<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-05369
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 of $10.50, 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. See "Underwriting" for a list of the factors considered in
determining the initial public offering price of the Units. Each of the Common
Stock and Warrants has been approved for listing and quotation on the Nasdaq
National Market under the symbols "PGEN" and "PGENW," respectively.
Interneuron Pharmaceuticals, Inc. ("Interneuron"), the majority stockholder
of the Company, has expressed its intention to purchase 500,000 Units in the
Offering at the initial public offering price. Interneuron will own
approximately 37% of the Company's outstanding Common Stock after the Offering
(approximately 36% if the Underwriters' over-allotment option is exercised in
full). See "Certain Transactions," "Principal Stockholders" and "Underwriting."
Of the 2,750,000 Units being sold in the Offering, SR One Limited ("SR
One"), a venture capital affiliate of SmithKline Beecham p.l.c., has expressed
its intention to purchase 214,000 Units in the Offering at the initial public
offering price. See "Underwriting."
Amgen Inc. ("Amgen") has agreed to purchase directly from the Company
1,023,256 shares of Common Stock (the "Amgen Shares") at $5.375 per share, 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" and "Underwriting."
---------------------------
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(1)(2)
<S> <C> <C> <C>
Per Unit............................... $7.00 $0.49 $6.51
Total(3)............................... $19,250,000 $1,147,580 $18,102,420
</TABLE>
(1) With respect to the Units purchased by Interneuron and SR One, the
Underwriting Discounts and Commissions shall be $0.21 per Unit and the
Company will receive the benefit of this reduction. 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 $1,500,000.
(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 $22,137,500, $1,349,705 and $20,787,795,
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 August 12, 1997.
---------------------------
<PAGE>
LEHMAN BROTHERS GENESIS MERCHANT GROUP
SECURITIES
August 6, 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. Interneuron has expressed its intention to purchase
500,000 Units in the Offering at the initial public offering price. As a result,
following the Offering, Interneuron will beneficially own approximately 37% of
the Company's Common Stock (approximately 36% if the Underwriter's overallotment
option is exercised in full). 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.......... 13,273,068 shares (1)(2)
Use of proceeds............................................ For research and development, expansion of facilities
and acquisition of equipment, expenses relating to
the Acquisition and the Offering and working capital
and general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbols............................. Common Stock--PGEN
Warrants--PGENW
</TABLE>
- ------------------------------
(1) Based on shares outstanding as of June 20, 1997. Includes: (i) 3,440,928
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) 1,023,256
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 $2.69
per share, pursuant to a stock purchase right; and (iv) 71,900 shares of
Common Stock to be issued to The Ohio University Foundation pursuant to an
anti-dilution adjustment in connection with the Offering. 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 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 952,731 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 $5.375, the Unit Shares IPO Price; (iii) 595,358
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 $0.83 per share; (iv) 72,536 shares of Common
Stock issuable upon exercise of warrants outstanding as of June 20, 1997,
with an exercise price of $3.31 per share; and (v) 56,738 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 $2.94 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 10,308 5,785
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 14,790 7,908
---------- ---------- ---------- ---------- ---------- ------------- ------------
Net loss.......................... $ (6,036) $ (2,875) $ (5,484) $ (1,541) $ (2,804) $ (12,958) $ (6,924)
---------- ---------- ---------- ---------- ---------- ------------- ------------
---------- ---------- ---------- ---------- ---------- ------------- ------------
Net loss per share................ $ (0.91) $ (0.46) $ (0.94) $ (0.50)
---------- ---------- ------------- ------------
---------- ---------- ------------- ------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Shares used in computing net loss per
share................................ 6,009,876 6,065,658 13,779,282 13,835,064
---------- ---------- ------------- ------------
---------- ---------- ------------- ------------
</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 $ 21,302
Working capital.................................................................. (3,032) (4,668) 16,175
Total assets..................................................................... 4,111 3,402 23,861
Long-term obligations............................................................ 8,763 966 966
Deficit accumulated during development stage..................................... (22,962) (60,092) (60,419)
Total stockholders' equity (deficit)............................................. (7,964) (2,701) 17,431
</TABLE>
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(1) Pro forma as adjusted as if the Acquisition, the 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
3,074,767 shares of Common Stock upon the closing of the Offering; (iii) the
contribution to capital of indebtedness evidenced by a convertible debenture
and a promissory note held by Interneuron (with an aggregate outstanding
balance of $7.1 million as of March 31, 1997) upon the closing of the
Offering; (iv) the contribution to capital of the Interneuron Bridge Loan
(as defined below) (with an outstanding balance of $1.3 million as of March
31, 1997) upon the closing of the Offering; and (v) the issuance of 71,900
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 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 1,023,256 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 $2.69
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) REFLECTS THE
INITIAL PUBLIC OFFERING PRICE OF $7.00 PER UNIT, AND A UNIT SHARES IPO PRICE OF
$5.375 PER SHARE; (III) REFLECTS THE CONSUMMATION OF A 1-FOR-2 REVERSE STOCK
SPLIT; AND (IV) REFLECTS THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF
PROGENITOR'S SERIES A AND SERIES B PREFERRED STOCK INTO AN AGGREGATE OF
3,074,767 SHARES OF COMMON STOCK UPON THE CLOSING OF THE OFFERING. 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; RISK OF PRODUCT LIABILITY; POSSIBLE
DELISTING FROM THE NASDAQ NATIONAL MARKET AND MARKET ILLIQUIDITY; DETERMINATION
OF UNIT SHARES IPO PRICE AND POTENTIAL CONFLICT OF INTEREST; REDEMPTION OF
WARRANTS; AND CURRENT PROSPECTUS REQUIRED TO EXERCISE THE WARRANTS. 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."
6
<PAGE>
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 and is continuing to incur
losses. As of March 31, 1997, the Company had an accumulated deficit of
approximately $60.4 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 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
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additional funds to continue research and development, conduct preclinical
studies and clinical trials, conduct activities relating to commercialization of
rights it has retained in corporate agreements, if any, and expand
administrative capabilities. The Company estimates that at its planned rate of
spending, 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 (collectively, the "Proceeds"), will be
sufficient to fund operations for approximately the next 18 months. In order to
achieve this result, however, the Company will need to closely manage the rate
of expenditures for all of its research programs. Although the Company
anticipates that such Proceeds will be sufficient to meet its funding
requirements for its primary research programs for approximately the next 18
months, the Company will be required to curtail the expansion of, or to reduce
the level of expenditures for, certain of its other research programs, or to
seek corporate collaborations with respect to such programs at an earlier stage
than would be required if the Company had greater financial resources or obtain
other funding. There can be no assurance that any such corporate collaboration
will be obtained on terms favorable to the Company or at all or that any such
funding will be available on terms favorable to the Company or at all.
There can be no assurance 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,
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financial condition and results of operations. There can be no assurance that
any collaborators and licensees will commit sufficient development resources,
technology, regulatory expertise, manufacturing, marketing and other resources
towards developing, promoting and commercializing products incorporating the
Company's discoveries. Further, competitive conflicts may arise among these
third parties that could prevent them from working cooperatively with the
Company. The amount and timing of resources devoted to these activities by such
parties could depend on the achievement of milestones by the Company and
generally will be controlled by such parties. In addition, the Company's
corporate agreements generally provide the Company's collaborators and licensees
with the right to terminate the agreement in part or in full under certain
circumstances. Any such termination would substantially reduce the likelihood
that the applicable product candidate or candidates would be developed, would
obtain regulatory approvals and would be manufactured and successfully
commercialized and any such termination could, therefore, have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's milestone payments or royalties from sales of products
by collaborators or licensees, if any, may be less 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."
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UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS. The Company's success will
depend to a significant extent on its ability to obtain and enforce patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. Because the patent positions of
biotechnology and pharmaceutical companies can be highly uncertain and
frequently involve complex legal and factual questions, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted with certainty. Commercialization of pharmaceutical products
can be subject to substantial delays as a result of the time required for
product development, testing and regulatory approval. The value of any patents
issued or licensed to the Company may depend upon the remaining term of patent
protection available at the time any products covered by such patents are
commercialized.
The Company actively pursues a policy of seeking patent protection for a
number of its proprietary products and technologies. Progenitor has licensed
from Ohio University two issued U.S. patents and pending U.S. patent
applications relating to stem cell technology and to gene delivery technology,
along 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
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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.
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.
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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 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
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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.
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 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
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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 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
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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.
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. Interneuron has expressed its intention to purchase 500,000 Units
in the Offering at the initial public offering price. As a result, following the
Offering, Interneuron will beneficially own approximately 37% of the Company's
Common Stock (approximately 36% if the Underwriter's over-allotment option is
exercised in full). The actual ownership percentage of Interneuron in the
Company after the Offering will depend upon the amount of the Final Acquisition
Consideration payable with respect to the Acquisition, which will determine the
number of shares of Common Stock to be issued in the Acquisition.
Interneuron is and will continue to be the Company's largest stockholder.
Accordingly, Interneuron will continue to have substantial influence over the
election of directors of the Company and other matters submitted to a
stockholder vote, including extraordinary corporate transactions such as a
merger or sale of
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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 1,439,016 shares of Common
Stock upon the conversion of its Series A Preferred Stock upon the closing of
the Offering. 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.
Interneuron has agreed to recapitalize a portion of its investment in the
Company immediately prior to the closing of the Offering such that (i)
Interneuron will not be entitled to receive the remaining minimum return
adjustments to the conversion ratio of the Company's Series A Preferred Stock
that would have entitled Interneuron to receive an additional 411,147 shares of
Common Stock upon the conversion of its Series A Preferred Stock upon the
closing of the Offering; and (ii) Interneuron will contribute to the Company's
capital all outstanding balances of intercompany loans from Interneuron to
Progenitor ($13.9 million as of July 31, 1997). 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
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adverse effect on the trading and market price of the Common Stock or on the
Company's ability to raise capital or to complete additional corporate
agreements, and the adoption of such proposals could have a material adverse
effect on the Company's business, financial condition and results of operations.
In both domestic and foreign markets, successful commercial sales of the
Company's or its collaborators' or licensees' potential products will depend in
part on the availability of reimbursement from government and health
administrative authorities, private health insurers or other third-party payors.
Third-party payors are increasingly challenging the price and cost-effectiveness
of medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. Future legislation
and regulations affecting the pricing of pharmaceuticals could further limit
reimbursement for medical products and services. There can be no assurance that
any of the Company's potential products will be considered cost-effective or
that adequate third-party reimbursement will be available to enable the Company,
its collaborators or licensees to maintain price levels sufficient to realize an
appropriate return on its investment. In addition, the trend toward managed
health care in the U.S. and the concurrent growth of managed care organizations,
such as health maintenance organizations, which could control or significantly
influence the purchase of health care services and products, as well as
legislative proposals to reduce government insurance programs, could result in
pricing pressure for any products that might be developed by the Company. If
adequate reimbursement is not provided by government and other third-party
payors for the Company's or its collaborators' or licensees' potential products,
there would be a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Government Regulation."
RISK OF PRODUCT LIABILITY. The testing, manufacture, marketing and sale of
pharmaceutical and other products entail the inherent risk of liability claims
or product recalls and associated adverse publicity. Clinical trials and sales
by the Company or its collaborators or licensees of potential products
incorporating the Company's discoveries may expose the Company to potential
liability resulting from the use of such products. Such liability might result
from claims made directly by consumers or by regulatory agencies, pharmaceutical
companies or others selling such products. The Company currently has a limited
amount of clinical trial and product liability insurance coverage through
Interneuron. The Company will seek to 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 has
been 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 has been 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
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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
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."
POSSIBLE DELISTING FROM THE NASDAQ NATIONAL MARKET; MARKET ILLIQUIDITY. The
Common Stock and Warrants (collectively, the "Listed Securities") have been
approved for separate listing on the Nasdaq National Market. In order to
maintain such listing, the Company will be required to comply with certain
Nasdaq National Market listing maintenance standards including minimum tangible
asset value amounts, public float requirements and minimum stock price amounts.
There can be no assurance that the Company will be able to comply with such
listing maintenance standards as in effect from time to time. If the Company is
unable to comply with the standards for continued listing, the Listed Securities
could be subject to delisting from the Nasdaq National Market. Trading, if any,
in the Listed Securities would thereafter be conducted on the Nasdaq Small Cap
Market or on an electronic bulletin board established for securities that do not
meet the Nasdaq Small Cap Market listing requirements or in what is commonly
referred to as the "pink sheets." As a result of any such delisting from the
Nasdaq National Market, an investor would find it more difficult to dispose of,
or to obtain accurate quotations as to the price of, the Company's securities.
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 has been 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 was determined
by such allocation, was one of the main factors in determining (i) the number of
shares of Common Stock to be issued upon conversion of the Series A and Series B
Preferred Stock; (ii) the number of shares of Common Stock to be issued to The
Ohio University Foundation in connection with its anti-dilution adjustment;
(iii) the number of shares of Common Stock to be issued pursuant to the
Acquisition; and (iv) 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."
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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 in one or more
series and to fix the powers, designations, preferences and relative rights
thereof without any further vote or action by the Company's stockholders. The
Company has no current plans to issue shares of Preferred Stock. However, the
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock would dilute the voting power of
holders of Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company. In addition, all outstanding
options under the Company's 1992 Stock Option Plan and 1996 Stock Incentive Plan
become exercisable, and purchase dates under the 1996 Employee Stock Purchase
Plan could be accelerated, upon certain changes in control of the Company. The
Company is subject to the provisions of Section 203 of the Delaware General
Corporation Law, which could delay or make more difficult a merger, tender offer
or proxy contest involving the Company and may have the effect of discouraging
takeovers which could be in the best interest of certain stockholders. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. There can be no assurance that this provision, the rights
of option holders and the Company's ability to issue Preferred Stock will not
have an adverse effect on the market value of the Company's stock 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
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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.
After the Offering, the Company will have outstanding 13,273,068 shares of
Common Stock (13,685,568 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. After taking into account the
purchases by Interneuron and entities affiliated with Robertson, Stephens & Co.
of an aggregate of 750,000 Unit Shares (the "Affiliate Shares"), 2,000,000 Unit
Shares will be freely tradeable immediately after the closing of the Offering.
The Affiliate Shares will be subject to certain volume, manner of sale and other
limitations under Rule 144, as well as the lockup agreements described below.
The 142,000 Unit Shares to be purchased by entities affiliated with InterWest
Partners and Oak Investment Partners will be eligible for immediate sale in the
public market, subject to the Mercator Lockup Agreements described below. In
addition, 3,440,928 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, 3,376,996 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 7,082,140 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 1,291,215 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 4,430,664 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 (plus
the 500,000 Affiliate Shares that Interneuron will acquire in the Offering) 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 1,023,256 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
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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 that is not
an "affiliate" of Mercator within the meaning of Rule 145 after each of 180
days, 270 days and 365 days following completion of the Acquisition, and as to
one-third of all shares held by an "affiliate" of Mercator within the meaning of
Rule 145 after each of 240, 270 and 365 days following completion of the
Acquisition.
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 1,448,110,
1,208,999, 1,208,999 and 6,139,663 of such shares will be eligible for immediate
sale in the public market beginning 181, 241, 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 883,814, 47,334,
64,786 and 64,786 of such shares will be eligible for immediate sale in the
public market beginning 181, 241, 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 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 132,731 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 952,731 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 1,660,694 shares of Common
Stock to be reserved for grants or awards under its 1992 Stock Option Plan and
1996 Stock Incentive Plan and an aggregate of 595,358 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. The Company has filed a registration statement on
Form S-8 to register an aggregate of 100,000 shares of Common Stock reserved for
issuance under the 1996 Employee Stock Purchase Plan. 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, 72,536 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 $4.07 per share. The initial public offering
price of the Units has been determined by negotiations between the Company and
representatives of the Underwriters. The allocation of the initial public
offering
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price of the Units between the Unit Shares and the Warrants has been determined
by the Board of Directors of the Company acting in good faith after consultation
with independent financial advisers. 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."
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USE OF PROCEEDS
The aggregate net proceeds from the sale of the 2,750,000 Units offered
hereby are estimated to be approximately $16.6 million ($19.3 million if the
Underwriters' over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and estimated expenses of the Offering of
approximately $1.5 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
$67,000 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.
The amounts actually expended for each purpose including the allocation of
funding among the Company's research programs 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 (collectively, the "Proceeds"), will be sufficient to meet its
funding requirements for approximately the next 18 months. In order to achieve
this result, however, the Company will need to closely manage the rate of
expenditures for all of its research programs. Although the Company anticipates
that such Proceeds will be sufficient to meet its funding requirements for its
primary research programs for approximately the next 18 months, the Company will
be required to curtail the expansion of, or to reduce the level of expenditures
for, certain of its other research programs, or to seek corporate collaborations
with respect to such programs at an earlier stage than would be required if the
Company had greater financial resources or obtain other funding. There can be no
assurance that any such corporate collaboration will be obtained on terms
favorable to the Company or at all or that any such funding will be available on
terms favorable to the Company or at all. 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.
23
<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 3,074,767 shares of Common
Stock upon the closing of the Offering, (b) the contribution to capital of
indebtedness evidenced by a convertible debenture and a promissory note held by
Interneuron (with an aggregate outstanding balance of $7.1 million as of March
31, 1997), (c) the contribution to capital of the Interneuron Bridge Loan (with
an outstanding balance of $1.3 million as of March 31, 1997), and (d) the
issuance of 71,900 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
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 1,023,256 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
$2.69 per share, pursuant to a stock purchase right, concurrently with the
closing of the Offering. 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
ACTUAL AND CONVERSIONS AS ADJUSTED
----------- --------------- -----------
<S> <C> <C> <C>
Cash and cash equivalents.................................................... $ 8 $ 132 $ 21,302
----------- --------------- -----------
----------- --------------- -----------
Long-term obligations (1).................................................... $ 8,763 $ 966 $ 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 -- --
Common Stock, $0.001 par value: 39,000,000 shares authorized; 2,887,217
shares issued and outstanding, actual; 9,474,812 shares issued and
outstanding, pro forma; and 13,273,068 shares issued and outstanding, pro
forma as adjusted (2).................................................... 3 9 13
Shareholder promissory note receivable..................................... -- -- (1,000)
Additional paid-in capital................................................. 14,972 57,382 78,837
Deficit accumulated during development stage............................... (22,962) (60,092) (60,419)
----------- --------------- -----------
Total stockholders' equity (deficit)..................................... (7,964) (2,701) 17,431
----------- --------------- -----------
Total capitalization................................................... $ 799 $ (1,735) $ 18,397
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
- ------------------------------
(1) See Notes 5, 9, 10, 13 and 14 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 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 952,731 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) 595,358 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 $0.83 per share; (iv) 72,536 shares of
Common Stock issuable upon exercise of warrants outstanding as of June 20,
1997, with an exercise price of $3.31 per share; and (v) 56,738 shares of
Common Stock issuable upon exercise of the Mercator Warrants, with a
weighted average exercise price of $2.94 per share. See "Management--Stock
Plans," "Certain Transactions" and "Description of Securities."
24
<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 9,474,812 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 3,074,767 shares of Common Stock
upon the closing of the Offering; and (iii) the issuance of 71,900 shares of
Common Stock to The Ohio University Foundation pursuant to an anti-dilution
adjustment in connection with the Offering. 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 $3.4 million or $0.36 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 and the receipt and application of the estimated net proceeds therefrom;
(ii) the sale of 1,023,256 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 $2.69 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 $17.4 million or $1.31 per share. This represents an immediate
increase in pro forma net tangible book value of $1.67 per share to existing
stockholders and an immediate dilution of $4.07 per share to new investors. The
following table sets forth the per share dilution to new investors in the
Offering:
<TABLE>
<S> <C> <C>
Initial public offering price per share allocated to each share of
Common Stock....................................................... $ 5.38
Pro forma net tangible deficit per share as of March 31, 1997...... $ (0.36)
Increase per share attributable to new investors................... 1.67
---------
Pro forma net tangible book value per share after the Offering....... 1.31
---------
Dilution per share to new investors.................................. $ 4.07
---------
---------
</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 (before deducting underwriting discounts and commissions and
estimated offering expenses). The calculation in this table with respect to
shares of 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................. 6,058,884 45.7% $ 36,117,000 48.2% $ 5.96
Former Mercator stockholders.......... 3,440,928 25.9 18,495,000 24.7 5.38
Amgen................................. 1,023,256 7.7 5,500,000 7.4 5.38
New investors......................... 2,750,000 20.7 14,781,000 19.7 5.38
------------ ----- ------------- -----
Total............................. 13,273,068 100.0% $ 74,893,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</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 952,731 shares of Common
Stock are to be granted under the 1996 Stock Incentive
25
<PAGE>
Plan upon the closing of the Offering, with an exercise price equal to the Unit
Shares IPO Price; (ii) 595,358 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 $0.83 per share;
(iii) 72,536 shares of Common Stock issuable upon exercise of outstanding
warrants, with an exercise price of $3.31 per share; and (iv) 56,738 shares of
Common Stock issuable upon exercise of the Mercator Warrants, with a weighted
average exercise price of $2.94 per share. See "Capitalization,"
"Business--Corporate Agreements," "Management--Stock Plans" and "Description of
Securities-- Preferred Stock."
26
<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
3,074,767 shares of Common Stock upon the closing of the Offering, the
contribution to capital of indebtedness evidenced by a convertible debenture and
a promissory note held by Interneuron (with an aggregate outstanding balance of
$7.1 million as of March 31, 1997) upon the closing of the Offering, the
issuance of 71,900 shares of Common Stock to The Ohio University Foundation
pursuant to an anti-dilution adjustment, and the contribution to capital of the
Interneuron Bridge Loan (with 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
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 $2.69 per share, pursuant to a stock purchase right, concurrently with
the closing of the Offering (collectively, the "Offering Adjustments"). 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."
27
<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 PRO
------------------------ ADJUST- ACQUI- ADJUST- AND ADJUST- FORMA AS
PROGENITOR MERCATOR(1) MENTS(2) SITION MENTS(3) CONVERSIONS MENTS(4) ADJUSTED
---------- ----------- -------- -------- ---------- ----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents..... $ 8 $ 124 $ -- $ 132 $ -- $ 132 $21,170 $21,302
Accounts
receivable...... 176 -- -- 176 -- 176 -- 176
Deferred interest
expense......... -- 750 (750) -- -- -- -- --
Prepaid expenses
and other
current
assets.......... 96 65 -- 161 -- 161 -- 161
---------- ----------- -------- -------- ---------- ----------- -------- --------
Total current
assets........ 280 939 (750) 469 -- 469 21,170 21,639
---------- ----------- -------- -------- ---------- ----------- -------- --------
Property and
equipment at
cost.............. 1,660 2,474 (1,298) 2,836 -- 2,836 -- 2,836
Less accumulated
depreciation... (822) (1,298) 1,298 (822) -- (822) -- (822)
---------- ----------- -------- -------- ---------- ----------- -------- --------
838 1,176 -- 2,014 -- 2,014 -- 2,014
Notes receivable
from officers, net
and other......... 58 150 -- 208 -- 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 $20,459 $23,861
---------- ----------- -------- -------- ---------- ----------- -------- --------
---------- ----------- -------- -------- ---------- ----------- -------- --------
LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts
payable......... $ 506 $ 685 $ 583 $ 1,774 $ -- $ 1,774 $ -- $ 1,774
Accrued
expenses........ 2,421 93 -- 2,514 -- 2,514 327 2,841
Convertible notes
payable......... -- 2,250 (2,250) -- -- -- -- --
Equipment
financing
obligations--
current......... 385 464 -- 849 -- 849 -- 849
---------- ----------- -------- -------- ---------- ----------- -------- --------
Total current
liabilities... 3,312 3,492 (1,667) 5,137 -- 5,137 327 5,464
Note
payable--Interneuron... 6,577 -- -- 6,577 (6,577) -- -- --
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 -- 966
---------- ----------- -------- -------- ---------- ----------- -------- --------
Total
liabilities... 12,075 5,385 (2,975) 14,485 (8,382) 6,103 327 6,430
---------- ----------- -------- -------- ---------- ----------- -------- --------
Redeemable preferred
stock,
Series A.......... -- 3,015 (3,015) -- -- -- -- --
Redeemable preferred
stock,
Series B.......... -- 8,020 (8,020) -- -- -- -- --
Redeemable preferred
stock,
Series C.......... -- 4,526 (4,526) -- -- -- -- --
Redeemable preferred
stock,
Series D.......... -- -- -- -- -- -- -- --
Stockholders' equity
(deficit):
Preferred stock,
Series A........ 20 -- -- 20 (20) -- -- --
Preferred stock,
Series B........ 3 -- -- 3 (3) -- -- --
Common stock...... 3 -- 3 6 3 9 4 13
Common stock...... -- 53 (53) -- -- -- -- --
Shareholder
promissory note
receivable...... -- -- -- -- -- -- (1,000) (1,000)
Additional paid-in
capital......... 14,972 -- 21,338 36,310 21,072 57,382 21,455 78,837
Deficit
accumulated
during
development
stage........... (22,962) (18,637) (5,823) (47,422) (12,670) (60,092) (327) (60,419)
---------- ----------- -------- -------- ---------- ----------- -------- --------
Total
stockholders'
equity
(deficit)..... (7,964) (18,584) 15,465 (11,083) 8,382 (2,701) 20,132 17,431
---------- ----------- -------- -------- ---------- ----------- -------- --------
Total
liabilities
and
stockholders'
equity
(deficit)..... $ 4,111 $ 2,362 $(3,071) $ 3,402 $ -- $ 3,402 $20,459 $23,861
---------- ----------- -------- -------- ---------- ----------- -------- --------
---------- ----------- -------- -------- ---------- ----------- -------- --------
</TABLE>
28
<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 9,922 386(5) 10,308
General and administrative.............. 1,791 1,593 3,384 -- 3,384
------------- ------------ ----------- ----- -------------
Total operating expenses.............. 5,664 7,642 13,306 386 13,692
------------- ------------ ----------- ----- -------------
Nonrecurring expense...................... 974 -- 974 -- 974
Interest expense, net..................... 178 66 244 (120)(6) 124
------------- ------------ ----------- ----- -------------
Net loss................................ $ (5,484) $ (7,208) $ (12,692) $ (266) $ (12,958)
------------- ------------ ----------- ----- -------------
------------- ------------ ----------- ----- -------------
Supplemental net loss per share........... $ (0.91)
-------------
-------------
Shares used in computing supplemental net
loss per share........................... 6,009,876(7)
-------------
-------------
Pro forma net loss per share.............. $ (0.94)
-------------
-------------
Shares used in computing pro forma net
loss per share........................... 13,779,282(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 5,399 386(5) 5,785
General and administrative............... 1,226 802 2,028 -- 2,028
------------- ----------- ----------- ----- -------------
Total operating expenses............... 3,376 4,051 7,427 386 7,813
------------- ----------- ----------- ----- -------------
Interest expense, net...................... 287 73 360 (265)(6) 95
------------- ----------- ----------- ----- -------------
Net loss................................. $ (2,804) $ (3,999) $ (6,803) $ (121) $ (6,924)
------------- ----------- ----------- ----- -------------
------------- ----------- ----------- ----- -------------
Supplemental net loss per share............ $ (0.46)
-------------
-------------
Shares used in computing supplemental net
loss per share............................ 6,065,658(7)
-------------
-------------
Pro forma net loss per share............... $ (0.50)
-------------
-------------
Shares used in computing pro forma net loss
per share................................. 13,835,064(7)
-------------
-------------
</TABLE>
29
<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:
3,440,928 shares of common stock.......................... $ 18,495
Stock options for 595,358 shares of common stock.......... 2,707
Warrants for 56,738 shares of common stock................ 138
Progenitor funding to Mercator............................ 1,308
Total estimated acquisition fees and costs.................. 1,500
---------
Total purchase price...................................... $ 24,148
---------
---------
Allocation of purchase price:
In-process research and development......................... $ 24,460
Excess of the estimated fair value of Mercator liabilities
assumed over assets purchased as of March 31, 1997........ (312)
---------
Total..................................................... $ 24,148
---------
---------
</TABLE>
For pro forma financial statement purposes, the purchase price was estimated
using the initial public offering price, and the Unit Shares IPO Price. The
initial public offering price of the Units has been determined through
negotiations between Progenitor and representatives of the Underwriters. The
Unit Shares IPO Price has been determined by the Board of Directors of
Progenitor acting in good faith after consultation with independent
financial advisers. 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.
30
<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 3,440,928 shares of common stock
issued..................................................... (3)
Eliminate Mercator common stock............................. 53
Reflect the issuance of common stock, options and warrants
in additional paid-in capital.............................. (21,338)
Deficit accumulated during the development stage:
Reflect charge for purchase of in-process
research and development................................ 24,460
Eliminate Mercator deficit accumulated
during the development stage............................ (18,637)
---------
Subtotal................................................ 5,823
---------
Total................................................. $ 0
---------
---------
</TABLE>
31
<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 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 ($24,460) 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.
32
<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 3,074,767 shares of Common Stock:
Preferred stock, Series A................................... $ (20)
Preferred stock, Series B................................... $ (3)
(b) The contribution to capital of indebtedness evidenced by a
convertible debenture and a promissory note held by
Interneuron:
Note payable--Interneuron................................... $ (6,577)
Convertible debenture--Interneuron.......................... $ (495)
(c) The contribution to capital of the Interneuron Bridge
Loan:....................................................... $ (1,310)
(d) Issuance of 71,900 shares of Common Stock to The Ohio
University Foundation in connection with an anti-dilution
adjustment pursuant to a stock purchase right............... $ (386)
To reflect a dividend for the total value of the shares of
Common Stock to be issued upon the automatic conversion of
the Series B Preferred Stock (a total of 725,353 shares with
a value of the Unit Shares IPO Price less consideration of
$1,560 paid as reflected in the historical financial
statements)................................................. (2,339)
To reflect as a dividend the additional shares of Common
Stock otherwise issuable upon automatic conversion of Series
A Preferred Stock, but the right to which shares was
relinquished or contributed to capital by Interneuron
(1,850,163 shares at the Unit Shares IPO Price)............. (9,945)
--------
$(12,670)
--------
--------
(e) To reflect the par value and additional paid-in capital as a
result of items (a) through (d) above:
Common Stock, (par value of $0.001) for a total issuance of
3,146,667 shares of common stock............................ $ 3
Additional paid-in capital.................................. $ 21,072
</TABLE>
The dividends shown in 3(d) above related to minimum return provisions which
will increase the net loss attributable to holders of Common Stock by
approximately $12.3 million for the year ended September 30, 1997.
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.
These rights, if not relinquished, would have resulted in Interneuron
receiving an additional 1,439,016 shares of Common Stock upon conversion of
its Series A Preferred Stock.
Interneuron has agreed to recapitalize a portion of its investment in the
Company immediately prior to the closing of the Offering such that (i)
Interneuron will not be entitled to receive the remaining minimum return
adjustments to the conversion ratio of the Company's Series A Preferred
Stock that would have entitled Interneuron to receive an additional 411,147
shares of Common Stock upon the conversion of its Series A Preferred Stock
upon the closing of the Offering; and (ii) Interneuron will contribute to
the Company's capital all outstanding balances of intercompany loans from
Interneuron
33
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
to Progenitor ($7.1 million as of March 31, 1997). The outstanding balances
of the intercompany loans from Interneuron have increased to $13.9 million
as of July 31, 1997.
(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 underwriting discounts and commissions and the
estimated expenses of the Offering)............................ $ 16,603
The receipt of $4,500 in cash in connection with the purchase of
1,023,256 Amgen Shares......................................... 4,500
The sale of 25,000 shares of Common Stock to The Ohio University
Foundation at a price of $2.69 per share....................... 67
---------
$ 21,170
---------
---------
(b) To record an accrual for bonuses payable to officers of the Company
in connection with the Offering.................................. $ 327
(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 3,798,256 shares of Common Stock................... $ 4
Additional paid-in capital....................................... $ 21,455
</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, a
promissory note held by Interneuron, and the Interneuron Bridge Loan which
will be contributed to the capital of the Company by Interneuron upon
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.
34
<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>
35
<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>
36
<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. Interneuron has expressed its intention to purchase 500,000 Units in the
Offering at the initial public offering price. As a result, following the
Offering, Interneuron will beneficially own approximately 37% of the Company's
Common Stock (approximately 36% if the Underwriter's 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 3,440,928 shares of
Common Stock to the Mercator stockholders (assuming Final Acquisition
Consideration of $22.0 million for Mercator). See "Business--Mercator
Acquisition."
Significant discovery, research and development efforts will be required
prior to the time any of the Company's gene discoveries may lead to product
candidates or result in products that may be brought to the market, if at all.
Products, if any, resulting from the Company's research and development programs
are not expected to be commercially available for a number of years, if at all,
even if any are successfully developed and proven safe and effective.
Significant additional research and development efforts and extensive
preclinical studies and clinical trials will be required prior to submission of
any regulatory application for commercial use. See "Risk Factors--Uncertainty of
Product Development."
The Company intends to use the net proceeds of the Offering, together with
the cash proceeds received from sale of the Amgen Shares 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
37
<PAGE>
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 seven 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. See
"Risk Factors--Control of Company By, and Potential Conflicts of Interest With,
Interneuron" and "Business--Corporate Agreements."
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. These rights, if not relinquished, would have resulted in Interneuron
receiving an additional 1,439,016 shares of Common Stock upon conversion of its
Series A Preferred Stock.
Interneuron has agreed to recapitalize a portion of its investment in the
Company immediately prior to the closing of the Offering such that (i)
Interneuron will not be entitled to receive the remaining minimum return
adjustments to the conversion ratio of the Company's Series A Preferred Stock
that would have entitled Interneuron to receive an additional 411,147 shares of
Common Stock upon the conversion of its Series A Preferred Stock upon the
closing of the Offering; and (ii) Interneuron will contribute to the Company's
capital all outstanding balances of intercompany loans from Interneuron to
Progenitor ($13.9 million as of July 31, 1997).
Upon the closing of the Offering, the minimum return adjustments on the
Series A and Series B Preferred Stock will be treated for accounting purposes as
a dividend to the preferred holders in the form of 435,121 additional shares of
Common Stock to be issued, and 1,850,163 shares of Common Stock the issuance of
which was relinquished or contributed to the capital of the Company by
Interneuron. 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.
PRO FORMA FOR ACQUISITION
As of March 31, 1997, the Company, on a pro forma basis (including Mercator)
had an accumulated deficit of approximately $60.4 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,
38
<PAGE>
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
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 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
39
<PAGE>
consulting fees, legal fees, sponsored research projects, license fees and
expenditures for laboratory supplies and animal facilities. The Company expects
research and development expenses to increase in the future, 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. Interneuron has
also agreed to recapitalize a portion of its investment in the Company
immediately prior to the closing of the IPO such that (i) Interneuron will not
be entitled to receive the remaining minimum return adjustments to the
conversion ratio of the Company's Series A Preferred Stock that would have
entitled Interneuron to receive an additional 411,147 shares of Common Stock
upon the conversion of its Series A Preferred Stock upon the closing of the
Offering; and (ii) Interneuron will contribute to the Company's capital all
outstanding balances of intercompany loans from Interneuron to Progenitor ($13.9
million as of July 31, 1997). All or a portion of such recapitalized amounts may
be deemed taxable income to Progenitor. There can be no assurance that all of
the foregoing taxable income amounts 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."
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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 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 (collectively, the "Proceeds"), will be
sufficient to meet its funding requirements for approximately the next 18
months. In order to achieve this result, however, the Company will need to
closely manage the rate of expenditures for all of its research programs.
Although the Company anticipates that such Proceeds will be sufficient to meet
its funding requirements for its primary research programs for approximately the
next 18 months, the Company will be required to curtail the expansion of, or to
reduce the level of expenditures for, certain of its other research programs, in
the future or to seek corporate collaborations with respect to such programs at
an earlier stage than would be required if the Company had greater financial
resources or obtain other funding. There can be no assurance that any such
corporate collaboration will be obtained on terms favorable to the Company or at
all or that any such funding will be available on terms favorable to the Company
or at all. 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
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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
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 recapitalize a portion of its
investment in the Company by making a contribution to the Company's capital of
the entire balance of the Interneuron Bridge Loan effective immediately prior to
closing of the Offering. The outstanding balance of such Interneuron Bridge Loan
was $3.7 million as of July 31, 1997. 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."
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
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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 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
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<PAGE>
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 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
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analytical methods to a given disease gene discovery program. The Company used a
combination of these methods to discover its HH gene.
FURTHER ELUCIDATION OF GENE FUNCTION
Many of the tools the Company uses for gene discovery and initial functional
characterization also are used in the further elucidation of gene function. The
Company has built and will continue to supplement a set of developmental and
adult models and systems for in-depth evaluation of the biological roles of its
discoveries. In combination, developmental biology and disease genetics
approaches to gene identification provide initial information on gene function
and medical relevance. A more thorough understanding of biological functions and
therapeutic implications is necessary to determine the appropriateness of genes
as therapeutic targets. The Company has assembled a group of well-characterized
cellular, developmental and adult models and methods to study the role of genes
in tissue and organ formation in order to determine their therapeutic relevance.
These include murine, 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,
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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 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
$750,000 pursuant to the agreement, in full satisfaction of the Company's
obligation to reimburse Chiron
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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 certain minimum return
adjustments through the quarter ended April 7, 1997 to the conversion ratio of
its Series A Preferred Stock. 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
1,439,016 shares of Common Stock upon the closing of the Offering. 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 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.
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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
$2.69 per share. The Ohio University Foundation also has the right to designate
two representatives to the Board of Directors of the Company until the Company
consummates an initial public offering. See "Certain Transactions--The Ohio
University Foundation."
ADVANCED TECHNOLOGY PROGRAM GRANT
In November 1994, the Company was awarded a $2.0 million, three-year grant
to study yolk sac-derived endothelial cells for therapeutic applications under
the ATP. The grant specifies the research and development of therapeutics based
on an understanding of the biology of development of endothelial cells. The
research agreements between the Company and its subcontractors under the ATP
grant (the University of Colorado, The University of Wisconsin, Ohio University,
Vanderbilt University and Bio Support, Inc.) require that all parties assign
rights to any inventions made by them under the grant to the
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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.
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
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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.
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
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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.
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It is uncertain whether any third-party patents will require the Company to
alter its products or processes, obtain licenses, cease certain activities or
pay substantial damages. If any licenses are required, there can be no assurance
that the Company will be able to obtain any such license on commercially
acceptable terms, if at all. Failure by the Company or its collaborators and
licensees to obtain a license to any technology required to commercialize the
Company's discoveries may have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Uncertainty of Patents and Proprietary Rights."
COMPETITION
Research in the field of genomics is highly competitive. Competitors of the
Company in the genomics area include, among others, public companies such as
Genome Therapeutics 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
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business, financial condition and results of operations. There can be no
assurance that regulatory approval will be obtained for any drugs or other
products developed by the Company or its collaborators or licensees.
Furthermore, regulatory approval may entail limitations on the indicated use of
a drug or other product. Because certain of the products likely to result from
the Company's discovery programs involve the application of new technologies and
may be based upon a new therapeutic approach, such products may be subject to
substantial additional review by various government regulatory authorities other
than the FDA and, as a result, regulatory approvals may be obtained more slowly
than for products using conventional technologies. Under current guidelines,
proposals to conduct clinical research involving gene therapy at institutions
supported by the NIH must be 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
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discoveries may expose the Company to potential liability resulting from the use
of such products. Such liability might result from claims made directly by
consumers or by regulatory agencies, pharmaceutical companies or others selling
such products. The Company currently has a limited amount of clinical trial and
product liability insurance coverage through Interneuron. The Company will seek
to obtain its own coverage upon the closing of the Offering and to maintain and
appropriately increase such coverage as clinical development of any product
candidates progresses and if and when its products are ready to be
commercialized. There can be no assurance that the Company will be able to
obtain such insurance or, if obtained, that such insurance can be acquired at a
reasonable cost or in sufficient amounts to protect the Company against such
liability. Certain of the Company's license agreements require the Company to
indemnify licensors against product liability claims arising from products
developed using the licensed technology. Also, certain of these agreements and
other collaborative and license agreements require the Company to maintain
minimum levels of insurance coverage. The failure to maintain product liability
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.
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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 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.
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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
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.
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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 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
3,440,928 shares of Common Stock to the Mercator stockholders, and Replacement
Options to acquire 595,358 shares of Common Stock to the optionholders of
Mercator, assuming Final Acquisition Consideration of $22.0 million.
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
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 make a contribution to the Company's
capital of the entire balance of the Interneuron Bridge Loan effective
immediately prior to the closing of the Offering. 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 10,252 and 190,052 shares of
the Company's Common Stock with exercise prices of $5.96 and $0.68,
respectively, assuming 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 190,052 shares of Common Stock will be
granted to Dr. Sigal, in replacement of such Mercator options previously
granted, with an exercise price of $0.68 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 952,731 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 625,000 shares of the Company's Common
Stock have been reserved for issuance under the 1997 Plan. Assuming Final
Acquisition Consideration for Mercator of $22.0 million, 595,358 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. See "Capitalization" and "Business-- Mercator Acquisition."
ELIGIBLE INDIVIDUALS. Only holders of Mercator Options are eligible to
receive Replacement Options under the 1997 Plan. All such holders of Incentive
Stock Options were, at the time their Mercator Options were awarded, employees
of Mercator. All such holders of Non-Qualified Stock Options were, at the time
their Mercator Options were awarded, employees, consultants or directors of
Mercator.
TERMS OF REPLACEMENT OPTIONS
The Terms of Replacement Options granted under the 1997 Plan will be as set
forth below:
a) NUMBER OF SHARES COVERED. Each Replacement Option will cover a number
of shares of the Company's Common Stock (rounded up to the nearest whole
share) equal to the number of shares of Mercator common stock covered by
the corresponding Mercator Option multiplied by the exchange ratio
applicable to the Mercator common stock in the Acquisition (the "Exchange
Ratio").
b) EXERCISE PRICE. The exercise price per share of the Company's Common
Stock (rounded down to the nearest penny) covered by each Replacement
Option will equal the per share exercise price of the corresponding
Mercator Option divided by the Exchange Ratio.
c) OPTION TERM. The term of each Replacement Option will be the same as
the remaining term of the corresponding Mercator Option. The maximum term
of the Mercator Options is ten years from the date of initial grant of
such Mercator Options.
d) VESTING. The vesting restrictions contained in each Replacement Option
will be the same as the vesting restrictions contained in the
corresponding Mercator Options. Replacement Options are subject to
accelerated vesting for any optionee terminated within one year of the
date of the Acquisition other than for "cause."
e) EARLY PURCHASE RIGHTS. Holders of Replacement Options have the right
(the "Early Purchase Right") to purchase all or part of the Common Stock
of the Company subject to their options prior to full vesting. Shares
purchased pursuant to the Early Purchase Right are subject to a
repurchase option in favor of the Company (the "Repurchase Option") that
expires in accordance with the same schedule as Replacement Options would
have vested had the option holder not exercised the Early Purchase Right.
The Repurchase Option is exercisable (i) within 90 days of the
termination of the optionholder's relationship with the Company or (ii)
upon a dissolution of the Company.
f) CERTAIN ADJUSTMENTS. The number of shares covered by, and the exercise
price of, each Replacement Option may, in the Board's discretion, be
adjusted appropriately to reflect any change in the capitalization of the
Company resulting from any acquisition, recapitalization, stock split-up
or combination of shares, or the payment of a stock dividend or other
increase or decrease in the the Company's Common Stock effected without
receipt of consideration by the Company.
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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 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
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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.
(4) Consists of options that vest equally over three years on each anniversary
of the date of grant, May 13, 1996.
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(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 190,052 shares of the Company's Common Stock at $0.68 per
share assuming consummation of the Acquisition for Final Acquisition
Consideration of $22.0 million. In connection with the Acquisition, the
Company has entered into an employment agreement with Dr. Sigal pursuant to
which he will be granted options to purchase an aggregate of 1% of the
Company's Common Stock on a fully-diluted basis after giving effect to the
Acquisition and the Offering. Such options will have an exercise price equal
to the Unit Shares IPO Price and will be subject to vesting in the amount of
25% on the first anniversary of the date of grant and 6.25% each quarter
thereafter until fully vested after four years. Such options will entitle
Dr. Sigal to acquire 132,731 shares of Common Stock.
FISCAL YEAR-END OPTION VALUES
For each of the Named Executive Officers, the following table shows
information about the value of unexercised options of Progenitor as of September
30, 1996. No options were exercised by the Named Executive Officers during
fiscal 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END(#) FISCAL YEAR-END($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Douglass B. Given, M.D., Ph.D............................. 39,916 171,584 $ 12,375 $ 12,375
H. Ralph Snodgrass, Ph.D.................................. 19,583 130,417 47,125 11,875
Stephen J. Williams, Ph.D................................. 15,833 96,667 15,000 15,000
Mark N.K. Bagnall......................................... 27,500 82,500 0 0
</TABLE>
- ------------------------
(1) Based on the fair market value of the Common Stock as of September 30, 1996
($5.50 per share), minus the exercise price, multiplied by the number of
shares underlying the option after giving effect to the subsequent repricing
of the options. See "--Cancellation and Regrant of Options."
CANCELLATION AND REGRANT OF OPTIONS
On December 30, 1996, the Compensation Committee approved the cancellation
and regrant of options previously granted to certain executive officers,
directors and key employees. The Compensation Committee concluded that the
relationship between the exercise price of those options and the recent fair
market value of the Company's Common Stock did not provide effective equity
incentives for such executive officers, directors and key employees. Equity
incentives are a significant component of the total compensation package of the
Company's employees and play a substantial role in the Company's ability to
retain the services of individuals essential to the Company's long-term success.
The Compensation Committee concluded that the Company's ability to retain key
employees would be impaired significantly unless value was restored to their
options. Accordingly, the Compensation Committee determined it was necessary to
cancel and regrant the options at exercise prices that reflect current fair
market value to provide realistic incentives for the executive officers,
directors and employees to whom such options had been granted. All stock options
with exercise prices of $5.50 or more were cancelled and regranted at an
exercise price of $5.50 per share, the fair market value on December 30, 1996,
as determined by the Compensation Committee. The vesting periods applicable to
these cancelled options relate back to the dates of the prior grants.
With respect to the Named Executive Officers, all of the Company's options
granted during fiscal 1996 were cancelled and regranted at an exercise price of
$5.50 per share. Drs. Given, Snodgrass and Williams
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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 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
1,439,016 shares of Common Stock upon the closing of the Offering. Interneuron
has also agreed to recapitalize a portion of its investment in the Company
immediately prior to the closing of the Offering such that (i) Interneuron will
not be entitled to receive the remaining minimum return adjustments to the
conversion ratio of the Company's Series A Preferred Stock that would have
entitled Interneuron to receive an additional 411,147 shares of Common Stock
upon the conversion of its Series A Preferred Stock upon the closing of the
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Offering and (ii) Interneuron will contribute to the Company's capital all
outstanding balances of intercompany loans from Interneuron to Progenitor ($13.9
million as of July 31, 1997). 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 will be reduced from 4,199,577 shares to
2,349,414 shares. 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 725,353 shares of Common Stock upon the
closing of the Offering. 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 indebtedness evidenced by the principal amount of this debenture
and accrued interest thereon (approximately $508,000 as of July 31, 1997), will
be contributed by Interneuron to the Company's capital immediately prior to the
closing of the Offering. 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 46,141 shares of Common
Stock following the closing of the Offering). Dr. Rosenwald received warrants to
purchase 12,274 of these shares of Series B Preferred Stock (representing the
right to purchase an estimated 25,511 shares of Common Stock upon the closing of
the Offering). 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 26,395 shares of Common Stock upon the closing of the
Offering). All of these warrants are exercisable until five years after the
closing of the Offering at an exercise price of $3.31 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 recapitalize a portion of its
investment in the Company by making a contribution to the Company's capital upon
the closing of the Offering of the indebtedness evidenced by the note
(approximately $9.7 million as of July 31, 1997). See "Description of
Securities-- Convertible Debenture and Promissory Note."
In connection with the Mercator Bridge Financing, Interneuron 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
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by the Company's assets. The principal balance outstanding at July 31, 1997 was
$3.7 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 recapitalize a portion of its investment in the
Company by making a contribution to the Company's capital of the entire balance
of the Interneuron Bridge Loan immediately prior to the closing of the Offering.
See "Risk Factors--Control of Company By, and Potential Conflicts of Interest
With, Interneuron."
Interneuron has expressed its intention to purchase 500,000 Units in the
Offering at the initial public offering price. As a result, following the
Offering, Interneuron will beneficially own approximately 37% of the Company's
Common Stock (approximately 36% if the Underwriter's over-allotment option is
exercised in full). The actual ownership percentage of Interneuron will depend
upon the amount of the Final Acquisition Consideration payable with respect to
the Acquisition, which will determine the number of shares of Common Stock to be
issued in the Acquisition. 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 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. In
addition, Interneuron has expressed its intention to purchase 500,000 Units in
the Offering.
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
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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 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. As
a result, 71,900 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 $2.69 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
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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 $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 obligated 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
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77,500 shares of Common Stock, at exercise prices ranging from $0.20 to $6.00
per share. Of these, options to purchase a total of 23,750 shares of Common
Stock had previously vested. The Release provides for the vesting as of June 1,
1996 of options to purchase 6,875 shares of Common Stock at $0.20 per share and
the vesting as of June 15, 1996 of options to acquire 2,500 shares of Common
Stock at $4.00 per share. All of Dr. Platika's other unvested options were
canceled pursuant to the Release. As of August 23, 1996, Dr. Platika had
exercised all of his 33,125 vested options. In connection with the Release,
Interneuron agreed to accelerate vesting of stock options to purchase 2,500
shares of Interneuron Common Stock at a price per share of $8.75, which options
were exercisable by Dr. Platika on or prior to August 24, 1996. As of August 15,
1996, Dr. Platika had exercised all of these Interneuron options.
The Revised Sigal Employment Agreement provides for the grant to Dr. Sigal
of options to acquire the Company's Common Stock in the amount of 1% of the
outstanding shares of Common Stock on a fully diluted basis after the closing of
the Offering. See "Management--Employment Agreements--Elliott Sigal."
The Company has granted stock options to its directors and executive
officers on several occasions since the beginning of fiscal 1993, all of which
vest over a four-year period from the date of grant, except as indicated below.
In fiscal 1993, Dr. Snodgrass received options to purchase 5,000 shares of
Common Stock at an exercise price of $0.20 per share, and options to purchase
5,000 shares of Common Stock at an exercise price of $2.00 per share.
During fiscal 1994, Mr. Sharrock received options to purchase 2,500 shares
of Common Stock at an exercise price of $4.00 per share, which vest over three
years. Also in fiscal 1994, the Company granted Drs. Cooper, Given, Snodgrass
and Williams options to purchase 8,500, 16,500, 10,000 and 20,000 shares of
Common Stock, respectively, at an exercise price of $4.00 per share.
In September 1995, the Company granted options to Drs. Given, Snodgrass and
Williams to purchase 45,000, 17,500 and 17,500 shares, respectively, at an
exercise price of $6.00 per share, which originally were intended to vest on
September 14, 2002. These options were amended by the Board of Directors on May
13, 1996, so that one-third of such options vest on each anniversary date of the
date of grant. In September 1995, the Company granted to Dr. Given options to
purchase an additional 50,000 shares at an exercise price of $6.00 per share,
which also vest over three years from the date of grant. In September 1995 the
Company also granted to Dr. Snodgrass options to purchase 12,500 shares of
Common Stock, all of which vest upon the earliest of the achievement of
performance milestones relating to the leptin receptor program or the BFU-e
growth factor program, or September 14, 2002.
On February 21, 1996, each of Messrs. Axline, Haig, Peppers and Sharrock
received options to purchase 7,500 shares of Common Stock at an exercise price
of $6.00 per share.
All of the option grants described above were made pursuant to the 1992
Stock Option Plan.
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 $125,000, $70,000, $66,000 and $66,000, respectively.
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) ................................... 4,998,453 47.4% 37.6%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Interneuron Pharmaceuticals, Inc.(4) ....................... 4,930,664 46.8 37.1
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Entities affiliated with Robertson, Stephens & Co. Group, 1,719,694 15.5 13.0
L.L.C.(5) ................................................
c/o Robertson, Stephens & Co.
555 California Street, Suite 2600
San Francisco, CA 94104
Entities affiliated with InterWest Partners(6) ............. 1,075,748 10.6 8.1
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Robert R. Momsen(7) ........................................ 1,075,748 10.6 8.1
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Entities affiliated with Oak Investment Partners(8) ........ 973,554 9.5 7.3
c/o Oak Investment Partners
One Gorham Island
Westport, CT 06880
Elliott Sigal, M.D., Ph.D.(9)............................... 200,304 2.1 1.5
Douglass B. Given, M.D., Ph.D.(10).......................... 160,281 1.7 1.2
Morris Laster, M.D.......................................... 112,500 1.2 *
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).......................................... 5,438,735 50.8 40.2
</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 issuance of 3,440,928 shares of Common Stock to the
Mercator stockholders pursuant to the Acquisition (assuming Final
Acquisition Consideration of $22.0 million for Mercator), and (ii) the
issuance of 71,900 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 9,474,812 shares of Common Stock
outstanding as of June 20, 1997 and the foregoing assumptions and Percentage
Beneficially Owned After Offering is based on 13,273,068 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 4,930,664 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) Number of Shares Beneficially Owned and Percentage Beneficially Owned After
Offering reflect 500,000 Units to be purchased by Interneuron in conjunction
with the Offering.
(5) Includes 1,018,638 shares held by RS & Co. IV, L.P. ("RS"), 271,297 shares
held by The Robertson, Stephens Orphan Fund ("RSOF") and 179,759 shares held
by Bayview Investors, Ltd. ("Bayview"). Number of Shares Beneficially Owned
and Percentage Beneficially Owned After Offering reflect 250,000 Units to be
purchased in the Offering by entities affiliated with Robertson, Stephens &
Co. 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) Includes 998,130 shares held by InterWest Partners V, L.P. ("Partners") and
6,618 shares held by InterWest Investors V ("Investors"). Number of Shares
Beneficially Owned and Percentage Beneficially Owned After Offering reflect
71,000 Units to be purchased in the Offering by entities affiliated with
InterWest Partners. The General Partner of Partners is InterWest Management
Partners V, L.P.,
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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 1,076,177 shares held by entities affiliated with InterWest
Partners. See footnote (6) above. 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) Includes 882,699 shares held by Oak Investment Partners V, Limited
Partnership ("Oak Investment") and 19,855 shares held by Oak V Affiliates
Fund ("Oak Affiliates"). Number of Shares Beneficially Owned and Percentage
Beneficially Owned After Offering reflect 71,000 Units to be purchased in
the Offering by entities affiliated with Oak Investment Partners. 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 options exercisable for 200,304 shares of Common Stock. Dr. Sigal
has agreed to become an executive officer of the Company upon the closing of
the Offering.
(10) 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.
(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 and 10-17 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 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 3,440,928 shares of Common Stock
pursuant to the Acquisition, there were 10,523,068 shares of Common Stock issued
and outstanding held of record by 121 stockholders, 1,290,821 shares of Common
Stock issuable upon the exercise of outstanding stock options (including
Replacement Options) and 129,274 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 of $10.50, subject to adjustment under certain circumstances. 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 "Warrant Agent"). The Warrant Shares, when
issued upon exercise of a Warrant, will be fully paid and
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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 exercise price and/or 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 "Subscription Form" 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 other
securities effective 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. 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. 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 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
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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. 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. As a
result, 4,924,930 shares of Common Stock, consisting of 4,199,577 shares
issuable to Interneuron as holder of the Series A Preferred Stock and 725,353
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 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. These minimum return adjustments would have
entitled Interneuron to receive an additional 1,439,016 shares of Common Stock
upon the conversion of its Series A Preferred Stock upon the closing of the
Offering. The holders of the Series B Preferred Stock will not be affected by
the terms of the option.
Interneuron has also agreed to recapitalize a portion of its investment in
the Company effective immediately prior to closing of the Offering such that
Interneuron will not be entitled to receive the remaining minimum return
adjustments to the conversion ratio of the Company's Series A Preferred Stock
that would have entitled Interneuron to receive an additional 411,147 shares of
the Common Stock upon the conversion of its Series A Preferred Stock upon the
closing of the Offering.
Interneuron's relinquishment and contribution to the Company's capital of
all minimum return adjustments 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 4,199,577 shares to 2,349,414 shares. The
number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock will equal the product of (a) the number of shares of Preferred
Stock held by Interneuron and (b) the greater of (x) one or (y) a fraction, the
numerator of which is $12.50 and the denominator of which is 2.0 multiplied by
the Unit Shares IPO Price.
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At the Unit Shares IPO Price, 3,074,767 shares of Common Stock will issue on
conversion of the Series A and Series B Preferred Stock. 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.
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 $2.69 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 72,536 shares of Common Stock at an exercise price of
$3.31. 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
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.
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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 33,745 shares
of Common Stock at an exercise price of $1.48 per share, and the Series B
Warrant will be converted into a warrant to purchase 22,993 shares of Common
Stock at an exercise price of $5.09 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 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
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indebtedness evidenced by the debenture will be contributed to the Company's
capital by Interneuron immediately prior to the closing of the Offering.
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 $9.7 million as of
July 31, 1997, payable on the earlier of five years from the date of the note or
the closing of the Offering. Interneuron has agreed to recapitalize a portion of
its investment in the Company by making a contribution to the Company's capital
immediately prior to closing of the Offering of the indebtedness evidenced by
the note, including additional advances from April 1, 1996 through the closing
of the Offering, and accrued interest thereon. See "Certain
Transactions--Relationship with Interneuron."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"), an anti-takeover law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is, or the transaction in which the
person became an interested stockholder was, approved in a prescribed manner or
another prescribed exemption applies. For purposes of Section 203, a "business
combination" is defined broadly to include a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. In
general, an "interested stockholder" is a person who, together with affiliates
and associates, owns (or within the three years prior to such transaction, did
own) 15% or more of the corporation's voting stock.
In addition, certain provisions of the Company's Restated Certificate of
Incorporation may have the effect of preventing, discouraging or delaying any
change in control of the Company. The authorization of undesignated Preferred
Stock makes it possible for the Board of Directors to issue Preferred Stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of the Company. See "--Preferred Stock."
LIMITATION OF LIABILITY
Section 145 ("Section 145") of the DGCL provides a detailed statutory
framework covering indemnification of officers and directors against liabilities
and expenses arising out of legal proceedings brought against them by reason of
their being or having been directors or officers. Section 145 generally provides
that a director or officer of a corporation (i) shall be indemnified by the
corporation for all expenses of such legal proceedings when he is successful on
the merits, (ii) may be indemnified by the corporation for the expenses,
judgments, fines and amounts paid in settlement of such proceedings (other than
a derivative suit), even if he is not successful on the merits, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, and
(iii) may be indemnified by the corporation for the expenses of a derivative
suit (a suit by a stockholder alleging a breach by a director or officer of a
duty owed to the corporation), even if he is not successful on the merits, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. No indemnification may be made
under clause (iii) above, however, if the director or officer is adjudged liable
for negligence or misconduct in the performance of his duties to the
corporation, unless a corporation determines that, despite such adjudication,
but in view of all the circumstances, he is entitled to indemnification. The
indemnification described in clauses (ii) and (iii) above may be made only upon
a determination that indemnification is proper because the applicable standard
of conduct has been met. Such a determination may be made by a majority of a
quorum of disinterested directors, independent legal counsel, the stockholders
or a court of competent jurisdiction.
The Company's Restated Certificate of Incorporation will provide that the
Company shall indemnify to the fullest extent permitted by Section 145, as it
now exists or as amended, all persons whom it may indemnify pursuant thereto.
The Company has entered into agreements to indemnify its directors and
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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.
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
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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 has determined 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. 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 such U.S. Holder's tax basis in the
Common Stock. Such capital gain or loss will constitute long-term (or, in the
case of an individual U.S. Holder, possibly mid-term) capital gain or loss
depending on the U.S. Holder's holding period for the Common Stock 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 constitute long-term (or, in the case of an individual U.S.
Holder, possibly mid-term) capital gain or loss depending on the U.S. Holder's
holding period for the Warrants at the time of the disposition.
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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 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
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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 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
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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. 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 13,273,068 shares of
Common Stock (13,685,568 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. After taking into account the purchases by Interneuron and
entities affiliated with Robertson, Stephens & Co. of an aggregate of 750,000
Unit Shares (the "Affiliate Shares"), 2,000,000 Unit Shares will be fully
tradeable immediately after the closing of the Offering. The Affiliate Shares
will be subject to certain volume, manner of sale and other limitations under
Rule 144, as well as the lockup agreements described below. The 142,000 Unit
Shares to be purchased by entities affiliated with InterWest Partners and Oak
Investment Partners will be eligible for immediate sale in the public market,
subject to the Mercator Lockup Agreements described below. In addition,
3,440,928 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, 3,376,996 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 7,082,140 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 1,291,215 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 4,430,664 of such Restricted Shares
(plus the 500,000 Affiliate Shares that Interneuron will acquire in the
Offering) 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 1,023,256
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 that is not an "affiliate" of Mercator
within the meaning of Rule 145 after each of 180 days, 270 days and 365 days
following completion of the Acquisition, and as to one-third of all shares held
by an "affiliate" of Mercator within the meaning of Rule 145 after each of 240,
270 and 365 days following completion of the Acquisition.
104
<PAGE>
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 1,448,110,
1,208,999, 1,208,999 and 6,139,863 of such shares will be eligible for immediate
sale in the public market beginning 181, 241, 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 883,814, 47,334,
64,786 and 64,786 of such shares will be eligible for immediate sale in the
public market beginning 181, 241, 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 132,731 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 952,731 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 1,660,694 shares of Common
Stock to be reserved for grants or awards under its 1992 Stock Option Plan and
1996 Stock Incentive Plan and an aggregate of 595,358 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. The Company has filed a registration statement on
Form S-8 to register an aggregate of 100,000 shares of Common Stock reserved for
issuance under the 1996 Employee Stock Purchase Plan. 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, 72,536 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."
105
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement, of which this Prospectus is a part, the Underwriters named below (the
"Underwriters"), for whom Lehman Brothers Inc. and Genesis Merchant Group
Securities are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company, and the Company has agreed to sell to each
Underwriter, the number of Units set forth opposite the name of each such
Underwriter below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF UNITS
- ----------------------------------------------------------------------------- ---------------
<S> <C>
Lehman Brothers Inc.......................................................... 1,077,500
Genesis Merchant Group Securities............................................ 1,077,500
Credit Suisse First Boston Corporation....................................... 60,000
Hambrecht & Quist LLC........................................................ 60,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................................... 60,000
Montgomery Securities........................................................ 60,000
Oppenheimer & Co., Inc....................................................... 60,000
Robertson, Stephens & Company LLC............................................ 60,000
UBS Securities LLC........................................................... 60,000
Cowen & Company.............................................................. 35,000
Furman Selz LLC.............................................................. 35,000
Pacific Growth Equities, Inc................................................. 35,000
Punk, Ziegel & Knoell........................................................ 35,000
Vector Securities International, Inc......................................... 35,000
---------------
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 $0.25 per Unit. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $0.10 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.
Interneuron has expressed its intention to purchase 500,000 Units in the
Offering at the initial public offering price. Such purchase will be made on the
same terms as purchases by other investors, except that Interneuron has agreed
for a period of 365 days from the date of this Prospectus not to sell or
otherwise dispose of, directly or indirectly, any of its shares of Common Stock
(or any securities convertible into or exchangeable for any shares of Common
Stock) without the prior written consent of Lehman Brothers Inc. The Units to be
purchased by Interneuron will be covered by the Underwriting Agreement and the
Underwriters will receive underwriting discounts and commissions on the Units
purchased by Interneuron equal to 3.0 percent of the initial public offering
price for such Units.
106
<PAGE>
Of the 2,750,000 Units being sold in the Offering, SR One has expressed its
intention to purchase 214,000 Units in the Offering at the initial public
offering price. Such purchase will be made on the same terms as purchases by
other investors, except that the Underwriters will receive underwriting
discounts and commissions on the Units purchased by SR One equal to 3.0 percent
of the initial public offering price for such Units.
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.
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 (240 days in the case of shares held by entities affiliated with
Robertson, Stephens & Co., InterWest Partners and Oak Investment Partners) 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 has been
determined by negotiations between the Company and the Representatives. The
material factors considered in determining the initial public offering price of
the Units, in addition to prevailing market conditions were 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
107
<PAGE>
companies in related businesses. The allocation of the initial public offering
price of the Units between the Unit Shares and the Warrants has been determined
by the Board of Directors of the Company acting in good faith after consultation
with independent financial advisers. The Company retained 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 due 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 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
108
<PAGE>
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 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.
109
<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) TO
------------------------------------------ SEPTEMBER 30, --------------------------- 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)............ 6,009,876 6,065,658
------------ ------------
------------ ------------
</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) TO
------------------------------------------ SEPTEMBER 30, --------------------------- 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.............................. $ (2.12) $ (1.02) $ (1.92) $ (0.54) $ (0.96)
Shares used in computing net loss per share..... 2,851,433 2,810,853 2,863,210 2,834,120 2,918,992
</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 at the Offering price of $7.00 per unit, with $5.375
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 lesser 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 amended and restated its Certificate of
Incorporation to give effect to a 1-for-2 reverse-stock split as described in
Note 1(j).
In August 1997, the Company and Interneuron entered into an agreement
whereby Interneuron agreed to forgive effective immediately prior to
consummation of the Offering the convertible debenture, the Note payable to
Interneuron, and the Interneuron Bridge Loan. The total balance forgiven,
including accrued interest, was $13.9 million at July 31, 1997. Interneuron also
agreed to forgive effective immediately prior to consummation of the Offering
all remaining minimum adjustments to the conversion ratio of the Company's
Series A Preferred Stock that had not been previously relinquished.
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 AVERAGE PURCHASE
SHARES EXERCISE 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>
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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........................................................... 23
Dividend Policy........................................................... 23
Capitalization............................................................ 24
Dilution.................................................................. 25
Unaudited Pro Forma Financial Statements.................................. 27
Progenitor Selected Historical Financial Data............................. 35
Mercator Selected Historical Financial Data............................... 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 37
Business.................................................................. 43
Management................................................................ 68
Certain Transactions...................................................... 84
Principal Stockholders.................................................... 90
Description of Securities................................................. 93
Certain Federal Tax Considerations........................................ 99
Shares Eligible for Future Sale........................................... 104
Underwriting.............................................................. 106
Legal Matters............................................................. 108
Experts................................................................... 108
Additional Information.................................................... 109
Index to Financial Statements............................................. F-1
</TABLE>
---------------------
UNTIL AUGUST 31, 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]
EACH UNIT CONSISTS OF ONE SHARE
OF COMMON STOCK AND
ONE COMMON STOCK
PURCHASE WARRANT
---------------------
PROSPECTUS
August 6, 1997
------------------------
LEHMAN BROTHERS
GENESIS MERCHANT GROUP
SECURITIES
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