus III, a California
Limited Partnership ("Landlord") and Mercator Genetics Inc., a Delaware
Corporation ("Tenant").
RECITALS
A. Landlord and Tenant entered into a lease dated July 29, 1993, and an
Addendum attached thereto, and a First Amendment to Lease dated August 11, 1993,
wherein Tenant agreed to lease from Landlord approximately 12,544 square feet of
space in the building commonly known as 4040 Campbell Ave., Menlo Park,
California ("Premises").
B. Landlord and Tenant now desire to amend the terms of the Lease.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt of which is hereby acknowledged, Landlord
and Tenant agree as follows:
1. The term of the lease shall be extended to end on June 30, 1995.
2. Original Rent $10,200, plus an additional $150/mo. for 544 additional
square feet. See Exhibit A attached. Total Rent $10,350.
The parties have signed this Second Amendment of Lease, which for reference
purposes shall be deemed to be dated as of the date first written above.
LANDLORD TENANT
WVP Income Plus III Mercator Genetics, Inc.
A California Limited Partnership A Delaware Corporation
By: /s/ Jon Rayden By: /s/ Colleen Prince
--------------------------- -----------------------------
Its: General Partner Its: Director, Finance: Administration
Date: 2/16/94 Date: 2/15/94
1
<PAGE>
THIRD AMENDMENT OF LEASE
This Third Amendment of Lease ("Amendment") is made and entered into this
10th day of October, 1994, by and between WVP Income Plus III, a California
Limited Partnership ("Landlord") and Mercator Genetics Inc., a Delaware
Corporation ("Tenant").
RECITALS
A. Landlord and Tenant entered into a lease dated July 29, 1993, and an
Addendum attached thereto, a First Amendment to Lease dated August 11, 1993, and
a Second Amendment to Lease dated February 7, 1994, wherein Tenant agreed to
lease from Landlord approximately 12,544 square feet of space in the building
commonly known as 4040 Campbell Ave., Menlo Park, California ("Premises").
B. Landlord and Tenant now desire to amend the terms of the Lease.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt of which is hereby acknowledged, Landlord
and Tenant agree as follows:
1. Effective November 1, 1994, the Premises shall include that space
outlined as Space B on Exhibit "A" attached hereto.
2. Effective November 1, 1994, the monthly Base Rent shall be increased
by $900.00 to $11,250.00. Additional 2,000 square feet at 0.45 = $900.
1
<PAGE>
April 27, 1995
Mr. Jon Rayden
General Partner
WVP INCOME PLUS III
19400 Stevens Creek Boulevard
Cupertino, CA 95054
RE: FOURTH AMENDMENT to the Master Lease dated July 29, 1993, as modified
by First Amendment dated August 11, 1993, as modified by Second
Amendment dated February 7, 1994, as modified by Third Amendment dated
October 10, 1994.
Dear Jon,
This letter shall constitute the Fourth Amendment dated April 27, 1995 to
the Master Lease dated July 29, 1993, as modified in the above statement for the
property located at 4040 Campbell Avenue, Menlo Park, California.
1. PREMISES: The first floor of the building consisting of the initial
thirteen thousand eight hundred ninety-one (13,891) rentable square feet, plus
an additional 5,408 square feet of expansion space (EBT) plus an additional
5,387 square feet of warehouse space, for a total of 24,686 square feet.
The additional space commitment of 5,387 +/- square feet is a concession by
Mercator Genetics given your request that the entire first floor be rented. Any
modification to this area will require extensive building code restorations and
will be cost prohibitive and therefore Mercator Genetics will be required to
lease such additional space without the ability to have it improved. Mercator
Genetics however is willing to lease such space provided this additional space
is not factored into the gross building operating expense cost, including but
not limited to, property management fee, insurance and taxes.
2. LEASE TERM: The term of the Lease shall be for a period of three (3)
years and three (3) months commencing July 1, 1995 and terminating September 30,
1998.
3. USE OF PREMISES: As per Lease Agreement dated July 29, 1993.
4. RENT SCHEDULE: The monthly base rent shall be as follows:
1
<PAGE>
EXISTING EBT WAREHOUSE
TIME FRAME 13,891 SF/ 5,408 SF/ 5,387 SF/ TOTAL RENT
NNN NNN GROSS
7/1/95-12/31/95 $10,620 $10,620
1/1/96-12/31/96 $11,000 $4,380 $ 850 $16,230
1/1/97-09/30/98 $12,000 $4,905 $ 995 $17,900
5. LEASE RENEWAL OPTION: Tenant shall have two (2) one (1) year options
to extend the term of the Lease. During the first option year the rental rate
shall be $17,900/month and during the second option year the rate shall be
$18,700/month. Said option shall be exercised, in writing, no later than-six
(6) months prior to the end of the lease term or extension period.
6. OPTION TO LEASE SECOND FLOOR SPACE: Tenant shall retain the option to
lease for a 23 month term ending on September 30, 1999, the current Spectra
Biomedical space of 10,000 +/- square feet commencing immediately upon current
lease termination of October 31, 1997. Such option to exercise must be
exercised in writing to Landlord no later than April 30, 1997. The rental rate
shall be $0.85 NNN/square foot. Tenant agrees that in the event it exercises
its option to lease the Spectra space, it will also exercise its first option to
extend as described in Paragraph 5 above. In any event, notwithstanding that
the second floor lease term ends on September 30, 1999, Tenant shall still have
the right to elect to exercise the second renewal option with respect to the
Premises described in paragraph 1 above. In the event Tenant exercises the
second renewal option of the first floor, it shall also have the option, which
Landlord hereby grants, to extend the term of the second floor through September
30, 2000. Such option shall be exercised, if at all, simultaneously with the
second renewal option. Landlord agrees to provide Tenant with new carpet in
carpeted areas and new VCT floor tiles as needed in laboratory areas for major
obvious cracked or missing tiles and repaint the entire second floor space. If
Tenant exercises the second floor option, the ground floor lease rate for the
period from the expiration of the ground floor lease (September 30, 1998) until
the termination of the lease for the optioned space, shall remain the same rent
as currently specified in Paragraph 5 above.
7. RIGHT OF FIRST REFUSAL: In the event Tenant does not exercise its
option to expand into the second floor and such space remains vacant, Tenant
shall retain a reoccurring Right of First Refusal. Tenant shall be required to
respond in writing within three (3) business days of receiving notice of a bona
fide written offer, together with a copy thereof.
8. RIGHT TO ASSIGN OR SUBLEASE: Tenant will require the Right to Assign
the Lease in its entirety or to sublease all or any portion of the Premises
without the consent of the Landlord to (a) any entity resulting from a merger or
consolidation with Tenant, or (b) any subsidiary or affiliate of Tenant. Upon
such an assignment, the assigning Tenant shall be released of all liability
under the Lease, as amended, provided that, in the event of an assignment
described in clause (b) above, the assignee has financial strength equal
2
<PAGE>
to or greater than that of the assigning Tenant at the time of the assignment.
Any other assignment or sublease would be made with the prior written consent of
the Landlord whose consent shall not be unreasonably withheld or delayed.
9. IMPROVEMENTS TO PREMISES: Landlord, at Landlord's sole cost and
expense, shall warrant that all electrical, HVAC, and plumbing shall be in good
working order. Landlord to be responsible to clean and paint the 5,408 square
feet EBT space and steam clean carpet before Tenant occupies the space.
Landlord shall also paint the entire 5,387 square feet at $0.30 per square foot
up to $1,600.
Landlord, at Landlord's sole cost and expense, shall provide new carpet to
all existing carpeted areas, including common area hallway to rear entrance, and
paint the entire 13,891 square feet of existing rented space, and install new
VCT floor tiles as needed in laboratory areas to restore major obvious cracked
or missing tiles.
If Tenant, at any time or times during the term of the Lease, shall desire
to make any alterations or improvements on the Premises, or any part or parts
thereof, the same shall be constructed without cost or expense to Landlord
(subject to Paragraph 11 below), in accordance with the requirements of all
laws, ordinances, codes, orders, rules and regulations of all governmental
authorities having jurisdiction over the Premises. In particular, Tenant shall
have the right to modify the building interiors. Should any modifications
require a building permit, such work shall be done by a licensed contractor.
10. OWNERSHIP OF SPECIALIZED TENANT IMPROVEMENTS: At the termination of
the Lease and any extension options, Tenant shall have the right to remove from
the Premises (and any expansion space) any specialized tenant improvements
installed by Tenant so long as Tenant repairs any damage resulting from such
removal.
11. LANDLORD WARRANTY: The Landlord, at Landlord's sole cost and expense,
will warrant that the building and all building systems and sub-systems are in
good working condition. In the event that the premise is not in compliance with
any code or other legal requirement (including without limitation Title 24 and
ADA requirements) and compliance is required by governmental or other authority,
Landlord shall be fully responsible for such compliance. The Tenant Improvement
Allowance will not be used for these purposes.
12. EXCLUSIVE ACCESS TO SIDE AND REAR ENTRY: Effective upon Spectra
Biomedical current lease expiration on October 31, 1997 and Mercator exercising
its option to lease second floor, Tenant shall be granted sole use of the side
and rear doors for entry and exit purposes. The only exception shall be in
emergency exit situations required by other second floor tenants.
13. PARKING: Tenant shall be granted use of an additional fifty (50)
non-designated parking spaces from the rear of the existing building parking
lot. Landlord shall improve the areas between the additional parking and the
rear exit door as to provide a safer and more inviting rear entrance.
Specifically, the stairwell shall be
3
<PAGE>
repaired, rear paved lot area shall be repaired as needed, gravel or some other
material brought in to provide an even and safe pathway across railroad tracks
for employees, tree to be removed, and indoor and outside lighting to be
increased at the rear entrance. The Tenant Improvement Allowance will not be
used for these purposes.
14. COMMERCIAL SIGN: Landlord agrees to remove Cornish & Carey Commercial
sign from front entrance as of the date the Landlord's first mortgage holder
approves this proposal.
15. SECURITY DEPOSIT: The security deposit shall be increased to be equal
to one month's rent at all times during the lease.
16. CONTINGENCY: This Fourth Amendment is contingent on Landlord being
able to obtain the approval of these terms from Landlord's first mortgage
holder, within two weeks of this final executed Lease Amendment dated April
27,1995. Landlord will attempt to obtain a Nondisturbance Agreement executed by
Landlord's first mortgage holder within thirty (30) days of this final executed
lease agreement dated April 27, 1995.
17. SEISMIC AND OTHER STRUCTURAL WORK: Notwithstanding any other
provision of this Lease, Landlord acknowledges and agrees that Landlord, at
Landlord's sole cost and expense (which shall not be passed through to Tenant in
any manner), shall be responsible for any and all structural work (including
without limitation seismic upgrades) required by any entity, agency, authority,
etc., having jurisdiction over the Building or the Premises, except to the
extent such structural or seismic work is required as a condition to the
approval by any such entity, agency, authority, etc., of any alterations to the
Building or the Premises requested by Tenant.
18. APPROVAL OF TENANT ALTERATIONS TO PREMISES: In the event that any
work is required to the Building or the Premises by any entity, agency, or
governmental or other authority pursuant to Paragraphs #11 or #17 above, and
such work is triggered by any improvement or alteration actually made to the
Premises by Tenant, then Tenant and not Landlord shall be responsible for and
shall pay for any and all such work.
19. Any claim by Tenant against Landlord shall be limited as described in
the Lease, and furthermore, Tenant expressly waives any and all rights to
proceed against the individual partners, General Partners, officers or agents of
Landlord, and shall look solely to the assets of the partnership, WVP Income
Plus III, for any liability that Landlord may have to Tenant. Landlord will
attempt to obtain a Non disturbance Agreement in favor of
4
<PAGE>
Tenant executed by Landlord's Mortgage Lender within thirty (30) days of a fully
executed agreement.
Sincerely,
/s/ Colleen Prince
Colleen Prince
Director, Finance & Administration
ACKNOWLEDGED AND AGREED:
LANDLORD: WVP Income Plus III
By: /s/ Jon Rayden
------------------------
Jon Rayden
General Partner
Date: May 22, 1995
5
<PAGE>
MERCATOR GENETICS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is effective as of this day of
_______, 19__ by and between Mercator Genetics, Inc., a Delaware corporation
(the "Company"), and _________________________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining liability insurance for its officers and directors, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance; and
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation, subjecting officers and directors to expensive
litigation risks at the same time as the availability and coverage of liability
insurance has been severely limited; and
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and the Indemnitee and other officers
and directors of the Company may not be willing to continue to serve in such
capacities without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company,
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's agreement to continue to
serve the Company, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
(a) INDEMNIFICATION OF EXPENSES. The Company shall indemnify
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry, or investigation that Indemnitee in good faith believes
might lead to the institution of any such action, suit, proceeding or
alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
arising in part out of any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee or agent of the Company, or
any subsidiary of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of any
action or inaction on the part of Indemnitee while serving in such capacity
(hereinafter an "Indemnifiable Event") against any and all expenses (including
attorneys' fees and all other
1
<PAGE>
costs, expenses and obligations incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in, any such action, suit,
proceeding, alternative dispute resolution mechanism, hearing, inquiry or
investigation), judgments, fines, penalties and amounts paid in settlement (if
such settlement is approved in advance by the Company, which approval shall not
be unreasonably withheld) of such Claim and any federal, state, local or foreign
taxes imposed on the Indemnitee as a result of the actual or deemed receipt of
any payments under this Agreement (collectively, hereinafter "Expenses"),
including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses. Such payment of Expenses shall
be made by the Company as soon as practicable but in any event no later than
five days after written demand by Indemnitee therefor is presented to the
Company.
(b) REVIEWING PARTY. Notwithstanding the foregoing, (i) the
obligations of the Company under Section I (a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(f) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section l(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any
Expense Advance shall be unsecured and no interest shall be charged thereon. If
there has not been a Change in Control (as defined in Section 10(c) hereof, the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section 1(c) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the fight to commence
litigation seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including the legal
or factual bases therefor, and the Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the Reviewing Party
otherwise shall be conclusive and binding on the Company and Indemnitee.
(c) CHANGE IN CONTROL. The Company agrees that if there is a Change
in Control of the Company (other than a Change in Control which has been
approved by a majority
2
<PAGE>
of the Company's Board of Directors who were directors immediately prior to such
Change in Control) then with respect to all matters thereafter arising
concerning the rights of Indemnitee to payments of Expenses and Expense Advances
under this Agreement or any other agreement or under the Company's Certificate
of Incorporation or Bylaws as now or hereafter in effect, Independent Legal
Counsel (as defined in Section 10(d) hereof) shall be selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
permitted to be indemnified under applicable law and the Company agrees to abide
by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to fully indemnify such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.
(d) MANDATORY PAYMENT OF EXPENSES. Notwithstanding any other
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section (1)(a)
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. EXPENSES: INDEMNIFICATION PROCEDURE.
(a) ADVANCEMENT OF EXPENSES. The Company shall advance all Expenses
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
days after written demand by Indemnitee therefor to the Company.
(b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) NO PRESUMPTIONS; BURDEN OF PROOF. For purposes of this
Agreement, the termination of any Claim by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of NOLO
CONTENDERE, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by
3
<PAGE>
Indemnitee to secure a judicial determination that Indemnitee should be
indemnified under applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by the Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder, the burden of proof shall be on the
Company to establish that Indemnitee is not so entitled.
(d) NOTICE TO INSURERS. If, at the time of the receipt by the
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such action,
suit, proceeding, inquiry or investigation in accordance with the terms of such
policies.
(e) SELECTION OF COUNSEL. In the event the Company shall be
obligated hereunder to pay the Expenses of any Claim, the Company, if
appropriate, shall be entitled to assume the defense of such Claim with counsel
approved by Indemnitee, upon the delivery to Indemnitee of written notice of its
election so to do. After delivery of such notice, approval of such counsel by
Indemnitee and the retention of such counsel by the Company, the Company will
not be liable to Indemnitee under this Agreement for any fees of counsel
subsequently incurred by Indemnitee with respect to the same Claim; provided
that, (i) Indemnitee shall have the right to employ Indemnitee's counsel in any
such Claim at Indemnitee's expense and (ii) if (A) the employment of counsel by
Indemnitee has been previously authorized by the Company, (B) Indemnitee shall
have reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, or (C) the Company
shall not continue to retain such counsel to defend such Claim, then the
reasonable fees and expenses of Indemnitee's counsel shall be at the expense of
the Company.
3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
(a) SCOPE. Notwithstanding any other provision of this Agreement,
the Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change after the date of this Agreement in any applicable law, statute or rule
which expands the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes shall be, IPSO FACTO, within the
purview of an Indemnitee's rights, and the Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
Board of Directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have not effect on this Agreement or the parties' rights and obligations
hereunder.
4
<PAGE>
(b) NONEXCLUSIVITY. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which an Indemnitee may be
entitled under the Company's Certificate of Incorporation, the Company's Bylaws,
any agreement, any vote of stockholders or disinterested Directors, the General
Corporation Law of the State of Delaware, or otherwise, both as to action in
Indemnitee's official capacity and as to action in another capacity while
holding such office. The indemnification provided under this Agreement shall
continue as to Indemnitee for any action taken or not taken while serving in an
indemnified capacity even though Indemnitee may have ceased to serve in such
capacity at the time of any action, suit or other covered proceeding.
4. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred by him in connection with any Claim, but not,
however, for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may override
Delaware law and prohibit the Company from indemnifying its directors and
officers under this Agreement or otherwise. For example, the Company and
Indemnitee acknowledge that the Securities and Exchange Commission has taken the
position that indemnification is not permissible for liabilities arising under
certain federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of director and officer liability insurance, Indemnitee shall be named
as an insured in such a manner as to provide Indemnitee the same rights and
benefits as are accorded to the most favorably insured of the Company's
directors, if the Indemnitee is a director; or of the Company's officers, if the
Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees, if Indemnitee is
5
<PAGE>
not an officer or director but is a key employee. Notwithstanding the
foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, the premium costs for such insurance are disproportionate
to the amount of coverage provided, the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit, or Indemnitee is
covered by similar insurance maintained by a subsidiary or parent of the
Company.
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) EXCLUDED ACTION OR OMISSIONS. To indemnify Indemnitee for acts,
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law.
(b) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise as required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
(c) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) INSURED CLAIMS. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company or any
parent or subsidiary of the Company; or
(e) CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for expenses
or the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from
6
<PAGE>
the date of accrual of such cause of action, and any claim or cause of action of
the Company shall be extinguished and deemed released unless asserted by the
timely filing of a legal action within such two-year period; PROVIDED, HOWEVER,
that if any shorter period of limitations is otherwise applicable to any such
cause of action, such shorter period shall govern.
10. CONSTRUCTION OF CERTAIN PHRASES.
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its officers and directors, so that if Indemnitee is or
was an officer or director of such constituent corporation, or is or was serving
at the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, employee benefit
plan, trust or other enterprise, Indemnitee shall stand in the same position
under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as an officer or director of the Company which imposes duties on, or
involves services by, such officer or director with respect to an employee
benefit plan, its participants or its beneficiaries; and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan, Indemnitee
shall be deemed to have acted in a manner "not opposed to the best interests of
the Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company, (A) who is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 10% or more of the
combined voting power of the Company's then outstanding Voting Securities,
increases his beneficial ownership of such securities by 5% or more over the
percentage so owned by such person, or (B) becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than 20% of the total voting power represented by
the Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
7
<PAGE>
constitute a majority thereof, or (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
transactions) all of substantially all of the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitees under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean
any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean
any securities of the Company that vote generally in the election of directors.
11. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director or officer of the Company or of any other enterprise at the Company's
request.
13. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
8
<PAGE>
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action, unless as a part of such action a court
of competent jurisdiction over such action determines that each of the material
assertions made by Indemnitee as a basis for such action were not made in good
faith or were frivolous. In the event of an action instituted by or in the name
of the Company under this Agreement to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee in defense of such action (including costs and expenses incurred with
respect to Indemnitee's counterclaims and cross-claims made in such action), and
shall be entitled to the advancement Expenses with respect to such action,
unless as a part of such action a court having jurisdiction over such action
determines that each of Indemnitee's material defenses to such action were made
in bad faith or were frivolous.
14. NOTICE. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. SEVERABILITY. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. CHOICE OF LAW. This Agreement shall be governed by and its provisions
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.
18. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who
9
<PAGE>
shall execute all documents required and shall do all acts that may be necessary
to secure such rights and to enable the Company effectively to bring suit to
enforce such rights.
19. AMENDMENT AND TERMINATION. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth the
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
MERCATOR GENETICS, INC.,
By:
--------------------------------------
Title:
------------------------------------
Address: 4040 Campbell Avenue
Menlo Park, CA 94025
AGREED TO AND ACCEPTED
INDEMNITEE:
- -----------------------------------------
- -----------------------------------------
- -----------------------------------------
(address)
10
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), dated as of February 14, 1997,
is entered into by and between Progenitor, Inc. ("Progenitor"), Mercator
Genetics, Inc., a Delaware corporation ("Mercator"), and Elliott Sigal, M.D.,
Ph.D. ("Dr. Sigal") and supersedes and replaces any prior employment agreement
previously entered into between Mercator or any subsidiary thereof and Dr.
Sigal.
RECITAL
Progenitor, Mercator and Dr. Sigal wish to set forth herein all of the
terms and conditions of their employment relationship.
ACCORDINGLY, the parties agree as follows:
1. TERM OF AGREEMENT.
(a) EFFECTIVE DATE. The Agreement shall become effective as of the
date ("Effective Date") on which the Effective Time of the Reorganization occurs
(as such terms are defined in the Agreement and Plan of Reorganization dated as
of February 14, 1997, by and among Progenitor, Mercator and MG Merger Sub Corp.,
a wholly-owned subsidiary of Progenitor). This Agreement shall not become
effective unless and until the Reorganization is consummated.
(b) PERIOD OF EMPLOYMENT. Progenitor shall employ Dr. Sigal to
render services to Progenitor in the position and with the duties and
responsibilities described in Section 2 for the period (the "Period of
Employment") commencing on the Effective Date and ending on the date upon which
the Period of Employment is terminated in accordance with Section 4.
2. POSITION AND RESPONSIBILITIES.
(a) POSITION. Dr. Sigal accepts employment with Progenitor as Senior
Vice President of Research and Development, and shall perform all services
appropriate to that position, as well as such other services as may be
reasonably assigned to Dr. Sigal by the Chief Executive Officer of Progenitor.
Such services shall include, without limitation, all services appropriate to
supervising and managing the preclinical and clinical development areas of
Progenitor and overseeing the research function, which will be headed by H.
Ralph Snodgrass, Vice President of Research and Chief Scientific Officer, except
that during a transition period, the Human Genetics program will report directly
to Dr. Sigal. Dr. Sigal shall devote reasonable business efforts and his full
business time to the performance of his duties and the 1997 Goals set forth in
Exhibit A hereto. Dr. Sigal shall at all times be subject to the direction and
supervision of the President and Chief Executive Officer of Progenitor. It is
understood that Dr. Sigal may be expected to travel if necessary or reasonably
advisable in order to meet the obligations of his position. Dr. Sigal's
signature authority shall be the same as peer officers, i.e., any
1
<PAGE>
commitments or expenses of Progenitor over ten thousand dollars ($10,000)
require the signatures of two such officers (the second such signature to be
that of Mark N.K. Bagnall, Vice President, Finance and Chief Financial Officer
or Douglas B. Given, President and Chief Executor Officer).
(b) OTHER ACTIVITY. Except upon the prior written consent of the
President and Chief Executive Officer of Progenitor, Dr. Sigal (during the
Period of Employment) shall not (i) engage in any other full or part-time
employment; or (ii) engage, directly or indirectly, in any other business or
commercial activity (whether or not pursued for pecuniary advantage) that might
materially interfere with the business of Progenitor or any Affiliate or
otherwise create a conflict of interest with Progenitor or any Affiliate. An
"Affiliate" shall mean any person or entity that directly or indirectly
controls, is controlled by, or is under common control with Progenitor. So that
Progenitor may be aware of the extent of any other demands upon Dr. Sigal's time
and attention, Dr. Sigal shall disclose in confidence to the President and Chief
Executive Officer of Progenitor the nature and scope of any other business
activity in which he is or becomes engaged during the Period of Employment.
Notwithstanding the foregoing, Dr. Sigal may devote a reasonable amount of time
to professional, civic, and community affairs, and he may own up to one per cent
(1%) of the publicly traded stock of any business. Dr. Sigal does not currently
serve on any Boards of Directors other than as follows: Terminal Plaza
Associates.
(c) RESIGNATION. As of the Effective Date, Dr. Sigal hereby resigns
from all positions, offices and responsibilities with Mercator, including
without limitation, (i) his position as President and Chief Executive Officer
and (ii) his position on the Board of Directors of Mercator.
3. COMPENSATION AND BENEFITS.
(a) COMPENSATION. In consideration of the services to be rendered
under this Agreement, Progenitor shall pay Dr. Sigal a salary at the rate of two
hundred twenty-five thousand dollars ($225,000) per year, payable monthly,
pursuant to the procedures regularly established. The Board of Directors of
Progenitor ("Board") (or its Compensation Committee) shall review annually Dr.
Sigal's salary for potential adjustment in its sole discretion and without
regard to any policy or practice Progenitor may have for adjusting salaries
generally, provided that Dr. Sigal's salary may be adjusted downward only if and
to the extent that such downward adjustments are implemented for all other
senior managers of Progenitor, other than the President and Chief Executive
Officer. Progenitor shall also provide Dr. Sigal the additional compensation
set forth in the attached Exhibit B. Dr. Sigal shall not be entitled to any
compensation from Progenitor or Mercator other than as specifically set forth in
this Agreement, except as the Board in its sole discretion may determine to
provide.
(b) BONUSES. Dr. Sigal shall be eligible to receive annual bonuses
based upon the achievement of reasonable objectives established by the Board of
2
<PAGE>
Directors or its Compensation Committee. The potential amount of such bonuses,
the performance criteria for the award of the bonuses, and any amount actually
awarded shall be subject to the recommendation of the President and Chief
Executive Officer of Progenitor and the approval of the Board of Directors or
the Compensation Committee. Dr. Sigal's potential bonuses shall be in the range
of 0 to 30% of salary and shall be not less than the potential bonuses provided
for other senior managers of Progenitor other than the President and Chief
Executive Officer.
(c) STOCK OPTIONS. Dr. Sigal shall receive stock options to purchase
shares of Progenitor Common Stock equal to one per cent (1%) of the outstanding
Common Stock of Progenitor on a fully-diluted basis ("Initial Options")
immediately after the closing of Progenitor's initial public offering of its
Common Stock and the closing of the Reorganization. The terms and conditions of
the Initial Options shall be subject to the recommendation of the Chief
Executive Officer of Progenitor and the approval of and grant by the Board of
Directors or the Compensation Committee, provided, however that (i) the exercise
price shall be the price to the public in the initial public offering, (ii) the
vesting schedule shall be one quarter (1/4) of the options vesting after one (1)
year with the remainder to vest ratably on a quarterly basis over the next three
(3) years such that the options are fully vested after four (4) years, and (iii)
the vesting shall accelerate in the event of a change of control of Progenitor
if, and to the extent that, such accelerated vesting is made available to any
other senior manager of Progenitor other than the President and Chief Executive
Officer. To the maximum extent permitted by law, the Inital Options shall be
incentive stock options. The Initial Options shall be in addition to Dr.
Sigal's stock options rolling over from Mercator pursuant to the Agreement and
Plan of Reorganization, dated as of February 14, 1997, by and among Progenitor,
Reorganization Sub, and Mercator (the "Reorganization Agreement"). If the
closing of the Reorganization referred to above occurs prior to the initial
public offering, then Dr. Sigal shall receive the Initial Options as provided
above except that they shall be received in stages as follows: (A) immediately
after the closing of the Reorganization, Dr. Sigal shall receive options equal
to one per cent (1%) of the then outstanding Common Stock of Progenitor on a
fully-diluted basis, at a fair market value to the determined by the Board of
Progenitor; and (B) immediately after the initial public offering, if and when
such occurs, Dr. Sigal shall receive additional options at the price to the
public, such that the total number of options received under subparts A and B of
this Section equals one per cent (1%) of the outstanding Common Stock of
Progenitor on a fully-diluted basis as of immediately following the initial
public offering.
If Dr. Sigal is terminated without Cause (as defined below) or
resigns for Good Reason (as defined below) during the first year of the Period
of Employment, the vesting of one quarter (1/4) of the stock options granted
pursuant to this Section 3(c) which otherwise would vest after one (1) year
shall vest proratably as of the effective date of termination based on the
number of full months Dr. Sigal was employed by Progenitor divided by twelve
(12). If Dr. Sigal is terminated without Cause or resigns for Good Reason after
the first year of the Period of Employment, the vesting the remaining stock
options shall accelerate if, and to the extent that, such accelerated vesting
3
<PAGE>
is made available to any other senior manager of Progenitor other than the
President and Chief Executive Officer.
(d) BENEFITS. Dr. Sigal shall be entitled to vacation leave in
accordance with Progenitor's standard policies. Dr. Sigal shall have the right
to participate in and to receive benefits from all present and future benefit
plans specified in Progenitor's policies and generally made available to
similarly situated employees of Progenitor including without limitation, life
insurance (in the amount of $450,000), disability insurance, medical, dental,
retirement, sick leave, and all comparable benefits similarly titled.
Progenitor shall further provide to Dr. Sigal the benefits listed on the
attached Exhibit C (and in connection therewith, Progenitor and Dr. Sigal agree
that the term "Lender" pursuant to that certain Promissory Note dated as of
September 7, 1995 in the principal amount of $150,000 payable by Dr. Sigal
shall, from and after the Effective Date, refer to Progenitor and not Mercator).
Dr. Sigal also shall be entitled to any benefits or compensation tied to
termination as described in Section 4. No statement concerning benefits or
compensation to which Dr. Sigal is entitled shall alter in any way the term of
this Agreement, any renewal thereof, or its termination. All compensation and
comparable payments to be paid to Dr. Sigal under this Agreement shall be less
withholdings required by law. Dr. Sigal shall not be entitled to any benefits
from Progenitor or Mercator other than as specifically set forth in this
Agreement, except as the Board in its sole discretion may determine to provide.
(e) EXPENSES. Progenitor shall pay or reimburse Dr. Sigal for
reasonable travel and other business expenses incurred by Dr. Sigal in the
performance of his duties, in accordance with Progenitor's policies, as they may
be amended in Progenitor's sole discretion.
(f) LIMITATION ON PAYMENTS. Notwithstanding anything in this
Agreement to the contrary, if any portion of any payments to Dr. Sigal by
Progenitor under this Agreement and any other present or future plan of
Progenitor or other present or future agreement between Dr. Sigal and Progenitor
would not be deductible by Progenitor for federal income tax purposes by reason
of application of section 162(m) of the Internal Revenue Code of 1986, as
amended ("Code"), then payment of that portion to Dr. Sigal shall be deferred
until the earliest date upon which payment thereof can be made to Dr. Sigal
without being non-deductible pursuant to section 162(m) of the Code. In the
event of such deferral, Progenitor shall pay interest to Dr. Sigal on the
deferred amount at 120% of the applicable federal rate provided for in section
1274(d)(1) of the Code. In addition, notwithstanding any provision of this
Agreement to the contrary, the total payments or benefits to be made or provided
to Dr. Sigal by Progenitor (whether pursuant to this Agreement or otherwise)
shall not exceed three times Dr. Sigal's annualized includible compensation for
the base period, as defined in Subsection (d) of Section 280G of the Code, minus
one dollar ($1.00). The intent of this portion of this Section 3(d) is to
prevent any payment or benefit to Dr. Sigal from being subject to the excise tax
imposed by Code Section 4999 and to prevent any item of expense or
4
<PAGE>
deduction of Progenitor from being disallowed as a result of the application of
Code Section 280G.
4. TERMINATION OF EMPLOYMENT.
(a) BY DEATH. The Period of Employment shall terminate automatically
upon the death of Dr. Sigal. Progenitor shall pay to Dr. Sigal's beneficiaries
or estate, as appropriate, all vested compensation then due and owing, including
but not limited to payment for any accrued unused vacation and vested bonus
("Accrued Compensation"). Thereafter, all obligations of Progenitor under this
Agreement shall cease. Nothing in this Section shall affect any entitlement of
Dr. Sigal's heirs to the benefits of any life insurance plan or other applicable
benefits.
(b) BY DISABILITY. If, by reason of any physical or mental
incapacity, Dr. Sigal has been or will be prevented from properly performing his
duties under this Agreement for more than ninety (90) days in any one (1) year
period, then, to the extent permitted by law, Progenitor may terminate the
Period of Employment upon thirty (30) days' advance written notice. Progenitor
shall pay Dr. Sigal all Accrued Compensation through the last business day of
the notice period. Thereafter, all obligations of Progenitor under this
Agreement shall cease, provided however, that nothing in this Section shall
affect Dr. Sigal's rights under any applicable Progenitor disability plan nor
Dr. Sigal's right to disability insurance.
(c) BY EMPLOYER NOT FOR CAUSE. At any time, Progenitor may terminate
the Period of Employment for any reason, with or without cause, by providing Dr.
Sigal thirty (30) days advance written notice. Progenitor shall have the
option, in its complete discretion, (A) to require Dr. Sigal to work from home
and not to report to his office during the balance of the notice period, or (B)
to terminate Dr. Sigal at any time prior to the end of such notice period. In
either event, Progenitor shall (i) pay to Dr. Sigal all Accrued Compensation and
continue his benefits through the last business day of the notice period; (ii)
pay to Dr. Sigal on the last business day of the notice period a lump sum equal
to six (6) months salary; (iii) pay Dr. Sigal's COBRA premiums for six (6)
months following the last business day of the notice period ("Benefit
Continuation Period"); and (iv) to the extent permitted by the applicable plans,
continue Dr. Sigal's life insurance and disability insurance coverage during the
Benefit Continuation Period (items i through iv collectively referred to
hereafter as "Separation Benefits"). Thereafter, all of Progenitor's
obligations under this Agreement shall cease.
(d) BY EMPLOYER FOR CAUSE. At any time and, except as to clause (i)
of this Section 4(d), without prior notice, Progenitor may terminate the Period
of Employment for Cause (as defined below). In the event of termination for
Cause, Progenitor shall pay Dr. Sigal all Accrued Compensation through the date
of termination, thereafter, all of Progenitor's obligations under this Agreement
shall cease. Termination shall be for "Cause" if Dr. Sigal: (i) exhibits in
regard to his employment unfitness or unavailability for service, habitual
neglect, or incompetence or willfully breaches any
5
<PAGE>
material term of this Agreement; (ii) engages in employment-related misconduct
or acts in bad faith and to the detriment of Progenitor; (iii) exhibits
dishonesty in regard to his employment or is convicted of a crime involving
dishonesty, breach of trust, or physical or emotional harm to any person; (iv)
furnishes proprietary confidential information of Progenitor to a competitor or
a potential competitor except in the bona fide belief that such action was for
the benefit and best interest of Progenitor, or (v) is habitually intoxicated by
alcohol or drugs during work hours. Notwithstanding the above, upon the
occurrence of an event described in subsection (i) above, Progenitor shall give
Dr. Sigal thirty (30) days advance written notice of its intent to terminate and
the reason for termination. During this thirty (30) day period, Dr. Sigal shall
have an opportunity to correct the situation, and if corrected (in Progenitor's
reasonable judgment), Dr. Sigal's Period of Employment shall not be terminated;
if not corrected (in Progenitor's reasonable judgment), termination shall become
effective upon expiration of such thirty (30) day period. If termination is due
to Dr. Sigal's disability, Section 4(b) above shall control, and not this
Section 4(d) on termination for Cause.
(e) BY EMPLOYEE NOT FOR CAUSE. At any time, Dr. Sigal may terminate
the Period of Employment for any reason, with or without cause, by providing
Progenitor thirty (30) days' advance written notice. Progenitor shall have the
option, in its complete discretion, to make Dr. Sigal's termination effective at
any time prior to the end of such notice period. In either event, Progenitor
shall pay Dr. Sigal all Accrued Compensation through the last day of the above
notice period, not to exceed thirty (30) days; thereafter, all of Progenitor's
obligations under this Agreement shall cease.
(f) BY EMPLOYEE FOR GOOD REASON. Dr. Sigal may terminate the Period
of Employment for Good Reason (as defined below), provided Dr. Sigal gives
Progenitor thirty (30) days' advance written notice of the reason for
termination and his intent to terminate this Agreement. During this period,
Progenitor shall have an opportunity to correct the condition constituting Good
Reason. If the condition is remedied within this period (in the reasonable
judgment of Dr. Sigal), Dr. Sigal's notice to terminate shall be rescinded
without the necessity of any further action by any party; if not remedied,
termination shall become effective upon expiration of the above notice period.
Progenitor shall also have the option, in its complete discretion, to make Dr.
Sigal's termination effective at any time prior to the end of the notice period.
In either event, Progenitor shall provide Dr. Sigal the Separation Benefits.
Thereafter, all of Progenitor's obligations under this Agreement shall cease.
Dr. Sigal shall be entitled to exercise his right to terminate this Agreement
for Good Reason only if he gives the required notice not more than sixty (60)
days after the occurrence of the event that is the basis for the Good Reason or
the occurrence of the most recent of a concerted continuous pattern of events.
Termination shall result from a "Good Reason" if: (i) there is
an adverse change in Dr. Sigal's title or a material and adverse change in Dr.
Sigal's position, duties, responsibilities, or status with Progenitor; (ii)
there is a reduction in Dr. Sigal's salary then in effect, other than a
reduction comparable to reductions generally
6
<PAGE>
applicable to similarly situated employees of Progenitor; (iii) there is a
material reduction in Dr. Sigal's benefits, other than a reduction comparable to
reductions generally applicable to similarly situated employees of Progenitor;
(iv) Dr. Sigal is requested to relocate outside the San Francisco Bay Area; or
(v) Progenitor materially breaches this Agreement.
(g) TERMINATION OBLIGATIONS
i) All benefits to which Dr. Sigal is otherwise entitled shall
cease upon Dr. Sigal's termination, unless explicitly continued either under
this Agreement or under any specific written or policy or benefit plan of
Progenitor.
ii) Upon termination of the Period of Employment, Dr. Sigal
shall be deemed to have resigned from all offices and directorships then held
with Progenitor or any Affiliate.
iii) Following any termination of the Period of Employment, Dr.
Sigal shall fully cooperate with Progenitor in all matters relating to the
winding up of pending work on behalf of Progenitor and the orderly transfer of
work to other employees of Progenitor. Dr. Sigal shall also cooperate, at
Progenitor's reasonable expense, in the defense of any action brought by any
third party against Progenitor that relates in any way to Dr. Sigal's acts or
omissions while employed by Progenitor.
5. PROPRIETARY INFORMATION. Dr. Sigal shall execute and deliver
concurrently with the Effective Date a proprietary information agreement in the
form attached as EXHIBIT E ("Proprietary Information Agreement").
6. NONSOLICITATION. Dr. Sigal agrees that for a period of one year from
his termination of employment with Progenitor, he shall not solicit for
employment any person employed by Progenitor.
7. RELEASE OF CLAIMS.
(a) Dr. Sigal, Progenitor, and Mercator shall execute and deliver
concurrently with the Effective Date the Mutual Release attached hereto as
EXHIBIT F.
(b) Dr. Sigal represents that, after consulting with counsel, he is
not presently aware of any claims against Progenitor, Mercator, or any Affiliate
relating to his employment and based on Title VII of the Civil Rights Act of
1964, the Age Discrimination in Employment Act, the Americans with Disabilities
Act, the California Fair Employment and Housing Act, fraud, negligent or
intentional misrepresentation, negligent or intentional interference with
contract or prospective economic advantage, defamation, slander, or invasion of
privacy.
8. ARBITRATION.
7
<PAGE>
(a) ARBITRABLE CLAIMS. All disputes between Dr. Sigal (and his
attorneys, successors, and assigns) and Progenitor or Mercator (and their
Affiliates, shareholders, directors, officers, employees, agents, successors,
attorneys, and assigns) of any kind whatsoever, including without limitation,
all disputes relating in any manner to the employment or termination of Dr.
Sigal, and all disputes arising under this Agreement, ("Arbitrable Claims")
shall be resolved by arbitration. All persons and entities specified in the
preceding sentence (other than Progenitor, Mercator, and Dr. Sigal) shall be
considered third-party beneficiaries of the rights and obligations created by
this Section on Arbitration. Arbitrable Claims shall include, but are not
limited to, contract (express or implied) and tort claims of all kinds, as well
as all claims based on any federal, state, or local law, statute, or regulation,
excepting only claims under applicable workers' compensation law and
unemployment insurance claims. By way of example and not in limitation of the
foregoing, Arbitrable Claims shall include any claims arising under Title VII of
the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the
Americans with Disabilities Act, and the California Fair Employment and Housing
Act, as well as any claims asserting wrongful termination, breach of contract,
breach of the covenant of good faith and fair dealing, negligent or intentional
infliction of emotional distress, fraud, negligent or intentional
misrepresentation, negligent or intentional interference with contract or
prospective economic advantage, defamation, invasion of privacy, and claims
related to disability. Arbitration shall be final and binding upon the parties
and shall be the exclusive remedy for all Arbitrable Claims. THE PARTIES HEREBY
WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS.
(b) PROCEDURE. Arbitration of Arbitrable Claims shall be in
accordance with the National Rules for the Resolution of Employment Disputes of
the American Arbitration Association, as amended ("AAA Employment Rules"), as
augmented in this Agreement. Arbitration shall be initiated as provided by the
AAA Employment Rules, although the written notice initiating arbitration as
provided by the AAA Employment Rules shall also include a statement of the
claim(s) asserted and the facts upon which the claim(s) are based. Either party
may bring an action in court to compel arbitration under this Agreement and to
enforce an arbitration award. Otherwise, neither party shall initiate or
prosecute any lawsuit or administrative action in any way related to any
Arbitrable Claim. The Federal Arbitration Act shall govern the interpretation
and enforcement of this Section 8.
(c) ARBITRATOR SELECTION AND AUTHORITY. All disputes involving
Arbitrable Claims shall be decided by a single arbitrator. The arbitrator shall
be selected by mutual agreement of the parties within thirty (30) days of the
effective date of the notice initiating the arbitration. If the parties cannot
agree on an arbitrator, then the complaining party shall notify the AAA and
request selection of an arbitrator in accordance with the AAA Employment Rules.
The arbitrator shall have only such authority to award equitable relief,
including but not limited to injunctive relief, damages, costs, and fees as a
court would have for the particular claim(s) asserted. The fees of the
arbitrator shall be split between both parties equally. The arbitrator shall
have exclusive
8
<PAGE>
authority to resolve all Arbitrable Claims, including, but not limited to,
whether any particular claim is arbitrable and whether all or any part of this
Agreement is void or unenforceable.
(d) CONTINUING OBLIGATIONS. The rights and obligations of Dr. Sigal
and Progenitor set forth in this Section on Arbitration shall survive the
termination of the Period of Employment and the expiration of this Agreement.
9. MISCELLANEOUS.
(a) NOTICES. Any notice under this Agreement must be in writing and
shall be effective upon delivery by hand, upon facsimile transmission, or three
(3) business days after deposit in the United States mail, postage prepaid,
certified or registered, and addressed to Progenitor or to Dr. Sigal at the
corresponding address or fax number below. Dr. Sigal shall be obligated to
notify Progenitor in writing of any change in his address. Notice of change of
address shall be effective only when done in accordance with this Section.
Progenitor's Notice Address:
Progenitor, Inc.
1507 Chambers Road
Columbus, OH 43212-1566
Attention: Douglas B. Given, M.D., Ph.D.
Fax Number: (614) 488-0404
With a copy to:
Gavin B. Grover
Morrison & Foerster, LLP
425 Market Street
San Francisco, California 94105-2482
Fax Number: (415) 268-7522
Dr. Sigal's Notice Address:
Elliott Sigal, M.D., Ph.D.
565 Ortega Street
San Francisco, CA 94122
With a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
9
<PAGE>
Attention: John V. Roos
Fax Number: (415) 493-6811
(b) ACTION BY PROGENITOR. All actions required or permitted to be
taken under this Agreement by Progenitor, including without LIMITATION, exercise
of discretion, consents, waivers, and amendments to this Agreement, shall be
made and authorized only by the President and Chief Executive Officer or by his
or her representative specifically authorized in writing to fulfill these
obligations under this Agreement.
(c) INTEGRATION. As of the Effective Date, this Agreement is
intended to be the final, complete, and exclusive statement of the terms of Dr.
Sigal's employment by Progenitor, Mercator or any of their respective
Affiliates. This Agreement supersedes all other prior and contemporaneous
agreements and statements, whether written or oral, express or implied,
pertaining in any manner to the employment of Dr. Sigal, and it may not be
contradicted by evidence of any prior or contemporaneous statements or
agreements. To the extent that the practices, policies, or procedures of
Progenitor, now or in the future, apply to Dr. Sigal and are inconsistent with
the terms of this Agreement, the provisions of this Agreement shall control,
including without limitation any practices, policies, or procedures relating to
the employment, discipline, or termination of employees.
(d) AMENDMENTS; WAIVERS. This Agreement may not be amended except by
an instrument in writing, signed by Progenitor and Dr. Sigal. No failure to
exercise and no delay in exercising any right, remedy, or power under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, or power under this Agreement preclude any other
or further exercise thereof, or the exercise of any other right, remedy, or
power provided herein or by law or in equity.
(e) ASSIGNMENT, SUCCESSORS AND ASSIGNS. This Agreement shall be
binding upon and inure to the benefit of (i) the heirs, executors and legal
representatives of Dr. Sigal upon Dr. Sigal's death and (ii) any successor or
assignee of Progenitor. Notwithstanding the above, Dr. Sigal's duties and
responsibilities set forth in Section 2 above shall not be assignable or
delegable. Nothing in this Agreement shall prevent the consolidation of
Progenitor with, or its merger into any other entity, or the sale by Progenitor
of all or substantially all of its assets, or the otherwise lawful assignment by
Progenitor of any rights or obligations under this Agreement.
(f) SEVERABILITY. If any provision of this Agreement, or its
application to any person, place, or circumstance, is held by an arbitrator or a
court of competent jurisdiction to be invalid, unenforceable, or void, such
provision shall be enforced to the greatest extent permitted by law, and the
remainder of this Agreement and such provision as applied to other persons,
places, and circumstances shall remain in full force and effect.
10
<PAGE>
(g) ATTORNEYS' FEES. In any arbitration proceeding brought to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to recover reasonable attorneys' fees and costs.
(h) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the law of the State of California.
(i) INTERPRETATION. This Agreement shall be construed as a whole,
according to its fair meaning, and not in favor of or against any party. By way
of example and not in limitation, this Agreement shall not be construed in favor
of the party receiving a benefit nor against the party responsible for any
particular language in this Agreement. Captions are used for reference purposes
only and should be ignored in the interpretation of the Agreement.
(j) EMPLOYEE ACKNOWLEDGMENT. Dr. Sigal acknowledges that he has had
the opportunity to consult legal counsel in regard to this Agreement, that he
has read and understands this Agreement, that he is fully aware of its legal
effect, and that he has entered into it freely and voluntarily and based on his
own judgment and not on any representations or promises other than those
contained in this Agreement.
The parties have duly executed this Agreement as of the date first
written above.
DR. SIGAL
/S/ ELLIOTT SIGAL
- --------------------------------------------------
Elliott Sigal, M.D., Ph.D.
PROGENITOR, INC.
By: /S/ MARK N.K. BAGNALL
-----------------------------------------------
Its: Vice President and Chief Financial Officer
----------------------------------------------
MERCATOR GENETICS, INC.
By: /S/ ELLIOTT SIGAL
-----------------------------------------------
Its: President and Chief Executive Offiver
----------------------------------------------
11
<PAGE>
EXHIBIT A
1997 Goals
1. Successfully design, implement and manage one or more research and
development programs which result in newly committed research and
development funding of between $2 million and $5 million per year for a 3
to 5 year period.
TARGET FOR COMPLETION: Within 12 months of the Effective Time of the
Reorganization.
2. Successfully merge the Research departments and employees of Mercator and
Progenitor into a newly-formed Research function, which will be headed by
H. Ralph Snodgrass, Vice President, Research and Chief Scientific Officer,
except that during a transition period the Human Genetics program will
report directly to Dr. Sigal. Recognizing Dr. Snodgrass' key role in
Progenitor, it is critical that this Reorganization be accomplished in a
way that optimizes Dr. Snodgrass' opportunity to continue to contribute to
the success of Progenitor. Any preclinical and clinical development
departments will report to Dr. Sigal.
TARGET FOR COMPLETION: Beginning immediately upon the Effective Time of
the Reorganization and ongoing thereafter.
3. In connection with the following programs:
(a) Genetics Program - asthma
(b) Genetics Program - schizophrenia
(c) Genetics Program - cancer or arteriosclerosis
(d) Developmental Biology Program - del-1 program
(e) Developmental Biology Program - Leptin receptor program
(f) Developmental Biology Program - model systems
(g) New Technology Programs - bioinformatics
(h) New Technology Programs - gene expression
Establish a strategic research plan using standard project management to
identify and implement an approved milestone-driven research and
development effort which results in a successful strategic alliance(s) in
genetics (minimum of $6 million in committed funding) and a successful
developmental biology alliance (minimum of $4 million in committed
funding), or results in additional equity financing of at least $15
million.
TARGET FOR COMPLETION: Within 12 months of the Effective Time of the
Reorganization.
Exhibit A
<PAGE>
4. Successfully contribute to other corporate goals mutually defined with
other members of senior management, e.g., corporate strategic plans,
budgets, etc.
TARGET FOR COMPLETION: On-going.
Exhibit A
<PAGE>
EXHIBIT B
ADDITIONAL COMPENSATION
All accrued but unpaid vacation of Dr. Sigal from his period of employment
by Mercator shall be carried over to employment by Progenitor. As of the date
of this Agreement, Dr. Sigal has 90 hours of accrued but unused vacation pay.
Any salary in the ordinary course of Dr. Sigal's employment by Mercator
that is accrued but unpaid by Mercator shall be carried over to and paid by
Progenitor at the next regularly-scheduled payroll date.
Progenitor options shall be substituted in accordance with the
Reorganization Agreement for any Mercator employee stock options of Dr. Sigal,
all of which will be fully vested as of the Effective Time. Such options shall
be not be included in the calculation of the options to be granted to Dr. Sigal
pursuant to Section 3(c) of the Employment Agreement.
Progenitor shall not assume, but shall have no objection to the payment by
Mercator of, Dr. Sigal's bonus of $40,000 effective January 1997 and payable
ratably from January through April, so long as the payment does not exceed the
budget provided Progenitor by Mercator in connection with the Loan Agreement.
The Retention Plan described in EXHIBIT D.
Exhibit B
<PAGE>
EXHIBIT C
ADDITIONAL BENEFITS
- - In September 1995, Mercator loaned $150,000 to Elliott Sigal. The related
note bears interest at the lesser of (i) 28.2% of the capital gain upon the
sale of the secured property or (ii) the Fannie Mae Rate, compounded
annually. The balance is due no later than the first anniversary of Dr.
Sigal's termination of employment.
- - Reimbursement for reasonable business use of car phone.
Exhibit C
<PAGE>
EXHIBIT D
Mercator Retention Plan
Dr. Sigal shall receive any payment to which Dr. Sigal is entitled by the
terms of the Mercator Retention Plan (as defined in the Reorganization
Agreement), at the rate of between fifteen percent (15%) and twenty five percent
(25%) of his base annual compensation.
Exhibit D
<PAGE>
EXHIBIT E
PROGENITOR, INC.
PROPRIETARY INFORMATION AGREEMENT
As an employee of Progenitor, Inc., a Delaware corporation ("Progenitor"),
and in consideration of the covenants contained herein and in the Employment
Agreement between me and Progenitor dated February __, 1997 (the "Employment
Agreement"), I agree to the following:
1. MAINTAINING CONFIDENTIAL INFORMATION
(a) PROPRIETARY AND CONFIDENTIAL INFORMATION. "Proprietary
Information" is all information and any idea in whatever form, tangible or
intangible, pertaining in any manner to the business of Progenitor, Mercator
Genetics, Inc., or any affiliate or subsidiary (the "Company"), or their
employees, clients, consultants, licensees, collaborators, or business
associates, which was produced by any employee of the Company in the course of
his or her employment or otherwise produced or acquired by or on behalf of the
Company. All Proprietary Information not generally known outside of the
Company's organization, and all Proprietary Information so known only through
improper means, shall be deemed "Confidential Information." Without limiting
the foregoing definition, Proprietary and Confidential Information shall
include, but not be limited to: (i) trade secrets, formulas, processes,
know-how, designs, development or experimental work, computer programs, data
bases, other original works of authorship, electronic codes, inventions,
improvements, and research projects; (ii) information about costs, profits,
markets, sales, and lists of customers or clients; (iii) business, marketing,
and strategic plans; and (iv) employee personnel files and compensation
information.
(b) RESTRICTION ON USE. I agree at all times during the term of my
employment not to use Proprietary Information, nor to disclose Confidential
Information, except for the benefit of the Company. Following my employment, I
agree that I shall neither, directly or indirectly, use any Proprietary
Information nor disclose any Confidential Information, except as expressly and
specifically authorized in writing by the President and Chief Executive Officer
or Board of Directors of the Company.
(c) FORMER EMPLOYER INFORMATION. I agree that I will not, during my
employment with the Company, improperly use or disclose any proprietary or
confidential information or trade secrets of my former or concurrent employers
or companies, if any, and that I will not bring onto the premises of the Company
any unpublished document or any property belonging to my former or concurrent
employers or companies, if any, unless consented to in writing by said employers
or companies.
(d) THIRD PARTY INFORMATION. I recognize that the Company has
received and in the future will receive from third parties their confidential or
proprietary information or trade secrets subject to a duty on the Company's part
to maintain the
Exhibit E-1
<PAGE>
confidentiality of such information and to use it only for certain limited
purposes. I agree that I owe the Company and such third parties, during the
term of my employment and thereafter, a duty to hold all such confidential or
proprietary information in the strictest confidence and not to disclose it to
any person, firm or corporation (except as necessary in carrying out my work for
the Company consistent with the company's agreement with such third party) or to
use it for the benefit of anyone other than for the Company or such third party
(consistent with the Company's agreement with such third party) without the
express written authorization of the President and Chief Executive Officer or
the Board of Directors of the Company.
2. RETAINING AND ASSIGNING INVENTIONS AND ORIGINAL WORKS
(a) INVENTION IDEAS. The term "Invention/Idea" includes any and all
ideas, processes, trademarks, service marks, inventions, technology, computer
hardware or software, original works of authorship, designs, formulas,
discoveries, patents, copyrights, products, and all improvements, know-how,
rights, and claims related to the foregoing that are conceived, developed, or
reduced to practice by me, alone or with others, during my employment with the
Company, except to the extent that California Labor Code Section 2870 lawfully
prohibits the assignment of rights in such intellectual property. A copy of
California Labor Code Section 2870 is attached hereto as Exhibit B.
(b) RECORDS. I agree to maintain adequate and current written
records on the development of all Invention/Ideas. The records will be in the
form of notes, sketches, drawings, and any other format that may be specified by
the Company. The records will be available to and remain the sole property of
the Company at all times.
(c) DISCLOSURE. I agree to disclose promptly to the Company all
Invention/Ideas and relevant records. I further agree that all information and
records pertaining to any idea, process, trademark, service mark, invention,
technology, computer hardware or software, original work of authorship, design,
formula, discovery, patent, copyright, product, and all improvements, know-how,
rights, and claims related to the foregoing ("Intellectual Property"), that I do
not believe to be an Invention/Idea, but that is conceived, developed, or
reduced to practice by me (alone or with others) during my employment with the
Company, shall be disclosed promptly to the Company (such disclosure to be
received in confidence). The Company shall examine such information to
determine if in fact the Intellectual Property is an Invention/Idea subject to
this Agreement. I understand that the Company's determination in this regard
shall not be binding upon me.
(d) INVENTIONS AND ORIGINAL WORKS ASSIGNED TO THE COMPANY. I agree
to assign, and hereby do assign, to the Company my entire right, title, and
interest (throughout the United States and in all foreign countries), free and
clear of all liens and encumbrances, in and to each Invention/Idea, which shall
be the sole property of the Company, whether or not patentable. In the event
any Invention/Idea is deemed by Company to be patentable or otherwise
registrable, I agree to assist the Company (at its
Exhibit E-2
<PAGE>
expense) in obtaining letters patent or other applicable registrations thereon
and shall execute all documents and do all other things necessary or proper
thereto (including testifying at the Company's expense) and to vest the Company,
or any entity or person specified by the Company, with full and perfect title
thereto or interest therein. I further agree to take any action necessary or
advisable in connection with any continuations, renewals, or reissues thereof or
in any related proceedings or litigation. Should the Company be unable to
secure my signature on any document necessary to apply for, prosecute, obtain,
or enforce any patent, copyright, or other right or protection relating to any
Invention/Idea, whether due to my mental or physical incapacity or any other
cause, I irrevocably designates and appoints the Company and each of its duly
authorized officers and agents as my agent and attorney-in-fact, to act for and
in my behalf and stead and to execute and file any such document, and to do all
other lawfully permitted acts to further the prosecution, issuance, and
enforcement of patents, copyrights, or other rights or protections with the same
force and effect as if executed, delivered, and/or done by me.
I acknowledge that all original works of authorship which are
made by me (solely or jointly with others) within the scope of my employment and
which are protectable by copyright are "works made for hire," as that term is
defined in the United States Copyright Act (17 USCA, Section 101).
I hereby waive and quitclaim to the Company any and all claims,
of any nature whatsoever, which I now or may hereafter have for infringement of
any patents or copyright resulting from any such application for letters patent
or copyright registrations assigned hereunder to the Company.
I agree that my obligations to assist the Company to obtain
United States or foreign letters patent and copyright registrations, as the case
may be, covering Inventions/Ideas assigned hereunder to the Company shall
continue beyond the termination of my employment, but the Company shall
compensate me at a reasonable rate for time actually spent by me at the
Company's request on such assistance.
(e) INVENTIONS ASSIGNED TO THE UNITED STATES. I agree to assign to
the United States government all my right, title, and interest in and to any and
all inventions, original works of authorship, developments, improvements or
trade secrets whenever such full title is required to be in the United States by
a contract between the Company and the United States or any of its agencies.
3. EXCEPTION TO ASSIGNMENTS. I understand that the provisions of this
Agreement requiring assignment of the Company do not apply to any invention
which qualifies fully under the provisions of Section 2870 of the California
Labor Code, a copy of which is attached hereto as Exhibit B. I will advise the
Company promptly in writing of any Inventions that I believe meet the criteria
in Subparagraph 2(d) above, and I will at that time provide to the Company in
writing all evidence necessary to substantiate that belief. I understand that
the Company will keep in confidence and will not disclose to third parties
without my consent any confidential information disclosed in writing to the
Exhibit E-3
<PAGE>
Company relating to inventions that qualify fully under the provisions of
Section 2870 of the California Labor Code.
4. COMPETITIVE ACTIVITY. I agree that for a period of six (6) months
after termination of my employment, I shall not, directly or indirectly, on
behalf of myself or any person, firm, partnership, joint venture, corporation or
other business entity, be employed by or consult with any entity listed on the
attached Exhibit C in any state where the Company conducts its business, unless
such employment or consulting occurs without the use in any way of Confidential
Information.
5. RETURNING COMPANY DOCUMENTS. I agree that, at the time of leaving the
employ of the Company, I will deliver to the Company (and will not keep in my
possession or deliver to anyone else) any and all tangible Proprietary
Information, devices, records, data, notes, reports, proposals, lists,
correspondence, specifications, drawings, blueprints, sketches, materials,
equipment, other documents or property, or reproductions of any aforementioned
items belonging to the Company, its successors or assigns.
6. REPRESENTATIONS. I agree to execute any proper oath or verify any
proper document required to carry out the terms of this Agreement. I represent
that my performance of all the terms of this Agreement will not breach any
agreement to keep in confidence proprietary information acquired by me in
confidence or in trust prior to my employment by the Company. I have not
entered into, and I agree I will not enter into, any oral or written agreement
in conflict herewith.
7. GENERAL PROVISIONS
(a) GOVERNING LAW. This Agreement will be governed by the laws of
the State of California.
(b) ENTIRE AGREEMENT. This Agreement sets for the entire agreement
and understanding between the Company and me relating to the subject matter
herein, merges all prior discussions between us and supersedes and replaces any
prior agreement concerning the subject matters herein. No modification of or
amendment to this Agreement, nor any waiver of any rights under this agreement,
will be effective unless in writing signed by the party to be charged. Any
subsequent change or changes in my duties, salary or compensation will not
affect the validity or scope of this Agreement.
(c) SEVERABILITY. If one or more of the provisions in this Agreement
are deemed void by law, then the remaining provisions will continue in full
force and effect.
(d) SUCCESSORS AND ASSIGNS. This Agreement will be binding upon my
heirs, executors, administrators and other legal representatives and will be for
the benefit of the Company, its successors, and its assigns.
Exhibit E-4
<PAGE>
Date:
------------------------------
-----------------------------------
Signature
-----------------------------------
Name of Employee (typed or printed)
- -----------------------------------
Witness
Exhibit E-5
<PAGE>
EXHIBIT A
LIST OF PRIOR INVENTIONS
AND ORIGINAL WORKS OF AUTHORSHIP
Identifying Number
Title Date or Brief Description
----- ---- --------------------
Exhibit A
<PAGE>
EXHIBIT B
CALIFORNIA LABOR CODE SECTION 2870
EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
(a) Any provision in any employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and ins unenforceable.
Exhibit B
<PAGE>
EXHIBIT C
LIST OF COMPETITORS
Any employment or consultation with the following companies would be subject to
the limitations of Section 4 of the Proprietary Information Agreement:
- - Ontogeny
- - Exelexis
- - Creative Biomolecules
- - Millenium Pharmaceuticals
- - Sequana
- - Human Genome Sciences
Exhibit C
<PAGE>
EXHIBIT F
MUTUAL RELEASE
In consideration of the covenants contained herein and in the Employment
Agreement between the parties hereto dated February __, 1997 (the "Employment
Agreement"), Progenitor, Inc. ("Progenitor"), Mercator Genetics, Inc.
("Mercator"), and Elliott Sigal, M.D., Ph.D. ("Dr. Sigal") agree as follows:
1. DR. SIGAL RELEASE. Dr. Sigal and his representatives, heirs,
successors, and assigns do hereby completely release and forever discharge
Progenitor, Mercator, any Affiliate (as defined in the Employment Agreement) of
Progenitor or Mercator, and their present and former shareholders, officers,
directors, agents, employees, attorneys, successors, and assigns from all
claims, rights, demands, actions, obligations, liabilities, and causes of
action, known or unknown, mature or unmatured, arising from or in any way
related to his employment with Mercator or any of its Affiliates to the extent
that such claims are based on contract or the duty of good faith and fair
dealing, including without limitation, any claim relating to compensation or
benefits, except as set forth in EXHIBIT B, EXHIBIT D or otherwise in the
Employment Agreement or in the Agreement and Plan of Reorganization, dated as of
February __, 1997, by and among Progenitor, Reorganization Sub, and Mercator
("Sigal Released Claims").
2. PROGENITOR/MERCATOR RELEASE. Progenitor and Mercator and their
successors and assigns do hereby completely release and forever discharge Dr.
Sigal and his representatives, heirs, successors, and assigns from all claims,
rights, demands, actions, obligations, liabilities, and causes of action, known
or unknown, mature or unmatured, arising from or in any way related to his
employment with Mercator or any of its Affiliates to the extent that such claims
are based on contract or the duty of good faith and fair dealing, except as set
forth in the Employment Agreement or in the Agreement and Plan of Reorganization
referred to above ("Progenitor/Mercator Released Claims").
3. SECTION 1542 WAIVER. The parties understand and agree that the
Released Claims include not only claims presently known to Dr. Sigal,
Progenitor, or Mercator, but also include all unknown or unanticipated claims,
rights, demands, actions, obligations, liabilities, and causes of action of
every kind and character that would otherwise come within the scope of the Sigal
Released Claims or the Progenitor/Mercator Released Claims, respectively. The
parties understand that they may hereafter discover facts different from what
they now believe to be true, which if known, could have materially affected this
Agreement, but they nevertheless waive any claims or rights based on different
or additional facts. The parties knowingly and voluntarily waive any and all
rights or benefits that they may now have, or in the future may have, under the
terms of Section 1542 of the California Civil Code, which provides as follows:
F-1
<PAGE>
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT
WITH THE DEBTOR.
4. INTEGRATION. The parties understand and agree that the preceding
Sections and the Employment Agreement recite the sole consideration for this
Agreement; that no representation or promise has been made by any party
concerning the subject matter of this Agreement, except as expressly set forth
in this Agreement or in the Employment Agreement; and that all agreements and
understandings between the parties concerning the subject matter of this
Agreement are embodied and expressed in this Agreement and the Employment
Agreement. This Agreement and the Employment Agreement shall supersede all
prior or contemporaneous agreements and understandings among the parties,
whether written or oral, express or implied, with respect to the subject matter
of this Agreement.
5. ASSIGNMENT; SUCCESSORS AND ASSIGNS. The parties represents that they
have not previously assigned or transferred any claims or rights released
pursuant to this Agreement. This Agreement shall be binding upon and shall
inure to the benefit of the parties and their respective heirs, successors,
attorneys, and permitted assigns. This Agreement shall also inure to the
benefit of any person or entity covered by the releases contained herein.
6. SEVERABILITY. If any provision of this Agreement, or its application
to any person, place, or circumstance, is held by an arbitrator or a court of
competent jurisdiction to be invalid, unenforceable, or void, such provision
shall be enforced to the greatest extent permitted by law, and the remainder of
this Agreement and such provision as applied to other persons, places, and
circumstances shall remain in full force and effect.
7. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the law of the State of California.
8. INTERPRETATION. This Agreement shall be construed as a whole,
according to its fair meaning, and not in favor of or against any party. By way
of example and not in limitation, this Agreement shall not be construed in favor
of the party receiving a benefit nor against the party responsible for any
particular language in this Agreement. Captions are used for reference purposes
only and should be ignored in the interpretation of the Agreement.
9. REPRESENTATION BY COUNSEL. The parties acknowledge that (i) they have
had the opportunity to consult counsel in regard to this Agreement; (ii) they
have read and understand the Agreement and they are fully aware of its legal
effect; and (iii) they are entering into this Agreement freely and voluntarily,
and based on each party's own
F-2
<PAGE>
judgment and not on any representations or promises made by the other party,
other than those contained in this Agreement.
The parties have duly executed this Agreement as of February __, 1997.
DR. SIGAL
- -----------------------------------
Elliott Sigal, M.D., Ph.D.
PROGENITOR, INC.
By:
--------------------------------
Its:
-------------------------------
MERCATOR GENETICS, INC.
By:
--------------------------------
Its:
-------------------------------
F-3
<PAGE>
THE INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
February 21, 1997
Dr. Roger Wolff
Mercator Genetics, Inc.
4040 Campbell Avenue
Menlo Park, CA 94025
Re: Scientific Collaboration Between Mercator Genetics, Inc. and
Affymetrix, Inc.
Dear Dr. Wolff:
Dr. Mark Chee has expressed his enthusiasm for collaborating with Mercator in a
project involving the demonstration of Affymetrix' GeneChip-TM- technology in
conjunction with Mercator reagents for use in [***]. Affymetrix shares this
enthusiasm and believes that the project can begin relatively quickly, will
produce interesting and publishable results, and will be beneficial to
Affymetrix, Mercator Genetics, Inc. ("Mercator"), and the public. The terms
under which we propose to collaborate are described below.
1. COLLABORATION WORK PLAN
Affymetrix and Mercator will collaborate in a project involving the use of
Affymetrix technology in [***]. The current work plan for the collaboration
is included Exhibit 1, incorporated herein by reference. Affymetrix and
Mercator will cooperate in modifying this work plan as the collaboration
develops.
The parties will periodically exchange written and other reports regarding their
progress in the collaboration.
2. FUNDING OF COLLABORATION
Each party will fund its own research under the collaboration unless otherwise
agreed in writing.
<PAGE>
Dr. Roger Wolff
Mercator Genetics, Inc.
February 21, 1997
Page 2
3. OWNERSHIP OF COLLABORATION TECHNOLOGY
Subject to the following paragraph, any invention conceived or reduced to
practice ("made") by a scientist(s) participating in the collaboration and any
patent application claiming the same shall be assigned to Affymetrix or Mercator
according to the assignment obligations of the scientist(s)/inventor(s) at the
time the invention was made. If there is a joint invention for which a patent
application is filed, then Affymetrix and Mercator agree to select mutually
acceptable counsel to prepare and file the application and to share equally in
paying expenses related to the application. Affymetrix and Mercator shall be
diligent in identifying inventions made under the collaboration for which patent
protection should be sought and in informing one another of the inventions, so
that scientific publication is not delayed by the patent process.
As used herein "Chip Project Inventions" shall mean all inventions conceived or
first reduced to practice by an employee of a party during performance of this
Agreement and specifically relating to the synthesis or use of the arrays of
oligonucleotides. Mercator agrees to assign to Affymetrix at Affymetrix' cost
all Chip Project Inventions. Mercator agrees to report to Affymetrix all such
Chip Project Inventions. Affymetrix agrees to grant Mercator a perpetual,
royalty-free, worldwide, internal use only license to all such Chip Project
Inventions, but no background inventions that may be required to use such Chip
Project Inventions.
4. ACCESS TO EXISTING PROPRIETARY RIGHTS
This agreement does not authorize Mercator to use Affymetrix proprietary
technology for any purpose other than for purposes of the collaboration and
provides no implied license. This agreement does not authorize Affymetrix to
use Mercator proprietary technology for any purpose other than for purposes of
the collaboration and provides no implied license. Nothing in this agreement
shall be construed as limiting either party's right to use or otherwise license
its intellectual property.
5. CONFIDENTIALITY
The parties will use reasonable, good faith efforts to maintain in confidence,
with respect to third parties, any confidential information provided by the
other party. In addition, the parties agree to maintain in confidence the
results generated by the collaboration for a period of no less than 90 days from
receipt by the non-disclosing party of a written description prepared by the
disclosing party of the information the party desires to disclose. This 90 day
period shall be used to evaluate the information to be disclosed for patentable
subject matter and to file one or more patent applications in
<PAGE>
Dr. Roger Wolff
Mercator Genetics, Inc.
February 21, 1997
Page 3
the event a patentable invention is to be disclosed. This confidentiality
provision is intended solely to give Affymetrix and Mercator a reasonable period
of time to review the information for patentable or other proprietary subject
matter.
6. TERM
The term of this agreement is 12 months, but the agreement may be renewed for an
additional time period if Affymetrix and Mercator each agree that the
collaboration should be continued in writing. Either party may terminate this
collaboration upon 60 days written notice to the other.
7. MISCELLANEOUS
7.1. The Parties indemnify and hold the other harmless, along with their
employees, officers, agents, directors, and contractors, from and against
any and all loss and/or liability (including but not limited to attorney's
fees and other related costs) arising out of personal injury or death of
its employees, agents, students or contractors, or loss of or damage to its
tangible personal property, in connection with the performance of this
agreement, except to the extent that such injury, death, loss or damage is
determined, after final judgment from which no appeal can be taken, to have
resulted from an act or omission amounting to sole negligence or willful
misconduct of the other party or an employee, agent, officer, or
representative thereof. Neither party shall be liable to the other party
with respect to any subject matter of this Agreement under any contract,
negligence, strict liability, or other legal or equitable theory for
(1) any special, incidental, or consequential damages or (2) the cost of
procurement of substitute goods, technology, or services, even if it has
been advised of the possibility of such damages.
7.2. This Agreement sets forth the entire agreement of the parties with respect
to the subject matter therein. To the extent that the terms of this
Agreement differ from the work plan, the terms of this Agreement will
govern. The Agreement may not be changed or modified except by written
agreement of the parties.
7.3. Each party shall operate as and have the status of an independent
contractor and shall not act as or be an agent or employee of the other.
Neither party is authorized to incur any expenses on behalf of the other.
<PAGE>
Dr. Roger Wolff
Mercator Genetics, Inc.
February 21, 1997
Page 4
Each party will abide by all relevant safety rules when present at the
facilities of the other.
7.4 Each party will maintain adequate insurance coverage during the term of the
Agreement, including workers compensation insurance, employer's liability
insurance, and comprehensive general bodily injury and property damage
liability insurance.
7.5. This Agreement shall be construed according to the laws of the State of
California without regard to conflict of law provisions.
If you agree to the foregoing provisions, then pleas sign and have an authorized
representative of Mercator sign an date both copies of this letter in the space
provided below, and return one executed copy.
Sincerely,
/s/ Stephen P.A. Fodor
-----------------------------------
Stephen P.A. Fodor, Ph.D.
President and Chief Operating Officer
ACCEPTED AND AGREED:
By:/s/ Elliott Sigal By:
-------------------------------- -------------------------------------
Title: President and CEO Title:
----------------------------- ----------------------------------
Date: 2/27/97 Date:
------------------------------ -----------------------------------
<PAGE>
COLLABORATION BETWEEN
AFFYMETRIX AND MERCATOR
[***]
<PAGE>
THE INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
March 3, 1997
Dr. Roger Wolff
Mercator Genetics, Inc.
4040 Campbell Avenue
Menlo Park, CA 94025
Re: Scientific Collaboration re: [***] Between Mercator Genetics,
Inc. and Affymetrix, Inc.
Dear Dr. Wolff:
Dr. Mark Chee has expressed his enthusiasm for collaborating with Mercator
Genetics, Inc. in a project involving the demonstration of Affyrmetrix
GeneChip-TM- technology in conjunction with Mercator's reagents for use in
[***]. Affymetrix shares this enthusiasm and believes that the project can
begin relatively quickly, will produce interesting and publishable results,
and will be beneficial to Affymetrix, Mercator Genetics, Inc. ("Mercator"),
and the public. The terms under which we propose to collaborate are
described below.
1. Collaboration Work Plan
Affymetrix and Mercator will collaborate in a project involving the use of
Affymetrix technology in [***]. The current work plan for the collaboration
is included in Exhibit 1, incorporated herein by reference. Affymetrix and
Mercator will cooperate in modifying this work plan as the collaboration
develops.
The parties will periodically exchange written and other reports regarding their
progress in the collaboration.
2. Funding of Collaboration
Each party will fund its own research under the collaboration unless otherwise
agreed in writing.
3. Ownership of Collaboration Technology
Subject to the following paragraph, any invention conceived or reduced to
practice ("made") by a scientist(s) participating in the collaboration and any
patent application claiming the same shall be assigned to Affymetrix or Mercator
according to the assignment obligations of the scientist(s)/inventor(s) at the
time the invention was made. If there is a joint invention for which a patent
application is filed, then Affymetrix and Mercator agree to select mutually
acceptable counsel to prepare and file the application and to share equally in
paying expenses related to the application. Affymetrix and Mercator shall be
diligent in identifying
1
<PAGE>
inventions made under the collaboration for which patent protection should be
sought and in informing one another of the inventions, so that scientific
publication is not delayed by the patent process.
As used herein "Chip Project Inventions" shall mean all inventions conceived or
first reduced to practice by an employee of a party during performance of this
Agreement and specifically relating to the synthesis or use of the arrays of
oligonucleotides. Mercator agrees to assign to Affymetrix at Affymetrix' cost
all Chip Project Inventions. Mercator agrees to report to Affymetrix all such
Chip Project Inventions. Affymetrix agrees to grant Mercator a perpetual,
royalty-free, worldwide, internal use only license to all such Chip Project
Inventions, but no background inventions that may be required to use such Chip
Project Inventions.
4. Access to Existing Proprietary Rights
This agreement does not authorize Mercator to use Affymetrix proprietary
technology for any purpose other than for purposes of the collaboration and
provides no implied license. This agreement does not authorize Affymetrix to
use Mercator proprietary technology for any purpose other than for purposes of
the collaboration and provides no implied license. Nothing in this agreement
shall be construed as limiting either party's right to use or otherwise license
its intellectual property.
5. Confidentiality
The parties will use reasonable, good faith efforts to maintain in confidence,
with respect to third parties, any confidential information provided by the
other party. In addition, the parties agree to maintain in confidence the
results generated by the collaboration for a period of no less than 90 days from
receipt by the non-disclosing party of a written description prepared by the
disclosing party of the information the party desires to disclose. This 90 day
period shall be used to evaluate the information to be disclosed for patentable
subject matter and to file one or more patent applications in the event a
patentable invention is to be disclosed. This confidentiality provision is
intended solely to give Affymetrix and Mercator a reasonable period of time to
review the information for patentable or other proprietary subject matter.
6. Term
The term of this agreement is twelve (12) months, but the agreement may be
renewed for an additional time period if Affymetrix and Mercator each agree that
the collaboration should be continued in writing. Either party may terminate
this collaboration upon sixty (60) days written notice to the other.
2
<PAGE>
7. Miscellaneous
7.1 The Parties indemnify and hold the other harmless, along with their
employees, officers, agents, directors, and contractors, from and against
any and all loss and/or liability (including but not limited to attorney's
fees and other related costs) arising out of personal injury or death of
its employees, agents, students or contractors, or loss of or damage to its
tangible personal property, in connection with the performance of this
agreement, except to the extent that such injury, death, loss or damage is
determined after final judgment from which no appeal can be taken, to have
resulted from an act or omission amounting to sole negligence or willful
misconduct of the other party or an employee, agent, officer, or
representative thereof. Neither party shall be liable to the other party
with respect to any subject matter of this Agreement under any contract,
negligence, strict liability, or other legal or equitable theory for (1)
any special, incidental, or consequential damages or (2) the cost of
procurement of substitute goods, technology, or services, even if it has
been advised of the possibility of such damages.
7.2 This Agreement sets forth the entire agreement of the parties with respect
to the subject matter therein. To the extent that the terms of this
Agreement differ from the work plan, the terms of this Agreement will
govern. The Agreement may not be changed or modified except by written
agreement of the parties.
7.3 Each party shall operate as and have the status of an independent
contractor and shall not act as or be an agent or employee of the other.
Neither party is authorized to incur any expenses on behalf of the other.
Each party will abide by all relevant safety rules when present at the
facilities of the other.
7.4 Each party will maintain adequate insurance coverage during the term of the
Agreement, including workers compensation insurance, employer's liability
insurance, and comprehensive general bodily injury and property damage
liability insurance.
7.5 This Agreement shall be construed according to the laws of the State of
California without regard to conflict of law provisions.
3
<PAGE>
If you agree to the foregoing provisions, then please sign and have an
authorized representative of Mercator sign and date both copies of this letter
in the space provided below, and return one executed copy.
Sincerely,
/s/ Stephen P.A. Fodor
Stephen P.A. Fodor, Ph.D.
President and Chief Operating Officer
ACCEPTED AND AGREED:
By: /s/ Elliott Sigal By:
------------------------- -------------------------
Title: President & CEO Title:
---------------------- ----------------------
Date: 3/7/97 Date:
----------------------- -----------------------
4
<PAGE>
[***] Collaboration between
Affymetrix, Inc. and Mercator Genetics, Inc.
[***]
5
<PAGE>
THE INFORMATION BELOW MARKED * AND [ ] HAS BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN
SEPARATELY FILED WITH THE COMMISSION.
PROGENITOR-PANGEA COLLABORATION AGREEMENT
INTRODUCTION
This document summarizes several discussions that have taken place between
Pangea and Progenitor relating to a potential collaboration between our
companies. It is our intention that this document serve as a framework under
which such collaboration will be guided and our mutual interests defined.
It is recognized by both parties that Pangea possesses certain technologies,
expertise, skills, and capabilities in bioinformatics, computing, data analysis
and handling, and that Progenitor possesses certain knowledge, expertise and
skills in the generation, interpretation and application of genomic information
and that a collaboration between the companies lead to a mutually beneficial and
synergistic arrangement.
In addition, both parties desire to collaborate to incorporate the knowledge and
skills of each in the conceptualization, development, and enhancement of
bioinformatics systems, software, and applications and in the use of these
systems, software and applications to make breakthroughs in drug discovery
research.
AREAS OF COLLABORATION
There are five areas of potential collaboration:
- - Enhancing the existing functionality within GeneWorld-TM- and
Pangeanetics-TM-.
- - Developing a relational database of genomic information. Pangea is
currently developing such a product (GeneThesaurus-TM-) -- that displays
and integrates genomic information in a relational format. It is
envisioned that, subject to mutual agreement, Progenitor will be
actively involved in determining the specifications for GeneThesaurus
and, in return, will be offered the opportunity to participate as a beta
test site for planned releases of the generally commercially available
versions of this software product no later than other beta test site
customers and will be offered the opportunity to license such versions
as soon as they become commercially available.
Pangea is planning to include model organism information (Menagerie-TM-)
in such a database. If Progenitor desires this additional functionality
to be available more quickly than scheduled by Pangea, then, subject to
mutual agreement, Pangea will assign software engineers to accomplish
this project by an agreed-upon date, and Progenitor will provide funding
for the project on mutually agreed terms.
- - Validation of protein structure and function prediction tools may also
be an area of interest to Progenitor and Pangea. Pangea is currently
developing a product (Prophecy-TM-) in this area. It is envisioned
that, subject to mutual agreement, Progenitor will be actively involved
in specification of such product and, if so, will be offered the
opportunity to participate as a beta test site for planned releases of
the
1
<PAGE>
generally commercially available versions of this software product no
later than other beta test site customers and will offered the
opportunity to license such versions as soon as they become generally
commercially available.
Progenitor has, or is planning to have, certain technologies and
capabilities that may be useful for validating the results of Pangea's
protein structure and function prediction tools. Additionally,
Progenitor has, or is planning to have, certain technologies and
capabilities that may be useful for validation and verification of
biological information arising from other Pangea products. If Pangea
desires access to such technologies and capabilities for the purpose of
validating the results of its tools or for validation and verification
of such biological information, then, subject to mutual agreement,
Progenitor will assign appropriate personnel and other resources to
accomplish this project and Pangea will provide funding for the effort
in an amount equal to Progenitor's access (or negotiated royalty rights
in lieu of such funding).
- - Research in the area of human genetics, and development of new tools for
analysis of data related to human genetics. Pangea is planning to add
such functionalities to its product suite. If Progenitor desires this
additional functionality to be available more quickly than scheduled by
Pangea, then, subject to mutual agreement, the scope of an appropriate
acceleration project will be mutually agreed to, Pangea will assign
software engineers to accomplish this project and Progenitor will
provide funding for the project on mutually agreed terms.
- - Developing gene expression analysis tools (ExpressionCity-TM-), a
consensus database (GeneForest-TM-) and utilizing polymorphism and
mutation data and high throughput screening data. This may be another
area for collaborative effort between the two companies.
Pangea would like to make use of Progenitor's polymorphism and mutation
data surrounding given disease states for use in a federated database of
diagnostic disease or clinical trial information. Pangea would also
like to make use of any high-throughput screening data, including data
related to failures, that Progenitor could make available. Utilization
of such data represents other areas for potential collaboration between
the two companies.
Therefore the parties agree upon the following:
I. Progenitor has licensed off-the-shelf versions of GeneWorld-TM- and
Pangeanetics-TM-. Pangea will endeavor to add enhancements to these
products requested by Progenitor, and agreed upon by Pangea, as part of
Pangea's support and maintenance efforts. If there are additions that
require significant effort beyond the scheduled upgrades, the parties
will discuss these individually and, subject to mutual agreement, agree
upon deliverables, funding and other terms.
II. Pangea will appoint Progenitor as a principal beta site for testing
planned releases of the generally commercially available versions of new
bioinformatics systems
2
<PAGE>
and technologies developed by Pangea and, as such, upon commercial
release of the software product for which Progenitor was serving as a
beta test site, Progenitor will be able to purchase licenses to use
the software at a discount of [***] of the license (or such other
amount as the parties agree). Progenitor agrees to act as a beta
customer for such products on reasonable and customary terms for beta
site arrangements.
III. In cases where Pangea develops generally commercially available
versions of products that are of no initial interest to Progenitor (at
the time of this agreement or during beta testing) Pangea will offer
to Progenitor the ability to purchase licenses to such generally
available products at a discount of [***] of the license (during the
first year of release of the product subject, to mutual agreement).
IV. In areas of collaboration where Pangea elects to fund a protein
structure and function validation project, or project for validation and
verification of biological information arising from other Pangea
products, subject to mutual agreement, Pangea will fund and
scientifically advise each such project. Progenitor will assign
appropriate personnel and other resources to accomplish this project and
Pangea will provide funding for the effort equal to Progenitor's costs
(or negotiated royalty rights in lieu of such funding).
V. In areas of collaboration where Progenitor elects to fund a project
under which Progenitor will be the primary source of funding for
development costs, subject to mutual agreement, Pangea will initiate
research to evaluate, recommend and, if possible, develop new tools.
Upon such election, Progenitor will fund (at the agreed upon rate) and
scientifically advise the required FTEs. Pangea, in return, will
license to Progenitor free of charge software developed under such
project and will use reasonable efforts to support and maintain the
software for a mutually agreed time period at a mutually agreed upon
price.
VI. [***]
VII. No right, title or interest in, to or under any intellectual property
owned or otherwise controlled by Progenitor or Pangea is granted or
implied. Any grant of any right or license in, to or under any
intellectual property owned or otherwise controlled by Progenitor or
Pangea shall be made only by a separate written agreement between the
parties.
3
<PAGE>
VIII. This document is being entered into in good faith between Progenitor and
Pangea. This document is not intended to bind the parties regarding
matters that are specified to be subject to mutual agreement between the
parties, unless and until such agreement is reached. For any matters
that are subject to later agreement of the parties, this document
constitutes an agreement to negotiate in good faith to reach, if
reasonably possible, agreement regarding such matters.
IX. Each Party shall bear its respective costs, fees and expenses in
connection with the collaborations contemplated by this document except
as otherwise agreed to by the parties hereto. This document shall not
create any form of joint ventures or partnership between the parties and
neither party shall take any contrary position nor shall either party be
entitled to, or for any reason attempt to, enter into any legal
obligation on behalf of the other. Neither party shall disclose the
terms or existence of this Agreement except to the extent mutually
agreed by Progenitor and Pangea.
The terms of this document will be reviewed annually on the anniversary of this
agreement by the appropriate officers of Progenitor and Pangea. At each such
review, Progenitor and Pangea will determine whether the terms of this agreement
should be extended or changed. However, since this is an initial agreement, the
parties will develop a more detailed working document, as appropriate, in which
mutually agreed upon timelines, functionality and other appropriate terms will
be stated. In any event, unless Progenitor and Pangea agree in writing to
extend the term of this document at the end of each one-year period, all rights
and obligations specified above, other than ownership of intellectual property
as specified in Paragraph VII, will terminate.
I agree that the terms set forth in this document are an accurate summary of the
understanding reached between Progenitor and Pangea.
Agreed and accepted on behalf of Progenitor.
Signature: /s/ Stephen J. Williams
--------------------------------
Name: Stephen J. Williams
-------------------------------------
Title: Vice President Corporate Development
------------------------------------
Date: 3/13/97
-------------------------------------
I agree that the terms set forth in this document are an accurate summary of the
understanding reached between Progenitor and Pangea.
Agreed and accepted on behalf of Pangea.
Signature: /s/ Dexstor Smith
--------------------------------
Name: Dexstor Smith
-------------------------------------
Title: President
------------------------------------
Date: 3/13/97
-------------------------------------
4
<PAGE>
PRODUCT INFORMATION
GENETHESAURUS-TM-
The amount of biological annotations and information in public databases is
staggering. EMBL, NCBL, DDBJ, and hosts of smaller academic institutions have
placed their information in the public domain. Most bioinformatics projects
rely on this information as a standard to which unknown sequences can be
compared. Unfortunately, this data is often in messy, incomplete, and in flat-
file format, which limits its usefulness and accessibility.
To address these problems, Pangea is developing a relational structure for
biological information known as GeneThesaurus-TM-. The first version is
designed to incorporate databases like GenBank, SwissProt, Enzyme Commission
(EC), and YPD in a relational structure that allows for easy and intuitive
querying of the database. Any field in GenBank will be searchable -- including
fuzzy word searches for keyword and title lines. The hierarchical
categorizations provided by GeneThesaurus-TM- will allow for complex MDD (multi-
dimensional database) queries and data mining. Researchers will be able to
analyze expression data based on functional grouping, nearest neighbors,
keywords, and gene family.
GeneThesaurus-TM- will provide users easy access the public data banks in a
relational format. Public data is pre-processed to add additional annotation,
linkages between data sources, and then stored in a relational format. The
program will serve as a flexible repository of private and corporate databases,
containing sequences, annotations, mapping, and experimental information.
GeneThesaurus-TM- is designed to handle future growth. Some of the information
stored and searchable in GeneThesaurus-TM- is currently contemplated to include:
- - function family / classification - cell / tissue /source localization
- - functional Pathway mapping - gene name
- - gene family - author /publication
- - homology - keyword / synonym
- - sequence features - disease relevance
- - regulation (transcription and - patent information
expression)
- - motif searching - database sub-selection
- - chromosomal mapping
Future versions [may] include Medline, PDB, EMBL, Flybase, OMIM, Menagerie-TM-,
and GDB, subject to availability.
Menagerie-TM-, a compendium of model organism information will allow storing of
information about genes and protein for specific model organisms. Having access
to the
5
<PAGE>
vast amount of annotation information, available both publicly and privately,
will facilitate research on cross species comparisons, as well as contributing
more density and depth to the annotations available about any single gene and
protein.
EXPRESSIONCITY-TM-
ExpressionCity-TM- is Pangea's environment for sophisticated statistical
analysis and 3D data visualization of gene expression data. This data can be
derived from a variety of sources such as ESTs, hybridizations of arrays of
oligonucleotides, cDNA clones, and rapid analysis of small restriction
fragments. These data sources can be of both normalized, enriched and raw
libraries of transcripts.
ExpressionCity-TM- gives the user multiple perspectives on their data --
providing, for example, molecular classifications (within GeneThesaurus-TM-) and
biological sample pathology information.
GENEFOREST-TM-
GeneForest-TM- (Fast Overlapping of Redundant Expressed Sequence Tags) uses
high-powered algorithms and computing power to cluster smaller DNA fragments
into groups. This enables calculation of the intensity of gene expression as
well as generation of unique, full-length, consensus databases. GeneForest-TM-
plugs into GeneWorld-TM- for the purposes of sequence clean-up, identification
and discovery through "strategies". Sophisticated quality control processes
within GeneForest-TM- identify false and improper clusters.
PROPHECY-TM-
Prophecy-TM- is a package of advanced tools and database support for prediction
of protein structure and function. Protein sequences that have no match to a
known 3D protein structure or functional family by classical sequence alignment
methods can be further analyzed using a triad of more algorithms:
- Hidden Markov Models
- Alignment Threading with Optimized Scores
- Test of Optimal Mutagenesis
Users can store their own experimental or theoretical structural coordinates as
well as their own sets of sequences and multiple sequence alignments. Using
these tools, Pangea will attempt to predict and store the 3D structures for all
of GenBank in a relational format (Virtual PDB) within GeneThesaurus-TM-. This
will provide users early access to a model structure and hence enable them to
study function and activity more quickly. Virtual PDB will also allow
assessment of the predictive power of the tools and can be used as a benchmark
comparison with known structure solved by crystallography.
6
<PAGE>
LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
---------------------------- ---------------------------------------
1. Mercator Genetics, Inc. Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report, which includes an explanatory paragraph regarding the Company's
ability to continue as a going concern, dated March 10, 1997 on our audits of
the financial statements of Progenitor, Inc. (a Development Stage Company). We
also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
March 13, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Mercator
Selected Historical Financial Data" and "Experts" and to the use of our report
dated February 14, 1997, with respect to the financial statements of Mercator
Genetics, Inc. (a development stage company) included in Amendment No. 3 to the
Registration Statement (Form S-1 No. 333-05369) and related Prospectus of
Progenitor, Inc. for the registration of 3,162,500 shares of its common stock.
ERNST & YOUNG LLP
Palo Alto, California
March 13, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF COUNSEL
The undersigned hereby consents to the use of our name and the statement
with respect to us appearing under the heading "Experts" in Amendment No. 3 to
the Registration Statement on Form S-1 of Progenitor, Inc.
/s/ Pennie & Edmonds LLP
- ----------------------------
PENNIE & EDMONDS LLP
New York, New York
March 13, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF PERSON TO BECOME DIRECTOR
I hereby consent to being named in the Registration Statement as a person
who may become a director of Progenitor, Inc.
/s/ Robert R. Momsen
-----------------------------------
Robert R. Momsen
Dated: March 13, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS INCLUDED IN THE REGISTRATION STATEMENT AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> SEP-30-1995 SEP-30-1996
<PERIOD-START> OCT-01-1994 OCT-01-1995
<PERIOD-END> SEP-30-1995 MAR-31-1996
<CASH> 1,173,743 26,695
<SECURITIES> 0 0
<RECEIVABLES> 193,898 193,897
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,521,859 363,368
<PP&E> 1,063,602 1,101,622
<DEPRECIATION> 409,121 536,281
<TOTAL-ASSETS> 2,395,075 1,086,597
<CURRENT-LIABILITIES> 1,790,859 1,163,853
<BONDS> 0 0
0 0
23,695 23,695
<COMMON> 2,789 2,853
<OTHER-SE> 14,546,639 14,897,701
<TOTAL-LIABILITY-AND-EQUITY> 2,395,075 1,086,597
<SALES> 0 0
<TOTAL-REVENUES> 2,821,386 911,962
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 4,227,959 1,705,732
<LOSS-PROVISION> 141,010 180,408
<INTEREST-EXPENSE> 352,242 56,733
<INCOME-PRETAX> (2,875,467) (1,541,039)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,875,467) (1,541,039)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,875,467) (1,541,039)
<EPS-PRIMARY> 0<F1> 0<F1>
<EPS-DILUTED> 0<F1> 0<F1>
<FN>
<F1>Historical earnings per share have not been presented because such amounts are
not meaningful due to the significant changes in capital structure upon the
IPO.
</FN>
</TABLE>
