<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1997
REGISTRATION NO. 333-05369
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 7
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. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, 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. / /
------------------------
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>
SUBJECT TO COMPLETION, DATED JULY 24, 1997
PROSPECTUS
2,750,000 UNITS
[LOGO]
EACH UNIT CONSISTS OF ONE SHARE OF COMMON STOCK
AND ONE COMMON STOCK PURCHASE WARRANT
----------------
All of the Units offered hereby (the "Offering") are being sold by
Progenitor, Inc. (the "Company"). Each Unit consists of one share of the
Company's common stock, par value $0.001 per share (the "Common Stock"), and one
Warrant to purchase one share of Common Stock (the "Warrants"). The Units will
separate immediately upon issuance, and the Common Stock (the "Unit Shares") and
Warrants that make up the Units will trade only as separate securities. Each
Warrant initially entitles the holder thereof to purchase one share of Common
Stock (the "Warrant Shares" and, together with the Units, the Unit Shares and
the Warrants, the "Securities") at a price equal to 150% of the initial public
offering price of the Units, subject to adjustment under certain circumstances.
The Warrants are exercisable at any time, unless previously redeemed, until the
fifth anniversary of this Prospectus, subject to certain conditions. The Company
may redeem the outstanding Warrants, in whole or in part, at any time upon at
least 30 days prior written notice to the registered holders thereof, at a price
of $0.01 per Warrant, provided that the average closing bid price of the Common
Stock during the 30 consecutive trading days ending within three days of the
date of the notice of redemption equals or exceeds 200% of the then-current
Warrant exercise price. See "Description of Securities."
Prior to the Offering, there has been no public market for the Common Stock
or Warrants. It is currently estimated that the initial public offering price of
the Units will be between $10.00 and $12.00 per Unit. See "Underwriting" for a
list of the factors to be considered in determining the initial public offering
price of the Units. The Company has applied for listing of the Common Stock and
Warrants on the Nasdaq National Market under the symbols "PGEN" and "PGENW,"
respectively.
Amgen Inc. ("Amgen") has agreed to purchase directly from the Company $5.5
million of Common Stock (the "Amgen Shares") at a price equal to the portion of
the initial public offering price of the Units allocated to the Unit Shares (the
"Unit Shares IPO Price") concurrently with the closing of the Offering pursuant
to a stock purchase agreement with the Company. See "Business--Corporate
Agreements--Amgen Agreements."
---------------------
THE SECURITIES 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 Unit............................... $ $ $
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 approximately $1,000,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
412,500 additional Units 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 Units 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 and Warrants will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1997.
---------------------
LEHMAN BROTHERS GENESIS MERCHANT GROUP
<PAGE>
SECURITIES
, 1997
<PAGE>
A color schematic diagram entitled "The Company's Genomics System". At the top
of the diagram are three circular black & white icons, labeled and representing,
left to right, "Developmental Biology", "Genomics Technologies" and "Disease
Genetics". This top area of the diagram is labeled "Gene Discovery". Lines
descend from each icon (blue, violet, and green, respectively) merging to form
an arrow (dark blue) at the bottom of the diagram. The region where the lines
merge is labeled "Further Elucidation of Gene Function" and the area at the tip
of the arrow is labeled "Therapeutic Targets". Below this area is a table with a
column at the left labeled "Discoveries" and a column at the right labeled
"Development/Commercial Rights" (see text below). The background image is an
enlargement of a photomicrograph of transfected mammalian cells. The diagram and
the table are shadowed with white rectangular regions.
<TABLE>
<S> <C>
DISCOVERIES DEVELOPMENT / COMMERCIAL RIGHTS
B219 Leptin Receptor Amgen/Licensed, with Retained
Rights
Red Blood Cell Growth Factor Novo Nordisk/Exclusive Rights
DEL-1 Angiogenesis/Osteogenesis Company Worldwide Rights
Gene
Hereditary Hemochromatosis Gene Company Worldwide Rights
EPM 1 Epilepsy Gene Company Worldwide Rights
T7T7 Gene Therapy Chiron/Licensed, with Retained
Rights
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OR THE WARRANTS. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK OR OF THE
WARRANTS FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT
POSITION IN
THE COMMON STOCK OR THE WARRANTS OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF
THE
COMMON STOCK OR THE WARRANTS 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 service marks 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. SUCH STATEMENTS, WHEN MADE IN CONNECTION WITH AN INITIAL PUBLIC
OFFERING, ARE NOT COVERED BY THE SAFE HARBORS PROVIDED IN SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THE
SECURITIES 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, cancer,
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, the Company has identified the
B219 leptin receptor gene, for which it has received one issued U.S. patent and
one notice 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 two
notices of allowance from the USPTO for two patent applications relating to
certain diagnostic markers for this condition. The Company also has received a
notice of allowance from the USPTO for a patent application relating to certain
genetic mutations within the gene associated with 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, while retaining 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 a price equal to the Unit
Shares IPO 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.
3
<PAGE>
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 systems, the
Company believes that developing cells and tissues provide a rich and largely
unexploited resource for the discovery and characterization 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 can identify 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 Offering, Interneuron is expected to own
beneficially approximately 43% of the Company's Common Stock (approximately 41%
if the Underwriters' over-allotment option is exercised in full), including
shares of Common Stock issuable upon conversion of the shares of Progenitor's
Series D Preferred Stock to be issued to Interneuron. 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>
Securities offered......................................... 2,750,000 Units, each consisting of one share of
Common Stock and one Warrant to purchase one share of
Common Stock. The Common Stock and Warrants will be
separately tradeable immediately following the
Offering. See "Description of Securities."
Common Stock to be outstanding after the Offering.......... 11,734,979 shares (1)(2)
Use of proceeds............................................ For research and development, expansion of facilities
and acquisition of equipment, expenses relating to
the Acquisition, repayment to Interneuron for certain
costs of the Offering and working capital and general
corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbols.................... Common Stock--PGEN
Warrants--PGENW
</TABLE>
- ------------------------------
(1) Based on shares outstanding as of June 20, 1997. Includes: (i) 2,175,878
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) 647,059
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 $4.25
per share, pursuant to a stock purchase right; and (iv) 24,020 shares of
Common Stock to be issued 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) to Amgen
and (iii) to The Ohio University Foundation will depend upon a variety of
factors, including the initial public offering price of the Units and the
Unit Shares IPO Price. See "Capitalization," "Business--Corporate
Agreements," "--Mercator Acquisition," "Certain Transactions" and
"Description of Securities."
(2) Excludes: (i) 2,750,000 shares of Common Stock issuable upon exercise of the
Warrants; (ii) 3,408,888 shares of Common Stock reserved or to be 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 695,463 shares of Common Stock were outstanding as of June 20,
1997 under such stock plans, with a weighted average exercise price of $5.13
per share, and (b) options to purchase 937,350 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 Unit Shares IPO Price; (iii)
376,479 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 $1.31 per share; (iv) 45,865 shares of Common
Stock issuable upon exercise of warrants outstanding as of June 20, 1997,
with an exercise price of $5.23 per share; and (v) 35,878 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 $4.65 per share. See "Capitalization," "--Mercator Acquisition,"
"Management--Stock Plans," "Certain Transactions" and "Description of
Securities."
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 ----------------------------
-------------------------------------------------------------- SIX MONTHS
SIX MONTHS ENDED YEAR ENDED ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31, SEPTEMBER 30, MARCH 31,
---------------------------------- ---------------------- ------------- ------------
1994 1995 1996 1996 1997 1996 1997
---------- ---------- ---------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PROGENITOR STATEMENT OF OPERATIONS
DATA:
Revenues.......................... $ -- $ 2,821 $ 1,332 $ 912 $ 859 $ 1,832 $ 984
Expenses:
Research and development........ 4,113 4,228 3,873 1,706 2,150 10,126 5,603
General and administrative...... 1,275 1,116 2,765(2) 691 1,226 4,358 2,028
Interest, net................... 648 352 178 56 287 124 95
---------- ---------- ---------- ---------- ---------- ------------- ------------
Total expenses................ 6,036 5,696 6,816 2,453 3,663 14,608 7,726
---------- ---------- ---------- ---------- ---------- ------------- ------------
Net loss.......................... $ (6,036) $ (2,875) $ (5,484) $ (1,541) $ (2,804) $ (12,776) $ (6,742)
---------- ---------- ---------- ---------- ---------- ------------- ------------
---------- ---------- ---------- ---------- ---------- ------------- ------------
Net loss per share................ $ (0.91) $ (0.46) $ (1.07) $ (0.56)
---------- ---------- ------------- ------------
---------- ---------- ------------- ------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Shares used in computing net loss per
share................................ 6,047,252 6,103,034 11,980,477 12,036,259
---------- ---------- ------------- ------------
---------- ---------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
----------------------------------------------
PRO FORMA
PROGENITOR FOR ACQUISITION PRO FORMA AS
ACTUAL AND CONVERSIONS(3) ADJUSTED(4)
---------- ------------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 8 $ 132 $ 31,686
Working capital.................................................................. (3,032) (4,668) 26,482
Total assets..................................................................... 4,111 3,402 34,245
Long-term obligations............................................................ 8,763 1,150 966
Deficit accumulated during development stage..................................... (22,962) (59,916) (60,320)
Total stockholders' equity (deficit)............................................. (7,964) (2,885) 27,738
</TABLE>
- ------------------------------
(1) Pro forma as adjusted as if the Acquisition, the debt and equity conversions
described in footnote (3) below, and the Offering and the other issuances
described in footnote (4) below 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) Pro forma as if the following had occurred on March 31, 1997: (i) the
Acquisition; (ii) the automatic conversion of all outstanding shares of
Progenitor's Series A and Series B Preferred Stock into an aggregate of
2,204,330 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 810,220 shares of Common Stock
(based on an aggregate outstanding balance of $6.9 million as of March 31,
1997) upon the closing of the Offering; (iv) the conversion of the
Interneuron Bridge Loan (as defined below) into an aggregate of 131,135
shares of Progenitor's Series D Preferred Stock (based on an outstanding
balance of $1.3 million as of March 31, 1997) upon the closing of the
Offering; and (v) the issuance of 24,020 shares of Common Stock to The Ohio
University Foundation pursuant to an anti-dilution adjustment in connection
with the Offering. See "Capitalization," "Business--Corporate Agreements,"
"Certain Transactions" and "Description of Securities."
(4) Pro forma as adjusted for the Offering to give effect to: (i) the issuance
and sale of the 2,750,000 Units offered hereby (after deducting estimated
underwriting discounts and commissions and the estimated expenses of the
Offering payable by the Company) and the receipt and application of the
estimated net proceeds therefrom; (ii) the sale of 647,059 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 $4.25
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
Securities."
------------------------------
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING
FINANCIAL INFORMATION, SHARE AND PER SHARE DATA: (I) ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION OR OF THE WARRANTS; (II) ASSUMES THE CLOSING
OF THE OFFERING OCCURRED AS OF JUNE 20, 1997 WITH AN INITIAL PUBLIC OFFERING
PRICE OF $11.00 PER UNIT, AND A UNIT SHARES IPO PRICE OF $8.50 PER SHARE; (III)
REFLECTS THE CONSUMMATION OF A 1-FOR-2 REVERSE STOCK SPLIT TO BE EFFECTED PRIOR
TO OR CONCURRENTLY WITH THE OFFERING; (IV) REFLECTS THE AUTOMATIC CONVERSION OF
ALL OUTSTANDING SHARES OF PROGENITOR'S SERIES A AND SERIES B PREFERRED STOCK
INTO AN AGGREGATE OF 2,204,330 SHARES OF COMMON STOCK UPON THE CLOSING OF THE
OFFERING; (V) REFLECTS THE CONVERSION OF A CONVERTIBLE DEBENTURE AND A PORTION
OF THE PROMISSORY NOTE HELD BY INTERNEURON INTO AN AGGREGATE OF 1,021,475 SHARES
OF COMMON STOCK (BASED ON AN AGGREGATE OUTSTANDING BALANCE OF $8.7 MILLION AS OF
JUNE 20, 1997) UPON THE CLOSING OFFERING; AND (VI) REFLECTS THE CONVERSION OF
THE INTERNEURON BRIDGE LOAN (AS DEFINED BELOW) INTO AN AGGREGATE OF 293,293
SHARES OF PROGENITOR'S SERIES D PREFERRED STOCK (BASED ON AN OUTSTANDING BALANCE
OF $2.9 MILLION AS OF JUNE 20, 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, AND THE NUMBER OF SHARES OF PROGENITOR'S SERIES D PREFERRED
STOCK TO BE ISSUED UPON CONVERSION OF THE INTERNEURON BRIDGE LOAN, WILL DEPEND
UPON A NUMBER OF FACTORS, INCLUDING THE DATE OF THE CLOSING OF THE OFFERING, THE
INITIAL PUBLIC OFFERING PRICE PER UNIT AND THE UNIT SHARES IPO PRICE. SEE
"CAPITALIZATION," "BUSINESS--CORPORATE AGREEMENTS," "--MERCATOR ACQUISITION,"
"CERTAIN TRANSACTIONS," "DESCRIPTION OF SECURITIES" 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. THE SAFE HARBORS PROVIDED IN SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT DO NOT APPLY,
HOWEVER, TO FORWARD-LOOKING STATEMENTS MADE IN CONNECTION WITH AN INITIAL PUBLIC
OFFERING. 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 THE TECHNOLOGICAL APPROACHES 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 PATENTS AND
PROPRIETARY RIGHTS; MANAGEMENT OF GROWTH, AND RISKS OF ACQUIRING NEW
TECHNOLOGIES; RISKS ASSOCIATED WITH THE ACQUISITION OF MERCATOR; 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 UNITS OFFERED HEREBY.
UNCERTAINTIES RELATING TO THE TECHNOLOGICAL APPROACHES 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 March 31,
1997, Progenitor had an accumulated deficit of approximately $23.0 million and a
working capital deficit of approximately $3.0 million. As of
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March 31, 1997, the Company had an accumulated deficit of approximately $60.3
million on a pro forma basis (including the results of Mercator). In connection
with the Acquisition, the Company expects to incur several nonrecurring charges
in the quarter and fiscal year ending September 30, 1997 which in the aggregate
are currently estimated to be approximately $31.0 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 August 15, 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 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, if any, are not expected for a number of years. 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. There can be no assurance that any of these
requirements will be met. 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 gene
discoveries may lead to product candidates or result in products that may be
brought to the market. Products, if any, resulting from the Company's research
and development programs are not expected to be commercially available for a
number of years. 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,
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and expand administrative capabilities. The Company estimates that at its
planned rate of spending, 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
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 any expansion or acceleration 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 corporate relationships. The
Company expects to rely on these relationships in order to research and develop
potential products, conduct preclinical studies and 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 for, 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
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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 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 Corp., 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, the regulatory approval process 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 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 may therefore be subject to internal
competition with a potential product under development or a 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.
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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 with certain corresponding foreign patent applications and one issued
foreign patent. Progenitor has received one issued U.S. patent relating to
nucleic acid molecules encoding the B219 leptin receptor. In addition,
Progenitor presently has seven 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. 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. 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 to
the Company one U.S. patent and one notice of allowance for claims relating to
nucleic acid molecules encoding certain leptin receptors.
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 issued to the Company would be
broad enough to cover leptin receptors of Millennium or others. The Company's
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 a 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 pending patent applications or that it or such
licensor was the first to file patent applications on such inventions.
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There can be no assurance that any patents issued to the Company 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 patent applications 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 may 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 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
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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 the 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 momentum in, the activities of the Company's
business and operations, including those of the business acquired.
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In connection with the Acquisition, the Company expects to incur several
one-time charges in the quarter and fiscal year ending September 30, 1997 which
in the aggregate are currently estimated to be approximately $31.0 million,
including the write-off of $27.0 million in costs related to the purchase of in-
process research and development, $1.0 million for severance, retention and
bonus programs, $2.5 million for employee relocation, and $500,000 for other
costs such as 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 July 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 (the
"Code"), 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 Section 382.
UNCERTAINTIES RELATED TO CLINICAL TRIALS. Before seeking regulatory
approval 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
studies 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 also may include
post-marketing studies of each product candidate to establish its safety and
efficacy, usually takes many years and requires the use of substantial
resources. Preclinical studies include laboratory evaluations and will require
animal tests conducted in
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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 submitted to the
FDA and the NIH, and may be subject to approval by the Recombinant DNA Advisory
Committee ("RAC") and the NIH. Furthermore, gene therapies are relatively new
technologies that have not been tested extensively in humans. The regulatory
requirements governing these products and related clinical procedures for their
use are uncertain and subject to change.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continual 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 during
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 of 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 trials 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 will 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."
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.
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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 Offering, Interneuron is expected to own
beneficially approximately 43% of the Company's Common Stock (approximately 41%
if the Underwriters' over-allotment option is exercised in full), including
shares of Common Stock issuable upon conversion of the shares of Progenitor's
Series D Preferred Stock to be issued to Interneuron. 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
Progenitor's Series D Preferred Stock and Common Stock upon the closing of the
Offering; (iii) the Unit Shares IPO 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 which also will determine
the number of shares of Progenitor's Series D Preferred Stock to be issued upon
conversion of the outstanding balance of the Interneuron Bridge Loan; and (iv)
the passage of measurement dates for determining the quarterly minimum return
adjustments to the conversion ratio of the Series A and Series B Preferred Stock
on each of April 7, July 7, October 7 and January 7, pursuant to the terms of
such Preferred Stock. As described below, Interneuron has relinquished seven of
such adjustments. Interneuron is and will continue to be the Company's largest
stockholder. Accordingly, Interneuron will continue to have substantial
influence over the election of
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directors of the Company and other matters submitted to a stockholder vote,
including extraordinary corporate transactions such as a merger or sale of
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. The Company granted Interneuron an
option and right of first refusal to acquire an exclusive, worldwide license to
manufacture, use and sell the protein product of the DEL-1 gene (as defined
below) ("Del-1") for human therapeutic uses in exchange for a royalty to the
Company based on sales. While the option agreement specifies the payments to be
made to Interneuron if the Company or a third party develops such a therapeutic,
the terms of any license agreement should Interneuron exercise its option,
including the amount of the royalty to the Company, will be determined through
negotiations between Interneuron and the Company and, given the relationship
between Interneuron and the Company, the terms of any such license agreement may
not be as favorable to the Company as those that may be obtainable from a third
party. In addition, such option and right of first refusal may have an adverse
effect on the Company's ability to enter into license or other agreements
relating to Del-1 with third parties. In connection with the grant of the
option, Interneuron relinquished its right to certain minimum return adjustments
to the conversion ratio of the Company's Series A Preferred Stock that would
have entitled Interneuron to receive an additional 909,965 shares of Common
Stock upon the conversion of its Series A Preferred Stock upon the closing of
the Offering assuming a Unit Shares IPO Price of $8.50. Interneuron and the
Company agreed to determine the value of the relinquishment of the minimum
return adjustments and the extent to which such value may be credited against
payments, including royalties, that would otherwise be payable by Interneuron to
the Company under any such license. Such relinquishment may be deemed taxable
income to the Company. There can be no assurance that all of such income would
be offset by current expenses or operating loss carryforwards. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Discovery Programs," "--Corporate Agreements," "Certain
Transactions--Relationship with Interneuron," "Principal Stockholders" and
"Description of Securities--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
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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 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
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 TRADING PRICES. Prior to the Offering, there has been no public
market for the Common Stock or the Warrants and there can be no assurance that
an active public market for the Common Stock or the Warrants will develop or be
sustained after the Offering. The initial public offering price of the Units
will be determined through negotiations between the Company and representatives
of the Underwriters. The allocation of the initial public offering price of the
Units between the Unit Shares and the Warrants will be determined by the Board
of Directors of the Company acting in good faith after consultation with
independent financial advisers. There can be no assurance that future market
prices for the Common Stock and Warrants together will equal or exceed the
initial public offering price of the Units or that the price of each of the
Common Stock and the Warrants will equal or exceed such allocation. 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 and
Warrants 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
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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 and the Warrants. See
"Underwriting."
DETERMINATION OF UNIT SHARES IPO PRICE; POTENTIAL CONFLICTS OF
INTEREST. The allocation of the initial public offering price of the Units
between the Unit Shares and the Warrants will be determined by the Board of
Directors of the Company acting in good faith after consultation with
independent financial advisers. The Unit Shares IPO Price, which will be
determined by such allocation, will be one of the main factors determining (i)
the number of shares of Common Stock to be issued upon conversion of (a) a
convertible debenture and a portion of a promissory note held by Interneuron
(with an aggregate outstanding balance of $8.7 million as of June 20, 1997) and
(b) the Series A and Series B Preferred Stock; (ii) the number of shares of
Series D Preferred Stock to be issued upon the conversion of the Interneuron
Bridge Loan (with an aggregate outstanding balance of $2.9 million as of June
20, 1997); (iii) the number of shares of Common Stock to be issued to The Ohio
University Foundation in connection with its anti-dilution adjustment; (iv) the
number of shares of Common Stock to be issued pursuant to the Acquisition; and
(v) the number of shares of Common Stock to be issued to Amgen. In determining
the Unit Shares IPO Price, each member of the Company's Board of Directors may
be deemed to have a conflict of interest with respect to one or more of these
matters by virtue of an affiliation with The Ohio University Foundation,
Interneuron or a related entity, or, in the case of Dr. Given, the receipt upon
the closing of the Offering of options with an exercise price equal to the Unit
Shares IPO Price. There can be no assurance that the market prices of the Common
Stock or the Warrants after the Offering will correspond to the allocation by
the Board of Directors. See "Management," "Certain Transactions," "Certain
Federal Tax Considerations" and "Underwriting."
REDEMPTION OF WARRANTS. The outstanding Warrants are subject to redemption
at $0.01 per Warrant upon at least 30 days (but not more than 60 days) written
notice provided that the market price (as determined in the Warrant Agreement
described below) of the Common Stock during the 30 consecutive trading days
ending within three days of the date of the notice of redemption equals or
exceeds 200% of the then-current Warrant exercise price. If the Company
exercises the right to redeem the outstanding Warrants, a holder would be forced
to (i) exercise the Warrant; (ii) sell the Warrant at the then-current market
price; or (iii) accept the redemption price which, at the time the Warrants are
called for redemption, is likely to be substantially less than the then-current
market price of the Warrants. See "Description of Securities--Warrants."
CURRENT PROSPECTUS REQUIRED TO EXERCISE THE WARRANTS. Holders will be able
to exercise the Warrants only if a current prospectus relating to the Warrant
Shares is then in effect. Although the Company has undertaken to maintain the
effectiveness of a current prospectus covering the Warrant Shares subject to
certain limited exceptions, there can be no assurance that the Company will be
able to do so. The value of the Warrants may be impaired if a current prospectus
covering the Common Stock issuable upon exercise of the Warrants is not kept
effective. See "Description of Securities--Warrants."
ANTI-TAKEOVER CONSIDERATIONS. After the Offering, the Company will have the
authority to issue up to 5,000,000 shares of Preferred Stock (including the
Series D 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 additional 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
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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 or Warrants in the future. See "Management--Stock Plans" and
"Description of Securities."
HAZARDOUS AND RADIOACTIVE MATERIALS; ENVIRONMENTAL MATTERS. Research and
development conducted by the Company involves the controlled use of hazardous
materials, chemicals, biological materials and 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 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 and the sale of 25,000 shares of Common Stock to The
Ohio University Foundation, primarily for research and development. In addition,
the Company intends to use a portion of such net proceeds as follows: (i)
approximately $1.0 million to pay expenses relating to employee benefit and
retention plans relating to the Acquisition; and (ii) approximately $1.0 million
relating to legal, accounting and other costs incurred in the Acquisition and
related Form S-4 registration statement. The Company expects to consolidate its
operations in California, and, in connection with such consolidation, to use
approximately $2.5 million of such net proceeds to facilitate employee
relocation, and $500,000 of such net proceeds for other costs such as benefit
costs, the consolidation of operations, the elimination of duplicate systems and
facilities, and other integration costs. 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
Securities."
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 or the Warrants and there can be no assurance that a
significant public market for the Common Stock or the Warrants 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 Warrants or the future ability of the Company to raise capital through an
offering of equity securities.
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After the Offering, the Company will have outstanding 11,734,979 shares of
Common Stock (12,147,479 shares if the Underwriters' over-allotment option is
exercised in full). Of these shares, the 2,750,000 Unit Shares (and up to an
additional 2,750,000 shares of Common Stock issuable upon exercise of the
Warrants) 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. In addition, 2,175,878 shares
of the Company's Common Stock will be issued in connection with the Acquisition
and registered under the Company's Registration Statement on Form S-4. However,
2,135,452 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, as well as the lockup
agreements described below.
The remaining 6,809,101 shares of Common Stock outstanding upon completion
of the Offering will be "restricted securities" as that term is defined in Rule
144 under the Securities Act ("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 1,091,540 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 4,848,374 of such Restricted Shares
and has agreed pursuant to a lockup agreement not to offer, sell, grant any
option to purchase 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. In addition, Amgen has agreed not to offer,
sell, grant any option to purchase or otherwise dispose of, for a period of 180
days from the date of this Prospectus, any of the 647,059 Restricted Shares it
will hold 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.
In addition to the limitations under Rule 145, 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, grant any option to purchase 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.
The Company also has agreed that it will not offer, sell, grant any option
to purchase 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.
Upon termination of the agreements described above, approximately 1,088,792,
711,817 and 6,207,250 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 728,042, 13,475 and 13,475
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) or otherwise. Lehman Brothers Inc. may, at any time
without notice, release all or any portion of the shares subject to such
agreements.
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
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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 117,350 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.
After the effective date of the Offering, the Company intends to file
registration statements on Form S-8 to register an aggregate of 695,463 shares
of Common Stock reserved for issuance upon exercise of outstanding options, an
aggregate of 937,350 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 Unit Shares IPO Price, an aggregate of 1,776,040 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
376,479 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, 45,865 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 Securities--Registration
Rights" and "Shares Eligible for Future Sale."
DILUTION. Investors purchasing Units in the Offering will incur immediate
and substantial dilution equal to $6.09 per share based upon certain
assumptions, including an initial public offering price of $11.00 per Unit and a
Unit Shares IPO Price of $8.50. The initial public offering price of the Units
will be determined by negotiations between the Company and representatives of
the Underwriters. The allocation of the initial public offering price of the
Units between the Unit Shares and the Warrants will be determined by the Board
of Directors of the Company acting in good faith after consultation with
independent financial advisers. If the Unit Shares IPO Price is less than $8.50
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
"--No Prior Trading Market; No Assurance of Active Trading Market; Potential
Volatility of Trading Prices," "--Determination of Unit Shares IPO Price;
Potential Conflicts of Interest," "Dilution," "Management," "Certain
Transactions" and "Underwriting."
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."
21
<PAGE>
USE OF PROCEEDS
The aggregate net proceeds from the sale of the 2,750,000 Units offered
hereby at an assumed initial public offering price of $11.00 per Unit are
estimated to be approximately $27.1 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 of
approximately $1.0 million payable by the Company and assuming no exercise of
the Warrants. The Company also will receive $4.5 million in cash and a $1.0
million promissory note from the sale of the Amgen Shares, and approximately
$106,000 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 the sale of the Amgen Shares and the sale of
25,000 shares of Common Stock to The Ohio University Foundation, primarily for
research and development. In addition, the Company intends to use a portion of
such net proceeds as follows: (i) approximately $1.0 million to pay expenses
relating to employee benefit and retention plans relating to the Acquisition;
and (ii) approximately $1.0 million relating to legal, accounting, and other
costs incurred in the Acquisition and related Form S-4 registration statement.
The Company expects to consolidate its operations in California, and, in
connection with such consolidation, to use approximately $2.5 million of such
net proceeds to facilitate employee relocation, and $500,000 of such net
proceeds for other costs such as benefit costs, the consolidation of operations,
the elimination of duplicate systems, and facilities, and other integration
costs. 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. Approximately $500,000 of the $1.0 million of expenses of
the Offering were advanced by Interneuron and evidenced as part of a promissory
note. The net proceeds to the Company, after deducting estimated underwriting
discounts and commissions and estimated expenses of the Offering, gives effect
to the repayment of such amount to Interneuron.
The amounts actually expended for each purpose will depend on numerous
factors, including any expansion or acceleration 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 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 Securities."
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.
22
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997 (i) the actual
capitalization of Progenitor as if the 1-for-2 reverse stock split had occurred
prior to March 31, 1997; (ii) the Company's capitalization on a pro forma basis
as if the Acquisition had occurred as of March 31, 1997 (assuming Final
Acquisition Consideration of $22.0 million for Mercator) and giving effect to
(a) the automatic conversion of all outstanding shares of Progenitor's Series A
and Series B Preferred Stock into an aggregate of 2,204,330 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 810,220 shares of Common Stock (based on an aggregate outstanding
balance of $6.9 million as of March 31, 1997), (c) the conversion of the
Interneuron Bridge Loan into an aggregate of 131,135 shares of Progenitor's
Series D Preferred Stock (based on an outstanding balance of $1.3 million as of
March 31, 1997), and (d) the issuance of 24,020 shares of Common Stock to The
Ohio University Foundation pursuant to an anti-dilution adjustment in connection
with the Offering; and (iii) the Company's capitalization on a pro forma as
adjusted basis to reflect (a) the issuance and sale of the 2,750,000 Units
offered hereby (after deducting estimated underwriting discounts and commissions
and the estimated expenses of the Offering payable by the Company) and the
receipt and application of the estimated net proceeds therefrom, (b) the sale of
647,059 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 $4.25 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 Series A
and Series B Preferred Stock; (ii) upon conversion of a convertible debenture
and a portion of the promissory note held by Interneuron; (iii) in the
Acquisition; (iv) to Amgen; and (v) to The Ohio University Foundation, and the
number of shares of Progenitor's Series D Preferred Stock to be issued upon
conversion of the Interneuron Bridge Loan, will depend upon a number of factors
including the date of the closing of the Offering, the initial public offering
price of the Units and the Unit Shares IPO Price. See "Use of Proceeds,"
"Business-- Corporate Agreements," "--Mercator Acquisition," "Certain
Transactions" and "Description of Securities."
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
------------------------------------------
(IN THOUSANDS, EXCEPT SHARES
AND PER SHARE DATA)
PRO FORMA
PROGENITOR FOR ACQUISITION PRO FORMA AS
ACTUAL AND CONVERSIONS ADJUSTED
----------- --------------- ------------
<S> <C> <C> <C>
Cash and cash equivalents............................................................ $ 8 $ 132 $ 31,686
----------- --------------- ------------
----------- --------------- ------------
Long-term obligations (1)............................................................ $ 8,763 $ 1,150 $ 966
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 -- --
Preferred Stock, Series D, $0.001 par value: 500,000 shares authorized; no shares
issued and outstanding, actual; 131,135 shares issued and outstanding, pro forma
and pro forma as adjusted........................................................ -- 1 1
Common Stock, $0.001 par value: 39,000,000 shares authorized; 2,887,217 shares
issued and outstanding, actual; 8,101,665 shares issued and outstanding, pro
forma; and 11,523,724 shares issued and outstanding, pro forma as adjusted (2)... 3 8 12
Shareholder promissory note receivable............................................. -- -- (1,000)
Additional paid-in capital......................................................... 14,972 57,022 89,045
Deficit accumulated during development stage....................................... (22,962) (59,916) (60,320)
----------- --------------- ------------
Total stockholders' equity (deficit)............................................. (7,964) (2,885) 27,738
----------- --------------- ------------
Total capitalization........................................................... $ 799 $ (1,735) $ 28,704
----------- --------------- ------------
----------- --------------- ------------
</TABLE>
- ----------------------------------
(1) See Notes 5, 9 and 10 to the Progenitor Financial Statements.
(2) Excludes: (i) 2,750,000 shares of Common Stock issuable upon exercise of the
Warrants; (ii) 3,408,888 shares of Common Stock reserved or to be 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 695,463 shares of Common Stock were outstanding as of June 20,
1997 under such stock plans, with a weighted average exercise price of $5.13
per share, and (b) options to purchase 937,350 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 Unit Shares IPO Price; (iii)
376,479 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 $1.31 per share; (iv)
45,865 shares of Common Stock issuable upon exercise of warrants outstanding
as of June 20, 1997, with an exercise price of $5.23 per share; (v) 35,878
shares of Common Stock issuable upon exercise of the Mercator Warrants, with
a weighted average exercise price of $4.65 per share; and (vi) 131,135
shares of Common Stock issuable upon conversion of Progenitor's Series D
Preferred Stock. See "Management--Stock Plans," "Certain Transactions" and
"Description of Securities."
23
<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 8,101,665 shares of Common Stock outstanding as of March 31, 1997 (as if the
1-for-2 reverse split of the Company's Common Stock had occurred prior to March
31, 1997), assuming (i) the Acquisition occurred as of March 31, 1997; (ii) the
automatic conversion of all outstanding shares of Progenitor's Series A and
Series B Preferred Stock into an aggregate of 2,204,330 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 810,220 shares of Common Stock (based on outstanding balances of
$6.9 million as of March 31, 1997) upon the closing of the Offering; (iv) the
conversion of the Interneuron Bridge Loan into an aggregate of 131,135 shares of
Progenitor's Series D Preferred Stock (based on an outstanding balance of $1.3
million as of March 31, 1997); and (v) the issuance of 24,020 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 a convertible debenture and a portion of the
promissory note held by Interneuron; (iv) to Amgen; and (v) to The Ohio
University Foundation, and the number of shares of Progenitor's Series D
Preferred Stock to be issued upon conversion of the Interneuron Bridge Loan,
will depend upon a number of factors, including the date of the closing of the
Offering, the initial public offering price of the Units and the Unit Shares IPO
Price. See "Business--Corporate Agreements," "--Mercator Acquisition,"
"Description of Securities" and "Certain Transactions--Relationship with
Interneuron."
As of March 31, 1997, the Company had a pro forma net tangible book value
deficit of approximately $3.6 million or $0.44 per share. Without taking into
account any other changes in pro forma net tangible book value deficit other
than to give effect to (i) the issuance and sale of the 2,750,000 Units offered
hereby at an assumed initial public offering price of $11.00 per Unit and the
receipt and application of the estimated net proceeds therefrom; (ii) the sale
of 647,059 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 $4.25 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 March 31, 1997 would have been approximately $27.7
million or $2.41 per share. This represents an immediate increase in pro forma
net tangible book value of $2.85 per share to existing stockholders and an
immediate dilution of $6.09 per share to new investors, assuming a Unit Shares
IPO Price of $8.50 per share. 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 allocated to each
share of Common Stock............................................. $ 8.50
Pro forma net tangible deficit per share as of March 31, 1997..... $ (0.44)
Increase per share attributable to new investors.................. 2.85
---------
Pro forma net tangible book value per share after the Offering...... 2.41
---------
Dilution per share to new investors................................. $ 6.09
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
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 Unit and
assuming a Unit Shares IPO Price of $8.50 per share and before deducting
estimated underwriting discounts and commissions and estimated offering
expenses). The calculation in this table with respect to shares of
24
<PAGE>
Common Stock to be purchased by new investors in the Offering excludes shares of
Common Stock issuable upon exercise of the Warrants.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 5,950,787 51.6% $ 28,053,000 37.2% $ 4.71
Former Mercator stockholders.......... 2,175,878 18.9 18,495,000 24.5 8.50
Amgen................................. 647,059 5.6 5,500,000 7.3 8.50
New investors......................... 2,750,000 23.9 23,375,000 31.0 8.50
------------ ----- ------------- -----
Total............................. 11,523,724 100.0% $ 75,423,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
The foregoing tables reflect no exercise of outstanding options or warrants
subsequent to March 31, 1997. As of June 20, 1997, there were (i) 3,408,888
shares of Common Stock reserved or to be 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 695,463 shares of Common
Stock were outstanding under such stock plans, with a weighted average exercise
price of $5.13 per share, and (b) options to purchase 937,350 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 Unit Shares IPO Price; (ii)
376,479 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 $1.31 per share; (iii) 45,865 shares
of Common Stock issuable upon exercise of outstanding warrants, with an exercise
price of $5.23 per share; and (iv) 35,878 shares of Common Stock issuable upon
exercise of the Mercator Warrants, with a weighted average exercise price of
$4.65 per share. See "Capitalization," "Business--Corporate Agreements,"
"Management--Stock Plans" and "Description of Securities-- Preferred Stock."
25
<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 Series A and Series B Preferred Stock into an aggregate of
2,204,330 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 810,220 shares of Common Stock (based on an
aggregate outstanding balance of $6.9 million as of March 31, 1997) upon the
closing of the Offering, the issuance of 24,020 shares of Common Stock to The
Ohio University Foundation pursuant to an anti-dilution adjustment, and the
conversion of the Interneuron Bridge Loan into 131,135 shares of Progenitor's
Series D Preferred Stock (based on an outstanding balance of $1.3 million as of
March 31, 1997) in connection with the Offering (collectively, the
"Conversions"); and (iii) the issuance and sale of 2,750,000 Units 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 $4.25 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, the
initial public offering price of the Units and the Unit Shares IPO Price. See
"Business-- Corporate Agreements," "Certain Transactions--Relationship with
Interneuron" and "Description of Securities."
The pro forma balance sheet assumes that the Acquisition, Conversions and
Offering Adjustments were consummated as of March 31, 1997. 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 six months ended March 31, 1997 with the historical financial
statements of Mercator for the year ended December 31, 1996 and for the six
months ended March 31, 1997, 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 $1.0 million for
severance, retention and bonus programs, $2.5 million to facilitate employee
relocation, and $500,000 for other costs such as employee benefit and
integration costs related to the consolidation of operations and the elimination
of duplicate systems and facilities 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.
In addition, the shares issuable upon the automatic conversions pursuant to the
minimum return provisions on the Series A and B Preferred Stock have been
treated as a dividend in the pro forma balance sheet. This dividend on preferred
stock, which will increase the net loss attributable to holders of Common Stock
by approximately $12.3 million, has been excluded as an adjustment in the pro
forma statement of operations as it is a non-recurring item directly related to
the Offering. See "Risk Factors--History of Operating Losses; Anticipation of
Future Losses," "--Risks Associated with the Acquisition of Mercator" 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."
26
<PAGE>
PRO FORMA BALANCE SHEETS
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO
FORMA
PRO DEBT AND FOR
ACQUI- FORMA EQUITY ACQUI-
ACTUAL SITION FOR CONVERSION SITION OFFERING
------------------------ ADJUST- ACQUI- ADJUST- AND ADJUST-
PROGENITOR MERCATOR(1) MENTS(2) SITION MENTS(3) CONVERSIONS MENTS(4)
----------- ----------- ----------- --------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 8 $ 124 $ -- $ 132 $ -- $ 132 $ 31,554
Accounts receivable............... 176 -- -- 176 -- 176 --
Deferred interest expense......... -- 750 (750) -- -- -- --
Prepaid expenses and other current
assets.......................... 96 65 -- 161 -- 161 --
----------- ----------- ----------- --------- ----------- ----------- -----------
Total current assets............ 280 939 (750) 469 -- 469 31,554
----------- ----------- ----------- --------- ----------- ----------- -----------
Property and equipment at cost...... 1,660 2,474 (1,298) 2,836 -- 2,836 --
Less accumulated depreciation... (822) (1,298) 1,298 (822) -- (822) --
----------- ----------- ----------- --------- ----------- ----------- -----------
838 1,176 -- 2,014 -- 2,014 --
Notes receivable from officers, net
and other......................... 58 150 -- 208 -- 208 --
Deferred offering and acquisition
costs............................. 1,627 97 (1,013) 711 -- 711 (711)
Convertible bridge promissory note
receivable from Mercator.......... 1,308 -- (1,308) -- -- -- --
----------- ----------- ----------- --------- ----------- ----------- -----------
Total assets.................... $ 4,111 $ 2,362 $ (3,071) $ 3,402 $ -- $ 3,402 $ 30,843
----------- ----------- ----------- --------- ----------- ----------- -----------
----------- ----------- ----------- --------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.................. $ 506 $ 685 $ 583 $ 1,774 $ -- $ 1,774 $ --
Accrued expenses.................. 2,421 93 -- 2,514 -- 2,514 404
Convertible notes payable......... -- 2,250 (2,250 ) -- -- -- --
Equipment financing obligations--
current......................... 385 464 -- 849 -- 849 --
----------- ----------- ----------- --------- ----------- ----------- -----------
Total current liabilities....... 3,312 3,492 (1,667 ) 5,137 -- 5,137 404
Note payable--Interneuron........... 6,577 -- -- 6,577 (6,393 ) 184 (184)
Convertible
debenture--Interneuron............ 495 -- -- 495 (495 ) -- --
Bridge Loan--Interneuron............ 1,310 -- -- 1,310 (1,310 ) -- --
Convertible Notes
payable--Progenitor............... 1,308 (1,308 ) -- -- -- --
Equipment financing obligations..... 381 585 -- 966 -- 966 --
----------- ----------- ----------- --------- ----------- ----------- -----------
Total liabilities............... 12,075 5,385 (2,975 ) 14,485 (8,198 ) 6,287 220
----------- ----------- ----------- --------- ----------- ----------- -----------
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 ) -- --
Preferred stock, Series D......... -- -- -- -- 1 1 --
Common stock...................... 3 -- 2 5 3 8 4
Common stock...................... -- 53 (53 ) -- -- -- --
Shareholder promissory note
receivable...................... -- -- -- -- -- -- (1,000)
Additional paid-in capital........ 14,972 -- 21,345 36,317 20,705 57,022 32,023
Deficit accumulated during
development stage............... (22,962 ) (18,637 ) (5,829 ) (47,428) (12,488 ) (59,916 ) (404)
----------- ----------- ----------- --------- ----------- ----------- -----------
Total stockholders' equity
(deficit)..................... (7,964 ) (18,584 ) 15,465 (11,083) 8,198 (2,885 ) 30,623
----------- ----------- ----------- --------- ----------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit)..................... $ 4,111 $ 2,362 $ (3,071 ) $ 3,402 $ -- $ 3,402 $ 30,843
----------- ----------- ----------- --------- ----------- ----------- -----------
----------- ----------- ----------- --------- ----------- ----------- -----------
<CAPTION>
PRO
FORMA AS
ADJUSTED
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 31,686
Accounts receivable............... 176
Deferred interest expense......... --
Prepaid expenses and other current
assets.......................... 161
-----------
Total current assets............ 32,023
-----------
Property and equipment at cost...... 2,836
Less accumulated depreciation... (822)
-----------
2,014
Notes receivable from officers, net
and other......................... 208
Deferred offering and acquisition
costs............................. --
Convertible bridge promissory note
receivable from Mercator.......... --
-----------
Total assets.................... $ 34,245
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.................. $ 1,774
Accrued expenses.................. 2,918
Convertible notes payable......... --
Equipment financing obligations--
current......................... 849
-----------
Total current liabilities....... 5,541
Note payable--Interneuron........... --
Convertible
debenture--Interneuron............ --
Bridge Loan--Interneuron............ --
Convertible Notes
payable--Progenitor............... --
Equipment financing obligations..... 966
-----------
Total liabilities............... 6,507
-----------
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......... --
Preferred stock, Series D......... 1
Common stock...................... 12
Common stock...................... --
Shareholder promissory note
receivable...................... (1,000 )
Additional paid-in capital........ 89,045
Deficit accumulated during
development stage............... (60,320 )
-----------
Total stockholders' equity
(deficit)..................... 27,738
-----------
Total liabilities and
stockholders' equity
(deficit)..................... $ 34,245
-----------
-----------
</TABLE>
27
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL
---------------------------
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
- ------------------------------------------ ------------- ------------ ----------- -------------- -------------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 1,332 $ 500 $ 1,832 $ -- $ 1,832
Operating expenses:
Research and development................ 3,873 6,049 9,922 204(5) 10,126
General and administrative.............. 1,791 1,593 3,384 -- 3,384
------------- ------------ ----------- ----- -------------
Total operating expenses.............. 5,664 7,642 13,306 204 13,510
------------- ------------ ----------- ----- -------------
Nonrecurring expense...................... 974 -- 974 -- 974
Interest expense, net..................... 178 66 244 (120)(6) 124
------------- ------------ ----------- ----- -------------
Net loss................................ $ (5,484) $ (7,208) $ (12,692) $ (84) $ (12,776)
------------- ------------ ----------- ----- -------------
------------- ------------ ----------- ----- -------------
Supplemental net loss per share........... $ (0.91)
-------------
-------------
Shares used in computing supplemental net
loss per share........................... 6,047,252(7)
-------------
-------------
Pro forma net loss per share.............. $ (1.07)
-------------
-------------
Shares used in computing pro forma net
loss per share........................... 11,980,477(7)
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
ACTUAL
--------------------------
FOR THE SIX MONTHS ENDED DEBT AND
MARCH 31, 1997 PRO FORMA EQUITY
-------------------------- FOR CONVERSION PRO FORMA
FOR THE SIX MONTHS ENDED MARCH 31, 1997 PROGENITOR MERCATOR(1) ACQUISITION ADJUSTMENTS AS ADJUSTED
- ------------------------------------------- ------------- ----------- ----------- -------------- -------------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues................................... $ 859 $ 125 $ 984 $ -- $ 984
Operating expenses:
Research and development................. 2,150 3,249 5,399 204(5) 5,603
General and administrative............... 1,226 802 2,028 -- 2,028
------------- ----------- ----------- ----- -------------
Total operating expenses............... 3,376 4,051 7,427 204 7,631
------------- ----------- ----------- ----- -------------
Interest expense, net...................... 287 73 360 (265)(6) 95
------------- ----------- ----------- ----- -------------
Net loss................................. $ (2,804) $ (3,999) $ (6,803) $ 61 $ (6,742)
------------- ----------- ----------- ----- -------------
------------- ----------- ----------- ----- -------------
Supplemental net loss per share............ $ (0.46)
-------------
-------------
Shares used in computing supplemental net
loss per share............................ 6,103,034(7)
-------------
-------------
Pro forma net loss per share............... $ (0.56)
-------------
-------------
Shares used in computing pro forma net loss
per share................................. 12,036,259(7)
-------------
-------------
</TABLE>
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
(1) Reflects the actual financial statements of Mercator for the date or period
indicated. Mercator actual financial statements for the six month period
ended March 31, 1997 were derived by combining the unaudited financial
statements of Mercator for the three month period ended December 31, 1996
with the unaudited financial statements of Mercator for the three month
period ended March 31, 1997. 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:
2,175,878 shares of common stock.......................... $ 18,495
Stock options for 376,479 shares of common stock.......... 2,713
Warrants for 35,878 shares of common stock................ 138
Progenitor funding to Mercator............................ 1,308
Total estimated acquisition fees and costs.................. 1,500
---------
Total purchase price...................................... $ 24,154
---------
---------
Allocation of purchase price:
In-process research and development......................... $ 24,466
Excess of the estimated fair value of Mercator liabilities
assumed over assets purchased as of March 31, 1997........ (312)
---------
Total..................................................... $ 24,154
---------
---------
</TABLE>
For pro forma financial statement purposes, the purchase price was estimated
using an assumed initial public offering price of $11.00 per Unit, and a
Unit Shares IPO Price of $8.50 per share. The initial public offering price
of the Units will be determined through negotiations between Progenitor and
representatives of the Underwriters. The actual Unit Shares IPO Price will
be determined by the Board of Directors of Progenitor acting in good faith
after consultation with financial advisers retained for the purpose of
advising the Board of Directors with respect to such allocation. See "Risk
Factors--No Prior Trading Market; No Assurance of Active Trading Market;
Potential Volatility of Trading Prices" and "--Determination of Unit Shares
IPO Price; Potential Conflicts of Interest." The actual purchase price for
Mercator will be determined by a valuation of the Common Stock, stock
options and warrants issued at the time of the closing of the Offering.
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The Acquisition was reflected in the unaudited pro forma balance sheet as
follows:
<TABLE>
<S> <C> <C>
Eliminate deferred interest expense......................... $ (750)
To establish fair value of property and equipment........... (1,298)
To eliminate Mercator accumulated depreciation.............. 1,298
Accounts payable incurred for acquisition costs............. (583)
Eliminate Mercator convertible notes payable, net........... 2,250
Eliminate Convertible Note Payable--Progenitor.............. 1,308
Eliminate Convertible bridge promissory note receivable from
Mercator .................................................. (1,308)
Write-off of deferred acquisition cost...................... (1,013)
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 2,175,878 shares of common stock
issued..................................................... (2)
Eliminate Mercator common stock............................. 53
Reflect the issuance of common stock, options and warrants
in additional paid-in capital.............................. (21,345)
Deficit accumulated during the development stage:
Reflect charge for purchase of in-process
research and development................................ 24,466
Eliminate Mercator deficit accumulated
during the development stage............................ (18,637)
---------
Subtotal................................................ 5,829
---------
Total................................................. $ 0
---------
---------
</TABLE>
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The allocation of the Mercator purchase price among the identifiable tangible
and intangible assets and liabilities is based on preliminary estimates of
the fair market value of those assets and liabilities. The technological
feasibility of the purchased in-process research and development technology
has not yet been established and the 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 ($1,308 as of
March 31, 1997). Prior to the closing of the Offering, Progenitor
anticipates that approximately $4,000 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 $27,000.
In connection with the Acquisition, the Company expects to incur several
nonrecurring charges in the quarter and fiscal year ending September 30,
1997 which in the aggregate are currently estimated to be $31,000, including
the write-off of costs related to the purchase of in-process research and
development, severance, employee retention and bonus programs and employee
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 July 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 ($24,466) 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.
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
(3) Reflects the following Conversions which will occur upon the closing of the
Offering:
<TABLE>
<S> <C> <C>
(a) The automatic conversion of all outstanding shares of Progenitor's
Preferred Stock Series A and Series B into an aggregate of
2,204,330 shares of Common Stock:
$ (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 810,220
shares of Common Stock:
$ (6,393)
Note payable--Interneuron.........................................
$ (495)
Convertible debenture--Interneuron................................
(c) The conversion of the Interneuron Bridge Loan into an aggregate of $ (1,310)
131,135 shares of Preferred Stock, Series D.......................
(d) Issuance of 24,020 shares of Common Stock to The Ohio University $ (204)
Foundation in connection with an anti-dilution adjustment pursuant
to a stock purchase right.........................................
(e) To reflect a dividend for the total value of the shares of Common (4,549)
Stock to be issued upon the automatic conversion of the Preferred
Stock, Series A and Series B (a total of 2,204,330 shares with a
value of $8.50 per share (the assumed Unit Shares IPO Price) less
consideration of $14,188 paid as reflected in the historical
financial statements).............................................
(f) To reflect as a dividend the additional shares of Common Stock (7,735)
otherwise issuable upon automatic conversion of Series A Preferred
Stock, but the right to which shares was relinquished by
Interneuron (909,965 shares at an assumed Unit Shares IPO Price of
$8.50 per share)..................................................
---------
$ (12,488)
---------
---------
(g) To reflect the par value and additional paid-in capital as a
result of items (a) through (f) above:
$ 3
Common Stock, (par value of $0.001) for a total issuance of
3,038,570 shares of common stock..................................
$ 1
Preferred Stock, Series D (par value $0.001) for a total issuance
of 131,135 shares of Preferred Stock..............................
$ 12,970
Additional paid-in capital........................................
</TABLE>
The dividends shown in 3(e) and (f) above related to minimum return
provisions will increase the net loss attributable to holders of Common
Stock by approximately $12.3 million for the year ended September 30, 1997,
assuming a Unit Shares IPO price of $8.50.
In exchange for an option agreement dated as of July 2, 1997, Interneuron
has relinquished its right to minimum return adjustments through the quarter
ended April 7, 1997 to the conversion ratio of its Series A Preferred Stock.
Based upon a Unit Shares IPO Price of $8.50, these rights, if not
relinquished, would have resulted in Interneuron receiving an additional
909,965 shares of Common Stock upon conversion of its Series A Preferred
Stock.
The Conversions described above will occur upon the closing of the Offering.
The number of shares to be issued upon the Conversions is dependent, among
other things, on the Unit Shares IPO Price. See
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
"Risk Factors--Determination of Unit Shares IPO Price; Potential Conflicts
of Interest." A decrease of $1.00 from the assumed Common Stock price
allocation of $8.50 per share would cause an increase of 412,947 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. See "Risk Factors--Control of Company By, and Potential
Conflicts of Interest With, Interneuron," "Business--Discovery Programs,"
"--Corporate Agreements" and "Certain Transactions--Relationship With
Interneuron."
(4) Reflects the Offering Adjustments as follows:
<TABLE>
<S> <C> <C>
(a) To record the receipt and application of cash and cash equivalents:
The issuance and sale of the 2,750,000 Units offered hereby
(after deducting estimated underwriting discounts and
commissions and the estimated expenses of the Offering)........ $ 27,132
The receipt of $4,500 in cash in connection with the purchase of
647,059 Amgen Shares........................................... 4,500
The sale of 25,000 shares of Common Stock to The Ohio University
Foundation at a price of $4.25 per share....................... 106
The repayment of the remaining portion of the promissory note
payable to Interneuron......................................... (184)
---------
$ 31,554
---------
---------
(b) To record an accrual for bonuses payable to officers of the Company
in connection with the Offering.................................. $ 404
(c) To reflect the stockholder promissory note receivable from Amgen... $ (1,000)
(d) To reflect the par value and additional paid-in capital as a result
of item (a) above:
Common Stock (par value of $.001), for consideration of a total
issuance of 3,422,059 shares of Common Stock................... $ 4
Additional paid-in capital....................................... $ 32,023
</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 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.
33
<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 financial statements audited by Coopers & Lybrand L.L.P. that
are not included herein. The statement of operations data for the six months
ended March 31, 1996 and 1997 and for the period from May 8, 1992 (date of
inception) to March 31, 1997 and the balance sheet data as of March 31, 1997,
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 data set forth herein. The
results for the six months ended March 31, 1996 and 1997, are not necessarily
indicative of the results to be expected for future periods. The selected
historical 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 SIX MONTHS (DATE OF
(DATE OF ENDED INCEPTION)
INCEPTION) TO YEARS ENDED SEPTEMBER 30, MARCH 31, TO
SEPTEMBER 30, ------------------------------------------ -------------------- MARCH 31,
1992 1993 1994 1995 1996 1996 1997 1997
------------- --------- --------- --------- --------- --------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ -- $ -- $ -- $ 2,821 $ 1,332 $ 912 $ 859 $ 5,012
Operating expenses:
Research and development....... 775 3,116 4,113 4,228 3,873 1,706 2,150 18,255
General and administrative..... 264 1,339 1,275 1,116 1,791 691 1,226 7,011
------------- --------- --------- --------- --------- --------- --------- ------------
Total operating expenses......... 1,039 4,455 5,388 5,344 5,664 2,397 3,376 25,266
------------- --------- --------- --------- --------- --------- --------- ------------
Nonrecurring expense............. -- -- -- -- 974 -- -- 974
Interest expense................. 23 246 648 352 178 56 287 1,734
------------- --------- --------- --------- --------- --------- --------- ------------
Net loss......................... $ (1,062) $ (4,701) $ (6,036) $ (2,875) $ (5,484) $ (1,541) $ (2,804) $ (22,962)
------------- --------- --------- --------- --------- --------- --------- ------------
------------- --------- --------- --------- --------- --------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
-------------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
--------- --------- ---------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 35 $ 11 $ 10 $ 1,174 $ 22 $ 8
Working capital......................... (379) (562) (988) (269) (1,755) (3,032)
Total assets............................ 568 979 977 2,395 920 4,111
Long-term obligations................... 1,210 6,150 11,767 705 4,010 8,763
Deficit accumulated during development
stage................................. (1,062) (5,763) (11,799) (14,674) (20,158) (22,962)
Total stockholders' deficit............. (1,057) (5,755) (11,791) (101) (5,164) (7,964)
</TABLE>
34
<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 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 statement of operations data for the three
months ended March 31, 1996 and 1997 and for the period from October 9, 1992
(date of inception) to March 31, 1997 and the balance sheet data as of March 31,
1997 have been derived from unaudited financial statements which include all
adjustments, consisting solely of normal recurring adjustments which Mercator
considers necessary for a fair presentation of its financial position at the end
of, and the results of its operations for, these periods. The results for the
three months ended March 31, 1996 and 1997 are not necessarily indicative of the
results to be expected for future periods. The selected historical financial
data should be read in conjunction with the Mercator Financial Statements and
related Notes thereto and other financial data included elsewhere herein.
<TABLE>
<CAPTION>
OCTOBER 9,
OCTOBER 9, 1992 1992
(DATE OF THREE MONTHS (DATE OF
INCEPTION) TO YEARS ENDED DECEMBER 31, ENDED INCEPTION) TO
DECEMBER 31, ------------------------------- MARCH 31, MARCH 31,
1993 1994 1995 1996 1996 1997 1997
--------------- --------- --------- --------- --------- --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ -- $ -- $ 375 $ 500 $ 125 $ -- $ 875
Operating costs and expenses:
Research and development........... 1,222 2,330 4,183 6,049 1,240 1,592 15,376
General and administrative......... 180 639 1,524 1,593 283 393 4,329
------- --------- --------- --------- --------- --------- --------------
Total operating costs and expenses... 1,402 2,969 5,707 7,642 1,523 1,985 19,705
------- --------- --------- --------- --------- --------- --------------
Loss from operations................. (1,402) (2,969) (5,332) (7,142) (1,398) (1,985) (18,830)
Interest income...................... 54 229 291 114 19 6 694
Interest expense..................... (21) (95) (156) (180) (49) (49) (501)
------- --------- --------- --------- --------- --------- --------------
Net loss............................. $ (1,369) $ (2,835) $ (5,197) $ (7,208) $ (1,428) $ (2,028) $ (18,637)
------- --------- --------- --------- --------- --------- --------------
------- --------- --------- --------- --------- --------- --------------
Net loss per share................... $ (14.38) $ (28.62) $ (48.70) $ (55.27) $ (12.94) $ (8.66)
------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997
--------- --------- --------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 858 $ 2,002 $ 1,446 $ 439 $ 124
Short-term investments.................................. 690 4,094 487 -- --
Working capital......................................... 1,393 6,355 1,112 (1,790) (2,553)
Total assets............................................ 2,187 7,834 3,573 3,083 2,362
Long-term obligations and redeemable preferred stock.... 3,331 11,580 12,004 16,247 17,454
Deficit accumulated during development stage............ (1,369) (4,204) (9,401) (16,609) (18,637)
</TABLE>
35
<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 March 31, 1997, Progenitor had a total
stockholders' deficit of $8.0 million, including an accumulated deficit of $23.0
million. See "Risk Factors-- History of Operating Losses; Anticipation of Future
Losses."
Interneuron provided the initial funding of Progenitor and had invested
$19.7 million in Progenitor in equity and debt financings through March 31,
1997. Following the Offering, Interneuron is expected to own approximately 41%
(approximately 40% if the Underwriters' over-allotment option is exercised in
full) of the outstanding Common Stock of the Company. In addition, based upon an
outstanding balance on the Interneuron Bridge Loan of $2.9 million as of June
20, 1997, Interneuron will own 293,293 shares of the Series D Preferred Stock
which it may convert at any time at its option into an equal number of shares of
Common Stock, which would bring its ownership to approximately 43% of the Common
Stock outstanding (approximately 41% if the Underwriters' over-allotment option
is exercised in full). 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 2,175,878 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."
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The Company intends to use the net proceeds of the Offering, together with
the cash proceeds received from sale of the Amgen Shares and the sale of 25,000
shares of Common Stock to The Ohio University Foundation, primarily for research
and development. In addition, the Company intends to use a portion of such net
proceeds as follows: (i) approximately $1.0 million to pay expenses relating to
employee benefit and retention plans relating to the Acquisition; and (ii)
approximately $1.0 million relating to legal, accounting and other costs
relating to the Acquisition and related Form S-4 registration statement. The
Company expects to consolidate its operations in California, and, in connection
with such consolidation, to use approximately $2.5 million of such net proceeds
to facilitate employee relocation, and $500,000 of such net proceeds for other
costs such as benefit costs, the consolidation of operations, the elimination of
duplicate systems and facilities, and other integration costs. 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's Series A and Series B Preferred Stock will be automatically
converted into Common Stock in the event of a qualifying initial public offering
such as the Offering. The terms of the Series A and Series B Preferred Stock
provide that, upon such an offering, the conversion ratio will be adjusted so
that the holders receive a minimum return of 35% annually, commencing July 7,
1995.
Interneuron has relinquished its right to minimum return adjustments on its
holdings of Series A Preferred Stock in exchange for an option agreement dated
as of July 2, 1997. Pursuant to this option agreement, Interneuron received a
right of first refusal to acquire an exclusive, worldwide license to
manufacture, use and sell certain technology related to the Company's Del-1
protein on terms to be negotiated. In the event that Progenitor grants such
rights to a third party, the Company must share fees, milestone payments and
royalties with Interneuron. Should the Company develop and sell the technology
independently, the Company will pay Interneuron royalties on net sales. Thus,
should the Company license or sell the technology to a third party, royalty
payments will be paid to Interneuron. Because the amount of revenue to be shared
or royalties to be paid depends upon the future development and success of the
technology and the structure of any future sale or license agreement, it is not
currently possible to estimate the future effect of the option on the Company.
The Company is not required to pursue the development of Del-1 and does not
expect the payments to be made to Interneuron if Del-1 is successfully developed
to be material to its total cost of developing Del-1. In addition, Del-1 is only
one of a number of discoveries generated from the Company's genomics system.
As a result of the option agreement, Interneuron relinquished its right to
receive minimum return adjustments on its Series A Preferred Stock through April
7, 1997. Based upon a Unit Shares IPO Price of $8.50, these rights, if not
relinquished, would have resulted in Interneuron receiving an additional 909,965
shares of Common Stock upon conversion of its Series A Preferred Stock.
The conversion of the Series A and Series B Preferred Stock into Common
Stock upon consummation of the Offering will be treated for accounting purposes
as a dividend to the preferred holders in the form of 535,126 additional shares
of Common Stock to be issued, and 909,965 shares of Common Stock the issuance of
which was relinquished by Interneuron, in each case assuming a Unit Shares IPO
Price of $8.50 and consummation of the Offering prior to October 7, 1997. In
accordance with generally acceptable accounting principles, this dividend will
increase the net loss attributable to holders of Common Stock by approximately
$12.3 million for the year ended September 30, 1997, assuming a Unit Shares IPO
Price of $8.50.
PRO FORMA FOR ACQUISITION
As of March 31, 1997, the Company, on a pro forma basis (including Mercator)
had an accumulated deficit of approximately $60.3 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
September 30, 1997, which in the aggregate are currently estimated to be
approximately $31.0 million, including the write-off of $27.0 million in costs
related to the purchase of in-process research and development, $1.0 million for
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severance, retention and bonus programs, $2.5 million to facilitate employee
relocation, and $500,000 for other costs such as 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 July 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 SIX MONTHS ENDED MARCH 31, 1996 AND 1997
Revenues for the six months ended March 31, 1996 and 1997 were $912,000 and
$859,000, respectively. For the first six months of 1996, Progenitor recognized
$500,000 in revenues pursuant to the collaboration agreement with Chiron entered
into in March 1995, and also recognized revenues totaling $400,000 under the
Company's ATP grant which provides for aggregate payments of $2.0 million over
three years. For the first six months of fiscal 1997, Progenitor recognized
$500,000 in revenue as a result of entering into a license agreement with Amgen,
and $351,000 of revenues related to Progenitor's ATP grant.
Research and development expense increased from $1.7 million for the six
months ended March 31, 1996 to $2.2 million for the six months ended March 31,
1997. The increase was due to the addition of five scientific staff members and
related recruiting costs, annual salary increases, costs associated with
additional sponsored research agreements entered into during September 1996, and
increased costs and expenses associated with patent filings and license and
collaborative agreements in process.
General and administrative expenses increased from $691,000 for the six
months ended March 31, 1996 to $1.3 million for the six months ended March 31,
1997. The increase is due primarily to new administrative personnel, and overall
salary increases.
Interest expense increased from $57,000 for the six months ended March 31,
1996 to $287,000 for the six months ended March 31, 1997 primarily as a result
of increased borrowings under the promissory note payable to Internueron.
PROGENITOR FISCAL YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
Revenues of $2.8 million in fiscal 1995 were 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.
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
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supplies and animal facilities. The Company expects research and development
expenses to increase in the future, depending 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
primarily from a credit from Interneuron for overbilled employee benefit
expenses incurred prior to fiscal 1995, which was offset against similar
expenses in 1995. 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 depending on the availability of capital.
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 federal
net operating loss carryforwards of $18.4 million and federal 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 Section 382. Under the terms of an option agreement with Interneuron with
respect to certain aspects of Del-1, Interneuron relinquished its rights to
certain minimum return provisions of the Company's Series A Preferred Stock.
Such relinquishment may be deemed taxable income to Progenitor. There can be no
assurance that all of such income would be offset by current expenses or
operating loss carryforwards. See "Risk Factors--Control of Company By, and
Potential Conflicts of Interest With, Interneuron," "Business--Discovery
Programs," "--Corporate Agreements" and "Certain Transactions--Relationship With
Interneuron."
LIQUIDITY AND CAPITAL RESOURCES
PROGENITOR
Since inception, Progenitor has financed its operations primarily through
debt and equity financings from Interneuron of $19.7 million through March 31,
1997, 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 $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, and $351,000 for the six months ended
March 31, 1997, under the ATP grant. Progenitor also completed sale-leaseback
transactions generating $88,000, $117,000 and $551,000 in cash during fiscal
1995, fiscal 1996, and the six months
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ended March 31, 1997, 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 March 31, 1997, Progenitor had cash and cash equivalents totaling $8,000.
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, 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 any expansion or acceleration 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.
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 "Interneuron
Bridge Loan"). Interneuron has agreed to convert the entire balance of the
Interneuron Bridge Loan into shares of Progenitor's Series D Preferred Stock
upon the closing of the Offering. Based on an outstanding balance of $2.9
million on the Interneuron Bridge Loan as of June 20, 1997, Interneuron would
receive 293,293 shares of Progenitor's Series D Preferred Stock upon such
conversion. See "Risk Factors--Control of Company By, and Potential Conflicts of
Interest With,
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Interneuron," "Certain Transactions--Relationship with Interneuron" and
"Description of Securities-- Preferred Stock."
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.
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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"), cancer, 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 one issued U.S. patent and one notice of allowance from the USPTO.
The B219 leptin receptor may have therapeutic applications in obesity, diabetes
and certain blood and immune system disorders. Progenitor has entered into a
license agreement with 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 the 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 eleven
pending U.S. patent applications, a provisional U.S. patent application and
certain corresponding foreign applications relating to its genomics technologies
and discoveries, and has received notices of allowance from the USPTO for patent
applications relating to the diagnosis of HH using specific gene markers and
genetic mutations, and for an application relating to its automated genomic
sequencing technology. A patent application relating to the EPM1 epilepsy gene
is pending in the USPTO. See "Risk Factors--Uncertainty of Patents and
Proprietary Rights," "--Mercator Acquisition" and "--Patents and Proprietary
Rights."
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.
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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
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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 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.
A table entitled "The Company's Genomics System". The table consists of 3
columns and 3 rows. The rows are labeled, top to bottom, with circular icons
(repeated from the inside front cover) and the words "Developmental Biology",
"Genomics Technologies" and "Disease Genetics". The columns are labeled (left to
right) within arrow-shaped bars (pointing left to right): "Discovery Resources",
"Discovery Tools" and "Further Elucidation of Gene Function". The text of the
table is as follows:
<TABLE>
<CAPTION>
FURTHER ELUCIDATION OF GENE
DISCOVERY RESOURCES DISCOVERY TOOLS FUNCTION
<S> <C> <C> <C>
DEVELOPMENTAL BIOLOGY -Stem Cells -Receptor Technologies -Murine Developmental Assays
-Developing Tissues -Gene Expression Analysis -Transgenic and Gene
Knock-Out Technologies
-Disease Models
-Gene Delivery and
Expression
GENOMICS TECHNOLOGIES -Genomics Databases -Bioinformatics
-Computational Biology
-Screening Algorithms
DISEASE GENETICS -Patient DNA Collections -High-Throughput Genomic Sequencing
- Chromosome Analysis
-Gene Mapping
-Genetic Analysis
</TABLE>
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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.
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, which may decrease
the time required to locate genes associated with complex diseases. Clinical
collaborations are in place to obtain approximately 5,000 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 June 20, 1997, approximately
75% of the samples from these collaborations had been
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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 DEL-1. The Company
continues to apply these technologies to its various discovery resources, and
has identified 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.
The Company has entered into a collaboration with the Ontario Cancer
Institute to isolate and characterize novel hematopoietic genes from single
murine hematopoietic cells during multiple defined stages of differentiation.
The collaboration uses technology that maps the expression of known genes during
cell differentiation and, when combined with subtractive techniques, allows for
the isolation of novel protein-encoding complementary DNAs ("cDNAs") from
single, well-characterized cells. These methods provide for cleaner sampling of
gene expression than can be accomplished in larger cultures of mixed or
non-synchronized cells and may facilitate the discovery of potentially medically
relevant genes and their functional characterization.
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 to the
isolation of new genes, elucidation of gene and protein function and
determination of novelty. The
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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 cDNAs. 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 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 reduces the amount of chromosomal material that must be
searched to locate 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
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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, XENOPUS (frog) and zebrafish
assays, transgenic and gene knock-out 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
and species 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 the 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 function during
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.
The Company also has entered into two collaborations to exploit murine
development to evaluate candidate genes from its discovery programs. The first
collaboration, with the University of Cambridge, 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. In situ DNA hybridization, which uses complementary binding
of DNA strands to indicate gene expression at specific sites throughout an
animal, was instrumental in the discovery by University of Cambridge researchers
of two genes involved in the early formation of mammalian tissues.
In the second collaboration, with Ohio University, transgenic mice are used
as tools to study the effects of over- and under-expression of genes during
early stages of development through adulthood, which the Company believes may
provide results relevant to human gene function and medical applications.
XENOPUS DEVELOPMENTAL ASSAYS
The Company has entered into a collaboration to identify and functionally
characterize novel hematopoietic genes using developing XENOPUS systems. The
XENOPUS system is useful for assessment of mammalian gene function, particulary
hematopoietic genes, because it can be manipulated easily and produces a large
volume of eggs for insertion and analysis of numerous individual genes.
Therefore, the
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biological effects of a broad range of mammalian genes can be assessed in a
rapid, high-throughput, reproducible system.
ZEBRAFISH DEVELOPMENTAL ASSAYS
As part of a research collaboration with Ohio University, the Company has
accessed the use of the zebrafish as an additional high-throughput developmental
biology assay system for gene characterization. Zebrafish have a number of
useful attributes for developmental biology assay systems, including a clear
body for organ visualization, ease of cell manipulation and transplantation,
rapid development, prolific egg-laying, and an established information base on
genes affecting development. In the collaborative program, candidate genes from
a variety of discovery sources will be inserted into fertilized zebrafish eggs
and the effects of the genes during development will be assessed. These assays
can be accomplished within 24 to 72 hours after transduction of the embryos with
the genes of interest.
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 uses 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 induce 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 one issued U.S patent and six notices of
allowance from the USPTO, three corporate agreements and the identification of
three novel gene and protein candidates.
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A diagram entitled "The Company's Discovery Programs". The diagram lists the
Company's discovery programs in a column on the far left, labeled "Program".
Across the top of the diagram, left to right, are labels indicating development
partner or licensee (if any) and R&D stage of each program, as follows:
"Partner/Licensee", "Discovery Phase", "Gene Identification", "Further
Elucidation of Gene Function" and "Target Development". Arrows extend, left to
right, from each label in the left column to indicate the stage of R&D of each
program, as follows: "Leptin Receptor (protein)"/AMGEN--arrow to "Target
Development"; "Red Blood Cell Growth Factor"/NOVO NORDISK--arrow to "Discovery
Phase"; "T717 Gene Therapy"/CHIRON--arrow to "Target Development; "HH
Diagnostic"--arrow to "Target Development"; "HH/Anemia Therapeutic"--arrow to
"Further Elucidation of Gene Function"; "Leptin Receptor (screening,
sorting)--arrow to "Further Elucidation of Gene Function"; "DEL-1 Gene"-- arrow
to "Further Elucidation of Gene Function"; "Asthma"--arrow to "Discovery Phase";
"Schizophrenia"--arrow to "Discovery Phase"; "Angiogenesis"--arrow to "Gene
Identification"; "Epilepsy (EPM1 Gene)--arrow to "Further Elucidation of Gene
Function"; "Hematopoiesis"--arrow to "Gene Identification". The first 3 programs
and corresponding arrows are in an upper area labeled "Partnered/Licensed
Programs"; the remainder are in the lower area labeled "Programs to be
Partnered".
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 one issued U.S. patent and one notice of allowance from the
USPTO for claims 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."
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
for patients who are undergoing kidney dialysis, cancer chemotherapy or bone
marrow transplantation. The Company has identified a growth factor activity
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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 two notices of
allowance from the USPTO for two such applications. The Company also has pending
patent applications relating to mutations in its HH gene for which it has
received a notice of allowance from the USPTO and pending patent applications
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 OSTEOGENESIS
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. 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. In addition, the Company
is investigating DEL-1 expression in bone and cartilage formation for potential
therapeutic applications in bone growth and repair, and osteoporosis.
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.
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Interneuron owns an option to acquire an exclusive license to manufacture,
use and sell certain aspects of Del-1. Subject to such option, the Company is
seeking collaborations to pursue the research, development and commercialization
of DEL-1 and Del-1. See "--Corporate Agreements--Interneuron Agreement."
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"), which
has filed a U.S. patent application relating to such gene. 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" and "--Patents and Proprietary
Rights."
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 June 20, 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 June 20, 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.
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 June 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
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Vanderbilt and enter into commercial collaborations for further development of
these gene sequences as therapeutic targets. See "--DEL-1 Gene in Angiogenesis
and Osteogenesis" and "--License Agreements-- Vanderbilt University."
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 any additional 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 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.
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The license agreement terminates upon the expiration of the last to expire
of any issued patent or 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
Securities--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.
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.
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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 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
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$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 the 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."
INTERNEURON AGREEMENT
In July 1997, the Company granted Interneuron an option to acquire an
exclusive, worldwide license to manufacture, use and sell certain aspects of
Del-1 for human therapeutic uses on terms to be negotiated. The Company retained
the right to negotiate with third parties to license Del-1, subject to a right
of first refusal held by Interneuron and provided that, in the event the Company
grants such rights to a third party, the Company must share fees, milestone
payments and royalties with Interneuron. Should the Company develop and sell
products using Del-1 independently, the Company will be required to pay
Interneuron royalties on net sales. The option and right of first refusal
agreement terminates upon the expiration of the last to expire of any patent
that might issue relating to the licensed technology, or upon the conclusion of
a license agreement with Interneuron.
In exchange for receiving the option and right of first refusal, Interneuron
paid the Company $1 and relinquished its right to minimum return adjustments
through the quarter ended April 7, 1997 to the conversion ratio of its Series A
Preferred Stock. Interneuron will retain the right to any additional minimum
return adjustments. Interneuron and the Company agreed to determine the value of
the relinquishment of the minimum return adjustments and the extent to which
such value may be credited against payments, including royalties, that would
otherwise be payable to the Company under any license agreement with
Interneuron. The terms of the Series A Preferred Stock provide for Interneuron
to receive a 35% annual return, implemented through minimum return adjustments
to the conversion ratio of the Series A Preferred Stock, at the time the Series
A Preferred Stock converts to Common Stock. Such conversion would have occurred
automatically on the closing of the Offering and, accordingly, prior to the
relinquishment, Interneuron would have been entitled to receive an additional
909,965 shares of Common Stock upon the closing of the Offering based upon an
assumed Unit Shares IPO Price of $8.50. See "Risk Factors--Control of Company
By, and Potential Conflicts of Interest with, Interneuron," "--Discovery
Programs," "Certain Transactions--Relationship with Interneuron" and
"Description of Securities-- Preferred Stock."
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. The Company believes that, once identified, 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
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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. 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, which allows the Company
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 Ohio University 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
$4.25 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.
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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 the United States Department of Commerce.
As of June 20, 1997, the Company had received $1,360,598 under the ATP grant,
and $145,820 in additional funds were payable to the Company. The balance of the
grant, $489,978, is payable in equal quarterly installments during the period
from June 20, 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
guarantee the availability of funds for the Company's grant for the year ending
May 31, 1998, it is likely that the Company will receive such grant payments.
There can be no assurance, however, that funding for the ATP program will not be
reduced or eliminated at any time.
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 one issued U.S. patent which relates to nucleic
acid molecules that encode the B219 leptin receptor. In addition, 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: seven U.S. applications, owned by Progenitor, relating to certain
leptin receptors (including various isoforms of the leptin receptor), for which
the USPTO issued one notice of allowance; 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. Additionally, 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 eleven
U.S. patent applications, a provisional U.S. patent application 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 two notices of allowance
from the USPTO; (iii) HH diagnostic markers which are genetic mutations within
the HH gene, for which Mercator has received a notice of allowance from the
USPTO; 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 eleven 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 U.S. patent application relating to the EPM1
epilepsy gene.
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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 discovery 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.
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, or that any patent issued to Progenitor would be broad enough to
cover leptin receptors of Millennium or others. Progenitor's 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 a 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.
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There can be no assurance that any patents issued to the Company 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 patent applications 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 may 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 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."
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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 Corp., 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 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 technologies that
are the same or similar to 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, the
regulatory approval process 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 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 may therefore be
subject to internal competition with a potential product under development or a
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 use of substantial resources. Preclinical
studies include laboratory evaluations and will require animal tests 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
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therapy at institutions supported by the NIH must be submitted to the FDA and
the NIH, and may be subject to approval by the RAC and the NIH. Furthermore,
gene therapies are relatively new technologies that have not been tested
extensively in humans. The regulatory requirements governing these products and
related clinical procedures for their use are uncertain and subject to change.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continual 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 during
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 of 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 trials 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 will 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 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;
No Assurance of Regulatory Approval" 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
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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 coverage, or the occurrence of any product liability
claim, or a recall of any products of the Company or its collaborators or
licensees 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 June 20, 1997, the Company had 63 full-time employees, of whom 20 hold
Ph.D. or M.D. degrees. Of the Company's full-time employees, 52 are engaged in
research and development activities, and 11 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 its operations, the Company must hire and retain
additional research, management, administrative and financial personnel. In
addition, in connection with the Acquisition 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 Columbus, Ohio. Total lease payments for fiscal
1996 were $154,175. Payments for the six months ended March 31, 1997 were
$111,444. 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 a per diem basis for each animal
housed. Total lease payments to The Ohio State University in fiscal 1996 were
$132,822. Payments for the six months ended March 31, 1997 were $50,176. 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 on September 30, 1998 and contains
provisions for two one-year renewal options and an option to lease an additional
10,000 square feet. In May 1997, the Company exercised one of its renewal
options, extending the lease term for the twelve-month period from October 1,
1998 to September 30, 1999, at a monthly rent of $17,900 during such period. In
addition, the Company exercised its option to lease an additional 10,000 square
feet for a twenty-three month term from November 1, 1997 to September 30, 1999,
at a monthly rent of approximately $8,500. Total base payments for fiscal 1996
were $176,040. Payments for the six months ended March 31, 1997 were $102,390.
The Company expects that 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 expects to
relocate its facilities in whole or in part to the San Francisco Bay Area. Such
a relocation will 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
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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."
SCIENTIFIC ADVISORY BOARD
The Company has established a group of scientists and physicians to advise
it on scientific and medical matters in the areas of the Company's business. The
Company's Scientific Advisory Board (the "SAB") includes experts in
developmental biology, human genetics, hematopoiesis, hematologic oncology,
cardiovascular medicine, immunology, mammalian recombinant gene transfer and
transgenics. The Company periodically consults with members of the SAB regarding
the Company's current and future research and development activities and focus.
The Company's Scientific Advisory Board is composed of the following
individuals by scientific discipline:
DEVELOPMENTAL BIOLOGY
Robert Auerbach, Ph.D., is the Harold R. Wolfe Professor of Zoology,
University of Wisconsin-Madison, and Director, Center of Developmental Biology.
Dr. Auerbach has authored more than 150 publications and has a particular
interest in hematopoietic and endothelial differentiation during embryogenesis
including development of the extraembryonic yolk sac.
Morris Laster, M.D., joined the Castle Group, Ltd. to identify and
commercialize new technologies. Dr. Laster was instrumental in founding
Progenitor, Inc., Neose Pharmaceuticals, Inc., and Xenograft, Inc. Dr. Laster
received his medical degree from Downstate Medical Center in New York and
performed a surgical internship at Case Western Reserve University.
Thomas Quertermous, M.D., is Professor of Molecular Physiology and
Biophysics, Vanderbilt University, Professor of Medicine, Vanderbilt University
Medical School, and Chief, Division of Cardiology, Vanderbilt University
Hospital. He was previously a member of the Clinical and Research faculty at
Harvard Medical School and the Massachusetts General Hospital. Dr. Quertermous
heads a leading laboratory studying the molecular basis of endothelial cell
biology.
Azim Surani, Ph.D., is Professor of Developmental Biology, University of
Cambridge, and a Member, Wellcome Institute of Cancer and Developmental Biology,
Cambridge, UK. Dr. Surani is a leading authority in developmental biology and
genomic imprinting.
Jonathan Van Blerkom, Ph.D., is Professor, Department of Molecular, Cellular
and Developmental Biology, University of Colorado, Boulder, and Co-Director,
Reproductive Genetics In Vitro, Denver, CO. Dr. Van Blerkom is a leading
authority in mammalian embryology with a particular emphasis on human
pre-implantation developmental biology.
Thomas E. Wagner, Ph.D., Progenitor's Scientific Founder, is a leading
authority in control mechanisms that regulate genetic expression, mammalian
recombinant gene transfer and genetic recombination in eukaryotes. Dr. Wagner is
Professor of Zoology and Biomedical Sciences at Ohio University and Scientific
Director of the Edison BioTechnology Institute. Dr. Wagner was a pioneer in the
development of transgenic animals and holds one of the key patents in the field.
He was a scientific founder of the transgenic sciences company, DNX, Inc.
Leonard I. Zon, M.D., is Associate Professor of Pediatrics, Harvard Medical
School, and is a member in the Program in Cell and Developmental Biology. Dr.
Zon is an Associate Investigator of the Howard Hughes Medical Institute. Dr.
Zon's laboratory studies the molecular biology of hematopoiesis and events in
the development of the hematopoietic system during embryogenesis.
HUMAN GENETICS
J. Michael Bishop, M.D., is recognized for his contribution in the field of
tumor viruses. Dr. Bishop received the Nobel prize (with Harold E. Varmus) in
Physiology and Medicine in 1989 for his work on oncogenes. He is currently a
Professor of Biochemistry & Biophysics at the University of California at San
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Francisco, where he also serves as Director of the C.W. Hooper Research
Foundation in the Department of Microbiology and Immunology. Dr. Bishop is also
a member of the National Academy of Sciences.
David R. Cox, M.D., Ph.D., a co-founder and Director of Mercator, is a
medical geneticist whose research over the past 15 years has focused on somatic
cell genetics, human molecular genetics and gene mapping. Dr. Cox is co-director
of The Stanford Human Genome Center at Stanford University and is also a
Professor of Genetics at Stanford University. Dr. Cox is a member of the
Ethical, Legal, and Social Implications Working Group of the NIH and is also a
member of the Council of the International Human Genome Organization.
Dennis T. Drayna, Ph.D., a co-founder of Mercator, was employed at Genentech
Inc. from 1985 to 1992, where he isolated a number of human genes involved in
lipid metabolism and localized genes involved in premature aging. Dr. Drayna was
postdoctoral fellow at the Howard Hughes Medical Institute at the University of
Utah, where he developed several technologies relating to human genetics and
linkage analysis. Dr. Drayna received a Ph.D. in Microbiology and Molecular
Genetics from Harvard University. Dr. Drayna currently is a visiting
investigator at the Genome Technology Branch of the National Human Genome
Research Institute.
Phillip Hieter, Ph.D., is a recognized leader in the molecular biology and
genetics of yeast, as well as chromosome structure and function. He is active in
the human genome effort, including membership on the Human Genome Committee of
the American Society of Human Genetics. Dr. Hieter serves as Professor of
Molecular Biology and Genetics at the Johns Hopkins University School of
Medicine. He has been elected to the Board of Directors of the Genetic Society
of America.
Robert Lewis, M.D., is Executive Vice President and Chief Scientific Officer
at Cell Therapeutics, Inc. He is the former President of Discovery Research,
Syntex USA. Prior to joining Syntex (1986-1995), Dr. Lewis was a faculty member
at Harvard Medical School. Dr. Lewis is well-known for his research in
immunology, especially for his work on mast cells and asthma.
Arno G. Motulsky, M.D., is a physician-scientist who has been a leading
figure in human and medical genetics research for the past four decades. He is
an expert in the genetics of common chronic disease. Dr. Motulsky currently
serves as Professor of Medicine and Genetics at the University of Washington
School of Medicine and is a member of the National Academy of Sciences and of
the Institute of Medicine.
Richard M. Myers, Ph.D., is a co-founder of Mercator. Dr. Myers has focused
his research on transcriptional regulation, mutation detection, human genetics
and molecular biology. He also is the developer of a number of techniques for
finding mutations in DNA. Most recently, Dr. Myers positionally cloned a gene
associated with a particular type of epilepsy. Dr. Myers is Professor of
Genetics at Stanford University School of Medicine and the Director of The
Stanford Human Genome Center.
Neil Risch, Ph.D., is recognized worldwide as a leader in the field of
genetic epidemiology and biostatistics. Dr. Risch is especially well-known for
statistical analysis applied to complex diseases, including psychiatric
disorders and cancer. He recently became affiliated with Stanford University
where he serves as Professor of Genetics in the School of Medicine. Prior to
this, Dr. Risch served as a Professor of Public Health and Genetics at Yale
University.
HEMATOLOGY/ONCOLOGY/IMMUNOLOGY
Steven J. Burakoff, M.D., is Professor of Pediatrics, Harvard Medical
School. Dr. Burakoff also serves as Chief, Division of Pediatric Oncology, and
Director, Pediatric Oncology Research Program, Dana-Farber Cancer Institute, and
Chief of Immunology, Bone Marrow Transplantation Unit, Children's Hospital
Medical Center and Brigham and Women's Hospital. Dr. Burakoff's major research
interests include cellular and molecular immunology, T cell activation and
signal transduction, and transplantation immunology.
David W. Golde, M.D., Chairman of the SAB, a renowned expert in the fields
of hematologic oncology and hematopoiesis, is Physician-in-Chief and head of
Hematologic Oncology at Memorial Sloan-Kettering Cancer Center, and Professor of
Medicine at Cornell University Medical College. The author of
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over 350 scientific publications, Dr. Golde's major research interests lie in
hematopoietic growth factors, human retrovirology and polypeptide hormone
action.
Jerome E. Groopman, M.D., is Chief of the Division of Hematology/Oncology at
the New England Deaconess Hospital in Boston, and Professor of Medicine at
Harvard Medical School. Dr. Groopman's major research interests include the
relationship among retroviruses, immune function and cancer in AIDS,
hematopoiesis, polypeptide growth factors and lymphokines. Dr. Groopman
currently serves as Chairman of the FDA Biological Response Modifiers Advisory
Committee, as a director of the American Foundation for AIDS Research and on the
National Heart, Lung and Blood Institute's AIDS Advisory Committee.
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 Acquisition, and the Company will not have any
remedy for breaches of representations and warranties identified 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
2,175,878 shares of Common Stock to the Mercator stockholders, and Replacement
Options to acquire 376,479 shares of Common Stock to the optionholders of
Mercator, assuming Final Acquisition Consideration of $22.0 million and a Unit
Shares IPO Price of $8.50.
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.
In order to provide funding for the Mercator Bridge Financing, Interneuron
has agreed to provide Progenitor a line of credit up to an aggregate maximum
amount of $6.6 million bearing interest at 10% per annum pursuant to the
Interneuron Bridge Loan. Interneuron has agreed to convert the entire balance of
the Interneuron Bridge Loan into shares of Progenitor's Series D Preferred Stock
upon the closing of the Offering, with the number of such shares issued to be
determined by dividing the outstanding balance of the Interneuron Bridge Loan as
of the closing of the Offering by 117.5% of the Unit Shares IPO Price. Based on
an outstanding balance on the Interneuron Bridge Loan of $2.9 million as of June
20, 1997, Interneuron would receive 293,293 shares of Series D Preferred Stock
upon such conversion. See "Risk Factors--Control of Company By, and Potential
Conflicts of Interest With, Interneuron," "Certain Transactions--Relationship
with Interneuron" and "Description of Securities--Preferred Stock."
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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.................... 43 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........................... 33 Director
Robert R. Momsen............................. 50 Director
Jerry P. Peppers (2)......................... 51 Director
David B. Sharrock (1)........................ 61 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,
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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 of the
Company 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 of the Company 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. ("Transcell"), 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 through September 1992. Dr.
Laster has been an executive of Paramount Capital Investments since 1990, and
has participated in the founding of several biotechnology companies. He
currently serves as Chairman of Partec Ltd., a biomedical venture and management
company based in Jerusalem, Israel, affiliated with Paramount Capital
Investment. Dr. Laster received his M.D. from Downstate Medical Center, New
York, and postdoctoral training in surgery at Case Western Reserve University
Hospital.
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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.
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.
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 University of California, San Francisco. He received his Ph.D. in
Molecular Pharmacology from Emory University.
YANNICK POULIOT, PH.D. has served as Director of Bioinformatics of the
Company since March 1997. 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.
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EMPLOYMENT AGREEMENTS
DOUGLASS B. GIVEN. The Company has entered into a new employment agreement
(the "Revised Given Employment Agreement") with Dr. Given. The Revised Given
Employment Agreement replaces the employment agreement entered into on January
3, 1993, which terminated January 3, 1997.
Pursuant to the Revised Given Employment Agreement, Dr. Given will receive
(i) a base salary of $275,000 per annum (increasing to $300,000 per annum upon
the closing of the Offering), (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 Unit Shares IPO Price. Additionally, Dr.
Given will receive assistance with relocation expenses, as more fully described
in "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 will pay Dr. Given 12 months base salary, a bonus equal to a percentage
of 12 months base salary that is equal to the average of the actual annual bonus
percentage for the two years immediately prior to the termination date, 18
months COBRA premiums and 18 months executive disability premiums. In addition,
all of the stock options granted to Dr. Given which would have vested over the
two year period immediately following the date of termination of his employment
will instead vest on the same dates they would have vested if he had continued
to be employed by the Company during such two year period or will vest at such
earlier date or dates as may be necessary by the terms of the plan pursuant to
which the options were granted in order to prevent such options from lapsing.
If Dr. Given's employment is terminated with cause, the Company will pay Dr.
Given a lump sum equal to six months base salary, six months maximum 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 would
have vested over the one year period immediately following the date of
termination of his employment will instead vest on the same dates they would
have vested if he had continued to be employed by the Company during such one
year period or will vest at such earlier date or dates as may be necessary by
the terms of the plan pursuant to which the options were granted in order to
prevent such options from lapsing.
Upon a "change in control" (as defined in the Revised Given Employment
Agreement) of the Company, Dr. Given will receive 12 months base salary and 12
months maximum bonus payments. In addition, all unvested stock options granted
to Dr. Given will 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 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 a price per share equal to
the Unit Shares IPO 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 vest as to 25% of
such options one year after the date of grant, with 6.25% vesting each quarter
thereafter until such options are 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
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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 down payment 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 the Fannie Mae rate, 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
earliest 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 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 6,483 and 120,181 shares of
the Company's Common Stock with exercise prices of $9.42 and $1.08,
respectively, assuming an initial public offering price of $11.00 per Unit, a
Unit Shares IPO Price of $8.50 per share, and a Final Acquisition Consideration
of $22.0 million.
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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.
PROVISIONS FOR OTHER EXECUTIVE OFFICERS. 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, and the Company will pay
the executive's COBRA premiums over the same nine month period. In addition,
such provisions provide that the executive would be entitled to full
acceleration of all outstanding stock options upon termination of the
executive's employment within one year of certain events defined as a change of
control of the Company and a severance payment equal to one year of his base
salary.
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.
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,
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."
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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 Unit Shares IPO Price. In addition, the 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
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by Mercator to Dr. Sigal in the fiscal year ended December 31, 1996 is provided
in footnote (9) to the following table:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ---------------
COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS (#) COMPENSATION
- ------------------------------------------------------------ ----------- ---------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Douglass B. Given, M.D., Ph.D. ............................ 1996 $ 219,231 $ -- 100,000(1) $ 31,065(2)
President and Chief Executive Officer 1995 185,000 46,250 95,000(1) 1,065(3)
Doros Platika, M.D. ........................................ 1996 110,769 -- -- 146,424(4)
Executive Vice President, Research and Development 1995 153,000 35,700 40,000(5)
H. Ralph Snodgrass, Ph.D. ................................. 1996 150,385 -- 100,000(1) --
Vice President, Research and Chief Scientific Officer 1995 123,000 30,000 30,000(1)(6)
Stephen J. Williams, Ph.D. ................................ 1996 149,615 -- 75,000(1) 50,743(7)
Vice President, Corporate Development 1995 135,000 -- 17,500(1)
Mark N.K. Bagnall(8) ...................................... 1996 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) Consists of premiums paid by the Company on a term life insurance policy for
Dr. Given.
(4) 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."
(5) Includes options exercisable for 7,500 shares of Common Stock, all of which
vested on September 14, 1995, the date of grant. As a result of the
termination of Dr. Platika's employment pursuant to the Separation Agreement
and Release, options granted during fiscal 1995 that were vested as of May
24, 1996 remained exercisable until August 24, 1996, and all other options
granted during fiscal 1995 terminated effective May 24, 1996 in accordance
with the terms of the 1992 Stock Option Plan. See "Certain
Transactions--Transactions with Directors and Executive Officers."
(6) Includes options exercisable for 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 red blood cell growth factor
program, or September 14, 2002.
(7) 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."
(8) 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
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$165,000 per year. Upon joining the Company, (i) Mr. Bagnall was paid a
signing bonus of $25,000, 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.
(9) 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 120,181 shares of Common Stock will be
granted to Dr. Sigal, in replacement of such Mercator options previously
granted, with an exercise price of $1.08 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 June
20, 1997, options to purchase 41,113 shares of Common Stock granted under the
1992 Stock Option Plan had been exercised, options to purchase 310,463 shares of
Common Stock were outstanding and options to purchase 148,425 shares of Common
Stock remained available for grant. The outstanding options were held by 44
individuals and were exercisable at a weighted average exercise price of $4.67
per share. Outstanding options to purchase an aggregate of 70,463 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 Section 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
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(unless such Options terminate or expire sooner by their terms), or such longer
period as determined by 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 Options' 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 August 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 June 20, 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 937,350 shares of
Common Stock at an exercise price equal to the Unit Shares IPO 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
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exercise price below the fair market value of the Common Stock. As of October
31, 1996, no such below-market grants had been made.
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 are 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 September 30, 1999. The administrator of the Stock Purchase
Plan has the authority to establish a Purchase Period following the initial
Purchase Period (the "Subsequent Purchase Period") that shall commence on the
date the administrator of the Stock Purchase Plan selects and end on September
30, 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 March 31, 1998. The subsequent Accrual Period with respect to the
Subsequent Purchase Period, if any, shall commence on the effective date
established by the Stock Purchase Plan and end on March 31, 1998. 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
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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, 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
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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 regarding 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 Unit, a Unit Shares IPO Price of $8.50 per
share, and Final Acquisition Consideration for Mercator of $22.0 million,
376,479 shares of Common Stock 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 Unit Shares IPO Price.
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
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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, at the time of either 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 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 the 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 the 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
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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.
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
with respect to Mercator Options that are Incentive Stock Options 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.
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(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 120,181 shares of the Company's Common Stock at $1.08 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 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 Unit Shares IPO 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 Unit
Shares IPO Price of $8.50 per share, such options would entitle Dr. Sigal to
acquire 117,350 shares of Common Stock.
FISCAL YEAR-END OPTION VALUES
For each of the Named Executive Officers, the following table shows
information about the value of unexercised options of Progenitor as of September
30, 1996. No options were exercised by the Named Executive Officers during
fiscal 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END(#) FISCAL YEAR-END($)(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.
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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.
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.
In July 1997, the Company granted Interneuron an option to acquire an
exclusive, worldwide license to manufacture, use and sell certain aspects of
Del-1 for human therapeutic uses on terms to be negotiated. The Company retained
the right to negotiate with third parties to license Del-1, subject to a right
of first refusal held by Interneuron and provided that, in the event the Company
grants such rights to a third party, the Company must share fees, milestone
payments and royalties with Interneuron. Should the Company develop and sell
products using Del-1 independently, the Company will be required to pay
Interneuron royalties on net sales. The option and right of first refusal
agreement terminates upon the expiration of the last to expire of any patent
that might issue relating to the licensed technology, or upon the conclusion of
a license agreement with Interneuron.
In exchange for receiving the option and right of first refusal, Interneuron
paid the Company $1 and relinquished its right to minimum return adjustments
through the quarter ended April 7, 1997 to the conversion ratio of its Series A
Preferred Stock. Interneuron will retain the right to any additional minimum
return adjustments. Interneuron and the Company agreed to determine the value of
the relinquishment of the minimum return adjustments and the extent to which
such value may be credited against payments, including royalties, that would
otherwise be payable to the Company under any license agreement with
Interneuron. The terms of the Series A Preferred Stock provide for Interneuron
to receive a 35% annual return, implemented through minimum return adjustments
to the conversion ratio of the Series A Preferred Stock, at the time the Series
A Preferred Stock converts to Common Stock. Such conversion would have occurred
automatically on the closing of the Offering and, accordingly, prior to the
relinquishment, Interneuron would have been entitled to receive an additional
909,965 shares of Common Stock upon the closing of the Offering. As a result,
the number of shares of Common Stock that Interneuron will receive upon
conversion of the Series A Preferred Stock upon the closing of the Offering
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<PAGE>
will be reduced from 2,655,614 shares to 1,745,649 shares, assuming an initial
public offering price of $11.00 per Unit and a Unit Shares IPO Price of $8.50
per share. See "Risk Factors--Control of Company By, and Potential Conflicts of
Interest With, Interneuron," "Business--Discovery Programs," "--Corporate
Agreements" and "Description of Securities--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 458,681 shares of Common Stock upon the
closing of the Offering based upon an assumed initial public offering price of
$11.00 per Unit and a Unit Shares IPO Price of $8.50 per share. See "Description
of Securities--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 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 with respect to the Company's Series B Preferred Stock 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 $504,000 as of June 20,
1997), will be converted automatically at the closing of the Offering into
shares of Common Stock at a conversion price equal to the Unit Shares IPO Price.
See "Description of Securities--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 29,179 shares of Common
Stock following the closing of the Offering based upon an assumed initial public
price of $11.00 per Unit, and assuming a Unit Shares IPO Price of $8.50 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 16,132
shares of Common Stock upon the closing of the Offering based upon an assumed
initial public offering price of $11.00 per Unit, and assuming a Unit Shares IPO
Price of $8.50 per share). Blair is owned substantially by family members of J.
Morton Davis (including members 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 16,692 shares of Common Stock upon the
closing of the Offering based upon an assumed initial public offering price of
$11.00 per Unit, and assuming a Unit Shares IPO Price of $8.50 per share). All
of these warrants are exercisable until five years after the closing of the
Offering at an exercise price of $5.23 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 Securities--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 upon the closing of
the Offering a portion of the indebtedness evidenced by the note (approximately
$8.2 million from an outstanding balance of approximately $8.6 million as of
June 20, 1997) into shares of the Company's Common Stock at a conversion price
equal to the Unit Shares IPO Price. The remaining portion of the note represents
advances for costs of the
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Offering and certain costs of the Acquisition incurred from October 1, 1996 that
will be repaid from the proceeds of the Offering. See "Use of Proceeds" and
"Description of Securities--Convertible Debenture and Promissory Note."
In connection with the Mercator Bridge Financing, Interneuron has agreed to
loan to the Company prior to the closing of the Acquisition 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 balance outstanding at June 20, 1997 was
$2.9 million and is expected to increase by approximately $800,000 per month in
order to fund the operations of Mercator pending completion of the Acquisition.
Interneuron has agreed to convert the entire balance of the Interneuron Bridge
Loan into shares of Progenitor's Series D Preferred Stock at a conversion price
per share of 117.5% of the Unit Shares IPO Price (an aggregate of 293,293 shares
based on the outstanding balance of $2.9 million of the Interneuron Bridge Loan
as of June 20, 1997, and a conversion price of $9.99 per share assuming a Unit
Shares IPO Price of $8.50 per share) upon the closing of the Offering. See "Risk
Factors--Control of Company By, and Potential Conflicts of Interest With,
Interneuron" and "Description of Securities-- Preferred Stock."
Based on the amount owed by Progenitor to Interneuron under the promissory
note as of June 20, 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 Unit, and assuming a Unit Shares IPO Price of $8.50 per share),
Interneuron is expected to own approximately 4,848,374 shares, or approximately
41% of the outstanding Common Stock (approximately 40% if the Underwriters'
over-allotment option is exercised in full) after the closing of the Offering
and the Acquisition (assuming no exercise of the Warrants). In addition,
Interneuron has agreed to convert the Interneuron Bridge Loan into shares of the
Company's Series D Preferred Stock upon the closing of this Offering as
described below. Interneuron has the option to convert the Series D Preferred
Stock into an equivalent number of shares of Common Stock at any time, which
would increase its total ownership to approximately 43% of the Common Stock
outstanding (approximately 41% if the Underwriters' over-allotment is exercised
in full). 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
Progenitor's Series D Preferred Stock or Common Stock upon the closing of the
Offering; (iii) the Unit Shares IPO 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 the number of shares of
Progenitor's Series D Preferred Stock to be issued upon conversion of the
Interneuron Bridge Loan; and (iv) the passage of measurement dates for
determining the quarterly minimum return adjustments to the conversion ratio of
the Series A and Series B Preferred Stock on each of April 7, July 7, October 7,
and January 7 (giving effect to Interneuron's relinquishment of seven of such
adjustments, as described above). The number of shares of Common Stock issuable
to Interneuron upon conversion of such Series A Preferred Stock and indebtedness
and the number of shares of Series D Preferred Stock issuable will increase to
the extent that the Unit Shares IPO Price is less than $8.50 per share. At a
Unit Shares IPO Price of $6.50 per share, Interneuron would own beneficially
6,083,430 shares upon the closing of the Offering or approximately 44% of the
outstanding Common Stock at such time (approximately 43% if the Underwriters'
over-allotment option is exercised in full), including shares of Common Stock
issuable upon conversion of the shares of Progenitor's Series D Preferred Stock
to be issued to Interneuron. See "Risk Factors--Determination of Unit Shares IPO
Price; Potential Conflicts of Interest."
During fiscal 1995, Interneuron paid for certain expenses of Progenitor that
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
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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, for the entitlement to tax
refunds, and for 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 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 directors 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."
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 lockup 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 shares of Common
Stock at $0.002 per share. Pursuant to certain antidilution 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
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of $6.00 per share pursuant to a stock purchase agreement. In the event that the
Unit Shares IPO Price 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
Unit Shares IPO Price. Assuming an initial public offering price of $11.00 per
Unit and a Unit Shares IPO Price of $8.50 per share, 24,020 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 per share. 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 $4.25 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 $108,000 in fiscal 1993, 1994, 1995, 1996 and for the six months
ended March 31, 1997, 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 $45,000 during fiscal 1993, 1994, 1995,
1996 and for the six months ended March 31, 1997, 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.
The Company has entered into the Revised Given Employment Agreement with Dr.
Given. See "Management--Employment Agreements." In addition to the compensation
package described in "Management--Employment Agreements," Dr. Given will receive
assistance with expenses related to possible relocation to California. Under the
Revised Given Employment Agreement, Dr. Given will receive
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$144,000, payable in $4,000 monthly increments over three years for use in
repaying any mortgage loan obtained in connection with a new home in California.
The Company will also loan up to $200,000 at 7% interest to Dr. Given for
the purpose of buying a new home in California ("Home Loan"). During the first
three years of the Home Loan, interest will accrue rather than compound and no
payments will be due during such period. After the initial three year period,
interest only payments will be due monthly, with the accrued interest to be
amortized and paid in 36 equal installments over the subsequent three years,
together with interest then currently accruing. The Home Loan will be secured by
a subordinated second deed of trust on the new home. Portions of the Home Loan
will be repayable as follows: (a) installments of 25% of the original principal
balance plus accrued interest will be forgiven by the Company upon the closing
of each single transaction providing the Company with committed funds of at
least $2,000,000 in the form of either equity, convertible debt or net proceeds
to the Company (and the Company will also pay to Dr. Given an amount necessary
to gross up for federal and state income taxes on the forgiven loan amounts);
(b) within 30 days after the sale of Company securities held by Dr. Given which
were acquired pursuant to options granted to him, in an amount equal to 25% of
the net proceeds received by Dr. Given from such a sale; (c) upon the sale of
the new home; and (d) in full upon the earlier of the fifth anniversary of the
making of the Home Loan or one year after the termination of Dr. Given's
employment with the Company.
In connection with the Revised Given Employment Agreement, the Company will
also pay the monthly mortgage payments on Dr. Given's Ohio home from the date
Dr. Given acquires a new home in California until the earlier of one year after
Dr. Given acquires a new home in California or the sale of the Ohio home. The
Company will also reimburse additional customary relocation expenses.
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 incurred a charge to operations in fiscal 1996 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."
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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.
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 Unit Shares IPO Price. Such options will vest quarterly over a
period of three years from the date of grant, subject to accelerated vesting in
certain circumstances under the terms of each officer's employment agreement or
employment letter, as applicable.
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, $88,000, $83,000 and $83,000, respectively, assuming a
Unit Shares IPO Price of $8.50, and an aggregate offering of 2,750,000 Units.
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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 20, 1997 (as described in
footnote (2) below), and as adjusted to reflect the sale of the 2,750,000 Unit
Shares (assuming no exercise of the Warrants), 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)(2) OFFERING OFFERING
- ------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Glenn L. Cooper, M.D.(3) ................................... 5,209,456 60.5% 43.3%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Interneuron Pharmaceuticals, Inc.(4) ....................... 5,141,667 59.7 42.7
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Entities affiliated with Robertson, Stephens & Co. Group, 929,365 11.2 7.9
L.L.C.(5) ................................................
c/o Robertson, Stephens & Co.
555 California Street, Suite 2600
San Francisco, CA 94104
Entities affiliated with InterWest Partners(6) ............. 635,355 7.6 5.4
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Robert R. Momsen(7) ........................................ 635,355 7.6 5.4
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Entities affiliated with Oak Investment Partners(8) ........ 570,732 6.9 4.9
c/o Oak Investment Partners
One Gorham Island
Westport, CT 06880
Douglass B. Given, M.D., Ph.D.(9)........................... 160,281 1.9 1.4
Elliott Sigal, M.D., Ph.D.(10).............................. 126,664 1.5 1.1
Morris Laster, M.D.......................................... 112,500 1.4 1.0
H. Ralph Snodgrass, Ph.D.(11)............................... 56,667 * *
Mark N.K. Bagnall(12)....................................... 55,000 * *
Stephen J. Williams, Ph.D.(13).............................. 45,834 * *
David B. Sharrock(14)....................................... 4,375 * *
Robert P. Axline(15)........................................ 1,875 * *
Alexander M. Haig, Jr.(16).................................. 1,875 * *
</TABLE>
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<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
NUMBER OF OWNED(2)
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED(1)(2) OFFERING OFFERING
- ------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Jerry P. Peppers(17)........................................ 1,875 * *
All executive officers and directors as a group
(10 persons)(18).......................................... 5,649,738 63.8 46.0
</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) Assumes: (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 an aggregate
outstanding balance of $8.7 million as of June 20, 1997), (ii) the issuance
of 2,175,878 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 24,020 shares of Common Stock to The
Ohio University Foundation, pursuant to certain anti-dilution adjustment
rights. Percentage Beneficially Owned Prior to Offering is based on
8,312,920 shares of Common Stock outstanding as of June 20, 1997 and the
foregoing assumptions and Percentage Beneficially Owned After Offering is
based on 11,734,979 shares of Common Stock outstanding after the closing of
the Offering, reflecting (a) the sale of 2,750,000 shares of Common Stock as
part of the Units 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 Securities." 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 June 20, 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 5,141,667 shares beneficially owned by Interneuron, options
exercisable for 6,375 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) Includes 293,293 shares issuable upon conversion of Series D Preferred
Stock to be received upon conversion of the Interneuron Bridge Loan (based
upon an outstanding balance on the Interneuron Bridge Loan of $2.9 million
as of June 20, 1997 and a conversion price of $9.99 per share of Series D
Preferred Stock).
(5) Consists of 644,138 shares held by RS & Co. IV, L.P. ("RS"), 171,556 shares
held by The Robertson, Stephens Orphan Fund ("RSOF") and 113,671 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.
(6) Consists of 631,170 shares held by InterWest Partners V, L.P. ("Partners")
and 4,185 shares held by InterWest Investors V ("Investors"). The General
Partner of Partners is InterWest Management
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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.
(7) Consists of 631,170 shares held by Partners and 4,185 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.
(8) Consists of 558,177 shares held by Oak Investment Partners V, Limited
Partnership ("Oak Investment") and 12,555 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 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.
(9) Includes 82,907 shares held by a limited partnership of which Dr. Given is
a general partner and options exercisable for 77,374 shares of Common Stock.
(10) Includes options exercisable for 126,664 shares of Common Stock. Dr. Sigal
has agreed to become an executive officer of the Company upon the closing of
the Offering.
(11) Includes options exercisable for 56,667 shares of Common Stock.
(12) Includes options exercisable for 55,000 shares of Common Stock.
(13) Includes options exercisable for 45,834 shares of Common Stock.
(14) Includes options exercisable for 4,375 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 1,875 shares of Common Stock.
(18) Includes options exercisable for 253,250 shares of Common Stock. See
footnotes 3, 9 and 11-17 above. Does not include shares beneficially owned
by Mr. Momsen or Dr. Sigal.
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DESCRIPTION OF SECURITIES
The Company's Restated Certificate of Incorporation authorizes 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.
UNITS
Each Unit consists of one share of Common Stock and one redeemable Warrant.
The Units will separate immediately upon issuance, and the Common Stock and
Warrants that comprise the Units will trade as separate securities.
COMMON STOCK
As of June 20, 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 2,175,878 shares of Common Stock
pursuant to the Acquisition, there were 8,984,979 shares of Common Stock issued
and outstanding held of record by 121 stockholders, 1,071,942 shares of Common
Stock issuable upon the exercise of outstanding stock options (including
Replacement Options) and 81,743 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 any
outstanding 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.
WARRANTS
Each Warrant will entitle the holder to purchase one share of Common Stock
at a price equal to 150% of the initial public offering price for the Units. The
Warrants will, subject to certain conditions, be exercisable at any time until
the fifth anniversary of the date of this Prospectus, unless earlier redeemed.
Upon notice to the Warrant holders, the Company may reduce the exercise price by
any amount for a period of not less than 20 days, or extend the expiration date
of the Warrants. The outstanding Warrants are redeemable by the Company at $0.01
per Warrant, upon at least 30 days (but not more than 60 days) written notice,
if the Market Price (as defined in the Warrant Agreement described below) per
share of Common Stock during the 30 consecutive trading days ending within three
days of the date of the notice of redemption equals or exceeds 200% of the
then-current Warrant exercise price. If the Company gives notice of its
intention to redeem the Warrants, a holder would be forced either to exercise
his or her Warrant before the date specified in the redemption notice or accept
the redemption price.
The exercise price of the Warrants was determined by negotiation between the
Company and the Underwriters and should not be construed to be predictive of the
prices of the Company's Securities or to imply that any price increases in the
Company's Securities will occur.
The Warrants will be issued in registered form under a Warrant Agreement
(the "Warrant Agreement") between the Company and the American Stock Transfer &
Trust Company, as warrant agent (the
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"Warrant Agent"). The Warrant Shares, when issued upon exercise of a Warrant,
will be fully paid and non-assessable, and the Company will pay any and all
federal and state documentary stamp and other original issue taxes incurred as a
result of the original issuance of the Warrants or the issuance of Warrant
Shares to the holder upon its exercise, but not any subsequent transfer taxes
applicable to the transfer of the Warrant. The Company shall not be required
upon the exercise of the Warrants to issue fractions of Warrants or Common
Stock, but shall make adjustments in cash on the basis of the current market
value of any fractional interest as provided in the Warrant Agreement. The
rights and duties of the Warrant Agent are set forth in the Warrant Agreement.
The Warrants contain provisions that protect the holders against dilution by
adjustment of the number of shares that may be purchased by the holders. Such
adjustments will occur in the event, among others, that the Company makes
certain distributions to holders of its Common Stock or issuances of Common
Stock at prices lower than the applicable current market price for its Common
Stock, there is a subdivision, combination, reorganization or a reclassification
of the Common Stock, the Company enters into a merger or consolidation with
another company, or there is a sale or transfer of all or substantially all the
assets of the Company. The holder of a Warrant will not possess any voting or
other rights as a stockholder of the Company until such holder exercises the
Warrant. The holders may institute any action, suit or proceeding against the
Company without obtaining the consent of the Warrant Agent.
A Warrant may be exercised upon surrender of the certificate for the Warrant
(the "Warrant Certificate") on or before the expiration date of the Warrant at
the offices of the Warrant Agent, with the form of "Election To Purchase" on the
reverse side of the Warrant Certificate completed and executed as indicated,
accompanied by payment of the exercise price (by certified or bank cashier's
check payable to the order of the Company or by wire transfer of same day funds)
for the number of shares with respect to which the Warrant is being exercised.
For a holder to exercise the Warrants, there must be a current registration
statement in effect with the Commission with respect to the issuance of shares
of Common Stock or other securities underlying the Warrants. The Company has
agreed to use its best efforts either (i) to maintain the effectiveness of the
registration statement of which this prospectus is a part, and to the extent
required under applicable law to keep such registration statement current
through the expiration date for the exercise of Warrants or until such time as
no Warrants remain outstanding or (ii) to prepare and file a registration
statement and the prospectuses used in connection therewith as may be necessary
to keep such registration statement with respect to such Common Stock or
securities effective and to the extent required under applicable law keep such
registration statement current through the expiration date for the exercise of
Warrants or until such time as no Warrants remain outstanding. The Company has
filed a registration statement (of which this Prospectus is a part) pursuant to
such undertaking. Until the expiration date for the exercise of Warrants, the
Company promptly shall give all record holders of Warrants notice of any lapses
in the effectiveness of the Registration Statement. If a current registration
statement is not in effect at the time a Warrant is exercised, the Company may
at its option redeem the Warrant by paying to the holder cash equal to the
difference between the aggregate low asked price, or closing price, as the case
may be, of the Common Stock on the exercise date and the exercise price of the
Warrant. The Company will not be required to honor the exercise of Warrants if,
in the opinion of the Company's Board of Directors upon advice of counsel, the
sale of securities upon exercise would be unlawful. There can be no assurance
that the Company will be able to file, cause to be declared effective, or keep a
registration statement continuously effective until all of the Warrants have
been exercised or have expired.
The Warrant Agreement contains provisions permitting the Company and the
Warrant Agent, without the consent of any Warrant holder, to supplement the
Warrant Agreement in order to make any changes in the Warrant Agreement which
the Warrant Agent has been advised by counsel (i) are required to cure any
ambiguity or to correct any defective or inconsistent provision or clerical
omission or mistake or manifest error contained in the Warrant Agreement, (ii)
add to the covenants and agreements of the Company or the Warrant Agent in the
Warrant, such further covenants and agreements thereafter to be observed or
(iii) result in the surrender of any right or power reserved to or conferred
upon the Company or the Warrant Agent in the Warrant, but which changes or
corrections do not or will not adversely affect, alter or
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change the rights, privileges or immunities of the registered holders of
Warrants. In addition, the Warrant Agreement may be modified, supplemented or
altered with the consent in writing of the holders of Warrants representing not
less than 50% of the Warrants then outstanding, except that no change in the
number or nature of the securities purchasable upon the exercise of any Warrant,
or increase in the applicable exercise price therefor, or acceleration of the
exercise deadline shall be made without the consent in writing of the registered
holder of each Warrant.
No commissions will be paid in connection with the sale of the Warrant
Shares offered hereby upon the exercise of the Warrants.
The foregoing discussion of certain terms and provisions of the Warrants is
qualified in its entirety by reference to the detailed provisions of the Warrant
Agreement and Warrant Certificate, the form of each of which has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market price of the Common Stock without assuming the
risk of ownership of the shares of Common Stock issuable upon the exercise of
the Warrants. The Warrant holders may be expected to exercise their Warrants at
a time when the Company would, in all likelihood, be able to obtain any needed
capital by an offering of Common Stock on terms more favorable than those
provided for by the Warrants. The Company's ability to raise additional capital
during the life of the Warrants, and the terms on which such capital is
available could be adversely affected by the existence of the Warrants. See
"Risk Factors-- Redemption of Warrants" and "--Current Prospectus Required To
Exercise The Warrants."
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 June 20, 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 Unit Shares
IPO Price is less than or greater than $8.50 per share, as the case may be. See
"Dilution," "Principal Stockholders," "--Registration Rights" and "Shares
Eligible for Future Sale."
Under the original terms of the Series A and B Preferred Stock, 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 would 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 1.1189 multiplied by the Unit Shares IPO Price. At the
assumed Unit Shares IPO Price of $8.50 per share, 3,114,295 shares of Common
Stock, consisting of 2,655,614 shares issuable to Interneuron as holder of the
Series A Preferred Stock and 458,681 shares issuable to the holders of the
Series B Preferred Stock, would have issued upon conversion of the Preferred
Stock. The number of shares issuable upon conversion of such Preferred Stock
increases 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.
In July 1997, the Company granted an option to Interneuron, the sole owner
of the Series A Preferred Stock, relating to certain aspects of Del-1. Pursuant
to the terms of the option, Interneuron relinquished its right to minimum return
adjustments through the quarter ended April 7, 1997 to the conversion ratio of
its Series A Preferred Stock. The holders of the Series B Preferred Stock will
not be affected by the terms of the option. Interneuron's relinquishment of such
right will reduce the number of shares of Common Stock that Interneuron will
receive upon conversion of the Series A Preferred Stock upon the closing of the
Offering from 2,655,614 shares to 1,745,649 shares, assuming a Unit Shares IPO
Price of $8.50 per share. The actual number of shares of Common Stock issuable
upon conversion of the Series A Preferred Stock
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will equal the product of (a) the number of shares of Preferred Stock held by
the 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 1.7021 multiplied by the Unit
Shares IPO Price. At an assumed Unit Shares IPO Price of $8.50 per share,
2,204,330 shares of Common Stock will issue on conversion of the Series A and
Series B Preferred Stock. At a Unit Shares IPO Price of $6.50 per share, a total
of 2,882,606 shares of Common Stock would issue upon such conversions,
consisting of 599,835 shares of Common Stock issuable to holders of Series B
Preferred Stock and 2,282,771 shares of Common Stock issuable to Interneuron (as
compared to 3,472,727 shares that would have been issuable to Interneuron, for a
total of 4,072,562 shares, had Interneuron not relinquished its minimum return
rights). At a Unit Shares IPO Price of $10.50 per share, a total of 1,784,439
shares of Common Stock would issue upon such conversions, consisting of 371,295
shares of Common Stock issuable to holders of Series B Preferred Stock and
1,413,144 shares of Common Stock issuable to Interneuron (as compared to
2,149,783 shares that would have been issuable to Interneuron, for a total of
2,521,078 shares, had Interneuron not relinquished its minimum return rights).
See "Risk Factors--Control of Company By, and Potential Conflicts of Interest
With, Interneuron," "Business-- Discovery Programs," "--Corporate Agreements"
and "Certain Transactions--Relationship with Interneuron."
On March 7, 1997, the Board of Directors authorized the designation of
2,000,000 shares of Series C Preferred Stock. No shares of such stock are issued
and outstanding and, pursuant to its terms, all of such stock will be
automatically removed from the authorized shares of Preferred Stock upon the
closing of the Offering.
Prior to the closing of the Offering, the Board of Directors will authorize
the designation of 500,000 shares of Series D Preferred Stock. Shares of Series
D Preferred Stock will be issued to Interneuron upon the closing of the Offering
upon the conversion of the outstanding balance of the Interneuron Bridge Loan.
The Series D Preferred Stock will be issued to Interneuron at a price per share
equal to 117.5% of the Unit Shares IPO Price ($9.99 per share assuming the Unit
Shares IPO Price is $8.50 per share) (the "Series D Issue Price").
The Series D Preferred Stock is entitled to a non-cumulative dividend of 7%
per annum, payable quarterly in cash when, as and to the extent declared by the
Board of Directors; provided, however, that upon the approval of the holders of
Series D Preferred Stock representing at least 75% of the then outstanding
shares of such stock, the Company may pay such dividends in Common Stock of the
Company having a fair market value equal to the amount of the dividend. In
certain circumstances involving a change in control of the Company, unless
converted into Common Stock prior to the change in control, the Series D
Preferred Stock is redeemable in whole or in part for cash at the option of the
Company at a price equal to the Series D Issue Price plus any declared and
unpaid dividends through the date fixed for redemption which shall not be prior
to the date of the change of control. The Series D Preferred Stock does not have
voting rights except as required by applicable law; provided, however, that the
Corporation may not, without first obtaining the approval (by vote or written
consent in accordance with applicable law) of the holders of a majority of the
then outstanding shares of Series D Preferred Stock, issue any series of
Preferred Stock having a preference over the Series D Preferred Stock with
respect to dividends or upon liquidation.
Upon a liquidation, dissolution or winding up of the Company, holders of
Series D Preferred Stock shall be entitled to receive, prior to and in
preference over the holders of Common Stock, an amount per share equal to the
Series D Issue Price plus any declared but unpaid dividends. Holders of the
Series D Preferred Stock have the right to convert such stock into Common Stock
on a one-for-one basis at any time, subject to certain anti-dilution
adjustments. In addition, each share of Series D Preferred Stock will
automatically convert into one share of Common Stock, subject to certain
anti-dilution adjustments, upon the satisfaction of the following conditions:
(i) the closing bid price of the Common Stock (a) on 20 out of 30 trading days
prior to the date of conversion equals or exceeds 150% of the Unit Shares IPO
Price and (b) on the five trading days prior to the date of conversion equals or
exceeds 135% of the Unit Shares IPO Price; and (ii) at least 24 months have
elapsed since the closing of the Offering. In the event that such conversion
would cause the ownership of the Company's outstanding voting securities by any
one holder of
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the Series D Preferred Stock to equal or exceed an amount representing 50% of
the total voting power of the Company's outstanding voting securities, such
conversion would apply pro rata to all holders solely to the extent that the
number of shares of Series D Preferred Stock resulting from the conversion would
cause such holder to own securities representing not more than 50% of the total
voting power of such securities. Any remaining unconverted shares would continue
to convert automatically on the same pro rata basis to the extent such
conversion would not result in such holder owning securities having 50% or more
of such voting power.
Assuming a Unit Shares IPO Price of $8.50 per share and based on an
outstanding balance of $2.9 million as of June 20, 1997 for the Interneuron
Bridge Loan, Interneuron will receive 293,293 shares of Series D Preferred Stock
upon the closing of the Offering. See "Risk Factors--Control of Company By, and
Potential Conflicts of Interest With, Interneuron" and "Certain
Transactions--Relationship With Interneuron."
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 additional 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 such
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 OTHER 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 $4.25 prior to the
closing of the Offering. See "Certain Transactions--The Ohio University
Foundation."
As of June 20, 1997, there were warrants outstanding to purchase an
aggregate of 34,901 shares of Series B Preferred Stock at an exercise price of
$6.875 per share (the "Progenitor Series B Warrants"). The Progenitor Series B
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 $6.875 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 Progenitor Series B 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 45,865 shares of Common Stock at an exercise price of
$5.23. The number of shares of Common Stock for which such warrants are
exercisable is subject to adjustment if the Unit Shares IPO Price is less than
or greater than $8.50 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 31, 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
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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 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 were outstanding as of February 14, 1997 and are 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 21,338 shares
of Common Stock at an exercise price of $2.34 per share, and the Series B
Warrant will be converted into a warrant to purchase 14,540 shares of Common
Stock at an exercise price of $8.04 per share, in each case assuming that the
Unit Shares IPO Price is $8.50 per share.
REGISTRATION RIGHTS
The holders of shares of Common Stock (the "Registrable Securities")
issuable, after completion of the Offering, upon exercise of the Progenitor
Series B Warrants 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
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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 Unit
Shares IPO Price, plus a cash payment in lieu of fractional shares.
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 $8.6 million as of
June 20, 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 $8.2 million from an
outstanding balance of approximately $8.6 million as of June 20, 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 Unit Shares IPO 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 $425,000 of principal and accrued
interest as of June 20, 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
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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 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 and Warrant Agent for the
Warrants.
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CERTAIN FEDERAL TAX CONSIDERATIONS
The following discussion is a summary of the material U.S. federal income
tax considerations relevant to the purchase, ownership and disposition of shares
of Common Stock and Warrants by purchasers of the Units, but does not purport to
be a complete analysis of all potential tax effects. The discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), U.S. Treasury
Regulations, Internal Revenue Service ("IRS") rulings and pronouncements and
judicial decisions all in effect as of the date hereof, all of which are subject
to change at any time, and any such change may be applied retroactively in a
manner that could adversely affect a holder of the Common Stock and Warrants.
The discussion does not address all of the U.S. federal income tax consequences
that may be relevant to a holder in light of such holder's particular
circumstances or to holders subject to special rules, such as certain financial
institutions, insurance companies, dealers in securities, tax-exempt
organizations and persons holding the Common Stock or Warrants as part of a
"straddle," "hedge" or "conversion transaction." Moreover, the effect of any
applicable state, local or foreign tax laws is not discussed and the discussion
of federal tax laws other than the income tax law is limited to a discussion of
the U.S. federal estate tax applicable to nonresident aliens. The discussion
deals only with the Common Stock and Warrants held as "capital assets" within
the meaning of section 1221 of the Code.
As used herein, "U.S. Holder" means a beneficial owner of the Common Stock
or Warrants who or that (i) is a citizen or resident of the United States; (ii)
is a U.S. corporation or is an entity taxable as such for U.S. federal income
tax purposes; (iii) is an estate the income of which is subject to U.S. federal
income taxation regardless of its source; (iv) is a trust if (A) a U.S. court is
able to exercise primary supervision over administration of that trust and (B)
one or more U.S. fiduciaries have authority to control substantial decisions of
that trust; or (v) is otherwise subject to U.S. federal income tax on a net
income basis in respect of the Common Stock or Warrants, as the case may be. As
used herein, a "Non-U.S. Holder" means a holder who or that is not a U.S.
Holder.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN, OR OTHER TAX
LAWS.
THE UNITS
Each Unit is comprised of one share of Common Stock and one Warrant. No gain
or loss will be recognized by a holder upon the purchase of the Units. Under
U.S. federal income tax rules, each purchaser of the Units must allocate the
purchase price for the Units between the Common Stock and Warrants by relative
fair market value to determine the purchaser's tax basis in the Common Stock and
Warrants. The Progenitor Board of Directors will determine the Unit Shares IPO
Price in good faith after consultation with its independent financial advisers,
based on the relative fair market value of a share of Common Stock and a
Warrant. For purposes of this Prospectus, it is assumed that the Units will be
offered to the public at $11.00, and that $8.50 will be allocated to the share
of Common Stock and $2.50 will be allocated to the Warrant included in each
Unit. The Company's determination of the value of the Common Stock and Warrants
is not binding on purchasers, and no assurance can be given that the IRS will
not challenge the Company's view of a proper allocation of the purchase price.
See "Underwriting."
TAXATION OF U.S. HOLDERS
DIVIDENDS. Dividends by the Company with respect to its Common Stock will
be includible in the gross income of a U.S. Holder as ordinary income to the
extent paid out of current or accumulated earnings and profits, as determined
for U.S. federal income tax purposes. In general, such dividends will be
eligible for the dividends-received deduction allowed to corporate U.S. Holders.
SALE OF COMMON STOCK. The sale of Common Stock by a U.S. Holder generally
will result in the recognition of capital gain or loss in an amount equal to the
difference between the amount realized and
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such U.S. Holder's tax basis in the Common Stock. Such capital gain or loss will
be long-term capital gain or loss if the U.S. Holder held such Common Stock for
more than one year at the time of disposition.
EXERCISE AND SALE OF WARRANTS. No gain or loss will be recognized by a U.S.
Holder upon the exercise of a Warrant. The U.S. Holder's tax basis in Common
Stock received upon the exercise of a Warrant will equal the sum of the U.S.
Holder's tax basis in the exercised Warrant and the Warrant's exercise price.
The holding period of the Common Stock acquired upon the exercise of the Warrant
will begin on the day following the date of exercise of the Warrant. Upon the
disposition of a Warrant by a U.S. Holder, such U.S. Holder will generally
recognize capital gain or loss on the difference between the amount realized on
the disposition and the U.S. Holder's tax basis in the Warrant. Such capital
gain or loss will be long-term capital gain or loss if the U.S. Holder has held
the Warrant for more than one year at the time of the disposition.
ADJUSTMENTS. Adjustments made to the exercise price of the Warrants, or the
failure to make such adjustments, may result, to the extent of the Company's
current or accumulated earnings and profits, in a taxable dividend to the
holders of Warrants or Common Stock, under Section 305 of the Code.
EXPIRATION OF WARRANTS. If a U.S. Holder allows a Warrant to expire without
exercise, the expiration will be treated as a sale or exchange of the Warrant on
the expiration date. Accordingly, the U.S. Holder will recognize capital loss
upon the expiration date equal to the U.S. Holder's tax basis in the Warrant.
Such capital loss will be long term capital loss if the U.S. Holder held the
Warrant for more than one year at the time of the Warrant's expiration.
TAXATION OF NON-U.S. HOLDERS
DIVIDENDS. Any dividends paid to a Non-U.S. Holder will generally be
subject to U.S. federal income tax withheld at the source at a 30% rate (or, if
any income tax treaty applies, a lower rate, if any, prescribed by the treaty),
unless such dividends are effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Holder (or are attributable
to a permanent establishment maintained in the United States by such Non-U.S.
Holder, if an applicable income tax treaty so requires as a condition for such
Non-U.S. Holder to be subject to U.S. federal income taxation on a net income
basis in respect of income from the Common Stock), in which case the Non-U.S.
Holder generally will be subject to tax in respect of such dividends in the same
manner as a U.S. Holder. Such U.S. federal income tax withholding shall apply
regardless of whether a dividend is paid from current or accumulated earnings
and profits of the Company or represents a return of tax basis for federal
income tax purposes, although the Non-U.S. Holder will be entitled to a refund
of withheld tax to the extent the dividend is not paid out of earnings and
profits. In addition, any such effectively connected dividends from earnings and
profits of the Company received by a corporate Non-U.S. Holder, under certain
circumstances, may be subject to an additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
SALE OF COMMON STOCK. A Non-U.S. Holder of shares of Common Stock will not
be subject to U.S. federal income tax (including taxes imposed by withholding)
on gains realized on the sale or other disposition of such shares, unless (i)
such gain is effectively connected with the conduct by the Non-U.S. Holder of a
trade or business in the United States (or is attributable to a permanent
establishment maintained in the United States by such Non-U.S. Holder, if an
applicable income tax treaty so requires as a condition for such Non-U.S. Holder
to be subject to U.S. taxation on a net income basis in respect of gain from the
sale of the Common Stock); (ii) in the case of gain realized by an individual
Non-U.S. Holder, the Non-U.S. Holder is present in the United States for 183
days or more during the taxable year of the sale and certain other conditions
are met; or (iii) the Company is or has been a "U.S. real property holding
corporation" (which the Company does not believe that it is or is likely to
become) at any time during the five-year period ending on the date of
disposition (or such shorter period that such shares were held) and, subject to
certain exceptions, the Non-U.S. Holder held, directly or indirectly, more than
5% of the Common Stock. If any of the above exceptions apply, the Non-U.S.
Holder generally will be subject to tax in respect of such gains in the same
manner as a U.S. Holder. Effectively connected gains realized by a
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corporate Non-U.S. Holder, under certain circumstances, may also be subject to
an additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
EXERCISE AND SALE OF WARRANTS. Generally, a Non-U.S. Holder will not be
subject to U.S. federal income tax (including such tax withheld at the source)
on the exercise or disposition of the Warrants. However, gain recognized upon
the disposition of a Warrant (including a disposition pursuant to a redemption
of the Warrant by the Company) will generally be subject to federal income tax
if (i) such gain is effectively connected with the conduct by the Non-U.S.
Holder of a trade or business in the United States (or is attributable to a
permanent establishment maintained in the United States by such Non-U.S. Holder,
if an applicable income tax treaty so requires as a condition for such Non-U.S.
Holder to be subject to U.S. taxation on a net income basis in respect of gain
from the sale of the Common Stock); (ii) in the case of gain realized by an
individual Non-U.S. Holder, the Non-U.S. Holder is present in the United States
for 183 days or more during the taxable year of the sale and certain other
conditions are met; or (iii) the Company is or has been a "U.S. real property
holding corporation" (which the Company does not believe that it is or is likely
to become) at any time during the five-year period ending on the date of
disposition (or such shorter period that such shares were held) and, subject to
certain exceptions, the Non-U.S. Holder held, directly or indirectly, more than
5% of the Common Stock. If any of the above exceptions apply, the Non-U.S.
Holder generally will be subject to tax in respect of such gains in the same
manner as a U.S. Holder. Effectively connected gains realized by a corporate
Non-U.S. Holder, under certain circumstances, may also be subject to an
additional "branch profits tax" at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
ADJUSTMENTS. Adjustments made to the exercise price of the Warrants, or the
failure to make such adjustments, may result, to the extent of the Company's
current or accumulated earnings and profits, in a taxable dividend to the
holders of Warrants or Common Stock, under Section 305 of the Code.
U.S. FEDERAL ESTATE TAX. Common Stock or Warrants owned or treated as owned
by an individual who is not a citizen or resident (as specially defined for U.S.
federal estate tax purposes) of the United States at the time of death will be
includible in the individual's gross estate for U.S. federal estate tax
purposes, unless an applicable treaty provides otherwise. Such individual's
estate may be subject to U.S. federal estate tax on the property includible in
the estate for U.S. federal estate tax purposes.
BACKUP WITHHOLDING AND INFORMATION WITHHOLDING
In general, information reporting requirements will apply to dividend
payments (or other taxable distributions) made in respect of shares of Common
Stock made within the United States to a non-corporate U.S. person, and "backup
withholding" at the rate of 31% will apply to such payments if the holder or
beneficial owner fails to provide an accurate taxpayer identification number in
the manner required by U.S. federal income tax law, if there has been
notification from the IRS of a failure by the holder or beneficial owner to
report all interest or dividends required to be shown on its federal income tax
returns or, in certain circumstances, if the holder or beneficial owner fails to
comply with applicable certification requirements. Certain corporations and
persons that are not U.S. persons may be required to establish their exemption
from information reporting and backup withholding by certifying their status on
IRS Forms W-8 or W-9.
In general, dividends on Common Stock and payment of the proceeds from the
sale of shares of Common Stock or Warrants to or through a U.S. office of a
broker is subject to both U.S. backup withholding and information reporting,
unless the holder or beneficial owner certifies its non-United States status
under penalties of perjury or otherwise establishes an exemption. U.S.
information reporting and backup withholding generally will not apply to a
payment made to or through a non-U.S. office of a non-U.S. broker. However, U.S.
information reporting dividends and requirements (but not backup withholding)
will apply to a payment made outside the United States of dividends and the
proceeds of a sale of shares of Common Stock or Warrants through an office
outside the United States of a broker that is a U.S. person, that derives 50% or
more of its gross income for a specified three-year period from the conduct of a
trade or business in the United States, or that is a "controlled foreign
corporation" as to the
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United States, unless the broker has documentary evidence in its files that the
holder or beneficial owner is a non-United States person or the holder or
beneficial owner otherwise establishes an exemption.
Amounts withheld under the backup withholding rules may be credited against
a holder's tax liability, and a holder may obtain a refund of any excess amounts
withheld under the backup withholding rules by filing the appropriate claim for
refund with the IRS.
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective investors should recognize that the present U.S. federal income
tax treatment of an investment in the Company may be modified by legislative,
judicial, or administrative action at any time, and that such action may affect
investments and commitments previously made. The rules dealing with U.S. federal
income taxation are constantly under review by persons involved in the
legislative process and by the IRS and U.S. Treasury Department, resulting in
revisions of regulations and revised interpretations of established concepts as
well as statutory changes. Revisions in U.S. federal tax laws and
interpretations thereof could adversely or beneficially affect the tax
consequences of an investment in the Company. For example, a recent U.S. federal
budget proposal would reduce the rate of U.S. federal income tax imposed on
capital gains, and, in certain circumstances, would "index" a holder's tax basis
in a capital asset to reflect inflation for purposes of determining gain or loss
upon the disposition of that asset, as long as the holder held that asset for a
certain period of time prior to its disposition. However, enactment of this
proposed legislation is not certain. Prospective investors are urged to consult
their tax advisors as to the impact to them of proposed legislative, regulative,
administrative or potential judicial changes to the U.S. federal income tax
laws.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for the Common
Stock or the Warrants and there can be no assurance that a significant public
market for the Common Stock or the Warrants 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 Warrants
or the future ability of the Company to raise capital through an offering of
equity securities.
After the Offering, the Company will have outstanding 11,734,979 shares of
Common Stock (12,147,479 shares if the Underwriters' over-allotment option is
exercised in full). Of these shares, the 2,750,000 Unit Shares (and up to an
additional 2,750,000 shares of Common Stock issuable upon exercise of the
Warrants) offered hereby will be freely tradeable without restriction in the
public market under 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. In addition, 2,175,878 shares of the Company's Common Stock will
be issued in connection with the Acquisition and registered under the Company's
Registration Statement on the Form S-4. However, 2,135,452 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, as well as the lockup agreements described below.
The remaining 6,809,101 shares of Common Stock outstanding upon completion
of the Offering will be "restricted securities" as that term is defined in Rule
144 under the Securities Act ("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 1,091,540 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 4,848,374 of such Restricted Shares
and has agreed pursuant to a lockup agreement not to offer, sell, grant any
option to purchase 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. In addition, Amgen has agreed not to offer,
sell, grant any option to purchase or otherwise dispose of, for a period of 180
days from the date of this Prospectus, any of the 647,059 Restricted Shares it
will hold 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.
In addition to the limitations under Rule 145, 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, grant any option to purchase 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.
The Company also has agreed that it will not offer, sell, grant any option
to purchase 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.
Upon termination of the agreements described above, approximately 1,088,792,
711,817 and 6,207,250 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
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limitations under Rules 144 and 145 and approximately 728,042, 13,475 and 13,475
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) or otherwise. Lehman Brothers Inc. may, at any time
without notice, release all or any portion of the shares subject to such
agreements. See "Underwriting."
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 117,350 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.
After the effective date of the Offering, the Company intends to file
registration statements on Form S-8 to register an aggregate of 695,463 shares
of Common Stock reserved for issuance upon exercise of outstanding options, an
aggregate of 937,350 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 Unit Shares IPO Price, an aggregate of 1,776,040 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
376,479 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, 45,865 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 Securities--Registration
Rights."
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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 Units set forth opposite the name of each such
Underwriter below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF UNITS
- ----------------------------------------------------------------------------- ---------------
<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 Units directly to the public initially at the initial
public offering price per Unit 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 Unit. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per Unit 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 Units 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 Units if any
such Units 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 Units exercisable solely to cover over-allotments at the
initial public offering price per Unit, 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 Units 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 Units
for sale to employees, directors and other persons and entities associated with
the Company. The number of Units available for sale to the general public will
be reduced to the extent that the reserved Units are purchased by persons or
entities designated by the Company. Any reserved Units that are not purchased by
persons or entities designated by the Company will be offered by the
Underwriters to the general public on the same basis as other Units offered
hereby.
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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 as part of the Units, 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
or the Warrants. The initial public offering price of the Units 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 Units, 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. The allocation of the initial
public offering price of the Units between the Unit Shares and the Warrants will
be determined by the Board of Directors of the Company acting in good faith
after consultation with independent financial advisers. The Company contemplates
the retention of Genesis Merchant Group Securities to provide financial advice
regarding the allocation of the initial public offering price of the Units
between the Unit Shares and the Warrants, for which Genesis Merchant Group
Securities is expected to receive $90,000. See "Risk Factors--No Prior Trading
Market; No Assurance of Active Trading Market; Potential Volatility of Trading
Prices" and "--Determination of Unit Shares IPO Price; Potential Conflicts of
Interest."
Until the distribution of the Unit Shares and Warrants 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 and Warrants. As an exception to these rules, the Representatives
are permitted to engage in certain transactions that stabilize the price of the
Common Stock or the Warrants. Such transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common Stock
or the Warrants.
If the Underwriters create a short position in the Units in connection with
the Offering, (i.e., if they sell more Units than are set forth on the cover
page of this Prospectus), the Representatives may reduce that short position by
purchasing Common Stock or the Warrants 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 or Warrants in the
108
<PAGE>
open market to reduce the Underwriters' short position or to stabilize the price
of the Common Stock or the Warrants, they may reclaim the amount of the selling
concession from the Underwriters and selling group members who sold those shares
or Warrants 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 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 Units, the Common Stock or the
Warrants. 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 Units 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 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 Units, the
109
<PAGE>
Common Stock and the Warrants, 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 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.
110
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Progenitor Financial Statements as of September 30, 1995 and 1996 and March 31, 1997 (unaudited) and for
the Years Ended September 30, 1994, 1995 and 1996 and the six months ended March 31, 1996 and 1997
(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 March 31, 1997 (unaudited) and for the
Years Ended December 31, 1994, 1995 and 1996 and the three months ended March 31, 1996 and 1997
(unaudited)
Report of Independent Auditors........................................................................... F-16
Balance Sheets........................................................................................... F-17
Statements of Operations................................................................................. F-18
Statement of Redeemable Preferred Stock, Common Stock and Accumulated Deficit............................ F-19
Statements of Cash Flows................................................................................. F-20
Notes to Financial Statements............................................................................ F-21
</TABLE>
F-1
<PAGE>
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.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
March 10, 1997
F-2
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------ MARCH 31,
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents........................................ $ 1,173,743 $ 22,315 $ 8,055
Accounts receivable.............................................. 193,898 175,498 175,497
Accounts receivable--parent...................................... 131,600 -- --
Prepaid expenses and other current assets........................ 22,618 120,827 96,048
-------------- -------------- --------------
Total current assets........................................... 1,521,859 318,640 279,600
-------------- -------------- --------------
Property and equipment, at cost:
Equipment........................................................ 1,063,602 1,216,219 1,660,183
Less accumulated depreciation.................................. (409,120) (674,847) (822,255)
-------------- -------------- --------------
654,482 541,372 837,928
Notes receivable from officers, net................................ 218,734 59,645 58,286
Convertible bridge promissory note................................. -- -- 1,308,274
Deferred offering and acquisition costs............................ -- -- 1,627,167
-------------- -------------- --------------
Total assets................................................... $ 2,395,075 $ 919,657 $ 4,111,255
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................. $ 232,656 $ 446,915 $ 506,369
Accrued expenses................................................. 1,343,718 1,361,615 2,420,599
Capital lease obligations--current............................... 214,485 265,155 385,509
-------------- -------------- --------------
Total current liabilities...................................... 1,790,859 2,073,685 3,312,477
-------------- -------------- --------------
Note payable--parent............................................... -- 3,443,050 6,576,666
Convertible debenture--parent...................................... 436,740 475,677 494,910
Bridge loan--parent................................................ -- -- 1,309,714
Capital lease obligations.......................................... 268,382 91,706 380,566
-------------- -------------- --------------
Total liabilities............................................ 2,495,981 6,084,118 12,074,333
-------------- -------------- --------------
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 March 31, 1997................. 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 March 31, 1997................. 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 2,887,217 shares issued
and outstanding as of September 30, 1995 and 1996 and March 31,
1997, respectively............................................. 2,789 2,886 2,887
Additional paid-in capital....................................... 14,546,640 14,966,792 14,972,322
Deficit accumulated during development stage..................... (14,674,030) (20,157,834) (22,961,982)
-------------- -------------- --------------
Total stockholders' deficit.................................... (100,906) (5,164,461) (7,963,078)
-------------- -------------- --------------
Total liabilities and stockholders' deficit.................... $ 2,395,075 $ 919,657 $ 4,111,255
-------------- -------------- --------------
-------------- -------------- --------------
</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 MAY 8, 1992
(DATE OF SIX MONTHS ENDED (DATE OF
YEARS ENDED SEPTEMBER 30, INCEPTION) TO MARCH 31, INCEPTION)
---------------------------------- SEPTEMBER 30, ------------------------ TO MARCH 31,
1994 1995 1996 1996 1996 1997 1997
---------- ---------- ---------- ------------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ -- $2,821,386 $1,332,366 $ 4,153,752 $ 911,962 $ 859,367 $5,013,119
Operating expenses:
Research and development... 4,112,991 4,227,959 3,872,891 16,104,790 1,705,732 2,150,379 18,255,169
General and
administrative........... 1,274,896 1,116,652 1,791,050 5,786,483 690,536 1,226,060 7,012,543
---------- ---------- ---------- ------------- ----------- ----------- ------------
Total operating
expenses............... 5,387,887 5,344,611 5,663,941 21,891,273 2,396,268 3,376,439 25,267,712
---------- ---------- ---------- ------------- ----------- ----------- ------------
Nonrecurring expense......... -- -- 973,525 973,525 -- -- 973,525
Interest expense:
Capital lease.............. 44,257 62,945 59,087 166,289 35,292 22,331 188,620
Debt to parent............. 603,581 289,297 119,617 1,280,499 21,441 264,745 1,545,244
---------- ---------- ---------- ------------- ----------- ----------- ------------
Net loss................. $(6,035,725) $(2,875,467) $(5,483,804) $(20,157,834) ($1,541,039) ($2,804,148) ($22,961,982)
---------- ---------- ---------- ------------- ----------- ----------- ------------
---------- ---------- ---------- ------------- ----------- ----------- ------------
Supplemental net loss per
share (unaudited).......... $ (0.91) $ (0.46)
---------- -----------
---------- -----------
Shares used in computing
supplemental net loss per
share (unaudited).......... 6,047,252 6,103,034
---------- -----------
---------- -----------
</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 MARCH 31, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------------------ -----------------------------------------
SERIES A SERIES B CLASS A CLASS B
--------------------- ------------------ -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- -------- ------- ---------- ------- --------- ------
<S> <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 -- $--
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 -- --
Issued in December 1992 and January 1993
at $.02 per share..................... -- -- -- -- 216,588 217 -- --
Repurchased at $.02 per share........... -- -- -- -- (74,267) (74) -- --
Cumulative net loss (May 8, 1992 through
September 30, 1993)................... -- -- -- -- -- -- -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, September 30, 1993............... -- -- -- -- 2,568,668 2,569 250,000 250
Net loss................................ -- -- -- -- -- -- -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, September 30, 1994............... -- -- -- -- 2,568,668 2,569 250,000 250
---------- ------- --------- ------
Issued preferred stock at $6.25 for
conversion of debt to equity.......... 2,020,496 20,205 -- -- -- -- -- --
Conversion of Class B common to Class A
common under anti-dilution
provisions............................ -- -- -- -- 178,750 179 (250,000) (250)
Issued in December 1994 at $.000 per
share under anti-dilution
provisions............................ -- -- -- -- 40,353 40 -- --
Stock options exercised at $.20 per
share................................. -- -- -- -- 1,500 1 -- --
Issued preferred stock in December-April
at $4.47 per share, net of offering
costs................................. -- -- 349,000 3,490 -- -- -- --
Net loss................................ -- -- -- -- -- -- -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, September 30, 1995............... 2,020,496 20,205 349,000 3,490 2,789,271 2,789 -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Stock options exercised at $.20-$6.00
per share............................. -- -- -- -- 38,300 39 -- --
Issued common stock in February 1996 at
$6.00 per share....................... -- -- -- -- 58,333 58 -- --
Net loss................................ -- -- -- -- -- -- -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, September 30, 1996............... 2,020,496 20,205 349,000 3,490 2,885,904 2,886 -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Net loss (unaudited).................... -- -- -- -- -- -- -- --
Stock options exercised at $.10-$2 per
share................................. -- -- -- -- 1,313 1 -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, March 31, 1997 (unaudited)....... 2,020,496 $20,205 349,000 $3,490 2,887,217 $2,887 -- $--
---------- -------- -------- ------- ---------- ------- --------- ------
---------- -------- -------- ------- ---------- ------- --------- ------
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING
PAID-IN DEVELOPMENT
CAPITAL STAGE TOTAL
------------ ------------- -------------
<S> <C> <C> <C>
Balance, May 8, 1992 (Date of inception)
Issued in May 1992 at $.002 per share... $ 2,413 $ -- $ 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............................ (13) -- --
Issued in December 1992 and January 1993
at $.02 per share..................... 4,105 -- 4,322
Repurchased at $.02 per share........... (1,411) -- (1,485)
Cumulative net loss (May 8, 1992 through
September 30, 1993)................... -- (5,762,838) (5,762,838)
------------ ------------- -------------
Balance, September 30, 1993............... 5,094 (5,762,838) (5,754,925)
Net loss................................ -- (6,035,725) (6,035,725)
------------ ------------- -------------
Balance, September 30, 1994............... 5,094 (11,798,563) (11,790,650)
------------ ------------- -------------
Issued preferred stock at $6.25 for
conversion of debt to equity.......... 12,607,895 -- 12,628,100
Conversion of Class B common to Class A
common under anti-dilution
provisions............................ 161,751 -- 161,680
Issued in December 1994 at $.000 per
share under anti-dilution
provisions............................ 214,960 -- 215,000
Stock options exercised at $.20 per
share................................. 299 -- 300
Issued preferred stock in December-April
at $4.47 per share, net of offering
costs................................. 1,556,641 -- 1,560,131
Net loss................................ -- (2,875,467) (2,875,467)
------------ ------------- -------------
Balance, September 30, 1995............... 14,546,640 (14,674,030) (100,906)
------------ ------------- -------------
Stock options exercised at $.20-$6.00
per share............................. 70,212 -- 70,251
Issued common stock in February 1996 at
$6.00 per share....................... 349,940 -- 349,998
Net loss................................ -- (5,483,804) (5,483,804)
------------ ------------- -------------
Balance, September 30, 1996............... 14,966,792 (20,157,834) (5,164,461)
------------ ------------- -------------
Net loss (unaudited).................... -- (2,804,148) (2,804,148)
Stock options exercised at $.10-$2 per
share................................. 5,530 -- 5,531
------------ ------------- -------------
Balance, March 31, 1997 (unaudited)....... $ 14,972,322 $(22,961,982) $ (7,963,078)
------------ ------------- -------------
------------ ------------- -------------
</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 MAY 8, 1992
(DATE OF SIX MONTHS ENDED (DATE OF
YEARS ENDED SEPTEMBER 30, INCEPTION) TO MARCH 31, INCEPTION)
---------------------------------- SEPTEMBER 30, ------------------------ TO MARCH 31,
1994 1995 1996 1996 1996 1997 1997
---------- ---------- ---------- ------------- ----------- ----------- ------------
(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) ($1,541,039) ($2,804,148) ($22,961,982)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 289,340 262,263 292,086 1,041,754 141,726 147,408 1,189,162
Gain on sale of equipment.... -- -- (23,247) (23,247) (16,437) -- (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) 60,846 1,359 (58,286)
Accounts receivable........ -- (193,898) 18,400 (175,498) -- 1 (175,497)
Accounts
receivable--parent....... -- (131,600) 131,600 -- 131,600 -- --
Prepaid expenses and other
current assets........... 7,000 (19,618) (98,209) (120,827) (120,158) 24,779 (96,048)
Accounts payable........... 59,847 59,490 87,998 320,654 (99,269) 185,715 506,369
Accrued expenses........... 274,529 664,324 17,897 1,361,615 (558,970) (291,914) 1,069,701
Accrued interest--parent... 603,581 261,350 119,617 1,252,552 19,615 264,745 1,517,297
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash used in operating
activities................. (4,867,574) (1,613,114) (4,778,573) (16,183,796) (1,982,086) (2,472,055) (18,655,851)
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash flows from investing
activities:
Purchase of property and
equipment.................... (294,623) (154,814) (83,467) (1,487,617) (36,146) (570,225) (2,057,842)
Proceeds from sale of
equipment.................... -- -- 54,000 54,000 -- -- 54,000
Advances under convertible
bridge promissory note....... -- -- -- -- -- (1,308,274) (1,308,274)
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash used in investing
activities................. (294,623) (154,814) (29,467) (1,433,617) (36,146) (1,878,499) (3,312,116)
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from note payable--
parent....................... 4,570,771 1,041,972 3,362,369 14,857,534 525,473 2,889,544 17,747,078
Proceeds from convertible
debenture--parent............ -- 436,740 -- 436,740 -- -- 436,740
Proceeds from bridge loan--
parent....................... -- -- -- -- -- 1,308,274 1,308,274
Deferred offering and
acquisition costs............ -- -- -- -- -- (276,269) (276,269)
Proceeds from issuance of
stock, net................... -- 1,560,431 420,250 1,988,594 351,125 5,531 1,994,125
Proceeds from sale leaseback... 662,602 87,771 117,325 867,698 117,325 550,676 1,418,374
Principal payments on capital
lease obligation............. (72,719) (194,787) (243,332) (510,838) (122,739) (141,462) (652,300)
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash provided by financing
activities................. 5,160,654 2,932,127 3,656,612 17,639,728 871,184 4,336,294 21,976,022
---------- ---------- ---------- ------------- ----------- ----------- ------------
Net (decrease) increase in
cash and cash
equivalents................ (1,543) 1,164,199 (1,151,428) 22,315 (1,147,048) (14,260) 8,055
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 $ 26,695 $ 8,055 $ 8,055
---------- ---------- ---------- ------------- ----------- ----------- ------------
---------- ---------- ---------- ------------- ----------- ----------- ------------
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>
SIX MONTHS ENDED
YEARS ENDED SEPTEMBER 30, MARCH 31,
---------------------------------- -------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss per share.............................. $ (2.01) $ (.97) $ (1.82) $ (.52) $ (.92)
Shares used in computing net loss per share..... 2,996,905 2,956,325 3,008,682 2,979,592 3,064,464
</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 unit, with
$8.50 of such price allocated to each share of common stock.
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. Upon an Offering, the conversion ratio will be
adjusted so that the holders receive a minimum return of 35% annually,
commencing on July 7, 1995. The minimum return is increased on a quarterly
basis. 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. Upon an Offering, the conversion ratio will be
adjusted so that the holders receive a minimum return of 35% annually,
commencing on July 7, 1995. The minimum return is increased on a quarterly
basis. 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.
F-13
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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 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. 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
F-14
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
13. SUBSEQUENT EVENTS: (CONTINUED)
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.
14. SUBSEQUENT EVENTS (UNAUDITED):
In July 1997, the Company entered into an option agreement with Interneuron
on the Company's Del-1 gene discovery. Under the agreement, Interneuron received
a right of first refusal to acquire an exclusive royalty bearing right to
manufacture, use and sell the technology on terms to be negotiated. In the event
the Company grants such rights to a third party, the Company must share fees,
milestone payments and royalties with Interneuron. Should the Company develop
and sell the technology independently, the Company will pay Interneuron
royalties on net sales. The option agreement terminates upon the expiration of
the last to expire of any issued patent that might issue relating to the
licensed technology, or upon the conclusion of a license agreement with
Interneuron. In exchange for receiving the option, Interneuron paid the Company
$1 and relinquished its right to receive certain minimum returns on its Series A
Preferred Stock through the quarter which ended April 7, 1997 (Note 8). This
relinquishment made by Interneuron may be deemed taxable income to the Company.
In July 1997, the Company authorized the issuance of up to 1,000,000 shares
of Series D Preferred Stock. Series D Preferred Stock is entitled to a
cumulative dividend of 7% per annum, payable quarterly in cash or common stock,
has no voting rights and is convertible into common shares based upon certain
provisions.
In July 1997, the Company entered into an agreement with Interneuron to
convert the outstanding balance of the Interneuron Bridge Loan (Note 13) into
Series D Preferred Stock upon closing of an Offering. The Interneuron Bridge
Loan converts to Series D Preferred Stock at a price equal to 117.5% of the
Offering price allocated to common shares. Interneuron may elect to convert the
Series D Preferred Stock into a like number of common shares at any time.
However, after 24 months, the Series D Preferred Stock will automatically
convert into common stock if the market value of the Company's common stock
equals or exceeds 150% of the Offering price allocated to common shares.
In July 1997, the Company amended and restated its Certificate of
incorporation to give effect to a 1-for-2 reverse-stock split as described in
Note 1(j).
F-15
<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-16
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1995 1996 1997
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $1,446,222 $ 438,859 $ 124,256
Short-term investments............................. 486,676 -- --
Current portion of notes receivable from
officers......................................... -- 174,606 --
Deferred interest expense.......................... -- 750,000 750,000
Other current assets............................... 115,460 241,416 64,456
---------- ----------- -----------
Total current assets................................. 2,048,358 1,604,881 938,712
Property and equipment, net.......................... 1,150,657 1,316,377 1,176,313
Notes receivable from officers....................... 351,645 150,000 150,000
Other assets......................................... 22,165 12,165 96,891
---------- ----------- -----------
$3,572,825 $ 3,083,423 $ 2,361,916
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities........... $ 573,382 $ 670,683 $ 777,876
Convertible notes payable.......................... -- 2,250,000 2,250,000
Current portion of equipment financing
obligations...................................... 362,823 474,272 464,238
---------- ----------- -----------
Total current liabilities............................ 936,205 3,394,955 3,492,114
Long-term convertible notes payable.................. -- -- 1,308,274
Long-term portion of equipment financing
obligations........................................ 969,279 685,874 584,665
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 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 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 4,526,319
Redeemable Series D, 12,373,134 shares authorized,
no shares issued and outstanding................. -- -- --
Common stock, $0.001 par value, 27,000,000 shares
authorized (25,000,000 shares in 1995):
Shares issued and outstanding -- 110,304, 174,056,
237,614 as of December 31, 1995, 1996 and March
31, 1997, respectively........................... 33,671 42,861 52,496
Shares to be issued -- no shares issued and
outstanding (51,884 shares at December 31, 1996,
no shares at December 31, 1995 or March 31,
1997)--amount to be paid in...................... -- 7,783 --
Deficit accumulated during the development stage..... (9,401,329) (16,609,368) (18,636,951)
---------- ----------- -----------
$3,572,825 $ 3,083,423 $ 2,361,916
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
See accompanying notes.
F-17
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(OCTOBER 9, THREE MONTHS ENDED MARCH (OCTOBER 9,
YEARS ENDED DECEMBER 31, 1992) TO 31, 1992) TO
------------------------------------- DECEMBER 31, ------------------------ MARCH 31,
1994 1995 1996 1996 1996 1997 1997
----------- ----------- ----------- ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ -- $ 375,000 $ 500,000 $ 875,000 $ 125,000 $ -- $ 875,000
Operating costs and expenses:
Research and development............ 2,330,100 4,182,836 6,049,081 13,783,966 1,239,986 1,591,971 15,375,937
General and administrative.......... 638,200 1,524,386 1,592,840 3,935,914 282,553 392,717 4,328,631
----------- ----------- ----------- ------------ ----------- ----------- ------------
Total operating costs and expenses.... 2,968,300 5,707,222 7,641,921 17,719,880 1,522,539 1,984,688 19,704,568
----------- ----------- ----------- ------------ ----------- ----------- ------------
Loss from operations.................. (2,968,300) (5,332,222) (7,141,921) (16,844,880 ) (1,397,539 ) (1,984,688 ) (18,829,568)
Interest income....................... 228,761 290,551 114,293 687,163 19,002 5,811 692,974
Interest expense...................... (95,033) (155,640) (180,411) (451,651 ) (48,864 ) (48,706 ) (500,357)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net loss.............................. $(2,834,572) $(5,197,311) $(7,208,039) $(16,609,368) $(1,427,401) $(2,027,583) $(18,636,951)
----------- ----------- ----------- ------------ ----------- ----------- ------------
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net loss per share (Note 2)........... $ (28.62) $ (48.70) $ (55.27) $ (12.94 ) $ (8.66 )
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Shares used in computing net loss per
share (Note 2)...................... 99,043 106,731 130,423 110,279 234,162
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes
F-18
<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 AND THREE MONTHS
ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
------------------------- ------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders at
$0.20 per share in March 1993 for
cash.................................. -- $ -- -- $ -- -- $ --
Issuance of common stock to scientific
advisors at $0.20 per share in March
1993 for cash......................... -- -- -- -- -- --
Issuance of common stock to an employee
at $0.20 per share in March 1993 for
cash.................................. -- -- -- -- -- --
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............ -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1993........... 301,500 3,015,000 -- -- -- --
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........................ -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1994........... 301,500 3,015,000 3,207,996 8,019,999 -- --
Issuance of common stock upon exercise
of stock options for cash at $0.50 to
$1.30 per share in March through
October 1995.......................... -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1995........... 301,500 3,015,000 3,207,996 8,019,999 -- --
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........................ -- -- -- -- -- --
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................. -- -- -- -- -- --
Common stock to be issued at $0.15 per
share for services.................... -- -- -- -- -- --
Net loss................................ -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996........... 301,500 3,015,000 3,207,996 8,019,999 4,526,317 4,526,319
Issuance of common stock upon exercise
of stock options for cash at $0.15 to
$1.30 per share in January 1997
(unaudited)........................... -- -- -- -- -- --
Net loss (unaudited).................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1997 (unaudited)..... 301,500 $ 3,015,000 3,207,996 $ 8,019,999 4,526,317 $ 4,526,319
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK DURING THE
----------------------------- DEVELOPMENT
SHARES AMOUNT STAGE
------------- ------------- -------------
<S> <C> <C> <C>
Issuance of common stock to founders at
$0.20 per share in March 1993 for
cash.................................. 84,000 $ 16,800 $ --
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...... -- -- --
Net loss from inception (October 9,
1992) to December 31, 1993............ -- -- (1,369,446)
------------- ------------- -------------
Balances at December 31, 1993........... 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....... -- -- --
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........... 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........... 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...... -- -- --
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........... 225,940 50,644 (16,609,368)
Issuance of common stock upon exercise
of stock options for cash at $0.15 to
$1.30 per share in January 1997
(unaudited)........................... 11,674 1,852
Net loss (unaudited).................... -- -- (2,027,583)
------------- ------------- -------------
Balance, March 31, 1997 (unaudited)..... 237,614 $ 52,496 $(18,636,951)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-19
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(OCTOBER 9, THREE MONTHS ENDED MARCH (OCTOBER 9,
YEARS ENDED DECEMBER 31, 1992) TO 31, 1992) TO
------------------------------------- DECEMBER 31, ------------------------ MARCH 31,
1994 1995 1996 1996 1996 1997 1997
----------- ----------- ----------- ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING
ACTIVITIES
Net loss...................... $(2,834,572) $(5,197,311) $(7,208,039) $(16,609,368) $(1,427,401) $(2,027,583) $(18,636,951)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 208,863 377,649 496,564 1,148,992 107,089 149,246 1,298,238
Stock to be issued for
services.................. -- -- 7,783 7,783 -- -- 7,783
Stock issued to employees... -- -- 9,000 9,000 -- -- 9,000
Interest expense on
convertible notes
payable................... -- -- -- -- -- 8,274 8,274
Changes in operating assets
and liabilities:
Notes receivable from
officers................ (654,376) 302,731 27,039 (324,606 ) (3,026 ) 174,606 (150,000)
Other current assets...... (152,724) 88,058 (125,956) (241,416 ) (29,373 ) 176,960 (64,456)
Other assets.............. (15,600) 3,435 10,000 (12,165 ) -- (84,726 ) (96,891)
Accounts payable and
accrued liabilities..... 143,213 305,338 97,301 670,683 113,624 107,193 777,876
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net cash used in operating
activities.................. (3,305,196) (4,120,100) (6,686,308) (15,351,097 ) (1,239,087 ) (1,496,030 ) (16,847,127)
----------- ----------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of
available-for-sale
securities.................. (4,589,279) (4,871,197) -- (10,149,989 ) -- -- (10,149,989)
Sales of available-for-sale
securities.................. 689,513 489,967 -- 1,179,480 -- -- 1,179,480
Maturities of
available-for-sale
securities.................. 495,163 7,988,670 486,676 8,970,509 486,676 -- 8,970,509
Capital expenditures.......... (484,212) (674,247) (662,284) (2,465,369 ) (95,282 ) (9,182 ) (2,474,551)
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net cash (used in) provided by
investing activities........ (3,888,815) 2,933,193 (175,608) (2,465,369 ) 391,394 (9,182 ) (2,474,551)
----------- ----------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS PROVIDED BY
FINANCING ACTIVITIES
Proceeds from issuance of
preferred stock............. 8,019,999 -- 4,526,319 15,561,318 -- -- 15,561,318
Proceeds from issuance of
common stock................ 800 13,171 190 33,861 (150 ) 1,852 35,713
Proceeds from convertible
notes payable............... -- -- 1,500,000 1,500,000 -- 1,300,000 2,800,000
Principal payments of
equipment financing
obligations................. (118,657) (236,236) (372,481) (749,542 ) (85,122 ) (111,243 ) (860,785)
Proceeds from equipment
financings.................. 435,520 854,163 200,525 1,909,688 -- -- 1,909,688
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net cash provided by financing
activities.................. 8,337,662 631,098 5,854,553 18,255,325 (85,272 ) 1,190,609 19,445,934
----------- ----------- ----------- ------------ ----------- ----------- ------------
Net increase (decrease) in
cash and cash equivalents... 1,143,651 (555,809) (1,007,363) 438,859 (932,965 ) (314,603 ) 124,256
Cash and cash equivalents at
beginning of period......... 858,380 2,002,031 1,446,222 -- 1,446,222 438,859 --
----------- ----------- ----------- ------------ ----------- ----------- ------------
Cash and cash equivalents at
end of period............... $ 2,002,031 $ 1,446,222 $ 438,859 $ 438,859 $ 513,257 $ 124,256 $ 124,256
----------- ----------- ----------- ------------ ----------- ----------- ------------
----------- ----------- ----------- ------------ ----------- ----------- ------------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest........ $ 95,033 $ 155,640 $ 180,411 $ 451,651 $ 48,864 $ 40,432 $ 492,083
----------- ----------- ----------- ------------ ----------- ----------- ------------
----------- ----------- ----------- ------------ ----------- ----------- ------------
</TABLE>
See accompanying notes.
F-20
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
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.
INTERIM FINANCIAL INFORMATION
The financial statements at March 31, 1997 and for the three months ended
March 31, 1996 and 1997 are unaudited but include all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
a fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Results for interim periods are not
necessarily indicative of results for the entire year.
F-21
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
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 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.
F-22
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
F-23
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
3. FINANCIAL INSTRUMENTS (CONTINUED)
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.
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
F-24
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
3. FINANCIAL INSTRUMENTS (CONTINUED)
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.
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-25
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
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-26
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
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
F-27
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
7. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
stock. The new options vest over the remaining vesting period of the original
options. Generally, options vest over a four-year period.
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-28
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
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
F-29
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
8. INCOME TAXES (CONTINUED)
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.
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 of which $1.3 million (unaudited) had been received through
March 31, 1997. 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
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. The $22 million purchase price will be allocated among the
stockholders and outstanding option and warrant holders as follows: 15.9% to the
common stockholders and holders of outstanding options; 14.75%, 39.07%, 23.46%
and 6.82% to preferred Series A, B, C, and D stock and warrant holders,
respectively. Based upon the number of outstanding shares, options and warrants
as of December 31, 1996, and assuming the conversion of the convertible notes
into 1,119,399 shares of Series D preferred stock, the consideration received
per share by the stock, option and warrant holders would be as follows:
<TABLE>
<S> <C>
Common stock........................................................ $ 1.16
Series A preferred stock............................................ $ 10.16
Series B preferred stock............................................ $ 2.64
Series C preferred stock............................................ $ 1.14
Series D preferred stock............................................ $ 1.34
</TABLE>
F-30
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
9. SUBSEQUENT EVENTS (CONTINUED)
If the purchase price is reduced due to breaches of representations,
warranties or covenants or due to IPO and reorganization expenses exceeding
limits specified in the agreement, the Series D stockholders will still receive
$1.34 per share, the common stock and option holders will receive a minimum of
10% of the total purchase price or $0.60 per share based on an assumed total
purchase price of $18 million (the actual percentage will be based on a
calculation specified in the agreement) and the remainder will be allocated
among the Series A, B, and C stock and warrant holders pro rata based upon the
original investment amount for such series.
In May 1997, the Company exercised its option to extend the lease of its
existing facility for a 12-month term ending September 30, 1999 for $17,900 per
month. In addition, the Company also exercised its option to expand its facility
for a 23 month term starting November 1, 1997 to September 30, 1999 for
approximately $8,500 per month.
F-31
<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........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Unaudited Pro Forma Financial Statements.................................. 26
Progenitor Selected Historical Financial Data............................. 34
Mercator Selected Historical Financial Data............................... 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 36
Business.................................................................. 42
Management................................................................ 67
Certain Transactions...................................................... 83
Principal Stockholders.................................................... 90
Description of Securities................................................. 93
Certain Federal Tax Considerations........................................ 101
Shares Eligible for Future Sale........................................... 105
Underwriting.............................................................. 107
Legal Matters............................................................. 109
Experts................................................................... 109
Additional Information.................................................... 109
Index to Financial Statements............................................. F-1
</TABLE>
---------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE UNITS, THE COMMON STOCK OR THE WARRANTS,
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 UNITS
[LOGO]
---------------------
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 Securities 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............................................ $ 31,183
NASD Filing Fee................................................. 10,276
Nasdaq National Market Listing Fee.............................. 50,000
Printing and engraving expenses................................. 250,000
Legal fees and expenses......................................... 400,000
Accounting fees and expenses.................................... 250,000
Transfer agent and registrar fees............................... 5,000
Miscellaneous................................................... 3,541
---------
Total....................................................... $1,000,000
---------
---------
</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 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.
II-1
<PAGE>
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 27,250
shares of Common Stock for $0.20 per share to certain former employees
pursuant to the exercise of stock options granted under the 1992 Stock
Option Plan, (c) issued and sold 50 shares of Common Stock for $2.00 per
share to a former employee
II-2
<PAGE>
pursuant to the exercise of stock options granted under the 1992 Stock
Option Plan, (d) issued and sold 5,000 shares of Common Stock for $4.00
per share to a former employee pursuant to the exercise of stock options
granted under the 1992 Stock Option Plan and (e) issued and sold 7,500
shares of Common Stock to a former employee for $6.00 per share pursuant
to the exercise of stock options granted under the 1992 Stock Option
Plan.
(6) In 1997, the Registrant issued and sold 1,125 shares of Common Stock for
$4.00 per share and 188 shares of Common Stock for $5.50 per share to an
employee pursuant to the exercise of stock options granted under the 1992
Stock Option Plan.
(7) 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 outstanding 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, as amended July 22, 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 Restated Certificate of Incorporation of the Company.
**3.2 Amended and Restated Bylaws of the Company.
3.3 Form of Certificate of Designation Establishing Series D Preferred Stock.
**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.
4.5 Form of Warrant for Purchase of Common Stock.
4.6 Form of Warrant Agreement.
**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.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
**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.
**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, April 27, 1995 and May 29, 1997.
**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 10.35 to the Registration Statement on
Form 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 May 1997, by and between the Company and
Douglass B. Given.
*/**10.37 Exclusive License Agreement and Option, dated as of April 1, 1997, by and between
The National Jewish Medical and Research Center and the Company.
*/**10.38 Sponsored Research Agreement, dated May 1, 1997, by and between the Ontario
Cancer Institute/Princess Margaret Hospital and the Company.
*/**10.39 Sponsored Research Agreement, dated April 15, 1997, by and between the University
of Cambridge and the Company.
*/**10.40 Sponsored Research Agreement, dated May 1, 1997, by and between the Board of
Regents of the University of Nebraska (doing business as the University of
Nebraska Medical Center) and the Company.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
*/**10.41 Sponsored Research Agreement, dated May 1, 1997, by and between Ohio University
and the Company.
10.42 Interneuron Option Agreement, dated July 2, 1997, by and between the Company and
Interneuron Pharmaceuticals, Inc.
**10.43 Loan Agreement, dated as of February 14, 1997, and amendment thereto dated as of
July 2, 1997, by and between the Company and Interneuron Pharmaceuticals, Inc.
(filed as Exhibit 10.37 to the Registration Statement on Form S-4 filed by the
Company and incorporated herein by reference.)
**11.1 Statement Regarding Computation of Per Share Earnings.
**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.
**27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Documents for which confidential treatment has been requested.
** Exhibit previously filed.
+ To be filed by amendment.
(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:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed a
new registration statement relating to the securities
II-6
<PAGE>
offered therein, and the offering of the securities at that time to be the
initial BONA FIDE offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) 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.
(c) 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.
(d) 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-7
<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 July 29, 1997.
PROGENITOR, INC.
By: /s/ MARK N. K. BAGNALL
-----------------------------------
Mark N. K. Bagnall
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
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 July 29, 1997
Douglass B. Given, M.D., Ph.D. Officer)
/s/ MARK N. K. BAGNALL Vice President, Finance and Chief
------------------------------------------- Financial Officer (Principal July 29, 1997
Mark N. K. Bagnall Financial and Accounting Officer)
/s/ ROBERT P. AXLINE*
------------------------------------------- Director July 29, 1997
Robert P. Axline
/s/ GLENN L. COOPER*
------------------------------------------- Director July 29, 1997
Glenn L. Cooper M.D.
/s/ ALEXANDER M. HAIG, JR.*
------------------------------------------- Director July 29, 1997
Alexander M. Haig, Jr.
/s/ MORRIS LASTER*
------------------------------------------- Director July 29, 1997
Morris Laster, M.D.
/s/ JERRY P. PEPPERS*
------------------------------------------- Director July 29, 1997
Jerry P. Peppers
/s/ DAVID B. SHARROCK*
------------------------------------------- Director July 29, 1997
David B. Sharrock
* By /s/ MARK N. K. BAGNALL
----------------------
Mark N. K. Bagnall
ATTORNEY-IN-FACT
</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, as
amended July 22, 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 Restated Certificate of Incorporation of the Company..........................................
**3.2 Amended and Restated Bylaws of the Company....................................................
3.3 Form of Certificate of Designation Establishing Series D Preferred Stock......................
**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................................................
4.5 Form of Warrant for Purchase of Common Stock
4.6 Form of Warrant Agreement
**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.....................................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT PAGE
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
**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.......................................................
**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, April 27, 1995
and May 29, 1997............................................................................
**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 May 1997, by and between the Company and Douglass B.
Given.......................................................................................
*/**10.37 Exclusive License Agreement and Option, dated as of April 1, 1997, by and between The National
Jewish Medical and Research Center and the Company..........................................
*/**10.38 Sponsored Research Agreement, dated May 1, 1997, by and between the Ontario Cancer
Institute/Princess Margaret Hospital and the Company........................................
*/**10.39 Sponsored Research Agreement, dated April 15, 1997, by and between the University of Cambridge
and the Company.............................................................................
*/**10.40 Sponsored Research Agreement, dated May 1, 1997, by and between the Board of Regents of the
University of Nebraska (doing business as the University of Nebraska Medical Center) and the
Company.....................................................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT PAGE
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
*/**10.41 Sponsored Research Agreement, dated May 1, 1997, by and between Ohio University and the
Company.....................................................................................
10.42 Interneuron Option Agreement, dated July 2, 1997, by and between the Company and Interneuron
Pharmaceuticals Inc.........................................................................
**10.43 Loan Agreement, dated as of February 14, 1997, and amendment thereto dated as of July 2, 1997,
by and between the Company and Interneuron Pharmaceuticals, Inc. (filed as Exhibit 10.37 to
the Registration Statement on Form S-4 filed by the Company and incorporated herein by
reference)..................................................................................
**11.1 Statement Regarding Computation of Per Share Earnings.........................................
**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..............................................................
**27.1 Financial Data Schedule.......................................................................
</TABLE>
- ------------------------
* Documents for which confidential treatment has been requested.
** Exhibit previously filed.
+ To be filed by amendment.
<PAGE>
2,750,000 Units
PROGENITOR, INC.
FORM OF UNDERWRITING AGREEMENT
_______ __, 1997
LEHMAN BROTHERS INC.
GENESIS MERCHANT GROUP SECURITIES
As Representatives of the Several Underwriters
c/o LEHMAN BROTHERS INC.
Three World Financial Center
New York, New York 10285
Ladies and Gentlemen:
Progenitor, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell an aggregate of 2,750,000 units (the "Initial Units"), each
consisting of (i) one share (the "Share") of common stock, par value $.001 per
share (the "Common Stock"), of the Company and (ii) one warrant that entitles
the holder to purchase one share of the Common Stock (the "Warrant"), to the
several Underwriters named in Schedule I hereto (the "Underwriters") for whom
Lehman Brothers Inc. ("Lehman") and Genesis Merchant Group Securities are acting
as representatives (collectively, the "Representatives"). In addition, solely
for the purpose of covering over-allotments, the Company proposes to grant to
the several Underwriters, upon the terms and conditions set forth in Section 2
hereof, an option to purchase up to an additional 412,500 Units (the "Option
Units"). The Initial Units and the Option Units, and the Shares and the
Warrants comprising such Initial Units and Option Units, are hereinafter
collectively referred to as the "Units." The Shares of Common Stock issuable
upon exercise of the Warrants are hereinafter referred to as the "Warrant
Shares." The Shares and Warrants included in the Units are hereinafter
collectively referred to as the "Securities."
The Company and the Underwriters agree that up to 100,000 of the Units
to be purchased by the Underwriters (the "Reserved Units") shall be reserved for
sale by the Underwriters to certain eligible employees, directors and other
persons and entities having business relationships with the Company, as part of
the distribution of the Units by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the
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extent that such Reserved Units are not so purchased by such eligible
employees, directors and other persons and entities having business
relationships with the Company, such Reserved Units may be offered to the
public as part of the public offering contemplated hereby.
The Units are being sold concurrently with the acquisition of Mercator
Genetics, Inc., a Delaware corporation ("Mercator"), by the Company. The
acquisition is being effected pursuant to an Agreement and Plan of
Reorganization, dated as of February 14, 1997 (the "Merger Agreement"), by and
among the Company, MG Merger Sub Corp., a Delaware corporation and a wholly
owned subsidiary of the Company ("Merger Sub"), and Mercator. Pursuant to the
Merger Agreement, the Company will acquire all of the issued and outstanding
capital stock of Mercator (the "Merger"). At the time the Merger is consummated
(the "Effective Time of the Merger") and pursuant to the Merger Agreement,
Merger Sub will be merged with and into Mercator, with Mercator as the surviving
corporation. The Merger Agreement, this Agreement, the Warrant Agreement and
the Securities are collectively referred to herein as the "Transaction
Documents."
The Company wishes to confirm as follows its agreements with you and
the other Underwriters on whose behalf you are acting in connection with the
several purchases by the Underwriters of the Units:
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") a
registration statement on Form S-1 (No. 333-5369) covering the registration
of the Units, the Shares, the Warrants and the Warrant Shares under the
Securities Act of 1933, as amended (the "1933 Act"), including the related
preliminary prospectus, or prospectuses, and either (A) has prepared and
filed, prior to the effective date of such registration statement, an
amendment to such registration statement, including a final prospectus or (B)
if the Company has elected to rely upon Rule 430A ("Rule 430A") of the rules
and regulations of the Commission under the 1933 Act (the "1933 Act
Regulations"), will prepare and file a prospectus, in accordance with the
provisions of Rule 430A and Rule 424(b) ("Rule 424(b)") of the 1933 Act
Regulations, promptly after execution and delivery of this Agreement.
Additionally, if the Company has elected to rely upon Rule 434 ("Rule 434")
of the 1933 Act Regulations, the Company will prepare and file a term sheet
(a "Term Sheet") in accordance with the provisions of Rule 434 and Rule
424(b), promptly after execution and delivery of this Agreement. The
information, if any, included in such prospectus or in such Term Sheet, that
was omitted from such registration statement at the time it became effective
but that is deemed to be part of such registration statement at the time it
becomes effective (a) pursuant to paragraph (b) of Rule 430A, is referred to
herein as the "Rule 430A Information," or (b) pursuant to
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<PAGE>
paragraph (d) of Rule 434, is referred to herein as the "Rule 434
Information." Each prospectus used before the time such registration
statement became effective, and any prospectus that omitted, as applicable,
the Rule 430A Information or the Rule 434 Information that was used after
effectiveness and prior to the execution and delivery of this Agreement is
herein called a "preliminary prospectus." Such registration statement,
including the exhibits thereto, at the time it became effective and
including, if applicable, the Rule 430A Information or the Rule 434
Information, is herein called the "Registration Statement." Any registration
statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein
referred to as the "Rule 462(b) Registration Statement," and after such
filing the term Registration Statement shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to
the Underwriters for use in connection with the offering of the Units is
herein referred to as the "Prospectus." If Rule 434 is relied upon, the term
"Prospectus" shall refer to the preliminary prospectus last furnished to the
Underwriters in connection with the offering of the Units, together with the
Term Sheet, and all references to the date of the Prospectus shall mean the
date of the Term Sheet. For purposes of this Agreement, all references to
the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy, if any, filed with the Commission pursuant to its
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements contained herein and subject to all
the terms and conditions set forth herein, the Company hereby agrees to issue
and sell to each Underwriter and each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $[ ] per
Unit (the "Purchase Price Per Unit"), the number of Initial Units set forth in
Schedule I opposite the name of such Underwriter under the column "Number of
Initial Units to be Purchased from the Company" (or such number of Initial Units
increased as set forth in Section 10 hereof).
Upon the basis of the representations, warranties and agreements
contained herein and subject to all the terms and conditions set forth herein,
the Company hereby grants an option (the "Over-Allotment Option") to the
Underwriters to purchase from the Company, at the Purchase Price Per Unit, up to
an aggregate of 412,500 Option Units. Option Units may be purchased solely for
the purpose of covering over-allotments made in connection with the offering of
the Units. Such option shall expire at 5:00 P.M., New York time, on the 30th
day after the date of this Agreement (or, if such 30th day shall be a Saturday
or Sunday or a holiday, on the next business day thereafter when the New York
Stock Exchange is open for trading). Such Over-Allotment Option may be
exercised at
3
<PAGE>
any time or from time to time until its expiration. Upon any exercise of the
Over-Allotment Option, each Underwriter, severally and not jointly, agrees to
purchase from the Company that proportion of the total number of Option Units
as is equal to the percentage of Initial Units that such Underwriter is
purchasing from the Company (or such number of Initial Units increased as set
forth in Section 10 hereof), subject to such adjustments as you may determine
to avoid fractional Units.
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you
that the Underwriters propose to make a public offering of the Units as soon
after the Registration Statement and this Agreement have become effective as
in your judgment is advisable and initially to offer the Units upon the terms
set forth in the Prospectus.
4. DELIVERY OF THE UNITS AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Initial Units shall be made at the office
of Skadden, Arps, Slate, Meagher & Flom (Illinois), 333 West Wacker Drive,
Suite 2100, Chicago, Illinois 60606, at 9:00 A.M., Chicago time, on the
third (fourth, if the pricing occurs after 4:30 p.m. (Eastern Time) on any
given day) business day after the date hereof (unless postponed in accordance
with the provisions of Section 10 hereof) (the "Closing Date"). The place of
closing for the Initial Units and the Closing Date may be varied by agreement
among you and the Company.
Delivery to the Underwriters of and payment for any Option Units to be
purchased by the Underwriters shall be made at the aforementioned office of
Skadden, Arps, Slate, Meagher & Flom (Illinois) at such time on such date (an
"Option Closing Date"), which may be the same as the Closing Date but shall in
no event be earlier than the Closing Date nor earlier than two nor later than
ten business days after the giving of the notice hereinafter referred to, as
shall be specified in a written notice from you on behalf of the Underwriters to
the Company of the Underwriters' determination to purchase a number, specified
in such notice, of Option Units. The place of closing for any Option Units and
the Option Closing Date for such Option Units may be varied by agreement between
you and the Company.
Certificates for the Securities comprising the Initial Units and for
the Securities comprising any Option Units to be purchased hereunder shall be
registered in such names and in such denominations as you shall request by
written notice (it being understood that a facsimile transmission shall be
deemed written notice) prior to 9:30 A.M., New York time, on the second business
day preceding the Closing Date or any Option Closing Date, as the case may be.
Such certificates shall be made available to you in New York, New York, as
requested by you in the aforesaid notice, for inspection and packaging not later
than 9:30 A.M., New York time, on the business day next preceding the Closing
Date or any
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<PAGE>
Option Closing Date, as the case may be. The certificates evidencing the
Securities comprising the Initial Units and the Securities comprising any
Option Units to be purchased hereunder shall be delivered to you on the
Closing Date or the Option Closing Date, as the case may be, against payment
of the purchase price therefor by wire transfer of same day funds to the
account designated by the Company. It is understood that each Underwriter
has authorized you, for its account, to accept delivery of, acknowledge
receipt of, and make payment of the purchase price for, the Initial Units and
the Option Units, if any, which it has agreed to purchase. Lehman,
individually and not as representative of the Underwriters, may (but shall
not be obligated to) make payment of the purchase price for the Initial Units
or the Option Units, if any, to be purchased by any Underwriter whose check
has not been received by the Closing Date or the Option Closing Date, as the
case may be, but such payment shall not relieve such Underwriter from its
obligations hereunder.
Each certificate evidencing each Warrant shall be substantially in the
form attached to the Warrant Agreement, dated as of __________ ___, 1997 between
American Stock Transfer & Trust Company, as Warrant Agent, and the Company (the
"Warrant Agreement").
5. AGREEMENTS OF THE COMPANY. The Company covenants and agrees with
the several Underwriters as follows:
(a) The Company will notify the Representatives
immediately, and confirm the notice in writing, (i) of the effectiveness of
the Registration Statement and any amendment thereto, (ii) of the receipt of
any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the suspension of qualification of the Securities for offering
or sale in any jurisdiction or the initiation of any proceedings for such
purpose and (v) during the period when the Prospectus is required to be
delivered under the 1933 Act or Securities Exchange Act of 1934, as amended
(the "1934 Act"), of any change, or any event or occurrence which could
result
5
<PAGE>
in such a change, in the condition, financial or otherwise, or the earnings,
business affairs or business prospects of the Company and its Subsidiaries
(as defined in Section 6.e. below), considered as one enterprise, or the
happening of any event, including the filing of any information, documents or
reports pursuant to the 1934 Act, that makes any statement of a material fact
made in the Registration Statement or the Prospectus (as then amended or
supplemented) untrue or which requires the making of any additions to or
changes in the Registration Statement or the Prospectus in order to state a
material fact required by the 1933 Act or the 1933 Act Regulations to be
stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus to
comply with the 1933 Act, the 1933 Act Regulations or any other law. The
Company shall use its best efforts to prevent the issuance of any stop order
or order suspending the qualification or exemption of the Units, the Shares,
the Warrants or the Warrant Shares under any state securities or Blue Sky
laws, and, if at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, or any state
securities commission or other regulatory authority shall issue an order
suspending the qualification or exemption of the Securities under any state
securities or Blue Sky laws, the Company shall use every reasonable effort to
obtain the withdrawal or lifting of such order at the earliest possible time.
(b) The Company will give the Underwriters notice of
its intention to prepare or file any amendment to the Registration Statement
(including any post-effective amendment), any Rule 462(b) Registration
Statement, any Term Sheet or any amendment or supplement to the Prospectus
(including any revised prospectus or Term Sheet and preliminary prospectus which
the Company proposes for use by the Underwriters in connection with the offering
of the Units which differs from the prospectus on file at the Commission at the
time the Registration Statement becomes effective, whether or not such revised
prospectus or Term Sheet and preliminary prospectus is required to be filed
pursuant to Rule 424(b)), whether pursuant to the 1933 Act, the 1934 Act or
otherwise, will furnish the Underwriters with copies of any Rule 462(b)
Registration Statement, Term Sheet, amendment or supplement a reasonable amount
of time prior to such proposed filing or use, as the case may be, and will not
file any such Rule 462(b) Registration Statement, Term Sheet, amendment or
supplement or use any such prospectus to which the Underwriters or counsel for
the Underwriters shall object.
(c) The Company has furnished or will deliver to the
Underwriters and their counsel, without charge, as many signed and conformed
copies of the Registration Statement as originally filed and of each amendment
thereto (including exhibits filed therewith or incorporated by reference
therein) as the Underwriters may reasonably request. If applicable, the copies
of the Registration Statement and each amendment thereto furnished to the
Underwriters
6
<PAGE>
will be identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) The Company will furnish to each Underwriter,
without charge, from time to time during the period when the Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, such number of
copies of the Prospectus (as amended or supplemented) as such Underwriter may
reasonably request for the purposes contemplated by the 1933 Act, the 1934 Act,
the 1933 Act Regulations or the rules and regulations of the Commission under
the 1934 Act (the "1934 Act Regulations"). If applicable, the Prospectus and
any amendments or supplements thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) The Company will comply with the 1933 Act and the
1933 Act Regulations so as to permit the completion of the distribution of the
Units as contemplated in this Agreement and in the Prospectus. If at any time
when a prospectus is required by the 1933 Act, the 1934 Act, the 1933 Act
Regulations or the 1934 Act Regulations to be delivered in connection with sales
of the Units, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue statements
of a material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in the light of the circumstances existing
at the time it is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement or
amend or supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 5(b) of the 1933 Act, such
amendment or supplement as may be necessary to correct such statement or
omission or to make the Registration Statement or the Prospectus comply with
such requirements and the Company will furnish to the Underwriters such number
of copies of such amendment or supplement as the Underwriters may reasonably
request.
(f) During the period of five years hereafter, the
Company will furnish to you (i) as soon as available, a copy of each report of
the Company mailed to stockholders or filed with the Commission or the Nasdaq
National Market ("NASDAQ"), and (ii) from time to time such other information
concerning the Company as you may request.
(g) The Company will use its best efforts, in
cooperation with counsel to the Underwriters, to qualify the Units,
7
<PAGE>
the Shares, the Warrants and the Warrant Shares for offering and sale under
the applicable securities or Blue Sky laws of such states and other
jurisdictions of the United States as the Representatives may designate and
to maintain such qualifications in effect for so long as may be necessary for
the distribution of the Units or their components, but in any event for a
period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement; PROVIDED,
HOWEVER, that the Company shall not be obligated to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified. In each
jurisdiction in which the Units, the Shares, the Warrants and the Warrant
Shares have been so qualified, the Company will file such statements and
reports as may be required by the laws of such jurisdiction to continue such
qualification in effect for so long as may be necessary for the distribution
of the Units or their components, but in any event for a period of not less
than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement.
(h) The Company will make generally available to its
security holders as soon as practicable, but not later than 45 days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 of the 1933 Act Regulations) covering a twelve-
month period beginning not later than the first day of the Company's fiscal
quarter next following the "effective date" (as defined in said Rule 158) of the
Registration Statement.
(i) The Company will use the net proceeds received by
it from the sale of the Units in the manner specified in the Prospectus under
"Use of Proceeds."
(j) If, at the time that the Registration Statement
becomes effective, any Rule 430A Information or Rule 434 Information shall have
been omitted therefrom, then immediately following the execution of this
Agreement, the Company will prepare, and file or transmit for filing with the
Commission in accordance with Rule 430A or Rule 434 and Rule 424(b), copies of a
Prospectus or Term Sheet containing such Rule 430A Information and Rule 434
Information, respectively, or, if required by Rule 430A, a post-effective
amendment to the Registration Statement (including an amended Prospectus),
containing such Rule 430A Information.
(k) If the Company elects to rely upon Rule 462(b),
the Company shall both file a Rule 462(b) Registration Statement with the
Commission in compliance with Rule 462(b) and pay the applicable fees in
accordance with Rule 111 of the 1933 Act Regulations by the earlier of (i) 10:00
P.M. Eastern Time on the date hereof and (ii) the time confirmations are sent or
given, as specified by Rule 462(b)(2).
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<PAGE>
(l) The Company, during the period when the Prospectus
is required to be delivered under the 1933 Act or the 1934 Act, will file all
documents required to be filed with the Commission pursuant to Section 13, 14 or
15 of the 1934 Act within the time periods required by the 1934 Act and the 1934
Act Regulations.
(m) During a period of 180 days from the date of the
Prospectus, the Company will not, without the prior written consent of Lehman,
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or indirectly,
any share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the 1933
Act with respect to any of the foregoing or (ii) enter into any swap or any
other agreement or any transaction that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Units to be sold
hereunder and any shares of Common Stock issued by the Company upon the exercise
of any Warrants, (B) any shares of Common Stock issued by the Company upon the
exercise of an option or warrant or the conversion of any security outstanding
on the date hereof and referred to in the Prospectus, (C) any shares of Common
Stock issued or options to purchase Common Stock granted pursuant to existing
employee benefit plans of the Company referred to in the Prospectus or (D) any
shares of Common Stock issued pursuant to any non-employee director stock plan.
(n) The Company has furnished or will furnish to you
"lock-up" letters, in form and substance satisfactory to you, signed by each of
its current officers and directors, each of its stockholders designated by you
and all stockholders and optionholders of Mercator.
(o) The Company will not waive, modify or amend, or
otherwise release Amgen Inc. ("Amgen") from its obligations under the sale
restrictions contained in, the Purchase Agreement, dated as of December 31,
1996, between the Company and Amgen, in each case without the prior written
consent of Lehman.
(p) The Company will supply the Underwriters with
copies of all correspondence to and from, and all documents issued to and by,
the Commission in connection with the registration of the Securities under the
1933 Act.
(q) Prior to the Closing Date, the Company shall
furnish to the Underwriters, as soon as they have been prepared, copies of any
unaudited interim financial statements of the Company
9
<PAGE>
and Mercator for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the
Prospectus.
(r) Prior to the Closing Date, the Company will issue
no press release or other communications directly or indirectly and hold no
press conference with respect to the Company or any of its Subsidiaries, the
condition, financial or otherwise, or the earnings, business affairs or business
prospects of the Company or any of its Subsidiaries, or the offering of the
Units, without the prior written consent of the Representatives unless in the
judgment of the Company and its counsel, and after notification to the
Representatives, such press release or communication is required by law.
(s) The Company has not taken, nor will it take,
directly or indirectly, any action designed to, or that might reasonably be
expected to, cause or result in stabilization or manipulation of the price of
the Units or any security of the Company to facilitate the sale or resale of the
Units or any other security of the Company.
(t) The Company will keep duly authorized and reserved
for issuance, upon exercise of the Warrants, a sufficient number of Warrant
Shares.
(u) The Company will use its best efforts to maintain
the quotation of the Common Stock (including the Shares) and the Warrants on
NASDAQ and will file with NASDAQ all documents and notices required by NASDAQ of
companies that have securities that are traded in the over-the-counter market
and quotations for which are reported by NASDAQ.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter that:
(a) When the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto becomes
effective, at the date of the Prospectus, if different, and at the Closing Date
and the Option Closing Date, as the case may be, the Registration Statement, the
Rule 462(b) Registration Statement and any amendments and supplements thereto
complied or will comply in all material respects with the requirements of the
1933 Act and the 1933 Act Regulations and did not and will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading.
The Prospectus and any supplements or amendments thereto will not at the date of
the Prospectus, at the date of any such supplements or amendments, or at the
Closing Date or the Option Closing Date, if any, include an untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the
10
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light of the circumstances under which they were made, not misleading. If
Rule 434 is used, the Company will comply with the requirements of Rule 434
and the Prospectus shall not be "materially different," as such term is used
in Rule 434, from the Prospectus included in the Registration Statement at
the time it became effective. The representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement or Prospectus relating to any Underwriter made in
reliance upon and in conformity with information furnished to the Company in
writing by or on behalf of any Underwriter, through you expressly for use in
the Registration Statement or Prospectus. The Company has not distributed
any offering materials in connection with the offering or sale of the Units
other than the Registration Statement, the preliminary prospectus, the
Prospectus, the Term Sheet, if applicable, or any other materials, if any,
permitted by the 1933 Act or the 1933 Act Regulations.
(b) Each preliminary prospectus and the prospectus
filed as part of the Registration Statement as originally filed or as part of
any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act Regulations
and, if applicable, each preliminary prospectus and the Prospectus delivered to
the Underwriters for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(c) The accountants who certified the applicable
financial statements of the Company and Mercator included in the Registration
Statement are each independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(d) The financial statements included in the
Registration Statement and the Prospectus present fairly the financial position
of the Company and Mercator as of the dates indicated and the results of its
operations for the periods specified; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis; and no supporting schedules are required to be included in the
Registration Statement. The pro forma financial statements included in the
Registration Statement and the Prospectus have been prepared in conformity with
the standards set forth in Rule 11-02 of Regulation S-X of the Commission and on
a basis consistent with such historical financial statements and give effect to
assumptions made on a reasonable basis and present fairly the historical and
proposed transactions contemplated by the Registration Statement and the
Prospectus and this Agreement. The summary and selected financial information
and data set forth in the Prospectus (historical and pro forma) are prepared on
an accounting basis consistent with such financial statements.
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(e) Since the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as otherwise
stated therein, (i) there has been no material adverse change or any development
involving a prospective material adverse change in or affecting the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its Subsidiaries, considered as one enterprise,
whether or not arising in the ordinary course of business, (ii) except with
respect to the Merger, there have been no transactions entered into by the
Company or its Subsidiaries, other than those in the ordinary course of
business, which are material with respect to the Company and its Subsidiaries,
considered as one enterprise, and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or any of its
Subsidiaries on any class of their respective capital stock. Neither the
Company nor Mercator has any material contingent obligations which are not
specifically disclosed in the their respective financial statements that are
included in Registration Statement. The term "Subsidiary" means any subsidiary
of the Company and includes, for purposes of this Agreement, Mercator and any of
its subsidiaries, on a pro forma basis assuming the Merger has been consummated
as of the date hereof.
(f) The Company and each of its Subsidiaries has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware with corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectus and, in the case of the Company, to enter into and perform its
obligations under this Agreement and the other Transaction Documents; and the
Company and each of its Subsidiaries is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure to so qualify
would not, singly or in the aggregate, have a material adverse effect on the
condition, financial or otherwise, or the earnings, business affairs or business
prospects of the Company and its Subsidiaries, considered as one enterprise.
(g) All of the issued and outstanding shares of
capital stock of, or other ownership interests in, each Subsidiary have been
duly authorized and validly issued, are fully paid and non-assessable and are
owned, directly or through subsidiaries, by the Company free and clear of any
security interest, mortgage, pledge, lien, charge, claim or encumbrance. Except
as described in the Prospectus, there are no outstanding subscriptions, options,
warrants, commitments, convertible or exchangeable securities or other rights to
acquire
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any shares of capital stock of, or ownership interests in, any Subsidiary of
the Company and there are no commitments, plans or arrangements to do so.
Except as described in the Prospectus, neither the Company nor any of its
Subsidiaries owns, directly or indirectly, any shares of stock or any other
equity or long-term debt securities of any corporation or has any equity
interest in any firm, partnership, joint venture, association or other entity.
(h) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under "Capitalization"
(except for subsequent issuances, if any, pursuant to this Agreement or pursuant
to reservations, agreements, employee or director benefit plans or the exercise
of convertible securities referred to in the Prospectus); the shares of issued
and outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable and have not been issued in
violation of or are not otherwise subject to any preemptive or other similar
rights; the Shares and Warrant Shares have been duly authorized for issuance
and, upon their respective issuance and delivery pursuant to the terms set forth
in the Prospectus, this Agreement and the Warrant Agreement, will be validly
issued and fully paid and non-assessable; the Warrants have been duly authorized
for issuance and, upon their issuance and delivery pursuant to the terms set
forth in the Prospectus, this Agreement and the Warrant Agreement, will be
validly issued; the Company has duly authorized the inclusion of the Shares and
the Warrants in the Units; the Company has or, no later than the Closing Date,
will have duly authorized and reserved for issuance upon the exercise of the
Warrants a sufficient number of Warrant Shares; the certificates evidencing the
Securities are in due and proper form under Delaware law; the authorized capital
stock of the Company, including the Securities, conforms to all statements
relating thereto contained in the Prospectus; and the issuance of the Securities
and the Warrant Shares are not subject to preemptive or other similar rights.
There are no outstanding subscriptions, options, warrants, convertible or
exchangeable securities or other rights granted to or by the Company to purchase
shares of Common Stock or other securities of the Company and there are no
commitments, plans or arrangements to issue any shares of Common Stock or any
security convertible into or exchangeable for Common Stock, in each case other
than as described in the Prospectus.
(i) Except as disclosed in the Registration Statement
and except as would not, singly or in the aggregate, reasonably be expected to
have a material adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
Subsidiaries, considered as one enterprise, (A) each of the Company and its
Subsidiaries is in compliance with all applicable Environmental Laws (as defined
below), (B) each of the Company and its Subsidiaries has all permits,
authorizations and approvals required
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under any applicable Environmental Laws and is in compliance with the
requirements of such permits, authorizations and approvals, (C) there are no
pending or, to the best knowledge of the Company, threatened Environmental
Claims against the Company or any of its Subsidiaries and (D) under
applicable law, there are no circumstances with respect to any property or
operations of the Company or any of its Subsidiaries that are reasonably
likely to form the basis of an Environmental Claim against the Company or any
of its Subsidiaries.
For purposes of this Agreement, the following terms shall have the
following meanings: "Environmental Law" means any United States (or other
applicable jurisdiction's) Federal, state, local or municipal statute, law,
rule, regulation, ordinance, code, policy or rule of common law and any judicial
or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgement, relating to the environment,
health, safety or any chemical, material or substance, exposure to which is
prohibited, limited or regulated by any governmental authority. "Environmental
Claims" means any and all administrative, regulatory or judicial actions, suits,
demands, demand letters, claims, liens, notices of noncompliance or violation,
investigations or proceedings relating in any way to any Environmental Law.
(j) Neither the Company nor any of its Subsidiaries is
in violation of its respective charter or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, loan agreement, deed, trust,
note, lease, sublease, voting agreement, voting trust, or other instrument or
agreement to which the Company or any of its Subsidiaries is a party or by which
any of them may be bound, or to which any of the property or assets of the
Company or any of its Subsidiaries is subject; and the execution and delivery of
each of this Agreement and the other Transaction Documents by the Company, and
the execution and delivery of each of the Transaction Documents by each of
Merger Sub and Mercator (each a "Merger Party"), to the extent each is a party
thereto, the performance by the Company of all of the provisions of this
Agreement and the other Transaction Documents, the performance of each of the
Merger Parties of all of the provisions of the Transaction Documents, to the
extent each is a party thereto, and the consummation of the transactions
contemplated by this Agreement and the other Transaction Documents have been
duly authorized by all necessary corporate action on the part of the Company and
each of the Merger Parties, as applicable, and will not conflict with or
constitute a breach of, or default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any of its Subsidiaries pursuant to, any contract, indenture,
mortgage, loan agreement, deed, trust, note, lease, sublease, voting agreement,
voting trust or other instrument or agreement to which
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the Company or any of its Subsidiaries is a party or by which any of them may
be bound, or to which any of the property or assets of the Company or any of
its Subsidiaries is subject, nor will such action result in any violation of
the provisions of the respective charter or bylaws of the Company or any of
its Subsidiaries or any applicable statute, law, rule, regulation, ordinance,
decision, directive or order.
(k) No labor dispute with the employees of the Company
or any of its Subsidiaries exists or, to the best knowledge of the Company, is
imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or its Subsidiaries' principal
suppliers, manufacturers or contractors which might, singly or in the aggregate,
be expected to result in any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries, considered as one enterprise.
(l) There is no action, suit or proceeding before or
by any court or governmental agency or body, domestic or foreign, now pending,
or, to the knowledge of the Company, threatened, against or affecting the
Company or any of its Subsidiaries, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which, singly or in
the aggregate, might result in any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its Subsidiaries, considered as one enterprise, or
which, singly or in the aggregate, might materially and adversely affect any of
their respective properties or assets or which might materially and adversely
affect the consummation of the Transaction Documents; all pending legal or
governmental proceedings to which the Company or any of its Subsidiaries is a
party or of which any of their respective properties or assets is the subject
which are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, are, considered in the aggregate,
not material; and there are no contracts or documents of the Company or any of
its Subsidiaries which are required to be filed as exhibits to the Registration
Statement by the 1933 Act or by the 1933 Act Regulations which have not been so
filed.
(m) Except with respect to the Protest filed with the
United States Patent and Trademark Office ("PTO") as described in the
Prospectus, each of the Company and its Subsidiaries owns or is licensed to use
all patents, patent applications, inventions, trademarks, trade names,
applications for registration of trademarks, service marks, service mark
applications, copyrights, know-how, manufacturing processes, formulae, trade
secrets, licenses and rights in any thereof and any other intangible property
and assets (herein called the "Proprietary Rights") which are material to the
business of the Company and its Subsidiaries,
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considered as one enterprise, as now conducted and as proposed to be
conducted, in each case as described in the Prospectus. The description of
the Proprietary Rights in the Prospectus is correct in all material respects
and fairly and correctly describes the Company's and its Subsidiaries' rights
with respect thereto. Except with respect to the Protest filed with the PTO
as described in the Prospectus, the Company does not have any knowledge of,
and the Company has not given or received any notice of, any pending
conflicts with or infringement of the rights of others with respect to any
Proprietary Rights or with respect to any license of Proprietary Rights.
Except with respect to the Protest filed with the PTO as described in the
Prospectus, no action, suit, arbitration, or legal, administrative or other
proceeding, or investigation is pending, or, to the best knowledge of the
Company, threatened, which involves any Proprietary Rights and is material to
the business of the Company and its Subsidiaries as now conducted and as
proposed to be conducted, in each case as described in the Prospectus.
Neither the Company nor any of its Subsidiaries is subject to any judgment,
order, writ, injunction or decree of any court or any Federal, state, local,
foreign or other governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, or any arbitrator, and has not
entered into and is not a party to any contract which restricts or impairs
the use of any such Proprietary Rights in a manner which would have a
material adverse effect on the use of any of the Proprietary Rights. To the
best knowledge of the Company, no Proprietary Rights used by the Company or
any of its Subsidiaries, and no services or products sold by the Company or
any of its Subsidiaries, conflict with or infringe upon any proprietary
rights available to any third party. Neither the Company nor any of its
Subsidiaries has received written notice of any pending conflict with or
infringement upon such third-party proprietary rights. Neither the Company
nor any of its Subsidiaries has entered into any consent, indemnification,
forbearance to sue or settlement agreement with respect to Proprietary Rights
other than in the ordinary course of business. Except as specifically
disclosed in the Prospectus, no claims have been asserted by any person with
respect to the validity of the Company's or any of its Subsidiaries'
ownership or right to use the Proprietary Rights and, to the best knowledge
of the Company, there is no reasonable basis for any such claim to be
successful. The Proprietary Rights are valid and enforceable and no
registration relating thereto has lapsed, expired or been abandoned or
cancelled or is the subject of cancellation or other adversarial proceedings,
and all applications therefore are pending and are in good standing. Each of
the Company and its Subsidiaries has complied, in all material respects, with
its contractual obligations relating to the protection of the Proprietary
Rights used pursuant to licenses. To the best knowledge of the Company, no
person is infringing on or violating the Proprietary Rights owned or used by
the Company or any of its Subsidiaries.
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(n) No registration, authorization, approval,
qualification or consent of any court or governmental authority or agency is
necessary in connection with the offering, issuance or sale of the Units, the
Shares, the Warrants and the Warrant Shares hereunder, except such as may be
required under the 1933 Act or the 1933 Act Regulations or state securities or
Blue Sky laws (or such as may be required by the National Association of
Securities Dealers, Inc. ("NASD")).
(o) The Company and each of its Subsidiaries possesses
and is operating in compliance with all licenses, certificates, consents,
authorities, approvals and permits (collectively, "permits") from all state,
Federal, foreign and other regulatory agencies or bodies necessary to conduct
the business now operated by it, and neither the Company nor any of its
Subsidiaries has received any notice of proceedings relating to the revocation
or modification of any such permit or any circumstance which would lead it to
believe that such proceedings are reasonably likely which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
materially and adversely affect the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
Subsidiaries, considered as one enterprise.
(p) Each Merger Party has, to the extent each is or
will be a party thereto, all requisite corporate power and authority to execute,
deliver and perform its respective obligations under each of the Transaction
Documents; each of the Transaction Documents has been duly and validly
authorized, executed and delivered by the Merger Parties, to the extent each is
a party thereto, and each constitutes a valid and binding obligation of each
such Merger Party enforceable against each such Merger Party in accordance with
its terms except as rights to indemnity and contribution hereunder may be
limited by Federal or state securities laws or the public policy underlying such
laws; and neither the Company nor Merger Sub nor, to the best knowledge of the
Company, Mercator is in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any of the Transaction
Documents, which default would have a material adverse effect on the condition,
financial or otherwise, or the earnings, business affairs or business prospects
of the Company and its Subsidiaries, considered as one enterprise.
(q) The Merger has been duly authorized by the Merger
Parties and the Merger has been approved by stockholders of Mercator holding the
requisite number of shares required to approve the Merger; insofar as the
Prospectus contains summaries of the Merger Agreement, the Merger and the other
transactions and agreements ancillary thereto, such summaries are in all
material respects accurate.
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(r) The Company has delivered to the Representatives
true and correct copies of each of the Transaction Documents that have been
executed and delivered prior to the date of this Agreement and each other
Transaction Document in the form substantially as it will be executed and
delivered on or prior to the Closing Date, together with all related agreements
and all schedules and exhibits thereto, and there have been no amendments,
alterations, modifications or waivers of any of the provisions of any of the
Transaction Documents since their date of execution or from the form in which
they have been delivered to the Representatives; there exists as of the date
hereof (after giving effect to the transactions contemplated by the Transaction
Documents) no event or condition that would constitute a default or an event of
default (in each case as defined in the applicable Transaction Document) under
any of the Transaction Documents which would reasonably be expected to result in
a material adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
Subsidiaries, considered as one enterprise, or materially adversely effect the
ability of each of the Merger Parties to consummate the Merger and the
transactions contemplated by the Merger Agreement.
(s) Except as described in the Prospectus, there are
no persons with registration or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered by the
Company or any of its Subsidiaries under the 1933 Act.
(t) No order preventing or suspending the use of any
preliminary prospectus has been issued and no proceedings for that purpose are
pending, threatened, or, to the knowledge of the Company, contemplated by the
Commission; and to the best knowledge of the Company, no order suspending the
offering of the Units, the Shares, the Warrants and the Warrant Shares in any
jurisdiction designated by the Underwriters pursuant to Section 5(g) of this
Agreement has been issued and, to the best knowledge of the Company, no
proceedings for that purpose have been instituted or threatened or are
contemplated.
(u) The Company and its Subsidiaries have good and
marketable title to their respective properties, free and clear of all material
security interests, mortgages, pledges, liens, charges, encumbrances, claims and
equities of record. The properties of the Company and its Subsidiaries are, in
the aggregate, in good repair (reasonable wear and tear excepted), and suitable
for their respective uses. Any real properties held under lease by the Company
or any of its Subsidiaries are held by the Company or such Subsidiary under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the conduct of the business of the Company
and its Subsidiaries, considered as one enterprise.
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(v) The Company and its Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) The Company and its Subsidiaries have conducted
and are conducting their respective businesses in compliance with all applicable
Federal, state, local and foreign statutes, laws, rules, regulations,
ordinances, codes, decisions, decrees, directives and orders, except where the
failure to do so would not, singly or in the aggregate, have a material adverse
effect on the condition, financial or otherwise, or on the earnings, business
affairs or business prospects of the Company and its Subsidiaries, considered as
one enterprise.
(x) To the best of the Company's knowledge, neither
the Company nor any of its Subsidiaries nor any employee or agent of the Company
or any of its Subsidiaries has made any payment of funds of the Company or any
of its Subsidiaries or received or retained any funds in violation of any law,
rule or regulation, which payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus.
(y) The Company is not now, and after sale of the
Units to be sold by it hereunder and application of the net proceeds from such
sale as described in the Prospectus under the caption "Use of Proceeds" will not
be, an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
(z) All offers and sales of capital stock of the
Company and its Subsidiaries prior to the date hereof were at all relevant times
duly registered or exempt from the registration requirements of the 1933 Act and
were duly registered or subject to an available exemption from the registration
requirements of the applicable state securities or Blue Sky laws.
(aa) The Common Stock and the Warrants are registered
pursuant to Section 12(g) of the 1934 Act. Each of the Common Stock (including
the Shares) and the Warrants have been duly authorized for quotation on NASDAQ.
The Company has taken no action designed to, or likely to have the effect of,
terminating the registration of the Common Stock or the Warrants under the 1934
Act or delisting the Common Stock or the Warrants from NASDAQ, nor
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has the Company received any notification that the Commission or NASDAQ is
contemplating terminating such registration or listing.
(bb) Neither the Company or any of its Subsidiaries
nor, to its knowledge, any of their respective officers, directors or affiliates
has taken, and at the Closing Date and at any later Option Closing Date, neither
the Company or any of its Subsidiaries nor, to its knowledge, any of their
respective officers, directors or affiliates will have taken, directly or
indirectly, any action which has constituted, or might reasonably be expected to
constitute, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Units.
(bc) The Company and its Subsidiaries maintain
insurance of the types and in amounts adequate for their respective businesses
and consistent with insurance coverage maintained by similar companies in
similar businesses, including but not limited to, insurance covering product
liability and real and personal property owned or leased against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(dd) The Company and its Subsidiaries have filed all
material tax returns required to be filed, which returns are true and correct in
all material respects, and neither the Company nor any of its Subsidiaries is in
default in the payment of any taxes, including penalties and interest,
assessments, fees and other charges, shown thereon due or otherwise assessed,
other than those being contested in good faith and for which adequate reserves
have been provided or those currently payable without interest which were
payable pursuant to said returns or any assessments with respect thereto.
(ee) Except as described in the Prospectus, to the
best of the Company's knowledge, there are no rulemaking or similar proceedings
before The United States Food and Drug Administration or comparable Federal,
state, local or foreign government bodies which involve or affect the Company or
any of its Subsidiaries, which, if the subject of an action unfavorable to the
Company or such Subsidiary, could involve a prospective material adverse change
in or effect on the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its Subsidiaries,
considered as one enterprise.
(ff) Neither the Company nor any of its Subsidiaries
has received any communication (whether written or oral) relating to the
termination or threatened termination or modification or threatened modification
of any material consulting, licensing, marketing, research and development,
cooperative or any similar agreement, including, without limitation, the
collaborative research and license agreements listed under the sections of the
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Prospectus entitled, "Business--Corporate Agreements," "Business--Technology
Agreements," "Business--License Agreements" and "Business--Advanced Technology
Program Grant." Each such agreement is in effect substantially as described in
such sections of the Prospectus.
(gg) To the knowledge of the Company, if any full-time
employee of the Company or any of its Subsidiaries identified in the Prospectus
has entered into any non-competition, non-disclosure, confidentiality or other
similar agreement with any party other than the Company or any such Subsidiary,
such employee is neither in violation thereof nor is expected to be in violation
thereof as a result of the business conducted or expected to be conducted by the
Company and its Subsidiaries as described in the Prospectus or such person's
performance of his obligations to the Company or any of its Subsidiaries; and
neither the Company nor any of its Subsidiaries has received written notice that
any consultant or scientific advisor of the Company or any of its Subsidiaries
is in violation of any non-competition, non-disclosure, confidentiality or
similar agreement.
7.INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless
(i) each Underwriter and (ii) each person, if any, who controls any Underwriter
within the meaning of Section 15 of the 1933 Act (any of the persons referred to
in this clause (ii) being hereinafter referred to as a "controlling person") and
(iii) the respective directors, officers, partners and employees of any of the
Underwriters or any controlling person (any person referred to in clause (i),
(ii) or (iii) may hereinafter be referred to as an "Indemnified Person") to the
fullest extent lawful, from and against any and all losses, claims, damages,
liabilities and expenses whatsoever (including, without limitation, all
reasonable costs of pursuing, investigating and defending any claim, suit or
action or any investigation or proceeding by any governmental agency or body,
commenced or threatened, including the reasonable fees and expenses of counsel
to any Indemnified Person), directly or indirectly, caused by, related to, based
upon or arising out of or in connection with (A) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any amendment thereto, including the Rule 430A Information and Rule 434
Information, if applicable, (B) any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading or caused by, related to, based upon, arising
out of or in connection with any untrue statement or alleged untrue statement of
a material fact contained in any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances
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under which they were made, not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such Underwriter furnished in writing to the
Company by or on behalf of any Underwriter through you expressly for use in
connection therewith or (C) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any
manner to, the Units or the Warrant Shares or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim,
damage, liability, expense or action arising out of or based upon matters
covered by clause (A) or (B) above (PROVIDED that the Company shall not be
liable under this clause (C) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability, expense or action resulted directly from any such acts or failures
to act undertaken or omitted to be taken by such Underwriter through its
gross negligence or willful misconduct); PROVIDED, HOWEVER, that the
indemnification contained in this paragraph (a) with respect to any
preliminary prospectus shall not inure to the benefit of any Underwriter (or
related Indemnified Person) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Securities by such
Underwriter to any person if a copy of the Prospectus shall not have been
delivered or sent to such person within the time required by the 1933 Act or
the 1933 Act Regulations, and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in
such preliminary prospectus was corrected in the Prospectus (or any amendment
or supplement thereto), PROVIDED that the Company has delivered the
Prospectus to the several Underwriters in requisite quantity on a timely
basis to permit such delivery or sending.
(b) If any action, suit or proceeding shall be brought
against any Indemnified Person in respect of which indemnity may be sought
against the Company, such Indemnified Person shall promptly notify the parties
against whom indemnification is being sought (the "indemnifying parties"), and
such indemnifying parties shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses. Such Indemnified
Person shall have the right to employ separate counsel in any such action, suit
or proceeding and to participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Person
unless (i) the indemnifying parties have agreed in writing to pay such fees and
expenses, (ii) the indemnifying parties have failed to assume the defense and
employ counsel or (iii) the named parties to any such action, suit,
investigation or proceeding (including any impleaded parties) include both such
Indemnified Person and the indemnifying parties and representation of such
Indemnified Person and any indemnifying party by the same counsel would, in the
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reasonable judgment of the Indemnified Person, be inappropriate due to actual or
potential differing interests between them (in which case the indemnifying party
shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Indemnified Person). It is understood, however,
that the indemnifying parties shall, in connection with any one such action,
suit or proceeding or separate but substantially similar or related actions,
suits or proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
only one separate firm of attorneys (in addition to any local counsel) at any
time for all such Indemnified Persons not having actual or potential differing
interests with you or among themselves, which firm shall be designated in
writing by Lehman, and that all such fees and expenses shall be reimbursed as
they are incurred. The indemnifying parties shall not be liable for any
settlement of any such action, suit or proceeding effected without their written
consent, which consent shall not be unreasonably withheld, but if settled with
such written consent, or if there be a final judgment for the plaintiff in any
such action, suit or proceeding, the indemnifying parties agree to indemnify and
hold harmless any Indemnified Person, to the extent provided in the preceding
paragraph, from and against any loss, claim, damage, liability or expense by
reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not
jointly, to indemnify and hold harmless the Company, its directors, its officers
who sign the Registration Statement and any person who controls the Company
within the meaning of Section 15 of the 1933 Act, to the same extent as the
foregoing indemnity from the Company to each Indemnified Person, but only with
respect to information relating to such Underwriter furnished in writing by or
on behalf of such Underwriter through Lehman expressly for use in the
Registration Statement, the Prospectus or any preliminary prospectus, or any
amendment or supplement thereto. If any action, suit, investigation or
proceeding shall be brought against the Company, any of its directors, any such
officer or any such controlling person based on the Registration Statement, the
Prospectus or any preliminary prospectus, or any amendment or supplement
thereto, and in respect of which indemnity may be sought against any Underwriter
pursuant to this paragraph (c), such Underwriter shall have the rights and
duties given to the Company by paragraph (b) above, and the Company, its
directors, any such officer and any such controlling person shall have the
rights and duties given to the Indemnified Persons by paragraph (a) above. The
indemnity and contribution obligations of the Underwriters set forth in this
Section 7 shall be in addition to any liability or obligation the Underwriters
may otherwise have to the Company.
(d) If the indemnification provided for in this
Section 7 is unavailable to, or insufficient to hold harmless, an indemnified
party under paragraphs (a) or (c) hereof in respect of
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any losses, claims, damages, liabilities or expenses referred to therein,
then each indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the
offering of the Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law or judicial determination, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and the Underwriters on the other hand, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other hand shall be
deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover page of the Prospectus or,
if Rule 434 is used, the corresponding location on the Term Sheet. The
relative fault of the Company on the one hand and the Underwriters on the
other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission or any failure of the nature
referred to in Section 7(f) hereof. The indemnity and contribution
obligations of the Company set forth herein shall be in addition to any
liability or obligation the Company may otherwise have to any Indemnified
Person.
(e) The Company and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section 7 were
determined by a pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities and expenses referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating any claim or defending
any such action, suit or proceeding. Notwithstanding the provisions of this
Section 7, no Underwriter (or any of its related Indemnified Persons) shall be
required to contribute (whether pursuant to subsection (c) or (d) or otherwise)
any amount in excess of the underwriting discount applicable to the Securities
underwritten by such Underwriter. No person guilty of fraudulent
misrepresentation
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(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
this Section 7 are several in proportion to the respective numbers of Units
set forth opposite their names in Schedule I hereto (or such numbers of Units
increased as set forth in Section 10 hereof) and not joint.
(f) The Company agrees to indemnify and hold harmless
each Indemnified Person to the fullest extent lawful, from and against any and
all losses, claims, damages, liabilities and expenses whatsoever (including,
without limitation, all reasonable costs of pursuing, investigating and
defending any claim, suit or action or any investigation or proceeding by any
governmental agency or body, commenced or threatened, including the reasonable
fees and expenses of counsel to any Indemnified Person), directly or indirectly,
caused by, related to, based upon or arising out of or in connection with the
failure of eligible employees, directors and other persons and entities having
business relationships with the Company to pay for and accept delivery of
Reserved Units which were subject to a properly confirmed agreement to purchase.
(g) No indemnifying party shall, without the prior
written consent of the Indemnified Person, effect any settlement of any pending
or threatened action, suit or proceeding in respect of which any Indemnified
Person is or could have been a party and indemnity could have been sought
hereunder by such Indemnified Person, unless such settlement includes an
unconditional release of such Indemnified Person from all liability on claims
that are the subject matter of such action, suit or proceeding.
(h) Any losses, claims, damages, liabilities or
expenses for which an indemnified party is entitled to indemnification or
contribution under this Section 7 shall be paid by the indemnifying party to the
indemnified party as such losses, claims, damages, liabilities or expenses are
incurred. The indemnity and contribution agreements contained in this Section 7
and the representations and warranties of the Company set forth in this
Agreement shall remain operative and in full force and effect, regardless of (i)
any investigation made by or on behalf of any Indemnified Person, the Company,
its directors or officers or any person controlling the Company, (ii) acceptance
of any Securities and payment therefor hereunder and (iii) any termination of
this Agreement.
8.CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters to purchase the Initial Securities hereunder are subject to the
following conditions:
(a) The Registration Statement, including any Rule
462(b) Registration Statement, shall have become effective on the date hereof;
no stop order suspending the effectiveness of the
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Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission. If the
Company has elected to rely upon Rule 430A, Rule 430A Information previously
omitted from the effective Registration Statement pursuant to Rule 430A shall
have been transmitted to the Commission for filing pursuant to Rule 424(b)
within the prescribed time period and the Company shall have provided
evidence satisfactory to the Underwriters of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule
430A. If the Company has elected to rely upon Rule 434, a Term Sheet shall
have been transmitted to the Commission for filing pursuant to Rule 424(b)
within the prescribed time period.
(b) The Underwriters shall have received:
(c)The favorable opinion, dated as of the Closing Date,
of Morrison & Foerster LLP, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, to the effect that:
A. The Company and each of its Subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
State of Delaware.
B. The Company and each of its Subsidiaries has corporate power and
authority to conduct its business as described in the Registration Statement and
the Prospectus and, in the case of the Company, to enter into and perform its
obligations under this Agreement and the Warrant Agreement.
C. To the best of their knowledge and information, the Company and each
of its Subsidiaries is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on
the Company and its Subsidiaries, considered as one enterprise.
D. The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under "Capitalization" (except for
subsequent issuances, if any, pursuant to reservations, agreements, employee
or director benefit plans or the exercise of convertible securities referred
to in the Prospectus),
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excluding Pro Forma and Pro Forma As Adjusted information. The shares of
issued and outstanding capital stock of the Company, including the Common
Stock, have been duly authorized and validly issued and are fully paid and
non-assessable and, to the best of their knowledge and information, have not
been issued in violation of or are not otherwise subject to any preemptive
rights or other similar rights.
E. The Shares and the Warrant Shares have been duly authorized for issuance
and, upon their respective issuance and delivery pursuant to the terms set forth
in the Prospectus, this Agreement and the Warrant Agreement, will be validly
issued, fully paid and non-assessable; the Warrants have been duly authorized
for issuance and, upon their issuance and delivery pursuant to the terms set
forth in the Prospectus, this Agreement and the Warrant Agreement, will be
validly issued; the Company has duly authorized the inclusion of the Shares and
the Warrants in the Units; the Company has duly authorized and reserved for
issuance upon the exercise of the Warrants a sufficient number of Warrant
Shares; and the issuance of the Securities and the Warrant Shares are not
subject to preemptive rights.
F. All of the issued and outstanding shares of capital stock of, or other
ownership interests in, each Subsidiary have been duly authorized and validly
issued, are fully paid and non-assessable and, except as described in the
Prospectus, are owned, directly or through subsidiaries, by the Company.
G. To the best of their knowledge and information, except as described in
the Prospectus, there are no outstanding options, warrants or other rights
granted to or by the Company or any of its Subsidiaries to purchase shares of
Common Stock or other securities of the Company or any of its Subsidiaries and
there are no commitments, plans or arrangements to issue any shares of Common
Stock or other securities.
H. Each of this Agreement and the Warrant Agreement has been duly
authorized, executed and delivered by the Company and constitutes the legal,
valid and binding obligation of the Company.
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I. Each Merger Party has, to the extent each is or will be a party thereto,
all requisite corporate power and authority to execute, deliver and perform
their respective obligations under each of the Transaction Documents; each of
the Transaction Documents has been duly and validly authorized, executed and
delivered by the Merger Parties, to the extent each is a party thereto, and each
constitutes a valid and binding obligation of each such Merger Party.
J. The Merger has been duly authorized by the Merger Parties and the Merger
has been approved by stockholders of Mercator holding the requisite number of
shares required to approve the Merger; insofar as the Prospectus contains
summaries of the Merger Agreement, the Merger and the other transactions and
agreements ancillary thereto, such summaries are in all material respects
accurate and complete.
K. At the time the Registration Statement became effective and at the
Closing Date, the Registration Statement (other than the financial statements,
and related notes thereto, and other financial information included therein, as
to which no opinion need be rendered) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act Regulations.
L. The form of certificate used to evidence each of the Securities is in
due and proper form and complies with all applicable statutory requirements
of Delaware law.
M. To the best of their knowledge and information, there are no legal or
governmental proceedings pending or threatened which are required to be
disclosed in the Registration Statement other than those disclosed therein, and
all pending legal or governmental proceedings to which the Company or any of its
Subsidiaries is a party or to which any of their respective properties is
subject which are not described in the Registration Statement, including
ordinary
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routine litigation incidental to the business, are, considered in the
aggregate, not material.
N. The information in the Prospectus under "Risk Factors--Shares
Eligible for Future Sale; Registration Rights; Possible Adverse Effect on
Stock Price," "Management--Employment Agreements,"
"Management--Directors' Compensation," "Management--Executive
Compensation," "Management--Stock Plans," "Management--Cancellation and
Regrant of Options," "Certain Transactions," "Description of Securities"
and "Shares Eligible for Future Sale," to the extent that it constitutes
matters of law, summaries of legal matters, documents or proceedings, or
legal conclusions, has been reviewed by them and is correct in all
material respects and fairly and correctly presents the information called
for with respect thereto.
O. To the best of their knowledge and information, there is no
agreement, contract or other document of a character required to be
described or referred to in the Registration Statement or to be filed as
an exhibit thereto other than those described or referred to therein or
filed as exhibits thereto, the descriptions thereof or references thereto
are correct in all material respects and fairly and correctly present the
information called for with respect thereto; and to the best of their
knowledge and information, no default exists in the due performance or
observance of any material obligation, agreement, covenant or condition
contained in any material contract, indenture, mortgage, loan agreement,
deed, trust, note, lease, sublease, voting trust, voting agreement or
other instrument or agreement of the Company or any of its Subsidiaries.
P. No authorization, approval, consent or order of any court or
governmental authority or agency is required in connection with the
offering, issuance or sale of the Units, the Shares, the Warrants and the
Warrant Shares, except such as may be required under the 1933 Act or the
1933 Act Regulations or state securities or Blue Sky laws or such as may
be required by the NASD; and the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
herein and the compliance by the Company with its obligations hereunder
will not conflict with or constitute a breach of, or default under, or
result in the creation or imposition of
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any lien, charge or encumbrance upon any property or assets of the Company
or any of its Subsidiaries pursuant to, any contract, indenture, mortgage,
loan agreement, note, deed, trust, lease, sublease, voting trust, voting
agreement or other instrument or agreement to which the Company or any of
its Subsidiaries is a party or by which it or any of them may be bound, or
to which any of their respective property or assets is subject, nor will
such action result in any violation of the provisions of the charter or
bylaws of the Company or any of its Subsidiaries, or any applicable
statute, law, rule, regulation, ordinance, code, decision, directive or
order.
Q. Except as described in the Prospectus, to the best of their knowledge
and information, there are no persons with registration or other similar
rights to have any securities registered pursuant to the Registration
Statement or otherwise registered by the Company under the 1933 Act.
R. The Company is not an "investment company" or a company "controlled"
by an "investment company" within the meaning of the Investment Company
Act of 1940, as amended.
S. To the best of their knowledge and information, each of the Company
and its Subsidiaries is in compliance with, and conducts its business in
conformity with, all applicable laws and regulations relating to the
operation of its business as described in the Registration Statement,
except to the extent that any failure so to comply or conform would not
have a material adverse effect upon the business or condition, financial
or otherwise, of the Company and its Subsidiaries, considered as one
enterprise.
T. The Registration Statement has become effective under the 1933 Act;
any required filing of the Prospectus, and any supplements thereto or the
Term Sheet, pursuant to Rule 424(b) and if applicable, Rule 434, has been
made in the manner and within the time period required; and to their best
knowledge and information, no stop order suspending the effectiveness of
the Registration Statement or any part thereof has been issued and no
proceedings therefor have been instituted or are pending or contemplated
under the 1933 Act.
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In rendering such opinion, such counsel may rely (w) as to
matters of patent law, on the opinion of Pennie & Edmonds, patent counsel
to the Company, given pursuant to Section 8(b)(ii) hereof, (x) as to
matters of local law, on opinions of local counsel, (y) as to matters
relating to Mercator, on opinions of counsel for Mercator and (z) except,
as otherwise provided in the opinion, as to matters of fact, on
certificates of officers of the Company and its Subsidiaries and of
governmental officials, in which case their opinion is to state that they
are so doing and that the Underwriters are justified in relying on such
opinions of certificates, and copies of said opinions of certificates are
to be attached to the opinion.
(b) The favorable opinion, dated as of the Closing Date,
of Pennie & Edmonds, patent counsel to the Company, in form and substance
satisfactory to counsel for the Underwriters, to the effect that:
A. The statements in the Prospectus relating to United States patent
matters, 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"; insofar as such statements constitute matters of law, legal
conclusions, or summaries of legal matters or proceedings, are correct in
all material respects and present fairly the information purported to be
shown.
B. With respect to the United States patent applications referred to in
the Registration Statement which are listed in Schedules E and G, the
sections of the Registration Statement entitled "Risk Factors --
Uncertainty of Patents and Proprietary Rights"; "Business -- The Company's
Genomics System" "Business --Discovery Programs"; and "Business -- Patents
and Proprietary Rights", at the time the Registration Statement became
effective, did not contain any untrue statement of material fact or omit
to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading.
C. With respect to the United States patent applications referred to in
the Prospectus which are listed in Schedules E and G, the sections of the
Prospectus entitled "Risk Factors -- Uncertainty of Patents and
Proprietary Rights"; "Business -- The Company's Genomics System";
"Business -- Discovery Programs"; and "Business --
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Patents and Proprietary Rights", as of the date of the Prospectus and as
of the Closing Date, do not contain any untrue statement of material fact
or omit to state a material fact necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading.
D. With respect to U.S. patent matters, nothing has come to such
counsel's attention which would lead them to believe that the sections of
the Registration Statement entitled "Risk Factors -- Uncertainty of
Patents and Proprietary Rights"; "Business -- The Company's Genomics
System"; "Business -- Discovery Programs; and "Business -- Patents and
Proprietary Rights", at the time the Registration Statement became
effective, contained any untrue statement of material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein, not misleading.
E. With respect to U.S. patent matters, nothing has come to such
counsel's attention which would lead them to believe that the sections of
the Prospectus entitled "Risk Factors -- Uncertainty of Patents and
Proprietary Rights"; "Business -- The Company's Genomics System";
"Business -- Discovery Programs"; and "Business -- Patents and Proprietary
Rights", as of the date of the Prospectus and as of the Closing Date,
contain any untrue statement of material fact or omit to state a material
fact necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
F. To the best of such counsel's knowledge, except as described in the
Prospectus, and with the exception of proceedings before the U.S. Patent
and Trademark Office, there are no pending, or threatened, legal or
governmental proceedings relating to U.S. Patent No. 5,032,407 or to any
U.S. patent application referred to in the Prospectus which is listed in
Schedules E and G.
G. To the best of such counsel's knowledge, the License Agreements
listed in Schedule I grant the Company or a Subsidiary of the Company, as
applicable, rights in the U.S. patents and patent applications referred to
in the Prospectus which are listed in Schedules D and G, and such License
Agreements are validly binding and enforceable
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under Federal case law relating to the licensing of patent rights.
H. To the best of such counsel's knowledge, the Company or a Subsidiary
of the Company, as applicable, owns the U.S. patent applications referred
to in the Prospectus which are listed in Schedule E.
I. To the best of such counsel's knowledge, except as described in the
Prospectus, no third party has any rights to U.S. Patent No. 5,032,407 or
to any U.S. patent application referred to in the Prospectus which is
listed in Schedules E and G.
J. To the best of such counsel's knowledge, no interference has been
declared or provoked with respect to U.S. Patent No. 5,032,407 or with
respect to any U.S. patent application referred to in the Prospectus which
is listed in Schedules E and G.
K. To the best of such counsel's knowledge, there have been no
inventorship challenges with respect to U.S. Patent No. 5,032,407 or with
respect to any U.S. patent application referred to in the Prospectus which
is listed in Schedules E and G.
L. To the best of such counsel's knowledge, no third party is infringing
U.S. Patent No. 5,032,407.
M. To the best of such counsel's knowledge, neither the Company nor any
of its Subsidiaries has received any notice challenging the Company's or
any of such Subsidiaries' rights to U.S. Patent No. 5,032,407 or to any
U.S. patent application referred to in the Prospectus which is listed in
Schedules E and G.
N. To the best of such counsel's knowledge, neither the Company nor any
of its Subsidiaries has received any notice challenging the validity or
enforceability of U.S. Patent No. 5,032,407.
O. While there can be no guarantee that any particular patent
application will issue as a patent, each of the U.S. patent applications
referred to in the Prospectus which is listed in
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Schedules E and G was properly filed, and is being properly and diligently
prosecuted, in the U.S. Patent and Trademark Office.
P. To the best of such counsel's knowledge, without any searches
specifically having been conducted, or having been required to have been
conducted, for the purpose of rendering such counsel's opinion, while
there can be no guarantee that any particular patent application will
issue as a patent, each of the U.S. patent applications referred to in the
Prospectus which is listed in Schedules E and G discloses patentable
subject matter.
Q. To the best of such counsel's knowledge, no liens have been recorded
against the Company or any of its Subsidiaries with respect to any U.S.
patent applications referred to in the Prospectus which are listed in
Schedule E.
R. To the best of such counsel's knowledge, no claim has been asserted
against the Company or any of its Subsidiaries relating to the potential
infringement of, or conflict with, any patents, trademarks, copyrights,
trade secrets, or proprietary rights, of others.
S. While there can be no assurance that any of the Company's U.S. patent
applications relating to certain leptin receptors will issue as patents,
or that any such patent, if issued, would be broad enough to cover leptin
receptors of Millennium or others, there is a reasonable basis for the
Company's continued efforts in seeking the broadest allowable claims from
the U.S. Patent and Trademark Office, including claims broad enough to
cover leptin receptors of Millennium or others.
T. To the best of such counsel's knowledge, for each U.S. patent
application listed in Schedules E and G, all information known, to date,
to be "material to patentability", as defined in 37 C.F.R. Section
1.56(b), has been disclosed, or will be disclosed pursuant to 37 C.F.R.
Section 1.97, to the U.S. Patent and Trademark Office.
(c) The favorable opinion, dated as of the Closing Date,
of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the Underwriters
with respect to the issuance and sale of the Securities, the Registration
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Statement and the Prospectus and such other related matters as the Underwriters
shall reasonably request.
(d) In giving their opinions required by subsections
(b)(i) and (b)(iii), respectively, of this Section 8, Morrison & Foerster LLP
and Skadden, Arps, Slate, Meagher & Flom (Illinois) shall each additionally
state that nothing has come to their attention that leads them to believe that
the Registration Statement (except for financial statements, and related notes
thereto, and other financial information included therein, as to which counsel
need make no statement), at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Prospectus (except for financial statements, and related notes thereto,
and other financial information included therein, as to which counsel need make
no statement), as of its date (unless the term "Prospectus" refers to a
prospectus which has been provided to the Underwriters by the Company for use in
connection with the offering of the Units which differs from the Prospectus on
file at the Commission at the time the Registration Statement becomes effective,
in which case at the time it is first provided to the Underwriters for such use)
or at the Closing Date or the Option Closing Date, as the case may be, included
or includes an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(a) (i) There shall not have been, since the date
hereof or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its Subsidiaries, considered as one
enterprise, whether or not arising in the ordinary course of business, (ii) the
representations and warranties of the Company in Section 6 hereof shall be true
and correct with the same force and effect as though expressly made at and as of
the Closing Date, except to the extent that any such representation or warranty
relates to a specific date, (iii) the Company shall have complied in all
material respects with all agreements and satisfied all conditions on its part
to be performed or satisfied at or prior to the Closing Date, (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been initiated or threatened by the
Commission and (v) the Representatives shall have received a certificate, dated
the Closing Date and signed by the President or
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any Vice President and the chief financial or accounting officer of the
Company to the effect set forth in clauses (i), (ii), (iii) and (iv) above.
(b) At the time of the execution of this Agreement,
the Underwriters shall have received from each of Coopers & Lybrand L.L.P. and
Ernst & Young LLP, independent public accountants to the Company and Mercator,
respectively, a letter dated such date, in form and substance satisfactory to
the Underwriters, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(c) The Underwriters shall have received from each of
Coopers & Lybrand L.L.P. and Ernst & Young LLP a letter, dated as of the Closing
Date, to the effect that they reaffirm the statements made in their letter
furnished pursuant to subsection (d) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to the
Closing Date.
(d) The Common Stock (including the Shares) and the
Warrants shall have been approved for quotation on NASDAQ.
(e) In the event that the Underwriters exercise their
option provided in Section 2 hereof to purchase all or any portion of the Option
Units, the representations and warranties of the Company contained herein and
the statements in any certificates furnished by the Company hereunder shall be
true and correct as of the Option Closing Date and, at the relevant Option
Closing Date, the Underwriters shall have received:
i) A certificate, dated such Option Closing Date,
of the President or any Vice President of the Company and of the chief financial
or accounting officer of the Company confirming that the certificate delivered
at the Closing Date pursuant to Section 8(c) hereof remains true and correct as
of such Option Closing Date.
ii) The favorable opinion of Morrison & Foerster
LLP, in form and substance satisfactory to counsel for the Underwriters, dated
such Option Closing Date, relating to the Option Units to be purchased on such
Option Closing Date and otherwise to the same effect as the opinion required by
Sections 8(b)(i) and 8(b)(iv) hereof.
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iii) The favorable opinion of Pennie & Edmonds,
in form and substance satisfactory to counsel for the Underwriters, dated
such Option Closing Date, to the same effect as the opinion required by
Section 8(b)(ii) hereof.
iv) The favorable opinion of Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel for the Underwriters, dated such
Option Closing Date, relating to the Option Units to be purchased on such
Option Closing Date and otherwise to the same effect as the opinion required
by Sections 8(b)(iii) and 8(b)(iv) hereof.
v) A Letter from each of Coopers & Lybrand
L.L.P. and Ernst & Young LLP, in form and substance satisfactory to the
Underwriters and dated such Option Closing Date, substantially the same in
form and substance as their letter furnished to the Underwriters pursuant to
Section 8(e) hereof, except that the "specified date" in each letter
furnished pursuant to this Section 8(g)(5) shall be a date not more than
three business days prior to such Option Closing Date.
(f) At the date of this Agreement, except as set
forth in Schedule II hereto, the Underwriters shall have received lock-up
agreements in form and substance satisfactory to the Underwriters by all of
the stockholders and optionholders of Mercator and by the persons listed on
Schedule III hereto.
(g) Counsel for the Underwriters shall have been
furnished with such documents and opinions as they may reasonably request for
the purpose of enabling them to pass upon the issuance and sale of the Units
as herein contemplated and related proceedings, or in order to evidence the
accuracy of any of the representations or warranties or the fulfillment of
any of the conditions herein contained; and all proceedings taken by the
Company in connection with the issuance and sale of the Units as herein
contemplated shall be satisfactory in form and substance to the Underwriters
and counsel for the Underwriters.
(h) The NASD shall not have raised any objection
with respect to the fairness and reasonableness of the underwriting terms and
arrangements.
(i) There shall have been no amendments,
alterations, modifications or waivers of any provisions of the Transaction
Documents since the date of the execution and delivery thereof by the parties
thereto other than those which are disclosed in the Registration Statement or
the Prospectus or any supplement thereto or which under the 1933 Act are not
required to be
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disclosed in the Prospectus or any supplement thereto and which have been
disclosed to the Underwriters prior to the date hereof.
(j) Each of the Merger Parties shall, to the extent
each is a party thereto, have complied in all material respects with all
agreements and covenants in the Transaction Documents and performed all
conditions specified therein that the terms thereof require to be complied
with or performed at or prior to the Effective Time of the Merger, except to
the extent that such compliance or performance has been waived by the other
parties to the applicable Transaction Documents.
(k) On or prior to the Closing Date, the Company
and Mercator shall have received the requisite approval or approvals of the
Merger Agreement and the Merger. Except as set forth in the Prospectus, no
such approval or approvals impose on the Company, its Subsidiaries or any
affiliate thereof any condition that adversely affects the ability of the
Company, its Subsidiaries and affiliates to conduct their businesses as the
same are described in the Prospectus or adversely affects the ability of the
Underwriters to market the Units on the terms and in the manner contemplated
by the Prospectus.
(l) The certificate of merger with respect to the
Merger shall have been filed with the Secretary of State of the State of
Delaware and shall have become effective, the Merger shall have occurred and
all other transactions contemplated by the Transaction Documents to be
consummated at or prior to the Effective Time of the Merger shall have been
consummated prior to the consummation of the purchase and sale of the Units
hereunder at the Closing Date.
(m) Except as is disclosed to the Underwriters in
writing, the representations and warranties of the Company and Mercator set
forth in the Transaction Documents shall be true, accurate and complete in
all material respects.
(n) Any certificate or document signed by any
officer of the Company and delivered to you, as Representatives of the
Underwriters, or to counsel for the Underwriters, shall be deemed a
representation and warranty by the Company to each Underwriter as to the
statements made therein.
(o) If any condition specified in this Section 8
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option Units,
on an Option Closing Date which is after the Closing Date, the obligations of
the several Underwriters to purchase the relevant Option Units, may be
terminated by the Representatives by notice to the Company at any time at or
prior to the Closing Date or such an Option Closing Date, as the case may be,
and such termination shall be without liability of any party to any other
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party except as provided in Section 9 and except that Sections 6 and 7 shall
survive any such termination and remain in full force and effect.
9.EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it
of its obligations hereunder: (i) the preparation, printing or reproduction,
and filing with the Commission of the Registration Statement (including
financial statements and exhibits thereto), each preliminary prospectus, the
Prospectus, and each amendment or supplement to any of them; (ii) the
printing (or reproduction) and delivery (including postage, air freight and
charges for counting and packaging) of such copies of the Registration
Statement, each preliminary prospectus, the Prospectus, and all amendments or
supplements to any of them as may be reasonably requested for use in
connection with the offering and sale of the Units; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the
Securities, including any stamp taxes in connection with the original
issuance and sale of the Securities; (iv) the printing (or reproduction) and
delivery of this Agreement, the Warrant Agreement the preliminary and
supplemental Blue Sky Memoranda and all other agreements or documents printed
(or reproduced) and delivered in connection with the original issuance and
sale of the Units; (v) the registration of the Common Stock and the Warrants
under the 1934 Act and the quotation of the Common Stock (including the
Shares) and the Warrants on NASDAQ; (vi) the registration or qualification of
the Units, the Shares, the Warrants and the Warrant Shares for offer and sale
under the securities or Blue Sky laws of the several states as provided in
Section 5(g) hereof (including the reasonable fees, expenses and
disbursements of counsel for the Underwriters relating to the preparation,
printing or reproduction, and delivery of the preliminary and supplemental
Blue Sky Memoranda and such registration and qualification); (vii) the filing
fees and the reasonable fees and expenses of counsel for the Underwriters
incident to securing any required review by the NASD; (viii) the fees and
expenses of the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company; (ix) the cost and
charges of any transfer agent or registrar for the Common Stock and the
warrant agent for the Warrants; and (x) all costs and expenses of the
Underwriters, including the fees and disbursements of counsel for the
Underwriters, in connection with matters related to the Reserved Units which
are designated by the Company for sale to employees, directors and other
persons and entities having a business relationship with the Company.
If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 or pursuant to clauses (ii), (iii), (iv) and
(v) of Section 11 hereof) or if this Agreement shall be terminated by the
Underwriters because of any
39
<PAGE>
failure or refusal on the part of the Company to comply, in any material
respect, with the terms or fulfill, in any material respect, any of the
conditions of this Agreement, the Company agrees to reimburse the
Representatives for all reasonable out-of-pocket expenses (including
reasonable fees and expenses of counsel for the Underwriters) incurred by you
in connection herewith.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by or on behalf of the
parties hereto; or (ii) if, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective before the offering of the Units may
commence, when notification of the effectiveness of the Registration Statement
or such post-effective amendment has been released by the Commission. Until
such time as this Agreement shall have become effective, it may be terminated by
the Company, by notifying you, or by you, as Representatives of the several
Underwriters, by notifying the Company.
If one or more of the Underwriters shall fail on the Closing Date
to purchase the Initial Units which it or they are obligated to purchase
under this Agreement (the "Defaulted Units"), the Representatives shall have
the right, within 24 hours thereafter, to make arrangements for one or more
of the non-defaulting Underwriters, or any other underwriters, to purchase
all, but not less than all, of the Defaulted Units in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such
24-hour period, then:
(a) if the number of Defaulted Units does not
exceed 10% of the number of Initial Units, the non-defaulting Underwriters
shall be obligated to purchase the full amount thereof in the proportions
that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Units exceeds 10% of
the number of Initial Units, this Agreement shall terminate without liability
on the part of any non-defaulting Underwriter or the Company.
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, either the Representatives or the Company
shall have the right to postpone the Closing Date for a period not exceeding
seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other
40
<PAGE>
documents or arrangements. As used herein, the term "Underwriter" includes
any person substituted for an Underwriter under this Section 10.
Any notice under this Section 10 may be given by telegram, telecopy
or telephone but shall be subsequently confirmed by letter.
11.TERMINATION OF AGREEMENT. a. The Underwriters may terminate
this Agreement, by notice to the Company, at any time at or prior to the
Closing Date or Option Closing Date, as the case may be, (i) if there has
been, since the date of this Agreement or since the respective dates as of
which information is given in the Registration Statement, any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
Subsidiaries, considered as one enterprise, whether or not arising in the
ordinary course of business, (ii) if there has occurred any change in the
financial markets in the United States or elsewhere or any outbreak of
hostilities or escalation thereof or other calamity or crisis the effect of
which is such as to make it, in your judgement, impracticable or inadvisable
to market the Securities or to enforce contracts for the sale of the Units,
(iii) if trading in the Common Stock or the Warrants has been suspended by
the Commission, or if trading generally on the American Stock Exchange, the
New York Stock Exchange or in the over-the-counter markets has been
suspended, or minimum or maximum prices for trading have been fixed, or
maximum ranges for prices for securities have been required, by such exchange
or markets or by order of the Commission or any other governmental authority,
or if a banking moratorium has been declared by either Federal or New York
authorities, (iv) the enactment, publication, decree or other promulgation of
any Federal or state statute, regulation, rule or order of any court or other
governmental authority which in your judgement materially and adversely
affects or may materially or adversely affect the business or operations of
the Company and its Subsidiaries, considered as one enterprise, or (v) the
taking of any action by any Federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your judgement has a
material adverse effect on the securities markets in the United States, and
would in your judgement make it impracticable or inadvisable to market the
Units or to enforce any contract for the sale thereof. Notice of such
termination may be given by telegram, telecopy or telephone and shall be
subsequently confirmed by letter.
(a) If this Agreement is terminated pursuant to
this Section 11, such termination shall be without liability of any party to
any other party except as provided in Section 9 and provided further that
Sections 6 and 7 shall survive such termination and remain in full force and
effect.
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12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the legend concerning over-
allotments on the inside front cover page and the concessions and reallowance
figures appearing under the caption "Underwriting" in any preliminary prospectus
and in the Prospectus constitute the only information furnished by or on behalf
of the Underwriters through you as such information is referred to in Sections
5(a) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10
and 11 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Company at the office of
the Company at 1507 Chambers Road, Columbus, Ohio 43212, Attention: Douglass
B. Given, President and Chief Executive Officer; or (ii) if to you, as
Representatives of the several Underwriters, care of Lehman Brothers Inc.,
Three World Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice
pursuant to Section 8 hereof, to the Director of Litigation, Office of the
General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor,
New York, New York 10285.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be
governed by and construed in accordance with the laws of the State of New
York applicable to contracts made and to be performed within the State of New
York. This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
15. SUCCESSORS. This Agreement has been and is made solely for the
benefit of the several Underwriters, the Company, its directors and officers,
the other persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the
term "successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Securities in his
status as such purchaser.
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Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
PROGENITOR, INC.
By: ----------------------------------
President and Chief
Executive Officer
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
LEHMAN BROTHERS INC.
GENESIS MERCHANT GROUP SECURITIES
As Representatives of the Several Underwriters
By: LEHMAN BROTHERS INC.
By:---------------------------------
43
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SCHEDULE I
PROGENITOR, INC.
Number of Initial
Units Purchased
UNDERWRITER FROM THE COMPANY
------------ ------------------
Lehman Brothers Inc. . . . . . . . . . . . . . . . . .
Genesis Merchant Group Securities. . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . .
--------------
44
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CERTIFICATE OF DESIGNATION
ESTABLISHING SERIES D PREFERRED STOCK
OF
PROGENITOR, INC.
PROGENITOR, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of Directors by
the Certificate of Incorporation, as amended, of said corporation, and pursuant
to the provisions of Section 151 of the General Corporation Law of the State of
Delaware, said Board of Directors, at a meeting held on July 28, 1997, adopted a
resolution providing for the number, designation, powers and preferences, and
the qualifications, limitations and restrictions thereof, of a series of
Preferred Stock, which resolution is as follows:
"RESOLVED, that this Corporation provide for a new
series of preferred stock, such series to be designated the
Series D Preferred Stock, which such series shall have the
number, designation, powers and preferences, and the
qualifications, limitations and restrictions thereof, as
follows:
1. DESIGNATION OF SERIES.
Five Hundred Thousand (500,000) shares of Preferred Stock shall be
designated "Series D Preferred Stock" (the "Series D Preferred Stock"). The
number of shares of Series D Preferred Stock may be decreased (but not below the
number of shares then outstanding) by a certificate executed, acknowledged,
filed and recorded in accordance with the General Corporation Law of the State
of Delaware setting forth a statement that a specified decrease thereof had been
authorized and directed by a resolution or resolutions adopted by the Board of
Directors pursuant to authority expressly vested in it by the provisions of the
Certificate of Incorporation of the Corporation.
2. DIVIDEND PROVISIONS.
(a) Subject to the rights of series of Preferred Stock which may from time
to time come into existence, the holders of shares of Series D Preferred Stock
shall be entitled to receive dividends, out of any assets legally available
therefor, prior and in preference to any declaration or payment of any dividend
(payable other than in Common Stock or other securities and rights convertible
into or entitling the holder thereof to receive, directly or indirectly,
additional shares of Common Stock of the Corporation) on the Common Stock of the
Corporation, at the rate of 7% of the Original Series D Issue Price (as defined
in Section 3(a) below) per share of Series D Preferred Stock per annum,
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<PAGE>
payable quarterly when, as and to the extent declared by the Board of Directors.
Such dividends shall not be cumulative and shall be payable in cash; provided,
however, that upon the approval of the holders of at least 75% of the then
outstanding shares of Series D Preferred Stock, the Corporation may pay such
dividends in Common Stock with an aggregate value, based upon the Fair Market
Value of such stock, equal to the amount of such dividends. The "Fair Market
Value" of the Common Stock shall equal the Market Price (as defined below) of
such security for the 10 consecutive trading days ending on the relevant
Calculation Date. For purposes of this Section 2(a), the "Calculation Date"
shall mean a date within three days before the date a dividend is declared.
(b) Unless full dividends upon the Series D Preferred Stock for all past
dividend periods and the then current dividend period shall have been paid and
declared and a sum sufficient for the payment thereof set apart, no dividend
whatsoever (other than a dividend payable solely in Common Stock or other
securities and rights convertible into or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock) shall be
paid or declared, and no distribution shall be made, on any Common Stock.
3. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, subject to the rights of any other
series of Preferred Stock that may from time to time come into existence, the
holders of Series D Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of the Corporation to the
holders of Common Stock by reason of their ownership thereof, an amount per
share equal to the sum of (i) 117.5% of the IPO Price (as defined below) of the
Common Stock for each outstanding share of Series D Preferred Stock (the
"Original Series D Issue Price") and (ii) any declared but unpaid dividends on
such share. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series D Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, subject to the rights of any other series of
Preferred Stock that may from time to time come into existence, the entire
assets and funds of the Corporation legally available for distribution shall be
distributed ratably among the holders of the Series D Preferred Stock in
proportion to the amount of such stock owned by each such holder. The "IPO
Price" of the Common Stock shall equal the initial public offering price per
share at which the Common Stock is offered in a Qualified Public Offering;
provided, that in the event the Common Stock is offered as part of a unit in
such Qualified Public Offering, the IPO Price shall be 117.5% of the portion of
the initial public offering price of a unit allocated to one share of the Common
Stock, with such allocation to be conclusively determined by the Board of
Directors of the Corporation acting in good faith after consultation with a
financial adviser. A "Qualified Public Offering" means an underwritten initial
public offering of the Common Stock or units consisting of Common Stock and
other equity securities that is registered under the Securities Act of 1933, as
amended, in which the aggregate proceeds to the
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Corporation, prior to the deduction of any underwriting discounts and
commissions, equal or exceed $15,000,000.
(b) Upon the completion of the distribution required in subparagraph (a)
of this Section 3 and any other distribution that may be required with respect
to any other series of Preferred Stock that may from time to time come into
existence, the remaining assets of the Corporation available for distribution to
stockholders shall be distributed among the holders of Common Stock.
(c) For purposes of this Section 3, a liquidation, dissolution or winding
up of the Corporation shall not be deemed to be occasioned by, and shall not be
deemed to include, (i) the acquisition of the Corporation by another entity by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation); or (ii) a sale of all
or substantially all of the assets of the Corporation.
4. CONVERSION. The holders of the Series D Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Series D Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such shares, at the office of the Corporation or any transfer agent
for such shares, into such number of duly authorized, validly issued, fully paid
and nonassessable shares of Common Stock as is determined by dividing the
Original Series D Issue Price by the Conversion Price applicable to such share,
determined as hereinafter provided, in effect on the date that the certificate
is surrendered for conversion. The initial Conversion Price per share for
shares of Series D Preferred Stock shall be the Original Series D Issue Price;
provided, however, that the Conversion Price for the Series D Preferred Stock
shall be subject to adjustment as set forth in subsection 4(d).
(b) AUTOMATIC CONVERSION. Each share of Series D Preferred Stock shall
automatically be converted into shares of Common Stock at the Conversion Price
at any time from and after two years after the date on which any shares of
Series D Preferred Stock were first issued (the "Purchase Date") in the event
that: (i) the Market Price (as defined below) of such Common Stock equals or
exceeds 150% of the IPO Price (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to the Common
Stock) for twenty (20) of the thirty (30) consecutive trading days preceding the
date of automatic conversion and (ii) for the last five (5) days of such a
thirty-day trading period, the Market Price of such Common Stock is not less
than 135% of the IPO Price (as adjusted for any stock dividends, combinations,
splits, recapitalizations and the like with respect to the Common Stock). In
the event that the foregoing conversion, if applied to all shares of Series D
Preferred Stock, would result in any one holder of the Series D Preferred Stock
owning securities of the Corporation having 50% or more of the total voting
power of the Corporation's then outstanding securities, such conversion shall be
applicable on a pro rata basis to all holders such that only that number of
shares of Series D Preferred Stock will be converted as would result
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<PAGE>
in such holder owning securities having less than 50% of such voting power. Any
remaining unconverted shares shall continue to convert automatically on the same
pro rata basis to the extent such conversion would not result in such holder
owning securities having 50% or more of such voting power. "Market Price" shall
mean, for any relevant day, the average last reported sale price of the Common
Stock, as reported by the primary exchange on which the Common Stock is traded,
if the Common Stock is traded on a national securities exchange, or by Nasdaq,
if such stock is traded on the Nasdaq National Market, or, if not listed on the
Nasdaq National Market or traded on any such exchange, the average of the bid
and asked price per share on Nasdaq or, if such quotations are not available,
the fair market value per share of the Common Stock as reasonably determined by
the Board of Directors of the Company.
(c) MECHANICS OF CONVERSION. Before any holder of Series D Preferred
Stock shall be entitled to convert the same into shares of Common Stock, he
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the Series D Preferred
Stock, and shall give written notice to the Corporation at its principal
corporate office, of the election to convert the same and shall state therein
the name or names in which the certificate or certificates for shares of Common
Stock are to be issued. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Series D
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series D Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date. Upon any such conversion, the holder of Series
D Preferred Stock being converted shall be entitled to receive all declared but
unpaid dividends with respect to the shares being converted.
(d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN DILUTIVE
ISSUANCES, SPLITS AND COMBINATIONS. The Conversion Price of the Series D
Preferred Stock shall be subject to adjustment from time to time as follows:
(i) In the event the Corporation should at any time or from time to
time after the Purchase Date fix a record date for the effectuation of a split
or subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional 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 (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series D
4
<PAGE>
Preferred Stock shall be appropriately decreased so that the number of shares of
Common Stock issuable on conversion of each share of such series shall be
increased in proportion to such increase of the aggregate of shares of Common
Stock outstanding and those issuable from time to time with respect to such
Common Stock Equivalents. In the event of any change in the number of shares of
Common Stock issuable with respect to such Common Stock Equivalents, or of any
termination or expiration thereof, the Conversion Price shall be recomputed to
reflect such change, termination or expiration, but no further adjustment shall
be made for the actual issuance of Common Stock with respect to such Common
Stock Equivalents.
(ii) If the number of shares of Common Stock outstanding at any time
after the Purchase Date is decreased by a combination of the outstanding shares
of Common Stock, then, following the record date of such combination, the
Conversion Price for the Series D Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be decreased in proportion to such decrease in
outstanding shares.
(e) RECAPITALIZATIONS, REORGANIZATIONS AND MERGERS. If at any time or
from time to time there shall be a recapitalization of the Common Stock,
including, without limitation, recapitalizations resulting from the acquisition
of the Corporation by another entity by means of any transaction or series of
related transactions (including, without limitation, any reorganization, merger
or consolidation), but excluding any subdivisions or combinations provided for
elsewhere in this Section 4, provision shall be made so that the holders of the
Series D Preferred Stock shall thereafter be entitled to receive upon conversion
of the Series D Preferred Stock the number of shares of stock or other
securities or property of the Corporation or otherwise, to which a holder of
Common Stock deliverable upon conversion would have been entitled on such
recapitalization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 4 with respect to the rights of
the holders of the Series D Preferred Stock after the recapitalization to the
end that the provisions of this Section 4 (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series D Preferred Stock) shall be applicable after that event
as nearly equivalent as may be practicable.
(f) NO IMPAIRMENT. The Corporation will not, by amendment of its
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, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 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 D Preferred Stock against impairment.
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<PAGE>
(g) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon conversion of any share
or shares of the Series D Preferred Stock, and the number of shares of Common
Stock to be issued shall be rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be determined on the
basis of the total number of shares of Series D Preferred Stock the holder is at
the time converting into Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of the
Conversion Price of Series D Preferred Stock pursuant to this Section 4, 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 Series D Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series D Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the Conversion Price for such series of Preferred Stock at the
time in effect, 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 Series D Preferred Stock.
(h) NOTICES OF RECORD DATE. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Corporation shall
mail to each holder of Series D Preferred Stock, at least twenty (20) days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.
(i) RESERVATION OF STOCK ISSUABLE 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 effecting the conversion of
the shares of the Series D Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series D Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series D
Preferred Stock, in addition to such other remedies as shall be available to the
holder of such Preferred Stock, the Corporation will take such corporate action
as may, in the opinion of its counsel, be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall be
sufficient for such purposes, including, without limitation, engaging in best
efforts to obtain the requisite shareholder approval of any necessary amendment
to its Certificate of Incorporation.
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<PAGE>
(j) NOTICES. Any notice required by the provisions of this Section 4 to
be given to the holders of shares of Series D Preferred Stock shall be deemed
given if deposited in the United States mail, postage prepaid, and addressed to
each holder of record at his address appearing on the books of the Corporation.
5. REDEMPTION. Subject to the rights of other series of Preferred Stock
which may from time to time come into existence, in the event of (a) the
acquisition of the Corporation by another entity by means of any transaction or
series of related transactions (including, without limitation, any
reorganization, merger or consolidation but excluding any merger effected
exclusively for the purpose of changing the domicile of the Corporation) or (b)
a sale of all or substantially all of the assets of the Corporation, as a result
of which, in the case of clause (a) or clause (b), the Corporation's
stockholders of record as constituted immediately prior to such acquisition or
sale do not, immediately after such acquisition or sale (by virtue of securities
issued as consideration for the Corporation's acquisition or sale or otherwise),
hold at least 50% of the voting power of the surviving or acquiring entity
(either (a) or (b) a "Change in Control"), the Corporation (provided it may
lawfully do so) may redeem in whole or in part, on a date not prior to the
closing of the Change in Control (the "Redemption Date"), the Series D Preferred
Stock held by each holder thereof with cash of the acquirer or surviving
corporation equal to the Original Series D Issue Price plus any declared and
unpaid dividends through the Redemption Date; provided, however, that at least
thirty (30) days prior to the Redemption Date written notice shall be mailed by
the Corporation, first class postage prepaid, to each holder of record of the
Series D Preferred Stock at the close of business on the business day next
preceding the day on which notice is given. Any partial redemption effected
pursuant to this Section 5 shall be made on a pro rata basis among the holders
of the Series D Preferred Stock in proportion to the number of shares of
Series D Preferred Stock then held by them.
6. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares of
Series D Preferred Stock shall be redeemed or converted pursuant to Section 4 or
Section 5 hereof, the shares so converted or redeemed shall be canceled and
retired and eliminated from the shares that the Corporation shall be authorized
to issue as Series D Preferred Stock.
7. VOTING RIGHTS. The Series D Preferred Stock shall not have voting
rights except as required by applicable law; provided, however, that the
Corporation shall not, without first obtaining the approval (by vote or written
consent in accordance with applicable law) of the holders of a majority of the
then outstanding Series D Preferred Stock, issue any series of Preferred Stock
having a preference over the Series D Preferred Stock with respect to dividends
or upon liquidation. In any instance where a vote of the Series D Preferred
Stock is required, holders of shares of Series D Preferred Stock will be
entitled to one vote for each share of such stock held by them.
****
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IN WITNESS WHEREOF, Progenitor, Inc. has caused this certificate to be
signed by Mark N.K. Bagnall, its Vice President, Finance and Chief Financial
Officer, this ___ day of _______________, 1997.
BY: __________________________________
Vice President, Finance and Chief
Financial Officer
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<PAGE>
EXHIBIT 4.5
VOID AFTER 5:00 P.M. NEW YORK TIME ON _________________, 2002
WARRANTS TO PURCHASE COMMON STOCK
W________ _________ Warrants
PROGENITOR, INC.
CUSIP _________
THIS CERTIFIES THAT FOR VALUE RECEIVED _____________________ or registered
assigns, is the registered holder of the number of Warrants ("Warrants") set
forth above. Each Warrant initially entitles the registered holder thereof to
purchase from Progenitor, Inc., a corporation incorporated under the laws of the
State of Delaware (the "Company"), subject to the terms and conditions set forth
hereinafter and in the Warrant Agreement (as hereinafter defined), one fully
paid and nonassessable share of Common Stock, $0.001 par value, of the Company
("Common Stock") upon presentation and surrender of this Warrant Certificate
with the Subscription Form on the reverse hereof duly executed, at any time
prior to 5:00 p.m., New York Time, on ___________, 2002 or, if such Warrant is
redeemed as provided in the Warrant Agreement, at any time prior to the
effective time of such redemption, at the stock transfer office of American
Stock Transfer & Trust Company, Warrant Agent of the Company (the "Warrant
Agent"), or of its successor warrant agent or, if there be no successor warrant
agent, at the corporate offices of the Company, and upon payment of the Exercise
Price (as defined in the Warrant Agreement) paid either in cash, or by certified
or official bank check, payable in lawful money of the United States of America
to the order of the Company. Each Warrant initially entitles the holder to
purchase one share of Common Stock for $______________. In the event of certain
contingencies provided for in the Warrant Agreement, the Exercise Price or the
number and kind of securities or other property for which the Warrants are
exercisable are subject to adjustment or modification. The Company may redeem
any or all outstanding and unexercised Warrants at any time after
_______________, 1998 if the Market Price (as defined in the Warrant Agreement)
equals or exceeds $________________ for each of the 30 consecutive trading days
immediately preceding the third day before the date of notice of such
redemption, upon 30 days' notice, at a price equal to $0.01 per Warrant.
This Warrant Certificate is subject to all of the terms, provisions and
conditions of the Warrant Agreement, dated as of _______________, 1997 ("Warrant
Agreement"), between the Company and the Warrant Agent, to all of which terms,
provisions and conditions the registered holder of this Warrant Certificate
consents by acceptance hereof. The Warrant Agreement is incorporated herein by
reference and made a part hereof and reference is made to the Warrant Agreement
for a full description of the rights, limitations of rights, obligations, duties
and immunities of the Warrant Agent, the Company and the holders of the Warrant
Certificates.
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<PAGE>
Copies of the Warrant Agreement are available for inspection at the stock
transfer office of the Warrant Agent or may be obtained upon written request
addressed to the Company at 1507 Chambers Road, Columbus, Ohio 43212, Attention:
President and Chief Executive Officer.
The Company shall not be required upon the exercise of the Warrants
evidenced by this Warrant Certificate to issue fractions of Warrants, Common
Stock or other securities, but shall make adjustment therefor in cash on the
basis of the current market value of any fractional interest as provided in the
Warrant Agreement.
In certain cases, the sale of securities by the Company upon exercise of
Warrants would violate the securities laws of the United States, certain states
thereof or other jurisdictions. The Company has agreed in the Warrant Agreement
that, among other things: (a) it will use its best efforts either (i) to
maintain the effectiveness of the Registration Statement and, to the extent
required under applicable law, to keep such Registration Statement current,
through the Expiration Date or until such time as no Warrants remain outstanding
or (ii) to prepare and file with the Securities and Exchange Commission a
registration statement and the prospectuses used in connection therewith as may
be necessary to keep such registration statement with respect to the Equity
Securities to be delivered upon the exercise of the Warrants effective and, to
the extent required under applicable law, to keep such registration statement
current from the date of issuance thereof through the Expiration Date or until
such earlier time as no Warrants remain outstanding; and (b) as expeditiously as
possible, it will register or qualify the Equity Securities to be delivered upon
exercise of the Warrants under the securities or Blue Sky laws of each
jurisdiction in which such registration or qualification is necessary and use
its best efforts to maintain all such registrations or qualifications in effect
from the date of issuance thereof through the Expiration Date or until such
earlier time as no Warrants remain outstanding; PROVIDED, that in no event shall
the Company be obligated to qualify to do business in any jurisdiction where it
is not now so qualified or to take any action which would subject it to general
service of process in any jurisdiction where it is not now so subject. However,
the Company will not be required to honor the exercise of Warrants if, in the
opinion of the Board of Directors, upon advice of counsel, the sale of
securities upon such exercise would be unlawful. In certain cases, the Company
may, but is not required to, purchase Warrants submitted for exercise for a cash
price equal to the difference between the market price of the securities
obtainable upon such exercise and the exercise price of such Warrants.
This Warrant Certificate, with or without other Certificates, upon
surrender to the Warrant Agent, any successor warrant agent or, in the absence
of any successor warrant agent, at the corporate offices of the Company, may be
exchanged for another Warrant Certificate or Certificates evidencing in the
aggregate the same number of Warrants as the Warrant Certificate or Certificates
so surrendered. If the Warrants evidenced by this Warrant Certificate shall be
exercised in part, the holder hereof shall be entitled to receive upon surrender
hereof another Warrant Certificate or Certificates evidencing the number of
Warrants not so exercised.
No holder of this Warrant Certificate, as such, shall be entitled to vote,
receive dividends or be deemed the holder of Common Stock or any other
securities of the Company which may at any time be issuable on the exercise
hereof for any purpose whatsoever, nor shall anything
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<PAGE>
contained in the Warrant Agreement or herein be construed to confer upon the
holder of this Warrant Certificate, as such, any of the rights of a stockholder
of the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof or give or withhold
consent to any corporate action (whether upon any recapitalization, issuance of
stock, reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, conveyance or otherwise) or to receive notice
of meetings or other actions affecting stockholders (except as provided in the
Warrant Agreement) or to receive dividends or subscription rights or otherwise
until the Warrants evidenced by this Warrant Certificate shall have been
exercised and the receipt by the Warrant Agent of the Exercise Price.
The Company shall not be required to issue or deliver any certificate for
shares of Common Stock or other securities upon the exercise of Warrants
evidenced by this Warrant Certificate until any tax which may be payable in
respect thereof by the holder of this Warrant Certificate pursuant to the
Warrant Agreement shall have been paid, such tax being payable by the holder of
this Warrant Certificate at the time of surrender.
This Warrant Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Warrant Agent.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or by facsimile signatures of the proper officers of the
Company and a facsimile of its corporate seal to be imprinted hereon.
Dated: , 1997.
------------------------
PROGENITOR, INC.
By:
------------------------------------
President and Chief Executive Officer
Attest:
--------------------------------
Secretary
Countersigned
- ------------------------------
, as Warrant Agent
- ------------
By:
------------------------
Authorized Officer
[FORM OF REVERSE OF WARRANT CERTIFICATE]
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<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
_____________ of the Warrants represented by this Warrant Certificate, and to
purchase the securities issuable upon the exercise of such Warrants, and
requests that certificates for such securities shall be issued in the name of:
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
---------------------
---------------------
---------------------
---------------------
[please print or type name and address]
and be delivered to
---------------------
---------------------
---------------------
---------------------
[please print or type name and address]
and if such number of Warrants shall not be all the Warrants evidenced by
this Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
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<PAGE>
If applicable, the undersigned represents that the exercise of the Warrants
evidenced hereby was solicited by a member of the National Association of
Securities Dealers, Inc. If not solicited by an NASD member, please leave blank
or write "unsolicited" in the space below.
------------------------------------
(Name of NASD Member)
Dated:
-------------------------
------------------------------
------------------------------
------------------------------
Address
------------------------------
Taxpayer Identification Number
------------------------------
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO
THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST
BE GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
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<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, _______________ hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
---------------------
---------------------
---------------------
---------------------
[please print or type name and address]
_________________ of the Warrants represented by this Warrant Certificate,
and hereby irrevocably constitutes and appoints______________________________
Attorney to transfer this Warrant Certificate on the books of the Company, with
full power of substitution in the premises.
Dated:---------------------------
-------------------------------
Signature Guaranteed
-------------------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO
THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST
BE GUARANTEED BY A MEMBER OF THE MEDALLION STAMP PROGRAM.
6
<PAGE>
WARRANT AGREEMENT
between
PROGENITOR, INC.
and
AMERICAN STOCK TRANSFER & TRUST COMPANY
Dated as of __________________, 1997
<PAGE>
This Agreement, dated as of _______________, 1997, is between Progenitor,
Inc., a Delaware corporation (the "Company"), and American Stock Transfer &
Trust Company, a _________________ (the "Warrant Agent").
RECITALS
The Company, at or about the time that it is entering into this Agreement,
proposes to issue and sell in a public offering up to 3,162,500 Units ("Units")
(including up to 412,500 Units if the Underwriters' over-allotment option is
exercised in full). Each Unit consists of one share of common stock, $.001 par
value, of the Company ("Common Stock") and one redeemable Warrant (collectively,
the "Warrants"), each Warrant exercisable to purchase one share of Common Stock
for $___________, upon the terms and conditions and subject to adjustment in
certain circumstances, all as set forth in this Agreement.
The Company wishes to retain the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance, transfer, exchange and redemption of the Warrants, the issuance of
certificates evidencing the Warrants to be issued under this Agreement (the
"Warrant Certificates") and the exercise of the Warrants.
The Company and the Warrant Agent wish to enter into this Agreement to set
forth the terms and conditions of the Warrants and the rights of the holders
thereof ("Warrantholders") and to set forth the respective rights and
obligations of the Company and the Warrant Agent. Each Warrantholder is an
intended beneficiary of this Agreement with respect to the rights of
Warrantholders herein.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth and for the purpose of defining the terms and provisions of the
Warrants and the Warrant Certificates and the respective rights and obligations
thereunder of the Company, the Warrantholders and the Warrant Agent, the parties
hereto agree as follows:
SECTION 1. APPOINTMENT OF WARRANT AGENT
The Company appoints the Warrant Agent to act as agent for the Company in
accordance with the instructions in this Agreement and the Warrant Agent accepts
such appointment.
SECTION 2. DATE, DENOMINATION AND EXECUTION OF WARRANT CERTIFICATES
The Warrant Certificates (and the Form of Election to Purchase and the Form
of Assignment to be printed on the reverse thereof) shall be in registered form
only and shall be substantially in the form attached hereto as EXHIBIT A (the
provisions of which are hereby incorporated herein), and may have such letters,
numbers or other marks of identification or designation and such legends,
summaries or endorsements printed, lithographed or engraved thereon as the
Company may deem appropriate and as are not inconsistent with the provisions of
this Agreement, or as may be required to comply with any law, or with any rule
or regulation made pursuant thereto, or with any rule or regulation of any stock
exchange on which the
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<PAGE>
Common Stock (or other securities issuable upon exercise of the Warrants) or the
Warrants may be listed or any automated quotation system, or to conform to
usage. Each Warrant Certificate shall entitle the registered holder thereof,
subject to the provisions of this Agreement and of the Warrant Certificate, to
purchase, on or before the close of business on _____________, 2002 (the
"Expiration Date"), one fully paid and non-assessable share of Common Stock for
each Warrant evidenced by such Warrant Certificate for $_____________ (the
"Exercise Price"), in each case subject to the adjustments provided in Section 6
hereof. Each Warrant Certificate issued as a part of a Unit offered to the
public as described in the recitals, above, shall be dated the date of issuance
thereof; each other Warrant Certificate shall be dated the date on which the
Warrant Agent receives valid issuance instructions from the Company or a
transferring holder of a Warrant Certificate or, if such instructions specify
another date, such other date.
For purposes of this Agreement, the term "close of business" on any given
date shall mean 5:00 p.m., New York Time, on such date; provided, however, that
if such date is not a business day, it shall mean 5:00 p.m., New York Time, on
the next succeeding business day. For purposes of this Agreement, the term
"business day" shall mean any day other than a Saturday, Sunday, or a day on
which banking institutions in New York are authorized or obligated by law to be
closed.
Each Warrant Certificate shall be executed on behalf of the Company by the
Chief Executive Officer or its President or a Vice President, either manually or
by facsimile signature printed thereon, and have affixed thereto the Company's
seal or a facsimile thereof which shall be attested by the Secretary or an
Assistant Secretary of the Company, either manually or by facsimile signature.
Each Warrant Certificate shall be manually countersigned by the Warrant Agent
and shall not be valid for any purpose unless so countersigned. In case any
officer of the Company who shall have signed any Warrant Certificate shall cease
to be such officer of the Company before countersignature by the Warrant Agent
and issue and delivery thereof by the Company, such Warrant Certificate,
nevertheless, may be countersigned by the Warrant Agent, issued and delivered
with the same force and effect as though the person who signed such Warrant
Certificate had not ceased to be such officer of the Company.
SECTION 3. SUBSEQUENT ISSUE OF WARRANT CERTIFICATES
Subsequent to their original issuance, no Warrant Certificates shall be
reissued except (i) Warrant Certificates issued upon transfer thereof in
accordance with Section 4 hereof, (ii) Warrant Certificates issued upon any
combination, split-up or exchange of Warrant Certificates pursuant to Section 4
hereof, (iii) Warrant Certificates issued in replacement of mutilated,
destroyed, lost or stolen Warrant Certificates pursuant to Section 5 hereof,
(iv) Warrant Certificates issued upon the partial exercise of Warrant
Certificates pursuant to Section 7 hereof, and (v) Warrant Certificates issued
to reflect any adjustment or change in the Exercise Price or the number or kind
of shares or securities purchasable thereunder pursuant to Section 22 hereof.
The Warrant Agent is hereby irrevocably authorized to countersign and deliver,
in accordance with the provisions of Sections 4, 5, 7 and 22, the new Warrant
Certificates required for purposes thereof, and the Company, whenever required
by the Warrant
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<PAGE>
Agent, will supply the Warrant Agent with Warrant Certificates duly executed on
behalf of the Company for such purposes.
SECTION 4. TRANSFERS AND EXCHANGES OF WARRANT CERTIFICATES
The Warrant Agent will keep or cause to be kept at its stock transfer
office in ________ _____________ ("Stock Transfer Office") books for
registration of ownership and transfer of the Warrant Certificates issued
hereunder. Such registers shall show the names and addresses of the respective
holders of the Warrant Certificates and the number of Warrants evidenced by each
such Warrant Certificate.
The Warrant Agent shall, from time to time, register the transfer of any
outstanding Warrants upon the books to be maintained by the Warrant Agent for
that purpose, upon surrender of the Warrant Certificate evidencing such
Warrants, with the Form of Assignment duly filled in and executed with such
signature guaranteed by a member of the Medallion Stamp Program and such
supporting documentation as the Warrant Agent or the Company may reasonably
require, to the Warrant Agent at its Stock Transfer Office at any time on or
before the Expiration Date, and upon payment to the Warrant Agent for the
account of the Company of an amount equal to any applicable transfer tax.
Payment of the amount of such tax may be made in cash, or by certified or
official bank check, payable in lawful money of the United States of America to
the order of the Company.
Upon receipt of a Warrant Certificate, with the Form of Assignment duly
filled in and executed, accompanied by payment of an amount equal to any
applicable transfer tax, the Warrant Agent shall promptly cancel the surrendered
Warrant Certificate and countersign and deliver to the transferee a new Warrant
Certificate for the number of full Warrants transferred to such transferee;
PROVIDED, HOWEVER, that in case the registered holder of any Warrant Certificate
shall elect to transfer fewer than all of the Warrants evidenced by such Warrant
Certificate, the Warrant Agent in addition shall promptly countersign and
deliver to such registered holder a new Warrant Certificate or Certificates for
the number of full Warrants not so transferred.
Any Warrant Certificate or Certificates may be exchanged at the option of
the holder thereof for another Warrant Certificate or Certificates of different
denominations, of like tenor and representing in the aggregate the same number
of Warrants, upon surrender of such Warrant Certificate or Certificates, with
the Form of Assignment duly filled in and executed, to the Warrant Agent, at any
time or from time to time after the close of business on the date hereof and
prior to the close of business on the Expiration Date. The Warrant Agent shall
promptly cancel the surrendered Warrant Certificate and deliver the new Warrant
Certificate pursuant to the provisions of this Section.
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<PAGE>
SECTION 5. MUTILATED, DESTROYED, LOST OR STOLEN WARRANT CERTIFICATES
Upon receipt by the Company and the Warrant Agent (i) of evidence
reasonably satisfactory to them of the ownership of and the loss, theft,
destruction or mutilation of any Warrant Certificate, and (ii) in the case of
loss, theft or destruction, of indemnity or security reasonably satisfactory to
them, and reimbursement to them of all reasonable expenses incidental thereto,
and, (iii) in the case of mutilation, upon surrender and cancellation of the
Warrant Certificate, then: the Warrant Agent shall countersign and deliver a new
Warrant Certificate of like tenor for the same number of Warrants.
SECTION 6. ADJUSTMENTS OF NUMBER AND KIND OF SHARES PURCHASABLE AND
EXERCISE PRICE
The number and kind of securities or other property purchasable upon
exercise of a Warrant shall be subject to adjustment from time to time upon the
occurrence, after the date hereof, of any of the following events:
A. Subject to the exceptions referred to in Subsection J below, in
case the Company shall, at any time or from time to time after the date hereof,
(1) pay a dividend in, or make a distribution of, shares of capital stock on its
outstanding Common Stock, (2) subdivide its outstanding shares of Common Stock
into a greater number of such shares, (3) combine its outstanding shares of
Common Stock into a smaller number of such shares, or (4) sell any shares of
Common Stock for a consideration per share less than the Market Price (as
defined in Subsection G below) on the date of such sale (any such payment,
distribution, subdivision, combination or sale being referred to as a "Change of
Shares") then, and thereafter upon each further Change of Shares, the Exercise
Price in effect immediately prior to such Change of Shares shall be changed to a
price (including any applicable fraction of a cent) determined by multiplying
the Exercise Price in effect immediately prior thereto by a fraction, the
numerator of which shall be the sum of (x) the number of shares of Common Stock
outstanding immediately prior to the issuance of such additional shares and (y)
the number of shares of Common Stock which the aggregate consideration, if any,
received (determined as provided in Subsection I(e) below) for the issuance of
such additional shares would purchase at the Market Price and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately after the issuance of such additional shares. Such adjustment shall
be made successively whenever such an issuance is made.
Upon each adjustment of the Exercise Price pursuant to this Subsection A,
the total number of shares of Common Stock purchasable upon the exercise of each
Warrant shall be such number of shares (calculated to the nearest one-hundredth;
provided, however, that in no event shall the aggregate Exercise Price increase
as a result of such rounding calculation) purchasable at the Exercise Price in
effect immediately prior to such adjustment multiplied by a fraction, the
numerator of which shall be the Exercise Price in effect immediately prior to
such adjustment and the denominator of which shall be the Exercise Price in
effect immediately after such adjustment.
4
<PAGE>
Any adjustment made pursuant to this Subsection A shall, in the case of a
stock dividend or distribution, become effective as of the record date therefor
and, in the case of a subdivision or combination or sale, be made as of the
effective date thereof. If, as a result of an adjustment made pursuant to this
Subsection A, the holder of any Warrant Certificate thereafter surrendered for
exercise shall become entitled to receive shares of two or more classes of
capital stock of the Company, the Board of Directors of the Company (whose
determination shall be conclusive if made in good faith and shall be evidenced
by a certified Board resolution filed with the Warrant Agent) shall determine
the allocation of the adjusted Exercise Price between or among shares of such
classes of capital stock.
B. In the event of a capital reorganization or a reclassification of
the Common Stock (except as provided in Subsection A above or Subsection D
below), any Warrantholder, upon exercise of Warrants, shall be entitled to
receive, in substitution for the Common Stock to which he would have become
entitled upon exercise immediately prior to such reorganization or
reclassification, the shares (of any class or classes) or other securities or
property of the Company (or cash) that he would have been entitled to receive at
the same aggregate Exercise Price upon such reorganization or reclassification
if such Warrants had been exercised immediately prior to the record date with
respect to such event; and in any such case, appropriate provision (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive if made in good faith and shall be evidenced by a certified Board
resolution filed with the Warrant Agent) shall be made for the application of
this Section 6 with respect to the rights and interests thereafter of the
Warrantholders (including but not limited to the allocation of the Exercise
Price between or among shares of classes of capital stock), to the end that this
Section 6 (including the adjustments of the number of shares of Common Stock or
other securities purchasable and the Exercise Price thereof) shall thereafter be
reflected, as nearly as reasonably practicable, in all subsequent exercises of
the Warrants for any shares or securities or other property (or cash) thereafter
deliverable upon the exercise of the Warrants. The above provisions of this
Subsection B shall similarly apply to successive reorganizations or
reclassifications.
C. Whenever the Exercise Price or the number of shares of Common
Stock or other securities purchasable upon exercise of a Warrant is adjusted as
provided in this Section 6, the Company will promptly file with the Warrant
Agent a certificate signed by the Chief Executive Officer or the President or a
Vice President of the Company and by the Chief Financial Officer or the
Secretary or an Assistant Secretary of the Company setting forth (i) the
Exercise Price and the number and kind of securities or other property
purchasable upon exercise of a Warrant, as so adjusted, (ii) a statement that
such adjustments in the Exercise Price or the number or kind of shares or other
securities or property, as the case may be, conform to the requirements of this
Section 6, and (iii) a statement showing in detail the method of calculation and
the facts upon which such adjustment or readjustment is based. Promptly after
receipt of such certificate, the Company, or the Warrant Agent at the Company's
request, will deliver, by first-class, postage prepaid mail, a copy of such
certificate (to be supplied by the Company) to the registered holders of the
outstanding Warrant Certificates; PROVIDED, HOWEVER, that failure to file or to
give any notice required under this Subsection, or any defect therein, shall not
affect the legality or validity of any such adjustments under this Section 6;
and PROVIDED,
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<PAGE>
FURTHER, that, where appropriate, such notice may be given in advance and
included as part of the notice required to be given pursuant to Section 12
hereof.
D. In case of any consolidation of the Company with, or merger of
the Company into, another corporation or entity (other than a consolidation or
merger which does not result in any reclassification or change of the
outstanding Common Stock), or in case of any sale, lease or conveyance to any
other person or entity of the property of the Company as an entirety or
substantially as an entirety, the Company shall not effect any such
consolidation merger, sale, lease or transfer unless prior to or simultaneously
with the consummation thereof the corporation or entity formed by such
consolidation or merger or the person or entity which shall have acquired or
leased such assets, as the case may be, shall execute and deliver to the Warrant
Agent a supplemental warrant agreement providing (i) that the holder of each
Warrant then outstanding shall have the right thereafter (until the expiration
of such Warrant) to receive, upon exercise of such Warrant, solely the kind and
amount of shares of stock and other securities and property (or cash) receivable
upon such consolidation, merger, sale, lease or transfer by a holder of the
number of shares of Common Stock of the Company for which such Warrant might
have been exercised immediately prior to such consolidation, merger, sale, lease
or transfer and (ii) for the assumption by such successor or purchaser of all
other obligations of the Company under this Agreement. Such supplemental
warrant agreement shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided in this Section 6.
The above provision of this Subsection D shall similarly apply to successive
consolidations, mergers, sales, leases or transfers.
The Warrant Agent shall not be under any responsibility to determine the
correctness of any provision contained in any such supplemental warrant
agreement relating to either the kind or amount of shares of stock or securities
or property (or cash) purchasable by holders of Warrant Certificates upon the
exercise of their Warrants after any such consolidation, merger, sale, lease or
transfer or of any adjustment to be made with respect thereto, but subject to
the provisions of Section 20 hereof, may accept as conclusive evidence of the
correctness of any such provisions, and shall be protected in relying upon, a
certificate of a firm of independent certified public accountants (who may be
the accountants regularly employed by the Company) with respect thereto.
E. Irrespective of any adjustments in the number or kind of shares
issuable upon exercise of Warrants, Warrant Certificates theretofore or
thereafter issued may continue to express the same price and number and kind of
shares as are stated in the similar Warrant Certificates initially issuable
pursuant to this Agreement.
F. The Company shall retain a firm of independent public accountants
of recognized standing, which may be the firm regularly retained by the Company,
selected by the Board of Directors of the Company or the Executive Committee of
said Board, and not disapproved by the Warrant Agent, to make any computation
required under this Section 6, and a certificate signed by such firm shall, in
the absence of fraud or gross negligence, be conclusive evidence of the
correctness of any computation made under this Section 6.
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<PAGE>
G. For the purpose of this Section 6, the following terms shall have
the meaning stated in this Subsection G. "Common Stock" shall mean (i) the
class of stock designated as Common Stock in the Certificate of Incorporation of
the Company, as amended, at the date of this Agreement, (ii) in the case of any
consolidation, merger, sale, lease or transfer of the character referred to in
Subsection D of this Section 6, the stock, securities or property provided for
in such Subsection, or (iii) any other class of stock resulting from successive
changes or reclassification of such Common Stock or consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value. In the event that at any time as a result of an adjustment made pursuant
to this Section 6, the holder of any Warrant thereafter surrendered for exercise
shall become entitled to receive any shares of capital stock of the Company
other than shares of Common Stock, thereafter the number of such other shares so
receivable upon exercise of any Warrant shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in this Section 6, and all
other provisions of this Agreement, with respect to the Common Stock, shall
apply on like terms to any such other shares. "Market Price" shall have the
meaning set forth in Section 7E, except that for all purposes of this Section 6,
the time periods set forth in the definition thereof shall be 10 consecutive
trading days.
H. The Company may, from time to time and to the extent permitted by
law, reduce the exercise price of the Warrants by any amount for a period of not
less than 20 days or extend the Expiration Date. If the Company so reduces the
exercise price of the Warrants, or extends the Expiration Date, it will give not
less than 15 days' notice of such decrease or extension (as the case may be),
which notice may be in the form of a publicly disseminated press release, and
shall take such other steps as may be required under applicable law in
connection with any offers or sales of securities at the reduced price or
relating to the extension of the Expiration Date.
I. For purposes of Subsection A hereof, the following provisions (a)
to (e) shall also be applicable:
(a) In the case of the sale by the Company of any units, the
allocation of the offering price of the units between the Common Stock portion
of such unit and any other portion of such unit will be determined by the Board
of Directors of the Company acting in good faith after consultation with an
independent financial adviser.
(b) In case of (1) the sale by the Company for cash (or as a
component of a unit being sold for cash) of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or any
securities convertible into or exchangeable for Common Stock without the payment
of any further consideration other than cash, if any (such securities
convertible, exercisable or exchangeable into Common Stock being herein called
"Convertible Securities"), or (2) the issuance by the Company, without the
receipt by the Company of any consideration therefor, of any rights or warrants
to subscribe for or purchase, or any options for the purchase of, Common Stock
or Convertible Securities, in each case, if (and only if) the consideration
payable to the Company upon the exercise of such rights, warrants or options
shall consist of cash, whether or not such rights, warrants or options, or the
right to
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<PAGE>
convert or exchange such Convertible Securities, are immediately exercisable,
and the price per share for which Common Stock is issuable upon the exercise of
such rights, warrants or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum aggregate
consideration payable to the Company upon the exercise of such rights, warrants
or options, plus the consideration, if any, received by the Company for the
issuance or sale of such rights, warrants or options, plus, in the case of such
Convertible Securities, the minimum aggregate amount of additional
consideration, other than such Convertible Securities, payable upon the
conversion or exchange thereof, by (y) the total maximum number of shares of
Common Stock issuable upon the exercise of such rights, warrants or options or
upon the conversion or exchange of such Convertible Securities issuable upon the
exercise of such rights, warrants or options) is less than the Market Price of
the Common Stock on the date of the issuance or sale of such rights, warrants or
options, then the total maximum number of shares of Common Stock issuable upon
the exercise of such rights, warrants or options or upon the conversion or
exchange of such Convertible Securities (as of the date of the issuance or sale
of such rights, warrants or options) shall be deemed to be outstanding shares of
Common Stock for purposes of Subsection A hereof and shall be deemed to have
been sold for cash in an amount equal to such price per share.
(c) In case of the sale by the Company for cash of any
Convertible Securities, whether or not the right of conversion or exchange
thereunder is immediately exercisable, and the price per share for which Common
Stock is issuable upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration received by the
Company for the sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by (y) the total
maximum number of shares of Common Stock issuable upon the conversion or
exchange of such Convertible Securities) is less than the Market Price of the
Common Stock on the date of the sale of such Convertible Securities, then the
total maximum number of shares of Common Stock issuable upon the conversion or
exchange of such Convertible Securities (as of the date of the sale of such
Convertible Securities) shall be deemed to be outstanding shares of Common Stock
for purposes of Subsection A hereof and shall be deemed to have been sold for
cash in an amount equal to such price per share.
(d) In case the Company shall modify the rights of conversion,
exchange or exercise of any of the securities referred to in (b) or (c) above
or any other securities of the Company convertible, exchangeable or
exercisable for shares of Common Stock, for any reason other than an event
that would require adjustment to prevent dilution, so that the consideration
per share received by the Company after such modification is less than the
Market Price on the date immediately prior to such modification, the Exercise
Price to be in effect after such modification shall be determined by
multiplying the Exercise Price in effect immediately prior to such
modification by a fraction, of which the numerator shall be the number of
shares of Common Stock outstanding on the date prior to the modification plus
the number of shares of Common Stock which the aggregate consideration
receivable by the Company for the securities affected by the modification
would purchase at the Market Price and of which the denominator shall be the
number of shares of Common Stock outstanding on such date plus the number of
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shares of Common Stock to be issued upon conversion, exchange or exercise of
the modified securities at the modified rate. Such adjustment shall become
effective as of the date upon which such modification shall take effect. On
the expiration of any such right, warrant or option or the termination of any
such right to convert or exchange any such Convertible Securities referred to
in (b) or (c) above, the Exercise Price then in effect hereunder shall
forthwith be readjusted to such Exercise Price as would have obtained (i) had
the adjustments made upon the issuance or sale of such rights, warrants,
options or Convertible Securities been made upon the basis of the issuance of
only the number of shares of Common Stock theretofore actually delivered (and
the total consideration received therefor) upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such Convertible
Securities and (ii) had adjustments been made on the basis of the Exercise
Price as adjusted under clause (i) for all transactions (which would have
affected such adjusted Exercise Price) made after the issuance or sale of
such rights, warrants, options or Convertible Securities.
(e) In case of the sale for cash of any shares of Common Stock,
any Convertible Securities, any rights or warrants to subscribe for or purchase,
or any options for the purchase of, Common Stock or Convertible Securities, the
consideration received by the Company theretofore shall be deemed to be the
gross sales price therefor without deducting therefrom any expense paid or
incurred by the Company or any underwriting discounts or commissions or
concessions paid or allowed by the Company in connection therewith.
J. Anything herein to the contrary notwithstanding, the Company
shall not be required to make any adjustment of the Exercise Price in the case
of: (i) the issuance of shares of Common Stock upon the sale or exercise in
whole or part of any Warrant or any other Warrant issued in connection with a
firm commitment underwritten initial public offering of the Company; (ii) the
issuance or exercise of shares of Common Stock or any other securities which may
now or hereafter be granted or exercised under the Company's 1992 Stock Option
Plan, 1996 Stock Incentive Plan, 1996 Employee Stock Purchase Plan and 1997
Stock Option Plan (the "Plans") or under any other employee benefit plan of the
Company approved by the Company's board of directors; (iii) the sale of any
shares of Common Stock and/or any Convertible Securities in a firm commitment
underwritten public offering, including, without limitation, shares sold upon
the exercise of any overallotment option granted to the underwriters in
connection with such offering; (iv) the issuance or sale of shares of Common
Stock or Convertible Securities upon the exercise of any rights or warrants to
subscribe for or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, whether or not any adjustment in the Exercise Price was
made or required to be made upon the issuance or sale of such Common Stock or
Convertible Securities and whether or not such rights, warrants or options were
outstanding on the date of the original sale of the Warrant or were thereafter
issued or sold; (v) the issuance or sale of shares of Common Stock upon
conversion or exchange of any Convertible Securities, whether or not any
adjustment in the Exercise Price was made or required to be made upon the
issuance or sale of such Convertible Securities and whether or not such
Convertible Securities were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold; (vi) the issuance of shares of
Common Stock in connection with a bona fide merger, acquisition or other similar
transaction involving the Company or a subsidiary of the Company with or into a
corporation or other entity if the board of directors of the Company has
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obtained a fairness opinion with respect to the issuance of such Common Stock
from a nationally recognized investment banking indicating that the financial
terms of such merger, acquisition or other similar transaction are fair to the
Company when taken as a whole; or (vii) the issuance of shares of Common Stock
in connection with a bona fide private placement transaction not involving
purchasers or placement agents affiliated with the Company or any affiliate of
the Company if (A) the discount to market is not greater than 20% and (B) the
Company has obtained a fairness opinion with respect to the issuance thereof
from a nationally recognized investment banking firm stating that the financial
terms of such transaction are fair to the Company when taken as a whole.
SECTION 7. EXERCISE AND REDEMPTION OF WARRANTS
Unless the Warrants have been redeemed as provided in this Section 7, the
registered holder of any Warrant Certificate may exercise the Warrants evidenced
thereby, in whole or in part from time to time at or prior to the close of
business, on the Expiration Date, subject to the provisions of Section 9, at
which time the Warrant Certificates shall be and become wholly void and of no
value. Warrants may be exercised by their holders or redeemed by the Company as
follows:
A. Exercise of Warrants shall be accomplished upon surrender of the
Warrant Certificate evidencing such Warrants, with the Form of Election to
Purchase on the reverse side thereof duly filled in and executed, to the Warrant
Agent at its Stock Transfer Office, together with payment to the Company of the
Exercise Price (as of the date of such surrender) of the Warrants then being
exercised. Payment of the Exercise Price may be made by wire transfer of same
day funds to an account in a bank designated by the Company for such purpose, or
by certified or bank cashier's check, payable in lawful money of the United
States of America to the order of the Company, or by any combination of such
methods. No adjustment shall be made for any cash dividends, whether paid or
declared, on any securities issuable upon exercise of a Warrant.
B. Upon receipt of a Warrant Certificate, with the Form of Election
to Purchase duly filled in and executed, accompanied by payment of the Exercise
Price of the Warrants being exercised (and an amount equal to any applicable
transfer tax and, if requested by the Company, any other taxes or governmental
charges which the Company may be required by law to collect in respect of such
exercise), the Warrant Agent shall promptly request from the Transfer Agent with
respect to the securities to be issued and shall promptly, and in any event
within five business days thereof, deliver to or upon the order of the
registered holder of such Warrant Certificate, in such name or names as such
registered holder may designate, a certificate or certificates for the number of
full shares of the securities to be purchased, together with cash made available
by the Company pursuant to Section 8 hereof in respect of any fraction of a
share of such securities otherwise issuable upon such exercise. If the Warrant
is then exercisable to purchase property other than securities, the Warrant
Agent shall take appropriate steps to cause such property to be delivered as
soon as practicable to or upon the order of the registered holder of such
Warrant Certificate. In addition, if it is required by law and upon instruction
by the Company, the Warrant Agent will deliver to each Warrantholder a
prospectus which complies
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with the provisions of Section 10 of the Securities Act of 1933, as amended, and
the Company agrees to supply the Warrant Agent with a sufficient number of
prospectuses to effectuate that purpose.
C. In case the registered holder of any Warrant Certificate shall
exercise fewer than all of the Warrants evidenced by such Warrant Certificate,
the Warrant Agent shall promptly countersign and deliver to the registered
holder of such Warrant Certificate, or to his duly authorized assigns, a new
Warrant Certificate or Certificates evidencing the number of Warrants that were
not so exercised.
D. Each person in whose name any certificate for securities is
issued upon the exercise of Warrants shall for all purposes be deemed to have
become the holder of record of the securities represented thereby as of, and
such certificate shall be dated, the date upon which the Warrant Certificate was
duly surrendered in proper form and payment of the Exercise Price was made;
PROVIDED, HOWEVER, that if the date of such surrender and payment is a date on
which the stock transfer books of the Company are closed, such person shall be
deemed to have become the record holder of such shares as of, and the
certificate for such shares shall be dated, the next succeeding business day on
which the stock transfer books of the Company are open (whether before, on or
after the Expiration Date) and the Warrant Agent shall be under no duty to
deliver the certificate for such shares until such date.
E. The Warrants outstanding at the date fixed for redemption may be
redeemed at the option of the Company, in whole or in part on a pro rata basis,
at a price equal to $0.01 per Warrant (the "Redemption Price") at any time after
the date falling six months from the date of first issuance of the Warrants
issued in the public offering as described in the recitals if, at the time
notice of such redemption is given by the Company as provided in Subsection F
below, the Market Price equals or exceeds $__________. For purposes of this
Subsection E, "Calculation Date" shall mean a date within three days of the
mailing of the notice of redemption, as provided in Subsection F below. "Market
Price" shall mean the average last reported sale price of the Common Stock, for
the 30 consecutive trading days ending on the Calculation Date, as reported by
the primary exchange on which the Common Stock is traded, if the Common Stock is
traded on a national securities exchange, or by Nasdaq, if the Common Stock is
traded on the Nasdaq National Market, or, if not listed on the Nasdaq National
Market or traded on any such exchange, the average of the bid and asked price
per share on Nasdaq or, if such quotations are not available, the fair market
value per share of the Common Stock as reasonably determined by the Board of
Directors of the Company. In the event the Company exercises its right to
redeem the Warrants, such Warrants will be exercisable until the close of
business on the business day immediately preceding the date fixed for
redemption. As of the date fixed for redemption, the holders of record of
redeemed Warrants shall be entitled to payment of the Redemption Price upon
surrender of such redeemed Warrants to the Company at the Stock Transfer Office
of the Warrant Agent.
F. Notice of redemption of Warrants shall be given at least 30 days
but not more than 60 days prior to the redemption date by mailing, by registered
or certified mail, return receipt requested, a copy of such notice to the
Warrant Agent and to all of the holders of record
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of Warrants at their respective addresses appearing on the books or transfer
records of the Company or such other address designated in writing by the holder
of record to the Warrant Agent.
G. From and after the redemption date, all rights of the Warrantholders
(except the right to receive the Redemption Price) shall terminate, but only if
(a) no later than one day prior to the redemption date the Company shall have
irrevocably deposited with the Warrant Agent as paying agent a sufficient amount
to pay on the redemption date the Redemption Price for all Warrants called for
redemption and (b) the notice of redemption shall have stated the name and
address of the Warrant Agent and the intention of the Company to deposit such
amount with the Warrant Agent no later than one day prior to the redemption
date.
H. The Warrant Agent shall pay to the holders of record of redeemed
Warrants all monies received by the Warrant Agent for the redemption of Warrants
to which the holders of record of such redeemed Warrants who shall have
surrendered their Warrants are entitled.
I. Any amounts deposited with the Warrant Agent that are not required for
redemption of Warrants may be withdrawn by the Company. Any amounts deposited
with the Warrant Agent that shall be unclaimed after six months after the
redemption date may be withdrawn by the Company, and thereafter the holders of
the Warrants called for redemption for which such funds were deposited shall
look solely to the Company for payment. The Company shall be entitled to the
interest, if any, on funds deposited with the Warrant Agent and the holders of
redeemed Warrants shall have no right to any such interest.
J. If the Company fails to make a sufficient deposit with the Warrant
Agent as provided above, the holder of any Warrants called for redemption may at
the option of the holder (a) by notice to the Company declare the notice of
redemption a nullity as to such holder, or (b) maintain an action against the
Company for the Redemption Price. If the holder brings such an action, the
Company will pay reasonable attorneys' fees of the holder. If the holder fails
to bring an action against the Company for the Redemption Price within 60 days
after the redemption date, the holder shall be deemed to have elected to declare
the notice of redemption to be a nullity as to such holder and such notice shall
be without any force or effect as to such holder. Except as otherwise
specifically provided in this Subsection J, a notice of redemption, once mailed
by the Company as provided in Subsection F shall be irrevocable.
SECTION 8. FRACTIONAL INTERESTS
The Company shall not be required to issue any Warrant Certificate
evidencing a fraction of a Warrant or to issue fractions of shares of securities
on the exercise of the Warrants. If any fraction (calculated to the nearest
one-hundredth) of a Warrant or a share of securities would, except for the
provisions of this Section, be issuable on the exercise of any Warrant, the
Company shall, at its option, either purchase such fraction for an amount in
cash equal to the current value of such fraction computed on the basis of the
Market Price, except that for all purposes of this Section 8, the time periods
set forth in the definition thereof shall be the trading day immediately
preceding the day upon which such Warrant Certificate was surrendered for
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exercise in accordance with Section 7 hereof or issue the required, fractional
Warrant or share. By accepting a Warrant Certificate, the holder thereof
expressly waives any right to receive a Warrant Certificate evidencing any
fraction of a Warrant or to receive any fractional share of securities upon
exercise of a Warrant, except as expressly provided in this Section 8.
SECTION 9. RESERVATION AND LISTING OF EQUITY SECURITIES
The Company covenants that it will at all times reserve and keep available,
free from any pre-emptive rights, out of its authorized and unissued equity
securities, solely for the purpose of issue upon exercise of the Warrants, such
number of shares of equity securities of the Company, including the Common
Stock, as shall then be issuable upon the exercise of all outstanding Warrants
("Equity Securities"). The Company covenants that all Equity Securities which
shall be so issuable shall, upon such issue, be duly authorized, validly issued,
fully paid and non-assessable.
The issuance of the Units, the Common Stock and the Warrants included in
the Units and the Equity Securities to be delivered upon the exercise of the
Warrants have been registered under the Securities Act pursuant to the Company's
Registration Statement on Form S-1 (Registration No. 333-05369). The Company
covenants and agrees that from and after the date hereof: (a) it will use its
best efforts either (i) to maintain the effectiveness of the Registration
Statement and, to the extent required under applicable law, to keep such
Registration Statement current, through the Expiration Date or until such time
as no Warrants remain outstanding or (ii) to prepare and file with the
Securities and Exchange Commission a registration statement and the prospectuses
used in connection therewith as may be necessary to keep such registration
statement with respect to the Equity Securities to be delivered upon the
exercise of the Warrants effective and, to the extent required under applicable
law, to keep such registration statement current from the date of issuance
thereof through the Expiration Date or until such earlier time as no Warrants
remain outstanding; (b) as expeditiously as possible, it will register or
qualify the Equity Securities to be delivered upon exercise of the Warrants
under the securities or Blue Sky laws of each jurisdiction in which such
registration or qualification is necessary and use its best efforts to maintain
all such registrations or qualifications in effect from the date of issuance
thereof through the Expiration Date or until such earlier time as no Warrants
remain outstanding; PROVIDED, that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified or
to take any action which would subject it to general service of process in any
jurisdiction where it is not now so subject; (c) it will pay all expenses
incurred by the Company in complying with this Section 9, including, without
limitation, (i) all registration and filing fees, (ii) all printing expenses,
(iii) all fees and disbursements of counsel for the Company and independent
public accountants, (iv) all NASD and Blue Sky fees and expenses (including fees
and expenses of counsel in connection with any Blue Sky surveys), and (v) the
entire expense of any special audits incident to or required by any such
registration; and (d) it will use its best efforts to list for quotation on the
Nasdaq National Market, or such other over-the-counter quotation system on which
the Common Stock may at any time be listed, or on any national securities
exchange on which the Common Stock may at any time be listed, the Equity
Securities, and will maintain such listing so long as any other
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shares of Equity Securities are so listed; and the Company shall use its best
efforts to so list on the Nasdaq National Market, or such other over-the-counter
quotation system, or each national securities exchange, and shall maintain such
listing of, any other shares of capital stock of the Company issuable upon the
exercise of the Warrants if and so long as any shares of capital stock of the
same class are traded on the Nasdaq National Market or such over-the-counter
quotation system or listed on such national securities exchange, and any such
quotation or listing will be at the Company's expense; PROVIDED, HOWEVER, that
in no event shall such Equity Securities be issued, and the Company is
authorized to refuse to honor the exercise of any Warrant, if such exercise
would result in the opinion of the Company's Board of Directors, upon advice of
counsel, in the violation of any law; PROVIDED, FURTHER, that in the case of a
Warrant exercisable solely for securities listed on a securities exchange or for
which there are at least two independent market makers, in lieu of obtaining
such registration or approval, the Company may elect to redeem Warrants
submitted to the Warrant Agent for exercise for a price equal to the difference
between the aggregate low asked price, or closing price, as the case may be, of
the securities for which such Warrant is exercisable on the date of such
submission and the Exercise Price of such Warrants; in the event of such
redemption, the Company will pay to the holder of such Warrants the
above-described redemption price in cash within 10 business days after receipt
of notice from the Warrant Agent that such Warrants have been submitted for
exercise; PROVIDED, FURTHER, that the foregoing provisos shall not affect or in
any way limit the obligations of the Company pursuant to clauses (a) and (b) of
this paragraph.
SECTION 10. REDUCTION OF EXERCISE PRICE BELOW PAR VALUE
Before taking any action that would cause an adjustment pursuant to
Section 6 hereof reducing the portion of the Exercise Price required to purchase
one share of capital stock below the then par value (if any) of a share of such
capital stock, the Company will use its best efforts to take any corporate
action which, in the opinion of its counsel, may be necessary in order that the
Company may validly and legally issue fully paid and non-assessable shares of
such capital stock.
SECTION 11. PAYMENT OF CERTAIN TAXES
The Company covenants and agrees that it will pay when due and payable any
and all federal and state documentary stamp and other original issue taxes which
may be payable in respect of the original issuance of the Warrant Certificates,
or any shares of Common Stock or other securities upon the exercise of Warrants.
The Company shall not, however, be required (i) to pay any tax which may be
payable in respect of any transfer involved in the transfer and delivery of
Warrant Certificates or the issuance or delivery of certificates for Common
Stock or other securities in a name other than that of the registered holder of
the Warrant Certificate surrendered for purchase or (ii) to issue or deliver any
certificate for shares of Common Stock or other securities upon the exercise of
any Warrant Certificate until any such tax shall have been paid, all such taxes
being payable by the holder of such Warrant Certificate at the time of
surrender.
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SECTION 12. NOTICE OF CERTAIN CORPORATE ACTION
In case the Company after the date hereof shall propose (i) to take a
record of the holders of any class of securities for the purpose of determining
the holders thereof that are entitled to receive any dividend or other
distribution, rights to subscribe for or purchase any additional shares of any
class of its capital stock or any other securities or property, any evidences of
its indebtedness or assets, or any other rights or options, (ii) to effect any
reclassification of Common Stock (other than a change in the par value of the
Common Stock) or any capital reorganization, or any consolidation or merger to
which the Company is a party and for which approval of any stockholders of the
Company is required, or any sale, lease, transfer or other disposition of all or
substantially all of its property and assets, or the liquidation, voluntary or
involuntary dissolution or winding-up of the Company, or (iii) the commencement
by any "person" or "group" (within the meaning of Section 13(d) and
Section 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) of a
BONA FIDE tender offer or exchange offer in accordance with the rules and
regulations of the Exchange Act to purchase shares of Common Stock of the
Company, then, in each such case, the Company shall file with the Warrant Agent,
and the Company, or the Warrant Agent on its behalf, shall mail (by first-class,
postage prepaid mail) to all registered holders of the Warrant Certificates
notice of such proposed action or event, which notice shall specify the date on
which the books of the Company shall close or a record be taken for such
dividend, distribution, offer of rights or options, or the date on which such
reclassification, reorganization, consolidation, merger, sale, lease, transfer,
other disposition, liquidation, voluntary or involuntary dissolution, winding-up
or tender offer shall take place, commence, or be completed, as the case may be,
and which shall also specify any record date for determination of holders of
Common Stock entitled to vote thereon or participate therein, and as of which
the holders of record of the Company's Common Stock (or other securities) shall
be entitled to exchange their shares of such Common Stock (or other securities)
for the securities or other property deliverable upon such reorganization,
reclassification, recapitalization, consolidation, merger, sale, lease,
transfer, other disposition, dissolution, liquidation, winding-up, tender offer
or other event, and shall set forth such facts with respect thereto as shall be
reasonably necessary to indicate any adjustments in the Exercise Price and the
number or kind of shares or other securities, cash or property purchasable upon
exercise of Warrants which will be required as a result of such action, if
applicable. Such notice shall be filed and mailed in the case of any action
covered by clause (i) above, at least 10 days prior to the record date for
determining holders of the Common Stock for purposes of such action or, if a
record is not to be taken, the date as of which the holders of shares of Common
Stock of record are to be entitled to such offering; and, in the case of any
action covered by clauses (ii) and (iii) above, at least 20 days prior to the
earlier of the date on which such reclassification, reorganization,
consolidation, merger, sale, lease, transfer, other disposition, liquidation,
voluntary or involuntary dissolution or winding-up, exchange or tender offer is
expected to become effective or be completed and the date on which it is
expected that holders of shares of Common Stock of record shall be entitled to
exchange their shares for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger, sale, transfer, other
disposition, liquidation, voluntary or involuntary dissolution or winding-up,
exchange or tender offer.
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Failure to give any notice or any defect therein shall not affect the
legality or validity of any transaction listed in this Section 12.
SECTION 13. DISPOSITION OF PROCEEDS ON EXERCISE OF WARRANT CERTIFICATES,
ETC.
The Warrant Agent shall account promptly to the Company with respect to
Warrants exercised and concurrently pay to the Company all moneys received by
the Warrant Agent for the purchase of securities or other property through the
exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by Warrantholders during normal business hours at its Stock Transfer
Office. Copies of this Agreement may be obtained upon written request addressed
to the Warrant Agent at its Stock Transfer Office.
SECTION 14. WARRANTHOLDER NOT DEEMED A STOCKHOLDER
No Warrantholder, as such, shall be entitled to vote, receive dividends or
be deemed the holder of Common Stock or any other securities of the Company
which may at any time be issuable on the exercise of the Warrants represented
thereby for any purpose whatsoever, nor shall anything contained herein or in
any Warrant Certificate be construed to confer upon any Warrantholder, as such,
any of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issuance of stock, reclassification of stock, change
of par value or change of stock to no par value, consolidation, merger,
conveyance or otherwise), or to receive notice of meetings or other actions
affecting stockholders (except as provided in Section 12 hereof), or to receive
dividends or subscription rights, or otherwise, until such Warrant Certificate
shall have been exercised in accordance with the provisions hereof and the
receipt by the Warrant Agent of the Exercise Price and any other amounts payable
upon such exercise.
SECTION 15. RIGHTS OF ACTION
All rights of action in respect to this Agreement are vested in the
respective registered holders of the Warrant Certificates; and any registered
holder of any Warrant Certificate, without the consent of the Warrant Agent or
of any other holder of a Warrant Certificate, may, in his own behalf for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company suitable to enforce, or otherwise in respect of, his right
to exercise the Warrants evidenced by such Warrant Certificate, for the purchase
of shares of the Common Stock in the manner provided in the Warrant Certificate
and in this Agreement.
SECTION 16. AGREEMENT OF HOLDERS OF WARRANT CERTIFICATES
Every holder of a Warrant Certificate by accepting the same consents and
agrees with the Company, the Warrant Agent and with every other holder of a
Warrant Certificate that:
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A. The Warrant Certificates are transferable on the registry books of the
Warrant Agent only upon the terms and conditions set forth in this Agreement;
and
B. The Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the absolute and lawful
owner of the Warrant (notwithstanding any notation of ownership or other writing
thereon made by anyone other than the Company or the Warrant Agent) for all
purposes whatsoever and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary.
SECTION 17. CANCELLATION OF WARRANT CERTIFICATES
In the event that the Company shall purchase or otherwise acquire any
Warrant Certificate or Certificates after the issuance thereof, such Warrant
Certificate or Certificates shall thereupon be delivered to the Warrant Agent
and be canceled by it and retired. The Warrant Agent shall also cancel any
Warrant Certificate delivered to it for exercise, in whole or in part, or
delivered to it for transfer, split-up, combination or exchange. Warrant
Certificates so canceled shall be delivered by the Warrant Agent to the Company
from time to time, or disposed of in accordance with the instructions of the
Company.
SECTION 18. CONCERNING THE WARRANT AGENT
The Company agrees to pay to the Warrant Agent from time to time, on demand
of the Warrant Agent, reasonable compensation for all services rendered by it
hereunder and also its reasonable expenses, including counsel fees, and other
disbursements incurred in the administration and execution of this Agreement and
the exercise and performance of its duties hereunder. The Company also agrees
to indemnify the Warrant Agent for, and to hold it harmless against, any loss,
liability or expense, incurred without gross negligence, bad faith or willful
misconduct on the part of the Warrant Agent, arising out of or in connection
with the acceptance and administration of this Agreement.
SECTION 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT
Any corporation into which the Warrant Agent may be merged or with which it
may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Warrant Agent, shall be the
successor to the Warrant Agent hereunder without the execution or filing of any
paper or any further act on the part of any of the parties hereto, provided that
such corporation would be eligible for appointment as a successor warrant agent
under the provisions of Section 21 hereof. In case at the time such successor
to the Warrant Agent shall succeed to the agency created by this Agreement, any
of the Warrant Certificates shall have been countersigned but not delivered, any
such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent and deliver such Warrant Certificates so countersigned;
and in case at that time any of the Warrant Certificates shall not have been
countersigned, any successor to the Warrant Agent may countersign such Warrant
Certificates either in the name of the predecessor Warrant Agent or in the name
of the successor Warrant
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Agent; and in all such cases such Warrant Certificates shall have the full force
provided in the Warrant Certificates and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and at
such time any of the Warrant Certificates shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior name
and deliver Warrant Certificates so countersigned; and in case at that time any
of the Warrant Certificates shall not have been countersigned, the Warrant Agent
may countersign such Warrant Certificates either in its prior name or in its
changed name; and in all such cases such Warrant Certificates shall have the
full force provided in the Warrant Certificates and in this Agreement.
SECTION 20. DUTIES OF WARRANT AGENT
The Warrant Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions, by all of which the Company
and the holders of Warrant Certificates, by their acceptance thereof, shall be
bound:
A. The Warrant Agent may consult with counsel satisfactory to it (who may
be counsel for the Company or the Warrant Agent's in-house counsel), and the
opinion of such counsel shall be full and complete authorization and protection
to the Warrant Agent as to any action taken, suffered or omitted by it in good
faith and in accordance with such opinion; PROVIDED, HOWEVER, that the Warrant
Agent shall have exercised reasonable care in the selection of such counsel.
Fees and expenses of such counsel, to the extent reasonable, shall be paid by
the Company.
B. Whenever in the performance of its duties under this Agreement, the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chief Executive Officer or the
President or a Vice President or the Secretary of the Company and delivered to
the Warrant Agent; and such certificate shall be full authorization to the
Warrant Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
C. The Warrant Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
D. The Warrant Agent shall not be liable for or by reason of any of the
statements of fact or recitals contained in this Agreement or in the Warrant
Certificates (except its countersignature on the Warrant Certificates and such
statements or recitals as describe the Warrant Agent or action taken or to be
taken by it) or be required to verify the same, but all such statements and
recitals are and shall be deemed to have been made by the Company only.
E. The Warrant Agent shall not be under any responsibility in respect of
the validity of this Agreement or the execution and delivery hereof (except the
due execution hereof
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by the Warrant Agent) or in respect of the validity or execution of any Warrant
Certificate (except its countersignature thereof); nor shall it be responsible
for any breach by the Company of any covenant or condition contained in this
Agreement or in any Warrant Certificate; nor shall it be responsible for the
making of any change in the number of shares of Common Stock for which a Warrant
is exercisable required under the provisions of Section 6 or responsible for the
manner, method or amount of any such change or the ascertaining of the existence
of facts that would require any such adjustment or change (except with respect
to the exercise of Warrant Certificates after actual notice of any adjustment of
the Exercise Price); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any shares
of Common Stock to be issued pursuant to this Agreement or any Warrant
Certificate or as to whether any shares of Common Stock will, when issued, be
validly issued, fully paid and non-assessable.
F. The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or take any other action likely to involve
expense unless the Company or one or more registered holders of Warrant
Certificates shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred. All rights of
action under this Agreement or under any of the Warrants may be enforced by the
Warrant Agent without the possession of any of the Warrants or the production
thereof at any trial or other proceeding relative thereto, and any such action,
suit or proceeding instituted by the Warrant Agent shall be brought in its name
as Warrant Agent, and any recovery of judgment shall be for the ratable benefit
of the registered holders of the Warrant Certificates, as their respective
rights or interests may appear.
G. The Warrant Agent and any stockholder, director, officer or employee
of the Warrant Agent may buy, sell or deal in any of the Warrants or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to or
otherwise act as fully and freely as though it were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.
H. The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chief Executive Officer or President or a Vice President or the Secretary of the
Company, and to apply to such officers for advice or instructions in connection
with the Warrant Agent's duties, and it shall not be liable for any action taken
or suffered or omitted by it in good faith in accordance with instructions of
any such officer.
I. The Warrant Agent will not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.
J. The Warrant Agent may execute and exercise any of the rights or powers
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys, agents or employees and the Warrant Agent shall not be answerable
or accountable for any act,
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default, neglect or misconduct of any such attorneys, agents or employees or for
any loss to the Company resulting from such neglect or misconduct; PROVIDED,
HOWEVER, that reasonable care shall have been exercised in the selection and
continued employment of such attorneys, agents and employees.
K. The Warrant Agent will not incur any liability or responsibility to
the Company or to any holder of any Warrant Certificate for any action taken, or
any failure to take action, in reliance on any notice, resolution, waiver,
consent, order, certificates or other paper, document or instrument reasonably
believed by the Warrant Agent to be genuine and to have been signed, sent or
presented by the proper party or parties.
L. The Warrant Agent will act hereunder solely as agent of the Company in
a ministerial capacity, and its duties will be determined solely by the
provisions hereof The Warrant Agent will not be liable for anything which it may
do or refrain from doing in connection with this Agreement except for its own
negligence, bad faith or willful conduct.
SECTION 21. CHANGE OF WARRANT AGENT
The Warrant Agent may resign and be discharged from all further duties and
liabilities under this Agreement (except liabilities arising as a result of the
Warrant Agent's own negligence or willful misconduct) upon 30 days' prior notice
in writing mailed, by registered or certified mail, to the Company. The Company
may remove the Warrant Agent or any successor warrant agent upon 30 days' prior
notice in writing, mailed to the Warrant Agent or successor warrant agent, as
the case may be, by registered or certified mail. If the Warrant Agent shall
resign or be removed or shall otherwise become incapable of acting, the Company
shall appoint a successor to the Warrant Agent and shall, within 15 days
following such appointment, give notice thereof in writing to each registered
holder of the Warrant Certificates. If the Company shall fail to make such
appointment within a period of 15 days after giving notice of such removal or
after it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Warrant Agent, then the holder of any Warrant
Certificate may apply to any court of competent jurisdiction for the appointment
of a new Warrant Agent. Any new Warrant Agent, whether appointed by the Company
or by such a court, shall be a bank or trust company having capital and surplus
of not less than $10,000,000 or a stock transfer company that is a registered
transfer agent under the Exchange Act. After appointment and execution of a
copy of this Agreement in effect at that time, the successor Warrant Agent shall
be vested with the same powers, rights, duties and responsibilities as if it had
been originally named as Warrant Agent without further act or deed; but the
former Warrant Agent shall deliver and transfer to the successor Warrant Agent,
within a reasonable time, any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Failure to give any notice provided for in this Section, however,
or any defect therein shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
warrant agent, as the case may be.
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SECTION 22. ISSUANCE OF NEW WARRANT CERTIFICATES
Notwithstanding any of the provisions of this Agreement or the several
Warrant Certificates to the contrary, the Company may, at its option, issue new
Warrant Certificates in such form as may be approved by its Board of Directors
to reflect any adjustment or change in the Exercise Price or the number or kind
of shares purchasable under the several Warrant Certificates made in accordance
with the provisions of this Agreement.
SECTION 23. NOTICES
Notice or demand pursuant to this Agreement to be given or made on the
Company by the Warrant Agent or by the registered holder of any Warrant
Certificate shall be sufficiently given or made if sent by first-class or
registered mail, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows: Progenitor, Inc.,
1507 Chambers Road, Columbus, Ohio 43212, Attention: Douglass B. Given M.D.,
Ph.D., with a copy to Morrison & Foerster LLP, 425 Market Street, San Francisco,
California 94105, Attention: Gavin B. Grover, Esq.
Subject to the provisions of Section 21, any notice pursuant to this
Agreement to be given or made by the Company or by the holder of any Warrant
Certificate to or on the Warrant Agent shall be sufficiently given or made if
sent by first-class or registered mail, postage prepaid, addressed (until
another address is filed in writing by the Warrant Agent with the Company) as
follows: __________________________, Attention: Corporate Trust Department.
Any notice or demand authorized to be given or made to the registered
holder of any Warrant Certificate under this Agreement shall be sufficiently
given or made if sent by first-class or registered mail, postage prepaid, to the
last address of such holder as it shall appear on the registers maintained by
the Warrant Agent.
SECTION 24. MODIFICATION OF AGREEMENT
The Company and the Warrant Agent, without the consent of any Warrant
holder, may supplement this Agreement in order to make any changes in this
Agreement which the Warrant Agent has been advised by counsel (i) are required
to cure any ambiguity or to correct any defective or inconsistent provision or
clerical omission or mistake or manifest error contained herein, (ii) add to the
covenants and agreements of the Company or the Warrant Agent in the Warrants
such further covenants and agreements thereafter to be observed or (iii) result
in the surrender of any right or power reserved to or conferred upon the Company
or the Warrant Agent in the Warrants, but which changes or corrections do not or
will not adversely affect, alter or change the rights, privileges or immunities
of the registered holders of Warrants. In addition, this Agreement may be
modified, supplemented or altered with the consent in writing of the holders of
Warrants representing not less than 50% of the Warrants then outstanding, except
that no change in the number or nature of the securities purchasable upon the
exercise of any Warrant, or increase in the applicable Exercise Price therefor,
or acceleration of the Expiration Date shall be made without the consent in
writing of the registered holder of each Warrant. For
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the purposes of any amendment, modification or waiver hereunder, Warrants held
by the Company or any affiliate of the Company shall be disregarded.
Any modification or amendment made in accordance with this Agreement will
be conclusive and binding on all present and future holders of Warrant
Certificates whether or not they have consented to such modification or
amendment or waiver and whether or not notation of such modification or
amendment is made upon such Warrant Certificates. Any instrument given by or on
behalf of any holder of a Warrant Certificate in connection with any consent to
any modification or amendment made in accordance with this Agreement will be
conclusive and binding on all subsequent holders of such Warrant Certificate.
As of the date hereof, this Agreement contains the entire and only
agreement, understanding, representation, condition, warranty or covenant
between the parties hereto with respect to the matters herein, supersedes any
and all other agreements between the parties hereto relating to such matters,
and may be modified or amended only by a written agreement signed by both
parties hereto pursuant to the authority granted by the first sentence of this
Section.
SECTION 25. SUCCESSORS
All the covenants and provisions of this Agreement by or for the benefit of
the Company or the Warrant Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
SECTION 26. GOVERNING LAW
This Agreement and each Warrant Certificate issued hereunder shall be
governed by and construed in accordance with the laws of the State of New York,
without reference to principles of conflict of laws.
SECTION 27. TERMINATION
This Agreement shall terminate as of the close of business on the
Expiration Date, or such earlier date upon which all Warrants shall have been
exercised or redeemed, except that the Warrant Agent shall account to the
Company as to all Warrants outstanding and all cash held by it as of the close
of business on the Expiration Date.
SECTION 28. BENEFITS OF THIS AGREEMENT
Nothing in this Agreement or in the Warrant Certificates shall be construed
to give to any person or corporation other than the Company, the Warrant Agent,
their respective successors and assigns hereunder, and the registered holders of
the Warrant Certificates any legal or equitable right, remedy or claim under
this Agreement; but this Agreement shall be for the sole and exclusive benefit
of the Company, the Warrant Agent, their respective successors and assigns
hereunder, and the registered holders of the Warrant Certificates.
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SECTION 29. DESCRIPTIVE HEADINGS
The descriptive headings of the several sections of this Agreement are
inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof
SECTION 30. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but such counterparts shall together constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, all as of the day and year first above written.
PROGENITOR, INC.
By:
---------------------------------
Douglass B. Given M.D., Ph.D.
President and Chief Executive Officer
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By:
---------------------------------
Title:
---------------------------------
<PAGE>
PROGENITOR, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
(amended and restated as of July 28, 1997)
The following constitute the provisions of the 1996 Employee Stock
Purchase Plan of Progenitor, Inc.
1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its Designated Parents or Subsidiaries with an opportunity to
purchase Common Stock of the Company through accumulated payroll deductions. It
is the intention of the Company to have the Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Code. The provisions of the Plan,
accordingly, shall be construed so as to extend and limit participation in a
manner consistent with the requirements of that section of the Code.
2. DEFINITIONS. As used herein, the following definitions shall
apply:
(a) "ACCRUAL PERIOD" shall mean a period of approximately six months,
commencing on April 1 and October 1 of each year and terminating on the next
following September 30 or March 31, respectively; provided, however, that (i)
the first Accrual Period shall commence on the Effective Date and shall end on
March 31, 1998 and (ii) the second Accrual Period with respect to the Subsequent
Purchase Period, if any, shall commence on the effective date of the Subsequent
Purchase Period established by the Plan Administrator as provided in
paragraph 4(a) and shall end on March 31, 1998.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(d) "COMMON STOCK" shall mean the common stock of the Company.
(e) "COMPANY" shall mean Progenitor, Inc., a Delaware corporation.
(f) "COMPENSATION" shall mean an Employee's base salary, commissions,
overtime, and bonuses from the Company or one or more Designated Parents or
Subsidiaries, including such amounts as are deferred by the Employee (i) under a
qualified cash or deferred arrangement described in Section 401(k) of the Code,
or (ii) to a plan qualified under Section 125 of the Code. Compensation does
not include annual awards, other incentive payments, shift premiums, long-term
disability payments, worker's compensation, reimbursements or other expense
allowances, fringe benefits (cash or noncash), moving expenses, deferred
compensation, contributions (other than contributions described in the first
sentence) made on the Employee's behalf by the Company or one or more Designated
Parents or Subsidiaries under any employee benefit or welfare plan now or
hereafter established, and any other payments not specifically referenced in the
first sentence.
<PAGE>
(g) "CORPORATE TRANSACTION" shall mean any of the following
stockholder-approved transactions to which the Company is a party:
(1) 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;
(2) 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;
(3) 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
(4) 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.
(h) "DESIGNATED PARENTS OR SUBSIDIARIES" shall mean the Parents or
Subsidiaries which have been designated by the Plan Administrator from time to
time in its sole discretion as eligible to participate in the Plan.
(i) "EFFECTIVE DATE" shall mean the date on which the Pricing
Committee of the Board agrees with the underwriters as to the price at which the
Units will be offered to the public in the initial public offering of the Units.
However, should any Designated Parent or Subsidiary become a participating
company in the Plan after such date, then such entity shall designate a separate
Effective Date with respect to its employee-participants.
(j) "EMPLOYEE" shall mean any individual who is engaged in the
rendition of personal services to the Company or a Designated Parent or
Subsidiary for Compensation. For purposes of the Plan, the employment
relationship shall be treated as continuing intact while the individual is on
sick leave or other leave of absence approved by the individual's employer.
Where the period of leave exceeds 90 days and the individual's right to
reemployment is not guaranteed either by statute or by contract, the employment
relationship will be deemed to have terminated on the 91st day of such leave.
(k) "ENROLLMENT DATE" shall mean the first day of each Purchase
Period.
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(l) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(m) "EXERCISE DATE" shall mean the last day of each Accrual Period.
(n) "FAIR MARKET VALUE" shall mean, as of any date, the value of
Common Stock determined as follows:
(1) Where there exists a public market for the Common Stock, the
Fair Market Value shall be (A) the closing sales price for a share of
Common Stock 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 stock exchange
determined by the Administrator to be the primary market for the
Common Stock or the Nasdaq National Market, 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 of Common Stock on the Nasdaq Small Cap Market for the day prior
to the time of the determination (or, if no such prices were reported
on that date, on the last date on which such prices were reported), in
each case as reported in THE WALL STREET JOURNAL or such other source
as the Plan Administrator deems reliable;
(2) In the absence of an established market of the type
described in (1), above, for the Common Stock, and subject to (3),
below, the Fair Market Value thereof shall be determined by the Plan
Administrator in good faith; or
(3) On the Effective Date, the Fair Market Value shall be the
portion of the Unit IPO Price which is allocated by the Board (acting
as the Board or through a committee) in good faith, after consultation
with independent financial advisers, to the Common Stock included in
the Units, net of discounts and underwriting commissions. "Unit IPO
Price" shall mean the price at which the Board (acting as the Board or
through a committee) and the underwriters agree to offer Units to the
public in the initial public offering of the Units, net of discounts
and underwriting commissions.
(o) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(p) "PARTICIPANT" shall mean an Employee of the Company or Designated
Parent or Subsidiary who is actively participating in the Plan.
(q) "PLAN" shall mean this Employee Stock Purchase Plan.
(r) "PLAN ADMINISTRATOR" shall mean either the Board or a committee
of the Board that is responsible for the administration of the Plan.
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(s) "PURCHASE PERIOD" shall mean a purchase period established
pursuant to paragraph 4 hereof.
(t) "PURCHASE PRICE" shall mean an amount equal to 85% of the Fair
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(u) "RESERVES" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(v) "SUBSIDIARY" shall mean a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.
(w) "UNIT" shall mean a unit consisting of one share of Common Stock
and one warrant to purchase one share of Common Stock.
3. ELIGIBILITY.
(a) GENERAL. Any individual who is an Employee on a given Enrollment
Date shall be eligible to participate in the Plan for the Purchase Period
commencing with such Enrollment Date.
(b) LIMITATIONS ON GRANT AND ACCRUAL. Any provisions of the Plan to
the contrary notwithstanding, no Employee shall be granted an option under the
Plan (i) if, immediately after the grant, such Employee (taking into account
stock owned by any other person whose stock would be attributed to such Employee
pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding
options to purchase stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or of any
Parent or Subsidiary of the Company, or (ii) which permits his or her rights to
purchase stock under all employee stock purchase plans of the Company and its
Parents or Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand
Dollars ($25,000) worth of stock (determined at the Fair Market Value of the
shares at the time such option is granted) for each calendar year in which such
option is outstanding at any time. The determination of the accrual of the
right to purchase stock shall be made in accordance with Section 423(b)(8) of
the Code and the regulations thereunder.
(c) OTHER LIMITS ON ELIGIBILITY. Notwithstanding subparagraph (a),
above, the following Employees shall not be eligible to participate in the Plan
for any relevant Purchase Period: (i) Employees whose customary employment is 20
or fewer hours or less per week; (ii) Employees whose customary employment is
for not more than 5 or fewer months in any calendar year; and (iii) Employees
who are subject to rules or laws of a foreign jurisdiction that prohibit or make
impractical the participation of such Employees in the Plan.
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4. PURCHASE PERIODS.
(a) The Plan shall be implemented through overlapping or consecutive
Purchase Periods until such time as (i) the maximum number of shares of Common
Stock available for issuance under the Plan shall have been purchased or
(ii) the Plan shall have been sooner terminated in accordance with paragraph 19
hereof. The maximum duration of a Purchase Period shall be twenty-seven (27)
months. Initially, the Plan shall be implemented through overlapping Purchase
Periods of twenty-four (24) months' duration commencing each April 1 and
October 1 following the Effective Date (except that (x) the initial Purchase
Period shall commence on the Effective Date and shall end on September 30, 1999
and (y) the Plan Administrator shall have the authority to establish a
subsequent Purchase Period (the "Subsequent Purchase Period") that shall
commence on the date the Plan Administrator selects and shall end on
September 30, 1999). The Plan Administrator shall have the authority to change
the length of any Purchase Period and the length of Accrual Periods within any
such Purchase Period subsequent to the initial Purchase Period by announcement
at least thirty (30) days prior to the commencement of the Purchase Period and
to determine whether subsequent Purchase Periods shall be consecutive or
overlapping.
(b) A Participant shall be granted a separate option for each
Purchase Period in which he/she participates. The option right shall be granted
on the Enrollment Date and shall be automatically exercised in successive
installments on the Exercise Dates ending within the Purchase Period.
(c) An Employee may participate in only one Purchase Period at a
time. Accordingly, except as provided in paragraph 4(d), an Employee who wishes
to join a new Purchase Period must withdraw from the current Purchase Period in
which he/she is participating and must also enroll in the new Purchase Period
prior to the Enrollment Date for that Purchase Period.
(d) If on the first day of any Accrual Period in a Purchase Period in
which a Participant is participating, the Fair Market Value of the Common Stock
is less than the Fair Market Value of the Common Stock on the Enrollment Date of
the Purchase Period (after taking into account any adjustment during the
Purchase Period pursuant to paragraph 18(a)), the Purchase Period shall be
terminated automatically and the Participant shall be enrolled automatically in
the new Purchase Period which has its first Accrual Period commencing on that
date, provided the Participant is eligible to participate in the Plan on that
date and has not elected to terminate participation in the Plan.
(e) Except as specifically provided herein, the acquisition of Common
Stock through participation in the Plan for any Purchase Period shall neither
limit nor require the acquisition of Common Stock by a Participant in any
subsequent Purchase Period.
5. PARTICIPATION.
(a) An eligible Employee may become a Participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and
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filing it with the Company's payroll office at least ten (10) business days
prior to the Enrollment Date for the Purchase Period in which such participation
will commence, unless a later time for filing the subscription agreement is set
by the Plan Administrator for all eligible Employees with respect to a given
Purchase Period.
(b) Payroll deductions for a Participant shall commence with the
first payroll period following the Enrollment Date and shall end on the last
complete payroll period during the Purchase Period, unless sooner terminated by
the Participant as provided in paragraph 10.
6. PAYROLL DEDUCTIONS.
(a) At the time a Participant files his/her subscription agreement,
he/she shall elect to have payroll deductions made during the Purchase Period in
an amount not exceeding ten percent (10%) of the Compensation which he/she
receives during the Purchase Period.
(b) All payroll deductions made for a Participant shall be credited
to his/her account under the Plan and will be withheld in whole percentages
only. A Participant may not make any additional payments into such account.
(c) A Participant may discontinue his or her participation in the
Plan as provided in paragraph 10, or may decrease the rate of his/her payroll
deductions during the Purchase Period by completing or filing with the Company a
new subscription agreement authorizing a decrease in the payroll deduction rate.
The decrease in rate shall be effective with the first full payroll period
commencing ten (10) business days after the Company's receipt of the new
subscription agreement unless the Company elects to process a given change in
participation more quickly. A Participant may increase the rate of his/her
payroll deductions for a future Purchase Period by filing with the Company a new
subscription agreement authorizing an increase in the payroll deduction rate
within ten (10) business days (unless the Company elects to process a given
change in participation more quickly) before the commencement of the upcoming
Purchase Period. A Participant's subscription agreement shall remain in effect
for successive Purchase Periods unless terminated as provided in paragraph 10.
The Plan Administrator shall be authorized to limit the number of payroll
deduction rate changes during any Purchase Period.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and paragraph 3(b) herein, a Participant's
payroll deductions may be decreased to 0% at such time during any Accrual Period
which is scheduled to end during the current calendar year (the "Current Accrual
Period") that the aggregate of all payroll deductions which were previously used
to purchase stock under the Plan in a prior Accrual Period which ended during
that calendar year plus all payroll deductions accumulated with respect to the
Current Accrual Period equal $21,250. Payroll deductions shall recommence at
the rate provided in such Participant's subscription agreement at the beginning
of the first Accrual Period which is scheduled to end in the following calendar
year, unless terminated by the Participant as provided in paragraph 10.
7. GRANT OF OPTION. On the Enrollment Date, each Participant in
such Purchase Period shall be granted an option to purchase on each Exercise
Date of such Purchase
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Period (at the applicable Purchase Price) up to a number of shares of the Common
Stock determined by dividing such Participant's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided (i) that such purchase
shall be subject to the limitations set forth in paragraphs 3(b) and 12 hereof,
and (ii) the maximum number of shares of Common Stock a Participant shall be
permitted to purchase in any Accrual Period shall be 5,000 shares, subject to
adjustment as provided in paragraph 18 hereof. Exercise of the option shall
occur as provided in paragraph 8, unless the Participant has withdrawn pursuant
to paragraph 10, and the option, to the extent not exercised, shall expire on
the last day of the Purchase Period.
8. EXERCISE OF OPTION. Unless a Participant withdraws from the Plan
as provided in paragraph 10, below, his/her option for the purchase of shares
will be exercised automatically on each Exercise Date, and the maximum number of
full shares subject to the option shall be purchased for such Participant at the
applicable Purchase Price with the accumulated payroll deductions in his/her
account. No fractional shares will be purchased; any payroll deductions
accumulated in a Participant's account which are not sufficient to purchase a
full share shall be carried over to the next Accrual Period or Purchase Period,
whichever applies, or returned to the Participant, if the Participant withdraws
from the Plan. Any amount remaining in a Participant's account following the
purchase of shares on the Exercise Date which exceeds the cost of one full share
of Common Stock on the Exercise Date shall be returned to the Participant and
shall not be carried over to the next Purchase Period. During a Participant's
lifetime, a Participant's option to purchase shares hereunder is exercisable
only by him/her.
9. DELIVERY. Upon receipt of a request from a Participant after
each Exercise Date on which a purchase of shares occurs, the Company shall
arrange the delivery to such Participant, as appropriate, of a certificate
representing the shares purchased upon exercise of his/her option.
10. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A Participant may withdraw all but not less than all the payroll
deductions credited to his/her account and not yet used to exercise his/her
option under the Plan at any time by giving written notice to the Company in the
form of Exhibit B to this Plan. All of the Participant's payroll deductions
credited to his/her account will be paid to such Participant promptly after
receipt of notice of withdrawal, such Participant's option for the Purchase
Period will be automatically terminated, and no further payroll deductions for
the purchase of shares will be made during the Purchase Period. If a
Participant withdraws from a Purchase Period, payroll deductions will not resume
at the beginning of the succeeding Purchase Period unless the Participant
delivers to the Company a new subscription agreement.
(b) Upon a Participant's ceasing to be an Employee for any reason or
upon termination of a Participant's employment relationship (as described in
paragraph 2(j)), the payroll deductions credited to such Participant's account
during the Purchase Period but not yet used to exercise the option will be
returned to such Participant or, in the case of his/her death, to the person or
persons entitled thereto under paragraph 14, and such Participant's option will
be automatically terminated.
7
<PAGE>
11. INTEREST. No interest shall accrue on the payroll deductions
credited to a Participant's account under the Plan.
12. STOCK.
(a) The maximum number of shares of Common Stock which shall be made
available for sale under the Plan shall be 100,000 shares, subject to adjustment
upon changes in capitalization of the Company as provided in paragraph 18. If
on a given Exercise Date the number of shares with respect to which options are
to be exercised exceeds the number of shares then available under the Plan, the
Plan Administrator shall make a pro rata allocation of the shares remaining
available for purchase in as uniform a manner as shall be practicable and as it
shall determine to be equitable.
(b) A Participant will have no interest or voting right in shares
covered by his/her option until such shares are actually purchased on the
Participant's behalf in accordance with the applicable provisions of the Plan.
No adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date of such purchase.
(c) Shares to be delivered to a Participant under the Plan will be
registered in the name of the Participant or in the name of the Participant and
his/her spouse.
13. ADMINISTRATION. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all persons. Members of the Board
who are eligible Employees are permitted to participate in the Plan except to
the extent limited by subparagraph (b) of this paragraph 13.
14. DESIGNATION OF BENEFICIARY.
(a) Each Participant will file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the Participant's account
under the Plan in the event of such Participant's death. If a Participant is
married and the designated beneficiary is not the spouse, spousal consent shall
be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the Participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a Participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such Participant's death,
the Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the Participant, or if no such executor or
administrator has been appointed (to the knowledge of the Plan Administrator),
the Plan Administrator, in its discretion, may deliver such shares and/or cash
to the spouse or to any one or more dependents or relatives of the Participant,
or if no spouse, dependent or relative is known to the Plan Administrator, then
to such other person as the Plan Administrator may designate.
8
<PAGE>
15. TRANSFERABILITY. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in paragraph 14 hereof) by the Participant. Any
such attempt at assignment, transfer, pledge or other disposition shall be
without effect, except that the Plan Administrator may treat such act as an
election to withdraw funds from a Purchase Period in accordance with paragraph
10.
16. USE OF FUNDS. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. REPORTS. Individual accounts will be maintained for each
Participant in the Plan. Statements of account will be given to Participants at
least annually, which statements will set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE
TRANSACTIONS.
(a) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any
required action by the stockholders of the Company, the Reserves, as well as the
Purchase Price, 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
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 Plan Administrator, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issue 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 thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an option. The Plan Administrator may, if it so determines in the exercise
of its sole discretion, make provision for adjusting the Reserves, as well as
the price per share of Common Stock covered by each outstanding option, in the
event the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock.
(b) CORPORATE TRANSACTIONS. In the event of a proposed Corporate
Transaction, the Plan Administrator may elect to shorten the Purchase Period
then in progress by setting a new Exercise Date (the "New Exercise Date"). If
the Plan Administrator shortens the Purchase Period then in progress in the
event of a Corporate Transaction, the Plan Administrator shall notify each
Participant in writing, at least ten (10) days prior to the New Exercise Date,
that the Exercise Date for his/her option has been changed to the New Exercise
Date and that his/her option will be exercised automatically on the New Exercise
Date, unless prior to such date he/she has withdrawn from the Purchase Period as
provided in paragraph 10. In the event of a proposed Corporate Transaction
(other than a Corporate Transaction described in Section 2(g)(2), above,) in
which the Plan Administrator elects not to shorten the Purchase Period, each
option under the
9
<PAGE>
Plan shall be assumed or an equivalent option shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation.
For purposes of this subparagraph, an option granted under the Plan shall be
deemed to be assumed if, following the Corporate Transaction, the option confers
the right to purchase, for each share of Common Stock subject to the option
immediately prior to the Corporate Transaction, the consideration (whether
stock, cash or other securities or property) received in the Corporate
Transaction by holders of Common Stock for each share of Common stock held on
the effective date of the Corporate Transaction (and if such holders were
offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding shares of Common Stock); provided,
however, that if such consideration received in the Corporate Transaction was
not solely common stock of the successor corporation or its Parent, the Board
may, with the consent of the successor corporation and the Participant, provide
for the consideration to be received upon exercise of the option to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
Corporate Transaction.
19. AMENDMENT OR TERMINATION.
(a) The Plan Administrator may at any time and for any reason
terminate or amend the Plan. Except as provided in paragraph 18, no such
termination can affect options previously granted, provided that a Purchase
Period may be terminated by the Plan Administrator on any Exercise Date if the
Plan Administrator determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in paragraph
18, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any Participant. To the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or any
other applicable law or regulation), the Company shall obtain stockholder
approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
Participant rights may be considered to have been "adversely affected," the Plan
Administrator shall be entitled to change the Purchase Periods, limit the
frequency and/or number of changes in the amount withheld during Purchase
Periods, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, establish additional terms, conditions, rules
or procedures to accommodate the rules or laws of applicable foreign
jurisdictions, permit payroll withholding in excess of the amount designated by
a Participant in order to adjust for delays or mistakes in the Company's
processing of properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for each
Participant properly correspond with amounts withheld from the Participant's
Compensation, and establish such other limitations or procedures as the Plan
Administrator determines in its sole discretion advisable and which are
consistent with the Plan.
20. NOTICES. All notices or other communications by a Participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Plan Administrator at the
location, or by the person, designated by the Plan Administrator for the receipt
thereof.
10
<PAGE>
21. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance. As a condition to the
exercise of an option, the Company may require the Participant 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 of the aforementioned applicable provisions of law. In
addition, no options shall be exercised or shares issued hereunder before the
Plan shall have been approved by stockholders of the Company as provided in
paragraph 23.
22. TERM OF PLAN. The Plan shall become effective upon the earlier
to occur of its adoption by the Board or its approval by the stockholders of the
Company. It shall continue in effect for a term of ten (10) years unless sooner
terminated under paragraph 19.
23. PLAN ADOPTION AND APPROVAL. On August 9, 1996, the Plan was
adopted by the Board and approved by the holder of a majority of the then
outstanding voting stock of the Company. On July __, 1997, the Board adopted
and approved an amendment and restatement of the Plan as provided herein.
24. NO EMPLOYMENT RIGHTS. The Plan does not, directly or indirectly,
create any right for the benefit of any employee or class of employees to
purchase any shares under the Plan, or create in any employee or class of
employees any right with respect to continuation of employment by the Company or
a Designated Parent or Subsidiary, and it shall not be deemed to interfere in
any way with such employer's right to terminate, or otherwise modify, an
employee's employment at any time.
25. EFFECT OF PLAN. The provisions of the Plan shall, in accordance
with its terms, be binding upon, and inure to the benefit of, all successors of
each Participant, including, without limitation, such Participant's estate and
the executors, administrators or trustees thereof, heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such
Participant.
26. APPLICABLE LAW. The law of the State of Delaware (excluding that
body of law pertaining to its conflicts of law) will govern all matters relating
to this Plan except to the extent it is superseded by the laws of the United
States.
11
<PAGE>
EXHIBIT A
PROGENITOR, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
___ Original Application Enrollment Date:_____________
___ Change in Payroll Deduction Rate
___ Change of Beneficiary(ies)
1. I,________________________, hereby elect to participate in
the Progenitor, Inc. 1996 Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") and subscribe to purchase shares of the Company's Common Stock
in accordance with this Subscription Agreement and the Employee Stock Purchase
Plan.
2. I hereby authorize payroll deductions from each paycheck in
the amount of ____% of my Compensation on each payday (not to exceed 10%) during
the Purchase Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that the payroll deductions shall be
accumulated for the purchase of shares of Common Stock at the applicable
Purchase Price determined in accordance with the Employee Stock Purchase Plan.
I understand that if I do not withdraw from a Purchase Period, any accumulated
payroll deductions will be used to automatically exercise my option.
4. I have received a copy of the complete "Progenitor, Inc.
1996 Employee Stock Purchase Plan." I understand that my participation in the
Employee Stock Purchase Plan is in all respects subject to the terms of the
Plan. I understand that the grant of the option by the Company under this
Subscription Agreement is subject to obtaining stockholder approval of the
Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase
Plan should be issued in the name(s) of:
_________________________________
_________________________________
6. I understand that if I dispose of any shares received by me
pursuant to this Plan within 2 years after the Enrollment Date (the first day of
the Purchase Period during which I purchased such shares) or within 1 year after
the Exercise Date (the date I purchased such shares), I will be treated for
federal income tax purposes as having received ordinary income at the time of
such disposition in an amount equal to the excess of the fair market value of
the shares on the date such shares were purchased for me over the price which I
paid for the shares. I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30
DAYS AFTER THE DATE OF ANY SUCH DISPOSITION AND I
<PAGE>
WILL MAKE ADEQUATE PROVISION FOR FOREIGN, FEDERAL, STATE OR OTHER TAX
WITHHOLDING OBLIGATIONS, IF ANY WHICH ARISE UPON THE DISPOSITION OF THE COMMON
STOCK. The Company may, but will not be obligated to, withhold from my
compensation the amount necessary to meet any applicable withholding obligation
including any withholding necessary to make available to the Company any tax
deductions or benefits attributable to sale or early disposition of Common Stock
by me. If I dispose of such shares at any time after the expiration of the 2-
year and 1-year holding periods described above, I understand that I will be
treated for federal income tax purposes as having received income only at the
time of such disposition, and that such income will be taxed as ordinary income
only to the extent of an amount equal to the lesser of (1) the excess of the
fair market value of the shares at the time of such disposition over the
purchase price which I paid for the shares, or (2) 15% of the fair market value
of the shares on the first day of the Purchase Period. The remainder of the
gain, if any, recognized on such disposition will be taxed as capital gain. I
also understand that the foregoing income tax consequences are based on current
federal income tax law and that the Company is not responsible for advising me
of any changes in the applicable tax rules.
7. I hereby agree to be bound by the terms of the Employee
Stock Purchase Plan. The effectiveness of this Subscription Agreement is
dependent upon my eligibility to participate in the Employee Stock Purchase
Plan.
8. In the event of my death, I hereby designate the following
as my beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan.
NAME: (Please print)
-------------------------------------------------------
(First) (Middle) (Last)
Relationship:
-------------------------------------------------------
Address:
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
Employee's Social
Security Number:
-------------------------------------------------------
Employee's Address:
-------------------------------------------------------
<PAGE>
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE PURCHASE PERIODS UNLESS TERMINATED BY ME.
Employee's Signature:
-------------------------------------------------------
Dated:
-------------------------------------------------------
Signature of spouse
if beneficiary is other
than spouse:
-------------------------------------------------------
Dated:
-------------------------------------------------------
<PAGE>
EXHIBIT B
PROGENITOR, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NOTICE OF WITHDRAWAL
The undersigned participant in the Purchase Period of the Progenitor,
Inc. 1996 Employee Stock Purchase Plan which began on _________________, 19___,
(the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Purchase Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Purchase Period. The
undersigned understands and agrees that his or her option for such Purchase
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Purchase Period and the undersigned shall be eligible to participate
in succeeding Purchase Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address
of Participant:
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
Signature:
-------------------------------------------------------
Date:
-------------------------------------------------------
<PAGE>
AGREEMENT
THIS AGREEMENT ("Agreement"), effective as of July 2, 1997 ("Effective
Date"), is made and entered into by and between PROGENITOR, INC., a corporation
organized under the laws of the State of Delaware, having its principal offices
at 1507 Chambers Road, Columbus, Ohio 43212, ("Progenitor") and INTERNEURON
PHARMACEUTICALS, INC., a corporation organized under the laws of the State of
Delaware, having its principal offices at One Ledgemont Center, 99 Hayden
Avenue, Lexington, Massachusetts 02173 ("Interneuron").
WHEREAS, Progenitor holds certain patent and other rights including rights
under a License Agreement (the "Vanderbilt License") between Vanderbilt
University and Progenitor dated July 1995 (the "Patent Rights") relating to
human therapeutic uses (the "Field") of the protein product of the del-1 gene
(the "Product");
WHEREAS, Interneuron desires to acquire certain rights in the form of an
option to obtain a license under the Patent Rights; and
WHEREAS, Progenitor is willing to grant, and Interneuron is willing to
accept, such certain rights under terms and conditions set forth below.
NOW, THEREFORE, in consideration of the following, Progenitor and Interneuron
agree as follows:
ARTICLE 1 - OPTION GRANT
1.1 Subject to the terms and conditions of this Agreement, Progenitor hereby
grants to Interneuron an option to acquire an exclusive, worldwide,
royalty-bearing right and license under the Patent Rights to manufacture,
use and sell the Product in the Field (the "Option").
1.2 Interneuron may exercise the Option by providing written notice to
Progenitor during the Option Period declaring Interneuron's intention to
enter into a license agreement relating to the Product. The term "Option
Period" shall mean the period commencing upon the Effective Date and
continuing until the effective date of an agreement whereby Progenitor
grants a right and license under the Patent Rights to manufacture, use and
sell the Product in the Field.
1.3 In the event that Interneuron elects to exercise the Option in accordance
with Article 1.2, the parties agree to promptly commence negotiations in
good faith of a license agreement relating to the grant by Progenitor to
Interneuron of an exclusive, royalty-bearing right and license under
<PAGE>
the Patent Rights to manufacture, use and sell the Product in the Field
(the "License Agreement").
1.4 Notwithstanding any provision in this Agreement to the contrary,
Progenitor, at any time prior to the effective date of the License
Agreement, in Progenitor's sole discretion, may initiate negotiations with
third parties for the purpose of granting a right and license to such a
third party under the Patent Rights to manufacture, use and sell the
Product in the Field. Such right and license may be exclusive. In the
event that Progenitor and a third party agree upon terms and conditions of
an agreement whereby Progenitor would grant a right and license to such a
third party under the Patent Rights to manufacture, use and sell the
Product in the Field, Progenitor, prior to entering into such agreement
with such third party, will offer such terms and conditions of agreement to
Interneuron as the terms and conditions of the License Agreement. In the
event that Interneuron does not enter into the License Agreement under the
terms and conditions offered by Progenitor within thirty (30) days after
receipt of Progenitor's written offer, Progenitor may enter into an
agreement with such third party under such terms and conditions without
further obligation to Interneuron except as set forth in Articles 2.2 and
2.3 below; provided that Progenitor enters into such agreement, on terms
not materially different than those offered to Interneuron, with such third
party within one hundred twenty (120) days after expiration of such thirty
(30) day period. If Progenitor does not enter into such agreement within
this time period, Interneuron's rights hereunder shall be reinstated and
the failure of Interneuron to enter into the License Agreement on any one
occasion shall not affect its right to do so on any subsequent occasion.
<PAGE>
ARTICLE 2 - CONSIDERATION
2.1 In consideration of the grant of the option and other rights contained
herein, Interneuron shall pay to Progenitor one dollar ($1), receipt of
which is hereby acknowledged by Progenitor, and, in addition, shall
relinquish its right to receive Minimum Return Adjustments (as defined in
the Certificate of Designation establishing Series A Preferred Stock of
Progenitor (the "Certificate of Designation")) to the Conversion Price of
the outstanding Series A Preferred Stock held by Interneuron (the "Series A
Preferred Stock") for the period commencing on the Final Closing Date (as
defined in the Certificate of Designation ) through the quarter which ended
April 7, 1997. In the event that Interneuron exercises the option granted
pursuant to Article 1.1, Interneuron and Progenitor shall determine, in
good faith, the extent to which the value of the returns relinquished
hereunder represents prepayment by Interneuron of payments, including
royalties, otherwise due and payable to Progenitor under the License
Agreement. Interneuron and Progenitor specifically agree that such
consideration shall not be considered to be prepayment for services to be
performed by Progenitor for the benefit of Interneuron.
2.2 In the event that Progenitor enters into an agreement with a third party
whereby Progenitor grants to such third party an exclusive right and
license under the Patent Rights to manufacture, use and sell the Product in
the Field in any country, Progenitor shall pay to Interneuron:
(a) Twenty percent (20%) of any fees, milestones and other consideration
received by Progenitor from such a third party licensee, including any
amount by which consideration for equity investments in Progenitor
exceeds the market value of such equity as defined in the relevant
agreement, but not including royalties on sales of the Product; and
(b) Fifty percent (50%) of any royalties, including advance royalties,
received by Progenitor from such a third party licensee on sales of
the Product by such third party licensee in the Field; provided,
however, that the maximum amount of such payment in any calendar year
shall not exceed three percent (3%) of such third party licensee's net
sales of the Product in the Field.
<PAGE>
Notwithstanding (a) above, payments received by Progenitor as equity
investments at market, and payments specifically allocated for research and
development activities conducted during the term of the relevant agreement
and relating to development of the Product shall not be fees, milestones or
other consideration for purposes of this Article 2.2.
2.3 In the event that Progenitor sells the Product, Progenitor shall pay to
Interneuron three percent (3%) of Progenitor's net sales of the Product in
the Field. For purposes of this Article 2.3, the term "Progenitor's net
sales" shall mean all revenues recognized in accordance with generally
accepted accounting principles from the sale or other disposition of the
Product by Progenitor and affiliates of Progenitor to a third party, 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 the
Product, 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.
ARTICLE 3 - TERM AND TERMINATION
3.1 This Agreement shall become effective on the Effective Date and shall
continue in full force and effect until expiration, revocation or
invalidation of the last patent within the Patent Rights, unless terminated
earlier pursuant to this Article 3.
3.2 In the event the License Agreement is entered into by and between
Progenitor and Interneuron, this Agreement shall be replaced thereby and,
thereafter, any and all provisions of this Agreement shall cease to be
effective.
ARTICLE 4 - MISCELLANEOUS
4.1 Progenitor shall use best efforts consist with reasonable and prudent
business judgment to (i) file and prosecute all patent applications within
the Patent Rights and to maintain all patents which may issue therefrom and
(ii) comply with the due diligence provisions of the Vanderbilt license.
4.2 This Agreement shall he governed by, and construed and interpreted in
accordance with, the laws of the State of Delaware, without reference to
conflicts of laws principles.
<PAGE>
4.3 All notices, payments and other communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been
received when personally delivered or when mailed through the United States
Postal Service, postage prepaid, return receipt requested, or when shipped
by private express carrier, shipment charges prepaid, to the party to whom
delivery shall be made at the respective addresses as set out above. A
party may change its address for the purpose of this Article 4.2 by written
notice to the other parties.
4.4 No modification to this Agreement, nor any waiver of any right hereunder,
shall be effective unless assented to in writing by the party to be charged
and the waiver of any breach or default shall not constitute a waiver of
any other right hereunder or any subsequent breach or default.
4.5 Progenitor and Interneuron each agree that their rights and obligations
under this Agreement may not be transferred or assigned to a third party
without the prior written consent of the other party hereto. Any purported
assignment in violation of the above shall be void. Any permitted assignee
shall agree in writing to assume all obligations of its assignor under this
Agreement. Notwithstanding the foregoing, a party to this Agreement may
transfer or assign its rights and obligations under this Agreement to a
successor to all or substantially all of the business or assets of such
party relating to this Agreement whether by sale, merger, operation of law
or otherwise; provided that such successor agrees in writing to assume the
obligations of such party under this Agreement.
4.6 In the event a term or condition of this Agreement is found by a court of
competent jurisdiction to be invalid or unenforceable, the parties hereto
shall use their best efforts to preserve the intent of this Agreement by
substituting a reasonably comparable term or condition for the benefit of
the party to whose advantage the invalid or unenforceable condition
operated or was intended to operate.
4.7 This Agreement constitutes the entire and exclusive agreement between the
parties hereto with respect to the subject matter hereof, and supersedes
and cancels all previous understandings, representations, registrations,
agreements, commitments and writings in respect thereof.
4.8 All headings of articles are for convenience of reference only, do not form
a part of this Agreement, and shall not affect in any way the meaning or
interpretation of this Agreement.
4.9 This Agreement may be executed in counterparts, each of which shall be
deemed an original, but both of which together shall constitute one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned are duly authorized to execute this
Agreement on behalf of Progenitor and Interneuron, as applicable.
PROGENITOR, INC. INTERNEURON PHARMACEUTICALS, INC.
("Progenitor") ("Interneuron")
By: /s/ Mark N.K. Bagnall By: /s/ Thomas F. Farb
--------------------- ------------------
Print Name: Mark N.K. Bagnall Print Name: Thomas F. Farb
Title: Vice President & Chief Title: Executive Vice President
Financial Officer and Chief Financial Officer
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-05369) 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."
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
July 28, 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. 7 to the
Registration Statement (Form S-1 No. 333-05369) and related Prospectus of
Progenitor, Inc.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 29, 1997
