<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1997
REGISTRATION NO. 333-23389
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
PROGENITOR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2836 31-1344193
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification number)
organization of registrant)
</TABLE>
1507 CHAMBERS ROAD
COLUMBUS, OHIO 43212
(614) 488-6688
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DOUGLASS B. GIVEN, M.D., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PROGENITOR, INC.
1507 CHAMBERS ROAD
COLUMBUS, OHIO 43212
(614) 488-6688
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
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<S> <C>
GAVIN B. GROVER, ESQ. JOHN V. ROOS, ESQ.
MICHAEL G. O'BRYAN, ESQ. PAGE MAILLIARD, ESQ.
MATTHEW S. CROWLEY, ESQ. TAMARA G. MATTISON, ESQ.
MORRISON & FOERSTER LLP WILSON SONSINI GOODRICH & ROSATI, PC
425 MARKET STREET 650 PAGE MILL ROAD
SAN FRANCISCO, CALIFORNIA 94105 PALO ALTO, CALIFORNIA 94304
(415) 268-7000 (415) 493-9300
</TABLE>
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effective date of this Registration
Statement and concurrent with the initial public offering by the Registrant of
shares of its common stock, as described herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
[MERCATOR PRESIDENT'S LETTER]
, 1997
Dear Stockholder:
A Special Meeting of Stockholders (the "Special Meeting") of Mercator
Genetics, Inc. ("Mercator") will be held on , 1997 at , local
time, at the corporate offices of Mercator, located at 4040 Campbell Avenue,
Menlo Park, California 94025.
At this Special Meeting, you will be asked:
1. To consider and vote upon a proposal (the "Reorganization Proposal") to
approve and adopt the Agreement and Plan of Reorganization dated as of
February 14, 1997, as amended (as the same may be amended, supplemented
or modified, the "Reorganization Agreement"), by and between Progenitor,
Inc., a Delaware corporation ("Progenitor"), MG Merger Sub Corp., a
Delaware corporation and a wholly-owned subsidiary of Progenitor ("Merger
Sub"), and Mercator, pursuant to which Merger Sub will be merged with and
into Mercator, with Mercator as the surviving corporation (the
"Reorganization").
2. To consider and vote upon a proposal (the "Mercator Certificate
Amendment Proposal") to amend the Certificate of Incorporation of
Mercator to provide that (i) the amount to which any outstanding shares
of the Common Stock or Preferred Stock of Mercator will be entitled in
the Reorganization will be equal to the amount specified in the
Reorganization Agreement, and (ii) Mercator's Series D Preferred Stock
will not be entitled to vote with respect to the Reorganization or any of
the other transactions contemplated by the Reorganization Agreement or
the agreements related thereto (no shares of Series D Preferred Stock
were outstanding as of the record date with respect to the Special
Meeting).
3. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
THE PROPOSED ACTIONS ARE FURTHER DESCRIBED IN THE ACCOMPANYING NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS AND PROXY STATEMENT/PROSPECTUS, WHICH YOU SHOULD
READ CAREFULLY.
In the Reorganization, the aggregate purchase price will be paid in shares
of the Common Stock, par value $0.001 per share ("Progenitor Common Stock") of
Progenitor. The aggregate value of the Progenitor Common Stock issued for all
shares of Mercator capital stock (including shares of Progenitor Common Stock
issuable upon exercise of all options and warrants to purchase Mercator capital
stock assumed by Progenitor) will be an amount equal to $22 million, less
certain expenses of Mercator and the amount, if any, of certain claims by
Progenitor and various indemnitees for certain breaches of the covenants,
representations and warranties of Mercator in the Reorganization Agreement. The
adjusted purchase price will be allocated among the shares of the various
classes and series of Mercator capital stock and outstanding options and
warrants in accordance with the formula set forth in the Reorganization
Agreement. Upon the closing of the Reorganization, each share of Mercator
capital stock outstanding immediately prior to such closing (excluding shares
held in the treasury of Mercator, shares held by Progenitor or any subsidiary of
Progenitor and shares held by dissenting stockholders who have asserted
applicable appraisal rights, if any) will be converted into the right to receive
a number of fully paid and nonassessable shares of Progenitor Common Stock equal
to the portion of the adjusted purchase price allocated to it pursuant to the
formula referred to above, divided by the portion of the price to the public
allocated to the shares of Progenitor Common Stock in the proposed initial
public offering of Progenitor Units described in the accompanying Proxy
Statement/Prospectus. Cash will be delivered in lieu of fractional shares. THE
PURCHASE PRICE CALCULATION AND THE ALLOCATION OF THE PURCHASE PRICE AMONG THE
CLASSES AND SERIES OF MERCATOR CAPITAL STOCK ARE FURTHER DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT/PROSPECTUS, WHICH YOU SHOULD READ CAREFULLY.
<PAGE>
Pursuant to the terms of the Reorganization Agreement, Progenitor has the
right, under certain circumstances, to elect to consummate the Reorganization by
paying the purchase price in cash, in unregistered shares of Progenitor Common
Stock or in the shares of another public company. The accompanying Proxy
Statement/Prospectus assumes that Progenitor will pay the purchase price in
registered shares of Progenitor Common Stock. In the event that Progenitor
elects to pay the purchase price in one of the alternative forms of
consideration described in the preceding sentence, additional materials will be
provided to the stockholders of Mercator and separate proxies will be solicited.
The purposes of the Mercator Certificate Amendment Proposal are (i) to
conform the allocation of consideration paid in connection with certain events
among the various classes and series of Mercator capital stock currently
provided in the Mercator Certificate of Incorporation to the allocation provided
in the Reorganization Agreement and (ii) to facilitate the desire of the holders
of certain bridge notes convertible into shares of Mercator's Series D Preferred
Stock to delay conversion of their notes until immediately prior to the
effective time of the Reorganization, which might not be possible in the absence
of the amendment. Approval of the Mercator Certificate Amendment Proposal is one
of the conditions to the obligation of Progenitor to consummate the
Reorganization.
Stockholders also will consider and vote upon any other matters that may
properly come before the Special Meeting.
MERCATOR'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TERMS OF THE
REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND HAS
DETERMINED THAT THE TERMS OF THE REORGANIZATION AGREEMENT ARE FAIR TO, AND IN
THE BEST INTERESTS OF, MERCATOR AND ITS STOCKHOLDERS. AFTER CAREFUL
CONSIDERATION, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF
APPROVAL OF THE REORGANIZATION PROPOSAL AND A VOTE IN FAVOR OF APPROVAL OF THE
MERCATOR CERTIFICATE AMENDMENT PROPOSAL.
If the Reorganization Proposal is approved, the conditions to the
Reorganization are satisfied or waived and the Reorganization is consummated,
you will receive detailed information on how to transmit your Mercator share
certificates to obtain certificates representing shares of Progenitor Common
Stock allocated to you as your portion of the Reorganization consideration.
HOWEVER, YOU WILL NOT BE ENTITLED TO RECEIVE SUCH SHARE CERTIFICATES UNTIL YOU
HAVE SIGNED AND DELIVERED TO PROGENITOR AN AGREEMENT CONTAINING CERTAIN
RESTRICTIONS ON THE TRANSFER OF SUCH SHARES, AS DESCRIBED IN THE ACCOMPANYING
PROXY STATEMENT/ PROSPECTUS. IN ADDITION, CERTAIN SHARES TO WHICH YOU MIGHT
OTHERWISE BE ENTITLED MAY BE SUBJECT TO A HOLDBACK ESCROW IN FAVOR OF PROGENITOR
WITH RESPECT TO CERTAIN INDEMNIFICATION OBLIGATIONS OF THE MERCATOR SECURITIES
HOLDERS THAT MAY BECOME APPLICABLE. THE MAXIMUM AMOUNT OF ANY SUCH ESCROW
HOLDBACK, TOGETHER WITH ANY PURCHASE PRICE ADJUSTMENT IN RESPECT OF
INDEMNIFICATION CLAIMS, WILL BE SHARES OF PROGENITOR COMMON STOCK WITH A VALUE
OF $2.2 MILLION.
TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ACCOMPANYING PROXY CARD AND RETURN IT IN THE ENCLOSED PREPAID
ENVELOPE.
If you attend the Special Meeting, you may vote in person if you wish, even
though you have previously returned your proxy. You should not send in the stock
certificate(s) for your Mercator capital stock at this time.
Sincerely,
Elliott Sigal, M.D., Ph.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
MERCATOR GENETICS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1997
To the stockholders of Mercator Genetics, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the Stockholders (the
"Special Meeting") of Mercator Genetics, Inc. ("Mercator") will be held at the
corporate offices of Mercator, located at 4040 Campbell Avenue, Menlo Park,
California 94025, on , 1997, at a.m. local time, for the following
purposes, all of which are more fully described in the accompanying Proxy
Statement/Prospectus:
1. To consider and vote upon a proposal (the "Reorganization Proposal") to
approve and adopt the Agreement and Plan of Reorganization dated as of
February 14, 1997, as amended (as the same may be amended, supplemented
or modified, the "Reorganization Agreement"), by and between Progenitor,
Inc., a Delaware corporation ("Progenitor"), MG Merger Sub Corp., a
Delaware corporation and a wholly-owned subsidiary of Progenitor ("Merger
Sub"), and Mercator, pursuant to which Merger Sub will be merged with and
into Mercator, with Mercator as the surviving corporation (the
"Reorganization"). A copy of the Reorganization Agreement is attached as
Appendix A to the accompanying Proxy Statement/Prospectus.
2. To consider and vote upon a proposal (the "Mercator Certificate
Amendment Proposal") to amend the Certificate of Incorporation of
Mercator, to provide that (i) the amount to which any outstanding shares
of the Common Stock or Preferred Stock of Mercator will be entitled in
the Reorganization will be the amount specified in the Reorganization
Agreement, and (ii) Mercator's Series D Preferred Stock will not be
entitled to vote with respect to the Reorganization or any of the other
transactions contemplated by the Reorganization Agreement or the
agreements related thereto (no shares of Mercator Series D Preferred
Stock were outstanding as of the record date with respect to the Special
Meeting).
3. To transact such other business as may properly come before the Special
Meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on , 1997 as
the record date for the determination of the holders of Mercator capital stock
entitled to notice of, and to vote at, the Special Meeting. THE REORGANIZATION,
THE REORGANIZATION PROPOSAL AND THE MERCATOR CERTIFICATE AMENDMENT PROPOSAL AND
OTHER MATTERS RELATED THERETO ARE MORE FULLY DESCRIBED IN THE ACCOMPANYING PROXY
STATEMENT/ PROSPECTUS AND THE APPENDICES THERETO, WHICH FORM A PART OF THIS
NOTICE.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER ATTENDING
THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS RETURNED A
PROXY.
By Order of the Board of Directors,
Elliott Sigal, M.D., Ph.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
, 1997
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
<PAGE>
PROGENITOR, INC.
PROSPECTUS
MERCATOR GENETICS, INC.
PROXY STATEMENT
This Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is being
furnished to holders of Common Stock, $0.001 par value per share (the "Mercator
Common Stock"), of Mercator Genetics, Inc., a Delaware corporation ("Mercator"),
and to holders of Mercator's Series A, Series B and Series C Preferred Stock,
$0.001 par value per share, in connection with the solicitation of proxies by
the Board of Directors of Mercator for use at the Special Meeting of
Stockholders of Mercator to be held at the corporate offices of Mercator,
located at 4040 Campbell Avenue, Menlo Park, California 94025, on ,
1997, at :00 a.m., local time, and at any and all adjournments or
postponements thereof (the "Mercator Special Meeting"). Mercator's Series A,
Series B, Series C and Series D Preferred Stock, $0.001 par value per share, are
sometimes referred to herein collectively as "Mercator Preferred Stock," and the
Mercator Common Stock and the Mercator Preferred Stock are sometimes referred to
herein collectively as the "Mercator Capital Stock." This Proxy
Statement/Prospectus also is being furnished to holders of options and warrants
to purchase shares of Mercator Capital Stock and to holders of other securities
convertible into or exercisable for Mercator Capital Stock.
This Proxy Statement/Prospectus relates to the Agreement and Plan of
Reorganization, dated as of February 14, 1997, as amended (as the same may be
amended, supplemented or modified, the "Reorganization Agreement"), by and
between Progenitor, Inc., a Delaware corporation ("Progenitor"), MG Merger Sub
Corp., a Delaware corporation and a wholly-owned subsidiary of Progenitor
("Merger Sub"), and Mercator, pursuant to which Merger Sub will be merged with
and into Mercator, with Mercator as the surviving corporation (the
"Reorganization"). A copy of the Reorganization Agreement is attached as
Appendix A to this Proxy Statement/Prospectus. See "The Reorganization" and "The
Reorganization Agreement."
In the Reorganization, the aggregate purchase price will be paid in fully
paid and nonassessable shares of the common stock, $0.001 par value per share
(the "Progenitor Common Stock"), of Progenitor. The aggregate value of the
Progenitor Common Stock issued for all shares of Mercator Capital Stock
(including shares of Progenitor 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 million, less (ii) both (A) the total amount
by which Total Mercator Reorganization Expenses (as defined herein) exceed
$800,000 and (B) the total amount by which Total Mercator IPO Expenses (as
defined herein) 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 Reorganization Agreement (the value of such Progenitor Common
Stock, as so adjusted, the "Adjusted Purchase Price"). The allocation of the
Adjusted Purchase Price 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 Reorganization Agreement, as
described in this Proxy Statement/Prospectus. See "The Reorganization--Exchange
Ratios--Illustrative Exchange Ratios."
The Reorganization is intended to be closed concurrently with or immediately
prior to the completion of the proposed intial public offering by Progenitor
(the "IPO") of units ("Progenitor Units") consisting of one share of Progenitor
Common Stock and one warrant (each, a "Progenitor Warrant") to purchase one
share of Progenitor Common Stock. The per unit price to the public for each
Progenitor Unit in the IPO is referred to in this Proxy Statement/Prospectus as
the "IPO Unit Price" and the amount of the IPO Unit Price allocated to the value
of the share of Progenitor Common Stock included in a Progenitor Unit is
referred to as the "IPO Common Stock Price."
Upon closing of the Reorganization, each share of Mercator Capital Stock
outstanding immediately prior to such closing (excluding shares held in the
treasury of Mercator, shares held by Progenitor or any subsidiary of Progenitor
and shares held by dissenting stockholders who have asserted applicable
appraisal or dissenters' rights, if any) will be converted into the right to
receive a number of shares of Progenitor Common Stock equal to the portion of
the Adjusted Purchase Price allocated to it pursuant to the formula referred to
above, divided by the IPO Common Stock Price. The actual IPO Common Stock Price
thus will
<PAGE>
affect only the number of shares of Progenitor Common Stock to be issued in the
Reorganization to each holder of Mercator Capital Stock, and will not affect the
dollar value of the aggregate number of such shares. Progenitor currently
contemplates that the IPO Unit Price will be between $10.00 and $12.00 per Unit,
and, assuming that the actual IPO Unit Price is $11.00, that the IPO Common
Stock Price will be $8.50, although there can be no assurance that the actual
IPO Unit Price will be within such range or that the actual IPO Common Stock
Price will be such amount. The Reorganization may be consummated even if the
actual IPO Unit Price is above or below such range or if the actual IPO Common
Stock Price is above or below such price. Cash will be delivered in lieu of
fractional shares.
The Reorganization Agreement allows Progenitor to pay the Adjusted Purchase
Price in shares of Progenitor Common Stock or cash or, if Progenitor elects not
to consummate the IPO, in unregistered shares of Progenitor's capital stock or
in other public equity securities mutually acceptable to Progenitor and
Mercator. This Proxy Statement/Prospectus assumes that Progenitor will pay the
Adjusted Purchase Price in registered shares of Progenitor Common Stock. If
Progenitor elects to pay the Adjusted Purchase Price in a form of consideration
other than Progenitor Common Stock registered hereby, additional information
will be provided to the holders of Mercator Capital Stock and separate proxies
will be solicited.
Progenitor's obligation to consummate the Reorganization is subject to
various conditions, including, among others, (i) approval and adoption at the
Mercator Special Meeting of the Reorganization Agreement and the Mercator
Certificate Amendment Proposal (described below) by the holders of Mercator
Capital Stock and (ii) consummation by Progenitor of the IPO.
In addition, at the Mercator Special Meeting Mercator stockholders will be
asked to vote on an amendment to the Certificate of Incorporation of Mercator
(the "Mercator Certificate Amendment Proposal"), providing that (i) the amount
to which any shares of Mercator Common Stock and Mercator Preferred Stock will
be entitled in the Reorganization will be the amount specified in the
Reorganization Agreement, and (ii) Mercator's Series D Preferred Stock will not
be entitled to vote with respect to the Reorganization or any of the other
transactions contemplated by the Reorganization Agreement or the agreements
related thereto (no shares of Mercator Series D Preferred Stock were outstanding
as of the record date with respect to the Mercator Special Meeting). APPROVAL OF
THE MERCATOR CERTIFICATE AMENDMENT PROPOSAL IS ONE OF THE CONDITIONS TO
PROGENITOR'S OBLIGATION TO EFFECT THE REORGANIZATION. IF THE MERCATOR
CERTIFICATE AMENDMENT PROPOSAL IS NOT APPROVED, PROGENITOR WILL NOT BE REQUIRED
TO CONSUMMATE THE REORGANIZATION. See "Amendment of Mercator Certificate of
Incorporation."
This Proxy Statement/Prospectus also constitutes the Prospectus of
Progenitor with respect to the shares of Progenitor Common Stock (i) to be
issued to holders of outstanding shares of Mercator Capital Stock upon
consummation of the Reorganization and (ii) offered for issuance in connection
with certain options and warrants to purchase Mercator Capital Stock. Progenitor
has filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement on Form S-4 pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), of which this Proxy Statement/Prospectus is a
part, covering the issuance of up to 3,700,000 shares of Progenitor Common Stock
in connection with the Reorganization and the issuance of the shares of
Progenitor Common Stock upon exercise of such options and warrants. Progenitor
also has filed with the Commission a Registration Statement on Form S-1 (No.
333-05369) pursuant to the Securities Act relating to the IPO (the "IPO
Registration Statement").
At the date hereof, there is no public trading market for shares of
Progenitor Common Stock.
All information contained in this Proxy Statement/Prospectus with respect to
Progenitor has been provided by Progenitor. All information contained in this
Proxy Statement/Prospectus with respect to Mercator has been provided by
Mercator. This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to stockholders of Mercator on or about , 1997. Any
stockholder who has given a proxy may revoke it at any time prior to its
exercise. See "The Mercator Special Meeting--Record Date; Proxies."
The Proxy Statement/Prospectus does not cover resales of Progenitor Common
Stock received by stockholders of Mercator in the Reorganization, and no person
is authorized to make use of this Proxy Statement/Prospectus in connection with
any such resale.
<PAGE>
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 PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY STATEMENT/PROSPECTUS.
THE PROPOSED REORGANIZATION IS A COMPLEX TRANSACTION. STOCKHOLDERS ARE STRONGLY
URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT/ PROSPECTUS,
PARTICULARLY THE MATTERS REFERRED TO ON PAGE 23 UNDER THE CAPTION "RISK
FACTORS."
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS , 1997.
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN. ANY INFORMATION OR
REPRESENTATIONS WITH RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY PROGENITOR OR MERCATOR. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION
TO OR FROM ANY PERSON TO OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER,
SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF PROGENITOR OR MERCATOR SINCE THE DATE HEREOF OR THAT THE
INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
<PAGE>
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TABLE OF CONTENTS
PAGE
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SUMMARY.................................................................................................... 1
The Companies............................................................................................ 2
Progenitor............................................................................................. 2
Mercator............................................................................................... 2
The Mercator Special Meeting............................................................................. 3
Time, Place and Date................................................................................... 3
Purpose................................................................................................ 3
Votes Required; Record Date............................................................................ 4
The Reorganization....................................................................................... 5
General................................................................................................ 5
Progenitor Reverse Stock Split......................................................................... 5
Conversion of Mercator Capital Stock; Exchange Ratios.................................................. 5
Adjusted Purchase Price Calculation; Indemnification; Escrow........................................... 7
Alternative Consideration.............................................................................. 9
Conditions to the Reorganization; Termination.......................................................... 9
Stock Ownership Following the Reorganization........................................................... 10
Regulatory Approvals................................................................................... 10
Certain Resale Restrictions............................................................................ 10
Accounting Treatment................................................................................... 11
Appraisal and Dissenters' Rights......................................................................... 11
Surrender of Stock Certificates.......................................................................... 11
Recommendation of the Mercator Board of Directors........................................................ 11
Risk Factors............................................................................................. 12
Interests of Certain Persons in the Reorganization....................................................... 12
Certain Federal Income Tax Consequences.................................................................. 13
Management of Progenitor after the Reorganization........................................................ 13
Comparative Rights of Stockholders....................................................................... 13
Comparative Dividend Policies............................................................................ 13
Stock Options and Warrants............................................................................... 14
Bridge Financing......................................................................................... 14
Initial Public Offering.................................................................................. 15
Summary Progenitor Selected Historical Financial Data.................................................... 17
Summary Mercator Selected Historical Financial Data...................................................... 18
Summary Pro Forma Financial Data......................................................................... 19
Comparative Per Share Data............................................................................... 21
RISK FACTORS............................................................................................... 23
Uncertainties Regarding the IPO, the IPO Common Stock Price and Exchange Ratios.......................... 23
Uncertainties Regarding the Value of Progenitor Common Stock............................................. 24
Absence of Fairness Opinion.............................................................................. 24
Uncertainties Relating to the Technological Approaches of Progenitor..................................... 24
History of Operating Losses; Anticipation of Future Losses............................................... 25
Uncertainty of Product Development....................................................................... 26
Need for Additional Capital; Uncertainty of Additional Funding........................................... 26
Dependence on Collaborators and Licensees................................................................ 27
Intense Competition; Rapid Technological Change.......................................................... 28
Uncertainty of Patents and Proprietary Rights............................................................ 28
Management of Growth; Risk of Acquiring New Technologies................................................. 31
Risks Associated with the Acquisition of Mercator........................................................ 31
</TABLE>
(i)
<PAGE>
<TABLE>
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TABLE OF CONTENTS
PAGE
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Uncertainties Related to Clinical Trials................................................................. 32
Government Regulation; No Assurance of Regulatory Approval............................................... 32
Dependence on Key Personnel.............................................................................. 33
Dependence on Research Collaborators and Scientific Advisors............................................. 34
Control of Progenitor by, and Potential Conflicts of Interests with, Interneuron......................... 34
Uncertainty of Health Care Reform Measures and Third-Party Reimbursement................................. 35
Risk of Product Liability................................................................................ 36
No Prior Trading Market; No Assurance of Active Trading Market; Potential Volatility of Stock Price...... 36
Anti-Takeover Considerations............................................................................. 37
Hazardous and Radioactive Materials; Environmental Matters............................................... 37
Management Discretion as to Use of Proceeds.............................................................. 38
Shares Eligible for Future Sale; Registration Rights; Possible Adverse Effect on Stock Price............. 38
Absence of Dividends..................................................................................... 40
THE MERCATOR SPECIAL MEETING............................................................................... 40
Date, Time and Place..................................................................................... 40
Purpose.................................................................................................. 40
Record Date; Proxies..................................................................................... 41
Required Vote; Voting Rights; Quorum..................................................................... 41
Solicitation of Proxies.................................................................................. 43
Appraisal and Dissenters' Rights......................................................................... 43
THE REORGANIZATION......................................................................................... 44
General.................................................................................................. 44
Exchange Ratios.......................................................................................... 44
Reductions for Certain Expenses........................................................................ 45
Adjustment of Exchange Ratios for Adjusted Purchase Price.............................................. 46
Illustrative Exchange Ratios........................................................................... 47
Cash in Lieu of Fractional Shares...................................................................... 49
Adjusted Purchase Price Calculation; Indemnification; Escrow............................................. 49
Effective Time........................................................................................... 51
Stock Ownership Following the Reorganization............................................................. 51
Conversion of Shares..................................................................................... 52
Nasdaq National Market Listing........................................................................... 52
Alternative Consideration................................................................................ 52
Cash................................................................................................... 52
Unregistered Shares of Progenitor Common Stock......................................................... 52
Other Public Equity.................................................................................... 53
Background of the Reorganization......................................................................... 53
Recommendation of the Mercator Board; Reasons of Mercator for the Reorganization......................... 55
Reasons of Progenitor for the Reorganization............................................................. 57
Interests of Certain Persons in the Reorganization....................................................... 57
Acceleration of Vesting of Stock Options............................................................... 57
Indemnification and Insurance.......................................................................... 58
Employment Agreements.................................................................................. 58
Employee Retention and Salary Protection Plans......................................................... 60
Progenitor Board....................................................................................... 60
Underwriter............................................................................................ 60
Certain Federal Income Tax Consequences.................................................................. 60
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Accounting Treatment..................................................................................... 62
Regulatory Approvals..................................................................................... 62
Lockup Agreements........................................................................................ 63
Resale Restrictions...................................................................................... 64
Lockup Agreements; Escrow.............................................................................. 64
Affiliate Agreements................................................................................... 64
Principal Stockholder Agreements......................................................................... 64
THE REORGANIZATION AGREEMENT............................................................................... 66
The Reorganization....................................................................................... 66
Progenitor Reverse Stock Split........................................................................... 66
Closing.................................................................................................. 66
Conversion of Securities................................................................................. 66
Stock Options and Warrants............................................................................... 66
Exchange of Shares....................................................................................... 68
Bridge Loan Financing.................................................................................... 69
Interneuron Bridge Loan................................................................................ 71
Representations and Warranties........................................................................... 71
Certain Covenants........................................................................................ 72
No Solicitation.......................................................................................... 75
Certain Employee Benefit Matters......................................................................... 75
Employee Retention Plan................................................................................ 75
Employee Salary Protection Plan........................................................................ 76
Senior Executive and Management Salary Protection Plan................................................. 76
Non-Solicitation Agreements............................................................................ 76
Director and Officer Indemnification..................................................................... 76
Access and Information................................................................................... 76
Agreements Relating to Approval of the Reorganization.................................................... 77
Additional Agreements.................................................................................... 77
Conditions............................................................................................... 78
Closing Deliverables................................................................................... 79
Termination.............................................................................................. 79
Amendment; Waiver........................................................................................ 80
Expenses................................................................................................. 80
Related Agreements....................................................................................... 81
APPRAISAL AND DISSENTERS' RIGHTS OF MERCATOR STOCKHOLDERS.................................................. 81
Applicability............................................................................................ 81
California Dissenters' Rights............................................................................ 81
Delaware Appraisal Rights................................................................................ 83
INITIAL PUBLIC OFFERING.................................................................................... 84
CAPITALIZATION............................................................................................. 86
COMPARATIVE DIVIDEND POLICIES.............................................................................. 88
PROGENITOR UNAUDITED PRO FORMA FINANCIAL STATEMENTS........................................................ 88
PROGENITOR SELECTED HISTORICAL FINANCIAL DATA.............................................................. 95
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PROGENITOR........ 96
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Overview................................................................................................. 96
Pro Forma for Reorganization........................................................................... 97
Results of Operations.................................................................................... 97
Six Months Ended March 31, 1996 and 1997............................................................... 97
Fiscal Years Ended September 30, 1994, 1995 and 1996................................................... 98
Liquidity and Capital Resources.......................................................................... 99
Progenitor............................................................................................. 99
Funding for Mercator Prior to the Reorganization....................................................... 100
Impact of New Accounting Pronouncements.................................................................. 100
MERCATOR SELECTED HISTORICAL FINANCIAL DATA................................................................ 101
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MERCATOR.......... 102
Overview................................................................................................. 102
Results of Operations.................................................................................... 102
Three months ended March 31, 1997 and 1996............................................................. 102
Years Ended December 31, 1994, 1995 and 1996........................................................... 103
Liquidity and Capital Resources.......................................................................... 103
BUSINESS OF PROGENITOR..................................................................................... 105
Overview................................................................................................. 105
Business Strategy........................................................................................ 105
Employ Its Integrated Genomics System.................................................................. 105
Employ Flexible Development and Commercialization Approach............................................. 105
Pursue Patent Protection............................................................................... 106
Maintain Technological Competitiveness................................................................. 106
Progenitor's Genomics System............................................................................. 106
Discovery Resources...................................................................................... 106
Stem Cells............................................................................................. 106
Developing Tissues..................................................................................... 107
Discovery Tools.......................................................................................... 107
Growth Factor Receptor Technologies.................................................................... 107
Gene Expression Analysis............................................................................... 107
Bioinformatics......................................................................................... 108
Further Elucidation of Gene Function..................................................................... 108
Murine Developmental Assays............................................................................ 109
Xenopus Developmental Assays........................................................................... 109
Zebrafish Developmental Assays......................................................................... 109
Transgenic and Gene Knock-Out Technologies............................................................. 110
Gene Delivery and Expression........................................................................... 110
Discovery Programs....................................................................................... 110
Leptin Receptors....................................................................................... 110
Red Blood Cell Growth Factor........................................................................... 111
del-1 Gene in Angiogenesis and Osteogenesis............................................................ 111
Angiogenesis........................................................................................... 111
Hematopoiesis.......................................................................................... 112
T7T7 Gene Therapy...................................................................................... 112
Corporate Agreements..................................................................................... 112
Amgen Agreements....................................................................................... 112
Novo Nordisk Agreement................................................................................. 113
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Chiron Agreement....................................................................................... 114
Interneuron Agreement.................................................................................. 115
Technology Agreements.................................................................................... 115
Pangea Agreements...................................................................................... 115
License Agreements....................................................................................... 116
Vanderbilt University.................................................................................. 116
Ohio University........................................................................................ 116
Advanced Technology Program Grant........................................................................ 116
Patents and Proprietary Rights........................................................................... 117
Competition.............................................................................................. 119
Government Regulation.................................................................................... 120
Product Liability Insurance.............................................................................. 121
Human Resources.......................................................................................... 121
Facilities............................................................................................... 122
Scientific Advisory Boards............................................................................... 122
Developmental Biology.................................................................................. 122
Hematology/Oncology/Immunology......................................................................... 123
MANAGEMENT OF PROGENITOR AFTER THE REORGANIZATION.......................................................... 124
Directors and Executive Officers......................................................................... 124
Key Scientific Personnel................................................................................. 126
Employment Agreements.................................................................................... 127
Board of Directors Committees and Other Information...................................................... 129
Compensation Committee Interlocks and Insider Participation.............................................. 130
Directors' Compensation.................................................................................. 130
Executive Compensation................................................................................... 131
Stock Plans.............................................................................................. 132
1992 Stock Option Plan................................................................................. 132
1996 Stock Incentive Plan.............................................................................. 133
1996 Employee Stock Purchase Plan...................................................................... 134
1997 Stock Option Plan................................................................................. 136
Terms of Replacement Options........................................................................... 137
Stock Option Grants in Last Fiscal Year.................................................................. 139
Fiscal Year-End Option Values............................................................................ 139
Cancellation and Regrant of Options...................................................................... 140
CERTAIN TRANSACTIONS OF PROGENITOR......................................................................... 140
Relationship with Interneuron............................................................................ 140
The Ohio University Foundation........................................................................... 144
Transactions with Directors and Executive Officers....................................................... 145
Insider Transactions..................................................................................... 147
PRINCIPAL STOCKHOLDERS OF PROGENITOR....................................................................... 148
BUSINESS OF MERCATOR....................................................................................... 151
Overview................................................................................................. 151
Discovery Resources...................................................................................... 151
Patents and Proprietary Rights........................................................................... 152
MANAGEMENT OF MERCATOR..................................................................................... 152
Directors and Executive Officers......................................................................... 152
Executive Compensation................................................................................... 152
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Stock Option Grants in Last Fiscal Year.................................................................. 153
Fiscal Year-End Option Values............................................................................ 153
Director's Compensation.................................................................................. 154
Transactions with Directors and Executive Officers....................................................... 154
PRINCIPAL STOCKHOLDERS OF MERCATOR......................................................................... 154
DESCRIPTION OF PROGENITOR SECURITIES....................................................................... 156
Progenitor Warrants...................................................................................... 157
Progenitor Common Stock.................................................................................. 158
Progenitor Units......................................................................................... 159
Progenitor Preferred Stock............................................................................... 158
Stock Purchase Right and Other Warrants.................................................................. 160
Registration Rights...................................................................................... 161
Convertible Debenture and Promissory Note................................................................ 162
Delaware Anti-Takeover Law and Certain Charter Provisions................................................ 162
Limitation of Liability.................................................................................. 162
Transfer Agent and Registrar............................................................................. 164
APPLICABILITY OF CALIFORNIA LAW TO MERCATOR................................................................ 164
COMPARISON OF STOCKHOLDER RIGHTS........................................................................... 164
General.................................................................................................. 164
Mercator Preferred Stock................................................................................. 165
Stockholder Meetings..................................................................................... 166
Cumulative Voting........................................................................................ 167
Election and Number of Directors......................................................................... 167
Removal of Directors..................................................................................... 167
Loans to Officers........................................................................................ 167
Limitation of Liability of Directors..................................................................... 168
Indemnification of Officers and Directors................................................................ 168
Execution of Corporate Instruments....................................................................... 169
Amendment of Bylaws...................................................................................... 169
AMENDMENT OF MERCATOR CERTIFICATE OF INCORPORATION......................................................... 169
OTHER MATTERS.............................................................................................. 170
LEGAL MATTERS.............................................................................................. 170
EXPERTS.................................................................................................... 170
STOCKHOLDER PROPOSALS...................................................................................... 170
ADDITIONAL INFORMATION..................................................................................... 170
FINANCIAL STATEMENTS....................................................................................... F-1
APPENDIX A--Amended and Restated Agreement and Plan of Reorganization...................................... A-1
APPENDIX B--Form of Escrow Agreement....................................................................... B-1
APPENDIX C--Exhibit A to Reorganization Agreement.......................................................... C-1
APPENDIX D--Form of Lockup Agreement....................................................................... D-1
APPENDIX E--Chapter 13 of the California General Corporation Law........................................... E-1
APPENDIX F--Section 262 of the Delaware General Corporation Law............................................ F-1
APPENDIX G--Proposed Form of Amendment of Mercator Certificate of Incorporation............................ G-1
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS AND THE APPENDICES HERETO. THIS SUMMARY DOES NOT
PURPORT TO CONTAIN A COMPLETE STATEMENT OF ALL MATERIAL INFORMATION RELATING TO
THE REORGANIZATION AGREEMENT, THE REORGANIZATION, THE MERCATOR SPECIAL MEETING
OR THE OTHER MATTERS DISCUSSED HEREIN AND IS SUBJECT TO, AND IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS CONTAINED IN
OR ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS. STOCKHOLDERS OF MERCATOR SHOULD
READ CAREFULLY THIS PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY. CERTAIN
CAPITALIZED TERMS USED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS.
THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), INCLUDING
STATEMENTS REGARDING PROGENITOR'S AND MERCATOR'S EXPECTATIONS, BELIEFS,
INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS WITH RESPECT TO PROGENITOR ARE BASED
ON INFORMATION AVAILABLE TO PROGENITOR AS OF THE DATE HEREOF, AND ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS WITH
RESPECT TO MERCATOR ARE BASED ON INFORMATION AVAILABLE TO MERCATOR AS OF THE
DATE HEREOF; NEITHER PROGENITOR NOR MERCATOR ASSUMES ANY OBLIGATION TO UPDATE
ANY SUCH FORWARD-LOOKING STATEMENTS. IT IS IMPORTANT TO NOTE THAT PROGENITOR'S
AND MERCATOR'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 IN "RISK FACTORS" BELOW.
SEE "RISK FACTORS." NOTE THAT THE SAFE HARBORS PROVIDED IN SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT DO NOT APPLY TO
FORWARD-LOOKING STATEMENTS MADE IN CONNECTION WITH AN INITIAL PUBLIC OFFERING.
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROXY
STATEMENT/PROSPECTUS, INCLUDING FINANCIAL INFORMATION, SHARE AND PER SHARE DATA
REFLECTS: (I) THE CONSUMMATION OF A 1-FOR-2 REVERSE SPLIT OF PROGENITOR COMMON
STOCK TO BE EFFECTED PRIOR TO OR CONCURRENTLY WITH THE REORGANIZATION AND THE
IPO; (II) THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK
OF PROGENITOR ("PROGENITOR PREFERRED STOCK") SERIES A AND SERIES B INTO AN
AGGREGATE OF 2,204,330 SHARES OF PROGENITOR COMMON STOCK UPON THE CLOSING OF THE
IPO; (III) THE CONVERSION OF THE CONVERTIBLE DEBENTURE AND A PORTION OF THE
PROMISSORY NOTE OF PROGENITOR HELD BY INTERNEURON PHARMACEUTICALS, INC.
("INTERNEURON") INTO AN AGGREGATE OF 1,021,475 SHARES OF PROGENITOR COMMON STOCK
(BASED ON AN AGGREGATE OUTSTANDING BALANCE OF $8.7 MILLION, AS OF JUNE 20, 1997)
UPON THE CLOSING OF THE IPO; (IV) THE CONVERSION OF THE INTERNEURON BRIDGE LOAN
(AS DEFINED BELOW) INTO AN AGGREGATE OF 293,293 SHARES OF PROGENITOR'S SERIES D
PREFERRED STOCK (BASED ON AN OUTSTANDING BALANCE OF $2.9 MILLION AS OF JUNE 20,
1997) UPON THE CLOSING OF THE IPO; (V) THE SALE OF 647,059 SHARES OF PROGENITOR
COMMON STOCK (THE "AMGEN SHARES") TO AMGEN INC. ("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 IPO; (VI) THE SALE OF 25,000 SHARES OF PROGENITOR COMMON
STOCK TO THE OHIO UNIVERSITY FOUNDATION AT A PRICE OF $4.25 PER SHARE, PURSUANT
TO A STOCK PURCHASE RIGHT, CONCURRENTLY WITH THE CLOSING OF THE IPO; (VII) THE
ISSUANCE OF 24,020 SHARES OF PROGENITOR COMMON STOCK TO THE OHIO UNIVERSITY
FOUNDATION PURSUANT TO AN ANTI-DILUTION ADJUSTMENT IN CONNECTION WITH THE IPO;
(VIII) EXCEPT WHERE THE CONTEXT OTHERWISE REQUIRES, THE CLOSING OF THE IPO AS IF
IT OCCURRED ON JUNE 20, 1997 WITH THE SALE OF 2,750,000 PROGENITOR UNITS AT AN
INITIAL IPO UNIT PRICE OF $11.00 PER UNIT AND AN IPO COMMON STOCK PRICE OF $8.50
PER SHARE; AND (IX) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION OR OF
THE PROGENITOR WARRANTS. THE NUMBERS OF SHARES OF PROGENITOR COMMON STOCK TO BE
ISSUED UPON CONVERSION OF PROGENITOR'S PREFERRED STOCK AND THE INTERNEURON
CONVERTIBLE DEBENTURE AND A PORTION OF THE PROMISSORY NOTE, THE NUMBER OF SHARES
OF PROGENITOR'S SERIES D PREFERRED TO BE ISSUED UPON CONVERSION OF THE
INTERNEURON BRIDGE LOAN, AND THE NUMBERS OF SHARES OF PROGENITOR COMMON STOCK TO
BE ISSUED TO AMGEN AND THE OHIO UNIVERSITY FOUNDATION AS DESCRIBED ABOVE, WILL
DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE DATE OF THE CLOSING OF THE IPO
AND THE IPO COMMON STOCK PRICE. SEE "INITIAL PUBLIC OFFERING," "BUSINESS OF
PROGENITOR--CORPORATE AGREEMENTS," "CERTAIN TRANSACTIONS OF PROGENITOR" AND
"DESCRIPTION OF PROGENITOR SECURITIES."
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This Proxy Statement/Prospectus is being provided to stockholders of
Mercator in connection with the proposed acquisition by Progenitor of Mercator
pursuant to the Reorganization. This Proxy Statement/ Prospectus also is being
provided to the holders of options and warrants to purchase shares of Mercator
Capital Stock and to holders of other securities convertible into or exercisable
for Mercator Capital Stock.
THE COMPANIES
PROGENITOR. Progenitor is engaged in the discovery and functional
characterization of genes to identify targets for the development of new
pharmaceuticals. Progenitor's initial focus is on the identification of genes
important in blood and immune cell development ("hematopoiesis"), blood vessel
development ("angiogenesis"), bone formation ("osteogenesis") and cancer. 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. Progenitor 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 have the potential to expedite product development and to reduce 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 United
States Patent and Trademark Office (the "USPTO"). The B219 leptin receptor may
have therapeutic applications in obesity, diabetes and certain blood and immune
cell disorders. Progenitor has entered into a license agreement wth Amgen
relating to certain aspects of Progenitor's leptin receptor technology.
Progenitor 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 Progenitor
believes has roles in angiogenesis and osteogenesis. Progenitor and Vanderbilt
have filed joint patent applications with respect to DEL-1.
Progenitor was incorporated in Delaware in February 1992 as a majority-owned
subsidiary of Interneuron, and commenced operations in May 1992. As of the date
hereof, there is no public trading market for shares of Progenitor Common Stock,
and none is expected to develop prior to the Mercator Special Meeting. The IPO
described herein is proposed to be consummated on or after the date of the
closing of the Reorganization. Following the closing of the IPO and the
Reorganization (and giving effect to the shares of Progenitor Common Stock to be
issued in the Reorganization, but assuming no exercise of the Progenitor
Warrants), Interneuron is expected to beneficially own approximately 43% of the
outstanding Progenitor Common Stock (approximately 41% if the Underwriters'
over-allotment option is exercised in full). See "Certain Transactions of
Progenitor--Relationship with Interneuron."
As used herein, the term "Progenitor" refers to Progenitor, Inc. and its
subsidiary, unless the context otherwise requires. Progenitor's executive
offices are located at 1507 Chambers Road, Columbus, Ohio 43212, and its
telephone number at that address is (614) 488-6688.
MERCATOR. Mercator was incorporated in Delaware in October 1992 and
commenced operations at its facility in Menlo Park in March 1993. Mercator
engages in the development of therapeutics and diagnostics for genetic-based
diseases through the understanding of the genes involved in these diseases.
Mercator's disease genetics approach combines enhanced positional cloning
technologies with high-throughput genomic sequencing and molecular biology
techniques. Using these techniques, Mercator identified a gene associated with
hereditary hemochromatosis ("HH"), for which it has received two notices of
allowance from the USPTO relating to the diagnosis of HH using genetic markers
in the region of the HH gene. Mercator also has received a notice of allowance
from the USPTO for a patent
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application relating to certain genetic mutations within the gene associated
with HH. In addition, Mercator has received a notice of allowance from the USPTO
on an application relating to its automated genomic sequencing technology.
Mercator's executive offices are located at 4040 Campbell Avenue, Menlo
Park, California 94025, and its telephone number at that address is (415)
617-0880.
THE MERCATOR SPECIAL MEETING
TIME, PLACE AND DATE. The Mercator Special Meeting will be held at the
corporate offices of Mercator, located at 4040 Campbell Avenue, Menlo Park,
California 94025, on , 1997, at :00 a.m., local time.
PURPOSE. At the Mercator Special Meeting, holders of Mercator Common Stock
and holders of Mercator's Series A, Series B and Series C Preferred Stock will
be asked to consider and vote upon a proposal (the "Reorganization Proposal") to
approve and adopt the Reorganization Agreement, pursuant to which Merger Sub
will be merged with and into Mercator, with Mercator as the surviving
corporation (sometimes referred to herein as the "Surviving Corporation"). A
copy of the Reorganization Agreement is attached as Appendix A to this Proxy
Statement/Prospectus. See "The Reorganization" and "The Reorganization
Agreement." As of the Record Date (as defined below), there were no shares of
Mercator's Series D Preferred Stock outstanding.
Approval of the Reorganization Proposal at the Mercator Special Meeting as
described herein will act as adoption of the Reorganization Agreement and
approval of the Reorganization only to the extent that the purchase price for
outstanding shares of Mercator Capital Stock is paid in shares of Progenitor
Common Stock registered under the Registration Statement on Form S-4 of which
this Proxy Statement/ Prospectus forms a part. In the event Progenitor exercises
its option, as provided in the Reorganization Agreement, to pay such purchase
price in a form other than shares of Progenitor Common Stock so registered,
additional information will be provided to Mercator stockholders, and new
proxies will be solicited of Mercator stockholders. See "The
Reorganization--Alternative Consideration." This Proxy Statement/Prospectus
assumes that Progenitor will pay the purchase price in shares of registered
Progenitor Common Stock.
Approval of the Reorganization Proposal at the Mercator Special Meeting as
described herein also will act as adoption of the Reorganization Agreement and
approval of the Reorganization only to the extent that the Adjusted Purchase
Price is not less than $15 million. In the event the Adjusted Purchase Price is
to be less than $15 million, additional information will be provided to Mercator
stockholders, and new proxies will be solicited of Mercator stockholders. See
"The Reorganization--Adjusted Purchase Price Calculation; Indemnification;
Escrow."
In addition, Mercator stockholders will be asked to consider and vote upon
the Mercator Certificate Amendment Proposal, which involves the amendment (the
"Mercator Certificate Amendment") of the Certificate of Incorporation of
Mercator, to provide that (i) the amount to which any shares of Mercator Capital
Stock will be entitled in the Reorganization will be the amount specified in the
Reorganization Agreement, and (ii) the Mercator Series D Preferred Stock will
not be entitled to vote with respect to the Reorganization or any of the other
transactions contemplated by the Reorganization Agreement or the agreements
related thereto. The purposes of such amendment are (i) to conform the
allocation of consideration paid in connection with certain events among the
various classes and series of Mercator Capital Stock currently provided in the
Mercator Certificate of Incorporation with the allocation provided in the
Reorganization Agreement, and (ii) to facilitate the desire of the holders of
the Venture Capital Bridge Notes (as defined below) to delay conversion of their
notes until immediately prior to the Effective Time (as defined below), which
might not be possible in the absence of the amendment. See "Amendment of
Mercator Certificate of Incorporation." There were no shares of Mercator Series
D Preferred Stock outstanding as of the Record Date, although the holders of the
Venture Capital Bridge Notes have agreed
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to convert their notes into shares of Mercator Series D Preferred Stock
effective immediately prior to the effective time of the Reorganization (the
"Effective Time"). Approval of the Mercator Certificate Amendment Proposal is
one of the conditions to the obligation of Progenitor to consummate the
Reorganization. Stockholders also will consider and vote upon any other matters
that may properly come before the Mercator Special Meeting.
All shares of Mercator Capital Stock represented by properly executed
proxies will be voted at the Mercator Special Meeting in accordance with the
directions on the proxies, unless such proxies have been previously revoked. IF
NO DIRECTION IS INDICATED, THE SHARES WILL BE VOTED FOR APPROVAL OF THE
REORGANIZATION PROPOSAL AND FOR APPROVAL OF THE MERCATOR CERTIFICATE AMENDMENT
PROPOSAL. If any other matter or matters are properly presented for action at
the Mercator Special Meeting, the persons named in the enclosed form of proxy
and acting thereunder will have the discretion to vote on such matters in
accordance with their best judgment. Any stockholder giving a proxy may revoke
his or her proxy at any time before its exercise at the Mercator Special Meeting
by filing written notice of such revocation with the Secretary of Mercator,
signing and delivering to such Secretary a proxy bearing a later date or
attending the Mercator Special Meeting and voting in person. However, the mere
presence at the Mercator Special Meeting of a stockholder who has delivered a
valid proxy will not of itself revoke that proxy. See "The Mercator Special
Meeting--Record Date; Proxies."
VOTES REQUIRED; RECORD DATE. Under applicable law and the charter documents
of Mercator, approval of each of the Reorganization Proposal and the Mercator
Certificate Amendment Proposal may require the affirmative vote of the holders
of a majority of each of (i) the outstanding shares of Mercator Common Stock,
(ii) the outstanding shares of Mercator Preferred Stock, voting together as a
single class, (iii) the outstanding shares of Mercator Series A Preferred Stock,
(iv) the outstanding shares of Mercator Series B Preferred Stock, (v) the
outstanding shares of Mercator Series C Preferred Stock, and (vi) the
outstanding shares of Mercator Capital Stock, voting together as a single class
(there having been no shares of Mercator Series D Preferred Stock outstanding as
of the Record Date), all as entitled to vote thereon at the Mercator Special
Meeting. Holders of Mercator Common Stock are entitled to one vote per share,
and holders of Mercator Preferred Stock are entitled for each share of such
Preferred Stock to the number of votes equal to the number of shares of Mercator
Common Stock into which such share of Mercator Preferred Stock could be
converted (which, as of the Record Date, was one vote per share). Only holders
of Mercator Capital Stock at the close of business on , 1997 (the
"Record Date") are entitled to notice of and to vote at the Mercator Special
Meeting. See "The Mercator Special Meeting--Record Date; Proxies" and
"--Required Vote; Voting Rights; Quorum."
As of the Record Date, there were 254,438 shares of Mercator Common Stock
issued and outstanding, held of record by 53 stockholders, 301,500 shares of
Mercator Series A Preferred Stock issued and outstanding, held of record by 3
stockholders, 3,207,996 shares of Mercator Series B Preferred Stock issued and
outstanding, held of record by 7 stockholders, and 4,526,317 shares of Mercator
Series C Preferred Stock issued and outstanding, held of record by 19
stockholders. There were no shares of Mercator Series D Preferred Stock
outstanding as of the Record Date.
As of June 20, 1997, directors and executive officers of Mercator and their
affiliates were beneficial owners of an aggregate of 33,500 shares of Mercator
Common Stock (exclusive of any shares issuable upon the exercise of stock
options remaining unexercised as of such date), or approximately 13.2% of the
254,438 shares of Mercator Common Stock issued and outstanding as of such date,
representing approximately 0.4% of the shares of Mercator Capital Stock (on an
as-converted basis) issued and outstanding as of such date. In addition, M.
Kathleen Behrens, Robert R. Momsen and Ann H. Lamont, directors of Mercator,
each have shared voting and investment power over shares held by entities (such
entities, each, a "Principal Stockholder" and, collectively, the "Principal
Stockholders") that as of such date held, respectively, 2,799,999, 2,707,997 and
2,499,999 shares of Mercator Preferred Stock issued and outstanding or, assuming
the conversion of the Venture Capital Bridge Notes into shares of Mercator
Series D Preferred Stock, held, respectively, 3,173,131, 3,081,131 and 2,873,132
shares of Mercator Preferred Stock. Each of
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Dr. Behrens, Mr. Momsen and Ms. Lamont disclaims beneficial ownership of such
shares. Such issued and outstanding shares represent, in the aggregate, as of
the Record Date, approximately 97% of the Mercator Capital Stock issued and
outstanding as of such date (assuming the conversion of the Venture Capital
Bridge Notes into shares of Mercator Series D Preferred Stock and the conversion
of all Mercator Preferred Stock into shares of Mercator Common Stock) and
approximately 99.7% of the Mercator Preferred Stock issued and outstanding as of
such date (assuming the conversion of the Venture Capital Bridge Notes into
shares of Mercator Series D Preferred Stock).
In addition, Progenitor has entered into agreements (each, a "Principal
Stockholder Agreement") with each of the Principal Stockholders pursuant to
which each such stockholder has agreed to vote or direct the vote of, and has
granted an irrevocable proxy in favor of Progenitor to vote, all shares of
Mercator Capital Stock owned by it in favor of (i) the Reorganization Proposal,
(ii) approval of the Reorganization Agreement and (iii) the Mercator Certificate
Amendment Proposal and any other matters contemplated by the Reorganization
Agreement or incidental to the Reorganization. See "The
Reorganization--Principal Stockholder Agreements."
The affirmative votes of the shares of Mercator Capital Stock held by the
Principal Stockholders will ensure that the Reorganization Proposal and the
Mercator Certificate Amendment Proposal are approved by the holders of a
majority of each of (i) the outstanding shares of Mercator Preferred Stock,
voting together as a single class, (ii) the outstanding shares of Mercator
Series A Preferred Stock, (iii) the outstanding shares of Mercator Series B
Preferred Stock, (iv) the outstanding shares of Mercator Series C Preferred
Stock, and (v) the outstanding shares of Mercator Capital Stock, voting together
as a single class. Accordingly, only the holders of a majority of the
outstanding shares of Mercator Common Stock have not yet agreed to vote their
shares in favor of the Reorganization Proposal and the Mercator Certificate
Amendment Proposal.
THE REORGANIZATION
GENERAL. Upon consummation of the Reorganization, Merger Sub will be merged
with and into Mercator, with Mercator being the surviving corporation. As a
result of the Reorganization, among other things, (i) Mercator will become a
wholly-owned subsidiary of Progenitor, and (ii) each issued and outstanding
share of Mercator Capital Stock (other than shares held in the treasury of
Mercator or held by Progenitor or any subsidiary of Progenitor and shares held
by stockholders who have properly asserted their applicable appraisal or
dissenters' rights, if any (collectively, "Excluded Shares")) will be converted
into the right to receive a number of shares of Progenitor Common Stock,
determined as described in this Proxy Statement/Prospectus.
PROGENITOR REVERSE STOCK SPLIT. Prior to or at the Effective Time,
Progenitor intends to effect a reverse stock split of Progenitor Common Stock
(presently contemplated as a 1-for-2 reverse stock split, such that every two of
the outstanding shares of Progenitor Common Stock will be combined into, and
thereafter represent, one share of Progenitor Common Stock). The information
provided in this Proxy Statement/ Prospectus assumes that the reverse stock
split has been consummated as a 1-for-2 reverse split, although Progenitor may
choose to effect a different split, or not to effect any split. See "The
Reorganization Agreement--Progenitor Reverse Stock Split."
CONVERSION OF MERCATOR CAPITAL STOCK; EXCHANGE RATIOS. The aggregate value
of the Progenitor Common Stock issued for all shares of Mercator Capital Stock
(including shares of Progenitor Common Stock issuable upon exercise of all
options and warrants to purchase Mercator Capital Stock assumed by Progenitor)
will be an amount equal to $22 million, less certain reductions and adjustments
that may be applicable (i) in the event certain expenses of Mercator in
connection with the Reorganization and the IPO exceed applicable threshold
amounts under the Reorganization Agreement or (ii) in the event of certain
purchase price adjustments pursuant to claims that might be asserted by
Progenitor in connection with the Reorganization Agreement. The Adjusted
Purchase Price will be paid in shares of Progenitor Common
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<PAGE>
Stock, based on the IPO Common Stock Price. The IPO Common Stock Price thus will
affect the number of shares of Progenitor Common Stock to be issued in the
Reorganization to each holder of Mercator Capital Stock, but will not affect the
dollar value of the aggregate number of such shares. The IPO Registration
Statement currently contemplates that the IPO Unit Price will be between $10.00
and $12.00 per Unit and that, assuming an IPO Unit Price of $11.00, the IPO
Common Stock Price will be $8.50 per share, although there can be no assurance
that the actual IPO Unit Price will be within such range or that the IPO Common
Stock Price will be $8.50. The Reorganization may be consummated even if the
actual IPO Unit Price is above or below such range or the actual IPO Common
Stock Price is other than $8.50.
The Adjusted Purchase Price will be allocated among the various classes and
series of Mercator Common Stock and Mercator Preferred Stock in accordance with
a formula provided in the Reorganization Agreement. The percentage of the
Adjusted Purchase Price allocable to each class or series of Mercator Capital
Stock will vary depending upon the level of the Adjusted Purchase Price. As an
example, at an Adjusted Purchase Price level of $22 million, an aggregate of
15.9% of the Adjusted Purchase Price will be allocated to the Mercator Common
Stock and for shares of Progenitor Common Stock to be issued upon exercise of
Replacement Options (defined below), and at an Adjusted Purchase Price level of
$19.8 million such percentage would be 12.655%. See "Risk Factors--Uncertainties
Regarding the IPO, the IPO Common Stock Price and Exchange Ratios" and "The
Reorganization--Exchange Ratios" and "--Adjusted Purchase Price Calculation;
Indemnification; Escrow."
Assuming that (i) there are no adjustments to or reductions of the purchase
price in respect of applicable expenses or indemnification claims, such that the
Adjusted Purchase Price is $22 million, (ii) the IPO Common Stock Price is
$8.50, (iii) the Venture Capital Bridge Notes are converted prior to the
Effective Time into a total of 1,119,399 shares of Series D Preferred Stock, and
(iv) other than the Series D Preferred Stock referred to in the preceding
clause, no additional shares of Mercator Capital Stock or options or warrants to
purchase any shares of Mercator Capital Stock are issued after June 20, 1997,
then the applicable fraction of a share of Progenitor Common Stock to be issued
upon consummation of the Reorganization for each of the respective classes and
series of Mercator Capital Stock (the fraction applicable to each such class or
series hereinafter the "Exchange Ratio" for such class or series) and the
corresponding value of the Progenitor Common Stock applicable to each such class
or series (the "Per Share Consideration") (with all amounts of Exchange Ratios
and Per Share Consideration given in this Proxy Statement/Prospectus being
rounded for purposes of this discussion) would be as follows:
<TABLE>
<CAPTION>
EXCHANGE PER SHARE
CLASS OR SERIES OF MERCATOR CAPITAL STOCK RATIO CONSIDERATION
- ------------------------------------------------------------------ ----------- -------------
<S> <C> <C>
Common Stock...................................................... 0.1379 $ 1.17
Series A Preferred................................................ 1.1954 $ 10.16
Series B Preferred................................................ 0.3107 $ 2.64
Series C Preferred................................................ 0.1341 $ 1.14
Series D Preferred................................................ 0.1577 $ 1.34
</TABLE>
Although the Reorganization Agreement does not provide a minimum amount of
Adjusted Purchase Price as a condition to Mercator's obligation to consummate
the Reorganization, if the Adjusted Purchase Price falls below $15 million,
additional information will be provided to holders of Mercator Capital Stock and
separate proxies will be solicited. Assuming that (i) after all adjustments and
reductions are made, the Adjusted Purchase Price is $15 million, (ii) the IPO
Common Stock Price is $8.50, (iii) the Venture Capital Bridge Notes are
converted prior to the Effective Time into a total of 1,119,399 shares of Series
D Preferred Stock, and (iv) other than the Series D Preferred Stock referred to
in the preceding clause, no additional shares of Mercator Capital Stock are
issued after June 20, 1997, then the applicable Exchange
6
<PAGE>
Ratio for each of the respective classes and series of Mercator Capital Stock
and the corresponding Per Share Consideration for each such class or series
would be as follows:
<TABLE>
<CAPTION>
EXCHANGE PER SHARE
CLASS OR SERIES OF MERCATOR CAPITAL STOCK RATIO CONSIDERATION
- ------------------------------------------------------------------ ----------- ---------------
<S> <C> <C>
Common Stock...................................................... 0.0591 $ 0.50
Series A Preferred................................................ 0.8903 $ 7.57
Series B Preferred................................................ 0.2226 $ 1.89
Series C Preferred................................................ 0.0890 $ 0.76
Series D Preferred................................................ 0.1577 $ 1.34
</TABLE>
THE EXCHANGE RATIO AND PER SHARE CONSIDERATION APPLICABLE TO EACH CLASS OR
SERIES OF MERCATOR CAPITAL STOCK WILL BE DEPENDENT UPON A NUMBER OF VARIABLES
THAT CANNOT BE DETERMINED UNTIL THE EFFECTIVE TIME, INCLUDING THE AMOUNT OF ANY
REDUCTIONS IN OR ADJUSTMENTS TO THE PURCHASE PRICE, THE NUMBER OF SHARES OF
MERCATOR CAPITAL STOCK OUTSTANDING AT THE EFFECTIVE TIME, THE NUMBER OF SHARES
OF MERCATOR CAPITAL STOCK SUBJECT TO OPTIONS OR WARRANTS OUTSTANDING AS OF THE
EFFECTIVE TIME AND THE IPO COMMON STOCK PRICE. ACCORDINGLY, IT IS NOT POSSIBLE
TO DETERMINE THE EXACT EXCHANGE RATIOS AND PER SHARE CONSIDERATION THAT ACTUALLY
WILL APPLY IN THE REORGANIZATION. SEE "THE REORGANIZATION--EXCHANGE RATIOS" FOR
A DETAILED DESCRIPTION OF FACTORS INVOLVED AND THE EFFECT ON THE RESPECTIVE
EXCHANGE RATIOS AND ON THE PER SHARE CONSIDERATION.
Fractional shares of Progenitor Common Stock will not be issued in
connection with the Reorganization. A holder of Mercator Capital Stock otherwise
entitled to a fractional share of Progenitor Common Stock will be paid cash in
lieu of such fractional share in an amount equal to the product of such fraction
multiplied by the IPO Common Stock Price.
BECAUSE THE MARKET PRICE OF PROGENITOR COMMON STOCK FOLLOWING THE IPO WILL
BE SUBJECT TO FLUCTUATION, THE MARKET VALUE OF THE SHARES OF PROGENITOR COMMON
STOCK THAT HOLDERS OF MERCATOR CAPITAL STOCK WILL RECEIVE IN THE REORGANIZATION
MAY INCREASE OR DECREASE FOLLOWING THE REORGANIZATION AND THE RELATIVE TRADING
PRICES OF PROGENITOR COMMON STOCK AND PROGENITOR WARRANTS MAY NOT REFLECT THE
PROGENITOR BOARD OF DIRECTORS' DETERMINATION WITH RESPECT TO THE IPO COMMON
STOCK PRICE. IN ADDITION, SHARES OF PROGENITOR COMMON STOCK ISSUED IN CONNECTION
WITH THE REORGANIZATION WILL BE SUBJECT, FOR PERIODS OF UP TO ONE YEAR FOLLOWING
THE EFFECTIVE TIME, TO RESTRICTIONS ON SALE AND OTHER TRANSFERS PURSUANT TO
LOCKUP AGREEMENTS (AS DEFINED BELOW). SEE "RISK FACTORS--UNCERTAINTIES REGARDING
THE IPO, THE IPO COMMON STOCK PRICE AND EXCHANGE RATIOS" AND "--UNCERTAINTIES
REGARDING THE VALUE OF PROGENITOR COMMON STOCK" AND "THE REORGANIZATION--LOCKUP
AGREEMENTS" AND "--RESALE RESTRICTIONS." NO ASSURANCE CAN BE GIVEN AS TO THE
FUTURE PRICES OR MARKETS FOR PROGENITOR COMMON STOCK.
See "Risk Factors--Uncertainties Regarding the Value of Progenitor Common
Stock," "The Reorganization--Exchange Ratios" and "--Adjusted Purchase Price
Calculation; Indemnification; Escrow," and "The Reorganization
Agreement--Conversion of Securities," "--Exchange of Shares" and "--Stock
Options and Warrants."
ADJUSTED PURCHASE PRICE CALCULATION; INDEMNIFICATION; ESCROW. The Adjusted
Purchase Price will be an amount equal to $22 million less (i) both (A) the
total amount by which Total Mercator Reorganization Expenses (as defined below)
exceed $800,000, and (B) the total amount by which Total Mercator IPO Expenses
(as defined below) exceed $50,000 (such combined total, the "Excess Expenses"),
and less (ii) subject to the terms of the Reorganization Agreement, amounts with
respect to any claims, damages, losses, costs, expenses, liabilities (absolute,
accrued, contingent or otherwise) and reasonable legal fees and expenses
incurred or suffered by Progenitor or other specified indemnitees directly or
indirectly arising out of any untruth, inaccuracy, error in, or breach of any
covenant, representation or warranty of Mercator contained in the Reorganization
Agreement (collectively, "Losses"). The maximum amount of the reduction for such
Losses is $2.2 million (the "Maximum Indemnification Reduction").
7
<PAGE>
The purchase price for all shares of Mercator Capital Stock and all options
and warrants to purchase Mercator Capital Stock, assuming no adjustments, thus
will be $22 million. The Reorganization Agreement does not provide for a minimum
Adjusted Purchase Price, although the Maximum Indemnification Reduction acts as
a limit of $2.2 million on the amount of Losses for which the purchase price may
be adjusted or indemnification may be sought, so that the minimum Adjusted
Purchase Price would be $19.8 million, less the amount of Excess Expenses. With
respect to the adjustment for Losses, as of the date hereof, Progenitor is not
aware of any Losses for which it currently intends to seek indemnification
(although there can be no assurance that Progenitor will not become aware of,
and seek indemnification for, any Losses prior to the Effective Time). With
respect to the adjustment for Excess Expenses, Mercator believes that, as of the
date hereof, it has not incurred any Excess Expenses, and estimates that it may
incur approximately $19,000 in Excess Expenses prior to the Effective Time
(although there can be no assurance that Mercator will not incur a larger amount
of Excess Expenses prior to the Effective Time), so that, assuming no claims for
Losses or for additional Excess Expenses arise prior to the Effective Time, the
Adjusted Purchase Price would be $21,981,000 or, assuming Losses arise such that
the Maximum Indemnification Reduction is applied, but no claims for additional
Excess Expenses arise, $19,781,000. See "Risk Factors-- Uncertainties Regarding
the IPO, the IPO Common Stock Price and Exchange Ratios." Although the amount of
the actual Adjusted Purchase Price is not a condition to Mercator's obligation
to consummate the Reorganization, this Proxy Statement/Prospectus assumes that
the Adjusted Purchase Price will be at least $15 million. If the Adjusted
Purchase Price is less than $15 million, additional information will be provided
to holders of Mercator Capital Stock and separate proxies will be solicited.
To the extent that all or any portion of claims for the indemnification
described above remain unresolved or unliquidated prior to the Effective Time,
shares of Progenitor Common Stock comprising a portion of the Adjusted Purchase
Price will be deposited in escrow (the "Escrow") for distribution to Progenitor
and the other indemnitees or to Mercator stockholders, as the case may be,
following resolution of such claims in accordance with the terms of the
Reorganization Agreement and the escrow agreement (the "Escrow Agreement") to be
entered into among Progenitor, Mercator, Merger Sub, the escrow agent and Robert
R. Momsen, as representative of the holders of Mercator Capital Stock and
options and warrants to purchase Mercator Capital Stock (the "Mercator
Representative") prior to the Effective Time in substantially the form of
Exhibit B to the Reorganization Agreement. A copy of the form of Escrow
Agreement is attached hereto as Appendix B.
BY VOTING TO APPROVE THE REORGANIZATION PROPOSAL, SURRENDERING
CERTIFICATE(S) EVIDENCING MERCATOR CAPITAL STOCK OR ACCEPTING OPTIONS OR
WARRANTS FOR SHARES OF PROGENITOR COMMON STOCK, EACH STOCKHOLDER OF MERCATOR,
OTHER THAN HOLDERS OF DISSENTING SHARES, AND EACH HOLDER OF MERCATOR OPTIONS AND
WARRANTS AGREES THAT (I) THE CONSIDERATION TO WHICH SUCH HOLDER IS OTHERWISE
ENTITLED IN CONNECTION WITH THE REORGANIZATION IS SUBJECT TO AN ADJUSTMENT TO
THE PURCHASE PRICE AND TO THE ESCROW, AS AND TO THE EXTENT APPLICABLE, (II)
SHARES OF PROGENITOR COMMON STOCK OTHERWISE REPRESENTING THE HOLDER'S PORTION OF
THE ADJUSTED PURCHASE PRICE WILL BE PLACED IN THE ESCROW IN RESPECT OF ALL
CLAIMS FOR CERTAIN LOSSES WHICH ARE MADE BEFORE THE EFFECTIVE TIME AND NOT
RESOLVED AT THE EFFECTIVE TIME (TOGETHER WITH A 10% MARGIN, BUT IN AGGREGATE,
TOGETHER WITH ANY REDUCTION TO THE PURCHASE PRICE ACTUALLY EFFECTED ON ACCOUNT
OF LOSSES, NOT TO EXCEED THE MAXIMUM INDEMNIFICATION REDUCTION), PURSUANT TO THE
REORGANIZATION AGREEMENT AND THE ESCROW AGREEMENT, AS OF THE EFFECTIVE TIME,
(III) THE MERCATOR REPRESENTATIVE IS AUTHORIZED TO ACT AS AGENT AND
REPRESENTATIVE OF THE HOLDER AND TO TAKE CERTAIN ACTIONS ON ITS BEHALF WITH
RESPECT TO THE SHARES OF PROGENITOR COMMON STOCK DEPOSITED IN OR SUBJECT TO THE
ESCROW, AS DESCRIBED ABOVE AND AS CONTEMPLATED BY THE REORGANIZATION AGREEMENT
AND THE ESCROW AGREEMENT, AND (IV) THE ESCROW AGENT IS AUTHORIZED FROM TIME TO
TIME TO DELIVER ALL OR ANY PORTION OF THE SHARES OF PROGENITOR COMMON STOCK SO
DEPOSITED IN SATISFACTION OF THE OBLIGATIONS DESCRIBED ABOVE AND AS CONTEMPLATED
IN THE ESCROW AGREEMENT. See "The Reorganization-- Adjusted Purchase Price
Calculation; Indemnification; Escrow" and "--Exchange Ratios." In certain
circumstances relating to the breach by Mercator of any of the covenants,
representations and warranties by Mercator in the Reorganization Agreement and
the Related Agreements (as defined below), Progenitor
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<PAGE>
may elect to terminate the Reorganization Agreement and not consummate the
Reorganization. See "The Reorganization Agreement--Conditions" and
"--Termination."
ALTERNATIVE CONSIDERATION. Pursuant to the Reorganization Agreement,
Progenitor has the option, in its discretion, of paying the Adjusted Purchase
Price in cash or, in the event Progenitor elects not to consummate the IPO but
elects to consummate the Reorganization, in unregistered shares of Progenitor
Common Stock or in public equity securities mutually acceptable to Progenitor
and Mercator. In such event, the terms and conditions of the Reorganization
Agreement will remain applicable to the maximum extent practicable and relevant.
THIS PROXY STATEMENT/PROSPECTUS ASSUMES THAT THE ADJUSTED PURCHASE PRICE WILL BE
PAID IN REGISTERED SHARES OF PROGENITOR COMMON STOCK. In the event that
Progenitor elects to pay the Adjusted Purchase Price in one of the alternative
forms of consideration described above, additional materials will be provided to
the stockholders of Mercator and separate proxies will be solicited.
CONDITIONS TO THE REORGANIZATION; TERMINATION. The obligations of
Progenitor and Mercator to effect the Reorganization are subject to the
satisfaction of certain conditions, including, among others (any of which may be
waived by both Progenitor and Mercator pursuant to the Reorganization
Agreement): (i) obtaining the approval of Mercator stockholders for the
Reorganization Proposal and the Mercator Certificate Amendment Proposal; (ii)
receipt of all necessary government consents and approvals (other than the
filing of the Certificate of Merger (as defined below)), other than such
consents or approvals the failure to obtain which would not materially adversely
affect the consummation of the Reorganization or in the aggregate have a
material adverse effect on the Surviving Corporation and its subsidiaries; and
(iii) receipt by Progenitor of all necessary state securities permits and other
authorizations to issue Progenitor Units in the Reorganization. The obligations
of each of Progenitor and Mercator are further subject to the following factors
(any of which may be waived by Progenitor or Mercator, as the case may be): (i)
performance by the other in all material respects of its obligations under the
Reorganization Agreement and the Related Agreements, and the representations and
warranties of the other being true and accurate as of the Effective Time as if
made at such time (unless specified to be made as of a specified date) and, in
the case of Progenitor, the Principal Stockholders having performed in all
material respects certain of the agreements contained in the Principal
Stockholder Agreements, and (ii) receipt from their respective counsel of legal
opinions with respect to the tax consequences of the Reorganization and other
matters. See "The Reorganization Agreement--Representations and Warranties,"
"--Certain Covenants," "--Conditions" and "--Termination."
In addition, Progenitor's obligation to effect the Reorganization is subject
to the following conditions (any of which may be waived by Progenitor pursuant
to the Reorganization Agreement): (i) completion of the IPO (unless Progenitor
shall have elected to consummate the Reorganization by paying the Adjusted
Purchase Price in one of the alternative forms of consideration described
herein), which Progenitor may elect in its sole discretion to cease pursuing or
to postpone beyond the termination of the Reorganization Agreement; (ii)
dissenting shares of Mercator Capital Stock not constituting more than 1% of the
Mercator Common Stock (calculated on a fully diluted basis); (iii) receipt from
each Mercator stockholder and each holder of options or warrants to purchase
Mercator Common Stock of an executed lockup agreement in the form of the
Investment Agreement prescribed by the Reorganization Agreement and attached to
the Reorganization Agreement as Exhibit M (each, a "Lockup Agreement"),
providing for certain restrictions on the resale of shares of Progenitor Common
Stock to be received by them in connection with the Reorganization; (iv)
conversion of all Venture Capital Bridge Notes into shares of Mercator Series D
Preferred Stock; and (v) the receipt by Mercator of the consent of Phoenix
Leasing Incorporated to the extent required to consummate the Reorganization.
See "The Reorganization Agreement--Conditions." Mercator has agreed to use
commercially reasonable efforts to provide to Progenitor an executed Lockup
Agreement on behalf of each Mercator stockholder and each holder of options or
warrants to purchase shares of Mercator Capital Stock. See "The
Reorganization--Lockup Agreements."
At any time on or prior to the Reorganization, to the extent legally
allowed, each of Progenitor and Mercator, without the approval of the Mercator
stockholders, may waive compliance with any of the
9
<PAGE>
agreements or satisfaction of any of the conditions contained in the
Reorganization Agreement for its respective benefit.
The Reorganization Agreement will terminate automatically, on July 31, 1997,
if the Reorganization has not been completed by such date, unless the parties to
the Reorganization Agreement otherwise agree. The Reorganization Agreement also
may be terminated by either Progenitor or Mercator under other circumstances,
including termination by Progenitor in the event of failure of Mercator's
stockholders to approve the Reorganization Agreement. See "The Reorganization
Agreement--Bridge Loan Financing" and "--Termination."
STOCK OWNERSHIP FOLLOWING THE REORGANIZATION. Based upon the capitalization
of Progenitor and Mercator as of June 20, 1997, assuming (i) conversion by the
holders of the Venture Capital Bridge Notes of all such Notes into shares of
Mercator Series D Preferred Stock, (ii) an Adjusted Purchase Price of
$22,000,000, (iii) an IPO Common Stock Price of $8.50, (iv) the sale in the IPO
of 2,750,000 shares of Progenitor Units, (v) the sale concurrently with the
closing of the IPO of 647,059 shares of Progenitor Common Stock to Amgen,
pursuant to the Amgen Purchase Agreement, and 25,000 shares of Progenitor Common
Stock to The Ohio University Foundation, pursuant to a stock purchase right,
(vi) the issuance of 24,020 shares of Progenitor Common Stock to The Ohio
University Foundation pursuant to an anti-dilution adjustment in connection with
the IPO, and (vii) the conversion of the Interneuron Bridge Loan into shares of
Progenitor's Series D Preferred Stock, the stockholders of Mercator will own
approximately 18.7% of the outstanding Progenitor Common Stock following
consummation of the Reorganization, the IPO and the sales of Progenitor Common
Stock and Progenitor Warrants to be completed concurrently with the IPO, or
approximately 18.2%, if the Underwriters' over-allotment option is exercised in
full (in each case assuming exercise of all then outstanding options and
warrants to acquire Progenitor Common Stock, including former options and
warrants to purchase Mercator Common Stock assumed by Progenitor, but assuming
no exercise of the Progenitor Warrants).
The above percentages could change depending on whether and to what extent
shares of Progenitor Common Stock and Mercator Common Stock issuable upon
exercise of outstanding Progenitor or Mercator stock options or warrants are
issued and whether any Mercator stockholders perfect any applicable statutory
appraisal or dissenters' rights. There also can be no assurance that Progenitor
will not elect to issue additional shares of Progenitor Common Stock prior to
the IPO or that the number of Progenitor Units to be issued in the IPO will be
the 2,750,000 Progenitor Units currently contemplated. IF THE IPO UNIT PRICE IS
LESS THAN $11.00, OR IF THE IPO COMMON STOCK PRICE IS MORE OR LESS THAN $8.50,
OR IF MORE PROGENITOR UNITS OR SHARES OF PROGENITOR COMMON STOCK ARE ISSUED IN
OR CONCURRENTLY WITH THE IPO EITHER AS A RESULT OF SUCH LOWER IPO UNIT PRICE OR
FOR ANY OTHER REASON, THE PERCENTAGES OF THE TOTAL OUTSTANDING SHARES OF
PROGENITOR COMMON STOCK AFTER CONSUMMATION OF THE REORGANIZATION AND THE IPO TO
BE HELD BY FORMER HOLDERS OF MERCATOR SECURITIES MAY DIFFER AND MAY BE
DECREASED. See "Risk Factors-- Uncertainties Regarding the IPO, the IPO Common
Stock Price and Exchange Ratios" and "--Control of Progenitor by, and Potential
Conflicts of Interest with, Interneuron," "The Reorganization--Stock Ownership
Following the Reorganization," "Initial Public Offering" and "Comparison of
Stockholder Rights." The number of shares of Progenitor Common Stock outstanding
at or after the Effective Time, and the percentages described above, also may be
affected by other transactions that Progenitor may enter into before or after
the Effective Time.
REGULATORY APPROVALS. No federal or state regulatory approvals are required
and no federal or state regulatory requirements must be complied with in order
to effect the Reorganization, other than the filing of the Certificate of Merger
with the Secretary of State of the State of Delaware and compliance with federal
securities laws and state securities and blue sky laws with respect to the
shares of Progenitor Common Stock to be issued concurrently with the
Reorganization and those to be issued in and in connection with the IPO. See
"The Reorganization--Regulatory Approvals."
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<PAGE>
CERTAIN RESALE RESTRICTIONS. Under the terms of the Reorganization
Agreement, all holders of Mercator Capital Stock and all holders of options or
warrants to purchase Mercator Capital Stock must agree, pursuant to Lockup
Agreements, to certain restrictions on resale of the shares of Progenitor Common
Stock to be received by them in connection with the Reorganization. (The Lockup
Agreements also contain other terms, as described below.) See "The
Reorganization--Lockup Agreements." Shares of Progenitor Common Stock otherwise
constituting a portion of the Adjusted Purchase Price also may be subject to
escrow restrictions in connection with the indemnification obligations of
Mercator and the Mercator stockholders and holders of options and warrants. See
"The Reorganization--Adjusted Purchase Price Calculation; Indemnification;
Escrow." Following expiration of the lock-up periods provided in the Lockup
Agreements, and release of the shares from escrow, all shares of Progenitor
Common Stock received by Mercator stockholders in the Reorganization will be
freely transferable, except that shares received by persons who are deemed to be
"affiliates" (as defined in the Securities Act) of Mercator may be resold by
such persons only in certain permitted circumstances. See "Risk
Factors--Uncertainties Regarding the Value of Progenitor Common Stock" and
"--Shares Eligible for Future Sale; Registration Rights; Possible Adverse Effect
on Stock Price" and "The Reorganization--Resale Restrictions."
ACCOUNTING TREATMENT. The Reorganization is expected to be treated by
Progenitor as a "purchase" transaction for accounting and financial reporting
purposes. See "The Reorganization--Accounting Treatment."
APPRAISAL AND DISSENTERS' RIGHTS
Dissenters' rights under the California General Corporate Law (the "CGCL")
or appraisal rights under the Delaware General Corporate Law (the "DGCL") may be
available in connection with the Reorganization. A stockholder of Mercator must
follow the appropriate procedures in order to exercise such rights. See
"Appraisal and Dissenters' Rights of Mercator Stockholders" and "Applicability
of California Law to Mercator."
SURRENDER OF STOCK CERTIFICATES
Prior to the Effective Time, Progenitor shall authorize a bank or trust
company to act as exchange agent (the "Exchange Agent") under the Reorganization
Agreement. As soon as reasonably practical after the Effective Time, the
Exchange Agent will send a letter of transmittal to each Mercator stockholder.
The letter of transmittal will contain instructions with respect to the
surrender of certificates representing Mercator Capital Stock to be exchanged
for Progenitor Common Stock. See "The Reorganization-- Lockup Agreements" and
"The Reorganization Agreement--Exchange of Shares."
MERCATOR STOCKHOLDERS SHOULD NOT FORWARD CERTIFICATES FOR MERCATOR CAPITAL
STOCK TO THE EXCHANGE AGENT UNTIL THEY HAVE RECEIVED LETTERS OF TRANSMITTAL AND
INSTRUCTIONS. MERCATOR STOCKHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH
THE ENCLOSED PROXY.
NO MERCATOR STOCKHOLDER AND NO HOLDER OF ANY OPTIONS OR WARRANTS TO PURCHASE
SHARES OF MERCATOR CAPITAL STOCK WILL BE ENTITLED UNDER THE TERMS OF THE
REORGANIZATION AGREEMENT TO RECEIVE CERTIFICATES FOR PROGENITOR COMMON STOCK
PURSUANT TO THE REORGANIZATION UNTIL SUCH HOLDER HAS DELIVERED TO PROGENITOR AN
EXECUTED LOCKUP AGREEMENT. SEE "THE REORGANIZATION--LOCKUP AGREEMENTS."
RECOMMENDATION OF THE MERCATOR BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF MERCATOR HAS UNANIMOUSLY APPROVED THE TERMS OF THE
REORGANIZATION AGREEMENT AND THE REORGANIZATION. THE MERCATOR BOARD BELIEVES
THAT THE TERMS OF THE REORGANIZATION AGREEMENT ARE FAIR TO, AND IN THE BEST
INTERESTS OF, MERCATOR AND ITS STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT
HOLDERS OF SHARES OF MERCATOR CAPITAL
11
<PAGE>
STOCK VOTE "FOR" APPROVAL OF THE REORGANIZATION PROPOSAL AND "FOR" APPROVAL OF
THE MERCATOR CERTIFICATE AMENDMENT PROPOSAL. THE APPROVAL OF THE REORGANIZATION
PROPOSAL BY THE STOCKHOLDERS OF MERCATOR SHALL CONSTITUTE ADOPTION OF THE
REORGANIZATION AGREEMENT AND EACH OF THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING, WITHOUT LIMITATION, CERTAIN PROVISIONS BENEFITING DIRECTORS,
EXECUTIVE OFFICERS AND EMPLOYEES OF MERCATOR, AS MORE FULLY DESCRIBED HEREIN.
See "The Reorganization--Background of the Reorganization," "--Recommendation of
the Mercator Board; Reasons of Mercator for the Reorganization," and
"--Interests of Certain Persons in the Reorganization."
RISK FACTORS
In addition to the conditions to consummation of the Reorganization set
forth below under "The Reorganization Agreement--Conditions," the Reorganization
and the business of Progenitor and Mercator after the Reorganization will be
subject to a number of risks, including (with references in this paragraph to
Progenitor, for periods following the Reorganization, referring to Progenitor
and its subsidiaries, including Mercator, unless the context otherwise
requires): uncertainties regarding the IPO, the IPO Common Stock Price and the
Exchange Ratios; uncertainties regarding the value of Progenitor Common Stock;
absence of a fairness opinion; uncertainties relating to the technological
approaches of Progenitor; 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 Progenitor by, and potential
conflicts of interest with, Interneuron; uncertainty of health care reform
measures and third-party reimbursement; risk of product liability; no prior
trading market, no assurance of active trading market and potential volatility
of stock price; anti-takeover considerations; hazardous and radioactive
materials and environmental matters; management discretion as to use of
proceeds; shares eligible for future sale, registration rights and possible
adverse effect on stock price; and absence of dividends. In considering whether
to approve the Reorganization Proposal and the Mercator Certificate Amendment
Proposal, Mercator stockholders should carefully review and consider the
information contained below under the caption "Risk Factors."
INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION
In considering the recommendation of the Mercator Board of Directors with
respect to the approval by the Mercator stockholders of the Reorganization
Proposal and the Mercator Certificate Amendment Proposal, Mercator stockholders
should be aware that certain members of Mercator management and the Mercator
Board of Directors have interests in the Reorganization that are in addition to
the interests of stockholders of Mercator generally. These interests arise from,
among other things, certain employee benefit plans, indemnification and
insurance arrangements and employment agreements among Progenitor, Mercator and
directors and certain executive officers of Mercator, including arrangements
providing for the acceleration at the consummation of the Reorganization of
certain options to purchase Mercator Capital Stock. Certain of such agreements
provide for payments in the event such officers are terminated in connection
with a change in control, including the Reorganization. In addition, one member
of the Board of Directors of Mercator will become a member of the Board of
Directors of Progenitor. Lehman Brothers Inc. ("Lehman Brothers"), one of the
representatives of the underwriters of the IPO, has received a retainer fee from
Mercator for advising Mercator with respect to potential alliances and sale
transactions and will receive an additional fee upon consummation of the
Reorganization. See "The Reorganization--Interests of Certain Persons in the
Reorganization."
12
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Reorganization is conditioned upon the delivery of
opinions of counsel that the Reorganization will qualify as a "reorganization"
for federal income tax purposes. If the Reorganization so qualifies, no gain or
loss generally will be recognized by (i) Mercator stockholders, (ii) Progenitor
stockholders, (iii) Progenitor or (iv) Mercator as a result of the
Reorganization. ALL MERCATOR SECURITIES HOLDERS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS. See "The Reorganization--Certain Federal Income Tax Consequences"
and "The Reorganization Agreement--Conditions."
MANAGEMENT OF PROGENITOR AFTER THE REORGANIZATION
It is anticipated that the number of directors on the Progenitor Board of
Directors after the Reorganization will be eight, and that the following current
executive officers of Progenitor will remain in their positions following the
Reorganization: Douglass B. Given, M.D., Ph.D., President and Chief Executive
Officer, and a director; H. Ralph Snodgrass, Ph.D., Vice President, Research and
Chief Scientific Officer; Stephen J. Williams, Ph.D., Vice President, Corporate
Development; and Mark N.K. Bagnall, Vice President, Finance, and Chief Financial
Officer. Glenn L. Cooper, M.D., will remain Chairman of the Board of Directors
of Progenitor. Elliott Sigal, M.D., Ph.D., currently the President and Chief
Executive Officer of Mercator, will become the Senior Vice President, Research
and Development, of Progenitor. The remaining members of the Board of Directors
of Progenitor are anticipated to be Robert P. Axline, Alexander M. Haig, Jr.,
Morris Laster, M.D., Jerry P. Peppers, David B. Sharrock and Robert R. Momsen,
who is being appointed to the Board of Directors upon consummation of the
Reorganization pursuant to the terms of the Reorganization Agreement. However,
Progenitor may elect to appoint additional directors and officers, and some
directors and officers may elect not to continue to serve as such after the
Reorganization. See "Management of Progenitor after the Reorganization."
Progenitor has entered into a new employment agreement with Dr. Given and has
signed an employment agreement, effective at the Effective Time, with Dr. Sigal
(see "Management of Progenitor after the Reorganization--Employment Agreements"
and "The Reorganization--Interests of Certain Persons in the Reorganization").
In addition, Progenitor has approved certain change of control and severance
provisions for Drs. Snodgrass and Williams and Mr. Bagnall (see "Management of
Progenitor after the Reorganization--Employment Agreements").
COMPARATIVE RIGHTS OF STOCKHOLDERS
The rights of Mercator stockholders are currently governed by the DGCL,
Mercator's Certificate of Incorporation and Mercator's Bylaws. In addition, the
rights of Mercator stockholders may also be governed by the CGCL in certain
respects. Upon consummation of the Reorganization, Mercator stockholders will
become stockholders of Progenitor, which, like Mercator, is a Delaware
corporation, and their rights as Progenitor stockholders will be governed by the
DGCL, Progenitor's Certificate of Incorporation and Progenitor's Bylaws. The
CGCL is not currently applicable to Progenitor and may not be applicable to
Progenitor immediately following the Reorganization or at any later time. For a
discussion of the various differences between the rights of stockholders of
Mercator and stockholders of Progenitor, see "Applicability of California Law to
Mercator" and "Comparison of Stockholder Rights."
COMPARATIVE DIVIDEND POLICIES
Mercator has never declared or paid cash dividends on shares of Mercator
Capital Stock. Progenitor has never declared or paid cash dividends on shares of
Progenitor Common Stock. Progenitor currently intends to retain any future
earnings for its business and, therefore, does not anticipate paying any
dividends on Progenitor Common Stock in the foreseeable future. See "Comparative
Dividend Policies."
13
<PAGE>
STOCK OPTIONS AND WARRANTS
As of the Effective Time, each of the warrants to acquire shares of Mercator
Capital Stock outstanding as of the date of the Reorganization Agreement and not
expired as of the Effective Time, and each of the options to acquire shares of
Mercator Capital Stock not expired as of the Effective Time, will be assumed by
Progenitor and converted into a warrant or an option, as the case may be (such
warrants and options are sometimes referred to herein, respectively, as
"Replacement Warrants" and "Replacement Options"), to purchase that number of
shares of Progenitor Common Stock (rounded up to the nearest whole share) which
the holder thereof would have been entitled to receive under the Reorganization
Agreement had the stock option or warrant been exercised immediately prior to
the Effective Time, and the Replacement Option or Warrant will have an aggregate
exercise price equal to the former aggregate exercise price of the Mercator
option or warrant, subject to certain adjustments. Shares of Progenitor Common
Stock issuable upon exercise of Replacement Options will be registered pursuant
to Registration Statements on Form S-8 to be filed by Progenitor after the
Reorganization. See "The Reorganization Agreement--Stock Options and Warrants"
and "Management of Progenitor after the Reorganization-- Stock Plans--1997 Stock
Option Plan."
Mercator has agreed to use commercially reasonable efforts to cause all
holders of all warrants to purchase Mercator Capital Stock to exercise such
securities for underlying Mercator Capital Stock on or prior to the date of the
closing of the transactions contemplated by the Reorganization Agreement (the
"Closing Date"). Exercise of all such warrants is a condition to Progenitor's
obligation to consummate the Reorganization. Mercator also has agreed to use
commercially reasonable efforts to provide to Progenitor duly executed Lockup
Agreements from each holder of options or warrants to acquire Mercator Capital
Stock. Progenitor is not required under the Reorganization Agreement to deliver
Progenitor Common Stock to any person otherwise entitled to receive shares of
Progenitor Common Stock pursuant to such options or warrants unless and until
such person shall have delivered to Progenitor a duly and validly executed
Lockup Agreement. See "The Reorganization--Lockup Agreements."
BRIDGE FINANCING
Concurrently with execution of the Reorganization Agreement, Progenitor and
Mercator entered into a letter agreement (the "Mercator Bridge Loan Agreement")
providing for a line of credit (the "Mercator Bridge Loan") in an initial
maximum commitment amount of $5 million to be provided to Mercator by Progenitor
in accordance with an agreed schedule commencing in February 1997. Advances
under the Mercator Bridge Loan bear interest at the rate of 10% per annum.
Pursuant to Progenitor's elections to extend the deadline for consummating the
Reorganization under the Reorganization Agreement from May 31, 1997 to June 30,
1997 and subsequently to July 31, 1997 (each such date, or such other date as
may be agreed by the parties to the Reorganization Agreement, as applicable, the
"Agreement Deadline"), the maximum commitment amount under the Mercator Bridge
Loan Agreement was increased to $5,800,000 and subsequently to $6,600,000 (such
increases, the "Initial Supplemental Funding" and the "Second Supplemental
Funding," respectively). The Mercator Bridge Loan Agreement does not provide for
any further increases in the maximum commitment amount. All outstanding balances
under the Mercator Bridge Loan are required to be repaid in full on January 15,
1999 or earlier under certain circumstances, including the occurrence of a
change in control of Mercator (other than as contemplated by the Reorganization
Agreement), an initial public offering by Mercator and an event of default under
the Mercator Bridge Loan Agreement. Such events of default include the failure
by Mercator to perform in any material respect any of its covenants or
agreements under the Mercator Bridge Loan Agreement or the Reorganization
Agreement, which failure is not cured within 10 days of written notice from
Progenitor, and the breach of certain representations and warranties by Mercator
that have, or are reasonably likely to have, a material adverse effect on
Mercator. See "The Reorganization Agreement--Bridge Loan Financing."
14
<PAGE>
INITIAL PUBLIC OFFERING
Progenitor intends to complete the IPO, underwritten on a firm-commitment
basis, concurrently with or immediately prior to the closing of the
Reorganization. In futherance thereof, Progenitor has filed the IPO Registration
Statement with the Commission to register the Progenitor Units that it proposes
to sell in the IPO and the shares of Progenitor Common Stock that may
subsequently be issued upon exercise of the Progenitor Warrants issued as part
of the Progenitor Units in the IPO. The IPO Registration Statement contemplates
that Progenitor will sell 2,750,000 Progenitor Units in the IPO, at an IPO Unit
Price estimated to be between $10 and $12 per Unit (although there can be no
assurance in this regard). In connection with the IPO, the Progenitor Board of
Directors will determine the IPO Common Stock Price in good faith, after
consultation with representations of the Underwriters. This Proxy
Statement/Prospectus assumes that the IPO Common Stock Price will be $8.50,
although there can be no assurance in this regard. Concurrently with the IPO,
Progenitor will sell additional shares of Progenitor Common Stock to Amgen at
the IPO Common Stock Price, pursuant to the Amgen Purchase Agreement, which
provides for Amgen's commitment to make an equity investment of $5.5 million in
Progenitor (see "Business of Progenitor--Corporate Agreements--Amgen
Agreements"), and will sell 25,000 shares to The Ohio University Foundation at a
price of $4.25 per share, pursuant to a stock purchase right (see "Certain
Transactions of Progenitor--The Ohio University Foundation"). In addition,
24,020 shares of Progenitor Common Stock will be issued to The Ohio University
Foundation pursuant to an anti-dilution adjustment in connection with the IPO.
Interneuron has agreed to convert the entire balance of the Interneuron Bridge
Loan into shares of Progenitor's Series D Preferred Stock upon the closing of
the IPO. Based on an outstanding balance of $2.9 million on the Interneuron
Bridge Loan as of June 20, 1997, Interneuron would receive 293,293 shares of
Progenitor's Series D Preferred Stock upon such conversion. Progenitor also has
granted to the underwriters of the IPO (the "Underwriters") an option,
exercisable at any time up to thirty days from the date of the IPO, to purchase
up to an additional 412,500 Progenitor Units at the IPO Unit Price, less
underwriting discounts and commissions, solely to cover over-allotments, if any.
However, there can be no assurance as to the price at which the IPO actually
will be consummated, as to the number of Progenitor Units to be sold in or
concurrently with the IPO, or as to the timing of the IPO, if it occurs at all.
The aggregate net proceeds to Progenitor from the sale of the 2,750,000
Progenitor Units in the IPO, at an assumed IPO Unit Price of $11.00, are
estimated to be approximately $27.1 million ($31.4 million if the Underwriters'
over-allotment option is exercised in full), after deducting estimated
underwriting discounts and commissions and estimated expenses of the IPO payable
by Progenitor and assuming no exercise of the Progenitor Warrants. Progenitor
will also receive $4.5 million in cash and a $1.0 million promissory note from
the sale of the Amgen Shares, and approximately $106,000 in cash from the sale
of 25,000 shares of Progenitor Common Stock to The Ohio University Foundation,
pursuant to a stock purchase right. Progenitor estimates that, at its planned
rate of spending, subject to the factors described herein, the net proceeds of
the IPO, together with the proceeds from the sale of the Amgen Shares, and the
interest income earned on such proceeds, together with existing cash and cash
equivalents, will be sufficient to meet its funding requirements for the next 18
months. There can be no assurance, however, that Progenitor's assumptions
regarding the amount of proceeds from the IPO and other sales of Progenitor
Common Stock and regarding its future levels of expenditures and operating
losses will prove accurate.
In the event that the IPO is not consummated prior to, or simultaneously
with, the Effective Time, Progenitor may abandon the Reorganization (provided,
however, that such right of Progenitor to abandon the Reorganization shall be
subject to Progenitor fulfilling its obligation to extend to Mercator the
Residual Loan Amount (as defined below) pursuant to the Mercator Bridge Loan
Agreement), unless Progenitor, in its sole discretion, determines to consummate
the Reorganization using one of the alternative forms of consideration described
below. See "The Reorganization--Alternative Consideration"
15
<PAGE>
and "The Reorganization Agreement--Bridge Loan Financing." If Progenitor so
determines to consummate the Reorganization using an alternative form of
consideration, additional information will be provided to holders of Mercator
Capital Stock and separate proxies will be solicited. The Reorganization
Agreement allows Progenitor, in its sole discretion, to cease pursuing the IPO
or to postpone consummation of the IPO until after the termination of the
Reorganization Agreement.
THE NUMBER OF PROGENITOR UNITS TO BE SOLD IN THE IPO, AND THE IPO UNIT PRICE
AND THE IPO COMMON STOCK PRICE, HAVE NOT YET BEEN DETERMINED AND ARE SUBJECT TO
CHANGE. TO THE EXTENT THE IPO UNIT PRICE IS LESS THAN $11.00 OR THE IPO COMMON
STOCK PRICE IS LESS THAN $8.50, THERE WILL BE MORE SHARES OF PROGENITOR COMMON
STOCK OUTSTANDING AFTER THE IPO, AND THE PROCEEDS TO PROGENITOR EXPECTED FROM
THE IPO WILL BE LOWER. THE DATE OF THE IPO ALSO HAS NOT BEEN DETERMINED, AND
THERE CAN BE NO ASSURANCE AS TO WHEN THE IPO WILL BE CONSUMMATED, IF AT ALL.
THERE ALSO CAN BE NO ASSURANCE THAT THE IPO UNIT PRICE WILL NOT BE MORE OR LESS
THAN $11.00, THAT THE IPO COMMON STOCK PRICE WILL NOT BE MORE OR LESS THAN
$8.50, THAT PROGENITOR WILL NOT ELECT TO ISSUE ADDITIONAL SHARES OF PROGENITOR
COMMON STOCK PRIOR TO OR IN CONNECTION WITH THE IPO, THAT THE NUMBER OF
PROGENITOR UNITS TO BE ISSUED IN THE IPO WILL BE THE 2,750,000 UNITS CURRENTLY
CONTEMPLATED OR THAT THE NUMBER OF SHARES OF PROGENITOR COMMON STOCK TO BE
ISSUED CONCURRENTLY WITH THE IPO WILL BE AS SET FORTH ABOVE. See "Risk
Factors--Uncertainties Regarding the IPO, the IPO Common Stock Price and
Exchange Ratios" and "Initial Public Offering."
16
<PAGE>
SUMMARY 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 Proxy Statement/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 of Progenitor" and the Progenitor Financial Statements
and related Notes thereto and other financial information included elsewhere
herein.
<TABLE>
<CAPTION>
MAY 8, 1992
MAY 8, 1992 (DATE OF
(DATE OF SIX MONTHS 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>
- --------------------------
17
<PAGE>
SUMMARY 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 Proxy Statement/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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Mercator" and the Mercator
Financial Statements and related Notes thereto and other financial data included
elsewhere herein.
<TABLE>
<CAPTION>
OCTOBER 9, 1992 OCTOBER 9, 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>
18
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following summary pro forma financial data are presented assuming (i)
that the consummation of the Reorganization was accounted for using the purchase
method of accounting, (ii) the automatic conversion of all outstanding shares of
Progenitor's Series A and Series B Preferred Stock into an aggregate of
2,204,330 shares of Progenitor Common Stock upon the closing of the IPO, the
conversion of a convertible debenture and a portion of the promissory note held
by Interneuron into an aggregate of 810,220 shares of Progenitor Common Stock
(based on an aggregate outstanding balance of $6.9 million as of March 31, 1996)
upon the closing of the IPO, and, in connection with the IPO, the issuance of
24,020 shares of Progenitor Common Stock to The Ohio University Foundation
pursuant to an anti-dilution adjustment and the conversion of the Interneuron
Bridge Loan into 131,135 shares of Progenitor Series D Preferred Stock, (based
upon an outstanding balance of $1.3 million as of March 31, 1997) (collectively,
the "Conversions"), (iii) the issuance and sale of 2,750,000 Progenitor Units
offered in the IPO (after deducting estimated underwriting discounts and
commissions and the estimated expenses of the IPO) 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 IPO, and the sale of 25,000 shares of Progenitor Common
Stock to The Ohio University Foundation at a price of $4.25 per share, pursuant
to a stock purchase right, concurrently with the closing of the IPO
(collectively, the "IPO Adjustments"). The number of shares of Progenitor Common
Stock to be issued in the Reorganization, upon the Conversions and upon the IPO
Adjustments, and the number of shares of Progenitor's Series D Preferred Stock
to be issued upon Conversion of the Interneuron Bridge Loan, will depend upon a
variety of factors, including the date of the closing of the IPO and the IPO
Common Stock Price. See "Business of Progenitor--Corporate Agreements," "Certain
Transactions of Progenitor-- Relationship with Interneuron" and "Description of
Progenitor Securities."
The pro forma balance sheet assumes that the Reorganization, the Conversions
and the IPO Adjustments were consummated as of March 31, 1997. However, the
terms of the IPO could change, and Progenitor may sell more or less Progenitor
Units in the IPO at a price more or less than the assumed IPO Unit Price of
$11.00, and the IPO Common Stock Price could be more or less than the assumed
amount of $8.50, which would affect the Conversions and the IPO Adjustments. See
"Initial Public Offering." 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 Reorganization, the Conversions
and the IPO Adjustments were consummated as of October 1, 1995. See "Progenitor
Unaudited Pro Forma Financial Statements."
The pro forma statements of financial position and results of operations
exclude certain non-recurring items such as estimated costs of severance,
retention and bonus programs, the elimination of duplicate systems and
facilities, employee relocation, and other employee benefit and integration
costs related to the consolidation of operations of Progenitor and Mercator
subsequent to the consummation of the Reorganization. In addition, Progenitor
will likely incur additional costs of being a public reporting entity. Such
increases in costs, particularly insurance and annual financial reporting costs,
have not been included in the pro forma statements of operations for either
period presented. See "Risk Factors--History of Operating Losses; Anticipation
of Future Losses" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Progenitor."
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 Progenitor's actual results of operations would
have been had the transactions occurred on such dates nor does it purport to
predict or indicate Progenitor'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
19
<PAGE>
this Proxy Statement/Prospectus and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Progenitor" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Mercator."
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED (1)
--------------------------------
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, MARCH 31,
------------- -----------------
1996 1997
------------- -----------------
<S> <C> <C>
PROGENITOR STATEMENT OF OPERATIONS DATA:
Revenues...................................................................... $ 1,832 $ 984
Expenses:
Research and development.................................................... 10,126 5,603
General and administrative.................................................. 4,358 2,028
Interest, net............................................................... 124 95
------------- -----------------
Total expenses............................................................ 14,608 7,726
------------- -----------------
Net loss...................................................................... $ (12,776) $ (6,742)
------------- -----------------
------------- -----------------
Net loss per share............................................................ $ (1.06) $ (.56)
------------- -----------------
------------- -----------------
Shares used in computing net loss per share................................... 12,011,135 12,066,917
------------- -----------------
------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1997
-----------------
PRO FORMA AS
ADJUSTED(2)
-----------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................... $ 31,686
Working capital.............................................................................. 26,886
Total assets................................................................................. 34,245
Long-term obligations........................................................................ 966
Deficit accumulated during development stage................................................. (52,181)
Total stockholders' equity (deficit)......................................................... 28,142
</TABLE>
- ------------------------
(1) Pro forma as adjusted as if the Reorganization, the Conversions and the IPO
had occurred as of October 1, 1995.
(2) Pro forma as adjusted to give effect to: (i) the Reorganization as if it had
occurred on March 31, 1997; (ii) the automatic conversion of all outstanding
shares of Progenitor Series A and Series B Preferred Stock into an aggregate
of 2,204,330 shares of Progenitor Common Stock upon the closing of the IPO;
(iii) the conversion of a convertible debenture and a portion of the
promissory note held by Interneuron into an aggregate of 810,220 shares of
Progenitor Common Stock (based on an aggregate outstanding balance of $6.9
million as of March 31, 1997) upon the closing of the IPO; (iv) the
conversion of the Interneuron Bridge Loan into an aggregate of 131,135
shares of Progenitor's Series D Preferred Stock (based on an outstanding
balance of $1.3 million as of March 31, 1997); (v) the issuance of 24,020
shares of Progenitor Common Stock to The Ohio University Foundation pursuant
to an anti-dilution adjustment in connection with the IPO; (vi) the issuance
and sale of the 2,750,000 Progenitor Units in the IPO (after deducting
estimated underwriting discounts and commissions and the estimated expenses
of the IPO payable by Progenitor) and the receipt and application of the
estimated net proceeds therefrom; (vii) the sale of 647,059 shares of
Progenitor Common Stock to
20
<PAGE>
Amgen for $4.5 million in cash and a $1.0 million promissory note,
concurrently with the closing of the IPO; and (viii) the sale of 25,000
shares of Progenitor Common Stock to The Ohio University Foundation at a
price of $4.25 per share, pursuant to a stock purchase right, concurrently
with the closing of the IPO. See "Initial Public Offering,"
"Capitalization," "Business of Progenitor--Corporate Agreements," "Certain
Transactions of Progenitor" and "Description of Progenitor Securities."
COMPARATIVE PER SHARE DATA
The following table sets forth net loss and book value per common share of
Progenitor and Mercator on a historical basis, for Progenitor on a pro forma
basis and for Mercator on a pro forma equivalent basis. Pro forma information
gives effect to the Reorganization under the purchase method of accounting and
reflects certain assumptions on the basis described in the notes to the
unaudited Pro Forma Financial Statements. The data set forth below should be
read in conjunction with the audited and unaudited consolidated historical
financial statements of Progenitor and Mercator, including the respective notes
thereto, appearing elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER SIX MONTHS ENDED
30, 1996(1) MARCH 31, 1997
-------------------- -------------------
<S> <C> <C>
PROGENITOR
Net loss per share:
Historical.......................................................... $ (1.82) $ (0.92)
Pro forma for reorganization (2).................................... (2.29) (1.22)
Book value per share at period end:
Historical.......................................................... (1.79) (2.76)
Pro forma for reorganization (3).................................... (1.14) (2.19)
MERCATOR
Net loss per share:
Historical.......................................................... $ (55.27) $ (19.69)
Pro forma equivalent (4)............................................ (0.53) (0.28)
Book value per share at period end:
Historical.......................................................... (73.29) (78.21)
Pro forma equivalent (4)............................................ (0.26) (0.51)
</TABLE>
- ------------------------
(1) Pro forma and Mercator information includes Mercator financial information
for the year ended December 31, 1996.
(2) The Progenitor pro forma for Reorganization net loss per share amounts are
computed by dividing (i) the pro forma for Reorganization net loss amounts
for the respective periods (see "Progenitor Unaudited Pro Forma Financial
Statements") by (ii) the weighted-average number of shares of common stock
and common stock equivalents outstanding of both Progenitor and Mercator
capital stock over the respective periods. Common Stock equivalents are
excluded from the computation when their effect is anti-dilutive; however,
pursuant to the requirements of the 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. The Progenitor pro forma for Reorganization
net loss per share computation thus is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1996
------------------ -------------------
<S> <C> <C>
Pro forma for Reorganization net loss (in thousands)................ $(12,692) $(6,803)
Weighted-average number of shares outstanding....................... 5,538,006 5,593,788
Pro forma for Reorganization, net loss per share.................... $ (2.29) $ (1.22)
</TABLE>
21
<PAGE>
(3) The Progenitor pro forma for Reorganization book value per share amounts are
computed by dividing (i) the pro forma for Reorganization book value for the
ends of the respective periods (except that with respect to Mercator book
value as of December 31, 1996 was utilized for both periods) by (ii) the
total number of (A) actual shares of Progenitor Common Stock outstanding as
of the end of the period indicated plus (B) the 2,179,439 shares of
Progenitor Common Stock assumed to be issued to the Mercator stockholders
upon the consummation of the Reorganization (based on an Adjusted Purchase
Price of $22 million, an IPO Common Stock Price of $8.50 and certain other
assumptions, and not including shares of Progenitor Common Stock to be
reserved for issuance in connection with Replacement Options and Replacement
Warrants). The computation thus is as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1996 MARCH 31, 1997
------------------ -------------------
<S> <C> <C>
Pro forma for Reorganization book value (in thousands).............. $(5,762) $(11,083)
Number of shares used in book value per share
computation....................................................... 5,065,343 5,066,656
Pro forma for Reorganization net book value per share............... $ (1.14) $ (2.19)
</TABLE>
(4) Mercator pro forma equivalent per share amounts are calculated by
multiplying (i) the pro forma per share information of Progenitor by (ii)
the assumed weighted average exchange ratio of all outstanding shares of
Mercator Capital Stock in the Reorganization (determined as described
below), so that the Mercator per share amounts are equated to the respective
values for one share of Progenitor. The weighted average exchange ratio was
assumed to be 0.232 per share, which represents the ratio of (i) 2,179,439
shares of Progenitor Common Stock assumed to be issued to holders of
Mercator Capital Stock upon consummation of the Reorganization (based upon
the assumptions noted in Note (3) above, and not including shares of
Progenitor Common Stock to be reserved for issuance in connection with
Replacement Options and Replacement Warrants), divided by (ii) 9,392,826
shares, representing all outstanding shares of Mercator Capital Stock as of
March 31, 1997. The actual weighted average exchange ratio cannot be
determined until the Effective Time.
No established public trading market exists for Progenitor Common Stock or
Mercator Capital Stock. Progenitor intends to consummate the IPO concurrently
with the effectiveness of the Reorganization. See "Initial Public Offering."
Progenitor has applied to list the Progenitor Common Stock to be issued in
connection with the Reorganization and the IPO on the Nasdaq National Market.
See "The Reorganization--Nasdaq National Market Listing." Neither Progenitor nor
Mercator has ever paid any cash dividends on its capital stock.
22
<PAGE>
RISK FACTORS
THIS PROXY STATEMENT/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 PROGENITOR'S (INCLUDING, WITH RESPECT TO
PERIODS AFTER THE EFFECTIVE TIME, PROGENITOR AND ITS SUBSIDIARIES, INCLUDING
MERCATOR) AND MERCATOR'S EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES
REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION,
STATEMENTS IN "SUMMARY," "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PROGENITOR," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
MERCATOR," "BUSINESS OF PROGENITOR," "BUSINESS OF MERCATOR" AND ELSEWHERE IN
THIS PROXY STATEMENT/PROSPECTUS REGARDING, AMONG OTHER THINGS, UNCERTAINTIES
REGARDING THE IPO, THE IPO COMMON STOCK PRICE AND EXCHANGE RATIOS; UNCERTAINTIES
REGARDING THE VALUE OF PROGENITOR COMMON STOCK; UNCERTAINTIES RELATING TO THE
TECHNOLOGICAL APPROACHES OF PROGENITOR; HISTORY OF OPERATING LOSSES AND
ANTICIPATION OF FUTURE LOSSES; UNCERTAINTY OF PRODUCT DEVELOPMENT; NEED FOR
ADDITIONAL CAPITAL AND UNCERTAINTY OF ADDITIONAL FUNDING; DEPENDENCE ON
COLLABORATORS AND LICENSEES; INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE;
UNCERTAINTY OF PATENT AND PROPRIETARY RIGHTS; RISKS ASSOCIATED WITH THE
ACQUISITION OF MERCATOR; MANAGEMENT OF GROWTH, AND RISKS OF ACQUIRING NEW
TECHNOLOGIES; UNCERTAINTIES RELATED TO CLINICAL TRIALS; GOVERNMENT REGULATION
AND UNCERTAINTY OF OBTAINING REGULATORY APPROVAL; DEPENDENCE ON KEY PERSONNEL;
DEPENDENCE ON RESEARCH COLLABORATORS AND SCIENTIFIC ADVISORS; CONTROL OF
PROGENITOR BY, AND POTENTIAL CONFLICTS OF INTEREST WITH, INTERNEURON;
UNCERTAINTY OF HEALTH CARE REFORM MEASURES AND THIRD-PARTY REIMBURSEMENT AND
RISK OF PRODUCT LIABILITY. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROXY
STATEMENT/PROSPECTUS ARE BASED ON INFORMATION AVAILABLE TO PROGENITOR OR
MERCATOR, AS THE CASE MAY BE, AS OF THE DATE HEREOF, AND NEITHER PROGENITOR NOR
MERCATOR ASSUMES ANY OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
IT IS IMPORTANT TO NOTE THAT PROGENITOR'S AND MERCATOR'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 IN "RISK FACTORS" BELOW. ACCORDINGLY, IN ADDITION TO THE OTHER
INFORMATION IN THIS PROXY STATEMENT/ PROSPECTUS, THE INFORMATION UNDER "RISK
FACTORS" SHOULD BE CONSIDERED CAREFULLY IN EVALUATING PROGENITOR AND ITS
BUSINESS. NOTE THAT THE SAFE HARBORS PROVIDED IN SECTION 27A OF THE SECURITIES
ACT AND SECTION 21E OF THE EXCHANGE ACT DO NOT APPLY TO FORWARD-LOOKING
STATEMENTS MADE IN CONNECTION WITH AN INITIAL PUBLIC OFFERING.
If the Reorganization is consummated, Mercator stockholders will receive
shares of Progenitor Common Stock in exchange for their shares of Mercator
Capital Stock. Accordingly, Mercator stockholders should consider carefully the
following factors in evaluating the proposals to be voted on at the Mercator
Special Meeting. The risk factors discussed below include, where appropriate, a
discussion of the risks associated with the business and operations of Mercator,
assuming the Reorganization is consummated.
UNCERTAINTIES REGARDING THE IPO, THE IPO COMMON STOCK PRICE AND EXCHANGE RATIOS
Progenitor's obligation to consummate the Reorganization is conditioned upon
the consummation of the IPO, of which there can be no assurance. The IPO, if
consummated, will occur after the Mercator Special Meeting (see "--No Prior
Trading Market; No Assurance of Active Trading Market; Potential Volatility of
Stock Price"). The Reorganization Agreement allows Progenitor, in its sole
discretion, to cease pursuing the IPO or to postpone consummation of the IPO
until after the termination of the Reorganization Agreement.
As a result of the Reorganization, each outstanding share of Mercator
Capital Stock, and certain options and warrants to purchase shares of Mercator
Capital Stock, will be converted into the right to receive a certain number of
shares of Progenitor Common Stock, or options or warrants to purchase a certain
number of shares of Progenitor Common Stock, based on the actual Adjusted
Purchase Price and the exchange ratio for the respective class and series of
such shares of Mercator Capital Stock. The actual Adjusted Purchase Price will
be an amount equal to $22 million less both (i) all Excess Expenses and (ii) all
Losses up to the amount of the Maximum Indemnification Reduction. Although the
Maximum Indemnification Reduction with respect to Losses has been agreed to be
$2.2 million, the actual amount of Losses
23
<PAGE>
(subject to such limit), and the actual amount of Excess Expenses (which are not
subject to any limit), cannot be determined until the Closing Date or, in the
event of any unresolved or unliquidated claims at the time of Closing, until the
resolution or liquidation of such claims through the Escrow. The number of
shares of Progenitor Common Stock to be received for each share of Mercator
Capital Stock (but not the value of the aggregate number of such shares to be
received) also will depend upon the actual IPO Common Stock Price, which will be
determined by the Progenitor Board of Directors in good faith after consultation
with representatives of the Underwriters.
The exchange ratios for each class and series of Mercator Capital Stock thus
are dependent upon a number of variables which cannot be determined until the
Effective Time, including the actual number of shares of Mercator Capital Stock
and the actual number of shares of Mercator Capital Stock subject to options and
warrants outstanding as of the Effective Time; the actual IPO Common Stock
Price; and the amount of the final Adjusted Purchase Price. Accordingly, it is
not possible to determine in advance the exact Exchange Ratio or the Per Share
Consideration for any class or series of Mercator Capital Stock that will
actually apply in the Reorganization. See "The Reorganization--Exchange Ratios."
UNCERTAINTIES REGARDING THE VALUE OF PROGENITOR COMMON STOCK
The Reorganization Agreement contemplates that Progenitor Common Stock will
be valued at the IPO Common Stock Price for purposes of determining the Exchange
Ratio applicable to each class and series of Mercator Capital Stock. There can
be no assurance that the price at which the shares of Progenitor Common Stock
and Progenitor Warrants will trade immediately after consummation of the IPO or
at any time thereafter will correspond to the IPO Unit Price or to the
Progenitor Board of Director's determination with respect to the relative fair
market value of a share of Progenitor Common Stock and a Progenitor Warrant. In
addition, all shares of Progenitor Common Stock to be issued in the
Reorganization will be subject under the terms of the Reorganization Agreement
to transfer restrictions contained in the Lockup Agreements restricting the
holder's ability to sell or transfer such shares for a period of 365 days after
consummation of the Reorganization; provided, that such restrictions shall lapse
as to one-third of such shares after 180 days and one-third of such shares after
270 days. See "The Reorganization-- Lockup Agreements." Accordingly, there can
be no assurance that the market price for Progenitor Common Stock that will
prevail upon the lapsing of these restrictions will be equal to or greater than
the IPO Price.
ABSENCE OF FAIRNESS OPINION
To date, there has not been any public market for Mercator Capital Stock.
The formula for determining the Adjusted Purchase Price was determined by
negotiations between Mercator and Progenitor and may not result in a purchase
price that is indicative of the value of the Mercator Capital Stock. Mercator
engaged Lehman Brothers as Mercator's agent to advise Mercator concerning
potential alliances and sale transactions. However, Mercator did not seek a
third party opinion as to the fairness of the Adjusted Purchase Price from
Lehman Brothers or any other independent source. In determining not to seek such
an opinion, Mercator considered that its executive officers and directors
possess sufficient business experience and acumen to negotiate the terms and
conditions of the Reorganization and assess the fairness of the Adjusted
Purchase Price to Mercator's stockholders from a financial perspective without a
third party opinion, as well as the cost of such an opinion. However, Mercator
stockholders should be aware that certain members of Mercator management and the
Mercator Board of Directors have interests in the Reorganization that are in
addition to the interests of the stockholders of Mercator generally. See "The
Reorganization--Interests of Certain Persons in the Reorganization."
UNCERTAINTIES RELATING TO THE TECHNOLOGICAL APPROACHES OF PROGENITOR
To date, Progenitor has not developed or commercialized any products. There
can be no assurance that Progenitor's genomics approaches will enable it to
discover genes with functions relevant to the
24
<PAGE>
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
Progenitor is successful in identifying genes associated with specific diseases,
there can be no assurance that Progenitor 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 Progenitor'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 Progenitor 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 Progenitor'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 of Progenitor--Progenitor'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. Progenitor'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 Progenitor or others may
result in Progenitor's technologies becoming obsolete before Progenitor recovers
any expenses it incurs in connection with its related development programs. See
"--Intense Competition; Rapid Technological Change" and "Business of
Progenitor--Competition."
HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES
Progenitor is a development stage company that commenced operations in May
1992. As of March 31, 1997, Progenitor had an accumulated deficit of
approximately $23.0 million and a working capital deficit of approximately $3.0
million. As of March 31, 1997, Progenitor and Mercator had a combined
accumulated deficit of approximately $52.2 million on a pro forma for
Reorganization basis. In connection with the Reorganization, Progenitor expects
to incur several nonrecurring charges in the quarter ending September 30, 1997
which in the aggregate are currently estimated to be approximately $32.0
million, including the write-off of costs related to the purchase of in-process
research and development, severance, employee retention and relocation, other
employee benefit costs, the consolidation of operations, the elimination of
duplicate systems and facilities and other integration costs. These amounts are
preliminary estimates only and could be materially higher. Factors that could
increase such costs include delays beyond July 31, 1997 in the completion of the
IPO, any unexpected employee turnover, unforeseen delays in addressing duplicate
facilities once the Reorganization 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 Progenitor and Mercator will not incur additional
charges in subsequent periods to reflect other costs associated with the
Reorganization or from the integration of operations after the Reorganization.
Neither Progenitor nor any of its collaborative partners or licensees has yet
developed products that have generated any revenues to Progenitor or entered
clinical trials that would lead to revenues to Progenitor if successful. To
date, all of Progenitor's revenues have resulted from payments from
collaborative and license agreements and a development grant from a governmental
agency. Progenitor 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. Progenitor has not yet generated any revenues from the
achievement of milestones under its corporate agreements. Royalties or other
revenues from commercial sales of products,
25
<PAGE>
if any, are not expected for a number of years. To achieve profitable
operations, Progenitor, 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 Progenitor 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 of Progenitor."
UNCERTAINTY OF PRODUCT DEVELOPMENT
Significant discovery, research and development efforts will be required
prior to the time any of Progenitor's gene discoveries may lead to product
candidates or result in products that may be brought to the market. Products, if
any, resulting from Progenitor'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 Progenitor 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 Progenitor 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 Progenitor to operate profitably. The failure of any of these
events to occur could have a material adverse effect on Progenitor's business,
financial condition and results of operations. See "Business of
Progenitor--Progenitor's Genomics System," "--Discovery Programs" and
"--Government Regulation."
NEED FOR ADDITIONAL CAPITAL; UNCERTAINTY OF ADDITIONAL FUNDING
Progenitor expects negative cash flow from operations to continue for the
foreseeable future. Progenitor will require substantial additional funds to
continue research and development, conduct preclinical studies and clinical
trials, conduct activities relating to commercialization of rights it has
retained in corporate agreements, if any, and expand administrative
capabilities. Progenitor estimates that at its planned rate of spending,
existing cash and cash equivalents, together with the net proceeds from the IPO,
and the proceeds from the sale of the Amgen Shares, and the interest income
earned on such proceeds, will be sufficient to fund operations for the next 18
months. There can be no assurance, however, that Progenitor's assumptions
regarding its future levels of expenditures and operating losses will prove
accurate. Progenitor's future funding requirements will depend on many factors,
including any expansion or acceleration and the breadth of Progenitor's research
and development programs; the results of research and development, preclinical
studies and clinical trials conducted by Progenitor or its collaborative
partners or licensees, if any; the acquisition and licensing of products and
technologies or businesses, if any; Progenitor's ability to establish and
maintain corporate relationships and academic collaborations; Progenitor's
ability to integrate the operations of Mercator with those of Progenitor;
Progenitor's ability to manage growth; competing technological and market
developments; the time and costs involved in filing, prosecuting, defending and
enforcing patent and other 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 Progenitor, the time and costs involved in conducting preclinical
studies and
26
<PAGE>
clinical trials, seeking regulatory approvals, and scaling-up manufacturing and
commercialization activities also would increase Progenitor's funding
requirements.
Progenitor will need to raise substantial additional capital to fund
operations. Prior to the IPO, Interneuron has funded substantially all of
Progenitor's operations. Interneuron, however, is under no obligation to
provide, and Progenitor does not expect that Interneuron will provide, any
additional funds in the future. Progenitor intends to seek additional funding
through public or private equity or debt financing 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 Progenitor. 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 Progenitor 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, Progenitor 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 of Progenitor--Liquidity and Capital Resources" and "Certain
Transactions of Progenitor."
DEPENDENCE ON COLLABORATORS AND LICENSEES
Progenitor's strategy for development and commercialization of drugs and
other products from its discoveries depends upon the establishment of corporate
relationships. Progenitor 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. Progenitor has entered into agreements with Amgen, Chiron
Corporation ("Chiron") and Novo Nordisk. Progenitor's revenues will be dependent
on the success of the products developed through these and future corporate
relationships. The failure of Progenitor's collaborators or licensees to
develop, obtain regulatory approval for, and market products incorporating
Progenitor's discoveries would have a material adverse effect on Progenitor's
business, financial condition and results of operations. There can be no
assurance that any collaborators or licensees will commit sufficient development
resources, technology, regulatory expertise, manufacturing, marketing and other
resources towards developing, promoting and commercializing products
incorporating Progenitor's discoveries. Further, competitive conflicts may arise
among these third parties that could prevent them from working cooperatively
with Progenitor. The amount and timing of resources devoted to these activities
by such parties could depend on the achievement of milestones by Progenitor and
generally will be controlled by such parties. In addition, Progenitor's
corporate agreements generally provide Progenitor'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 Progenitor's business, financial condition and results of
operations. Progenitor's milestone payments or royalties from sales of products
by collaborators or licensees, if any, may be less than the revenues Progenitor
could have generated had it commercialized and marketed products itself. There
can be no assurance that Progenitor 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 Progenitor will receive milestone payments or
generate revenues from royalties sufficient to offset Progenitor's significant
investment in research and development and other costs. If Progenitor 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 Progenitor on acceptable terms, if at all. See
"--Need for Additional Capital; Uncertainty of Additional Funding," "Business of
Progenitor--Corporate Agreements," "--Technology Agreements" and "--License
Agreements."
27
<PAGE>
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
Research in the field of genomics is highly competitive. Competitors of
Progenitor 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. Progenitor's competitors may
discover, characterize or develop important genes in advance of Progenitor,
which could have a material adverse effect on any related Progenitor discovery
program. Progenitor expects competition to intensify in genomics research as
technical advances in the field are made and become more widely known.
Progenitor is subject to significant competition from organizations that are
pursuing the same or similar technologies as those which constitute Progenitor's
discovery platforms, and from organizations that are pursuing pharmaceutical or
other products that are or may be competitive with Progenitor's or its
collaborators' or licensees' potential products. Many of the organizations
competing with Progenitor 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 Progenitor.
Progenitor 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. Progenitor'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 Progenitor. Any product candidate or
technology of Progenitor 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 of Progenitor--Business Overview," "--Progenitor's Genomics System"
and "--Competition."
UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS
Progenitor'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 Progenitor may depend upon the
remaining term of patent protection available at the time any products covered
by such patents are commercialized.
Progenitor actively pursues a policy of seeking patent protection for a
number of its proprietary products and technologies. Progenitor has prior to the
Reorganization 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 pending seven 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. Progenitor believes that there may be significant
litigation regarding patent and other intellectual property rights relating to
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leptin and leptin receptors. Progenitor 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
Progenitor 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
Progenitor's invention date, 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, including obesity,
could have a material adverse effect on Progenitor'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 Progenitor
applies for patent protection on a corresponding full-length gene could
adversely affect Progenitor'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 Progenitor or its collaborators or licensees may give rise to
claims of patent infringement.
The patent positions of pharmaceutical and biotechnology firms, including
Progenitor, 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, Progenitor 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, Progenitor 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 Progenitor would not be
found invalid or unenforceable by a court or that such patents would cover
products or technologies of Progenitor'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 Progenitor. To protect its proprietary
rights, Progenitor may be required to participate in interference proceedings
declared by the USPTO to determine priority of invention, which may result in
substantial cost to Progenitor. Moreover, even if Progenitor's patents issue,
there can be no assurance that
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they will provide sufficient proprietary protection or will not be later
limited, circumvented or invalidated. Accordingly, there can be no assurance
that Progenitor will develop proprietary technologies that are patentable, that
Progenitor'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 Progenitor's patents
will not be held invalid by a court of competent jurisdiction.
In addition to patent protection, Progenitor also relies to a significant
extent upon trade secret protection for its confidential and proprietary
information including many of Progenitor'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
Progenitor'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. Progenitor 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
Progenitor. There can be no assurance, however, that these agreements will
provide meaningful protection of Progenitor's trade secrets or adequate remedies
in the event of unauthorized use or disclosure of such information, that
Progenitor 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 Progenitor's key discovery technologies would materially and adversely affect
Progenitor's competitive position and could have a material adverse effect on
Progenitor'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 Progenitor projects or apply
Progenitor's technology to other projects and, if adversely determined, such
disputes could have a material adverse effect on Progenitor's business,
financial condition and results of operations.
Progenitor may incur substantial costs if it is required to defend itself in
patent suits brought by third parties or if Progenitor initiates such a suit to
enforce Progenitor's patents or to determine the validity, scope or
enforceability of other parties' proprietary rights. Any legal action against
Progenitor 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 Progenitor to potential liability for damages,
require Progenitor 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 Progenitor or its collaborators or licensees to cease doing
so. There can be no assurance that Progenitor 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
Progenitor's business, financial condition and results of operations. In
addition, if Progenitor becomes involved in such litigation, it could consume a
substantial portion of Progenitor's managerial and financial resources.
Progenitor 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 Progenitor 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 Progenitor will be able to obtain any such license on commercially
acceptable terms, if at all. Failure by Progenitor or its collaborators and
licensees to obtain a license to any technology required to commercialize
Progenitor's discoveries may have a material adverse effect on Progenitor's
business, financial condition and results of operations. See "Business of
Progenitor--Patents and Proprietary Rights."
MANAGEMENT OF GROWTH; RISK OF ACQUIRING NEW TECHNOLOGIES
One of Progenitor's strategies is to maintain its technological
competitiveness by accessing new equipment and advanced technologies. The
expansion of Progenitor'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 Progenitor's management
personnel, systems, procedures and controls will be adequate to support the
expansion of Progenitor'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
Progenitor will be able to manage successfully the growth and expansion of its
operations. Failure of Progenitor to manage its growth, or any specific
acquisition of additional capabilities, could have a material adverse effect on
Progenitor's business, financial condition and results of operations.
RISKS ASSOCIATED WITH THE ACQUISITION OF MERCATOR
The Reorganization involves the integration of two companies that have
previously operated independently at different locations with separate work
forces. No assurance can be given that difficulties encountered in integrating
the operations of Mercator will be overcome, or that the specific benefits
expected from the integration of Mercator, including the addition of new
research capabilities, equipment and technologies, will be achieved or that any
anticipated cost savings will be realized. The acquisition of Mercator also
involves a number of special risks, including assimilation of new operations and
personnel; the diversion of resources from Progenitor'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 Progenitor'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 Progenitor's business
and operations, including those of the business acquired.
In connection with the Reorganization, Progenitor 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 $32.0 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 $1.5 million for other
costs, such as benefit costs, the consolidation of operations, the elimination
of duplicate systems and facilities, and other integration costs. These amounts
are preliminary estimates only and could be materially higher. Factors that
could increase such costs include delays beyond July 31, 1997 in the completion
of the IPO, any unexpected employee turnover, unforeseen delays in addressing
duplicate facilities once the Reorganization 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 Progenitor will not incur additional
charges in subsequent periods to reflect other costs associated with the
Reorganization or from the integration of operations after the Reorganization.
There can be no assurance that the
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Reorganization will not have a material adverse effect on the business,
financial condition and results of operations of Progenitor or that Progenitor
will realize the benefits and strategic objectives sought through the
Reorganization. Costs associated with the Reorganization, or liabilities and
expenses associated with the operations of Mercator, that exceed the
expectations of Progenitor, could have a material adverse effect on Progenitor's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Progenitor--Liquidity and Capital Resources," "Business of Progenitor--Human
Resources" and "--Facilities."
Under Section 382 of 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,
Progenitor has not incurred an ownership change under Section 382. As a result
of the actions contemplated by the IPO, the Reorganization 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
IPO 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 Progenitor's discoveries, Progenitor 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
Progenitor'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
Progenitor or its collaborators or licensees are not shown to be safe and
effective in clinical trials, the resulting delays in developing other product
candidates and conducting related preclinical studies and clinical trials, as
well as the need for additional financing, would have a material adverse effect
on Progenitor's business, financial condition and results of operations. See
"Business of Progenitor--Progenitor's Genomics System" and "--Discovery
Programs."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Prior to marketing, any new drug or other product developed by Progenitor 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
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the product development efforts of Progenitor and its collaborators or
licensees, and have a material adverse effect on Progenitor'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 Progenitor 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 Progenitor's discovery
programs involve the application of new technologies and may be based upon a new
therapeutic approach, such products may be subject to substantial additional
review by various government regulatory authorities other than the FDA and, as a
result, regulatory approvals may be obtained more slowly than for products using
conventional technologies. Under current guidelines, proposals to conduct
clinical research involving gene therapy at institutions supported by the
National Institutes of Health ("NIH") must be approved by the Recombinant DNA
Advisory Committee ("RAC") and the NIH. Furthermore, gene therapies are
relatively new technologies 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. The NIH has proposed revised
rules with respect to the RAC that would, among other things, remove the RAC's
authority over the approval of individual gene therapy experiments. There can be
no assurance, however, that such proposed rules will be adopted.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continual review. Among the conditions for product
approval and continued marketing approval is that the quality control and
manufacturing procedures of Progenitor 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 Progenitor'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 Progenitor, 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. Progenitor 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. Progenitor 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 Progenitor 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 Progenitor's
collaborators or licensees from marketing drugs or other products developed by
Progenitor or will limit the commercial use of such products and could have a
material adverse effect on Progenitor's business, financial condition and
results of operations. See "Business of Progenitor--Government Regulation."
DEPENDENCE ON KEY PERSONNEL
Progenitor 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 Progenitor's business, financial
condition and results of operations. In order to support Progenitor's existing
operations, Progenitor will be required to hire and retain
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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 Progenitor's success.
There can be no assurance that Progenitor 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,
Progenitor's anticipated growth and expansion, including the Reorganization, is
expected to place increased demands on Progenitor's resources and management
skills. The failure of Progenitor's existing personnel to handle such increased
demands or Progenitor's failure to attract and to retain additional personnel
with such capabilities could have a material adverse effect on Progenitor's
business, financial condition and results of operations. See "--Risks Associated
with the Acquisition of Mercator," "Business of Progenitor--Human Resources" and
"Management of Progenitor After the Reorganization."
DEPENDENCE ON RESEARCH COLLABORATORS AND SCIENTIFIC ADVISORS
Progenitor has relationships with collaborators at academic and other
institutions who conduct research in cooperation with Progenitor. Such
collaborators are not employees of Progenitor. All of Progenitor's consultants
are employed by employers other than Progenitor and may have commitments to, or
consulting or advisory contracts with, other entities that may limit their
availability to Progenitor. As a result, Progenitor 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 Progenitor's activities. The potential success of Progenitor's
discovery programs depends in part on continued collaborations with researchers
at academic and other institutions. There can be no assurance that Progenitor
will be able to negotiate additional acceptable collaborations at academic and
other institutions or that its existing collaborations will be maintained or be
successful.
Progenitor's research collaborators and scientific advisors sign agreements
which provide for confidentiality of Progenitor'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 Progenitor will be
able to maintain the confidentiality of its technology and other confidential
information in connection with every collaboration, and any unauthorized
dissemination of Progenitor's confidential information could have a material
adverse effect on Progenitor's business, financial condition and results of
operations. See "--Uncertainty of Patents and Proprietary Rights."
CONTROL OF PROGENITOR BY, AND POTENTIAL CONFLICTS OF INTEREST WITH, INTERNEURON
Following the closing of the IPO and the Reorganization (but assuming no
exercise of the Progenitor Warrants), Interneuron is expected to own
beneficially approximately 43% of the outstanding Progenitor Common Stock
(approximately 41% if the Underwriters' over-allotment option is exercised in
full). The actual ownership percentage of Interneuron in Progenitor after the
IPO will depend upon a variety of factors, including: (i) the amount of the
Adjusted Purchase Price; (ii) the outstanding balances of loans from Interneuron
to Progenitor that will be converted into shares of Progenitor Series D
Preferred Stock and Progenitor Common Stock upon the closing of the IPO; (iii)
the IPO Common Stock Price, which will determine the number of shares of
Progenitor Common Stock to be issued in the Reorganization, to be issued upon
conversion of outstanding balances of loans from Interneuron to Progenitor, to
be issued in respect of the Amgen Purchase Agreement and to be issued to
Interneuron in connection with the conversion provisions of its Series A
Preferred Stock upon the closing of the IPO and will determine the number of
shares of Progenitor's Series D Preferred Stock to be issued upon conversion of
the outstanding balance of the Interneuron Bridge Loan; and (iv) the passage of
measurement dates for determining the quarterly minimum return adjustments to
the conversion ratio of Progenitor Series A and Series B Preferred Stock on each
April 7, July 7, October 7 and January 7 (giving effect to Interneuron's
reliquishment of seven of such adjustments). Interneuron is and will continue to
be Progenitor's largest
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stockholder. Accordingly, Interneuron will continue to have substantial
influence over the election of directors of Progenitor and other matters
submitted to a stockholder vote, including extraordinary corporate transactions
such as a merger or sale of substantially all of Progenitor's assets. In
addition, Progenitor 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 Progenitor, 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 Progenitor immediately prior to such equity offering, subject to certain
limitations.
Interneuron may elect to increase its ownership percentage in Progenitor
through other means, including additional equity investments or the purchase of
Progenitor 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
Progenitor's voting stock could have the effect of delaying or preventing sales
of additional securities of Progenitor or a sale of Progenitor or other change
of control supported by the other stockholders of Progenitor.
In addition, Progenitor may be subject to various risks arising from
Interneuron's influence over Progenitor, including conflicts of interest
relating to new business opportunities that could be pursued by Progenitor or by
Interneuron and its other affiliates, and significant corporate transactions for
which stockholder approval is required. Progenitor has granted Interneuron an
option to acquire an exclusive, worldwide license to manufacture, use and sell
the protein product of the DEL-1 gene for human therapeutic uses in exchange for
a royalty to Progenitor based on sales. While the option agreement specifies the
payments to be made to Interneuron if Progenitor 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 Progenitor, will be
determined through negotiations between Interneuron and Progenitor and, given
the relationship between Interneuron and Progenitor, the terms of any such
license agreement may not be as favorable to Progenitor as those that may be
obtainable from a third party. In connection with the grant of the option
Interneuron relinquished its right to certain minimum return adjustments to the
conversion ratio of Progenitor's Series A Preferred Stock that would have
entitled Interneuron to receive an additional 909,965 shares of Progenitor
Common Stock upon the conversion of the Progenitor Series A Preferred Stock held
by Interneuron upon the closing of the IPO. Interneuron and Progenitor agreed to
determine the value of the relinquishment of the minimum return adjustments and
the extent to which such value represents prepayment by Interneuron of payments,
including royalties, that would otherwise be payable to Progenitor under any
such license. Such relinquishment may be deemed taxable income to Progenitor.
There can be no assurance that all of such income would be offset by current
expenses or operating loss carryforwards. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation of Progenitor,"
"Business of Progenitor--Discovery Programs" and "--Corporate Agreements,"
"Certain Transactions of Progenitor--Relationship with Interneuron," "Principal
Stockholders of Progenitor" and "Description of Progenitor 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 Progenitor
expects that there will continue to be, a number of legislative and regulatory
proposals aimed at changing the health care system. While Progenitor cannot
predict whether any such legislative or regulatory proposals will be adopted or
the effect that such proposals may have on its business, the consideration or
approval of such proposals could have a material adverse effect on the trading
and market price of the Progenitor Common Stock or on Progenitor's ability to
raise capital or to complete additional corporate agreements, and the adoption
of such proposals could have a material adverse effect on Progenitor's business,
financial condition and results of operations.
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In both domestic and foreign markets, successful commercial sales of
Progenitor'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 Progenitor's potential products will be considered cost-effective or that
adequate third-party reimbursement will be available to enable Progenitor, 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 Progenitor. If
adequate reimbursement is not provided by government and other third-party
payors for Progenitor's or its collaborators' or licensees' potential products,
there would be a material adverse effect on Progenitor's business, financial
condition and results of operations. See "Business of Progenitor--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 Progenitor or its
collaborators or licensees of potential products incorporating Progenitor's
discoveries may expose Progenitor 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. Progenitor currently has a limited amount of clinical trial and
product liability insurance coverage through Interneuron. Progenitor will seek
to obtain its own coverage upon completion of the IPO 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 Progenitor 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 Progenitor against such
liability. Certain of Progenitor'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 Progenitor 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 Progenitor or its collaborators or licensees could inhibit or prevent
commercialization of products being developed by Progenitor and could have a
material adverse effect on Progenitor's business, financial condition and
results of operations. In addition, to the extent any product liability claim
exceeds the amount of any insurance coverage, Progenitor's business, financial
condition and results of operations could be materially and adversely affected.
See "Business of Progenitor--Corporate Agreements," "--Technology Agreements,"
"--License Agreements" and "--Product Liability Insurance."
NO PRIOR TRADING MARKET; NO ASSURANCE OF ACTIVE TRADING MARKET; POTENTIAL
VOLATILITY OF STOCK PRICE
There has been no public market for Progenitor Common Stock or the
Progenitor Warrants and there can be no assurance that an active public market
for Progenitor Common Stock or the Progenitor Warrants will develop or be
sustained after the IPO. The IPO Unit Price will be determined through
negotiations between Progenitor and representatives of the Underwriters, and the
allocation of the IPO Unit Price between the IPO Common Stock and the Progenitor
Warrants will be determined by the Board of Directors of Progenitor, acting in
good faith after consultations with representatives of the Underwriters. There
can be no assurance that the IPO Unit Price will be $11.00 or that the IPO
Common Stock Price will be $8.50. There also can be no assurance that future
market prices for the Progenitor Common Stock and Progenitor
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Warrants together will equal or exceed the IPO Unit Price or that future market
prices for the Progenitor Common Stock will equal or exceed the IPO Common Stock
Price or reflect the initial allocation of fair market value between the share
of Progenitor Common Stock and the Progenitor Warrant comprising a Progenitor
Unit. 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 Progenitor Common
Stock and Progenitor Warrants also may experience such volatility. Factors such
as the results of preclinical studies and clinical trials by Progenitor or its
collaborative partners, licensees or competitors, evidence of the safety or
efficacy of products of Progenitor or its competitors, announcements of
technological innovations or new discoveries, product opportunities or products
by Progenitor or its competitors, changes in governmental regulations or
third-party reimbursement policies, developments in patent or other proprietary
rights of Progenitor or its competitors, fluctuations in Progenitor's operating
results and changes in general market conditions for biotechnology stocks could
have an adverse impact on the future price of Progenitor Common Stock and the
Progenitor Warrants.
ANTI-TAKEOVER CONSIDERATIONS
After the IPO, Progenitor will have the authority to issue up to 5,000,000
shares of Preferred Stock in addition to the Series D Preferred Stock in one or
more series and to fix the powers, designations, preferences and relative rights
thereof without any further vote or action by Progenitor's stockholders.
Progenitor has no current plans to issue additional shares of Preferred Stock.
However, the rights of the holders of Progenitor 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 Progenitor Common Stock and could have the
effect of delaying, deferring or preventing a change in control of Progenitor.
In addition, all outstanding options under Progenitor'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 Progenitor. Progenitor is subject to the provisions of Section 203 of
the DGCL, which could delay or make more difficult a merger, tender offer or
proxy contest involving Progenitor 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 Progenitor's ability to issue Preferred Stock will not
have an adverse effect on the market value of Progenitor Common Stock or
Progenitor Warrants in the future. See "Management of Progenitor After the
Reorganization--Stock Plans" and "Description of Progenitor Securities."
HAZARDOUS AND RADIOACTIVE MATERIALS; ENVIRONMENTAL MATTERS
Research and development conducted by Progenitor involves the controlled use
of hazardous materials, chemicals, biological materials and radioactive
compounds. Progenitor, 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. Progenitor 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, Progenitor could be held liable for any resulting damages, and any
such liability could exceed Progenitor's resources. Moreover, there can be no
assurance that Progenitor's collaborators and licensees are and will continue to
be in compliance with such standards or that Progenitor 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 Progenitor's
business, financial condition and results of operations. See "Business of
Progenitor--Government Regulation."
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MANAGEMENT DISCRETION AS TO USE OF PROCEEDS
Progenitor intends to use the net proceeds of the IPO, together with the
cash proceeds received from the sale of the Amgen Shares, primarily for research
and development. In addition, Progenitor 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 Reorganization, and (ii)
approximately $500,000 to reimburse Interneuron for certain costs of the IPO
incurred after October 1, 1996. In the event Progenitor consolidates its
operations in California, Progenitor may use approximately $2.5 million of such
net proceeds to facilitate employee relocation, plant closing and consolidation.
Progenitor 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. Progenitor 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 Proxy Statement/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 Progenitor's future business, financial
condition or results of operations. See "Initial Public Offering," "Certain
Transactions of Progenitor" and "Description of Progenitor Securities."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POSSIBLE ADVERSE EFFECT ON
STOCK PRICE
There has not been any public market for the Progenitor Common Stock or the
Progenitor Warrants and there can be no assurance that a significant public
market for the Progenitor Common Stock or the Progenitor Warrants will be
developed or be sustained after the IPO. Sales of substantial amounts of
Progenitor Common Stock in the public market after the IPO, or the possibility
of such sales occurring, could adversely affect prevailing market prices for the
Progenitor Common Stock or the Progenitor Warrants or the future ability of
Progenitor to raise capital through an offering of equity securities.
After the IPO, Progenitor will have outstanding 11,738,538 shares of
Progenitor Common Stock (12,151,038 shares if the Underwriters' over-allotment
option is exercised in full), including the shares of Progenitor Common Stock to
be issued to Mercator stockholders in the Reorganization, shares issued to
Interneuron upon the conversion of debt, the Amgen Shares and the 25,000 shares
to be purchased by The Ohio University Foundation. Of these shares, the
2,750,000 shares of Progenitor Common Stock offered as part of the Progenitor
Units in the IPO and up to 2,750,000 shares of Progenitor Common Stock issuable
upon exercise of the Progenitor Warrants offered as part of the Progenitor
Warrants in the IPO will be freely tradeable without restriction in the public
market under the Securities Act, unless such shares are held by "affiliates" of
Progenitor, as that term is defined in Rule 144 under the Securities Act. The
shares of Progenitor Common Stock to be issued in connection with the
Reorganization are being registered under Progenitor's Registration Statement on
Form S-4, of which this Proxy Statement/Prospectus forms a part. However,
2,135,572 of such shares issued to "affiliates" of Mercator within the meaning
of Rule 145 under the Securities Act will be subject to certain volume, manner
of sale and other limitations under Rules 144 and 145.
The remaining 6,852,966 shares of Progenitor Common Stock outstanding upon
completion of the IPO will be "restricted securities" as that term is defined in
Rule 144 ("Restricted Shares"). The Restricted Shares were issued and sold by
Progenitor 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 Progenitor's executive officers and
directors and certain stockholders, who collectively hold 1,264,647 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
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days from the date of the IPO Prospectus (the "IPO Prospectus") without the
prior written consent of Lehman Brothers. Interneuron will hold 4,848,374
Restricted Shares and has agreed pursuant to a lockup agreement not to offer,
sell or otherwise dispose of any of its Restricted Shares for a period of 365
days from the date of the IPO Prospectus without the prior written consent of
Lehman Brothers. Progenitor also has agreed that it will not offer, sell or
otherwise dispose of Progenitor Common Stock for a period of 180 days from the
date of the IPO Prospectus, other than pursuant to existing stock option plans,
without the prior written consent of Lehman Brothers. In addition, Amgen has
agreed not to offer, sell or otherwise dispose of, for a period of 180 days from
the date of the IPO Prospectus, any of the Amgen Shares without the prior
written consent of Progenitor, and Progenitor has agreed in the underwriting
agreement with the Underwriters that it will not grant such consent without the
prior written consent of Lehman Brothers. To date, holders of substantially all
outstanding shares of Mercator Capital Stock and options to purchase Mercator
Capital Stock have entered into Lockup Agreements with Progenitor pursuant to
which they have agreed not to offer, sell or otherwise dispose of shares of the
Progenitor Common Stock acquired in the Reorganization (including upon the
exercise of any Replacement Options after the Reorganization) without the prior
written consent of Lehman Brothers. Such restrictions lapse as to one-third of
all shares beneficially owned by a holder after each of 180 days, 270 days and
365 days following completion of the Reorganization. It is a condition to the
closing of the Reorganization that all stockholders and optionholders of
Mercator enter into such Lockup Agreements, although there can be no assurance
that such persons will do so.
Upon termination of the agreements described above, approximately 943,207,
711,857 and 6,207,290 of such shares will be eligible for immediate sale in the
public market beginning 181 days, 271 and 366 days, respectively, after the date
of the IPO Prospectus, subject to certain volume, manner of sale and other
limitations under Rules 144 and 145 and approximately 874,812, 14,622 and 14,621
of such shares will be eligible for immediate sale in the public market
beginning 181, 271 and 366 days after the date of the IPO Prospectus without
limitation under Rule 144(k). Lehman Brothers may, at any time without notice,
release all or any portion of the shares subject to such agreements.
As of June 20, 1997, options to purchase a total of 1,068,363 shares were
outstanding or to be outstanding under Progenitor's stock option plans
(including the 1997 Stock Option Plan). Of such shares, approximately 756,745,
124,307 and 124,306 shares are subject to lockup agreements for a period of 180
days, 270 days and 365 days from the date of the IPO Prospectus, and the
remaining 63,005 shares will be available for sale in the public market 90 days
after the date of the IPO Prospectus pursuant to Rule 701. As of June 20, 1997,
1,776,040 shares were available or were to be reserved for future option grants
under such plans and options to purchase 937,385 shares of Progenitor Common
Stock were to be granted under the 1996 Stock Incentive Plan upon the closing of
the IPO.
In general, under Rule 144, beginning 90 days after the effective date of
the IPO Prospectus, a person (or persons whose shares of Progenitor 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
Progenitor) 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 Progenitor Common Stock (approximately 106,150 shares
immediately after the IPO), or (ii) the average weekly trading volume of the
Progenitor 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 Progenitor. Under Rule 144(k), a person who is
not deemed to have been an affiliate of Progenitor 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 Progenitor) is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
Any employee, officer or director of or consultant to Progenitor who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701
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under the Securities Act, which permit non-affiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permit affiliates to sell
their Rule 701 shares without having to comply with Rule 144's holding period
restrictions, in each case commencing 90 days after the date of the IPO
Prospectus.
After the effective date of the IPO, Progenitor intends to file registration
statements on Form S-8 to register an aggregate of 695,463 shares of Progenitor
Common Stock reserved for issuance upon exercise of outstanding options, an
aggregate of 937,385 shares of Progenitor Common Stock reserved for issuance
pursuant to options to be granted upon the closing of the IPO with an exercise
price equal to the IPO Common Stock Price, an aggregate of 2,134,927 shares of
Progenitor Common Stock to be reserved for grants or awards under its 1992 Stock
Option Plan, 1996 Stock Incentive Plan and 1996 Employee Stock Purchase Plan and
an aggregate of 372,920 shares of Progenitor Common Stock subject to Replacement
Options that are reserved for issuance under its 1997 Stock Option Plan. Such
registration statements will become effective automatically upon filing. Shares
issued under the foregoing plans after the filing of the registration statements
on Form S-8 may be sold in the open market subject, in the case of certain
holders, to the Rule 144 limitations applicable to affiliates, the
above-referenced lockup agreements and vesting restrictions imposed by
Progenitor.
After the closing of the IPO, 45,865 shares of Progenitor 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 Progenitor
Securities--Registration Rights."
ABSENCE OF DIVIDENDS
Progenitor has never declared or paid cash dividends on the Progenitor
Common Stock. Progenitor 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.
THE MERCATOR SPECIAL MEETING
DATE, TIME AND PLACE
The Mercator Special Meeting will be held at the corporate offices of
Mercator, located at 4040 Campbell Avenue, Menlo Park, California 94025, on
, 1997 at :00 a.m., local time.
PURPOSE
At the Mercator Special Meeting, holders of Mercator Capital Stock will be
asked to consider and vote upon (i) the Reorganization Proposal to approve and
adopt the Reorganization Agreement and (ii) the Mercator Certificate Amendment
Proposal to amend the Certificate of Incorporation of Mercator such that (a) the
amount to which any shares of Mercator Capital Stock will be entitled in the
Reorganization will be equal to the amount provided in the Reorganization
Agreement, and (b) Mercator's Series D Preferred Stock will not be entitled to
vote with respect to the Reorganization or any of the other transactions
contemplated by the Reorganization Agreement or the Related Agreements (as
defined below). The purposes of the Mercator Certificate Amendment Proposal are
(i) to conform the allocation of consideration paid in connection with certain
events among the various classes and series of Mercator Capital Stock currently
provided in the Mercator Certificate of Incorporation to the allocation provided
in the Reorganization Agreement and (ii) to facilitate the desire of the holders
of the Venture Capital Bridge Notes to delay conversion of their notes until
immediately prior to the effective time of the Reorganization, which might not
be possible in the absence of the amendment. See "Amendment of Mercator
Certificate of Incorporation." There were no shares of Mercator Series D
Preferred Stock outstanding as of the Record Date, although the holders of the
Venture Capital Bridge Notes have agreed to convert their notes into shares of
Series D Preferred Stock effective immediately prior to the Effective Time.
Approval
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of the Mercator Certificate Amendment Proposal is one of the conditions to the
obligation of Progenitor to consummate the Reorganization. See "The
Reorganization," "The Reorganization Agreement" and "Amendment of Mercator
Certificate of Incorporation." Stockholders also will consider and vote upon any
other matters that may properly come before the Mercator Special Meeting.
Approval of the Reorganization Proposal at the Mercator Special Meeting as
described herein will act as adoption of the Reorganization Agreement and
approval of the Reorganization only to the extent that the purchase price for
outstanding shares of Mercator Capital Stock is paid in shares of Progenitor
Common Stock registered pursuant to the Registration Statement on Form S-4 of
which this Proxy Statement/Prospectus forms a part. Shares of Progenitor Common
Stock issuable upon exercise of Replacement Options issued in connection with
the Reorganization upon conversion of outstanding options to purchase Mercator
Common Stock will be registered pursuant to Registration Statements on Form S-8
to be filed by Progenitor after the Reorganization. In the event Progenitor
exercises its option, as provided in the Reorganization Agreement, to pay such
purchase price in a form other than shares of Progenitor Common Stock so
registered, additional information will be provided to Mercator stockholders,
optionholders and warrant holders, and new proxies will be solicited of Mercator
stockholders. See "The Reorganization--Alternative Consideration."
Approval of the Reorganization Proposal at the Mercator Special Meeting as
described herein also will act as adoption of the Reorganization Agreement and
approval of the Reorganization only to the extent that the Adjusted Purchase
Price is not less than $15 million. In the event the Adjusted Purchase Price is
to be less than $15 million, additional information will be provided to Mercator
stockholders, and new proxies will be solicited of Mercator stockholders. See
"The Reorganization--Adjusted Purchase Price Calculation; Indemnification;
Escrow."
RECORD DATE; PROXIES
Only holders of Mercator Common Stock and holders of Mercator's Series A,
Series B and Series C Preferred Stock at the close of business on the Record
Date are entitled to notice of and to vote at the Mercator Special Meeting.
All shares of Mercator Capital Stock represented by properly executed
proxies will be voted at the Mercator Special Meeting in accordance with the
directions on the proxies, unless such proxies have been previously revoked. IF
NO DIRECTION IS INDICATED, THE SHARES WILL BE VOTED FOR APPROVAL OF THE
REORGANIZATION PROPOSAL AND FOR APPROVAL OF THE MERCATOR CERTIFICATE AMENDMENT
PROPOSAL. Mercator does not know of any matters other than as described in the
Notice of Special Meeting that can come before the Mercator Special Meeting. If
any other matter or matters are properly presented for action at the Mercator
Special Meeting, the persons named in the enclosed form of proxy and acting
thereunder will have the discretion to vote on such matters in accordance with
their best judgment. Any stockholder giving a proxy may revoke his or her proxy
at any time before its exercise at the Mercator Special Meeting by filing
written notice of such revocation with the Secretary of Mercator, signing and
delivering to such Secretary a proxy bearing a later date, or attending the
Mercator Special Meeting and voting in person (the foregoing does not apply to
the proxies given under the Principal Stockholders Agreements). However, the
mere presence at the Mercator Special Meeting of a stockholder who has delivered
a valid proxy will not of itself revoke that proxy.
REQUIRED VOTE; VOTING RIGHTS; QUORUM
Under applicable law and the charter documents of Mercator, approval of each
of the Reorganization Proposal and the Mercator Certificate Amendment Proposal
may require the affirmative vote of the holders of a majority of each of (i) the
outstanding shares of Mercator Common Stock entitled to vote thereon at the
Mercator Special Meeting, (ii) the outstanding shares of Mercator Preferred
Stock, voting together as a single class, (iii) the outstanding shares of
Mercator Series A Preferred Stock, (iv) the
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outstanding shares of Mercator Series B Preferred Stock, (v) the outstanding
shares of Mercator Series C Preferred Stock and (vi) the outstanding shares of
Mercator Capital Stock, voting together as a single class (there having been no
shares of Mercator Series D Preferred Stock outstanding as of the Record Date),
all as entitled to vote thereon at the Mercator Special Meeting.
Holders of Mercator Common Stock are entitled to one vote per share, and
holders of Mercator Preferred Stock are entitled for each share of such
Preferred Stock to the number of votes equal to the number of shares of Mercator
Common Stock into which such share of Mercator Preferred Stock could be
converted (which, as of the Record Date, was one vote per each share of such
Preferred Stock). Abstentions will have the effect of votes against the approval
of the Reorganization Proposal and the Mercator Certificate Amendment Proposal.
The presence in person or by properly executed proxy of holders of a
majority of all of the outstanding shares of Mercator Common Stock entitled to
vote and a majority of all the outstanding shares of Mercator Preferred Stock
(each on an as-converted basis) entitled to vote is necessary to constitute a
quorum at the Mercator Special Meeting. Abstentions will be treated as shares
that are present at the Mercator Special Meeting for purposes of determining
whether a quorum exists.
As of the Record Date, there were 254,438 shares of Mercator Common Stock
issued and outstanding, held of record by 53 stockholders, 301,500 shares of
Mercator Series A Preferred Stock issued and outstanding, held of record by 3
stockholders, 3,207,996 shares of Mercator Series B Preferred Stock issued and
outstanding, held of record by 7 stockholders, and 4,526,317 shares of Mercator
Series C Preferred Stock issued and outstanding, held of record by 19
stockholders. There were no shares of Mercator Series D Preferred Stock
outstanding as of the Record Date.
As of June 20, 1997, directors and executive officers of Mercator and their
affiliates were beneficial owners of an aggregate of 33,500 shares of Mercator
Common Stock (exclusive of any shares issuable upon the exercise of stock
options remaining unexercised as of such date), or approximately 13.2% of the
254,438 shares of Mercator Common Stock issued and outstanding as of such date,
representing approximately 0.4% of the shares of Mercator Capital Stock (on an
as-converted basis) issued and outstanding as of such date. In addition, M.
Kathleen Behrens, Robert R. Momsen and Ann H. Lamont, directors of Mercator,
each have shared voting and investment power over shares held by respective
Principal Stockholders, that, as of such date, held, respectively, 2,799,999,
2,707,997 and 2,499,999 shares of Mercator Preferred Stock issued and
outstanding or, assuming the conversion of the Venture Capital Bridge Notes into
shares of Mercator Series D Preferred Stock, held, respectively, 3,173,131,
3,081,131 and 2,873,132 shares of Mercator Series D Preferred Stock. Each of Dr.
Behrens, Mr. Momsen and Ms. Lamont disclaims beneficial ownership of such
shares. Such shares represent, in the aggregate, as of the Record Date,
approximately 97% of the Mercator Capital Stock issued and outstanding as of
such date (assuming the conversion of the Venture Capital Bridge Notes into
shares of Mercator Series D Preferred Stock and the conversion of all Mercator
Preferred Stock into shares of Mercator Common Stock), and approximately 99.7%
of the Mercator Preferred Stock issued and outstanding as of such date (assuming
the conversion of the Venture Capital Bridge Notes into shares of Mercator
Series D Preferred Stock).
In addition, Progenitor has entered into a Principal Stockholder Agreement
with each Principal Stockholder pursuant to which each such stockholder has
agreed to vote or direct the vote of, and has granted an irrevocable proxy in
favor of Progenitor to vote, all shares of Mercator Capital Stock owned by it in
favor of (i) the Reorganization Proposal, (ii) approval of the Reorganization
Agreement and (iii) the Mercator Certificate Amendment Proposal and any other
matters contemplated by the Reorganization Agreement or incidental to the
Reorganization. Execution of the Principal Stockholder Agreements was required
to induce Progenitor and Merger Sub to enter into the Reorganization Agreement,
and no compensation was paid to any of the Principal Stockholders in
consideration for such Principal Stockholders to enter into such agreements. See
"The Reorganization--Principal Stockholder Agreements."
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The affirmative votes of the shares of Mercator Capital Stock held by the
Principal Stockholders will ensure that the Reorganization Proposal and the
Mercator Certificate Amendment Proposal are approved by the holders of a
majority of each of (i) the outstanding shares of Mercator Preferred Stock,
voting together as a single class, (ii) the outstanding shares of Mercator
Series A Preferred Stock, (iii) the outstanding shares of Mercator Series B
Preferred Stock, (iv) the outstanding shares of Mercator Series C Preferred
Stock and (v) the outstanding shares of Mercator Capital Stock, voting together
as a single class. Accordingly, only the holders of a majority of the
outstanding shares of Mercator Common Stock have not yet agreed to vote their
shares in favor of the Reorganization Proposal and the Mercator Certificate
Amendment Proposal.
SOLICITATION OF PROXIES
Proxies are being solicited by and on behalf of the Mercator Board of
Directors. Mercator will bear all expenses in connection with the solicitation
of proxies. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of Mercator in person or by
telephone, telegram or other means of communication. Such directors, officers
and employees will not be additionally compensated for, but may be reimbursed
for out-of-pocket expenses incurred in connection with, such solicitation.
APPRAISAL AND DISSENTERS' RIGHTS
Dissenters' rights under the CGCL and appraisal rights under the DGCL may be
available in connection with the Reorganization. Under the CGCL, the provisions
of California law relating to dissenters' rights purport to apply to the
Reorganization, to the exclusion of rights otherwise provided by the DGCL. In
the event that dissenters' rights under the CGCL or that appraisal rights under
the DGCL are available, a stockholder of Mercator must follow the appropriate
procedures in order to exercise such rights. See "Appraisal and Dissenters'
Rights of Mercator Stockholders" and "Applicability of California Law to
Mercator."
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THE REORGANIZATION
THIS SECTION OF THE PROXY STATEMENT/PROSPECTUS DESCRIBES CERTAIN ASPECTS OF
THE PROPOSED REORGANIZATION. TO THE EXTENT THAT IT RELATES TO THE REORGANIZATION
AGREEMENT AND THE TERMS OF THE REORGANIZATION, THE FOLLOWING DESCRIPTION DOES
NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
REORGANIZATION AGREEMENT, WHICH IS ATTACHED AS APPENDIX A TO THIS PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. ALL STOCKHOLDERS
ARE URGED TO READ THE REORGANIZATION AGREEMENT.
GENERAL
The Reorganization Agreement provides that the Reorganization will be
consummated if the approval of Mercator stockholders required therefor is
obtained and all other conditions to the Reorganization are satisfied or waived
as provided in the Reorganization Agreement. Upon consummation of the
Reorganization, Merger Sub will be merged with and into Mercator, and Mercator
will be the Surviving Corporation. Effective at the Effective Time, the
Certificate of Incorporation of Mercator will be amended to the maximum extent
permissible in order to conform to the terms of the Certificate of Incorporation
of Merger Sub (other than with respect to the name of the Surviving Corporation)
and such amended Certificate of Incorporation will be the Certificate of
Incorporation of the Surviving Corporation until duly amended, and the Bylaws of
the Merger Sub will be the Bylaws of the Surviving Corporation until duly
amended. The directors and officers of Merger Sub will be the initial directors
and officers of Surviving Corporation following consummation of the
Reorganization.
EXCHANGE RATIOS
Upon consummation of the Reorganization, each issued and outstanding share
of Mercator Capital Stock (other than Excluded Shares) will be converted into
the right to receive a number of shares of Progenitor Common Stock, determined
as follows.
The Adjusted Purchase Price will be an amount equal to $22 million, less (i)
both (A) the total amount by which Total Mercator Reorganization Expenses (as
defined below) exceed $800,000 and (B) the total amount by which Total Mercator
IPO Expenses (as defined below) exceed $50,000 (see "--REDUCTIONS FOR CERTAIN
EXPENSES"), and less (ii) the amount, if any, of indemnification claims by
Progenitor and various indemnitees for certain breaches of the covenants,
representations and warranties of Mercator in the Reorganization Agreement. See
"--Adjusted Purchase Price Calculation; Indemnification; Escrow."
The aggregate Adjusted Purchase Price will be allocated among the shares of
the various classes and series of Mercator Capital Stock and outstanding options
and warrants in accordance with the following formula (subject to adjustment as
provided below (see "--ADJUSTMENT OF EXCHANGE RATIOS FOR ADJUSTED PURCHASE
PRICE")), so that each share will be entitled to receive the Per Share
Consideration allocable to it as follows:
(i) Mercator Common Stock: (x) 15.90% of the Adjusted Purchase Price,
divided by (y) the number of shares of Mercator Common Stock plus all shares
of Mercator Common Stock subject to options outstanding at the Effective
Time.
(ii) Mercator Series A Convertible Preferred Stock: (x) 14.75% of the
Adjusted Purchase Price, divided by (y) the number of shares of Mercator
Series A Preferred Stock plus the shares of Mercator Series A Preferred
Stock subject to warrants issued to Phoenix Leasing Incorporated ("Phoenix
Warrants") outstanding at the Effective Time.
(iii) Mercator Series B Convertible Preferred Stock: (x) 39.07% of the
Adjusted Purchase Price, divided by (y) the number of shares of Mercator
Series B Preferred Stock plus the shares of Series B Preferred Stock subject
to the Phoenix Warrants outstanding at the Effective Time.
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<PAGE>
(iv) Mercator Series C Convertible Preferred Stock: (x) 23.46% of the
Adjusted Purchase Price, divided by (y) the number of shares of Mercator
Series C Preferred Stock outstanding at the Effective Time.
(v) Mercator Series D Convertible Preferred Stock: (x) 6.82% of the
Adjusted Purchase Price, divided by (y) the number of shares of Mercator
Series D Preferred Stock outstanding at the Effective Time.
As of June 20, 1997, the numbers of shares of the various classes and series
of Mercator Capital Stock outstanding or subject to options or warrants were as
follows:
254,438 shares of Mercator Common Stock;
301,500 shares of Mercator Series A Preferred Stock;
3,207,996 shares of Mercator Series B Preferred Stock;
4,526,317 shares of Mercator Series C Preferred Stock;
0 shares of Mercator Series D Preferred Stock;
2,729,179 shares of Mercator Common Stock subject to options to purchase;
17,850 shares of Mercator Series A Preferred Stock subject to the
Phoenix Warrants; and
46,800 shares of Mercator Series B Preferred Stock subject to the
Phoenix Warrants.
In addition, there were outstanding notes totaling $1,499,999.99 convertible
into debt or preferred stock of Mercator (collectively, the "Venture Capital
Bridge Notes"). Each of the Venture Capital Bridge Notes is held by a Principal
Stockholder, and the Principal Stockholders, in the Principal Stockholder
Agreements, have each agreed to convert such Notes prior to the Effective Time
into that number of shares of Mercator Series D Preferred Stock with a value
equal to the face value of the amount of such Notes (without any premium,
interest or other additional amount), with such shares of Series D Preferred
Stock being valued at $1.34 per share. Such conversion would result in 1,119,399
shares of Series D Preferred Stock outstanding, and is a condition to
Progenitor's obligation to consummate the Reorganization. See "--Principal
Stockholder Agreements."
The Reorganization Agreement does not preclude Mercator from issuing
additional options to purchase shares of Mercator Common Stock. Any additional
options so issued will reduce the Per Share Consideration (and, consequently,
the Exchange Ratio) applicable to Mercator Common Stock and the options to
acquire Mercator Common Stock.
The Exchange Ratios for each class and series of Mercator Capital Stock will
be equal to the Per Share Consideration for such class or series, divided by the
IPO Common Stock Price. The IPO Registration Statement currently contemplates
that the IPO Unit Price will be between $10.00 and $12.00 per share, although
there can be no assurance that the actual IPO Unit Price will not be above or
below such range. Based on an IPO Unit Price of $11.00, it is contemplated that
the IPO Common Stock Price will be $8.50, although there can be no assurance
that the IPO Unit Price will be $11.00 or that the IPO Common Stock Price will
be $8.50.
REDUCTIONS FOR CERTAIN EXPENSES. For purposes of determining the Purchase
Price, the following terms have the following meanings:
"Total Mercator Reorganization Expenses" means all expenses incurred or paid
by Mercator, or which Mercator is legally obligated to pay or reimburse, in
connection with the Reorganization, including, without limitation, all legal and
investment banking fees (excluding $75,000 in fees to be paid to Lehman Brothers
in the form of shares of Mercator Common Stock) and costs, one-half of all
accounting fees and costs, and all out-of-pocket costs incurred for
photocopying, mailing, courier service, travel or government fees and filing
service fees related to the Reorganization.
"Total Mercator IPO Expenses" means all expenses incurred or paid by
Mercator, or which Mercator is legally obligated to pay or reimburse, in
connection with the IPO, except for expenses requested by Progenitor. Total
Mercator IPO Expenses includes (i) costs, fees and expenses of any accountants'
comfort
45
<PAGE>
letter to be delivered to the Underwriters and of any audit by Mercator's
accountants of its financial statements, and (ii) costs, fees and expenses of
Mercator's patent counsel with respect to expertising portions of the IPO
Registration Statement relating to Mercator's intellectual property rights, but
do not include any accounting fees and costs incurred by Mercator as a result of
complying with certain requirements of the Reorganization Agreement.
Mercator has agreed that, prior to the closing of the Reorganization, it
will provide Progenitor with (i) final invoices by every law firm, investment
banking firm and accounting firm that provided services to or on behalf of
Mercator and its stockholders in connection with the Reorganization and the IPO,
(ii) final or estimated written statements for any other expenses related to the
Reorganization and the IPO known to Mercator and includible in Total Mercator
Reorganization Expenses and Total Mercator IPO Expenses, and (iii) a written
representation that the foregoing invoices and written statements constitute all
of the expenses includible in Total Mercator Reorganization Expenses and Total
Mercator IPO Expenses.
Mercator has informed Progenitor that, as of the date of this Proxy
Statement/Prospectus, expenses includible in Total Mercator Reorganization
Expenses and Total Mercator IPO Expenses actually incurred were $790,000 and
$38,500, respectively, and that an additional $25,000 of expenses includible in
Total Mercator Reorganization Expenses and $15,000 of expenses includible in
Total Mercator IPO Expenses were expected to be incurred prior to the Effective
Time. Based on such information, an adjustment of approximately $19,000 is
anticipated as of the date of this Proxy Statement/Prospectus. However, there
can be no assurance that actual Total Mercator Reorganization Expenses or Total
Mercator IPO Expenses will not be greater than such amounts or that the actual
adjustment will not be greater than the stated amount.
ADJUSTMENT OF EXCHANGE RATIOS FOR ADJUSTED PURCHASE PRICE. The percentages
of the Adjusted Purchase Price allocable to each class or series of Mercator
Capital Stock as set forth above are calculated assuming an Adjusted Purchase
Price of $22 million. If the Adjusted Purchase Price is less than $22 million
(see "--Adjusted Purchase Price Calculation; Indemnification; Escrow"), then the
percentages would be adjusted as follows:
(i) For Mercator Common Stock, if the Adjusted Purchase Price is between
$18 and $22 million, the applicable percentage would be prorated between 10%
and 15.90% (10% in the case of $18 million and 15.90% in the case of $22
million) and, if the Adjusted Purchase Price is less than $18 million, the
applicable percentage would be 10%. The formula for determining the
applicable percentage thus is (1.475x - 16,550,000) DIVIDED BY 1,000,000,
where x is the amount of the Adjusted Purchase Price, provided that the
applicable percentage shall not be less than 10%.
(ii) For Series D Preferred Stock, the applicable percentage would be
such percentage as would result in an aggregate payment of $1.5 million.
Accordingly, the applicable percentage will be calculated as an amount equal
to $1.5 million divided by the Adjusted Purchase Price.
(iii) The remaining percentage of the Adjusted Purchase Price (after
deducting from 100% the percentages applicable to the Mercator Common Stock
and Mercator Series D Preferred Stock described above) would be apportioned
among the Mercator Series A, Series B and Series C Preferred Stock in order
to return the original investment amount to each such series of Mercator
Preferred Stock on a pro rata basis up to 100% of such original investment
amount (i.e., any shortfall to be borne pro rata by each series based upon
the original investment amount for such series), and any excess above such
original investment will be shared pro rata based upon the number of
outstanding shares of Mercator Series A, Series B and Series C Preferred
Stock (including any shares
46
<PAGE>
subject to outstanding warrants) at the Effective Time, in each case
assuming the following original investment amounts and the following
outstanding share numbers:
<TABLE>
<CAPTION>
ORIGINAL % OF A,B & C
INVESTMENT ORIGINAL % A,B&C
SERIES AMOUNT INVESTMENT NO. SHARES SHARES
- ---------- ---------------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
A $3,193,500 20.1396% 319,350 3.94%
($10.00/share)
B $8,136,990 51.315438% 3,254,796 40.18%
($2.50/share)
C $4,526,317 28.5449% 4,526,317 55.88%
($1.00/share)
---------------- ------------- ---------- -----------
TOTAL: $15,856,807 100% 8,100,463 100%
</TABLE>
In the event that any portion of the Adjusted Purchase Price is subject to
holdback and deposit into Escrow (see "--Adjusted Purchase Price Calculation;
Indemnification; Escrow"), the above percentages will be calculated based upon
the amount of the Adjusted Purchase Price not subject to holdback. Any
subsequent release of Progenitor Common Stock from the Escrow holdback will be
calculated in a manner to result in a net adjustment in the above percentages
based upon what would be the new Adjusted Purchase Price after giving effect to
the release of Progenitor Common Stock from Escrow.
Exhibit A to the Reorganization Agreement, which sets forth the formula for
adjusting the allocation of the Adjusted Purchase Price among the various
classes and series of Mercator Capital Stock in the event the Adjusted Purchase
Price is less than $22 million, is attached to this Proxy Statement/Prospectus
as Appendix C. Such Exhibit A provides additional examples of the percentages
applicable for allocating the Adjusted Purchase Price among the various classes
and series of Mercator Capital Stock applicable for different Adjusted Purchase
Prices.
In no event will the amount paid by Progenitor for all of the outstanding
Mercator Capital Stock (including shares of Progenitor Common Stock reserved for
issuance upon exercise of outstanding options and warrants to purchase Mercator
Capital Stock assumed in the Reorganization) exceed the Adjusted Purchase Price.
Approval of the Reorganization Proposal at the Mercator Special Meeting as
described herein will act as adoption of the Reorganization Agreement and
approval of the Reorganization only to the extent that the Adjusted Purchase
Price is not less than $15 million. In the event the Adjusted Purchase Price is
to be less than $15 million, additional information will be provided to Mercator
stockholders, and new proxies will be solicited of Mercator stockholders.
ILLUSTRATIVE EXCHANGE RATIOS. Set forth below are four examples of the
respective Exchange Ratios and corresponding Per Share Consideration that might
result from different Adjusted Purchase Prices. Each example assumes that (i)
the IPO Common Stock Price is $8.50, (ii) the Venture Capital Bridge Notes are
converted prior to the Effective Time into a total of 1,119,399 shares of
Mercator Series D Preferred Stock and (iii) other than the Series D Preferred
Stock referred to in the preceding clause, no additional shares of Mercator
Capital Stock or options or warrants to purchase any shares of Mercator Capital
Stock are issued after June 20, 1997. However, there can be no assurance that
such assumptions will be true at the Effective Time, or that the purchase price
(or the Adjusted Purchase Price) will not be less than the amounts used in the
illustrations below. The amounts of Exchange Ratios and Per Share Consideration
given below and elsewhere in this Proxy Statement/Prospectus have been rounded
for proposes of this discussion.
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<PAGE>
1. Adjusted Purchase Price of $22 Million
Assuming that there are no reductions or adjustments to the Purchase Price,
such that the Adjusted Purchase Price is $22 million, the Exchange Ratio and Per
Share Consideration for each of the respective classes and series of Mercator
Capital Stock would be as follows:
<TABLE>
<CAPTION>
EXCHANGE PER SHARE
CLASS OR SERIES OF MERCATOR CAPITAL STOCK RATIO CONSIDERATION
- -------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Common Stock........................................................ 0.1379 $ 1.17
Series A Preferred.................................................. 1.1954 $ 10.16
Series B Preferred.................................................. 0.3107 $ 2.64
Series C Preferred.................................................. 0.1341 $ 1.14
Series D Preferred.................................................. 0.1577 $ 1.34
</TABLE>
2. Adjusted Purchase Price of $21 Million
If there are reductions or adjustments to the Purchase Price such that the
Adjusted Purchase Price is $21 million, the Exchange Ratio and Per Share
Consideration for each of the respective classes and series of Mercator Capital
Stock would be as follows:
<TABLE>
<CAPTION>
EXCHANGE PER SHARE
CLASS OR SERIES OF MERCATOR CAPITAL STOCK RATIO CONSIDERATION
- -------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Common Stock........................................................ 0.1194 $ 1.02
Series A Preferred.................................................. 1.1854 $ 10.08
Series B Preferred.................................................. 0.3030 $ 2.58
Series C Preferred.................................................. 0.1266 $ 1.08
Series D Preferred.................................................. 0.1577 $ 1.34
</TABLE>
3. Adjusted Purchase Price of $19.8 Million
If there are reductions or adjustments to the Purchase Price such that the
Adjusted Purchase Price is $19.8 million, the Exchange Ratio and Per Share
Consideration for each of the respective classes and series of Mercator Capital
Stock would be as follows:
<TABLE>
<CAPTION>
EXCHANGE PER SHARE
CLASS OR SERIES OF MERCATOR CAPITAL STOCK RATIO CONSIDERATION
- -------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Common Stock........................................................ 0.0988 $ 0.84
Series A Preferred.................................................. 1.1718 $ 9.96
Series B Preferred.................................................. 0.2930 $ 2.49
Series C Preferred.................................................. 0.1172 $ 1.00
Series D Preferred.................................................. 0.1577 $ 1.34
</TABLE>
4. Adjusted Purchase Price of $15 Million
If there are reductions or adjustments to the Purchase Price such that the
Adjusted Purchase Price is $15 million, the Exchange Ratio and Per Share
Consideration for each of the respective classes and series of Mercator Capital
Stock would be as follows:
<TABLE>
<CAPTION>
EXCHANGE PER SHARE
CLASS OR SERIES OF MERCATOR CAPITAL STOCK RATIO CONSIDERATION
- -------------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Common Stock........................................................ 0.0591 $ 0.50
Series A Preferred.................................................. 0.8903 $ 7.57
Series B Preferred.................................................. 0.2226 $ 1.89
Series C Preferred.................................................. 0.0890 $ 0.76
Series D Preferred.................................................. 0.1577 $ 1.34
</TABLE>
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<PAGE>
The amount of the IPO Common Stock Price is not a condition to Mercator's
obligation to consummate the Reorganization, and approval of the Reorganization
Proposal and the Reorganization Agreement as described in this Proxy
Statement/Prospectus will constitute such approval regardless of the actual
amount of the IPO Common Stock Price. However, as also discussed above, the
actual IPO Common Stock Price will affect only the number of shares of
Progenitor Common Stock to be issued to each Mercator stockholder, and will not
affect the value of the aggregate number of such shares.
THE EXCHANGE RATIO AND PER SHARE CONSIDERATION APPLICABLE TO EACH CLASS OR
SERIES OF MERCATOR CAPITAL STOCK WILL BE DEPENDENT UPON A NUMBER OF VARIABLES
THAT CANNOT BE DETERMINED UNTIL THE EFFECTIVE TIME, INCLUDING THE AMOUNT OF ANY
REDUCTIONS IN OR ADJUSTMENTS TO THE PURCHASE PRICE, THE NUMBER OF SHARES OF
MERCATOR CAPITAL STOCK OUTSTANDING AT THE EFFECTIVE TIME, THE NUMBER OF SHARES
OF MERCATOR CAPITAL STOCK SUBJECT TO OPTIONS OR WARRANTS OUTSTANDING AS OF THE
EFFECTIVE TIME, AND THE IPO COMMON STOCK PRICE. ACCORDINGLY, IT IS NOT POSSIBLE
TO DETERMINE IN ADVANCE THE EXACT EXCHANGE RATIOS THAT ACTUALLY WILL APPLY IN
THE REORGANIZATION. SEE "RISK FACTORS--UNCERTAINTIES REGARDING THE IPO AND
EXCHANGE RATIOS" AND "INITIAL PUBLIC OFFERING."
CASH IN LIEU OF FRACTIONAL SHARES. Fractional shares of Progenitor Common
Stock will not be issued in connection with the Reorganization. A holder of
Mercator Capital Stock otherwise entitled to a fractional share of Progenitor
Common Stock will be paid cash in lieu of such fractional share in an amount
equal to the product of such fraction multiplied by the IPO Common Stock Price.
ADJUSTED PURCHASE PRICE CALCULATION; INDEMNIFICATION; ESCROW
The Adjusted Purchased Price will be an amount equal to $22 million less
both (i) Excess Expenses, and (ii) subject to the terms of the Reorganization
Agreement, any Losses incurred or suffered by Progenitor, the Surviving
Corporation, Merger Sub and each of their officers, directors, employees,
agents, representatives and affiliates (collectively, the "Progenitor
Indemnitees" and individually each a "Progenitor Indemnitee"). The Maximum
Indemnification Reduction for Losses is $2.2 million. Mercator and the Mercator
stockholders, option holders and warrant holders are required to indemnify the
Progenitor Indemnitees against such Losses by means of an adjustment to the
Adjusted Purchase Price and the related holdback Escrow of a portion of the
Adjusted Purchase Price.
The purchase price for all shares of Mercator Capital Stock and all options
and warrants to purchase Mercator Capital Stock, assuming no adjustments, thus
will be $22 million. The Reorganization Agreement does not provide for a minimum
Adjusted Purchase Price, although the Maximum Indemnification Reduction acts as
a cap for Losses, so that the minimum purchase price is $19.8 million, less the
Excess Expenses. With respect to the adjustment for Losses, as of the date
hereof, Progenitor is not aware of any breaches of representations, warranties
or covenants for which it currently intends to seek indemnification (although
there can be no assurance that Progenitor will not become aware of, and seek
indemnification for, any such breaches prior to the Closing Date). With respect
to the adjustment for Excess Expenses, Mercator believes that, as of the date
hereof, it has not incurred any Excess Expenses, and estimates that it may incur
approximately $19,000 in Excess Expenses prior to the Effective Time (although
there can be no assurance that Mercator will not incur a larger amount of Excess
Expenses prior to the Effective Time), so that, assuming no claims for Losses or
additional Excess Expenses arise prior to the Effective Time, the Adjusted
Purchase Price would be $21,981,000 or, assuming claims for Losses arise such
that the Maximum Indemnification Reduction is applied, but that no claims for
additional Excess Expenses arise, $19,781,000. Although the amount of the actual
Adjusted Purchase Price is not a condition to Mercator's obligation to
consummate the Reorganization, this Proxy Statement/Prospectus assumes that the
Adjusted Purchase Price will be at least $15 million. For an illustration of
Exchange Ratios and Per Share Consideration that would apply in the event the
Adjusted Purchase Price is $15 million, see "The Reorganization--Exchange
Ratios--Illustrative Exchange Ratios." If the Adjusted Purchase Price is less
than $15 million, additional information will be provided to holders of Mercator
Capital Stock and separate proxies will be solicited.
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<PAGE>
In certain circumstances relating to the breach by Mercator of any of the
covenants, representations and warranties by Mercator in the Reorganization
Agreement and the Related Agreements, Progenitor may elect to terminate the
Reorganization Agreement and not consummate the Reorganization. See "The
Reorganization Agreement--Conditions" and "--Termination."
Losses will only be counted as a reduction to the purchase price or
otherwise be indemnifiable through the Escrow if the aggregate amount of Losses
exceeds $100,000 (the "Threshold Amount"), in which case Losses shall be counted
or indemnifiable to the full amount, including the initial $100,000 (but subject
in any event to the limit of the Maximum Indemnification Reduction). Progenitor
Indemnitees must submit their claims for Losses prior to the Effective Time to
be eligible for a reduction to the purchase price or indemnification through the
Escrow.
Losses asserted by Progenitor and agreed by Mercator prior to the Effective
Time will result in an adjustment to the Adjusted Purchase Price in the agreed
amount, assuming the agreed amount exceeds the Threshold Amount. If unresolved
or unliquidated claims remain at the Effective Time that (together with any
amount of Losses agreed by Progenitor and Mercator prior to the Effective Time
that did not result in a reduction to the purchase price) exceed the Threshold
Amount, then Progenitor will deposit into the Escrow shares of Progenitor Common
Stock otherwise to be delivered to Mercator security holders in connection with
the Reorganization with a value (determined by reference to the IPO Common Stock
Price) equal to 110% of the amount of such unresolved or unliquidated claims
(plus any agreed claims not indemnified through a reduction in the purchase
price), subject to a maximum amount equal to the Maximum Indemnification
Reduction minus any reduction in the purchase price on account of Losses. The
shares to be held in Escrow will be determined on an individual recipient basis,
pro rata according to such person's allocable portion of the Adjusted Purchase
Price.
If shares of Progenitor Common Stock are deposited into the Escrow in
respect of unresolved or unliquidated claims, the Mercator Representative will
act as agent and representative of Mercator stockholders and optionholders to
negotiate with Progenitor in order to resolve each claim. Mr. Momsen, the
Mercator Representative, is a member of the Mercator Board of Directors and is a
General Partner of InterWest Partners V and InterWest Investors V, both of which
are stockholders of Mercator. Following consummation of the Reorganization, Mr.
Momsen will become a member of the Progenitor Board of Directors.
The Escrow will be subject to the terms and conditions of the Reorganization
Agreement and the Escrow Agreement in substantially the form of Exhibit B to the
Reorganization Agreement, a copy of which is attached as Appendix B hereto. The
Mercator Representative will be entitled on behalf of all Mercator stockholders
and optionholders to negotiate with Progenitor and to settle or agree with
Progenitor with respect to such claims, and to take certain other actions as
described in the Reorganization Agreement and the Escrow Agreement. If
Progenitor and the Mercator Representative cannot resolve each claim within a
specified period, either Progenitor or the Mercator Representative may submit
the dispute to binding arbitration. Upon the resolution of any claim, the escrow
agent will distribute to Progenitor or the Progenitor Indemnitee a number of
shares of Progenitor Common Stock with a value (determined by reference to the
IPO Common Stock Price) equal to the agreed amount of the claim to which
Progenitor or such Progenitor Indemnitee is entitled, and will distribute to
Mercator stockholders (and to Progenitor to hold as reserved for issuance in
respect of portions of the Escrow Consideration allocated to Mercator options or
warrants) all shares of Progenitor Common Stock remaining in the Escrow that are
not reserved for other claims not resolved as of such time.
Progenitor, Mercator and the Mercator Representative have agreed in the
Escrow Agreement to use commercially reasonable efforts to cause all claims
under the Escrow Agreement to be resolved prior to the six month anniversary of
the Effective Time.
BY VOTING TO APPROVE THE REORGANIZATION PROPOSAL, SURRENDERING
CERTIFICATE(S) EVIDENCING MERCATOR CAPITAL STOCK OR ACCEPTING OPTIONS OR
WARRANTS FOR SHARES OF PROGENITOR COMMON STOCK, EACH STOCKHOLDER OF
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<PAGE>
MERCATOR, OTHER THAN HOLDERS OF DISSENTING SHARES, AND EACH HOLDER OF MERCATOR
OPTIONS OR WARRANTS TO PURCHASE MERCATOR CAPITAL STOCK, AGREES THAT (I) THE
CONSIDERATION TO WHICH SUCH HOLDER IS OTHERWISE ENTITLED IN CONNECTION WITH THE
REORGANIZATION IS SUBJECT TO AN ADJUSTMENT TO THE PURCHASE PRICE AND TO THE
ESCROW, AS AND TO THE EXTENT APPLICABLE, (II) SHARES OF PROGENITOR COMMON STOCK
OTHERWISE REPRESENTING THE HOLDER'S PORTION OF THE ADJUSTED PURCHASE PRICE WILL
BE PLACED IN THE ESCROW IN RESPECT OF ALL CLAIMS FOR LOSSES WHICH ARE MADE
BEFORE THE EFFECTIVE TIME AND NOT RESOLVED AT THE EFFECTIVE TIME (TOGETHER WITH
A 10% MARGIN, BUT IN AGGREGATE, TOGETHER WITH ANY REDUCTION TO THE PURCHASE
PRICE ACTUALLY EFFECTED ON ACCOUNT OF LOSSES, NOT TO EXCEED THE MAXIMUM
INDEMNIFICATION REDUCTION), PURSUANT TO THE REORGANIZATION AGREEMENT AND THE
ESCROW AGREEMENT, AS OF THE EFFECTIVE TIME, (III) THE MERCATOR REPRESENTATIVE IS
AUTHORIZED TO ACT AS AGENT OF THE HOLDER AND TO TAKE CERTAIN ACTIONS ON ITS
BEHALF WITH RESPECT TO THE SHARES OF PROGENITOR COMMON STOCK DEPOSITED IN OR
SUBJECT TO THE ESCROW, AS DESCRIBED ABOVE AND AS CONTEMPLATED BY THE
REORGANIZATION AGREEMENT AND THE ESCROW AGREEMENT, AND (IV) THE ESCROW AGENT IS
AUTHORIZED FROM TIME TO TIME TO DELIVER ALL OR ANY PORTION OF THE SHARES OF
PROGENITOR COMMON STOCK SO DEPOSITED IN SATISFACTION OF THE OBLIGATIONS
DESCRIBED ABOVE AND AS CONTEMPLATED IN THE ESCROW AGREEMENT.
EFFECTIVE TIME
The Effective Time will occur upon the filing of a Certificate of Merger
(the "Certificate of Merger") with the Secretary of State of the State of
Delaware or at such later time as is specified on such certificate. The filing
of the Certificate of Merger will occur as soon as practicable after the closing
of the transactions contemplated by the Reorganization Agreement.
The Reorganization Agreement will be terminated automatically if the
Reorganization has not been consummated on or before the Agreement Deadline and
under certain other conditions. The initial Agreement Deadline was May 31, 1997,
but was extended at the election of Progenitor in accordance with the terms of
the Reorganization Agreement to June 30, 1997 and subsequently to July 31, 1997,
when Progenitor committed to provide to Mercator the Initial Supplemental
Funding and the Second Supplemental Funding, respectively. The Reorganization
Agreement does not contemplate any further extension of the Agreement Deadline.
However, the Agreement Deadline may be extended, without any additional
consideration and without any further vote of Mercator stockholders, upon the
agreement of the parties to the Reorganization Agreement in the event the IPO is
postponed beyond the currently contemplated Agreement Deadline or for other
reasons as such parties may agree. See "The Reorganization
Agreement--Conditions" and "--Termination."
STOCK OWNERSHIP FOLLOWING THE REORGANIZATION
Based upon the capitalization of Progenitor and Mercator as of June 20,
1997, (i) assuming conversion by the holders of the Venture Capital Bridge Notes
of all such Notes into shares of Mercator Series D Preferred Stock, (ii) an
Adjusted Purchase Price of $22 million, (iii) an IPO Common Stock Price of
$8.50, (iv) the sale in the IPO of 2,750,000 Progenitor Units, (v) the sale
concurrently with the closing of the IPO of 500,000 shares of Progenitor Common
Stock to Amgen, pursuant to the Amgen Purchase Agreement, and 25,000 shares of
Progenitor Common Stock to The Ohio University Foundation, pursuant to a stock
purchase right, and (vi) the issuance of 24,020 shares of Progenitor Common
Stock to The Ohio University Foundation pursuant to an anti-dilution adjustment
in connection with the IPO, and (vii) the conversion of the Interneuron Bridge
Loan into shares of Progenitor Series D Preferred Stock, the stockholders of
Mercator will own approximately 18.7% of the outstanding Progenitor Common Stock
following consummation of the Reorganization, the IPO and the sales of
Progenitor Common Stock to be completed concurrently with the IPO, or
approximately 18.2%, if the Underwriters' over-allotment option is exercised in
full (in each case assuming exercise of all then outstanding options and
warrants to acquire Progenitor Common Stock, including former options and
warrants to purchase Mercator Common Stock assumed by Progenitor, but assuming
no exercise of the Progenitor Warrants).
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The above percentages could change depending on whether and to what extent
shares of Progenitor Common Stock and Mercator Common Stock issuable upon
exercise of outstanding Progenitor or Mercator stock options or warrants are
issued and whether any Mercator stockholders perfect any applicable statutory or
dissenters' rights. There also can be no assurance that Progenitor will not
elect to issue additional shares of Progenitor Common Stock prior to the IPO or
that the number of shares of Progenitor Common Stock to be issued in or
concurrently with the IPO will be the 2,750,000 shares currently contemplated to
be issued as part of Progenitor Units. IF THE IPO UNIT PRICE IS LESS THAN
$11.00, OR IF THE IPO COMMON STOCK PRICE IS MORE OR LESS THAN $8.50, OR IF MORE
PROGENITOR UNITS OR SHARES OF PROGENITOR COMMON STOCK ARE ISSUED IN OR
CONCURRENTLY WITH THE IPO, EITHER AS A RESULT OF SUCH LOWER IPO UNIT PRICE OR
IPO COMMON STOCK PRICE OR FOR ANY OTHER REASON, THE PERCENTAGES OF THE TOTAL
OUTSTANDING SHARES OF PROGENITOR COMMON STOCK AFTER CONSUMMATION OF THE
REORGANIZATION AND THE IPO TO BE HELD BY FORMER HOLDERS OF MERCATOR SECURITIES
MAY DIFFER, AND MAY BE DECREASED. See "Risk Factors--Uncertainties Regarding the
IPO, the IPO Common Stock Price and Exchange Ratios" and "--Control of
Progenitor by, and Potential Conflicts of Interest with, Interneuron," "Initial
Public Offering" and "Comparison of Stockholder Rights." The number of shares of
Progenitor Common Stock outstanding at or after the Effective Time, and the
percentages described above, also may be affected by other transactions that
Progenitor may enter into before or after the Effective Time.
CONVERSION OF SHARES
Except for Excluded Shares, the conversion of Mercator Capital Stock into
the right to receive Progenitor Common Stock and cash in lieu of fractional
shares will occur automatically at the Effective Time.
NASDAQ NATIONAL MARKET LISTING
There currently is no public trading market for Progenitor Common Stock.
Application has been made to list the Progenitor Common Stock issued in
connection with the Reorganization and the IPO on the Nasdaq National Market
("Nasdaq") under the symbol "PGEN," and to list the Progenitor Warrants on the
Nasdaq under the symbol "PGENW."
ALTERNATIVE CONSIDERATION
Pursuant to the Reorganization Agreement, Progenitor has the option, in its
discretion, of paying the Adjusted Purchase Price in cash or, in the event
Progenitor elects not to consummate the IPO but elects to consummate the
Reorganization, in unregistered shares of Progenitor Common Stock or in public
equity securities mutually acceptable to Progenitor and Mercator. Any form of
consideration used to pay the Adjusted Purchase Price will be subject to the
terms and conditions of the Reorganization Agreement and the Related Agreements,
including, without limitation, the escrow provisions thereof.
CASH. Progenitor has the option, at any time (prior to the Agreement
Deadline), to acquire Mercator by paying the Adjusted Purchase Price in cash,
rather than in shares of Progenitor Common Stock. If Progenitor elects to
acquire Mercator by payment of cash:
(i) the Reorganization will be structured as a reverse triangular
merger, in which the Per Share Consideration applicable to each class of
Mercator Capital Stock will be paid in cash;
(ii) options (both vested and unvested) and warrants to acquire Mercator
Capital Stock shall be "cashed out" at the applicable Per Share
Consideration for the underlying capital stock net of any exercise price for
such options or warrants; and
(iii) terms and conditions of the Reorganization Agreement that would not
be applicable in a cash-out merger, such as the requirement for the delivery
of opinions of tax counsel, shall not be applicable.
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UNREGISTERED SHARES OF PROGENITOR COMMON STOCK. If Progenitor elects not to
consummate the IPO, Progenitor will have the option to acquire Mercator (prior
to the Agreement Deadline) by paying the Adjusted Purchase Price with
unregistered shares of Progenitor's capital stock. If Progenitor elects such
option, such substitution of consideration will be subject to terms and
conditions to be agreed upon by Progenitor and Mercator regarding the Progenitor
capital stock to be issued and the method for determining the appropriate
valuation thereof, and Progenitor will execute a registration rights agreement
on behalf of each Mercator stockholder as contemplated by the Reorganization
Agreement.
OTHER PUBLIC EQUITY. If Progenitor elects not to consummate the IPO,
Progenitor will have the option to acquire Mercator (prior to the Agreement
Deadline) by paying the Adjusted Purchase Price, or causing the Adjusted
Purchase Price to be paid, with public equity securities mutually acceptable to
Progenitor and Mercator ("Optional Public Equity"). In the event of such
election, the terms and conditions of the Reorganization Agreement will remain
applicable to the maximum extent practicable to the reorganization by which such
Optional Public Equity is issued, including the Per Share Consideration
applicable to such shares of Mercator Capital Stock, the substitution of
warrants and options to acquire the Optional Public Equity in lieu of Mercator
Capital Stock and the other related obligations provided for in the
Reorganization Agreement concerning the registration with the Commission of the
issuance of such Optional Public Equity. In addition, in such event, Mercator
will receive representations and warranties from the issuer of such Optional
Public Equity that are substantially similar to those representations and
warranties given by Progenitor in the Reorganization Agreement.
THIS PROXY STATEMENT/PROSPECTUS ASSUMES THAT THE ADJUSTED PURCHASE PRICE
WILL BE PAID IN REGISTERED SHARES OF PROGENITOR COMMON STOCK. In the event that
Progenitor elects to pay the Adjusted Purchase Price in one of the alternative
forms of consideration described above, additional materials will be provided to
the stockholders of Mercator and separate proxies will be solicited.
BACKGROUND OF THE REORGANIZATION
Mercator was incorporated in 1992 to focus on the human genetics of
monogenic diseases. In 1995 Mercator began to reposition its business strategy
to focus on polygenic diseases in order to attract corporate funding. As a
result of a management restructuring in January, 1996, Dr. Elliott Sigal was
appointed President and Chief Executive Officer. At that time, Mercator adopted
a business strategy focused upon the following short-term objectives: (1) the
isolation of genes associated with HH, (2) the development of a clinical
database, (3) the creation of asthma, schizophrenia and cancer programs and (4)
the building of the management team. Mercator's longer-term strategy focused
upon three major components: (1) to establish alliances with leading
pharmaceutical companies focused on specific disease areas, (2) to develop and
expand its technologies through strategic alliances within the biotechnology
industry, and (3) to move towards internal product development through retained
rights to develop diagnostic and therapeutics based on its gene discoveries.
Since its incorporation, Mercator's ability to achieve these goals has been
hampered by a lack of corporate funding emanating from strategic partnerships.
Mercator believes that inadequate funding has adversely affected its ability to
build its infrastructure and to attain the financial stability necessary to
attract corporate partners.
In April 1996, Mercator closed its series C round of private financing at a
pre-money valuation of under $4 million. During the summer of 1996, Mercator
sought to raise private capital in a proposed financing of Series D Preferred
Stock at a valuation of $16 million ($1.34 per share for preferred stock). The
Mercator Board subsequently determined the value of conversion options to be
$0.15 per share. Mercator also pursued several corporate collaborations during
that period and was approached by a major pharmaceutical company and several
biotechnology companies concerning a possible acquisition of Mercator.
At the October 23, 1996, Board meeting, the Mercator Board recognized that
Mercator was likely to exhaust its cash reserves prior to it being able to
successfully raise additional private funds. The Board also
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recognized that Mercator's lack of adequate capitalization made it difficult for
Mercator to build infrastructure and to obtain the stability required to attract
a major corporate alliance. Accordingly, the Mercator Board decided to target a
merger or strategic alliance, rather than continue private fundraising efforts.
The Mercator Board believed a merger or strategic alliance would (1) bring
additional technologies to Mercator, particularly technologies in functional
genomics, and (2) increase Mercator's financial stability and potentially
simplify its funding strategy. Mercator's Board of Directors concluded that such
a sale or strategic combination of Mercator was the best means for Mercator to
(1) accomplish its strategic objectives, (2) maximize the probability of
continued employment for Mercator employees, and (3) maximize value for Mercator
stockholders.
Mercator contacted Lehman Brothers in October, 1996, to seek its assistance
in identifying and contacting companies that would be viable candidates for a
merger or strategic alliance. Subsequently, Mercator and Lehman Brothers entered
into a letter agreement dated as of October 27, 1996 pursuant to which Lehman
Brothers agreed to act as Mercator's sole and exclusive agent for purposes of
advising Mercator concerning potential alliances and sale transactions. Upon
execution of the Lehman Brothers engagement letter, Mercator paid to Lehman
Brothers a retainer fee consisting of $75,000 cash and agreed to issue to Lehman
Brothers 51,884 shares of Mercator Common Stock. Lehman Brothers also will
receive, upon consummation of the Reorganization, 3% of the aggregate
consideration paid to former Mercator securities holders, less the amount
previously paid (both in cash and in shares of Mercator Common Stock) as a
retainer, or a net additional cash payment of approximately $510,000, assuming
an Adjusted Purchase Price of $22 million. Lehman Brothers is one of the
representatives of the underwriters in the proposed IPO.
On October 14, 1996, Dr. Sigal made a presentation at the BioAlliance
Conference in Tokyo, Japan. At that conference, Dr. Sigal met Dr. Given and Dr.
Williams of Progenitor. In early November 1996, Dr. Given and Dr. Sigal
discussed by telephone the possibility of a strategic business combination
between Mercator and Progenitor. They agreed that there could be strong
synergies between Mercator and Progenitor and that a more in-depth discussion
was warranted. On November 14, 1996, Dr. Sigal and Dr. Given met in San
Francisco and discussed their mutual interest in the possibility of a merger.
The following day the management teams of the two companies met and commenced
due diligence.
Representatives of Progenitor and Mercator conducted a series of due
diligence and negotiating discussions during December, 1996. On January 17,
1997, the Board of Directors of Mercator agreed to the general terms of a letter
of intent with Progenitor with respect to the proposed Reorganization, and
committed to move toward execution of a definitive agreement. The Board of
Directors of Mercator held a meeting on February 13, 1997, and, on February 14,
1997, the discussions between Progenitor and Mercator culminated in the
execution of the Reorganization Agreement.
Throughout the period of initial discussions with Progenitor until January
17, 1997, Mercator had been discussing and negotiating merger and financing
opportunities with a number of pharmaceutical and biotechnology companies.
Mercator had received indications of significant interest from two major
pharmaceutical companies, as well as several biotechnology companies. For the
reasons set forth below (see "Recommendation of the Mercator Board; Reasons of
Mercator for the Reorganization"), the Mercator Board of Directors believed the
proposed Reorganization with Progenitor to be in the best interests of Mercator
and its stockholders.
The Mercator Board of Directors met on October 23, 1996, November 19, 1996,
December 18, 1996, January 6 and 24, 1997 and February 5, 1997 to consider the
possible sale, merger or other alliance transactions involving Mercator. At the
October Board meeting, the Mercator Board decided that a merger or similar
strategic combination would be in the best interest of Mercator. At the November
19 meeting, Mercator management presented to the Mercator Board an overview of
the companies Mercator would target for strategic discussions. The Mercator
Board recognized that, because of limited funds, any strategic combination would
need to be completed by January or February 1997. The Mercator Board also
discussed a verbal indication of interest from Company A in discussing an
acquisition that could be valued
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at approximately $24 million. The Mercator Board instructed Mercator's
management to pursue discussions with all of the companies presented. Finally,
the Mercator Board of Directors adopted the Employee Retention Plan and the
Salary Protection Plans to provide additional security to employees of Mercator
during the pendency of Mercator's efforts to explore a sale or business
combination. See "--Interests of Certain Persons in the Reorganization."
At the December Board meeting, the Mercator Board was presented with (1) an
update of all potential merger and strategic alliance discussions, (2) an update
of discussions with Company A, which no longer included an immediate merger, but
which had been revised to offer a convertible loan to Mercator (this offer was
subsequently confirmed by letter dated December 20, 1996), and (3) an update on
discussions with Progenitor. On January 6, the Mercator Board discussed all
potential merger candidates. The Mercator Board recognized that the only
discussions that were likely to consummate in a significant alliance prior to
Mercator requiring significant additional funding were the loan offer by Company
A and the Progenitor merger. On January 17, the Mercator Board concluded that a
merger better served the interests of Mercator shareholders and employees than
the loan from Company A and agreed to accept the letter of intent from
Progenitor and progress the Progenitor discussions towards a definitive
agreement. At the January 24, 1997 meeting, the Mercator Board was informed that
on January 22, 1997, subsequent to its agreeing to continue the Progenitor
discussions toward a definitive agreement, the loan offer from Company A had
been withdrawn. The Mercator Board concluded that, while other longer-term
opportunities might exist, only the Progenitor discussions were likely to
conclude in a definitive merger agreement prior to the need for additional
financing. At the February 5, 1997, Board meeting, the Mercator Board was
presented with an update of the Progenitor discussions on a definitive
agreement. The Mercator Board instructed Mercator management to pursue these
negotiations. These negotiations culminated in Mercator Board approval of an
agreement on February 13, 1997, which agreement was signed February 14, 1997.
Subsequently, the initial Agreement Deadline of May 31, 1997 was extended
pursuant to the terms of the Reorganization Agreement at the election of
Progenitor to June 30, 1997 and subsequently to July 31, 1997.
RECOMMENDATION OF THE MERCATOR BOARD; REASONS OF MERCATOR FOR THE REORGANIZATION
THE MERCATOR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TERMS OF THE
REORGANIZATION AGREEMENT AND THE REORGANIZATION, BELIEVES THAT THE TERMS OF THE
REORGANIZATION AGREEMENT ARE FAIR TO, AND IN THE BEST INTERESTS OF, MERCATOR AND
ITS STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SHARES OF MERCATOR
CAPITAL STOCK VOTE FOR APPROVAL OF THE REORGANIZATION PROPOSAL AND FOR APPROVAL
OF THE MERCATOR CERTIFICATE AMENDMENT PROPOSAL.
In reaching its determination to move forward with the Reorganization with
Progenitor and enter into the Reorganization Agreement, Mercator identified the
following potential benefits of the Reorganization:
- One of Mercator's strategic objectives was to expand its technical
capabilities into the area of functional genomics. These additional skills
would be of significant value in attracting corporate partnerships.
Mercator believed that Progenitor had the functional genomic capabilities
sought by Mercator. These skills were demonstrated through Progenitor's
success in discovering the Leptin receptor.
- Mercator believed the combination of Progenitor's functional genomics
approach with Mercator's disease genetics approach would be attractive to
both the private and the public financial markets, which it believed could
make it easier for Mercator to raise additional financing in order to
compete more effectively with larger and better-financed genomics
companies.
- Mercator's opportunities to identify a potential merger candidate were
limited by its financing. Given significant additional funds, Mercator may
have been able to identify alternative merger candidates providing
opportunities similar to those offered by Progenitor. However, Progenitor
had strong financial backing through its parent company, Interneuron, had
corporate collaborations with Amgen, Chiron, and Novo Nordisk, and had
proven functional genomics technology. Thus the
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Progenitor merger was the best opportunity for meeting Mercator's goal of
consummating a merger or similar strategic alliance in early 1997.
- Mercator believed that its workforce is one of its most valuable assets.
Mercator and Progenitor have complementary workforces and a merger with
Progenitor would maximize the likelihood that both (1) a merger with
Progenitor would protect the bulk of Mercator's workforce and (2)
Mercator's greatest assets would be utilized in building value in the
merged entity.
- Mercator believed that a large part of the value in its workforce is
derived from the unique corporate culture that exists at Mercator. In
order to preserve this culture, Mercator favored a strategic combination
with a smaller biotech company with a complementary workforce. Mercator
believed that an acquisition by a major pharmaceutical company or larger
biotech company that did not share a similar culture would lessen the
ability of Mercator to create additional value in the merged entity.
Mercator believed that Progenitor's corporate culture is complementary to
Mercator's corporate culture.
- Mercator believed that continuing its operations in the San Francisco Bay
Area where there is significant ongoing technology development is key to
its success. Mercator also strongly favored a single location for a merged
entity. Mercator believed Progenitor to be committed in principle to
Mercator's operations in the San Francisco Bay Area. Certain other
potential merger opportunities, in addition to taking longer to
consummate, might have required Mercator to move its facilities outside of
the San Francisco Bay Area.
- Certain alternative merger discussions would have required additional time
to move forward. The Mercator Board of Directors concluded that further
delay of a merger decision would have been detrimental to employee morale
and would have required additional financing of Mercator's operations
pending completion of an alternative transaction.
- The terms of the Reorganization with Progenitor contemplated a bridge
financing of Mercator's operations by Progenitor pending completion of the
transaction, which would allow the continuation of Mercator's research
programs pending completion of the Reorganization.
- Mercator believed that the value offered for Mercator by Progenitor to be
fair in light of the recent venture financing attempt at a valuation of
$16 million which did not bring any funds into Mercator.
- Mercator believed that the value offered to the preferred shareholders and
the common shareholders to be fair to all shareholders. In order to assure
fairness, the preferred shareholders renegotiated the distribution of the
proceeds to provide a greater return to the common shareholders. Assuming
a purchase price of $22 million, the common shareholders are only entitled
to $0.38 per share in accordance with Mercator's Certificate of
Incorporation. To reward the value created by the common shareholders, the
preferred shareholders and warrant holders agreed to provide the common
shareholders with approximately $1.16 per share. A merger of over $30
million would have been required to provide the common shareholders with
an equivalent return in accordance with Mercator's Certificate of
Incorporation.
- Mercator believed that the merged entity would be more valuable than
Mercator and Progenitor are individually. Mercator also believed that the
value created through ongoing research, financing, and partnering
activities of the merged entity will enable the value of Mercator
shareholder's ownership in the merged entity to increase above the $22
million purchase price.
- The Mercator Board of Directors considered the terms of the Reorganization
and the Mercator Bridge Loan Agreement financing commitment to be superior
to alternative transactions in terms of the overall combination of (i)
consideration to be received by holders of Mercator Capital Stock; (ii)
timing for completion of the transaction; (iii) complementary nature of
Progenitor as an acquiror of Mercator's business, operations and
workforce; and (iv) opportunity to participate in the appreciation
potential of Progenitor Common Stock.
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In the course of evaluating the Progenitor opportunity, Mercator reviewed
and considered certain other factors relevant to the Reorganization. In
particular:
- Mercator considered that some or all of the above-listed benefits may not
materialize.
- The Reorganization with Progenitor assumes the completion of an initial
public offering. Since Progenitor had filed for an initial public offering
in the summer of 1996 and later decided to postpone that offering, there
was no assurance that Progenitor would be in a position to complete an
initial public offering in the immediate future.
- Because Progenitor's obligation to consummate the Reorganization would be
contingent on an initial public offering, Mercator believed Mercator's
employees would experience a period of uncertainty between execution of
the definitive merger agreement and the initial public offering.
The foregoing discussion of the information and factors considered by the
Mercator Board is not intended to be exhaustive but is believed to include all
material factors considered by the Mercator Board. In view of the variety of
factors considered by the Mercator Board, the Mercator Board did not find it
practical to and did not quantify or otherwise assign relative weight to the
factors discussed above in reaching its determination. In addition, individual
members of the Mercator Board may have given different weights to different
factors.
REASONS OF PROGENITOR FOR THE REORGANIZATION
The Progenitor Board of Directors believes that the terms of the
Reorganization Agreement are fair to, and in the best interests of, Progenitor
and its stockholders. The Progenitor Board of Directors believes that, through
the Reorganization and the acquisition of Mercator, Progenitor will obtain a
disease genetics approach to gene discovery and technologies that will enhance
and extend its genomics capabilities. Progenitor also will obtain worldwide
rights to a gene associated with HH 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.
INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION
In considering the recommendation of the Mercator Board of Directors with
respect to the Reorganization Proposal and the Mercator Certificate Amendment
Proposal, Mercator stockholders should be aware that certain members of the
Mercator Board and the management of Mercator have interests in the
Reorganization that are in addition to the interests of stockholders of Mercator
generally.
ACCELERATION OF VESTING OF STOCK OPTIONS. Progenitor has agreed to honor
the option vesting commitments for employees and senior executives and
management made by the Mercator Board of Directors, with respect to options
existing at the Effective Time that are converted into options to purchase
shares of Progenitor Common Stock. Under those commitments, upon (i) a change of
control of Mercator (which would include the Reorganization), followed by (ii)
the termination of employment (or consulting relationship) of an optionholder
for any reason other than cause by the successor corporation prior to the first
anniversary of such change of control, all stock options held by such
optionholder will become fully vested and exercisable. See "The Reorganization
Agreement--Stock Options and Warrants."
All of the unvested options to purchase Mercator Capital Stock held by
certain officers and management personnel of Mercator generally will vest upon
any merger of Mercator, including the Reorganization (except as noted below).
Completion of the Reorganization thus will result in the immediate vesting of
options held by the following executive officers of Mercator in accordance with
pre-existing arrangements, regardless of whether there is any termination of the
employment of the
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optionholder (showing number of shares held and number of shares not yet vested
as of June 20, 1997): (i) Dr. Sigal, who holds options to purchase 918,310
shares of Mercator Common Stock, of which options representing 413,243 shares
had not vested; (ii) Montgomery Mars, Vice President of Business Development,
who holds options to purchase 229,577 shares, of which options representing
176,964 shares had not vested; and (iii) Dr. Karen Brunke, Vice President of
Clinical Research, who holds options to purchase 221,000 shares, of which
options to purchase 140,106 shares had not vested. Dr. Brunke also holds 6,000
shares of Mercator Common Stock, of which 1,672 shares are subject to repurchase
by Mercator, which repurchase rights will no longer apply after the
Reorganization. In addition, 63,750 of the 89,055 unvested options held by Dr.
Randall Schatzman, Executive Director of Biology, who holds options to purchase
a total of 120,000 shares, and all of the 36,566 unvested options held by Dr.
Roger Wolff, Director of Genetics, who holds options to purchase a total of
80,000 shares, will accelerate upon the completion of the Reorganization.
INDEMNIFICATION AND INSURANCE. Progenitor has agreed that, for a period of
six years from the Effective Time, (i) Progenitor will, and will cause the
Surviving Corporation to, honor the rights of indemnification in favor of the
officers and directors of Mercator in their capacities as officers and directors
of Mercator prior to the Effective Time to the extent provided by Mercator's
Certificate of Incorporation and Bylaws and the indemnification agreements
between such officers and directors and Mercator, as well as any such rights
provided by the DGCL (other than with respect to any Purchase Price Reduction or
any holdback of Escrow consideration as to any claim as to which Progenitor or
any Progenitor Indemnitee is entitled to indemnification as described above),
and (ii) Progenitor will maintain officers' and directors' liability insurance
policies covering the officers and directors of Mercator with respect to certain
potential liabilities related to the IPO on the same terms as those applicable
to the then current officers and directors of Progenitor.
Effective upon consummation of the Reorganization, each of Dr. Sigal and Mr.
Momsen, who will become an executive officer and a director, respectively, of
Progenitor, will enter into an indemnification agreement with Progenitor in the
form entered into by Progenitor with its current directors and executive
officers. These agreements, among other things, provide for the indemnification
of Progenitor'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
Progenitor, arising out of such person's services as a director or executive
officer of Progenitor, any subsidiary of Progenitor or any other company or
enterprise to which such person provides services at the request of Progenitor
to the fullest extent permitted by applicable law.
EMPLOYMENT AGREEMENTS
Progenitor signed an employment agreement (the "Revised Sigal Employment
Agreement") with Dr. Sigal on February 14, 1997, effective upon the consummation
of the Reorganization (the "Effective Date"), to serve as the Senior Vice
President of Research and Development of Progenitor. Dr. Sigal has agreed to
supervise and manage the preclinical and clinical development areas of
Progenitor 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 Progenitor 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 Progenitor Common Stock
equal to 1% of the outstanding Progenitor Common Stock on a fully-diluted basis
on the Effective Date, which options will be exercisable at the IPO Common Stock
Price and will be granted in addition to the Replacement Options to be issued to
Dr. Sigal in connection with the Reorganization. The options to be granted upon
the closing of the IPO will have an exercise price equal to the IPO Common Stock
Price, 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 Progenitor in
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the event that other options granted to a senior manager of Progenitor (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 Progenitor other than for "cause"
(or death or disability) or 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 would also then be available to Dr. Sigal by the terms of the
Revised Sigal Employment Agreement. See "Management of Progenitor after the
Reorganization--Employment Agreements."
The Revised Sigal Employment Agreement provides that from and after the
Effective Date, Progenitor 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 the exclusive purpose of providing
funds to Dr. Sigal for a downpayment on the purchase price of his principal
residence (the "Property"). The Sigal Note is secured by the Property. The Sigal
Note accrues interest at a rate equal to the lesser of (i) 28.2% of the capital
gains realized upon a sale of the Property (a different calculation applies if
the Sigal Note becomes payable prior to a sale of the Property) and (ii) the
cumulative interest on the unpaid principal balance of the Sigal Note accruing
at 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 earlier of: (a) any sale or transfer
of the Property; (b) the refinancing of any loan secured by a first mortgage on
the Property; (c) the first anniversary of Dr. Sigal's retirement or termination
of employment with Progenitor; (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 the 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," Progenitor will: (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 Progenitor
terminates Dr. Sigal's employment for "cause," Progenitor will 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 Progenitor 30
days advance written notice. Progenitor will have the option, in its complete
discretion, to make Dr. Sigal's termination effective at any time prior to the
end of such notice period. In either event, Progenitor will 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 Progenitor 30
days advance written notice of the reason for termination and his intent to
terminate. During this period, Progenitor will have an opportunity to correct
the condition constituting good reason. If not remedied, Progenitor shall
provide Dr. Sigal the Separation Benefits.
For more information on Dr. Sigal's employment arrangements, see "Management
of Progenitor after the Reorganization--Employment Agreements--Elliott Sigal."
Mercator also is obligated, under currently effective arrangements, to pay
Mr. Mars a cash bonus of $25,000 or, at the election of Mr. Mars, grant him a
fully vested option to purchase 25,000 shares of Mercator Common Stock for each
"corporate alliance" (defined as a strategic corporate alliance with a
pharmaceutical or biotechnology company in the areas of therapeutics,
diagnostics or technology) consummated by Mercator during Mr. Mars' first full
year of employment by Mercator. The Mercator Board of Directors has agreed that
the Reorganization will constitute such an alliance. With respect to the
Reorganization, Mr. Mars has elected to receive the $25,000 cash bonus, and
Mercator paid him such bonus in April 1997.
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EMPLOYEE RETENTION AND SALARY PROTECTION PLANS. Senior executives and
management of Mercator are eligible to participate, along with other employees,
in the employee retention plan (the "Employee Retention Plan") and the salary
protection plans (the "Salary Protection Plans") adopted by Mercator.
Under the Employee Retention Plan, in the event of a change of control of
Mercator (which would include the Reorganization) on or before November 19,
1997, employees, senior executives and management recommended by the Mercator
Chief Executive Officer and approved by the Mercator Board of Directors and who
have not voluntarily terminated employment prior to the date sixty days after
the effective date of the change in control will be eligible to receive cash
bonuses. The cash bonuses will be allocated from a pool of $400,000 set aside
for such purpose, with each individual receiving an amount determined in
accordance with a range specified in the Reorganization Agreement, depending
upon their positions and on the performance of the individual during the period
from knowledge of the impending change until the date the payments are
distributed, and the exact amount within such range to be subject to
Progenitor's approval. For senior managers, including Dr. Sigal, Dr. Karen
Brunke, the Vice President of Clinical Research, Dr. Randall Schatzman, the
Executive Director of Biology, and Dr. Roger Wolff, the Director of Genetics,
the available bonus range is 15% to 25% of their respective salaries, which
would provide a total bonus amount in the range of $87,000 to $145,000 in the
aggregate for all of such four senior managers. Progenitor has indicated that,
following the Reorganization, it will cause Mercator to honor the payments
contemplated by the Employee Retention Plan, regardless of the actual date of
the change in control of Mercator; provided that the Reorganization is
consummated with Progenitor Common Stock registered as described in the
Reorganization Agreement and this Proxy Statement/ Prospectus. See "The
Reorganization Agreement--Certain Employee Benefit Matters."
Under the Salary Protection Plan for senior executives and management (the
"Senior Executive and Management Salary Protection Plan"), senior executives and
certain managers who are constructively terminated or terminated without cause
will receive severance pay of between two and six months' base pay and health
and dental benefits. Progenitor has agreed to cause Mercator to honor such plan
following the Reorganization, provided that such plan meets certain conditions.
See "The Reorganization Agreement--Certain Employee Benefit Matters."
PROGENITOR BOARD. Mr. Momsen, a member of the Board of Directors of
Mercator, will become a member of the Board of Directors of Progenitor upon the
effectiveness of the Reorganization. As a non-employee director, Mr. Momsen will
receive, based on amounts currently provided to other non-employee directors,
$2,000 for attendance at meetings of the Progenitor Board of Directors and any
committees thereof, and will be eligible to participate in the Progenitor 1996
Stock Incentive Plan, under which 300,000 shares of Progenitor Common Stock have
been reserved for issuance to non-employee directors. The amount of compensation
for attendance at Progenitor Board and committee meetings, and the number of
shares under the 1996 Stock Incentive Plan reserved for issuance to non-employee
directors, is subject to change.
UNDERWRITER. Lehman Brothers, one of the representatives of the
underwriters of the IPO, has received a retainer fee from Mercator for advising
Mercator with respect to potential alliances and sale transactions, and will
receive an additional fee upon consummation of the Reorganization. See "The
Reorganization--Background of the Reorganization" and "Initial Public Offering."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses certain federal income tax considerations
of the Reorganization that are applicable to holders of Mercator Capital Stock.
Mercator stockholders should be aware that the following discussion does not
deal with all federal tax consequences that may result from the Reorganization
and does not deal with all federal income tax considerations that may be
relevant to particular Mercator stockholders in light of their particular
circumstances, such as holders who are dealers in securities, who are foreign
persons or who acquire their Mercator Capital Stock through stock option or
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stock purchase programs or in other compensatory transactions. In addition, the
following discussion generally does not address the tax consequences of
transactions, other than the Mercator Certificate Amendment Proposal,
effectuated prior to, at the time of or after the Reorganization (whether or not
such transactions are in connection with the Reorganization) including, without
limitation, the exercise of options, warrants or similar rights to purchase
stock, or the exchange, assumption or substitution of options, warrants or
similar rights to purchase Mercator Capital Stock for rights to purchase
Progenitor Common Stock. Furthermore, no foreign, state or local tax
considerations are addressed herein. This discussion is based on legal
authorities in existence as of the date hereof. No assurances can be given that
future legislation, regulations, administrative pronouncements or court
decisions will not significantly change the law and materially affect the
conclusions expressed herein. Any such change, even though made after
consummation of the Reorganization, could be applied retroactively. ACCORDINGLY,
ALL MERCATOR SECURITIES HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
REORGANIZATION TO THEM.
The Reorganization is intended to qualify as a reorganization within the
meaning of Section 368(a) of the Code. Subject to the limitations and
qualifications described herein, and assuming the Reorganization so qualifies,
the following tax consequences should generally result:
(i) no gain or loss will be recognized by the stockholders of Mercator
upon the conversion of their Mercator Capital Stock into shares of
Progenitor Common Stock pursuant to the Reorganization, except with respect
to cash, if any, received in lieu of fractional shares of Progenitor Common
Stock;
(ii) a stockholder of Mercator will recognize gain or loss equal to the
difference between the cash received in lieu of a fractional share interest
of Progenitor Common Stock and such stockholder's tax basis in the
fractional share for which cash is received;
(iii) the aggregate tax basis of the shares of Progenitor Common Stock
received in exchange for shares of Mercator Capital Stock pursuant to the
Reorganization (including fractional shares for which cash is received) will
be the same as the aggregate tax basis for such shares of Mercator Capital
Stock, decreased by the amount of any tax basis allocable to the fractional
share interests for which cash is received;
(iv) the holding period for shares of Progenitor Common Stock received
in exchange for shares of Mercator Capital Stock pursuant to the
Reorganization will include the period that such shares of Mercator Capital
Stock were held by the holder, provided such shares of Mercator Capital
Stock were held as capital assets by the holder at the Effective Time;
(v) a dissenting stockholder of Mercator, if any, who receives payment
for shares in cash will generally recognize capital gain or loss (if the
shares were held as a capital asset at the Effective Time) equal to the
difference between the cash received and the holder's basis in such shares,
provided the payment neither is essentially equivalent to a dividend within
the meaning of Section 302 of the Code nor has the effect of the
distribution of a dividend within the meaning of Section 356(a)(2) of the
Code (collectively, a "Dividend Equivalent Transaction"). A sale of shares
pursuant to an exercise of dissenter or appraisal rights will generally not
be a Dividend Equivalent Transaction if, as a result of such exercise, the
stockholder owns no shares of Progenitor Common Stock (either actually or
constructively within the meaning of Section 318 of the Code); and
(vi) no gain or loss will be recognized by Progenitor or Mercator as a
result of the Reorganization.
Notwithstanding the qualification of the Reorganization as a
"reorganization" within the meaning of Section 368(a) of the Code, a recipient
of Progenitor Common Stock would recognize income to the extent such shares were
considered to be received in exchange for services or other consideration (other
than
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solely Mercator Capital Stock), in which event all or a portion of such income
may be taxable as ordinary income. For example, the Internal Revenue Service
could assert that (as a result of the Mercator Certificate Amendment or the
Reorganization) some of the Progenitor Common Stock issued to holders of
Mercator Common Stock should be treated as having been issued to other Mercator
stockholders and thereafter transferred to such holders of Mercator Common
Stock. Should this position prevail, this deemed transfer could be a fully
taxable transaction to the deemed transferors, resulting in the recognition of
taxable income or gain inherent in such Progenitor Common Stock. Regardless of
whether the deemed transfer were taxable to the transferors, the former holders
of Mercator Common Stock would likely recognize ordinary income equal to the
fair market value of the additional stock received. While there can be no
assurance that the Internal Revenue Service would not be successful in any such
assertion in Wilson Sonsini Goodrich & Rosati's opinion, the better view is that
the Internal Revenue Service should not prevail.
No gain or loss will be recognized by a holder of an unexercised option to
purchase shares of Mercator Capital Stock solely as a result of the conversion
of such option into an option to acquire Progenitor Common Stock, provided that
such option (i) was issued in connection with the performance of services and
(ii) did not and will not have a readily ascertainable fair market value (within
the meaning of Income Tax Regulations section 1.83-7(b)) when issued or at the
Effective Time. In addition, to the extent any such unexercised option is an
"incentive stock option" immediately prior to the Effective Time, such option
will remain an "incentive stock option" after its conversion into an option to
acquire Progenitor Common
Stock. The federal income tax treatment of a reorganization exchange of options
and warrants not received in connection with the performance of services under
existing law is unclear. On December 23, 1996, the Internal Revenue Service
published proposed regulations which would permit the tax-free exchange of such
options and warrants in exchanges occurring on or after the date that is 60 days
after the final regulations are filed with the Federal Register. It is unknown
whether these regulations will become effective prior to the effective date of
the Merger.
It is a condition to the consummation of the Reorganization that Progenitor
receive an opinion from its counsel, Morrison & Foerster LLP, and that Mercator
receive an opinion from its counsel, Wilson Sonsini Goodrich & Rosati, to the
effect that the Reorganization will constitute a reorganization within the
meaning of Section 368(a) of the Code and that Progenitor and Mercator will each
be a party to that reorganization within the meaning of Section 368(b) of the
Code. Neither Progenitor nor Mercator intends to waive such condition. In
rendering such opinions, counsel will rely upon representations of Progenitor,
Mercator and others, including the representations contained in the Lockup
Agreements regarding the intent of Mercator stockholders with respect to sales
of the shares of Progenitor Common Stock to be received by them pursuant to the
Reorganization Agreement. See "--Lockup Agreements." A ruling from the United
States Internal Revenue Service concerning the tax consequences of the
Reorganization will not be requested. Accordingly, there can be no assurance
that the Internal Revenue Service will not assert a position contrary to the
conclusions expressed herein and in such opinions.
ACCOUNTING TREATMENT
The Reorganization is expected to be accounted for under the purchase method
of accounting, in accordance with generally accepted accounting principles.
Under the purchase method of accounting, the purchase price of Mercator will be
allocated to the net assets acquired based upon their estimated relative fair
values and in-process research and development technology received at the
Effective Time, with the excess of the purchase price over the fair value of the
net identifiable assets and in-process research and development technology
received allocated to goodwill, if any.
REGULATORY APPROVALS
The obligations of Progenitor and Mercator to consummate the Reorganization
are subject to the condition that there be no preliminary or permanent
injunction or other order by any federal, state or foreign court that prohibits
consummation of the Reorganization, and that there be no statute, rule,
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regulation, executive order, stay, decree or judgment by any court or
governmental authority that prohibits or restricts the consummation of the
Reorganization. In addition, other than the filing of the Certificate of Merger
with the Secretary of State of Delaware, all authorizations, consents, orders or
approvals of, or declarations or filings with, and all expirations of waiting
periods imposed by, any governmental entity (all of the foregoing, "Consents")
necessary for the consummation of the Reorganization, other than Consents the
failure to obtain which would not materially adversely affect the consummation
of the Reorganization or in the aggregate have a material adverse effect on the
Surviving Corporation and its subsidiaries, taken as a whole, shall have been
filed, occurred or been obtained. The obligations of Progenitor and Mercator to
consummate the Reorganization also are subject to Progenitor's receipt of all
federal and state securities or blue sky permits and other authorizations
necessary to issue shares of Progenitor Common Stock in exchange for the shares
of Mercator Capital Stock and to consummate the Reorganization and to issue
Progenitor Units in connection with the IPO. See "The Reorganization
Agreement--Conditions." Mercator and Progenitor are not aware of any
governmental consents required for consummation of the Reorganization, other
than the filing of the Certificate of Merger and compliance with federal
securities laws and state securities and blue sky laws.
Either Progenitor or Mercator may terminate the Reorganization Agreement if
any court in the United States or other United States governmental body shall
have issued an order, decree or ruling, or taken any other action, restraining,
enjoining or otherwise prohibiting the Reorganization, and such order, decree,
ruling or other action shall have become final and non-appealable, provided that
the party seeking to terminate the Reorganization Agreement for such reason
shall have used commercially reasonable efforts to remove such order, decree or
ruling. See "The Reorganization Agreement--Termination."
In addition, it is a condition to Progenitor's obligation to effect the
Reorganization that the IPO shall have been consummated. Progenitor will not
consummate the IPO unless it has received all necessary authorizations,
consents, orders or approvals of, and made all declarations or filings with, any
governmental entity, including the declaration by the Commission of the
effectiveness of the IPO Registration Statement and all waiting periods with
respect thereto shall have expired.
LOCKUP AGREEMENTS
Pursuant to the Reorganization Agreement, Mercator agreed to use its
commercially reasonable efforts to provide to Progenitor executed Lockup
Agreements, in the form agreed between Mercator and Progenitor, from each
Mercator stockholder and each holder of options or warrants to purchase Mercator
Capital Stock. Additionally, Progenitor is not required to deliver any shares of
Progenitor Common Stock following the Reorganization to any person otherwise
entitled to such shares until that person has delivered a duly executed Lockup
Agreement to Progenitor. NO MERCATOR STOCKHOLDER, AND NO HOLDER OF OPTIONS OR
WARRANTS TO PURCHASE SHARES OF MERCATOR CAPITAL STOCK, WILL BE ENTITLED UNDER
THE TERMS OF THE REORGANIZATION AGREEMENT TO RECEIVE SHARES OF PROGENITOR COMMON
STOCK IN CONNECTION WITH THE REORGANIZATION UNTIL SUCH HOLDER HAS DELIVERED A
DULY EXECUTED LOCKUP AGREEMENT TO PROGENITOR.
The form of Lockup Agreement requires each signing stockholder, optionholder
or warrant holder to, among other things:
(i) Represent that such holder does not have, and as of the Effective
Time will not have, any present plan or intention (a "Plan of Transfer") to
engage in a sale, exchange, transfer, distribution, pledge, disposition or
any other transaction which would result in a direct or indirect disposition
or reduction in risk of ownership (a "Sale") of more than 50% of the shares
of Progenitor Common Stock that the holder may acquire pursuant to the
Reorganization Agreement. A sale that occurs in a transaction that is in
contemplation of, or related or pursuant to, the Reorganization or the
Reorganization Agreement (a "Related Transaction") will be considered a Sale
for purposes of this representation. Mercator shares with respect to which a
Sale occurs prior to the Effective Time in a
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Related Transaction will be considered to be outstanding Mercator shares
that are exchanged for shares of Progenitor Common Stock which are disposed
of pursuant to a Plan of Transfer.
(ii) Agree that, in connection with the IPO, such holder shall not sell,
offer, contract to sell, grant any option to purchase, transfer the economic
risk of ownership in, make any short sale, pledge or otherwise dispose of,
any shares of Progenitor Common Stock, without the prior written consent of
the managing underwriters of the IPO. Such shares shall be subject to
release from such restriction, however, in accordance with the following
schedule, to the extent otherwise permissible under the requirements for a
tax-free reorganization: one-third of such shares of Progenitor Common Stock
shall be released at each of 180, 270 and 365 days after the effective date
of the IPO; provided, that all such shares of Progenitor Common Stock with
respect to an employee stockholder shall be released 180 days after the
effective date of the IPO if such stockholder's employment by Mercator is
terminated by Mercator prior to such 180th day, and all such shares of
Progenitor Common Stock shall be released on the effective date of
termination if such stockholder's employment by Mercator is terminated by
Mercator after such 180th day (except in either case where the termination
is in connection with the refusal to accept a transfer to a position with
Progenitor that is at least an equivalent position to that currently held
and which does not require the employee to relocate his or her place of
employment).
A copy of the required form of Lockup Agreement is attached to this Proxy
Statement/Prospectus as Appendix D and is incorporated herein by reference. If
you have not yet signed and returned your Lockup Agreement, please contact
Michele Phua, Controller of Mercator, at (415) 614-7024.
Progenitor is entitled to place legends on the certificates evidencing
shares of Progenitor Common Stock pursuant to the Lockup Agreements or any
agreement with persons deemed to be "affiliates" of Mercator (see "--Resale
Restrictions"), and to issue appropriate stop transfer instructions to the
Progenitor transfer agent. Progenitor intends to agree with Lehman Brothers, as
representative of the Underwriters, not to waive any of the restrictions on
transfer described in the Lockup Agreement without the consent of Lehman
Brothers, and Lehman Brothers has agreed not to waive such restrictions without
the prior written consent of Progenitor.
RESALE RESTRICTIONS
LOCKUP AGREEMENTS; ESCROW. All holders of Mercator Capital Stock and all
holders of options or warrants to purchase Mercator Capital Stock are required
under the Reorganization Agreement to agree, pursuant to Lockup Agreements, to
certain restrictions on resale of the shares of Progenitor Common Stock to be
received by them in connection with the Reorganization. See "--Lockup
Agreements." Shares of Progenitor Common Stock otherwise constituting a portion
of the Adjusted Purchase Price also may be subject to escrow restrictions in
connection with the indemnification obligations of Mercator and Mercator
stockholders and holders of options or warrants to purchase shares of Mercator
Capital Stock. See "--Adjusted Purchase Price Calculation; Indemnification;
Escrow."
AFFILIATE AGREEMENTS. In accordance with the expiration of the lockup
periods provided in the Lockup Agreements, and release of the shares from the
Escrow, all shares of Progenitor Common Stock received by Mercator stockholders
in the Reorganization will be freely transferable, except that shares of
Progenitor Common Stock received by persons who are deemed to be "affiliates"
(as such term is defined under the Securities Act) of Mercator may be resold by
them only in transactions permitted by the resale provisions of Rule 145
promulgated under the Securities Act (or Rule 144 in the case of such persons
who become affiliates of Progenitor) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of Mercator generally
include individuals or entities that control, are controlled by, or are under
common control with, Mercator and may include certain officers and directors of
Mercator as well as principal stockholders of Mercator. The Reorganization
Agreement provides that Progenitor and Mercator will agree upon a list of
applicable affiliates, and that Mercator will use commercially reasonable
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efforts to cause each of such affiliates to execute, prior to the date of this
Proxy Statement/Prospectus, a written agreement (each, an "Affiliate Agreement")
restricting the disposition by such person of the shares of Progenitor Common
Stock to be received by such person in the Reorganization. Progenitor and
Mercator have agreed upon such a list, which includes, among others, all of the
executive officers and directors of Mercator and each of the Principal
Stockholders. As of the date of this Proxy Statement/ Prospectus, Mercator had
obtained such agreements from all such affiliates.
Progenitor is entitled to place appropriate legends describing the
restrictions on transfer, on the certificates evidencing shares of Progenitor
Common Stock subject to the Lockup Agreements or any agreement with persons
deemed to be "affiliates" of Mercator, and to issue appropriate stop transfer
instructions to the transfer agent.
PRINCIPAL STOCKHOLDER AGREEMENTS
The Principal Stockholders consist of each of InterWest Partners V,
InterWest Investors V, Oak V Affiliates Fund, Oak Investment Partners V, L.P.,
RS&Co. IV, L.P., RS&Co. Orphan Fund and Bayview Investors, Ltd. Concurrent with
the execution of the Reorganization Agreement, each Principal Stockholder
executed a Principal Stockholder Agreement and a release (each, a "Principal
Stockholder Release") in favor of Progenitor, Mercator and Merger Sub. The
Principal Stockholders, as of the Record Date, collectively held approximately
99% of the Mercator Series A Preferred Stock, 100% of the Mercator Series B
Preferred Stock and 99% of the Mercator Series C Preferred Stock, or
approximately 99.7% of the Mercator Preferred Stock and 97% of the Mercator
Capital Stock (in each case assuming the conversion of the Venture Capital
Bridge Notes into shares of Series D Preferred Stock), each on an as-
converted-to-common basis. The Principal Stockholders also collectively hold all
of the outstanding Venture Capital Bridge Notes.
Pursuant to the Principal Stockholder Agreements, each Principal Stockholder
agreed to vote all shares of Mercator Capital Stock held by it in favor of the
Reorganization and any matters related thereto, and granted an irrevocable proxy
to Progenitor to vote its shares of Mercator Capital Stock in favor of the
Reorganization. In the event the Reorganization is not approved by Mercator
stockholders, each Principal Stockholder has agreed to exchange its shares of
Mercator Capital Stock and Venture Capital Bridge Notes for the same
consideration that would be applicable under the Reorganization Agreement.
Pursuant to the Principal Stockholder Agreements, each Principal Stockholder has
also (i) waived or terminated certain rights of first refusal and registration
rights with respect to Mercator Capital Stock, (ii) agreed to convert its
Venture Capital Bridge Notes into shares of Mercator Series D Preferred Stock,
effective immediately prior to the Effective Time, and (iii) agreed not to sell
or otherwise dispose of any shares of Mercator Capital Stock until the Effective
Time of the termination of the Reorganization Agreement.
Each Principal Stockholder has also agreed in its Principal Stockholder
Agreement that it will not, directly or indirectly, initiate, solicit or
encourage, or take any other action to facilitate any inquiries or the making of
any proposal with respect to, or engage or participate in negotiations
concerning, provide any nonpublic information or data to, or have any
discussions with, any person other than Progenitor relating to any acquisition,
tender offer (including a self-tender offer), exchange offer, merger,
consolidation, acquisition of beneficial ownership of (or the right to vote
securities representing) ten percent (10%) or more of the total voting power of
Mercator, dissolution, business combination, purchase of all or any significant
portion of the assets or any division of (or any equity interest in) Mercator or
any subsidiary, or any similar transaction other than the Reorganization. Each
Principal Stockholder agreed to notify Progenitor if any such acquisition
proposals are received and furnish to Progenitor a copy of any written proposal
relating thereto.
Pursuant to the Principal Stockholder Releases, each Principal Stockholder
represented to Progenitor that there were no claims that have been, could have
been or in the future might be asserted by such Principal Stockholder against
Progenitor, Mercator, Merger Sub and certain related parties arising out of
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facts or circumstances occurring at any time on or prior to the date of the
Release and in any way relating to any duty or obligation of such parties to the
Principal Stockholder solely in connection with Mercator, and released all such
parties from any such claims that might nonetheless exist, except such claims as
may arise or result from the IPO or the transactions contemplated by the
Reorganization Agreement.
THE REORGANIZATION AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF CERTAIN PROVISIONS OF THE REORGANIZATION
AGREEMENT, A COPY OF WHICH IS ATTACHED AS APPENDIX A TO THIS PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE REORGANIZATION
AGREEMENT.
THE REORGANIZATION
Pursuant to the Reorganization Agreement, and subject to the terms and
conditions thereof, at the Effective Time Merger Sub will be merged with and
into Mercator, with Mercator as the Surviving Corporation, and the separate
existence of Merger Sub shall thereupon cease. The Reorganization will have the
effects specified in Section 259 of the DGCL.
PROGENITOR REVERSE STOCK SPLIT
Prior to or at the Effective Time, Progenitor intends to effect a reverse
stock split of Progenitor Common Stock (presently contemplated as a one-for-two
reverse stock split, such that every two of the outstanding shares of Progenitor
Common Stock will be combined into, and thereafter represent, one share of
Progenitor Common Stock). The discussion in this Proxy Statement/Prospectus
assumes that the reverse stock split has been consummated as a one-for-two
reverse split, although Progenitor may choose to effect a different split, or
not to effect any split.
CLOSING
The closing of the transactions contemplated by the Reorganization Agreement
(the "Closing") will take place simultaneously with the closing of the IPO,
subject to the satisfaction or waiver of all of the conditions to the
obligations of Mercator and Progenitor, respectively, to consummate the
Reorganization. See "--Conditions." The transactions will not be closed,
however, until after the IPO has been consummated, and there can be no assurance
as to the timing of the IPO. See "Initial Public Offering."
CONVERSION OF SECURITIES
Each holder of a certificate representing any shares of Mercator Capital
Stock, other than Excluded Shares (a "Certificate"), upon consummation of the
Reorganization will cease to have any rights with respect to such Mercator
Common Stock, except the right to receive, without interest, shares of
Progenitor Common Stock and cash in lieu of fractional shares (as described in
"The Reorganization--Exchange Ratios") upon the surrender of such Certificate.
Any shares of Progenitor Common Stock owned by Mercator would become
treasury stock of Progenitor.
STOCK OPTIONS AND WARRANTS
As of the Effective Time, each of the warrants to acquire shares of Mercator
Capital Stock outstanding as of the date of the Reorganization Agreement and not
expired as of the Effective Time, and each of the options to acquire shares of
Mercator Capital Stock not expired as of the Effective Date, will be assumed by
Progenitor and converted into a Replacement Warrant or a Replacement Option, as
the case may be, to purchase that number of shares of Progenitor Common Stock
(rounded up to the nearest whole share) to which the holder thereof would have
been entitled to receive under the Reorganization
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Agreement with respect to the shares of Mercator Capital Stock which the holder
could have purchased had the stock option or warrant been exercised immediately
prior to the Effective Time (see "The Reorganization--Exchange Ratios"), and the
Replacement Option or Replacement Warrant shall have an aggregate exercise price
equal to the former aggregate exercise price; provided, however, that in the
case of any Mercator stock option to which Section 421 of the Code applies by
reason of its qualification under Section 422 of the Code, the conversion
formula shall be adjusted, if necessary, to comply with Section 424(a) of the
Code to the effect that the number of shares shall be rounded down to the
nearest whole share and the exercise price shall be rounded up to the nearest
penny.
Progenitor has agreed to honor the option vesting commitments for employees
and senior executives and management made by the Mercator Board of Directors,
with respect to options existing at the Effective Time that are converted as
described above into options to purchase shares of Progenitor Common Stock.
Under those commitments, upon (i) a change of control of Mercator (which would
include the Reorganization), followed by (ii) the termination of employment (or
consulting relationship) of an optionholder for any reason other than cause by
the successor corporation prior to the first anniversary of such change of
control, all stock options held by such optionholder will become fully vested
and exercisable. In addition, the Reorganization will result in the vesting of
options for several of the executive officers of Mercator in accordance with
pre-existing arrangements, regardless of whether there is any termination in the
employment of the optionholder. See "The Reorganization--Interests of Certain
Persons in the Reorganization--Stock Option Plans."
Except as described above, the converted stock options or warrants, as the
case may be, will be subject to the same terms and conditions (including,
without limitation, expiration date, vesting and exercise provisions) as were
applicable to such stock options or warrants immediately prior to the Effective
Time (giving effect to any accelerated vesting applicable as a result of the
consummation of the Reorganization), except that holders will be required to
execute a Lockup Agreement as a condition to receipt of such stock options.
Consummation of the Reorganization will not be treated as a termination of
employment for purposes of such stock options. In addition, no such option or
warrant will be converted into a stock option or warrant to purchase a partial
share of Progenitor Common Stock. Progenitor has provided for the assumption of
such options by adopting the Progenitor 1997 Stock Option Plan. See "Management
of Progenitor After the Reorganization--Stock Plans--1997 Stock Option Plan."
The assumption of such options enables participants in Mercator's 1993 Stock
Option Plan and 1996 Stock Option Plan to hold options to acquire Progenitor
Common Stock after the Reorganization, rather than having their options
terminate upon consummation of the Reorganization. As of June 20, 1997, there
were outstanding options to purchase an aggregate of 2,729,179 shares of
Mercator Common Stock, at a weighted average exercise price of $0.18 per share
(at exercise prices ranging from $.15 to $1.30 per share). In addition, at such
date the Phoenix Warrants to purchase 17,850 shares of Mercator Series A
Preferred Stock, at $2.80 per share, and 46,800 shares of Mercator Series B
Preferred Stock, at $2.50 per share, were outstanding.
The Reorganization Agreement provides that Mercator will use commercially
reasonable efforts to cause all holders of all warrants to purchase Mercator
Capital Stock to exercise such securities for underlying Mercator Capital Stock
on or prior to the Closing Date. Exercise of all such warrants is a condition to
Progenitor's obligation to consummate the Reorganization. The Reorganization
Agreement also provides that Mercator will use commercially reasonable efforts
to provide to Progenitor duly executed Lockup Agreements from each holder of
options or warrants to acquire Mercator Capital Stock, and that Progenitor is
not required under the Reorganization Agreement to deliver to any person
otherwise entitled to receive shares of Progenitor Common Stock pursuant to the
exercise of any options or warrants to purchase Mercator Capital Stock that are
assumed by Progenitor unless and until such person shall have delivered to
Progenitor a duly and validly executed Lockup Agreement. Progenitor is entitled
to place legends on the certificates evidencing shares of Progenitor Common
Stock pursuant to the
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Lockup Agreement or any Affiliate Agreement, and to issue appropriate stop
transfer instructions to the transfer agent. See "The Reorganization--Lockup
Agreements."
The Reorganization Agreement provides that Progenitor will file one or more
registration statements on Form S-8 under the Securities Act, or such amendments
to its existing registration statements on Form S-8 or amendments to the S-4
Registration Statement as may be available, in order to register the shares of
Progenitor Common Stock issuable upon exercise of Replacement Options. Such
filing is to be done as soon as practicable after the later of the Effective
Time or the IPO, but in no event more than 90 days after such event.
EXCHANGE OF SHARES
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail to each holder of record of Mercator Common Stock (i) a letter
of transmittal and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing shares of Progenitor
Common Stock. Upon surrender of a Certificate to the Exchange Agent together
with such letter of transmittal properly completed and duly executed (together
with any other information on documents required thereby) the holder of such
Certificate will be entitled to receive in exchange therefor (i) a certificate
representing that number of whole shares of Progenitor Common Stock and (ii) a
check representing the amount of cash in lieu of fractional shares, if any,
which such holder has the right to receive in respect of the Certificate so
surrendered, subject to the holdback of shares of Progenitor Common Stock, if
any, pursuant to the indemnification requirements and the escrow agreement
described herein. MERCATOR STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES
UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL. MERCATOR STOCKHOLDERS SHOULD NOT
RETURN THEIR CERTIFICATES WITH THE ENCLOSED PROXY.
Notwithstanding the foregoing, Progenitor shall not be required to deliver
to any person otherwise entitled to receive any shares of Progenitor Common
Stock in exchange for Certificates or pursuant to options or warrants to
purchase Mercator Capital Stock unless and until such person shall have
delivered to Progenitor a signed Lockup Agreement. See "The
Reorganization--Lockup Agreements."
No fractional shares of Progenitor Common Stock will be issued pursuant to
the Reorganization. In lieu thereof, cash adjustments will be paid in an amount
equal to the product of the fraction of a share of Progenitor Common Stock that
would otherwise be issuable multiplied by the IPO Common Stock Price. See "The
Reorganization--Exchange Ratios."
If any issuance of shares of Progenitor Common Stock in exchange for shares
of Mercator Capital Stock is to be made to a person other than the Mercator
stockholder in whose name the certificate is registered at the Effective Time,
it will be a condition of such exchange that the certificate so surrendered be
properly endorsed or otherwise be in proper form for transfer and that the
Mercator stockholder requesting such issuance either pay any transfer or other
tax required or establish to the satisfaction of the Exchange Agent that such
tax has been paid or is not payable.
After the Effective Time, there will be no further transfers of Mercator
Common Stock on the stock transfer books of Mercator. If a certificate
representing Mercator Common Stock is presented for transfer, it will be
canceled and a certificate representing the appropriate number of full shares of
Progenitor Common Stock and cash in lieu of fractional shares and any dividends
and distributions will be issued in exchange therefor upon completion of the
letter or transmittal, any accompanying information and execution and delivery
of the Lockup Agreement.
Neither the Exchange Agent nor any party to the Reorganization Agreement is
liable to a holder of shares of Mercator Capital Stock for any shares of
Progenitor Common Stock or dividends thereon or the cash payment for fractional
interests delivered to a public official pursuant to applicable escheat laws.
In the event that any Certificate has been lost, stolen or destroyed, upon
(i) the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed, and (ii) if required by
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Progenitor, in its discretion, the posting by such person of a bond in such sum
as Progenitor may direct as indemnity, or such other form of indemnity as
Progenitor shall direct, against any claim that may be made against Progenitor
with respect to such Certificate, Progenitor will issue or cause to be issued in
exchange for such Certificate the number of whole shares of Progenitor Common
Stock and cash in lieu of fractional shares into which the shares of Mercator
Capital Stock represented by the Certificate are converted in the
Reorganization.
Holders of Mercator Capital Stock may be entitled to dissent from the
Reorganization and demand appraisal or dissenters' rights with respect to any
such Mercator Capital Stock in accordance with their statutory rights (each
person electing to exercise such rights, a "Dissenting Holder"). Shares of
Mercator Capital Stock held by a Dissenting Holder will not be converted, but
will from and after the Effective Time represent only the right to receive such
consideration as may be determined to be due to the Dissenting Holder pursuant
to the applicable statute; provided, however, that each share of Mercator
Capital Stock held by a Dissenting Holder who, after the Effective Time
withdraws his or her demand for appraisal or loses his or her rights of
appraisal with respect to such shares of Mercator Common Stock, will not be
deemed to be an Excluded Share but will be deemed to be converted, as of the
Effective Time, into the right to receive Progenitor Common Stock in accordance
with the applicable Exchange Ratio. See "Appraisal and Dissenters' Rights of
Mercator Stockholders" and "Applicability of California Law to Mercator."
After the Effective Time and until surrendered, shares of Mercator Capital
Stock (except for Dissenting Shares), will be deemed for all corporate purposes,
other than the payment of dividends and distributions, to evidence ownership of
the number of full shares of Progenitor Common Stock into which such shares of
Mercator Capital Stock were converted at the Effective Time. No dividends or
other distributions, if any, payable to holders of Progenitor Common Stock will
be paid to the holders of any certificates for shares of Mercator Common Stock
until such certificates are properly surrendered for exchange. Upon surrender of
such certificates, all such declared dividends and distributions which shall
have become payable with respect to such Progenitor Common Stock in respect of a
record date after the Effective Time will be paid to the holder of record of the
full shares of Progenitor Common Stock represented by the certificate issued in
exchange therefor, without interest.
NO MERCATOR STOCKHOLDER WILL BE ENTITLED UNDER THE TERMS OF THE
REORGANIZATION AGREEMENT TO RECEIVE SHARES OF PROGENITOR COMMON STOCK (OR CASH
IN LIEU OF FRACTIONAL SHARES THEREOF) UNLESS AND UNTIL SUCH STOCKHOLDER SHALL
HAVE DELIVERED TO PROGENITOR A DULY AND VALIDLY EXECUTED LOCKUP AGREEMENT IN THE
FORM REQUIRED PURSUANT TO THE REORGANIZATION AGREEMENT. A form of the required
Lockup Agreement is attached to this Proxy Statement/Prospectus as Appendix D.
See "The Reorganization--Lockup Agreements."
BRIDGE LOAN FINANCING
Progenitor has agreed to provide the Mercator Bridge Loan to Mercator
pursuant to the Mercator Bridge Loan Agreement executed by Progenitor and
Mercator concurrently with the Reorganization Agreement. The line of credit was
in an initial maximum commitment amount of $5 million and was provided pursuant
to an agreed funding schedule and subject to specified terms and conditions.
Advances under the Mercator Bridge Loan Agreement bear interest at the rate of
10% per annum. All advances under the Mercator Bridge Loan are payable in full
on January 15, 1999, or, if earlier, on the earliest to occur of several events,
including the occurrence of a change in control of Mercator (other than as
contemplated by the Reorganization Agreement), an initial public offering by
Mercator and an event of default under the Mercator Bridge Loan Agreement. Such
events of default include, among others, Mercator's failure to perform in any
material respect material covenants contained in the Mercator Bridge Loan
Agreement or the Reorganization Agreement, and the failure of any Principal
Stockholder to perform any material covenants contained in certain parts of the
Principal Stockholder Agreements, which failure is not cured within 10 days of
written notice from Progenitor, and the breach of certain representations and
warranties by Mercator that have, or are reasonably likely to have, a material
adverse effect on
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Mercator. Advances also are repayable by Mercator on thirty days notice by
Mercator, and advances that have been repaid may be reborrowed, subject to the
terms and conditions of the Mercator Bridge Loan Agreement. Absent such
terminating events, the Mercator Bridge Loan will remain in place even if
Mercator stockholders do not approve the Reorganization Proposal. As of June 23,
1997, outstanding advances under the Mercator Bridge Loan totaled $2.9 million.
The amount of advances or repayments under the Mercator Bridge Loan will have no
effect on the Adjusted Purchase Price or otherwise on the applicable Exchange
Rates or Per Share Consideration.
Progenitor has the option, after the applicable Agreement Deadline or such
earlier date as the Reorganization Agreement is terminated, to convert all or
any portion of the principal and accrued interest under the Mercator Bridge Loan
into shares of Mercator Series D Preferred Stock, as provided in the promissory
note executed by Mercator in favor of Progenitor in connection with the Mercator
Bridge Loan (the "Mercator Promissory Note"), at a price of $1.34 per share (the
"Conversion Price"), provided that Progenitor must convert at least 10% of the
then outstanding principal balance under the Mercator Bridge Loan Agreement.
The maximum commitment amount of the line of credit increased to $5.8
million at the end of May, 1997, when Progenitor elected to extend the Agreement
Deadline to June 30, 1997, and increased to $6.6 million at the end of June,
1997, when Progenitor elected to extend the Agreement Deadline to July 31, 1997.
In the event the Reorganization has not closed on or prior to the applicable
Agreement Deadline, Progenitor will advance to Mercator an amount (the "Residual
Loan Amount") equal to the maximum commitment amount less all advances then
outstanding. Advances under the Mercator Bridge Loan are secured pursuant to a
security agreement between Mercator and Progenitor, whereby Mercator assigned
and pledged a security interest to Progenitor in all tangible and intangible
personal property of Mercator, including equipment, inventory, receivables,
intellectual property collateral, deposit accounts, books, records, products and
proceeds; provided, that the pledge of intellectual property collateral is
limited to the extent such grant would violate the terms of any license
agreement or other agreement to which Mercator is a party (other than to the
extent that such term would be rendered ineffective pursuant to Section 9-318 of
the Uniform Commercial Code of any relevant jurisdiction). In connection with
the Interneuron Bridge Loan, Progenitor has assigned certain of its interests in
the Mercator Bridge Loan to Interneuron.
All advances under the Mercator Bridge Loan are subject to certain
conditions precedent, including certification by an officer of Mercator that
there exists no event of default and no event which, with the giving of notice
or lapse of time, would constitute an event of default exists. In addition,
Mercator must submit information with each request for advance regarding use of
the funds made with prior advances.
In connection with the Mercator Bridge Loan, Mercator agreed that, so long
as any principal or interest is outstanding thereunder, (i) Mercator will not
take any action for which the consent of the Series D Preferred Stock, voting as
a separate class, would be required under Section 5(b)(ii) of the Mercator
Certificate of Incorporation (assuming more than 100,000 of such shares were
outstanding), without Progenitor's consent, (ii) Mercator will not issue any
shares of Series D Preferred Stock to any other party, except as required by the
Reorganization Agreement, and (iii) prior to agreeing to any merger, acquisition
or sale of assets that constitutes a "Liquidating Event" under the Mercator
Certificate of Incorporation, Mercator will consult with Progenitor as to the
amount of consideration to be received by the holders of Series D Preferred
Stock in connection with such Liquidating Event, although Mercator may
consummate such transaction without Progenitor's consent. If the Liquidating
Event is consummated, to the extent Progenitor has converted on or prior to
consummation of the transaction, Progenitor and all other holders of Mercator
Series D Preferred Stock will be entitled to all appraisal or dissenter's rights
provided by law in respect of such Liquidating Event and, in the event
Progenitor and such other holders are not entitled under applicable law to such
rights, Mercator will provide Progenitor the right to seek an appraisal of the
Series D Preferred Stock.
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INTERNEURON BRIDGE LOAN. Progenitor is funding the Mercator Bridge Loan
initially through a loan to Progenitor from Interneuron (the "Interneuron Bridge
Loan"). Such loan will become due and payable on January 15, 1999 or, if
earlier, on the earliest to occur of several specified events, provided that the
outstanding principal and accrued interest of such loan will be converted into
Series D Preferred Stock upon the closing of the IPO. Other amounts owed to
Interneuron by Progenitor may be converted into shares of Progenitor Common
Stock in connection with the IPO or repaid by Progenitor with a portion of the
proceeds of the IPO. Advances under the Interneuron Bridge Loan are secured
pursuant to a security agreement and other collateral documents between
Progenitor and Interneuron, whereby Progenitor assigned and pledged a security
interest to Interneuron in all tangible and intangible personal property of
Progenitor, including equipment, inventory, receivables, intellectual property
collateral, deposit accounts, books, records, products, proceeds, and a
collateral assignment of the security interest granted to Progenitor by Mercator
under the security agreement related to the Mercator Bridge Loan, together with
a direct pledge of the Mercator Promissory Note, to be held by Interneuron until
repayment of all amounts outstanding under the Interneuron Bridge Loan;
provided, however, the pledge of general intangibles is limited to the extent
that (i) such general intangibles are not assignable as a matter of law or (ii)
such grant would require the consent of the licensor, lessor or other third
party according to the express terms of any applicable license, lease or other
agreement (but solely to the extent that such restriction is enforceable under
applicable law) and such consent has not been obtained. Upon the occurrence and
continuance of an event of default on the part of Progenitor under the
Interneuron Bridge Loan, Interneuron will be entitled to conduct proceedings to
enforce, to make all waivers, amendments and agreements with respect to and to
take all action upon the happening of an event of default under the Mercator
Bridge Loan. See "Description of Progenitor Securities--Convertible Debenture
and Promissory Note," "Certain Transactions of Progenitor--Relationship with
Interneuron" and "Risk Factors--Control of Progenitor By, and Potential
Conflicts of Interest With, Interneuron."
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains certain representations and warranties
by Mercator relating to, among other things: (i) due organization, power and
standing; (ii) capital structure; (iii) the authorization, execution, delivery
and enforceability of the Reorganization Agreement and the Related Agreements;
(iv) valid issuance of Mercator Capital Stock; (v) required governmental
consents and approvals and the absence of breaches or violations of its
Certificate of Incorporation or Bylaws (each as amended to date), agreements and
instruments, and law; (vi) the absence of litigation; (vii) form of Certificate
of Incorporation and Bylaws in effect; (viii) reports and financial statements;
(ix) the absence of certain changes or events; (x) the accuracy of information
in the filing of registration and information statements, including this Proxy
Statement/Prospectus; (xi) the validity of and the absence of material defaults
under certain contracts and agreements; (xii) employee benefit plans; (xiii)
taxes; (xiv) compliance with applicable law; (xv) interested party transactions;
(xvi) labor and employment matters; (xvii) ownership of Progenitor Common Stock;
(xviii) insurance; (xix) absence of products; (xx) environmental matters; (xxi)
intellectual property rights; (xxii) real property; (xxiii) the provision of
true and complete copies of all requested documents; (xxiv) ownership of
Mercator Capital Stock; (xxv) suppliers; (xxvi) completeness of representations;
(xxvii) actions regarding Delaware's takeover statute; (xxviii) voting
arrangements; (xxix) ownership of shares of other companies; (xxx) absence of
undisclosed liabilities; (xxxi) title to personal property; (xxxii) guarantees
and suretyships; (xxxiii) brokers; and (xxxiv) complete disclosure regarding
facts which would result in a material adverse effect.
The Reorganization Agreement also contains certain representations and
warranties by Progenitor relating to, among other things: (i) due organization,
power and standing; (ii) capital structure; (iii) the authorization, execution,
delivery and enforceability of the Reorganization Agreement and the Related
Agreements; (iv) valid issuance of Progenitor Common Stock; (v) required
governmental consents and approvals and the absence of breaches or violations of
its Certificate of Incorporation or Bylaws (each as amended to date), agreements
and instruments, and law; (vi) the absence of litigation; (vii) the validity of
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certain contracts and agreements; (viii) absence of registration rights; (ix)
form of Certificate of Incorporation and Bylaws in effect; (x) title to property
and assets; (xi) taxes; (xii) financial statements; (xiii) the absence of
certain changes or events; (xiv) the preparation and accuracy of information in
the filing of registration and information statements, including this Proxy
Statement/Prospectus; (xv) intellectual property rights; (xvi) the provision of
true and complete copies of all requested documents; (xvii) employee benefit
plans; (xviii) environmental matters; (xix) insurance; (xx) absence of
undisclosed liabilities; (xxi) financial resources; and (xxii) complete
disclosure regarding facts which could result in a material adverse effect.
CERTAIN COVENANTS
The Reorganization Agreement provides that Mercator will, prior to the
Effective Time, except as agreed to in writing by Progenitor, (i) conduct its
business only in accordance with the operating budget attached to the Bridge
Loan Agreement (the "Mercator Budget") and only in the ordinary and usual course
of business and consistent with past practices; and (ii) not, except as
contemplated by the Reorganization Agreement, (a) amend its Certificate of
Incorporation or Bylaws, or (b) split, combine or reclassify any shares of its
outstanding capital stock or declare, set aside or pay any dividend or other
distribution in respect of its capital stock, or directly or indirectly redeem,
purchase or otherwise acquire any shares of its capital stock or other
securities, other than in connection with the use of shares of capital stock to
pay the exercise price or tax withholdings in connection with its stock-based
employee benefit plans in the ordinary course of business and consistent with
past practices.
The Reorganization Agreement provides that, prior to the Effective Time,
Mercator will not, except as set forth in the Reorganization Agreement and
except as agreed to in writing by Progenitor, (i) authorize for issuance, issue,
sell, pledge, dispose of, encumber, deliver or agree or commit to issue, sell,
pledge, or deliver any additional shares of, or rights of any kind to acquire
any shares of, its capital stock or exchangeable into shares of stock or any
bond, debenture, note or other indebtedness having the right to vote (or
convertible into or exercisable for securities having the right to vote), except
for unissued shares of Mercator Capital Stock reserved for issuance upon the
exercise of the stock options or pursuant to Mercator's employee stock plans or
the Phoenix Warrants; (ii) except as set forth in the Mercator Budget, acquire,
dispose of, transfer, lease, license, mortgage, pledge or encumber any fixed or
other assets, other than in the ordinary course of business and consistent with
past practices; (iii) except as set forth in the Mercator Budget, incur, assume
or prepay any indebtedness, liability or obligation or any other liabilities or
issue any debt securities, other than in the ordinary course of business and
consistent with past practices; (iv) assume, guarantee, endorse or otherwise
become liable or responsible for the obligations of any other person, other than
in the ordinary course of business and consistent with past practices (and other
than obligations under the Mercator Bridge Loan Agreement); or (v) make any
loans, advances or capital contributions to, or investments in, any other
person, other than in the ordinary course of business and consistent with past
practices.
The Reorganization Agreement also provides that, prior to the Effective
Time, Mercator will, except as agreed to in writing by Progenitor, (i) use
commercially reasonable efforts to preserve intact its business organization, to
keep available the services of its present officers and key employees, and to
preserve the goodwill of those having business relationships with it; (ii) pay
debts and taxes when due subject to good faith disputes thereof, and pay or
perform other obligations when due; (iii) use commercially reasonable efforts to
not take or omit to take any action, and shall not agree to take or omit to take
any action, which would make any representation or warranty of Mercator in the
Reorganization Agreement untrue or incorrect; (iv) not enter into any contract
or commitment, or violate, amend or otherwise modify or waive any of the terms
of any contract or commitment, other than in the ordinary course of business and
consistent with past practices; (v) not transfer to any person or entity
intellectual property rights; (vi) not enter into or amend any agreements
pursuant to which any other party is granted research, distribution, marketing
or other rights of any type or scope; (vii) not enter into any operating lease
other than in the
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ordinary course of business and consistent with past practices, and in no event
in excess of an aggregate of $10,000 over the term of any and all such leases;
(viii) not pay, discharge or satisfy, in an amount in excess of $10,000 in any
one case or $25,000 in the aggregate, any claim, liability or obligation arising
other than in the ordinary course of business; (ix) not make any capital
expenditures, capital additions or capital improvements in an amount in excess
of $10,000 in any one case or $25,000 in the aggregate; (x) not reduce the
amount of any insurance coverage provided by existing insurance policies; (xi)
not, except as set forth in the Reorganization Agreement, hire any new employee,
pay any special bonus or special remuneration to any employee or member of the
Board of Directors, or increase the salaries, wage rates, fringe benefits or
other compensation of its members of the Board of Directors, officers or
employees; (xii) not, except as set forth in the Reorganization Agreement, grant
any severance or termination pay to any director or officer or to any other
employee; (xiii) not commence a lawsuit other than for the routine collection of
bills, in such cases where it in good faith determines that failure to commence
suit would result in the material impairment of a valuable aspect of its
business, provided that it consults with Progenitor prior to the filing of such
a suit, or for a breach of the Reorganization Agreement or the Related
Agreements; (xiv) not acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire or engage in discussions relating to the acquisition of any assets that
are material, individually or in the aggregate, to its business, taken as a
whole; (xv) not, other than in the ordinary course of business and consistent
with past practices, make or change any material election in respect of taxes,
adopt or change any accounting method in respect of taxes, file any material
return or any amendment to a material return, enter into any closing agreement,
settle any claim or assessment in respect of taxes, or consent to any extension
or waiver of the limitation period applicable to any claim or assessment in
respect to taxes; (xvi) give all notices and other information required prior to
the Effective Time under any applicable law in connection with the transactions
provided for in the Reorganization Agreement and the Related Agreements; (xvii)
not revalue any of its assets, including without limitation, writing down the
value of inventory or writing off notes or accounts receivable, except as
required under generally accepted accounting practices and in the ordinary
course of business consistent with past practices; (xviii) not enter into any
agreement or arrangement with any holder of 5% or more of the equity securities
of Mercator, any director or any officer, or any person or entity related to any
thereof, except as permitted by the terms of the Reorganization Agreement; and
(xix) not enter into any contract, agreement, commitment or arrangement with
respect to any of the items prohibited by the Reorganization Agreement.
The Reorganization Agreement provides that Mercator will not, except as
required by law and certain exceptions pursuant to the Reorganization Agreement:
(i) enter into, adopt or amend any bonus, profit sharing, compensation, stock
option, pension, retirement, deferred compensation, employment, severance or
other employee benefit plan, agreement, trust, plan, fund or other arrangement
between Mercator and one or more of its officers, directors or employees
(collectively, "Compensation Plans"), (ii) institute any new employee benefit,
welfare program or Compensation Plan, (iii) make any change in any Compensation
Plan or other employee welfare or benefit arrangement, or enter into any
employment or similar agreement or arrangement with any employee, or (iv) enter
into or renew any contract, agreement, commitment or arrangement providing for
the payment to any director, officer or employee of compensation or benefits
contingent, or the terms of which are materially altered in favor of such
individual, upon the occurrence of any of the transactions contemplated by this
Reorganization Agreement and the Related Agreements. The Reorganization
Agreement provides that Mercator will notify Progenitor immediately regarding
any other change of which it has knowledge concerning the scientists or
scientific advisors of Mercator, including any resignation or other materially
adverse change in such persons' relationship with Mercator.
The Reorganization Agreement provides that, among other things, (i)
Progenitor will be permitted to designate one representative to attend all
Mercator Board of Directors and committee meetings during the period prior to
the Effective Time and will receive copies of all correspondence relating to any
such
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meeting, except any portion of a meeting (or correspondence) relating to
Mercator's compliance with the terms of the Reorganization Agreement or the
enforcement of its obligations thereunder; (ii) Mercator will use commercially
reasonable efforts to cause to be delivered to Progenitor and the Underwriters
with respect to the IPO and to Progenitor in connection with the Reorganization
letters of Mercator's independent auditors, in connection with and on the
respective effective dates of the IPO Registration Statement and the
registration statement of Progenitor of which this Proxy Statement/Prospectus is
a part, and subsequent updates thereto, dated the date of the Effective Time.
The Reorganization Agreement provides that, except as otherwise stated
therein, each of Mercator and Progenitor will, and Progenitor will cause its
subsidiaries to, use commercially reasonable efforts (i) to take, or cause to be
taken, all actions necessary to comply promptly with all legal requirements that
may be imposed on such party or its subsidiaries with respect to the
Reorganization and the consummation of the transactions contemplated by the
Reorganization Agreement and the Related Agreements, subject to the appropriate
vote or consent of stockholders, and (ii) to obtain (and to cooperate with the
other party to obtain) any consent, authorization, order or approval of, or any
exemption by, any governmental entity or any other public or private third party
that is required to be obtained or made by such party or any of its subsidiaries
in connection with the Reorganization and the transactions contemplated by the
Reorganization Agreement and the Related Agreements; provided, however, that a
party shall not be obligated to take any action pursuant to the foregoing if the
taking of such action or such compliance or the obtaining of such consent,
authorization, order, approval or exemption would result in the imposition of
certain conditions or restrictions on such party or on the Surviving
Corporation.
The Reorganization Agreement provides that Progenitor and Mercator will
agree upon a list of persons who may be deemed "affiliates" of Mercator for
purposes of Rule 145 under the Securities Act ("Affiliates"). Mercator agreed to
use commercially reasonable efforts to cause each Affiliate to deliver to
Progenitor, prior to the date of this Proxy Statement/Prospectus, a written
agreement that such Affiliate will not sell, pledge, transfer or otherwise
dispose of any shares of Progenitor Common Stock, except pursuant to an
effective registration statement or in compliance with such Rule 145 or an
exemption from the registration requirements of the Securities Act. See "The
Reorganization--Resale Restrictions."
The Reorganization Agreement provides that, prior to the Effective Time,
Mercator will cause one or more of its designated representatives to confer on a
regular and frequent basis with Progenitor and to report the general status of
its ongoing operations and to deliver to Progenitor (not less than monthly)
unaudited consolidated balance sheets and related consolidated statements of
income, changes in stockholders' equity and changes in financial position for
the period since the last such reports as well as copies of the detailed ledger
and other expenditure items, and projected expenditures contemplated by the
Bridge Loan Agreement. Each party shall promptly advise the other of any change
or event having, or which, insofar as can reasonably be foreseen, could have, a
material adverse effect on such party or which would cause or constitute a
breach of any of the representations, warranties or covenants of such party
contained therein. Except where prohibited by applicable statutes and
regulations, and subject to the Reorganization Agreement, each party shall
promptly provide the other (or its counsel) with copies of all other filings
made by such party with any state or federal government entity in connection
with the Reorganization Agreement or the related agreements or the transactions
contemplated thereby.
The Reorganization Agreement also provides that (i) except as otherwise
contemplated by the Reorganization Agreement, Mercator shall not change its
methods or policies of accounting in effect at November 30, 1996, except as
required by changes in generally accepted accounting principles as concurred in
by such party's independent auditors; (ii) Mercator will not change its fiscal
year; (iii) Progenitor may elect in its sole discretion to cease pursuit of the
IPO or to postpone the IPO until after expiration of the Agreement Deadline if
it determines that continued pursuit of the IPO is inadvisable; (iv) Mercator
may enter into strategic collaborations with third parties in the ordinary
course of business upon prior discussion with Progenitor and receipt of approval
by Progenitor; (v) Progenitor will not withhold unreasonably its approval of any
action proposed to be taken by Mercator for which
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Progenitor's approval is required under the Reorganization Agreement, except
where Progenitor is permitted therein to act in its sole discretion; (vi)
subject to prior consultation with Progenitor, Mercator will be free to hire
additional employees in the ordinary course of business prior to the Effective
Time and to grant stock options to acquire Mercator Common Stock to any such new
employee (in usual and customary amounts and with an exercise price that is
equal to the fair market value thereof on the date of grant); (vii) Mercator
will use commercially reasonable efforts to consult with Progenitor regarding
the retention of any such new employee; and (viii) Progenitor and its
subsidiaries will use commercially reasonable efforts to not fail to take or
omit to take any action, and Progenitor shall not agree to take or omit to take
any action, which would make any representation or warranty of Progenitor herein
untrue or incorrect.
NO SOLICITATION
The Reorganization Agreement provides that, until the earlier of termination
of the Reorganization Agreement or consummation of the Reorganization, Mercator
will not, directly or indirectly, initiate, solicit or encourage, or take any
other action to facilitate any inquiries or the making of any proposal with
respect to, or engage or participate in negotiations concerning, provide any
nonpublic information or data to, or have any discussions with, any person other
than Progenitor and its affiliates relating to, any acquisition, tender offer
(including a self-tender offer), exchange offer, merger, consolidation,
acquisition of beneficial ownership of (or the right to vote securities
representing) ten percent (10%) or more of the total voting power of Mercator,
dissolution, business combination, purchase of all or any significant portion of
the assets or any division of (or any equity interest in) Mercator or any
subsidiary, or any similar transaction other than the Reorganization. Mercator
will notify Progenitor if any such acquisition proposals are received and
furnish to Progenitor a copy of any written proposal relating thereto.
The Principal Stockholders have agreed in their respective Principal
Stockholder Agreements to abide by similar restrictions with respect to
transactions involving the possible acquisition of Mercator. See "The
Reorganization--Principal Stockholder Agreements."
CERTAIN EMPLOYEE BENEFIT MATTERS
Upon consummation of the Reorganization, all options to purchase Mercator
Common Stock granted under Mercator's stock option plans will become options to
acquire Progenitor Common Stock. The vesting and exercisability of options
granted to certain officers and management personnel will be accelerated as a
result of the Reorganization, as set forth in the applicable agreements, or for
other individuals may be subject to the acceleration in the event of certain
terminations of employment following the Reorganization. See "--Stock Options
and Warrants," "The Reorganization--Interests of Certain Persons in the
Reorganization," "Management of Progenitor after the Reorganization--Stock
Plans" and "--Terms of Replacement Options."
EMPLOYEE RETENTION PLAN. Under the Employee Retention Plan, in the event of
a change of control of the Company on or before November 19, 1997, a $400,000
pool will be set aside to be paid sixty days after the effective date of the
change of control to eligible employees and consultants, including senior
executives and management, who have not voluntarily terminated employment with
Mercator by such date. The pool is to be allocated among employees and
consultants as recommended by Mercator's Chief Executive Officer and approved by
Mercator's Board of Directors, in accordance with a range specified in the
Reorganization Agreement and depending upon each individual's performance during
the period from knowledge of the impending change until the date payments are
distributed, with Progenitor's approval for each individual within the range.
With respect to senior executives, including Drs. Sigal, Brunke, Schatzman and
Wolff, the range is 15% to 25% of base pay. Progenitor has indicated that,
following the Reorganization, it will cause Mercator to honor the payments
contemplated by the Employee Retention Plan, regardless of the actual date of
the change in control of Mercator; provided that the Reorganization is
consummated with Progenitor Common Stock registered as described in the
Reorganization Agreement
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and this Proxy Statement/Prospectus. See "The Reorganization--Interests of
Certain Persons in the Reorganization."
EMPLOYEE SALARY PROTECTION PLAN. Under the Employee Salary Protection Plan,
full-time employees, other than senior executives and managers participating in
the Senior Executive and Management Salary Protection Plan (described below),
who are employed by Mercator as of or hired after the date of approval of that
Plan (which was approved by the Mercator Board of Directors on November 19,
1996) and who are terminated except for cause within 12 months of such date of
approval shall receive a severance payment of between two and four weeks base
salary, depending on years of service with Mercator, provided that no employee
shall receive less than two weeks or more than four weeks of severance. Such
employees also shall continue to receive health and dental benefits during their
severance periods. Progenitor has agreed to cause Mercator to honor such plan
following the Reorganization, provided that such plan meets certain conditions.
SENIOR EXECUTIVE AND MANAGEMENT SALARY PROTECTION PLAN. Senior Executives
(as defined below) who are constructively terminated or terminated without cause
shall receive a severance payment of between two and six months base pay, as
specified in the Plan. The Senior Executives also shall continue to receive
health and dental benefits during their severance periods. "Senior Executives"
for purposes of this Plan are Drs. Sigal, Schatzman, Brunke and Wolff, Mr. Mars
and Ms. Michele Phua (Controller). See "The Reorganization--Interests of Certain
Persons in the Reorganization."
NON-SOLICITATION AGREEMENTS. In addition, Mercator has agreed to use
commercially reasonable efforts to obtain signed non-solicitation agreements
from certain employees and officers of Mercator, pursuant to which each such
employee or officer would agree that such employee will not, during the period
of his or her employment by Progenitor and for a period of one year thereafter,
solicit for employment any person employed by Progenitor or any affiliate of
Progenitor, without Progenitor's consent.
DIRECTOR AND OFFICER INDEMNIFICATION
Progenitor has agreed that, following the Effective Time, the officers and
directors of Mercator shall be entitled to be indemnified by the Surviving
Corporation in their capacities as officers or directors of Mercator prior to
the Effective Time to the extent provided by Mercator's Certificate of
Incorporation, Mercator's Bylaws and the indemnification agreements entered into
with officers and directors, as well as to any such rights provided by the DGCL
(other than with respect to any reduction in the purchase price or holdback of
Escrow consideration as to any claim to which Progenitor or any Progenitor
indemnitee is entitled to indemnification as described above). Progenitor has
agreed to, and to cause the Surviving Corporation to, honor such rights of
indemnification for at least six years following the Effective Time, and has
further agreed that the Certificate of Incorporation and Bylaws of the Surviving
Corporation shall contain substantially the same indemnification provisions set
forth in Mercator's Certificate of Incorporation and Bylaws and shall not be
amended in any manner adverse to Mercator's officers and directors with respect
to such matters for at least six years following the Effective Time. For a
period of six years after the Effective Time, Progenitor has agreed to maintain
in effect directors' and officers' liability insurance covering the officers and
directors of Mercator with respect to the IPO on the same terms as those
applicable to the then current officers and directors of Progenitor. See "The
Reorganization--Interests of Certain Persons in the Reorganization."
ACCESS AND INFORMATION
The Reorganization Agreement provides that, until the Effective Time,
Mercator and Progenitor, and Progenitor's subsidiaries, shall each afford to the
other access to all of its books, records, properties, facilities, personnel
commitments and records, and each shall furnish promptly to the other all
information concerning its business, properties and personnel as such other
party may reasonably request. Whenever
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any event occurs that should be set forth in an amendment or supplement to this
Proxy Statement/ Prospectus, each party will promptly inform the other and
cooperate in mailing to Mercator's stockholders such amendment or supplement.
Mercator also has agreed to furnish Progenitor all information concerning
Mercator and its stockholders and to take such other action as Progenitor may
reasonably request in connection with the IPO and the Reorganization.
All information furnished by Mercator to Progenitor or furnished by
Progenitor to Mercator pursuant to the Reorganization Agreement will be treated
as the sole property of the party furnishing the information until consummation
of the Reorganization. The parties will hold any such information which is
nonpublic in confidence in accordance with the current confidentiality agreement
between the parties, shall survive the termination, if any, of the
Reorganization Agreement.
So long as the Reorganization Agreement is in effect, Progenitor and
Mercator will each obtain the approval of the other prior to issuing any press
release or any other written communication (including any written communication
to employees) with respect to the Reorganization Agreement or the Related
Agreements or the transactions contemplated thereby, and will use commercially
reasonable efforts to consult with one another before otherwise making any
statement made in a public forum or responding to any press inquiry with respect
to the Reorganization Agreement or the Related Agreements or the transactions
contemplated thereby, except in each case as may be required by law or any
governmental agency.
AGREEMENTS RELATING TO APPROVAL OF THE REORGANIZATION
The Reorganization Agreement provides that (i) except to the extent required
in the exercise of the fiduciary duties of the Mercator Board of Directors under
applicable law as advised by independent counsel, Mercator will recommend
approval and adoption of the Reorganization Agreement and the Related Agreements
by the stockholders of Mercator and take all lawful action to solicit such
approval, and (ii) Mercator will, in accordance with the requirements of the IPO
and the Reorganization and the requirements of applicable law and Mercator's
Certificate of Amendment and Bylaws, use commercially reasonable efforts to
obtain the approval of Mercator stockholders for the Reorganization Agreement
and the Related Agreements and the amendment of the Mercator Certificate of
Incorporation as described herein. The Reorganization Agreement also provides
that, if any "fair price," "moratorium," "control share acquisition" or other
similar anti-takeover statute shall become applicable to the transactions
contemplated by the Reorganization Agreement, Mercator and the Mercator Board of
Directors will grant such approvals and take such actions as are necessary so
that such transactions contemplated may be commenced as promptly as practicable
and otherwise act to eliminate or minimize the effects of such statute or
regulation in the contemplated transaction.
ADDITIONAL AGREEMENTS
The Reorganization Agreement provides that Mercator and Progenitor will
cooperate with one another and use all commercially reasonable efforts to take,
or cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by the
Reorganization Agreement and the Related Agreements.
The Reorganization Agreement further provides that (i) each party will keep
the other apprised of the status of any inquiries made of such party by the
Commission or any other governmental agency or authority with respect to the
Reorganization Agreement and the Related Agreements or the transactions
contemplated therein; (ii) prior to the Closing Date, Mercator will review and,
to the extent determined necessary or advisable, consistent with generally
accepted accounting principles and the accounting rules, regulations and
interpretations of the Commission, modify and change its accrual, reserve and
provision policies and practices to reflect the Surviving Corporation's plans
with respect to the conduct of Mercator's business following the Reorganization
and to make adequate provision (for the costs and expenses relating
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thereto) so as to be applied consistently on a mutually satisfactory basis with
those of Progenitor; (iii) Mercator will use commercially reasonable efforts to
obtain the requisite stockholder approval for any payments that may be
considered parachute payments under Section 280G of the Code in the absence of
stockholder approval; and (iv) Mercator will use commercially reasonable efforts
to facilitate Progenitor reaching agreement with designated scientific advisors
and key scientists of Mercator regarding continued employment or affiliation
with the Surviving Corporation.
The Reorganization Agreement also provides that Progenitor and Mercator will
agree on one designee who Progenitor will cause to be elected to the Progenitor
Board of Directors promptly upon or immediately after the Effective Time,
provided that Progenitor will not thereafter have any obligation to nominate or
take any other steps to cause such designee to be elected to the Progenitor
Board of Directors. Progenitor and Mercator have agreed that such designee shall
be Robert R. Momsen. See "Management of Progenitor after the Reorganization."
Mr. Momsen also will act as the Mercator Representative in connection with
certain claims by Progenitor and other indemnitees for indemnification by
Mercator and Mercator securities holders. See "The Reorganization--Adjusted
Purchase Price Calculation; Indemnification; Escrow."
CONDITIONS
The obligations of Progenitor and Mercator to effect the Reorganization are
subject to the satisfaction of certain conditions, including, among others (any
of which may be waived by both Mercator and Progenitor pursuant to the
Reorganization Agreement): (i) obtaining Mercator stockholders' approval; (ii)
the absence of any injunction or other order by any federal, state or foreign
court which prohibits the consummation of the Reorganization; (iii) the absence
of any statute, rule, regulation, executive order, stay, decree, or judgment by
any court or governmental authority which prohibits or restricts the
consummation of the Reorganization; (iv) other than the filing of the
Certificate of Merger with the Secretary of State of Delaware, all
authorizations, consents, orders or approvals of, or declarations or filings
with, and all expirations of waiting periods imposed by, any governmental entity
(all of the foregoing, "Consents") which are necessary for the consummation of
the Reorganization, other than Consents the failure to obtain which would not
materially adversely affect the consummation of the Reorganization or in the
aggregate have a material adverse effect on the Surviving Corporation and its
subsidiaries, taken as a whole, shall have been filed, occurred or been obtained
and shall be in full force and effect; (v) Progenitor shall have received all
state securities or blue sky permits and other authorizations necessary to issue
shares of Progenitor Common Stock in exchange for the shares of Mercator Capital
Stock and to consummate the Reorganization; and (vi) the absence of any action
taken, or any statute, rule, regulation or order enacted, entered, enforced or
deemed applicable to the Reorganization, by any federal or state governmental
entity which, in connection with the grant of a regulatory approval, imposes any
condition or restriction upon the Surviving Corporation or its subsidiaries (or,
in the case of any disposition of assets required in connection with such
regulatory approval, upon Progenitor or its subsidiaries or Mercator), which in
any such case would so materially adversely impact the economic or business
benefits of the transactions contemplated by the Reorganization Agreement as to
render inadvisable the consummation of the Reorganization.
The obligation of each of Progenitor and Mercator to effect the
Reorganization is also subject to the following additional conditions (any of
which may be waived by Progenitor or Mercator, as the case may be, pursuant to
the Reorganization Agreement): (i) the other party has performed its obligations
under the Reorganization Agreement and the Related Agreements prior to the
Effective Time and the representations and warranties of the other party
contained in the Reorganization Agreement are true and correct in all material
respects at and as of the Effective Time as if made at and as of such time and,
in the case of Progenitor's obligations, the Principal Stockholders shall have
performed certain of the agreements contained in the Principal Stockholders
Agreements; (ii) each shall have received an opinion of its counsel
substantially to the effect that, if the purchase price is paid in shares, the
Reorganization will be treated for
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federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code and that Progenitor and Mercator will each be a party to the
reorganization within the meaning of Section 368(b) of the Code, and (iii) each
of Progenitor and Mercator has received an opinion of counsel to the other
regarding certain legal matters. In addition, Progenitor's obligation to effect
the Reorganization is subject to: (i) the completion of the IPO, unless
Progenitor elects to consummate the Reorganization by paying the Adjusted
Purchase Price in one of the alternative forms of consideration described herein
(see "The Reorganization--Alternative Consideration"); (ii) the absence of
dissenting shares constituting more than one percent of the Mercator Common
Stock calculated on a fully diluted basis; (iii) the receipt of duly executed
Lockup Agreements from each Mercator stockholder and each holder of options or
warrants to purchase Mercator Common Stock; (iv) the conversion by holders of
the Venture Capital Bridge Notes of such notes into shares of Mercator Series D
Preferred Stock; and (v) the receipt of Mercator of the consent of Phoenix
Leasing Incorporated to the extent required to consummate the Reorganization.
CLOSING DELIVERABLES. As a condition (which may be waived) to Progenitor's
obligation to effect the Reorganization (but not otherwise as a covenant on the
part of Mercator), Mercator agreed, at the closing of the Reorganization, to
deliver to Progenitor, among other things: (i) copies of applicable resolutions
of the Mercator Board of Directors and together with a certificate of the
Secretary of Mercator as to the number of dissenting shares; (iii) resignations
of all officers and directors of Mercator from their positions as such; (iv)
evidence of the submission for conversion of each of the Venture Capital Bridge
Notes and of the exercise of all warrants to purchase Mercator Capital Stock;
(v) any comfort letter or update called for by the Reorganization Agreement;
(vi) any affiliate agreements called for by the Reorganization Agreement; (vii)
the Lockup Agreements; (viii) the employment agreement between Progenitor and
Elliott Sigal; (ix) evidence of the termination or resolution of certain rights
relating to securities of Mercator; (x) the executed Escrow Agreement; (xi) all
consents received by Mercator in connection with the Reorganization Agreement
and the Related Agreements; (xii) any assignments of intellectual property
rights called for by the Reorganization Agreement; (xiii) the non-solicitation
agreements called for by the Reorganization Agreement; (xiv) any advisor and
scientist agreements executed pursuant to the Reorganization Agreement; (xv) a
certificate of the President or a Vice President of Mercator as to the
performance of Mercator's obligations and as to Mercator's representations and
warranties; and (xviii) evidence that all conditions to Progenitor's obligations
have been satisfied in all material respects.
As a condition (which may be waived) to Mercator's obligation to effect the
Reorganization (but not otherwise as a covenant on the part of Progenitor),
Progenitor agreed, at the closing of the Reorganization, to deliver to Mercator
the following: (i) copies of applicable resolutions of Progenitor and Merger
Sub; (ii) evidence that all conditions to Mercator's obligations have been
satisfied in all material respects; (iii) a certificate of the President or a
Vice President of Progenitor as to the performance of Progenitor's obligations
and as to Progenitor's representations and warranties; and (iv) a certificate
setting forth any and all claims for a reduction in the purchase price or other
indemnity under the Reorganization Agreement, showing the amount of any claims
previously agreed between Mercator and Progenitor and the amount of any
unresolved claims.
At the Effective Time or at any time prior thereto, to the extent legally
allowed, each of Progenitor and Mercator, without the approval of the Mercator
stockholders, may waive compliance with any of the agreements or satisfaction of
any of the conditions contained in the Reorganization Agreement for its
respective benefit. See "--Amendment; Waiver."
TERMINATION
The Reorganization Agreement may be terminated and the Reorganization
abandoned: (i) by mutual written consent of Progenitor and Mercator, (ii)
automatically, if the Reorganization has not been consummated on or before the
applicable Agreement Deadline (see "The Reorganization--Effective Time"), (iii)
by Mercator, if there is any material breach of a representation and warranty or
material obligation of Progenitor under the Reorganization Agreement such that
certain conditions to closing
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would not be satisfied as of the time of such breach and, if such breach is
curable, such default shall have not been remedied within 10 days after receipt
by Progenitor of notice in writing from Mercator specifying such breach, (iv) by
Progenitor, if there shall have been any Event of Default under (and as defined
in) the Mercator Bridge Loan Agreement, (v) by either Progenitor or Mercator, if
any court of competent jurisdiction in the United States or other United States
governmental body shall have issued an order, decree or ruling or taken any
other action restraining, enjoining or otherwise prohibiting the Reorganization
and such order, decree, ruling or any other action shall have become final and
non-appealable, provided, that the party seeking to terminate the Reorganization
Agreement shall have used commercially reasonable efforts to remove such order,
decree or ruling, (vi) by Progenitor, upon written notice to Mercator, if any
approval of the stockholders of Mercator required for the consummation of the
Reorganization submitted for approval shall not have been obtained by reason of
the failure to obtain the required vote at a duly held meeting of stockholders
(or pursuant to a written consent in lieu thereof), or (vii) by Progenitor at
any time if it elects not to pursue the IPO (provided, however, that such right
of Progenitor to terminate shall be subject to Progenitor fulfilling its
obligation to extend to Mercator the Residual Loan Amount pursuant to the
Mercator Bridge Loan Agreement).
In the event of termination, the Reorganization Agreement will be of no
further effect and, except for a termination resulting from a breach by a party
to the Reorganization Agreement, there will be no liability or obligation on the
part of either Progenitor or Mercator or their respective officers or directors,
except as specifically provided in the Reorganization Agreement.
AMENDMENT; WAIVER
The Reorganization Agreement may be amended by Progenitor and Mercator at
any time before or after approval thereof by the stockholders of Mercator, but,
after any such approval, no amendment may be made which alters the Adjusted
Purchase Price, which in any way materially adversely affects the rights of such
stockholders, or which requires stockholder approval under the terms of the
Reorganization Agreement, without the further approval of such stockholders. The
Reorganization Agreement may not be amended except by an instrument in writing
signed on behalf of Mercator, Progenitor and Merger Sub.
At the Effective Time or any time prior thereto, to the extent legally
allowed, the parties to the Reorganization Agreement may (i) extend the time for
the performance of any of the obligations or other acts of the other parties
thereto, (ii) waive any inaccuracies in the representations and warranties
contained in the Reorganization Agreement or in any document delivered pursuant
thereto, and (iii) waive compliance with any of the agreements or conditions
contained in the Reorganization Agreement. Any agreement on the part of a party
thereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Such waiver shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
EXPENSES
Except as provided in the Reorganization Agreement or the Related
Agreements, all costs and expenses incurred in connection with the
Reorganization Agreement and the Related Agreements and the transactions
contemplated thereby (whether or not the Reorganization is consummated) will be
paid by the party incurring such expenses. Certain expenses of Mercator incurred
in connection with the Reorganization or the IPO will result in an adjustment to
the purchase price otherwise payable by Progenitor in the Reorganization. See
"The Reorganization--Adjusted Purchase Price Calculation; Indemnification;
Escrow."
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RELATED AGREEMENTS
The Mercator Bridge Loan Agreement, together with the security agreement and
the promissory note related thereto, the Reorganization Agreement, the Escrow
Agreement, the Principal Stockholder Agreements and the related Principal
Stockholder Releases, the Employment Agreement relating to Dr. Sigal, the
Non-Solicitation Agreements, the Affiliate Agreements and the Lockup Agreements
are sometimes referred to collectively herein as the "Related Agreements."
APPRAISAL AND DISSENTERS' RIGHTS OF MERCATOR STOCKHOLDERS
APPLICABILITY
Dissenters' rights under the CGCL and appraisal rights under the DGCL may be
available in connection with the Reorganization. Under both California law and
Delaware law, stockholders who do not vote to approve a reorganization and who
follow certain procedures may, under certain circumstances, be entitled to
exercise dissenters' or appraisal rights and receive cash for the "fair value"
of their shares of an acquired company. However, Section 2115 of the CGCL
provides that Mercator may be subject to California law with respect to certain
corporate matters, including the right of Mercator stockholders to dissent from
the Reorganization and receive the "fair market value" of their shares of
Mercator Capital Stock, rather than the consideration specified in the
Reorganization Agreement. In addition, the CGCL provides that, where provisions
specified by Section 2115 of the CGCL apply, such provisions apply to the
exclusion of the law of the state of incorporation of the subject corporation.
See "Applicability of California Law to Mercator."
Because the provisions specified by Section 2115 include dissenters' rights,
the provisions of Delaware law relating to appraisal rights may not be available
to Mercator stockholders in the Reorganization. Although the constitutionality
of Section 2115 might be challenged in certain circumstances insofar as it
purports to apply corporate law requirements of California that are in some
respects in conflict with those of Delaware, the discussion herein assumes that
Section 2115 would be applicable to Mercator to the full extent of its terms and
that it would not be applicable to Progenitor after the Reorganization.
In the event that dissenters' rights under the CGCL or appraisal rights
under the DGCL are available to Mercator stockholders in the Reorganization, a
summary of the relevant sections of the CGCL and the DGCL is set forth below.
However, Progenitor and Mercator reserve the right to challenge the
applicability of appraisal or dissenter's rights with respect to the
Reorganization. The Reorganization Agreement also provides that as a condition
to the obligations of Progenitor to effect the Reorganization there must not be
shares of Mercator Capital Stock with respect to which appraisal or dissenters'
rights procedures have been successfully exercised ("Dissenting Shares")
constituting more than one percent of the Mercator Common Stock on a
fully-diluted basis.
CALIFORNIA DISSENTERS' RIGHTS
The following summary of the provisions of Sections 1300-1312 of the CGCL
("Chapter 13") is not intended to be a complete statement of such provisions and
is qualified in its entirety by reference to the full text of Chapter 13, a copy
of which is attached to this Proxy Statement/Prospectus as Appendix E and is
incorporated herein by reference. See "--Applicability" and "Applicability of
California Law to Mercator."
If dissenters' rights under California law are available to holders of
Mercator Capital Stock, under Chapter 13 any shares of Mercator Capital Stock as
to which such dissenters' rights are properly exercised will not be converted
into the right to receive shares of Progenitor Common Stock by virtue of the
Reorganization but instead will be converted into the right to receive the "fair
market value" of such shares, determined as of the day before the first
announcement of the terms of the Reorganization, excluding any appreciation or
depreciation in consequence of the Reorganization. For shares of Mercator
Capital Stock to qualify as Dissenting Shares under Chapter 13, (i) such shares
must not have been voted
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for approval of the Reorganization Proposal and (ii) the holder of such shares
must submit certificates for endorsement (as described below).
If the Reorganization is approved at the Mercator Special Meeting, Mercator
will, within ten days after such approval, mail to any stockholder who may have
a right to require Mercator to purchase his, her or its shares for cash as a
result of making such a demand (as described below), a notice that the required
stockholder approval of the Reorganization Proposal was obtained (the "Notice of
Approval"), accompanied by a copy of Chapter 13. The Notice of Approval will set
forth the price determined by Mercator to represent the "fair market value" of
any Dissenting Shares (which shall constitute an offer by Mercator to purchase
such Dissenting Shares at such stated price) and will set forth a brief
description of the procedures to be followed by such stockholders who wish to
exercise their dissenters' rights.
Within 30 days after the date on which the Notice of Approval was mailed (i)
Mercator must receive the demand of the dissenting stockholder, which is
required by law to contain a statement concerning the number and class of shares
of Mercator Capital Stock held of record by such dissenting stockholder and what
the stockholder claims to be the fair market value of the Dissenting Shares as
of the close of business on the day immediately prior to the announcement of the
Reorganization (the statement of fair market value in such demand by the
dissenting stockholder constitutes an offer by the dissenting stockholder to
sell the Dissenting Shares at such price); and (ii) the dissenting stockholder
must submit share certificate(s) representing the Dissenting Shares to Mercator
at Mercator's principal office. The certificate(s) will be stamped or endorsed
with a statement that the shares are Dissenting Shares or will be exchanged for
certificates of appropriate denomination so stamped or endorsed. If the price
contained in the Notice of Approval is acceptable to the dissenting stockholder,
the dissenting stockholder may demand the same price. This would constitute an
acceptance of the offer by Mercator to purchase the dissenting stockholder's
stock at the price stated in the Notice of Approval.
If Mercator and a dissenting stockholder agree upon the price to be paid for
the Dissenting Shares, upon the dissenting stockholder's surrender of the
certificates representing the Dissenting Shares, such price (together with
interest thereon at the legal rate on judgments from the date of the agreement
between Mercator and the dissenting shareholder) is required by law to be paid
to the dissenting shareholder within 30 days after such agreement or within 30
days after any statutory or contractual conditions to the Reorganization are
satisfied, whichever is later, subject to the surrender of the certificates
therefor.
If Mercator and a dissenting stockholder disagree as to the price for such
Dissenting Shares or disagree as to whether such Dissenting Shares are entitled
to be classified as Dissenting Shares, such holder may, within six months after
the Notice of Approval is mailed, file a complaint in the Superior Court of the
proper county requesting the court to make such determinations or,
alternatively, may intervene in any pending action brought by any other
dissenting shareholder. Costs of such an action (including compensation of
appraisers) are required to be assessed as the court considers equitable, but
must be assessed against Mercator if the appraised value determined by the court
exceeds the price offered by Mercator.
The court action to determine the fair market value of the shares will be
suspended if litigation is instituted to test the sufficiency or regularity of
the votes of the stockholders in authorizing the Reorganization. Furthermore, no
stockholder who has appraisal rights under Chapter 13 shall have any right to
attack the validity of the Reorganization or to have the Reorganization set
aside or rescinded except in an action to test whether the number of shares
required to authorize or approve the Reorganization has been legally voted in
favor of the Reorganization.
Dissenting Shares may lose their status as such and the right to demand
payment will terminate if (i) the Reorganization is abandoned (in which case
Mercator shall pay on demand to any dissenting stockholder who has initiated
proceedings in good faith as provided under Chapter 13 all necessary expenses
and reasonable attorneys' fees incurred in such proceedings); (ii) the shares
are transferred
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<PAGE>
before being submitted for endorsement or are surrendered for conversion into
shares of another class; (iii) the dissenting stockholder and Mercator do not
agree upon the status of the shares as Dissenting Shares or upon the price of
such shares and the dissenting stockholder fails to file suit against Mercator
or intervene in a pending action within six months following the date on which
the Notice of Approval was mailed to the stockholder; or (iv) the dissenting
stockholder withdraws his or her demand for the purchase of the Dissenting
Shares with the consent of Mercator.
DELAWARE APPRAISAL RIGHTS
The following summary of the provisions of Section 262 of the DGCL ("Section
262") is not intended to be a complete statement of such provisions and is
qualified in its entirety by reference to the full text of Section 262, a copy
of which is attached to this Proxy Statement/Prospectus as Appendix F and
incorporated herein by reference. See "--Applicability" and "Applicability of
California Law to Mercator."
If a holder of Mercator Capital Stock exercises appraisal rights in
connection with the Reorganization under Section 262, any shares of Mercator
Capital Stock with respect to which such rights have been exercised and
perfected will not be converted into Progenitor Common Stock but, instead, will
be converted into the right to receive such consideration as may be determined
by the Delaware Court of Chancery (the "Delaware Court") to be due with respect
to such shares pursuant to the DGCL. A stockholder electing to exercise
appraisal rights must, prior to the vote concerning the Reorganization Proposal
at the Mercator Special Meeting, perfect his, her or its appraisal rights by
demanding in writing from Mercator the appraisal of his, her or its shares of
Mercator Capital Stock. A vote against the Reorganization Proposal will not
constitute a demand for appraisal. A stockholder electing to exercise appraisal
rights also must not vote in favor of the Reorganization (a vote in favor of the
Reorganization will constitute a waiver of such stockholder's appraisal rights).
A holder who elects to exercise appraisal rights should mail or deliver his, her
or its written demand to the Secretary of Mercator. The demand should specify
the holder's name and mailing address and that such holder is demanding
appraisal of his, her or its shares. Only a holder of record as of the demand
date and continuing until the Effective Time of shares of Mercator Capital Stock
(or his, her or its duly appointed representative) is entitled to assert
appraisal rights for the shares registered in that holder's name. This Proxy
Statement/Prospectus is being sent by personal delivery or by mail to all
holders of record of Mercator Capital Stock as of the Record Date and
constitutes notice of the appraisal rights under Section 262.
Within 10 days after the Effective Time, the Surviving Corporation shall
notify stockholders who have perfected their appraisal rights of the date that
the Reorganization has become effective. Within 120 days after the Effective
Time, any stockholder who has made a valid written demand and who has not voted
in favor of approval of the Reorganization Proposal may (i) file a petition in
the Delaware Court demanding a determination of the value of shares of Mercator
Capital Stock and (ii) upon written request, receive from the Surviving
Corporation a statement setting forth the aggregate number of shares of Mercator
Capital Stock not voted in favor of the Reorganization Proposal and with respect
to which demands for appraisal have been received and the aggregate number of
holders of such shares.
If a petition for an appraisal is timely filed, at a hearing on such
petition, the Delaware Court is required to determine the holders of Dissenting
Shares entitled to appraisal rights and to determine the "fair value" of the
Dissenting Shares, taking into account all relevant factors, exclusive of any
element of value arising from the accomplishment or expectation of the
Reorganization, together with a fair rate of interest, if any.
Any holder of Dissenting Shares who has demanded an appraisal under Section
262 will not, after the Effective Time, be entitled to vote the shares subject
to such demand for any purpose or to receive payment of dividends or other
distributions on such Dissenting Shares (except dividends or other distributions
payable to stockholders of record as of a date prior to the Effective Time).
The shares of any Mercator stockholder who demands appraisal under Section
262 and subsequently withdraws or loses his, her or its right to appraisal will
be converted into a right to receive that number of
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<PAGE>
shares of Progenitor Common Stock as is determined in accordance with the
Reorganization Agreement. A stockholder will effectively lose his right to
appraisal if he, she or it votes in favor of the Reorganization Proposal, if no
petition for appraisal is filed within 120 days after the Effective Time, or if
the holder withdraws such holder's demand for appraisal within 60 days after the
Effective Time. A holder of stock represented by certificates may also lose his,
her or its right to appraisal if he, she or it fails to comply with the Court's
direction to submit such certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings.
INITIAL PUBLIC OFFERING
Progenitor intends to consummate the IPO concurrently with or immediately
prior to the closing of the Reorganization, through an underwriting syndicate of
which Lehman Brothers will serve as one of the representatives of the
Underwriters. In furtherance thereof, Progenitor filed the IPO Registration
Statement under the Securities Act with the Commission to register the
Progenitor Units that it proposes to sell in the IPO and the shares of
Progenitor Common Stock that may subsequently be issued upon exercise of the
Progenitor Warrants issued as part of the Progenitor Units in the IPO. The IPO
Registration Statement contemplates that Progenitor will sell 2,750,000
Progenitor Units in the IPO, at an IPO Unit Price estimated to be between $10.00
and $12.00 per Unit, although there can be no assurance in this regard. In
connection with the IPO, the Progenitor Board of Directors will determine the
IPO Common Stock Price in good faith, after consultation with representatives of
the Underwriters. This Proxy Statement/Prospectus assumes that the IPO Common
Stock Price will be $8.50, although there can be no assurance in this regard.
Concurrently with the IPO, Progenitor will sell additional shares of Progenitor
Common Stock to Amgen at the IPO Common Stock Price, pursuant to a stock
purchase agreement providing for Amgen's commitment to make an equity investment
of $5.5 million in Progenitor (see "Business of Progenitor-- Corporate
Agreements--Amgen Agreements"), and will sell 25,000 shares of Progenitor Common
Stock to The Ohio University Foundation at a price of $4.25 per share, pursuant
to a stock purchase right (see "Certain Transactions of Progenitor--The Ohio
University Foundation"). In addition, 24,020 shares of Progenitor Common Stock
will be issued to The Ohio University Foundation pursuant to an anti-dilution
adjustment in connection with the IPO. Interneuron has agreed that upon the
closing of the IPO the Interneuron Bridge Loan will be converted into 293,293
shares of Progenitor's Series D Preferred Stock (based on an aggregate
outstanding balance of $2.9 million as of June 20, 1997). Progenitor also has
granted to the Underwriters an option, exercisable at any time up to thirty days
from the date of the IPO, to purchase up to an additional 412,500 Progenitor
Units at the IPO Unit Price, less underwriting discounts and commissions, solely
to cover over-allotments, if any. However, there can be no assurance as to the
price at which the IPO actually will be consummated, as to the number of shares
of Progenitor Common Stock to be sold in or concurrently with the IPO, or as to
the timing of the IPO, if it occurs at all.
The aggregate net proceeds from the sale of the 2,750,000 Progenitor Units
in the IPO at an assumed IPO Unit Price of $11.00 are estimated to be
approximately $27.1 million ($31.4 million if the Underwriters' over-allotment
option is exercised in full), after deducting estimated underwriting discounts
and commissions and estimated expenses of the IPO payable by Progenitor and
assuming no exercise of the Progenitor Warrants. Progenitor will also receive
$4.5 million in cash and a $1.0 million promissory note from the sale of the
Amgen Shares, and approximately $106,000 in cash from the sale of 25,000 shares
of Progenitor Common Stock to The Ohio University Foundation, pursuant to a
stock purchase right.
Progenitor intends to use the net proceeds of the IPO, together with the
cash proceeds received from the sale of the Amgen Shares, primarily for research
and development. In addition, Progenitor 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 Reorganization; and (ii)
approximately $1.0 million relating to legal, accounting and other costs
incurred in connection with the Reorganization and this Proxy
Statement/Prospectus. In the event Progenitor consolidates its operations in
California, Progenitor may use approximately $2.5 million of such net proceeds
to facilitate employee relocation and for the
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consolidation of operations and elimination of duplicate systems and facilities.
Progenitor 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. Progenitor also may use a portion of the net
proceeds of the IPO 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
Proxy Statement/Prospectus. In connection with the Mercator Bridge Loan,
Interneuron has agreed to provide to Progenitor the Interneuron Bridge Loan. The
amounts actually expended for each purpose will depend on numerous factors,
including any expansion or acceleration of Progenitor's research and development
programs; the results of research and development, preclinical studies and
clinical trials conducted by Progenitor or its collaborative partners or
licensees, if any; the acquisition and licensing of products and technologies;
Progenitor's ability to establish and maintain relationships with corporate and
academic collaborators; the ability of Progenitor to integrate the operations of
Mercator with those of Progenitor; Progenitor'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. Progenitor estimates that, at its planned rate of spending,
subject to the factors described above, the net proceeds of the IPO, together
with the proceeds from the sale of the Amgen Shares, and the interest income
earned on such proceeds, together with existing cash and cash equivalents, will
be sufficient to meet its funding requirements for the next 18 months. There can
be no assurance, however, that Progenitor's assumptions regarding the amount of
proceeds from the IPO or other sales of its shares or regarding its future
levels of expenditures and operating losses will prove accurate. Pending such
uses, Progenitor intends to invest the net proceeds of the IPO 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" and "--Management Discretion as to Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Progenitor--Liquidity and Capital Resources," "Certain
Transactions of Progenitor" and "Description of Progenitor Securities." In
addition, should any holders of Mercator Capital Stock dissent, if applicable,
to the Reorganization and perfect their appraisal or dissenters' rights, a
portion of the proceeds may be used to pay the fair value of any such holders'
shares.
In the event that the IPO is not consummated prior to, or simultaneously
with, the Effective Time, Progenitor may abandon the Reorganization, unless
Progenitor, in its sole discretion, determines to consummate the Reorganization
using one of the alternative forms of consideration described above. See "The
Reorganization--Alternative Consideration." If Progenitor so determines to
consummate the Reorganization using a form of consideration other than
Progenitor Common Stock, additional information will be provided to Mercator
stockholders and separate proxies will be solicited. The Reorganization
Agreement allows Progenitor, in its sole discretion, to cease pursuing the IPO
or to postpone consummation of the IPO until after the termination of the
Reorganization Agreement.
Due to the nature of public equity offerings, Progenitor and the
Underwriters have not finally determined the precise terms of the IPO, nor can
there be any assurance that the IPO will even be consummated. The IPO Unit Price
will be determined by negotiations among Progenitor and the Underwriters with
reference to a number of factors, many of which are outside the control of
Progenitor, including the history and prospects of the industry in which
Progenitor and Mercator compete, the ability of management of Progenitor and
Mercator, the past and present operations of Progenitor and Mercator, the
historical results of operations of Progenitor and Mercator, the prospects for
future earnings of Progenitor after the Reorganization, the general condition of
the equity securities markets at the time of the IPO and market prices at that
time of securities of generally comparable companies. The IPO Common Stock Price
will be determined by the Progenitor Board of Directors, after consultation with
its financial advisors, based upon the relative fair market value of a share of
Progenitor Common Stock and a Progenitor Warrant. The actual amount of
Progenitor Units to be offered and sold in the IPO also depends
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<PAGE>
upon a number of factors, many of which are outside the control of Progenitor,
including market conditions and the price of Progenitor Units. THE NUMBER OF
PROGENITOR UNITS TO BE SOLD IN THE IPO, AND THE IPO UNIT PRICE AND THE IPO
COMMON STOCK PRICE, HAVE NOT YET BEEN DETERMINED AND ARE SUBJECT TO CHANGE. TO
THE EXTENT THE IPO UNIT PRICE IS LESS THAN $11.00 OR THE IPO COMMON STOCK PRICE
IS LESS THAN $8.50, THERE WILL BE MORE SHARES OF PROGENITOR COMMON STOCK
OUTSTANDING AFTER THE IPO, AND THE PROCEEDS TO PROGENITOR EXPECTED FROM THE IPO
WILL BE LOWER. THE DATE OF THE IPO ALSO HAS NOT BEEN DETERMINED, AND THERE CAN
BE NO ASSURANCE AS TO WHEN THE IPO WILL BE CONSUMMATED, IF AT ALL. THERE ALSO
CAN BE NO ASSURANCE THAT THE IPO UNIT PRICE WILL NOT BE MORE OR LESS THAN
$11.00, THAT THE IPO COMMON STOCK PRICE WILL NOT BE MORE OR LESS THAN $8.50,
THAT PROGENITOR WILL NOT ELECT TO ISSUE ADDITIONAL SHARES OF PROGENITOR COMMON
STOCK PRIOR TO OR IN CONNECTION WITH THE IPO, THAT THE NUMBER OF PROGENITOR
UNITS TO BE ISSUED IN THE IPO WILL BE THE 2,750,000 UNITS CURRENTLY CONTEMPLATED
OR THAT THE NUMBER OF SHARES OF PROGENITOR COMMON STOCK TO BE ISSUED
CONCURRENTLY WITH THE IPO WILL BE AS SET FORTH ABOVE. See "Risk
Factors--Uncertainties Regarding the IPO, the IPO Common Stock Price and
Exchange Ratios."
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) Progenitor's pro forma capitalization as if the
Reorganization had occurred as of March 31, 1997 (assuming an Adjusted Purchase
Price of $22.0 million) and giving effect to (a) the automatic conversion of all
outstanding shares of Progenitor's Series A and Series B Preferred Stock into an
aggregate of 2,204,330 shares of Progenitor Common Stock upon the closing of the
IPO, (b) the conversion of a convertible debenture and a portion of the
promissory note held by Interneuron into an aggregate of 810,220 shares of
Progenitor Common Stock (based on an aggregate outstanding balance of $6.9
million as of March 31, 1997), (c) the conversion of the Interneuron Bridge Loan
into an aggregate of 131,135 shares of Progenitor's Series D Preferred Stock
(based on an outstanding balance of $1.3 million as of March 31, 1997) and (d)
the issuance of 24,020 shares of Progenitor Common Stock to The Ohio University
Foundation pursuant to an anti-dilution adjustment in connection with the IPO;
and (iii) Progenitor's capitalization on a pro forma as adjusted basis to
reflect (a) the issuance and sale of the 2,750,000 Progenitor Units offered in
the IPO (after deducting estimated underwriting discounts and commissions and
the estimated expenses of the IPO payable by Progenitor) and the receipt and
application of the estimated net proceeds therefrom, (b) the sale of 647,059
shares of Progenitor Common Stock to Amgen, concurrently with the closing of the
IPO, and (c) the sale of 25,000 shares of Progenitor Common Stock to The Ohio
University Foundation at a price of $4.25 per share, pursuant to a stock
purchase right, concurrently with the closing of the IPO. The number of shares
of Progenitor Common Stock to be issued (i) upon conversion of Progenitor's
Series A and Series B Preferred Stock, (ii) upon conversion of the Interneuron
convertible debenture and a portion of the promissory note, (iii) in the
Reorganization, (iv) to Amgen, and (v) to The Ohio University Foundation, and
the number of shares of Progenitor's Series D Preferred Stock to be issued upon
conversion of the Interneuron Bridge Loan, will depend upon a number of factors,
including the date of the closing of the IPO, the IPO Unit Price and the IPO
Common Stock Price. See "Business of Progenitor--Corporate Agreements," "Certain
Transactions of Progenitor" and "Description of Progenitor Securities."
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<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-------------------------------------------
PRO FORMA
FOR
PROGENITOR REORGANIZATION PRO FORMA
ACTUAL AND CONVERSIONS AS ADJUSTED
----------- ----------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................................ $ 8 $ 132 $ 31,686
----------- -------- -----------
----------- -------- -----------
Long-term obligations (1)............................................ 8,763 $ 1,150 $ 966
Stockholders' equity (deficit):
Preferred Stock, Series A, $0.01 par value: 2,120,000 shares
authorized; 2,020,496 shares issued and outstanding, actual; no
shares authorized, issued or outstanding, pro forma and pro forma
as adjusted...................................................... 20 -- --
Preferred Stock, Series B, $0.01 par value: 880,000 shares
authorized; 349,000 shares issued and outstanding, actual; no
shares authorized, issued or outstanding, pro forma and pro forma
as adjusted...................................................... 3 -- --
Preferred Stock, Series D, $0.01 par value: 1,000,000 shares
authorized; no shares issued and outstanding, actual; 131,135
shares issued and outstanding, pro forma and pro forma as
adjusted......................................................... -- 1 1
Common Stock, $0.001 par value: 39,000,000 shares authorized;
2,887,217 shares issued and outstanding, actual; 8,105,224 shares
issued and outstanding, pro forma; and 11,527,283 shares issued
and outstanding, pro forma as adjusted (2)....................... 3 8 12
Shareholder promissory note receivable............................. -- -- (1,000)
Additional paid-in capital......................................... 14,972 49,287 81,310
Deficit accumulated during development stage....................... (22,962) (52,181) (52,181)
----------- -------- -----------
Total stockholders' equity (deficit)............................. (7,964) (2,885) 28,142
----------- -------- -----------
Total capitalization........................................... 799 $ (1,735) $ 29,108
----------- -------- -----------
----------- -------- -----------
</TABLE>
- ------------------------
(1) See Notes 5, 9 and 10 to the Progenitor Financial Statements.
(2) Excludes: (i) 2,750,000 shares of Progenitor Common Stock issuable upon
exercise of the Progenitor Warrants; (ii) 1,776,040 shares of Progenitor
Common Stock reserved or to be reserved for grants or awards under the
Progenitor 1992 Stock Option Plan, 1996 Stock Incentive Plan and 1996
Employee Stock Purchase Plan, of which (a) options to purchase 695,463
shares of Progenitor Common Stock were outstanding as of June 20, 1997 under
such stock plans, with a weighted average exercise price of $5.13 per share,
and (b) options to purchase 937,385 shares of Progenitor Common Stock are to
be granted under the 1996 Stock Incentive Plan upon the closing of the IPO,
with an exercise price equal to the IPO Common Stock Price; (iii) 372,920
shares of Progenitor Common Stock to be issuable upon exercise of
Replacement Options to be issued under the 1997 Stock Option Plan in
connection with the Reorganization, with a weighted average exercise price
of $1.31 per share; (iv) 45,865 shares of Progenitor Common Stock issuable
upon exercise of warrants outstanding as of June 20, 1997, with an exercise
price of $5.23 per share; (v) 35,878 shares of Progenitor Common Stock
issuable upon exercise of the Phoenix Warrants, with a weighted average
exercise price of $4.65 per share; and (vi) 131,135 shares of Progenitor
Common Stock issuable upon conversion of Progenitor's Series D Preferred
Stock. See "Management of Progenitor after the Reorganization--Stock Plans,"
"Certain Transactions of Progenitor" and "Description of Progenitor
Securities."
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COMPARATIVE DIVIDEND POLICIES
No dividends have been declared or paid on Progenitor Common Stock or
Mercator Capital Stock since their respective dates of incorporation, nor does
Progenitor anticipate paying cash dividends on Progenitor Common Stock in the
foreseeable future following of the Reorganization. Any payment of cash
dividends, if any, would be made at the discretion of the Progenitor Board of
Directors after taking into account various factors, including Progenitor's
financial condition, results of operations, current and anticipated cash needs
and plans for expansion.
PROGENITOR UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial data are presented assuming (i) that the
consummation of the Reorganization was accounted for using the purchase method
of accounting, (ii) the consummation of the Conversions and (iii) the
consummation of the IPO Adjustments. The number of shares of Progenitor Common
Stock to be issued in the Reorganization, upon the Conversions and upon the IPO
Adjustments, and the number of shares of Progenitor's Series D Preferred Stock
to be issued upon conversion of the Interneuron Bridge Loan, will depend upon a
variety of factors, including the date of the closing of the IPO and the IPO
Common Stock Price. See "Business of Progenitor--Corporate Agreements," "Certain
Transactions of Progenitor--Relationship with Interneuron" and "Description of
Progenitor Securities."
The pro forma balance sheet assumes that the Reorganization, the Conversions
and the IPO Adjustments were consummated as of March 31, 1997. However, the
terms of the IPO could change, Progenitor may sell more or less Progenitor Units
in the IPO at a price more or less than the assumed IPO Unit Price of $11.00,
and the IPO Common Stock Price could be more or less than the assumed amount of
$8.50, which would affect the Conversions and the IPO Adjustments. See "Initial
Public Offering." 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 Reorganization, Conversions and IPO
Adjustments were consummated as of October 1, 1995.
The pro forma statements of financial position and results of operations
exclude certain non-recurring items such as estimated costs of severance,
retention and bonus programs, the elimination of duplicate systems and
facilities, employee relocation, and other employee benefit and integration
costs related to the consolidation of operations of Progenitor and Mercator
subsequent to the consummation of the Reorganization. In addition, Progenitor
will likely incur additional costs of being a public reporting entity. Such
increases in costs, particularly insurance and annual financial reporting costs,
have not been included in the pro forma statements of operations for either
period presented. See "Risk Factors--History of Operating Losses; Anticipation
of Future Losses" and "--Risks Associated with the Acquisition of Mercator" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Progenitor."
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 Progenitor's actual results of operations would
have been had the transactions occurred on such dates nor does it purport to
predict or indicate Progenitor'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
Proxy Statement/Prospectus and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Progenitor" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Mercator."
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PRO FORMA BALANCE SHEETS
MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO
REORGAN- FORMA
ACTUAL IZATION FOR
---------------------------- ADJUST- REORGAN-
PROGENITOR MERCATOR(1) MENTS(2) IZATION
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 8 $ 124 $ -- $ 132
Accounts receivable................................ 176 -- -- 176
Deferred interest expense.......................... -- 750 (750) --
Prepaid expenses and other current assets.......... 96 65 -- 161
------------- ------------- ------------- -------------
Total current assets............................. 280 939 (750) 469
------------- ------------- ------------- -------------
Property and equipment at cost....................... 1,660 2,474 (1,298) 2,836
Less accumulated depreciation.................... (822) (1,298) 1,298 (822)
------------- ------------- ------------- -------------
838 1,176 -- 2,014
Notes receivable from officers, net and other........ 58 150 -- 208
Deferred offering and acquisition costs.............. 1,627 97 (1,013) 711
Convertible bridge promissory note receivable from
Mercator........................................... 1,308 -- (1,308) --
------------- ------------- ------------- -------------
Total assets..................................... $ 4,111 $ 2,362 $ (3,071) $ 3,402
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ 506 $ 685 $ 583 $ 1,774
Accrued expenses................................... 2,421 93 -- 2,514
Convertible notes payable.......................... -- 2,250 (2,250) --
Equipment financing obligations--current........... 385 464 -- 849
------------- ------------- ------------- -------------
Total current liabilities........................ 3,312 3,492 (1,667) 5,137
Note payable--Interneuron............................ 6,577 -- -- 6,577
Convertible debenture--Interneuron................... 495 -- -- 495
Bridge Loan--Interneuron............................. 1,310 -- -- 1,310
Convertible Notes payable--Progenitor................ 1,308 (1,308) --
Equipment financing obligations...................... 381 585 -- 966
------------- ------------- ------------- -------------
Total liabilities................................ 12,075 5,385 (2,975) 14,485
------------- ------------- ------------- -------------
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
Preferred stock, Series B.......................... 3 -- -- 3
Preferred stock, Series D.......................... -- -- -- --
Common stock, Class A.............................. 3 -- 2 5
Common stock....................................... -- 53 (53) --
Shareholder promissory note receivable............. -- -- -- --
Additional paid-in capital......................... 14,972 -- 21,345 36,317
Deficit accumulated during development stage....... (22,962) (18,637) (5,829) (47,428)
------------- ------------- ------------- -------------
Total stockholders' equity (deficit)............. (7,964) (18,584) 15,465 (11,083)
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity
(deficit)...................................... $ 4,111 $ 2,362 $ (3,071) $ 3,402
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
PRO
FORMA
DEBT AND FOR
EQUITY REORGAN-
CONVERSION IZATION IPO PRO
ADJUST- AND ADJUST- FORMA AS
MENTS(3) CONVERSIONS MENTS(4) ADJUSTED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ -- $ 132 $ 31,554 $ 31,686
Accounts receivable................................ -- 176 -- 176
Deferred interest expense.......................... -- -- -- --
Prepaid expenses and other current assets.......... -- 161 -- 161
------------- ------------- ------------- -------------
Total current assets............................. -- 469 31,554 32,023
------------- ------------- ------------- -------------
Property and equipment at cost....................... -- 2,836 -- 2,836
Less accumulated depreciation.................... -- (822) -- (822)
------------- ------------- ------------- -------------
-- 2,014 -- 2,014
Notes receivable from officers, net and other........ -- 208 -- 208
Deferred offering and acquisition costs.............. -- 711 (711) --
Convertible bridge promissory note receivable from
Mercator........................................... -- -- -- --
------------- ------------- ------------- -------------
Total assets..................................... $ -- $ 3,402 $ 30,843 $ 34,245
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................... $ -- $ 1,774 $ -- $ 1,774
Accrued expenses................................... -- 2,514 -- 2,514
Convertible notes payable.......................... -- -- -- --
Equipment financing obligations--current........... -- 849 -- 849
------------- ------------- ------------- -------------
Total current liabilities........................ -- 5,137 -- 5,137
Note payable--Interneuron............................ (6,393) 184 (184) --
Convertible debenture--Interneuron................... (495) -- -- --
Bridge Loan--Interneuron............................. (1,310) -- -- --
Convertible Notes payable--Progenitor................ -- -- -- --
Equipment financing obligations...................... -- 966 -- 966
------------- ------------- ------------- -------------
Total liabilities................................ (8,198) 6,287 (184) 6,103
------------- ------------- ------------- -------------
Redeemable preferred stock, Series A................. -- -- -- --
Redeemable preferred stock, Series B................. -- -- -- --
Redeemable preferred stock, Series C................. -- -- -- --
Redeemable preferred stock, Series D................. -- -- -- --
Stockholders' equity (deficit):
Preferred stock, Series A.......................... (20) -- -- --
Preferred stock, Series B.......................... (3) -- --
Preferred stock, Series D.......................... 1 1 -- 1
Common stock, Class A.............................. 3 8 4 12
Common stock....................................... -- -- -- --
Shareholder promissory note receivable............. -- -- (1,000) (1,000)
Additional paid-in capital......................... 12,970 49,287 32,023 81,310
Deficit accumulated during development stage....... (4,753) (52,181) -- (52,181)
------------- ------------- ------------- -------------
Total stockholders' equity (deficit)............. 8,198 (2,885) 31,027 28,142
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity
(deficit)...................................... $ -- $ 3,402 $ 30,843 $ 34,245
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
89
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
ACTUAL
----------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED DEBT AND
SEPTEMBER 30, DECEMBER 31, EQUITY
1996 1996 PRO FORMA FOR CONVERSION PRO FORMA
FOR THE YEAR ENDED SEPTEMBER 30, 1996 PROGENITOR MERCATOR(1) REORGANIZATION ADJUSTMENTS AS ADJUSTED
- --------------------------------------------------- ------------- ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 1,332 $ 500 $ 1,832 $ -- $ 1,832
Operating expenses:
Research and development......................... 3,873 6,049 9,922 204(5) 10,126
General and administrative....................... 1,791 1,593 3,384 -- 3,384
------------- ------------- -------------- ------ ------------
Total operating expenses....................... 5,664 7,642 13,306 204 13,510
------------- ------------- -------------- ------ ------------
Nonrecurring expense............................... 974 -- 974 -- 974
Interest expense, net.............................. 178 66 244 (120)(6) 124
------------- ------------- -------------- ------ ------------
Net loss......................................... $ (5,484) $ (7,208) $ (12,692) $ (84) $ (12,776)
------------- ------------- -------------- ------ ------------
------------- ------------- -------------- ------ ------------
Supplemental net loss per share.................... $ (0.91)
-------------
-------------
Shares used in computing supplemental net loss per
share............................................. 6,047,252(7)
-------------
-------------
Pro forma net loss per share....................... $ (1.06)
------------
------------
Shares used in computing pro forma net loss per
share............................................. 12,011,135(7)
------------
------------
</TABLE>
<TABLE>
<CAPTION>
ACTUAL
-----------------------
FOR THE SIX MONTHS DEBT AND
ENDED MARCH 31, 1997 EQUITY
----------------------- PRO FORMA FOR CONVERSION PRO FORMA
FOR THE SIX MONTHS ENDED MARCH 31, 1997 PROGENITOR MERCATOR(1) REORGANIZATION ADJUSTMENTS AS ADJUSTED
- ------------------------------------------------------- ---------- ----------- -------------- -------------- ------------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues............................................... $ 859 $ 125 $ 984 $ -- $ 984
Operating expenses:
Research and development............................. 2,150 3,249 5,399 204(5) 5,603
General and administrative........................... 1,226 802 2,028 -- 2,028
---------- ----------- ------- ------ ------------
Total operating expenses........................... 3,376 4,051 7,427 204 7,631
---------- ----------- ------- ------ ------------
Interest expense, net.................................. 287 73 360 (265)(6) 95
---------- ----------- ------- ------ ------------
Net loss............................................. $ (2,804) $ (3,999) $ (6,803) $ 61 $ (6,742)
---------- ----------- ------- ------ ------------
---------- ----------- ------- ------ ------------
Supplemental net loss per share........................ $ (0.46)
----------
----------
Shares used in computing supplemental net loss per
share................................................. 6,103,034(7)
----------
----------
Pro forma net loss per share........................... $ (0.56)
------------
------------
Shares used in computing pro forma net loss per
share................................................. 12,066,917(7)
------------
------------
</TABLE>
90
<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. Progenitor will consummate the Reorganization upon the closing of
the IPO.
(2) In connection with the Reorganization, the allocation of the purchase price
to the assets and liabilities of Mercator at estimated fair values is as
follows:
<TABLE>
<S> <C>
Purchase Price:
Progenitor Common Stock, stock options and warrants to be issued:
2,179,437 shares of common stock................................... $ 18,525
Stock options for 372,920 shares of Common Stock................... 2,683
Warrants for 35,878 shares of Progenitor Common Stock.............. 138
Progenitor funding to Mercator....................................... 1,308
Total estimated acquisition fees and costs........................... 1,500
---------
Total purchase price............................................... $ 24,154
---------
---------
Allocation of purchase price:
In-process research and development.................................. $ 24,466
Excess of the estimated fair value of Mercator liabilities assumed
over assets purchased as of March 31, 1997......................... (312)
---------
Total.............................................................. $ 24,154
---------
---------
</TABLE>
For pro forma financial statement purposes, the purchase price was estimated
using an assumed IPO Common Stock Price of $8.50 per share. The actual
purchase price will be determined by a valuation of the Progenitor Common
Stock, stock options and warrants issued at the time of the closing of the
IPO.
The Reorganization was reflected in the unaudited pro forma balance sheet as
follows:
<TABLE>
<S> <C> <C>
Eliminate deferred interest expense......................... $ (750)
To establish fair value of property and equipment........... (1,298)
To eliminate Mercator accumulated depreciation.............. 1,298
Accounts payable incurred for acquisition costs............. (583)
Eliminate Mercator convertible notes payable, net........... 2,250
Eliminate convertible note payable--Progenitor.............. 1,308
Eliminate convertible bridge promissory note receivable from
Mercator................................................... (1,308)
Write-off of deferred acquisition cost...................... (1,013)
Eliminate Mercator redeemable preferred stock, Series A..... 3,015
Eliminate Mercator redeemable preferred stock, Series B..... 8,020
Eliminate Mercator redeemable preferred stock, Series C..... 4,526
Reflect par value of the 2,179,437 shares of common stock
issued..................................................... (2)
Eliminate Mercator common stock............................. 53
Reflect the issuance of common stock, options and warrants
in additional paid-in capital.............................. (21,345)
Deficit accumulated during the development stage:
Reflect charge for purchase of in-process research and
development............................................. 24,466
Eliminate Mercator deficit accumulated during the
development stage....................................... (18,637)
---------
Subtotal................................................ 5,829
---------
Total................................................. $ 0
---------
---------
</TABLE>
91
<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
Reorganization is consummated. Accordingly, final amounts could differ from
those used herein and the impact of such difference in Progenitor's
financial statements could be material.
In addition, Progenitor will provide additional funding to Mercator prior to
the closing of the IPO, 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 IPO, 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 Reorganization would be approximately $27,000.
In connection with the Reorganization, Progenitor expects to incur several
nonrecurring charges in the quarter ended September 30, 1997 which in the
aggregate is currently estimated to be $32,000, including the write-off of
costs related to the purchase of in-process research and development,
severance, employee retention and bonus programs and employee relocation and
other employee benefit costs, the consolidation of operations, the
elimination of duplicate systems and facilities, and other integration
costs. Factors that could increase such costs include delays in the closing
of the IPO beyond July 31, any unexpected employee turnover, unforeseen
delays in consolidating duplicate facilities once the Reorganization has
been completed and the associated costs of hiring temporary employees and
consultants, and any additional fees and charges to obtain consents,
regulatory approvals or permits. The costs of the write-off of in-process
research and development have been considered in the purchase price
allocation above, while the remaining costs have been excluded from the pro
forma presentation. In addition, the charge for purchased in-process
research and development ($24,466) has been excluded from the pro forma
statement of operations as it is a material nonrecurring charge which will
be reflected in the statement of operations of Progenitor within the year
following the Reorganization.
(3) Reflects the following Conversions which will occur upon the closing of the
IPO:
<TABLE>
<S> <C> <C>
(a) The automatic conversion of all outstanding shares of Progenitor's
Preferred Stock Series A and Series B into an aggregate of
2,204,330 shares of Progenitor Common Stock:
$ (20)
Preferred Stock, Series A........................................
$ (3)
Preferred Stock, Series B........................................
(b) The conversion of a convertible debenture and a portion of the
promissory note held by Interneuron into an aggregate of 810,220
shares of Progenitor Common Stock:
$ (6,393)
Note payable--Interneuron........................................
$ (495)
Convertible debenture--Interneuron...............................
(c) The conversion of the Interneuron Bridge Loan into an aggregate of $ (1,310)
131,135 shares of Progenitor's Preferred Stock, Series D...........
(d) Issuance of 24,020 shares of Progenitor Common Stock to The Ohio $ (204)
University Foundation in connection with an anti-dilution
adjustment pursuant to a stock purchase right......................
</TABLE>
92
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<S> <C> <C>
(4,549)
Reflect dividend for issuance of additional Progenitor Common Stock
shares upon the automatic conversion of all outstanding shares of
Progenitor's Preferred Stock Series A and Series B.................
---------
$ (4,753)
---------
---------
(e) To reflect the par value and additional paid-in capital as a result
of items (a) through (d) above:
$ 3
Progenitor Common Stock, Class A (par value of $0.001) for a
total issuance of 3,038,570 shares of Progenitor Common Stock....
$ 1
Progenitor Preferred Stock, Series D (par value $0.01) for a
total issuance of 131,135 shares of Progenitor Preferred Stock...
$ 12,970
Additional paid-in capital.......................................
</TABLE>
The Conversions described above will occur upon the closing of the IPO. The
number of shares of Progenitor Common Stock to be issued upon the
Conversions is dependent on the IPO Common Stock Price. A decrease of $1.00
from the IPO Common Stock Price of $8.50 per share would cause an increase
of 412,947 in the number of shares issued under the Conversions. Since the
Preferred Stock has a guaranteed quarterly return that is determined on each
of April 7, July 7, October 7 and January 7, the passage of any such dates
will alter the conversion ratio and the number of shares of Progenitor
Common Stock issuable upon such Conversion.
(4) Reflects the IPO Adjustments as follows:
<TABLE>
<S> <C> <C>
(a) To record the receipt and application of cash and cash equivalents:
$ 27,132
The issuance and sale of the 2,750,000 Progenitor Units offered
hereby (after deducting estimated underwriting discounts and
commissions and the estimated expenses of the IPO).............
4,500
The receipt of $4,500 in cash in connection with the purchase of
647,059 Amgen Shares...........................................
106
The sale of 25,000 shares of Progenitor Common Stock to The Ohio
University Foundation at a price of $4.25 per share............
(184)
The repayment of the remaining portion of the promissory note
payable to Interneuron.........................................
---------
$ 31,554
---------
---------
(b) To reflect the shareholder promissory note receivable from Amgen... $ (1,000)
(c) To reflect the par value and additional paid-in capital as a result
of item (a) above:
$ 4
Progenitor Common Stock, Class A (par value of $.001) for
consideration of a total issuance of 3,422,059 shares of
Progenitor Common Stock........................................
$ 32,023
Additional paid-in capital.......................................
</TABLE>
(5) Reflects research and development expense regarding the additional shares
issued to The Ohio University Foundation pursuant to an anti-dilution
adjustment in connection with the IPO relating to previous research and
technology arrangements.
(6) Eliminates interest expense relating to a convertible debenture and portion
of promissory note held by Interneuron which will convert to Progenitor
Common Stock upon the closing of the IPO.
93
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
(7) Supplemental loss per share amounts are computed using the weighted-average
number of shares outstanding of Progenitor Common Stock and Progenitor
Common Stock equivalents. Progenitor Common Stock equivalents are excluded
from the computation when their effect is anti-dilutive; however, pursuant
to the requirements of the Commission, Progenitor 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 Proxy Statement/Prospectus 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 Reorganization and the IPO
Adjustments assuming the Reorganization and the IPO occurred as of October
1, 1995.
94
<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 Proxy Statement/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 of Progenitor" 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>
95
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PROGENITOR
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF PROGENITOR SHOULD BE READ IN CONJUNCTION WITH EACH OF THE
PROGENITOR AND MERCATOR FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION OF MERCATOR." EXCEPT
WHERE SPECIFIED BELOW, REFERENCES TO PROGENITOR AND ITS RESULTS OF OPERATIONS
AND RESOURCES ASSUME THAT THE REORGANIZATION IS NOT CONSUMMATED.
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 Progenitor meeting certain milestones. Payments under collaborative or
licensing arrangements, if any, will be subject to significant fluctuation in
both timing and amount and therefore Progenitor's results of operations for any
period may not be comparable to the results of operations for any other period.
Progenitor 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, without giving
effect to the Reorganization, had a total stockholders' deficit of $8.0 million,
including an accumulated deficit of $23.0 million. See "Risk Factors--History of
Operating Losses; Anticipation of Future Losses."
Interneuron provided the initial funding of Progenitor and had invested
$19.7 million in Progenitor in equity and debt financings through March 31,
1997. Following the closing of the IPO and the Reorganization, Interneuron is
expected to own beneficially approximately 41% (approximately 40% if the
Underwriters' over-allotment option is exercised in full) of the outstanding
Common Stock of Progenitor. In addition, based upon an outstanding balance on
the Interneuron Bridge Loan of $2.9 million as of June 20, 1997, Interneuron
will own 293,293 shares of the Progenitor Series D Preferred Stock, which it may
convert at any time at its option into an equal number of shares of Progenitor
Common Stock, which would bring its ownership to approximately 43% of the
Progenitor Common Stock outstanding (approximately 41% if the Underwriters'
over-allotment option is exercised in full). Accordingly, Interneuron is and
will continue to be Progenitor's largest stockholder. Interneuron has no
obligation to invest any additional funds in Progenitor, and Progenitor 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.
Progenitor 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
Progenitor. See "Risk Factors--Need for Additional Capital; Uncertainty of
Additional Funding," "--Control of Progenitor by, and Potential Conflicts of
Interest with, Interneuron" and "Certain Transactions of
Progenitor--Relationship with Interneuron."
On February 14, 1997, Progenitor entered into the Reorganization Agreement.
Progenitor intends to close the Reorganization by issuing 2,179,437 shares of
Progenitor Common Stock to the Mercator stockholders (assuming an Adjusted
Purchase Price of $22.0 million).
Significant discovery, research and development efforts will be required
prior to the time any of Progenitor's gene discoveries may lead to product
candidates or result in products that may be brought to
96
<PAGE>
the market, if at all. Products, if any, resulting from Progenitor'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."
Progenitor intends to use the net proceeds of the IPO, together with the
cash proceeds received from sale of the Amgen Shares, primarily for research and
development. In addition, Progenitor 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 Reorganization; and (ii)
approximately $1.0 million relating to legal, accounting and other costs
incurred in connection with the Reorganization and this Proxy
Statement/Prospectus. In the event Progenitor consolidates its operations in
California, Progenitor may use approximately $2.5 million of such net proceeds
to facilitate employee relocation, plant closing and consolidation. Progenitor
anticipates using the balance of such net proceeds for the expansion or upgrade
of facilities, acquisition of equipment and for working capital and other
general corporate purposes.
PRO FORMA FOR REORGANIZATION
As of March 31, 1997, Progenitor, on a pro forma basis (including Mercator)
had an accumulated deficit of approximately $47.4 million. Progenitor expects to
incur substantial additional losses over the next several years as it expands
its research and development activities. In connection with the Reorganization,
Progenitor expects to incur several nonrecurring charges in the quarter ended
September 30, 1997, which in the aggregate are currently estimated to be
approximately $32.0 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 $1.5 million for other costs, such as benefit costs, the consolidation of
operations, the elimination of duplicate systems and facilities, and other
integration costs. Factors that could increase such costs include delays in the
closing of the IPO beyond July 31, 1997, any unexpected employee turnover,
unforeseen delays in consolidating duplicate facilities once the Reorganization
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, Progenitor 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 of Progenitor--Facilities."
RESULTS OF OPERATIONS
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
Progenitor'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 were recognized
during the first six months of fiscal 1997.
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.
97
<PAGE>
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 Interneuron.
FISCAL YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
Revenues of $2.8 million in fiscal 1995 were primarily attributable to an
initial cash payment of $2.5 million under Progenitor's collaboration agreement
with Chiron and recognition of $260,000 of revenues related to a payment under
Progenitor's ATP grant. Revenues for fiscal 1996 totaled $1.3 million as a
result of a $500,000 milestone payment received from Chiron in January 1996 and
revenues recognized under the ATP grant totaling $751,000.
Research and development expenses increased from $4.1 million for fiscal
1994, to $4.2 million for fiscal 1995 and decreased to $3.9 million for fiscal
1996. The increase in fiscal 1994 was largely due to the addition of senior
research and development management in late fiscal 1993 as well as annual salary
increases, increased short-term sponsored research commitments and increased
depreciation expenses resulting from additions of laboratory, office and
computer equipment. The increase in research and development expenses in fiscal
1995 was largely attributable to the $750,000 reimbursement to Chiron for
certain start-up manufacturing costs related to the Chiron collaboration. The
decrease in research and development expenses to $3.9 million was largely
attributable to the $750,000 Chiron reimbursement recorded in June 1995. Other
research and development expenses consisted primarily of salaries and consulting
fees, legal fees, sponsored research projects, license fees and expenditures for
laboratory supplies and animal facilities. Progenitor 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. Progenitor 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. Progenitor 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 IPO.
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
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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
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, Progenitor has not
incurred an ownership change under Section 382. As a result of the actions
contemplated by the IPO, the Reorganization 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 IPO 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 guaranteed return provisions of Progenitor's
Series A Preferred Stock. Such relinquishment may be deemed taxable income to
Progenitor. There can be no assurance that all of such income would be offset by
current expenses or operating loss carryforwards.
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 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, 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.
Following the Reorganization, Progenitor expects negative cash flow from
operations to continue for the foreseeable future. Progenitor 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. Progenitor estimates
that, at its planned rate of spending, its existing cash and cash equivalents,
together with the net proceeds from the IPO, the proceeds from the sale of the
Amgen Shares, and the interest income earned on such proceeds, will be
sufficient to meet its funding requirements for the next 18 months. There can be
no assurance, however, that Progenitor's assumptions regarding its future levels
of expenditures and operating losses or regarding the amount of IPO proceeds or
the proceeds from the sale of shares will prove accurate. Progenitor's future
funding requirements will depend on many factors, including any expansion or
acceleration of Progenitor's research and development programs; the results of
research and development, preclinical studies and clinical trials conducted by
Progenitor or its collaborative partners or licensees, if any; the acquisition
and licensing of products and technologies or businesses, if any; Progenitor's
ability to establish and maintain corporate relationships and academic
collaborations; Progenitor's ability to integrate the operations of Mercator
with those of Progenitor; Progenitor'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 Progenitor, 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 Progenitor's funding requirements.
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Progenitor will need to raise substantial additional capital to fund
operations. Prior to the IPO, Interneuron has funded substantially all of
Progenitor's operations. Interneuron, however, is under no obligation to
provide, and Progenitor does not expect that Interneuron will provide, any
additional funds in the future. Progenitor 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 Progenitor. If additional funds are raised by issuing
equity securities, dilution to existing stockholders will result. In addition,
in the event that additional funds are obtained through collaborative or license
arrangements, such arrangements may require Progenitor 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, Progenitor 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 REORGANIZATION
In connection with the Reorganization, Progenitor has committed pursuant to
the Mercator Bridge Loan Agreement an aggregate maximum amount of $6.6 million
to fund Mercator's interim working capital needs, estimated to be $800,000 per
month. The Mercator Bridge Loan 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 Mercator Bridge Loan Agreement. Upon closing of the IPO, the
Mercator Bridge Loan will increase Progenitor's purchase price consideration.
See "The Reorganization Agreement--Bridge Loan Financing."
In order to provide funding for the Mercator Bridge Loan, Interneuron has
agreed to provide Progenitor a line of credit of up to an aggregate maximum
amount of $6.6 million bearing interest at 10% per annum. Interneuron has agreed
to convert the entire balance of the Interneuron Bridge Loan into shares of
Progenitor's Series D Preferred Stock upon the closing of the IPO. Based on an
outstanding balance of $2.9 million on the Interneuron Bridge Loan as of June
20, 1997, Interneuron would receive 293,293 shares of Progenitor's Series D
Preferred Stock upon such conversion. See "Certain Transactions--Relationship
with Interneuron," Description of Progenitor Securities--Preferred Stock," "The
Reorganization Agreement--Bridge Loan Financing" and "Risk Factors--Control of
Progenitor By, and Potential Conflicts of Interest With, Interneuron."
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."
Progenitor 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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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 "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Mercator" and the Mercator
Financial Statements and related Notes thereto and other financial data included
elsewhere herein.
<TABLE>
<CAPTION>
OCTOBER 9, 1992 OCTOBER 9, 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>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF MERCATOR
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF MERCATOR SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS OF MERCATOR AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS. REFERENCES TO MERCATOR AND ITS RESULTS OF OPERATIONS AND
RESOURCES IN THIS SECTION ASSUME THAT THE REORGANIZATION IS NOT CONSUMMATED.
OVERVIEW
Mercator was incorporated in the State of Delaware in October 1992 and
commenced its operations at its facility in Menlo Park in March 1993. Mercator
engages in the discovery and development of therapeutics and diagnostics for
genetic-based diseases through the understanding of the genes involved in these
diseases. Mercator has devoted substantially all of its resources to research
and development programs since its inception. As a development stage company,
Mercator's activities have primarily consisted of performing research and
development, raising capital and developing collaborative relationships or other
arrangements. Mercator expects to incur increasing losses and require additional
financial resources to achieve commercialization of its products. As of December
31, 1996, Mercator had cumulative operating losses of $16.6 million. Mercator
has raised a total of $17.1 million through equity and convertible debt
financings as of December 31, 1996. The fundings primarily were from the
following private investors and their affiliates: Robertson Stephens & Co. IV.
L.P., InterWest Partners and Oak Investment Partners. Mercator continues to seek
additional funding through public or private equity or debt financing and
collaborative arrangements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
REVENUES. Mercator recognized $125,000 for the three months ended March 31,
1996 and no revenue in the three months ended March 31, 1997. The revenues were
attributable to Mercator's research collaboration and license agreement with
Agene Research Institute ("Agene") that was entered into in April 1995, in which
Agene agreed to fund certain research and development efforts of Mercator in the
area of aging. On December 27, 1996, the agreement and associated research was
terminated by mutual agreement between the parties.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased from $1,240,000 for the three months ended March 31, 1996 to
$1,592,000 for the three months ended March 31, 1997. The increase is due to an
increase in salary expenses associated with the annual performance review that
occurred in September 1996, and an increase in sponsored research costs
associated with additional agreements entered into subsequent to March 31, 1996,
partially offset by a decrease in consulting services in bioinformatics and
decreases in scientific advisory expenses and material purchases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $283,000 for the three months ended March 31, 1996 to $393,000
for the three months ended March 31, 1997. The increase is due to an increase in
salary and bonus expenses associated with the recruitment of the Vice President
of Business Development in July 1996, an increase in legal fees associated with
a license agreement in process and the filing of the patent application for the
hemochromatosis gene, partially offset by decreases in recruiting costs and
consulting.
INTEREST INCOME. Interest income decreased from $19,000 for the three
months ended March 31, 1996 to $5,800 for the three months ended March 31, 1997
as a result of a decrease in cash and cash equivalents.
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YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996.
REVENUES. Mercator recognized no revenue in 1994. Revenues for the year
ended December 31, 1995 were $375,000, compared to $500,000 for the year ended
December 31, 1996. The revenues were attributable to Mercator's research
collaboration and license agreement with Agene.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased from $2.3 million in 1994 to $4.2 million in 1995 and to $6.0 million
in 1996. The increase in research and development expenses in 1995 was largely
due to increases in research personnel costs, research activities, material
purchases and sponsored research activities resulting from additional research
headcount. Depreciation expense also increased in 1995 as Mercator purchased
additional capital equipment. In 1996, the increase in research and development
expenses was primarily due to a significant increase in sponsored research
activities. Mercator entered into a number of collaborative arrangements with
universities and other research institutions for collecting blood samples and
performing joint research programs in the area of asthma and schizophrenia. The
amount incurred on the contracted research programs in 1995 and 1996 were
$60,000 and $1,069,000, respectively. Other 1996 increases were largely due to
consulting fees incurred in the areas of bioinformatics and sponsored research.
Mercator expects research and development expenses to continue to increase over
the next several years as Mercator continues to expand its research efforts.
However, increases in research and development activities by Mercator will be
largely dependent on the availability of capital.
GENERAL AND ADMINISTRATIVE EXPENSES. Mercator's general and administrative
expenses increased from $638,000 in 1994 to $1,524,000 in 1995 and to $1,593,000
in 1996. The increase in 1995 expenses was largely due to an increase in annual
salary associated with the addition of the President and Chief Executive Officer
who was hired in December 1994. In addition, severance expenses of $356,000 were
paid to this President and Chief Executive Officer who resigned in December
1995. Also included in the 1995 expenses was a write off of $148,000 of fund
raising expenses associated with an aborted private placement round. Expenses in
1996 compared to 1995 remained relatively consistent. In 1996, Mercator did not
have severance expenses and did not have a write-off of fund raising expenses as
it had in 1995. The absence of these expenses was more than offset by increases
in annual salary and recruiting costs associated with the recruitment of the
Vice President of Business Development and an increase in general and patent
legal fees resulting from increased business activities and patent filings
associated with the discovery of the hemochromatosis gene. Depending upon the
receipt of additional financing, Mercator expects general and administrative
expenses to continue to increase over the next several years as Mercator
continues to expand its business development activities.
INTEREST EXPENSE. Interest expense increased from $95,000 in 1994 to
$156,000 in 1995, and to $180,000 in 1996. The increases in 1995 and 1996 were
due to increased borrowings through equipment financing obligations. Mercator
expects interest expense to continue to increase over the next several years as
Mercator continues to finance its equipment purchases, if any, through equipment
financing obligations. However, the amount of borrowings will be largely
dependent on Mercator's ability to obtain equipment financing.
INTEREST INCOME. Interest income increased from $229,000 in 1994 to
$291,000 in 1995, and decreased to $114,000 in 1996. The increase in interest
income in 1995 was attributed to increased average cash balances resulting from
equity financings. The decrease in 1996 was primarily due to decreased average
cash balances resulting from the ongoing funding of Mercator's research and
development programs. Mercator expects interest income to fluctuate in the
future depending upon the availability of additional financing.
LIQUIDITY AND CAPITAL RESOURCES
Mercator has financed its operations since inception primarily through
private placements of equity securities, issuance of debt, and entering into
equipment financing obligations and collaborative arrangements. Through March
31, 1997, Mercator had obtained aggregate gross proceeds of approximately
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$15.6 million through its private placements of equity securities. In addition,
in 1996 Mercator obtained $1.5 million through the issuance of the Venture
Capital Bridge Notes which are payable on demand and in the three months to
March 31, 1997, Mercator obtained $1.3 million through the Mercator Bridge Loan
from Progenitor. Mercator has also received proceeds totaling $1.9 million
through equipment financing obligations and has received $875,000 from Agene for
its research collaboration in aging.
Cash, cash equivalents and short-term investments were $100,000 at March 31,
1997, $400,000 at December 31, 1996, and $1.9 million at December 31, 1995. The
decrease from December 31, 1995 to 1996 is primarily the result of $4.5 million
received from the issuance of Mercator Series C Preferred Stock and $1.5 million
from the issuance of the Venture Capital Bridge Notes being more than offset by
net cash used in operations of $6.7 million and $700,000 of capital
expenditures. The decrease from December 31, 1996 to March 31, 1997 is primarily
the result of $1.3 million received from the Mercator Bridge Loan from
Progenitor more than offset by net cash used in operations of $1.5 million.
During 1994, 1995 and 1996, Mercator used $3.3 million, $4.1 million and
$6.7 million, respectively, to fund its operating activities. Equipment acquired
under equipment financing obligations during 1994, 1995 and 1996 were $436,000,
$854,000 and $201,000, respectively. Mercator also purchased equipment that
amounted to $484,000, $674,000 and $662,000 in 1994, 1995 and 1996,
respectively. Principal repayments of equipment financing obligations made
during 1994, 1995, and 1996 were $119,000, $236,000 and $372,000, respectively.
To support Mercator's research prior to the Effective Time, Mercator will
receive up to a further $5.3 million under the Mercator Bridge Loan Agreement.
See "The Reorganization--Bridge Loan Financing."
Mercator will require substantial additional funding in order to complete
its research and development activities and commercialize any potential
products. Mercator's recurring losses from operations raise substantial doubt
about its ability to continue as a going concern. Mercator will continue to
explore collaborative opportunities that may result in additional financing.
There can be no assurance, however, that Mercator can raise additional capital.
If Mercator is unable to establish corporate partnerships for its research and
development programs, Mercator's future capital requirements will increase
substantially. In addition, Mercator's future capital requirements will depend
on many other factors, including scientific progress in its research and
development programs, the size and complexity of such programs, the scope and
results of preclinical and clinical trials, the ability of Mercator to establish
and maintain corporate partnerships, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, the cost of
manufacturing preclinical and clinical material and other factors not within
Mercator's control. Insufficient funds may require Mercator to delay, scale back
or eliminate some of its research and development programs, to lose rights under
existing licenses or to relinquish greater or all rights to product candidates
at an earlier stage of development or on less favorable terms than Mercator
would otherwise choose or may adversely affect Mercator's ability to operate as
a going concern. If additional funds are raised through issuing equity
securities, substantial dilution to existing stockholders may result.
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BUSINESS OF PROGENITOR
OVERVIEW
Progenitor is engaged in the discovery and functional characterization of
genes to identify targets for the development of new pharmaceuticals.
Progenitor's initial focus is on the identification of genes important in
hematopoiesis, angiogenesis, osteogenesis and cancer. 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 IPO.
Through the Reorganization, Progenitor gains a complementary gene discovery
approach, disease genetics, established discovery programs and worldwide rights
to two genes. Progenitor 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 Progenitor's leptin
receptor technology. Progenitor 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, the developmentally-regulated
DEL-1 gene, which Progenitor believes has roles in angiogenesis and
osteogenesis. Progenitor and Vanderbilt have filed joint patent applications
with respect to DEL-1.
BUSINESS STRATEGY
Progenitor'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 Progenitor 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. Progenitor 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.
Key elements of Progenitor's business strategy to achieve this objective
include:
EMPLOY ITS INTEGRATED GENOMICS SYSTEM. Progenitor intends to implement its
integrated genomics system to accelerate the discovery and characterization of
therapeutic targets for the development of new pharmaceuticals. Using
complementary gene discovery approaches and applying genomics technologies,
Progenitor 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. Progenitor
intends to use a two-tiered approach to developing and commercializing its gene
discoveries. Progenitor intends to enter into partnerships with
biopharmaceutical firms to support gene discovery programs in specific disease
areas. In parallel, Progenitor 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.
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PURSUE PATENT PROTECTION. Progenitor 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. Progenitor
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. Progenitor intends to continue to
access the best available genomics technologies in order to maintain its
competitiveness and ensure a sustainable flow of therapeutic targets. Progenitor
has entered into and intends to continue to enter into multiple collaborations,
licensing agreements and other business arrangements to gain access to such
technologies.
PROGENITOR'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. Progenitor focuses on elucidating gene function
using approaches that Progenitor believes may accelerate discovery of genes with
medical relevance. Progenitor's system combines developmental biology with
genomics capabilities, including sequencing, 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, Progenitor
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. Progenitor believes that its expertise in
manipulating and analyzing developing cells and tissues may allow it to isolate
and characterize the function of these genes. Progenitor used its developmental
biology approach to identify the B219 leptin receptor and DEL-1.
Progenitor'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. Progenitor 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.
DISCOVERY RESOURCES
Progenitor 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
Progenitor 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 Progenitor 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, Progenitor believes that they may be useful in the
treatment and management of diseases characterized by abnormal changes in the
cells of such organs.
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Progenitor 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. Progenitor used cultured murine
yolk sac stem cell lines to identify its BFU-e red blood cell growth factor
activity. In May 1995, Progenitor entered into a collaboration with Novo Nordisk
relating to this growth factor. In November 1996, Progenitor'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, Progenitor 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. Progenitor 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, Progenitor 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. Progenitor 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
Progenitor 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. Progenitor 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. Progenitor 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.
DISCOVERY TOOLS
Progenitor employs a variety of discovery tools in order to identify
candidate genes with medical relevance from its discovery resources.
GROWTH FACTOR RECEPTOR TECHNOLOGIES
Progenitor 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.
Progenitor used these technologies to facilitate the discovery of the B219
leptin receptor. Progenitor 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, Progenitor
will seek to identify the therapeutic activities of various forms of these
receptors.
GENE EXPRESSION ANALYSIS
Progenitor 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. Progenitor believes
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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. Progenitor applied
gene expression analysis in its discovery of the B219 leptin receptor and DEL-1.
Progenitor continues to apply these technologies to its various discovery
resources, and has identified numerous novel genes involved in hematopoiesis and
angiogenesis, which will be subjected to further functional characterization.
Progenitor is developing bioinformatics applications and high-throughput systems
to further exploit its capabilities in the analysis of gene expression.
Progenitor 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
Progenitor has implemented and intends to continue to upgrade and integrate
its bioinformatics system to capture, manage and analyze the data from its
discovery programs. Bioinformatics allows Progenitor to correlate and analyze
data on its potential gene targets with data from public and proprietary
databases using a combination of standard and proprietary computational tools
and screening algorithms. This correlation and analysis may provide new insights
and guidance to discovery programs, contributing to the isolation of new genes,
elucidation of gene and protein function and determination of novelty.
Progenitor'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, Progenitor 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 Progenitor's existing bioinformatics and general laboratory data
management capabilities. In addition, Progenitor has entered to a separate
collaboration agreement with Pangea under which Progenitor will explore
potential collaborations that would combine Progenitor's developmental biology
expertise with Pangea software to produce new bioinformatics products.
Progenitor 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."
FURTHER ELUCIDATION OF GENE FUNCTION
Many of the tools Progenitor uses for gene discovery and initial functional
characterization also are used in the further elucidation of gene function.
Progenitor 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. Progenitor 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.
Progenitor believes that genes discovered using developmental biology and
disease genetics are equally amenable to further functional characterization
using these biological models. For example,
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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, Progenitor 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, Progenitor 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.
Progenitor 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.
Progenitor uses the following to accelerate the further elucidation of gene
function:
MURINE DEVELOPMENTAL ASSAYS
Progenitor'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. Progenitor 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, Progenitor
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. Progenitor also uses certain murine yolk sac stem cell lines to
evaluate the effects of discovered genes on endothelial cell growth and blood
vessel formation.
Progenitor 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 Progenitor to prioritize
gene sequences for further functional characterization and to obtain whole-body
evaluation of gene expression during murine development using in situ DNA
hybridization. In situ DNA hybridization, which uses complementary binding of
DNA strands to indicate gene expression at specific sites throughout an animal,
was instrumental in the discovery by University of Cambridge researchers of two
genes involved in the early formation of mammalian tissues.
In the second collaboration, with Ohio University, transgenic mice are used
as tools to study the effects of over- and under-expression of genes during
early stages of development through adulthood, which Progenitor believes may
provide results relevant to human gene function and medical applications.
XENOPUS DEVELOPMENTAL ASSAYS
Progenitor 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, particularly
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, Progenitor 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
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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 Progenitor 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. Progenitor'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. Progenitor also produces developmental and adult
gene knock-out models through genetic manipulation of ES cells. These models
allow Progenitor to evaluate the biological effects of eliminating expression of
a gene of interest. Progenitor 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 Progenitor to study the
function of newly discovered genes in a range of cellular and animal models.
Among a variety of systems Progenitor uses is a proprietary gene delivery
system, T7T7, which Progenitor 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. Progenitor 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
Progenitor has established gene discovery programs for the identification of
medically relevant genes in the areas of hematopoiesis, angiogenesis, and
osteogenesis. To date, these programs have produced one issued U.S. patent and
two notices of allowance from the USPTO, two corporate agreements and the
identification of three novel gene and protein candidates.
LEPTIN RECEPTORS
Abnormalities in the expression of leptin and the functioning of leptin
receptors have been implicated in obesity, diabetes and other metabolic
disorders. Progenitor 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,
Progenitor 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, Progenitor licensed certain aspects of its leptin receptor technology to
Amgen for human therapeutic, diagnostic and prophylactic uses. Progenitor has
retained exclusive rights to the leptin receptor technology for certain other
uses, including small molecule screening and cell sorting. Progenitor is seeking
collaborators in these two areas. See "Risk Factors--Dependence on Collaborators
and Licensees," "--Corporate Agreements--Amgen Agreements" and "--Patents and
Proprietary Rights."
Progenitor recently published findings suggesting that leptin receptors may
play a broad and fundamental biological role. In particular, Progenitor has
demonstrated in vitro that leptin stimulates the growth
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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, Progenitor 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
Progenitor 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. Progenitor has identified a growth factor activity that
stimulates the formation and development of red blood cells from burst-forming
units-erythroid ("BFU-e"), which are the earliest red blood cell precursors
found in adult bone marrow. The identified activity is distinct from that of
erythropoietin and other known growth factors. Progenitor 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 Progenitor. Progenitor, 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."
DEL-1 GENE IN ANGIOGENESIS AND OSTEOGENESIS
Progenitor believes that drugs designed to inhibit the growth of new blood
vessels may represent an important therapeutic approach to treating cancer.
Progenitor, 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,
Progenitor believes that Del-1 may be a highly specific, accessible and stable
target for the development of cancer therapeutics, diagnostics and imaging
agents. Progenitor has shown that mice implanted with human tumors express the
murine DEL-1 gene in developing blood vessels that feed the tumor. Progenitor
also has demonstrated that a variety of human tumor samples have a higher level
of DEL-1 expression than normal, noncancerous tissues. In addition, Progenitor
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. Progenitor has an exclusive, worldwide license
to Vanderbilt's commercial rights under these patent applications.
Interneuron owns an option to acquire an exclusive license to manufacture,
use and sell certain aspects of Del-1. Progenitor is seeking collaborations to
pursue the research, development and commercialization of DEL-1 and Del-1. See
"--Corporate Agreements--Interneuron Agreement."
ANGIOGENESIS
Progenitor 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, Progenitor, 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
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to be therapeutically relevant, Progenitor will seek to exercise its rights
under its agreement with Vanderbilt and enter into commercial collaborations for
further development of these gene sequences as therapeutic targets. See "--DEL-1
Gene in Angiogenesis and Bone Development" and "--License Agreements--Vanderbilt
University."
HEMATOPOIESIS
Progenitor 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. Progenitor 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. Progenitor's developmental systems enable gene isolation
during differentiation of rare hematopoietic precursor cells that appear only
briefly during development. Progenitor, 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
Progenitor 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.
Progenitor 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
Progenitor 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 Progenitor's
applications with respect to such programs or that, if issued, any resulting
patents will provide Progenitor with meaningful protection or rights. See "Risk
Factors--Uncertainty of 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, Progenitor entered into a license agreement with Amgen
relating to certain aspects of Progenitor's leptin receptor technology. The
agreement grants Amgen an exclusive, worldwide license, with the right to grant
sublicenses, to use Progenitor'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.
Progenitor 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. Progenitor 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 Progenitor's exclusive retained rights,
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and a non-exclusive right, without the right to grant licenses, to the licensed
technology in Amgen's field of use for research and development purposes only.
Amgen has sole discretion over the development and commercialization of licensed
products.
The license agreement terminates upon the expiration of the last to expire
of any 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, Progenitor 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 Progenitor, Amgen's
license rights revert to Progenitor.
Progenitor 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, Progenitor 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 Progenitor for the development and commercialization of a
subsequent product. An additional $2.0 million in milestone payments, plus
royalties, could be paid to Progenitor 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 Progenitor'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, Progenitor 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 IPO. Pursuant to the Amgen
Purchase Agreement, Amgen has agreed for a period of time to limit its ownership
interest in the Progenitor Common Stock below a specified percentage. Pursuant
to the Amgen Purchase Agreement, Amgen will receive certain registration rights
with respect to the Amgen Shares. See "Description of Progenitor Capital
Stock--Registration Rights."
NOVO NORDISK AGREEMENT
In May 1995, Progenitor 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 Progenitor related to the BFU-e red blood cell growth
factor activity identified by Progenitor 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 Progenitor 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 Progenitor 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 Progenitor for additional research, which may entitle
Progenitor 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 Progenitor'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 Progenitor an exclusive worldwide license to all
of Novo Nordisk's rights
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arising from the research conducted pursuant to the agreement to make, use and
sell related products. In the event that Novo Nordisk and Progenitor had
developed joint technology under the agreement prior to such early termination,
Progenitor would be obligated to pay Novo Nordisk royalties for any sales of
products made using the licensed technology.
If Novo Nordisk decides to develop any licensed products, it will be
obligated to pay Progenitor 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, Progenitor
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, Progenitor 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 Progenitor 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
Progenitor 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, Progenitor 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.
Progenitor 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 Progenitor 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. Progenitor has the right to collaborate and jointly invest in Chiron's
development efforts on the tumor ablation product, with Progenitor'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 Progenitor, but Chiron would retain exclusive rights to inventions and
discoveries made solely by its
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employees, and joint rights to discoveries made jointly with Progenitor. Chiron
also would be required to pay Progenitor all royalties accrued before
termination.
Progenitor 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 Progenitor's
research and development expenses. Progenitor has paid Chiron $750,000 pursuant
to the agreement, in full satisfaction of Progenitor's obligation to reimburse
Chiron for certain start-up manufacturing costs. Under the agreement, Progenitor
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, Progenitor would receive an aggregate of
$51.3 million (including payments already received) plus royalties on net
product sales. There can be no assurance that Progenitor 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, Progenitor granted Interneuron an option to acquire an
exclusive, worldwide royalty-bearing license to manufacture, use and sell Del-1
for human therapeutic uses on terms to be negotiated. Progenitor retained the
right to negotiate with third parties to license the Del-1 protein, provided
that, in the event Progenitor grants such rights to a third party, Progenitor
must share fees, milestone payments and royalties with Interneuron. Should
Progenitor develop and sell products using Del-1 independently, Progenitor will
pay Interneuron royalties on net sales.
The option 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, Interneuron paid Progenitor $1 and
relinquished its right to minimum return adjustments through the quarter ended
April 7, 1997 to the conversion ratio of the shares of Progenitor Series A
Preferred Stock held by Interneuron. The terms of the Progenitor Series A
Preferred Stock provide for Interneuron to receive a 35% annual return,
implemented through minimum return adjustments to the conversion ratio of the
Progenitor Series A Preferred Stock at the time the Progenitor Series A
Preferred Stock converts to Progenitor Common Stock. Such conversion will occur
automatically on the closing of the IPO and, accordingly, prior to the
relinquishment, Interneuron would have received an additional 909,965 shares of
Progenitor Common Stock upon the closing of the IPO, based on an IPO Common
Stock Price of $8.50. See "--Discovery Programs," "Risk Factors--Control of
Progenitor By, and Potential Conflicts of Interest with, Interneuron" "Certain
Transactions--Relationship with Interneuron," and "Description of
Securities--Progenitor Preferred Stock."
TECHNOLOGY AGREEMENTS
PANGEA AGREEMENTS
Progenitor has entered into purchase and collaboration agreements with
Pangea relating to the licensing and further development of advanced
bioinformatics technology. Pursuant to the agreements, Progenitor purchased
bioinformatics products that combine hardware and software for use in
information management and high-throughput analysis. Progenitor 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
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discount. Progenitor and Pangea also will explore potential collaborations that
would combine Progenitor's developmental biology expertise with Pangea software
to produce new bioinformatics products.
LICENSE AGREEMENTS
VANDERBILT UNIVERSITY
In July 1995, Progenitor entered into a license agreement with Vanderbilt
pursuant to which Progenitor 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, Progenitor is obligated to pay royalties on any
resulting product sales. Vanderbilt University may terminate the agreement after
three years if Progenitor has not made adequate efforts to commercialize
products based on the gene.
OHIO UNIVERSITY
Progenitor 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
Progenitor 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, Progenitor 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 Progenitor subject to
certain anti-dilution protection and was granted the right to purchase 25,000
shares of Progenitor'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 IPO at a price equal to $4.25
per share. The Ohio University Foundation also has the right to designate two
representatives to the Board of Directors of Progenitor until Progenitor
consummates an initial public offering. See "Certain Transactions of
Progenitor--The Ohio University Foundation."
ADVANCED TECHNOLOGY PROGRAM GRANT
In November 1994, Progenitor 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 Progenitor 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 Progenitor. The ATP
grant provides that Progenitor retains full rights to any intellectual property
developed as part of the project.
The ATP grant is administered by United States Department of Commerce. As of
June 20, 1997, Progenitor had received $1,360,598 under the ATP grant, and
$145,820 in additional funds were payable to Progenitor. 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 Progenitor that, although it could not
guarantee the availability of funds for Progenitor's grant for the year ending
May 31, 1998, it is likely that Progenitor 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.
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PATENTS AND PROPRIETARY RIGHTS
Patents and licenses are important to Progenitor's businesses. Progenitor'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. Progenitor also relies on trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. To date, Progenitor 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.
Progenitor'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 Progenitor may depend upon the
remaining term of patent protection available at the time products that utilize
the patented technology are commercialized.
Progenitor believes that there may be significant litigation regarding
patent and other intellectual property rights relating to leptin and leptin
receptors. Progenitor is aware that Millennium has filed a patent application
relating to a receptor for leptin and its use in obesity applications, and has
licensed to Hoffmann-La Roche Inc. rights to develop certain therapeutics for
obesity using Millennium's discovery of a leptin receptor. There can be no
assurance that Millennium's patent application, or additional patent
applications filed by Millennium or others, will not result in issued patents
covering a leptin receptor, the leptin protein or other ligands, or any of their
respective uses including obesity. There can be no assurance that the invention
by Millennium will be accorded an invention date later than Progenitor's
invention date, that any patent 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 Progenitor'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 Progenitor
applies for patent protection on a corresponding full-length gene could
adversely affect Progenitor's ability to obtain patent protection with respect
to such gene. To the extent any patents issue to other parties on such partial
or full-length genes, and as other patents issue with the expansion of
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the biotechnology industry, the risk increases that the potential products and
processes of Progenitor or its collaborators or licensees may give rise to
claims of patent infringement.
The patent positions of pharmaceutical and biotechnology firms, including
Progenitor, 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, Progenitor 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, Progenitor 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 Progenitor would not be
held invalid or unenforceable by a court or that such patents would cover
products or technologies of Progenitor'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 Progenitor. To protect its proprietary
rights, Progenitor may be required to participate in interference proceedings
declared by the USPTO to determine priority of invention, which may result in
substantial cost to Progenitor. Moreover, even if Progenitor'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 Progenitor will develop proprietary
technologies that are patentable, that Progenitor'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 Progenitor's patents will not be held invalid by a
court of competent jurisdiction.
In addition to patent protection, Progenitor also relies to a significant
extent upon trade secret protection for its unpatented confidential and
proprietary information, including many of Progenitor'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 Progenitor's trade secrets or disclose such technology.
To protect its trade secrets, Progenitor 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
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. There can be no assurance,
however, that these agreements will provide meaningful protection of
Progenitor's trade secrets or adequate remedies in the event of unauthorized use
or disclosure of such information, that Progenitor 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
Progenitor's key discovery technologies would materially and adversely affect
Progenitor's competitive position and could have a material adverse effect on
Progenitor'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 Progentior projects or apply
Progenitor technology to other
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projects and, if adversely determined, such disputes could have a material
adverse effect on Progenitor's business, financial condition and results of
operations.
Progenitor may incur substantial costs if it is required to defend itself in
patent suits brought by third parties or if Progenitor initiates such a suit to
enforce Progenitor's patents or to determine the scope and validity or
enforceability of other parties' proprietary rights. Any legal action against
Progenitor 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 Progenitor to potential liability for damages,
require Progenitor 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 Progenitor or its collaborators or licensees to cease doing
so. There can be no assurance that Progenitor 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
Progenitor's business, financial position and results of operations. In
addition, if Progenitor becomes involved in such litigation, it could consume a
substantial portion of Progenitor's managerial and financial resources.
Progenitor 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 Progenitor 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 Progenitor will be able to obtain any such license on commercially
acceptable terms, if at all. Failure by Progenitor or its collaborators and
licensees to obtain a license to any technology required to commercialize
Progenitor's discoveries may have a material adverse effect on Progenitor'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
Progenitor 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. Progenitor's competitors may discover, characterize or develop
important genes in advance of Progenitor, which could have a material adverse
effect on any related Progenitor discovery program. Progenitor expects
competition to intensify in genomics research as technical advances in the field
are made and become more widely known.
In addition, Progenitor faces, and will continue to face, intense
competition from pharmaceutical and biotechnology companies, as well as academic
and research institutions and governmental agencies. Progenitor is subject to
significant competition from organizations that are pursuing the same or similar
technologies as those which constitute Progenitor's discovery approaches, and
from organizations that are pursuing pharmaceutical or diagnostic products that
are competitive with Progenitor's or its collaborators' potential products. Many
of the organizations competing with Progenitor 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
Progenitor. See "Risk Factors--Intense Competition; Rapid Technological Change."
Progenitor 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. Progenitor'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
Progenitor. Any product candidate or technology of Progenitor may
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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 Progenitor 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 Progenitor and its collaborators or licensees, and have a materially
adverse effect on Progenitor'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 Progenitor 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 Progenitor's discovery programs involve the application of new
technologies and may be based upon a new therapeutic approach, such products may
be subject to substantial additional review by various government regulatory
authorities other than the FDA and, as a result, regulatory approvals may be
obtained more slowly than for products using conventional technologies. Under
current guidelines, proposals to conduct clinical research involving gene
therapy at institutions supported by the NIH must be approved by the RAC and the
NIH. Furthermore, gene therapies are relatively new technologies 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. The NIH has proposed revised rules with respect to the RAC that
would, among other things, remove the RAC's authority over the approval of
individual gene therapy experiments. There can be no assurance, however, that
such proposed rules will be adopted.
Even if regulatory approval is obtained, a marketed product and its
manufacturer are subject to continual review. Among the conditions for product
approval and continued marketing approval is that the quality control and
manufacturing procedures of Progenitor 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 Progenitor'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 Progenitor, 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. Progenitor has not submitted an IND for any
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product candidate, and no product candidate has been approved for
commercialization in the U.S. or elsewhere. Progenitor 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 Progenitor 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 Progenitor's collaborators or licensees from marketing drugs or other
products developed by Progenitor or will limit the commercial use of such
products and could have a material adverse effect on Progenitor's business,
financial condition and results of operations.
In addition to regulations enforced by the FDA, Progenitor 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. Progenitor's
research and development activities involve the controlled use of hazardous
materials, chemicals, biological materials and radioactive compounds. Although
Progenitor believes that its safety procedures for the 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,
Progenitor could be held liable for any resulting damages and any such liability
could exceed Progenitor's resources. See "Risk Factors--Government Regulation"
and "--Hazardous and Radioactive Materials; Environmental Matters."
PRODUCT LIABILITY INSURANCE
The testing, manufacture, marketing and sale of pharmaceutical and other
products entail the inherent risk of liability claims or product recalls and
associated adverse publicity. Clinical trials and sales by Progenitor or its
collaborators or licensees of potential products incorporating Progenitor's
discoveries may expose Progenitor 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. Progenitor currently has a limited amount of clinical trial and
product liability insurance coverage through Interneuron. Progenitor will seek
to obtain its own coverage upon the closing of the IPO 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 Progenitor 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 Progenitor against such
liability. Certain of Progenitor's license agreements require Progenitor 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 Progenitor 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 Progenitor or its collaborators or licensees could inhibit or
prevent commercialization of products being developed by Progenitor and could
have a material adverse effect on Progenitor's business, financial condition and
results of operations. In addition, to the extent any product liability claim
exceeds the amount of any insurance coverage, Progenitor'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, Progenitor had 63 full-time employees, of whom 20 hold
Ph.D. or M.D. degrees. Of Progenitor's full-time employees, 52 are engaged in
research and development activities and 11 are engaged in business development,
finance and administration. None of Progenitor's employees is covered by a
collective bargaining agreement, and Progenitor has never experienced any strike
or work stoppage. Progenitor believes its relations with its employees to be
good.
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In order to support its operations, Progenitor must hire and retain
additional research, management, administrative and financial personnel. In
addition, in connection with the Reorganization and the potential relocation of
Progenitor's facilities, Progenitor may be required to expend substantial
additional resources to create a combined personnel base. Progenitor'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 Progenitor 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
Progenitor 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, Progenitor 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. Progenitor
expects that its current facilities will be adequate to serve its needs for the
foreseeable future. Although Progenitor 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, Progenitor is considering
relocating its facilities in whole or in part to the San Francisco Bay Area.
Such a relocation could involve substantial nonrecurring charges including lease
termination costs, costs of moving records and equipment and employee severance
and relocation payments. These and related charges could have a material adverse
effect on Progenitor'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 of Progenitor."
SCIENTIFIC ADVISORY BOARDS
Progenitor has established a group of scientists and physicians to advise it
on scientific and medical matters in the areas of Progenitor's business. The
Progenitor Scientific Advisory Board (the "SAB") includes experts in
developmental biology, hematopoiesis, hematologic oncology, cardiovascular
medicine, immunology, mammalian recombinant gene transfer and transgenics.
Progenitor periodically consults with members of the SAB regarding Progenitor's
current and future research and development activities and focus.
The Progenitor 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.
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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.
HEMATOLOGY/ONCOLOGY/IMMUNOLOGY
Steven J. Burakoff, M.D., is Professor of Pediatrics, Harvard Medical
School. Dr. Burakoff also serves as Chief, Division of Pediatric Oncology, and
Director, Pediatric Oncology Research Program, Dana-Farber Cancer Institute, and
Chief of Immunology, Bone Marrow Transplantation Unit, Children's Hospital
Medical Center and Brigham and Women's Hospital. Dr. Burakoff's major research
interests include cellular and molecular immunology, T cell activation and
signal transduction, and transplantation immunology.
David W. Golde, M.D., Chairman of the SAB, a renowned expert in the fields
of hematologic oncology and hematopoiesis, is Physician-in-Chief and head of
Hematologic Oncology at Memorial Sloan-Kettering Cancer Center, and Professor of
Medicine at Cornell University Medical College. The author of 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
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.
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MANAGEMENT OF PROGENITOR AFTER THE REORGANIZATION
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Progenitor following the
consummation of the Reorganization and the IPO 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 Progenitor since June 1994 and served as Executive
Vice President and Chief Operating Officer from January 1993 to June 1994. Prior
to joining Progenitor, 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 Progenitor upon consummation of the Reorganization. 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.
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MARK N. K. BAGNALL has served as Vice President, Finance and Chief Financial
Officer of Progenitor since August 1996. Prior to joining Progenitor, Mr.
Bagnall served as Vice President of Finance, Chief Financial Officer and
Secretary of Somatix Therapy Corporation ("Somatix"), a biotechnology company,
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
Progenitor since May 1996 and has served as Vice President, Research since he
joined Progenitor in July 1993. Prior to joining Progenitor, 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 Progenitor since May 1996 and previously served as Vice
President, Business Development from June 1994 to May 1996. Prior to joining
Progenitor, 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
Progenitor 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 Progenitor
from September 1992 until June 1994. Prior to joining Progenitor 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 Progenitor 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 Progenitor 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 been a Director of Progenitor 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
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Jerusalem, Israel, affiliated with Paramount Capital Investments. Dr. Laster
received his M.D. from Downstate Medical Center, New York, and postdoctoral
training in surgery at Case Western Reserve University Hospital.
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 Progenitor'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 Progenitor 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
Progenitor anticipates that it will employ the following key scientific
personnel:
KAREN J. BRUNKE, PH.D. will serve as Vice President of Scientific Affairs of
Progenitor upon consummation of the Reorganization. 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 Progenitor since
September 1996, and previously served as Manager, Department of Molecular
Biology and Project Leader of Progenitor's Novel Hematopoietic Receptor
Discovery Program. Dr. Cioffi joined Progenitor in December 1992 as a Research
Scientist. Prior to joining Progenitor, 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
Progenitor since March 1997. Prior to joining Progenitor, 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
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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.
EMPLOYMENT AGREEMENTS
DOUGLASS B. GIVEN. Progenitor 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
Progenitor 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
Progenitor Common Stock at an exercise price per share equal to the IPO Common
Stock Price. Additionally, Dr. Given will receive assistance with relocation
expenses, as more fully described in "Certain Transactions of
Progenitor--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,
Progenitor 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 Progenitor 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, Progenitor 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 Progenitor 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 Progenitor, 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. Progenitor signed the Revised Sigal Employment Agreement
with Dr. Sigal on February 14, 1997, effective upon the Effective Date, to serve
as the Senior Vice President of Research and Development of Progenitor.
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 Progenitor Board of
Directors or its Compensation Committee in the range of up to 30% of his base
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salary, (iii) certain additional benefits, including life insurance benefits in
the amount of $450,000, and (iv) stock options to purchase shares of Progenitor
Common Stock equal to 1% of the outstanding Progenitor Common Stock of
Progenitor on a fully-diluted basis on the Effective Date, which options will be
exercisable at the IPO Common Stock Price and will be granted in addition to the
Replacement Options to be issued to Dr. Sigal in connection with the
Reorganization. The options to be granted upon the closing of the IPO 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 Progenitor in the event that other options granted to a senior
manager of Progenitor (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
Progenitor 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, Progenitor will replace Mercator as the lender under the Sigal
Note. 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 earlier of: (a) any sale or transfer of the Property;
(b) the refinancing of any loan secured by a first mortgage on the Property; (c)
the first anniversary of Dr. Sigal's retirement or termination of employment
with Progenitor; (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 the 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," Progenitor will: (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
the 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. If Progenitor terminates Dr.
Sigal's employment for "cause," Progenitor will 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 Progenitor 30
days advance written notice. Progenitor will have the option, in its complete
discretion, to make Dr. Sigal's termination effective at any time prior to the
end of such notice period. In either event, Progenitor will 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 Progenitor 30
days advance written notice of the reason for termination and his intent to
terminate. During this period, Progenitor will have an opportunity to correct
the condition constituting "good reason". If not remedied, Progenitor will
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
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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 Reorganization. All such options will be converted into Replacement
Options as a result of the Reorganization. In connection with the completion of
the Reorganization, Dr. Sigal will receive fully vested Replacement Options
under the 1997 Plan to purchase 4,949 and 120,180 shares of Progenitor Common
Stock with exercise prices of $12.34 and $1.08, respectively, assuming an IPO
Unit Price of $11.00, an IPO Common Stock Price of $8.50 and an Adjusted
Purchase Price of $22.0 million.
The Compensation Letter and, to the extent still operative, the prior Sigal
employment agreement, will terminate upon consummation of the Reorganization,
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 Progenitor and
their respective affiliates.
For more information on Dr. Sigal's compensation, see "The
Reorganization--Interests of Certain Persons in the Reorganization" and
"Management of Mercator."
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 Progenitor shall pay
the executive's COBRA premium 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 Progenitor
and a severance payment equal to one year of his base salary.
Progenitor 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 IPO. Pursuant to the intercompany services agreement to be entered into
by Progenitor with Interneuron, Interneuron will have the right to nominate one
designee for election to Progenitor's Board of Directors, for so long as
Interneuron reports Progenitor's financial results on a consolidated basis, on
an equity basis or otherwise on a basis pursuant to which a portion of
Progenitor's results of operations appears in the financial results of
operations of Interneuron. See "Certain Transactions of Progenitor--Relationship
with Interneuron" and "--The Ohio University Foundation." Pursuant to the
Reorganization Agreement, Progenitor will cause Robert R. Momsen to be elected
to its Board of Directors effective on or prior to consummation of the
Reorganization.
Effective August 9, 1996, the Progenitor 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 Progenitor's independent auditors and reviewing Progenitor'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 Progenitor and will administer various incentive compensation and
benefit plans.
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All executive officers serve at the discretion of the Progenitor Board of
Directors, subject to the terms of any employment agreements. Progenitor has
entered into employment agreements with Dr. Given and Dr. Sigal, which will be
effective upon the closing of the IPO. There are no family relationships among
Progenitor'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 Progenitor. Dr. Cooper
serves as chairman of Progenitor's 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 of
Progenitor--Transactions with Directors and Executive Officers."
DIRECTORS' COMPENSATION
Effective after the IPO, Progenitor'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 Progenitor 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 Progenitor Common Stock under Progenitor's 1996 Stock
Incentive Plan have been reserved for issuance to non-employee directors of
Progenitor (other than those who are employees of Interneuron) pursuant to
compensation policies for such directors to be adopted by Progenitor 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 Progenitor Board that he attends.
Upon execution of this agreement, Progenitor also granted Mr. Sharrock options
to purchase 2,500 shares of Progenitor 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, Progenitor 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 Progenitor'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 Progenitor, effective upon the closing of the IPO, of
additional options to acquire 25,000
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shares of Progenitor Common Stock at the IPO Common Stock 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 IPO.
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"). See "--Directors and Executive Officers" and "The
Reorganization--Interests of Certain Persons in the Reorganization." (For
information regarding the compensation paid by Mercator to Dr. Sigal, who is
expected to serve as Progenitor's Senior Vice President of Research and
Development following the Reorganization, in the fiscal year ended December 31,
1996, see "Management of Mercator--Executive Compensation" and "The
Reorganization--Interests of Certain Persons in the Reorganization.")
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) 1,063(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 1995 123,000 30,000 30,000(1)(6)
Officer
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 Progenitor on a term life
insurance policy for Dr. Given and (ii) an aggregate amount of $30,000 of
indebtedness which was forgiven by Progenitor effective in fiscal 1996. See
"Certain Transactions of Progenitor--Transactions with Directors and
Executive Officers."
(3) Consists of premiums paid by Progenitor on a term life insurance policy for
Dr. Given.
(4) Dr. Platika's employment with Progenitor terminated effective as of May 24,
1996, pursuant to a Separation Agreement and Release. Prior to termination,
Progenitor 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, Progenitor agreed to forgive an additional
$120,000 of such
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indebtedness, provided that Dr. Platika repaid the balance of $96,426 to
Progenitor, which was paid as of July 23, 1996. See "Certain Transactions of
Progenitor--Transactions with Directors and Executive Officers."
(5) Includes options exercisable for 7,500 shares of Progenitor 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 of Progenitor--Transactions with Directors and Executive
Officers."
(6) Includes options exercisable for 12,500 shares of Progenitor 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 Progenitor
effective in fiscal 1996 in lieu of a bonus. See "Certain Transactions of
Progenitor--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 Progenitor, until September 30, 1996.
Mr. Bagnall currently receives a salary of $165,000 per year. Upon joining
Progenitor, (i) Mr. Bagnall was paid a signing bonus of $25,000, and was
granted options to purchase 110,000 shares of Progenitor Common Stock, 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.
STOCK PLANS
1992 STOCK OPTION PLAN
The 1992 Stock Option Plan was adopted and approved by the Progenitor Board
of Directors in December 1992 and by the stockholders of Progenitor 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 Progenitor
Common Stock available for grant. A total of 500,000 shares of Progenitor 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 Progenitor
Common Stock granted under the 1992 Stock Option Plan had been exercised,
options to purchase 310,463 shares of Progenitor Common Stock were outstanding
and options to purchase 148,425 shares of Progenitor 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 Progenitor. The 1992 Stock Option
Plan will terminate in 2002, unless sooner terminated by the Progenitor Board of
Directors.
The Progenitor 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 Progenitor
Common Stock that are designed to qualify, under Section 422 of the Code, as
"incentive stock options" ("Incentive Stock Options") or (ii) options to
purchase Progenitor Common Stock that are not described in Sections 422 or 423
of the Code ("Non-Qualified Stock Options" and, collectively with Incentive
Stock Options "Options").
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The Progenitor Board of Directors has discretion to grant Incentive Stock
Options to employees and officers (including officers who are directors) of
Progenitor and Non-Qualified Stock Options to employees, officers (including
officers who are directors), directors, independent contractors and consultants
of Progenitor. 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 Progenitor 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 Progenitor 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 Progenitor or
any related corporation ceases for any reason (other than termination because of
death or total disability) may exercise, in the three-month period following
such cessation (unless such Options terminate or expire sooner by their terms),
or such longer period as determined by 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 Progenitor in which Progenitor 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 Progenitor 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 Progenitor Board of Directors may amend the 1992 Stock Option Plan,
insofar as permitted by law, with respect to any shares of Progenitor 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 Progenitor
Board of Directors in May 1996 and by the stockholders of Progenitor 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 Progenitor 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 Progenitor Common Stock were outstanding and options to purchase
2,465,000 shares of Progenitor Common Stock remained available for grant, of
which options to purchase 937,385 shares of Progenitor Common Stock at an
exercise price equal to the IPO Common Stock Price will be granted upon the
closing of the IPO. Currently outstanding options under the 1996 Plan were held
by four Named Executive Officers and were exercisable at an exercise price of
$5.50
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per share. No options were held by persons who are not officers or directors of
Progenitor. A total of 300,000 shares of Progenitor Common Stock under the 1996
Plan have been reserved for issuance to non-employee directors of Progenitor
(other than those who are employees of Interneuron) pursuant to director
compensation policies to be adopted by Progenitor 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 Progenitor, the Board of Directors has delegated administration
of the 1996 Plan to the Compensation Committee (the "Compensation 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 Progenitor 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 Compensation Committee has discretion to grant Options, Restricted
Stock, SARs, DERs and Performance Shares to employees, officers (including
officers who are directors of Progenitor), directors and consultants of
Progenitor, provided that only employees and officers of Progenitor may receive
Incentive Stock Options. The Compensation 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 Compensation Committee has
discretion to grant such Options with an exercise price below the fair market
value of the Progenitor Common Stock. As of October 31, 1996, no such
below-market grants had been made.
Upon certain changes in control of Progenitor (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 Progenitor, 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 Progenitor.
The Progenitor 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
Progenitor's 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan"),
was approved by the Progenitor 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 Progenitor with an
opportunity to purchase Progenitor Common Stock through payroll deductions. An
aggregate of 100,000 shares of Progenitor Common Stock has been reserved for
issuance under the Stock Purchase Plan and available for purchase thereunder,
subject to adjustment in the event of a stock split, stock dividend or other
similar change in the Common Stock or the capital structure of Progenitor. All
employees of Progenitor (and employees of "subsidiary corporations" and "parent
corporations" of Progenitor (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
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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
Progenitor and the Underwriters agree as to the pricing with respect to the IPO.
Accrual Periods are generally six month periods, with the initial Accrual Period
commencing on the effective date of the Stock Purchase Plan and ending on
September 30, 1997. Thereafter, Accrual Periods will commence each April 1 and
October 1. Exercise Dates are the last day of each Accrual Period. In the event
of a merger of Progenitor with or into another corporation, the sale of all or
substantially all of the assets of Progenitor, or certain other transactions in
which the stockholders of Progenitor before the transaction own less than 50% of
the total combined voting power of Progenitor's outstanding securities following
the transaction, the administrator of the Stock Purchase Plan may elect to
shorten the Purchase Period then in progress.
On the first day of each Purchase Period, a participating employee is
granted a purchase right which is a form of option to be automatically exercised
on the forthcoming Exercise Dates within the Purchase Period during which
deductions are to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan.
When the purchase right is exercised, the participant's withheld salary is used
to purchase shares of Progenitor Common Stock. The price per share at which
shares of Progenitor 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 Progenitor Common Stock is lower than the fair market value
of the Progenitor 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 Progenitor 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 Progenitor
Common Stock which may be purchased during any calendar year are imposed by the
Code.
The Stock Purchase Plan will be administered by the Progenitor 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.
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1997 STOCK OPTION PLAN
In March 1997, the Progenitor Board of Directors approved the 1997 Stock
Option Plan (the "1997 Plan"). The purpose of the 1997 Plan is to allow
Progenitor to comply with its obligations under the Reorganization Agreement to
issue the Replacement Options to those who held options to purchase Mercator
Common Stock ("Mercator Options") prior to the Reorganization. The intent and
effect of the 1997 Plan is to give holders of Mercator Options the right to
acquire shares of Progenitor Common Stock in lieu of, but not in addition to,
the shares of Mercator Common Stock underlying unexercised Mercator Options held
by them immediately prior to the closing of the Reorganization. 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 Progenitor's Board
of Directors unless and until the Board delegates administration to the
Compensation Committee. Subject to the provisions of the 1997 Plan, the
Progenitor 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 Progenitor Board, in the
exercise of this power, may correct any defect, omission or inconsistency in the
1997 Plan or in any option agreement thereunder, in a manner and to the extent
it shall deem necessary or expedient to make the 1997 Plan fully effective, and
may amend the 1997 Plan as provided therein.
TYPES OF AWARDS. Awards under the 1997 Plan will consist solely of the
issuance of Replacement Options to each holder of Mercator Options. With respect
to all Mercator Options that are designed to qualify as Incentive Stock Options,
the corresponding Replacement Options also shall be designed to qualify as
Incentive Stock Options. With respect to all Mercator Options that are
Non-Qualified Stock Options, the corresponding Replacement Options also shall be
Non-Qualified Stock Options. Incentive Stock Options shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Replacement Options
are granted only by such person. Non-Qualified Stock Options shall not be
transferable except by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order, and shall be exercisable
during the lifetime of the person to whom such options are granted only by such
person or any transferee pursuant to a qualified domestic relations order. No
Replacement Options will be issued under the 1997 Plan to any holder of a
Mercator Option unless and until such holder has either (i) returned the
agreement evidencing such Mercator Option to Progenitor for cancellation, or
(ii) delivered to Progenitor (a) evidence reasonably satisfactory to Progenitor
regarding the loss, theft or destruction of such option agreement and (b)
indemnity or security reasonably satisfactory to Progenitor. In addition, each
such holder also must first deliver to Progenitor a signed Lockup Agreement. See
"The Reorganization--Lockup Agreements."
AVAILABLE SHARES. A total of up to 550,000 shares of Progenitor Common
Stock have been reserved for issuance under the 1997 Plan. Assuming an IPO
Common Stock Price of $8.50 and an Adjusted Purchase Price of $22.0 million,
372,920 shares of Progenitor 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 Reorganization, and may increase or decrease to the
extent that the IPO Common Stock Price is less than or greater than $8.50. The
number of shares of Progenitor Common Stock that correspond to Mercator Options
also will depend upon the IPO Common Stock Price. See "Capitalization" "The
Reorganization--Exchange Ratios."
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.
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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 Progenitor 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 Mercator Common Stock in the Reorganization.
b) EXERCISE PRICE. The exercise price per share of Progenitor 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 applicable 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 Reorganization 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 Progenitor
Common Stock 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 Progenitor (the "Repurchase Option") that
expires in accordance with the same schedule as the 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 Progenitor or (ii)
upon a dissolution of Progenitor.
f) CERTAIN ADJUSTMENTS. The number of shares covered by, and the exercise
price of, each Replacement Option may, in the Progenitor Board's
discretion, be adjusted appropriately to reflect any change in the
capitalization of Progenitor 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 Progenitor Common
Stock effected without receipt of consideration by Progenitor.
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 Progenitor Board or
the Compensation Committee, either at the time of the grant or exercise
of the Replacement Option (but in the case of an Incentive Stock Option,
only at the time of grant), (a) by delivery to Progenitor of other
Progenitor Common Stock, (b) according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other Progenitor Common Stock) 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 Progenitor 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
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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 Progenitor to withhold
shares from the shares of Progenitor Common Stock otherwise issuable to
the participant as a result of the exercise of the Option; or (iii)
delivering to Progenitor owned and unencumbered shares of the Progenitor
Common Stock.
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 Progenitor is not the
surviving corporation, or (ii) a reverse merger in which Progenitor is
the surviving corporation but the shares of Progenitor Common Stock
outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash
or otherwise, then to the extent permitted by applicable law: (a) any
surviving corporation shall assume any Replacement Options outstanding
under the 1997 Plan or shall substitute similar options for those
outstanding under the 1997 Plan, or (b) such Replacement Options shall
continue in full force and effect. In the event any surviving corporation
refuses to assume or continue such Replacement Options, or to substitute
similar options for those outstanding under the 1997 Plan, then such
Replacement Options shall be terminated if not exercised prior to such
event. In the event of a dissolution or liquidation of Progenitor, any
Replacement Options outstanding under the 1997 Plan shall terminate if
not exercised prior to such event.
AMENDMENT. Progenitor'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,
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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. (For information regarding the stock option grants by
Mercator to Dr. Sigal during the fiscal year ended December 31, 1996, see
"Management of Mercator--Executive Compensation" and "The
Reorganization--Interests of Certain Persons in the Reorganization.")
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE 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 Progenitor Common Stock on the date of grant,
as determined by the Progenitor 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 realized 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
term for the appriecated 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
Progenitor's estimate or projection of future stock price. Actual gains, if
any, resulting from stock option exercises and Progenitor Common Stock
holdings are dependent on the future performance of the Progenitor Common
Stock and overall stock market conditions. There can be no assurance that
the amounts reflected in this table will be achieved.
(4) Consists of options that vest equally over three years on each anniversary
of the date of grant, May 13, 1996.
(5) Consists of options that were granted on the date of employment, August 20,
1996, with options to purchase 27,500 shares vesting immediately and the
balance of options to purchase 82,500 shares vesting equally over three
years on each anniversary of the date of grant.
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
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Executive Officers during fiscal 1996. (For information about the value of
unexercised options of Mercator held by Dr. Sigal, see "Management of
Mercator--Executive Compensation.")
<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 Progenitor 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 Progenitor 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
Progenitor's employees and play a substantial role in Progenitor's ability to
retain the services of individuals essential to Progenitor's long-term success.
The Compensation Committee concluded that Progenitor'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 Progenitor's options
granted during fiscal 1996 were cancelled and regranted at an exercise price of
$5.50 per share. Drs. Given, Snodgrass and Williams also had 95,000, 30,000 and
17,500 options, respectively, originally granted as of September 14, 1995, which
were cancelled and regranted at an exercise price of $5.50 per share from an
original exercise price of $6.00 per share. In addition, the 7,500 options
granted to each of Messrs. Axline, Haig, Peppers and Sharrock in fiscal 1996
were cancelled and regranted at an exercise price of $5.50 per share from an
original exercise price of $6.00 per share. The 110,000 options granted to Mr.
Bagnall in fiscal 1996 were cancelled and regranted at an exercise price of
$5.50 per share from an original exercise price of $9.00 per share.
CERTAIN TRANSACTIONS OF PROGENITOR
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 of Progenitor--License Agreements--Ohio University." Upon Progenitor's
organization, Interneuron purchased 2,081,250 shares of Progenitor Common Stock
for $0.002 per share. Progenitor also issued 112,500 and 56,250 shares of
Progenitor Common Stock, respectively, to Morris Laster, M.D., a director of
Progenitor, and Steven Kanzer, then Assistant Secretary of Progenitor, 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 Progenitor's President
until September 1992, and
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was a director of Progenitor until May 1996. Dr. Rosenwald also owns the Castle
Group Ltd. ("Castle"), a venture capital firm. Dr. Laster was Progenitor'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 Progenitor at a conversion price
of $6.25 per share.
In July 1997, Progenitor granted Interneuron an option to acquire an
exclusive, worldwide royalty-bearing license to manufacture, use and sell Del-1
for human therapeutic uses on terms to be negotiated. Progenitor retained the
right to negotiate with third parties to license Del-1, provided that, in the
event Progenitor grants such rights to a third party, Progenitor must share
fees, milestone payments and royalties with Interneuron. Should Progenitor
develop and sell products using Del-1 independently, Progenitor will pay
Interneuron royalties on net sales.
The option 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, Interneuron paid Progenitor $1 and
relinquished its right to minimum return adjustments through the quarter ended
April 7, 1997 to the conversion ratio of the Progenitor Series A Preferred Stock
held by Interneuron. The terms of the Progenitor Series A Preferred Stock
provide for Interneuron to receive a 35% annual return, implemented through
minimum return adjustments to the conversion ratio of the Progenitor Series A
Preferred Stock at the time the Progenitor Series A Preferred Stock converts to
Progenitor Common Stock. Such conversion would have occurred automatically on
the closing of the IPO and, accordingly, prior to the relinquishment,
Interneuron would have been entitled to receive an additional 909,965 shares of
Progenitor Common Stock upon the closing of the IPO. As a result, the number of
shares of Progenitor Common Stock that Interneuron will receive upon conversion
of the Progenitor Series A Preferred Stock upon the closing of the IPO will be
reduced from 2,655,614 shares to 1,745,649 shares, assuming an IPO Unit Price of
$11.00 per Unit and an IPO Common Stock Price of $8.50 per share. See "Risk
Factors--Control of Progenitor By, and Potential Conflicts of Interest with,
Interneuron," "Business of Progenitor--Discovery Programs" and "--Corporate
Agreements" and "Description of Progenitor Securities--Preferred Stock."
Between December 1994 and July 1995, Progenitor issued and sold an aggregate
of 349,000 shares of Series B Preferred Stock in a private placement. These
shares will convert into an estimated 458,681 shares of Progenitor Common Stock
upon the closing of the IPO based upon an assumed IPO Common Stock Price of
$8.50. See "Description of Progenitor Securities--Progenitor Preferred Stock."
The private placement was a sale of units, each unit consisting of shares of
Series B Preferred Stock of Progenitor, shares of preferred stock of Transcell,
a subsidiary of Interneuron, a put protection right from Interneuron and
warrants to purchase Interneuron's common stock. The put protection right
provides that on the third anniversary of the final closing date of the private
placement, holders of such Series B Preferred Stock have the right to sell to
Interneuron their Series B Preferred Stock of Progenitor at a purchase price
equal to the purchase price of such shares in the private placement. The put
protection right will expire upon the closing of the IPO. Of the approximately
$4.4 million gross proceeds of the private placement, Progenitor received
approximately $1.6 million, net of placement agent fees and Interneuron received
approximately $833,000 as its consideration for the issuance of warrants for its
Common Stock and the put protection right. Of this amount, Interneuron loaned
approximately $417,000 to Progenitor in exchange for a convertible debenture
dated March 31, 1995, bearing interest at 1% over the prime rate. The principal
amount of this debenture and accrued interest thereon (approximately $504,000 as
of June 20, 1997) will be converted automatically at the closing of the IPO into
shares of Progenitor Common Stock at a conversion price equal to the IPO Common
Stock Price. See "Description of Progenitor Securities-- Convertible Debenture
and Promissory Note."
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Paramount Capital, Inc. ("Paramount") acted as the placement agent for the
private placement and D.H. Blair & Co., Inc. ("Blair") was a selected dealer.
Paramount is owned by Dr. Rosenwald. Progenitor paid Paramount approximately
$129,000 as its share of placement agent fees. Pursuant to Paramount's rights
under its placement agent agreement, designees of Paramount received in the
private placement warrants to purchase an aggregate of 22,201 shares of Series B
Preferred Stock (representing the right to purchase 29,179 shares of Progenitor
Common Stock following the closing of the IPO based upon an assumed IPO Common
Stock Price of $8.50 per share). Dr. Rosenwald received warrants to purchase
12,274 of these shares of Series B Preferred Stock (representing the right to
purchase an estimated 16,132 shares of Progenitor Common Stock upon the closing
of the IPO, based upon an assumed IPO Common Stock Price of $8.50). Blair is
owned substantially by family members of J. Morton Davis (including members of
Dr. Rosenwald's family), a principal stockholder of Interneuron. Blair received
fees for acting as selected dealer, aggregating $45,094. Designees of Blair also
received in the private placement warrants to purchase an aggregate of 12,700
shares of Series B Preferred Stock (representing the right to purchase 16,692
shares of Progenitor Common Stock upon the closing of the IPO, based upon an
assumed IPO Common Stock Price of $8.50). All of these warrants are exercisable
until five years after the closing of the IPO at an exercise price of $5.23 per
share of Progenitor Common Stock, and pursuant to a cashless exercise provision
may be exercised without the need to pay any cash. Progenitor 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 Progenitor 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 IPO. Interneuron has agreed to convert a portion of the
indebtedness evidenced by the note (approximately $8.2 million from an
outstanding balance of approximately $8.6 million as of June 20, 1997) into
shares of Progenitor Common Stock at a conversion price equal to the IPO Common
Stock Price, except that advances for costs of the IPO and certain costs of
associated with the Reorganization incurred from October 1, 1996 will be repaid
from the net proceeds of the IPO. See "Description of Progenitor Capital
Securities--Convertible Debenture and Promissory Note."
Based on the amount owed by Progenitor to Interneuron under the promissory
note as of June 20, 1997, and as a result of the conversion upon the closing of
the IPO of the Series A Preferred Stock, convertible debenture and promissory
note held by Interneuron (assuming an IPO Common Stock Price of $8.50),
Interneuron is expected to own beneficially approximately 4,848,374 shares, or
approximately 41% of Progenitor's outstanding Common Stock (approximately 40% if
the Underwriters' over-allotment option is exercised in full) after the closing
of the IPO and the Reorganization (assuming no exercise of the Progenitor
Warrants). In addition, Interneuron has agreed to convert the Interneuron Bridge
Loan into shares of Progenitor's Series D Preferred Stock, upon the closing of
the IPO as described below. Interneuron has the option to convert Progenitor's
Series D Preferred Stock into shares of Progenitor Common Stock at any time,
which would increase its total ownership to approximately 43% of the Progenitor
Common Stock outstanding (approximately 41% if the Underwriters over-allotment
is exercised in full). The actual ownership percentage of Interneuron will
depend upon a variety of factors, including: (i) the amount of the Adjusted
Purchase Price; (ii) the outstanding balances of loans from Interneuron to
Progenitor that will be converted into Progenitor's Series D Preferred Stock or
Progenitor Common Stock upon the closing of the IPO; (iii) the IPO Common Stock
Price, which will determine the number of shares of Progenitor Common Stock to
be issued in the Reorganization, to be issued upon conversion of outstanding
balances of loans from Interneuron to Progenitor, to be issued in respect of the
Amgen Purchase Agreement and to be issued to Interneuron in connection with the
conversion provisions of its Series A Preferred Stock upon the closing of the
IPO, and the number of shares of Progenitor's Series D Preferred Stock to be
issued upon conversion of the Interneuron Bridge Loan; and (iv) the
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passage of measurement dates for determining the quarterly minimum return
adjustments to the conversion ratio of the Series A and Series B Preferred Stock
on each of April 7, July 7, October 7, and January 7 (giving effect to
Interneuron's relinquishment of seven of such adjustments). The number of shares
of Progenitor Common Stock issuable to Interneuron upon conversion of such
Series A Preferred Stock and indebtedness and the number of shares of
Progenitor's Series D Preferred Stock issuable will increase to the extent that
the IPO Common Stock Price is less than the anticipated price of $8.50 per
share. At an IPO Common Stock Price of $6.50 per share, and assuming no exercise
of the Progenitor Warrants, Interneuron would own beneficially 6,083,430 shares
upon the closing of the IPO and the Reorganization or approximately 44% of the
outstanding Progenitor Common Stock at such time (approximately 43% if the
Underwriters' over-allotment option is exercised in full).
During fiscal 1995, Interneuron paid for certain expenses of Progenitor
which were reimbursed by Progenitor at cost. In addition, Interneuron guaranteed
Progenitor's office lease (which guarantee will be released upon the closing of
the IPO as to obligations arising after the closing of the IPO) and its
equipment leases. Prior to the closing of the IPO, Progenitor and Interneuron
intend to enter into a tax allocation agreement to provide, among other things,
for the payment of tax liabilities, the entitlement to tax refunds and the
allocation of responsibility and cooperation in the filing of tax returns. In
addition, Progenitor and Interneuron intend to enter into an intercompany
services agreement which will provide, among other things, for: the
participation of Progenitor 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 Progenitor'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 Progenitor, 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 Progenitor immediately prior to such equity offering, subject to certain
limitations. The intercompany services agreement also will provide that all
future transactions between Progenitor and Interneuron must be on terms no less
favorable to Progenitor than could be obtained from unaffiliated third parties
and must be approved or ratified by a majority of the independent members of
Progenitor's Board of Directors. As defined in the intercompany services
agreement, independent directors are those who are not employees, officers,
directors or affiliates of, or persons with other material financial interests
involving, Interneuron, Progenitor or any of their respective affiliates.
The intercompany services agreement also will provide to Interneuron the
right to nominate one designee for election to Progenitor's Board of Directors,
for so long as Interneuron reports Progenitor's financial results on a
consolidated basis, on an equity basis or otherwise on a basis pursuant to which
a portion of Progenitor's results of operations appear in the financial results
of operations of Interneuron. After the IPO, Interneuron will continue to have
substantial influence in the election of directors of Progenitor and voting with
respect to matters submitted to stockholders, including extraordinary corporate
transactions such as a merger or sale of substantially all of Progenitor's
assets. Interneuron's ownership of a substantial block of Progenitor's voting
stock could have the effect of delaying or preventing sales of additional
securities of Progenitor or a sale of Progenitor or other change of control
supported by the other stockholders of Progenitor. In addition, Progenitor may
be subject to various risks arising from Interneuron's influence over
Progenitor, including conflicts of interest relating to new business
opportunities that could be pursued by Progenitor or by Interneuron and its
other affiliates, and significant corporate transactions for which stockholder
approval is required. See "Risk Factors--Control of Progenitor by, and Potential
Conflicts of Interest with, Interneuron."
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In connection with the Mercator Bridge Loan, Interneuron has agreed to loan
to Progenitor up to an aggregate of $6.6 million pursuant to a promissory note
secured by Progenitor's assets. The Interneuron Bridge Loan bears interest at a
rate of 10% per annum and is repayable in full on maturity at January 15, 1999
in the event there is no initial public offering. The outstanding principal
balance of the Interneuron Bridge Loan outstanding at consummation of the IPO
will depend upon the timing of the IPO's completion. The principal balance
outstanding at June 20, 1997 was $2.9 million and is expected to increase by
approximately $800,000 per month in order to fund the operations of Mercator
pending completion of the Reorganization. Interneuron has agreed to convert the
entire balance of the Interneuron Bridge Loan into shares of Progenitor's Series
D Preferred Stock (an aggregate of 293,293 shares, based on the outstanding
balance of $2.9 million of the Interneuron Bridge Loan as of June 20, 1997, and
a conversion price of $9.99 per share for Progenitor's Series D Preferred Stock)
upon the closing of the IPO. See "Description of Progenitor
Securities--Preferred Stock," "Risk Factors--Control of Progenitor By, and
Potential Conflicts of Interest With, Interneuron," and "The Reorganization
Agreement--Bridge Loan Financing."
Interneuron has no obligation to invest any further funds in Progenitor or
otherwise provide funding to Progenitor after the IPO, and Progenitor does not
expect Interneuron to do so. Progenitor 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 Progenitor. 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 Progenitor Common Stock during the 365-day period following the
date of consummation of the IPO. See "Risk Factors--Shares Eligible for Future
Sale; Registration Rights; Possible Adverse Effect on Stock Price."
THE OHIO UNIVERSITY FOUNDATION
Upon Progenitor's formation in February 1992, The Ohio University Foundation
purchased 125,000 shares of Progenitor 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
Progenitor Common Stock at $0.002 per share. Pursuant to certain antidilution
rights, The Ohio University Foundation was issued an additional 53,750 shares of
Progenitor Common Stock from fiscal 1992 through fiscal 1994. Also, in December
1994, Dr. Wagner received an additional 53,750 shares of Progenitor 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 Progenitor Common Stock for a purchase price of
$6.00 per share pursuant to a stock purchase agreement. In the event that the
IPO Common Stock Price is less than $12.00, pursuant to such stock purchase
agreement, The Ohio University Foundation will be entitled to receive additional
shares of Progenitor Common Stock such that the effective price per share paid
by The Ohio University Foundation under the agreement is equal to 50% of the IPO
Common Stock Price. Assuming an IPO Common Stock Price of $8.50 per share,
24,020 additional shares of Progenitor 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, Progenitor 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 Progenitor 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 IPO at a price equal to $4.25 per share.
Ohio University entered into license and sponsored research agreements with
Progenitor (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,
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The Ohio University Foundation has the right to designate two members of the
Progenitor Board of Directors until the completion of the IPO. Messrs. Axline
and Peppers are Trustees of The Ohio University Foundation and serve as The Ohio
University Foundation's designees to Progenitor'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 of Progenitor-- License
Agreements."
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
On January 3, 1993, Progenitor 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, Progenitor 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 Progenitor Board of
Directors. The $40,000 second portion of the promissory note is payable on or
before April 15, 1997 or upon the termination of Dr. Given's employment and is
subject to forgiveness in increments upon the achievement of certain performance
milestones, including a successful initial public offering of Progenitor Common
Stock. As of February 28, 1997, Progenitor 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 IPO, 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.
Progenitor has entered into the Revised Given Employment Agreement with Dr.
Given. See "Management of Progenitor after the Reorganization--Employment
Agreements." In addition to the compensation package described in "Management of
Progenitor after the Reorganization--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.
Progenitor 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 Progenitor upon the closing of
each single transaction providing Progenitor with committed funds of at least
$2,000,000 in the form of either equity, convertible debt or net proceeds to
Progenitor (and Progenitor 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 Progenitor securities held by Dr. Given which
were acquired pursuant to options granted to him, in an amount equal to 25% of
the
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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 Progenitor.
In connection with the Revised Given Employment Agreement, Progenitor 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.
Progenitor 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 Progenitor,
Dr. Platika and Interneuron. The Release obligates Dr. Platika to provide
services to Progenitor 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 Progenitor for a period of two years after his
termination. The Release also contains arrangements with respect to loans made
by Progenitor to Dr. Platika and certain stock options to acquire securities of
Progenitor and Interneuron. Prior to termination, Progenitor 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 Progenitor Board of Directors.
Pursuant to the Release, an additional $120,000 of this balance was forgiven
subject to Dr. Platika's payment to Progenitor of withholding payments required
with respect thereto and with respect to the loans to Dr. Platika previously
forgiven by Progenitor 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. Progenitor incurred a charge to operations in fiscal 1996
equal to the amount of loan forgiveness in connection with the Release. Prior to
the Release, Progenitor had granted Dr. Platika options to purchase a total of
77,500 shares of Progenitor 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
Progenitor Common Stock had previously vested. The Release provides for the
vesting as of June 1, 1996 of options to purchase 6,875 shares of Progenitor
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 Progenitor Common Stock in the amount of 1% of the
outstanding shares of Progenitor Common Stock on a fully diluted basis after the
closing of the IPO. See "Management of Progenitor after the
Reorganization--Employment Agreements--Elliott Sigal" and "The
Reorganization--Interests of Certain Persons in the Reorganization."
Progenitor 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 Progenitor
Common Stock at an exercise price of $0.20 per share, and options to purchase
5,000 shares of Progenitor Common Stock at an exercise price of $2.00 per share.
During fiscal 1994, Mr. Sharrock received options to purchase 2,500 shares
of Progenitor Common Stock at an exercise price of $4.00 per share, which vest
over three years. Also in fiscal 1994, Progenitor granted Drs. Cooper, Given,
Snodgrass and Williams options to purchase 8,500, 16,500, 10,000 and 20,000
shares of Progenitor Common Stock, respectively, at an exercise price of $4.00
per share.
In September 1995, Progenitor 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
146
<PAGE>
intended to vest on September 14, 2002. These options were amended by the
Progenitor 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,
Progenitor 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, Progenitor also granted to Dr. Snodgrass
options to purchase 12,500 shares of Progenitor 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 Progenitor 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 Progenitor were cancelled and regranted on December 30, 1996. See "Management
of Progenitor After the Reorganization--Cancellation and Regrant of Options."
On March 7, 1997, the Progenitor Board of Directors approved an amendment to
the 1996 Stock Incentive Plan to increase by 2,000,000 the number of shares of
Progenitor Common Stock reserved and available for issuance pursuant to stock
options granted thereunder.
Upon the closing of the IPO, 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 Progenitor Common Stock, respectively, at an exercise price equal to
the IPO Common Stock 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.
On March 5, 1997, the Compensation Committee approved certain change of
control and severance provisions for Drs. Snodgrass and Williams and Mr.
Bagnall. Such provisions will provide that upon termination of the executive's
employment without cause, he will receive a severance payment equal to nine
months of his base rate of compensation, and acceleration of all outstanding
options that would have vested during the nine month period after such
termination of employment. In addition, such provisions provide that the
executive would be entitled to full acceleration of all outstanding stock
options upon certain events defined as a change of control of Progenitor and a
severance payment equal to one year of his base salary and the maximum annual
bonus payment applicable to such executive upon any termination of such
executive's employment by Progenitor following a change of control.
The Compensation Committee also approved on December 30, 1996 an incentive
bonus program for executive officers of Progenitor providing for bonus payments
based upon a percentage of base salary based upon various performance milestones
primarily related to the Reorganization and the IPO. The amount of such bonus
payments to Drs. Given, Snodgrass and Williams and to Mr. Bagnall will be
approximately $150,000, $88,000, $83,000 and $83,000, respectively, assuming an
IPO Common Stock Price of $8.50 and an aggregate offering of 2,750,000
Progenitor Units in the IPO.
INSIDER TRANSACTIONS
Progenitor has adopted a policy that all future transactions between
Progenitor and its executive officers, directors and other affiliates must be
approved by a majority of the disinterested members of the Progenitor Board of
Directors, and must be on terms no less favorable to Progenitor than could be
obtained from unaffiliated third parties. In addition, this policy requires that
any loans by Progenitor 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.
147
<PAGE>
PRINCIPAL STOCKHOLDERS OF PROGENITOR
The following table sets forth certain information regarding beneficial
ownership of Progenitor Common Stock as of June 20, 1997 (assuming the sale of
the Amgen Shares to Amgen), and as adjusted to reflect the sale of the 2,750,000
Progenitor Units anticipated to be offered in the IPO (assuming no exercise of
the Progenitor Warrants), by (i) each stockholder who is known by Progenitor to
own beneficially more than 5% of Progenitor's outstanding Common Stock, (ii)
each director and Named Executive Officer of Progenitor, and (iii) all directors
and executive officers of Progenitor as a group. The table presents information
regarding beneficial ownership (i) not giving effect to the Reorganization and
(ii) on a pro forma basis assuming the Reorganization had been effected (for an
Adjusted Purchase Price of $22.0 million and with an IPO Common Stock Price of
$8.50).
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY PERCENTAGE BENEFICIALLY
OWNED(1) OWNED(2)
------------------------------ ------------------------------------
PRIOR TO ASSUMING PRIOR TO ASSUMING
REORGANIZATION REORGANIZATION REORGANIZATION REORGANIZATION
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Glenn L. Cooper, M.D.(3)................ 5,209,456 5,209,456 54.5% 43.3%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Interneuron Pharmaceuticals, Inc.(4).... 5,141,667 5,141,667 53.8 42.7
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Entities affiliated with Robertson,
Stephens & Co. Group, L.L.C.(5)....... 0 929,424 0 7.9
c/o Robertson, Stephens & Co.
555 California Street, Suite 2600
San Francisco, CA 94104
Entities affiliated with InterWest
Partners(6)........................... 0 635,355 0 15.4
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Robert R. Momsen(7)..................... 0 635,355 0 15.4
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Entities affiliated with Oak Investment
Partners(8)........................... 0 570,793 0 4.9
c/o Oak Investment Partners
One Gorham Island
Westport, CT 06880
Douglass B. Given, M.D., Ph.D.(9)....... 160,281 160,281 1.7 1.4
Elliott Sigal, M.D., Ph.D.(10).......... 0 120,180 0 1.0
Morris Laster, M.D...................... 112,500 112,500 1.2 1.0
</TABLE>
148
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES BENEFICIALLY PERCENTAGE BENEFICIALLY
OWNED(1) OWNED(2)
------------------------------ ------------------------------------
PRIOR TO ASSUMING PRIOR TO ASSUMING
REORGANIZATION REORGANIZATION REORGANIZATION REORGANIZATION
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
H. Ralph Snodgrass, Ph.D.(11)........... 56,667 56,667 * *
Stephen J. Williams, Ph.D.(13).......... 45,834 45,834 * *
Mark N.K. Bagnall(12)................... 55,000 55,000 * *
David B. Sharrock(14)................... 4,375 4,375 * *
Robert P. Axline(15).................... 1,875 1,875 * *
Alexander M. Haig, Jr.(16).............. 1,875 1,875 * *
Jerry P. Peppers(17).................... 1,875 1,875 * *
All executive officers and directors as
a group (10 persons)(18).............. 5,649,738 5,649,738 -- --
</TABLE>
- ------------------------
* Less than one percent.
(1) To Progenitor'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 Progenitor Common Stock indicated opposite such person's name.
(2) Percentage of beneficial ownership is based on 9,559,101 shares of
Progenitor Common Stock outstanding as of June 20, 1997, assuming (i) the
conversion of a convertible debenture and a portion of the promissory note
held by Interneuron and all outstanding shares of Progenitor Preferred Stock
into Progenitor Common Stock (based on an aggregate outstanding balance of
$8.7 million as of June 20, 1997), (ii) the issuance of 24,020 shares of
Progenitor Common Stock to The Ohio University Foundation, pursuant to
certain anti-dilution adjustment rights and (iii) completion of the IPO,
reflecting (a) the sale of 2,750,000 Progenitor Units to be offered in the
IPO, (b) the purchase by The Ohio University Foundation of 25,000 shares of
Progenitor Common Stock, pursuant to a stock purchase right and (c) the
issuance to Amgen of the Amgen Shares; and 11,738,538 shares of Progenitor
Common Stock outstanding after completion of the Reorganization, reflecting
the issuance of 2,179,437 shares of Progenitor Common Stock to the Mercator
stockholders pursuant to the Reorganization (assuming an Adjusted Purchase
Price of $22.0 million). See "Capitalization" and "Description of Progenitor
Securities." Shares of common stock subject to options, warrants (including
the Phoenix Warrants) and convertible notes and other purchase rights
currently exercisable or convertible, or exercisable or convertible within
60 days of June 20, 1997 are deemed outstanding for computing the percentage
of the person or entity holding such securities but are not deemed
outstanding for computing the percentage of any other person or entity.
(3) Includes 5,141,667 shares beneficially owned by Interneuron, options
exercisable for 6,375 shares of Progenitor Common Stock held by Dr. Cooper
and options exercisable for 2,000 shares of Progenitor Common Stock held by
Dr. Cooper's wife. Dr. Cooper is President, Chief Executive Officer and a
director of Interneuron. Dr. Cooper disclaims beneficial ownership of the
shares held by Interneuron.
(4) Includes 293,293 shares issuable upon conversion of Progenitor's Series D
Preferred Stock received upon conversion of the Interneuron Bridge Loan
(based upon an outstanding balance on the Interneuron Bridge Loan of $2.9
million as of June 20, 1997 and a conversion price of $9.99 per share of
Progenitor's Series D Preferred Stock).
(5) Consists of 644,180 shares held by RS & Co. IV, L.P. ("RS"), 171,566 shares
held by The Robertson, Stephens Orphan Fund ("RSOF") and 113,678 shares held
by Bayview Investors, Ltd. ("Bayview"). The General Partner of RS is RS &
Co. Venture Partners for IV, L.P., the General Partners of which consist of
individuals including M. Kathleen Behrens, a director of Mercator, that
share voting and
149
<PAGE>
investment power over securities held by RS. The General Partners of RSOF
are Bayview and Robertson, Stephens & Company Investment Management, L.P.,
the General Partners of which are Robertson, Stephens Private Equity Group,
L.L.C. and RS & Co. Inc., respectively. The Managing Member of Robertson,
Stephens Private Equity Group, L.L.C. is RS & Co. Inc., the shareholders of
which are a group of individuals. All of the individuals described above
disclaim beneficial ownership of the securities held by RS, RSOF and
Bayview.
(6) Consists of 631,170 shares held by InterWest Partners V, L.P. ("Partners")
and 4,185 shares held by InterWest Investors V ("Investors"). The General
Partner of Partners is InterWest Management Partners V, L.P., the General
Partners of which consist of individuals including Robert R. Momsen, a
director of Mercator (who has also agreed to become a director of
Progenitor), that share voting and investment power over securities held by
Partners. The General Partners of Investors consist of individuals including
Robert R. Momsen that share voting and investment power over securities held
by Investors. All of the individuals described above disclaim beneficial
ownership of the securities held by Partners and Investors, except to the
extent of their pro rata partnership interests therein.
(7) Consists of 631,170 shares held by Partners and 4,185 shares held by
Investors. Mr. Momsen is a General Partner of both Partners and Investors.
Mr. Momsen disclaims beneficial ownership of the securities held by Partners
and Investors except to the extent of his pro rata partnership interests
therein.
(8) Consists of 558,236 shares held by Oak Investment Partners V, Limited
Partnership ("Oak Investment") and 12,557 shares held by Oak V Affiliates
Fund ("Oak Affiliates"). Oak Associates V, L.L.C. is the General Partner of
Oak Investment. The managing members of Oak Associates V, L.L.C. consist of
individuals including Ann H. Lamont, a director of Mercator, that share
voting and investment power over the securities held by Oak Investment. The
General Partners of Oak Affiliates consist of a group of individuals,
including Ann H. Lamont, a director of Mercator, that have shared voting and
investment power over the securities held by Oak Affiliates. All of the
individuals described above disclaim beneficial ownership of the securities
held by Oak Investment and Oak Affiliates.
(9) Includes 82,907 shares held by a limited partnership of which Dr. Given is
a general partner and options exercisable for 77,374 shares of Progenitor
Common Stock.
(10)Includes options exercisable for 120,180 shares of Progenitor Common Stock.
Dr. Sigal has agreed to become an executive officer of Progenitor upon the
closing of the IPO.
(11) Includes options exercisable for 56,667 shares of Progenitor Common Stock.
(12) Includes options exercisable for 55,000 shares of Progenitor Common Stock.
(13) Includes options exercisable for 45,834 shares of Progenitor Common Stock
(14) Includes options exercisable for 4,375 shares of Progenitor Common Stock.
(15) Includes options exercisable for 1,875 shares of Progenitor Common Stock.
(16) Includes options exercisable for 1,875 shares of Progenitor Common Stock.
(17) Includes options exercisable for 1,875 shares of Progenitor Common Stock.
(18) Includes options exercisable for 253,250 shares of Progenitor Common Stock.
See footnotes 3, 8 and 10-16 above. Does not include shares beneficially
owned by Mr. Momsen or Dr. Sigal.
150
<PAGE>
BUSINESS OF MERCATOR
OVERVIEW
Mercator uses a disease genetics approach and an array of genomics
technologies to discover medically useful genes to identify targets for the
development of new pharmaceuticals. Mercator believes that its genomics system
will provide a means of generating multiple targets for the development of new
human therapeutics and diagnostics to address major unmet medical needs.
Mercator's gene discovery approach utilizes disease genetics for identification
of medically relevant genes through advanced positional cloning techniques and
analytical methods. Mercator's objective is to identify and characterize genes
as therapeutic targets, and to commercialize those targets through partnerships
with biopharmaceutical firms.
Mercator's disease genetics approach incorporates an enhanced positional
cloning approach for locating disease-causing genes in selected patient
populations. This approach enables the discovery of multiple genes associated
with complex diseases, such as asthma and schizophrenia. The disease genetics
approach incorporates strategies for discovery and analysis of multiple genetic
markers, mutation analyses, and statistically powerful methods to expedite
discovery of genes potentially associated with a given disease. Mercator has
validated its disease genetics approach in the discovery of an HH gene. This
approach also was used in the discovery of the EPM1 epilepsy gene.
DISCOVERY RESOURCES
Mercator uses the following resources and tools to provide an important
platform for the discovery of candidate genes for therapeutic development: the
use of multiple strategic populations to identify genes associated with complex
diseases; bioinformatics, which allows Mercator to correlate and analyze data on
its potential gene targets with data from public and proprietary databases using
a combination of standard and proprietary computational tools and screening
algorithms; high-throughput genomic sequencing, an automated, proprietary system
for sequencing large regions of genomic DNA; chromosome analysis and gene
mapping, technologies that expedite positional cloning of disease genes from
human populations and evaluation of genes discovered through developmental
biology; and several analytical methods for the identification of genes
associated with complex diseases.
Mercator's bioinformatics system provides a means to assess gene discoveries
in relation to information in public databases, to correlate its 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. In addition to having these capabilities, Mercator's
bioinformatics system can be used as a discovery tool to capitalize on the
wealth of information being generated by the Human Genome Project and other
genomics programs.
Mercator also uses multiple strategic populations to identify genes
associated with complex diseases. Clinical collaborations are in place to obtain
approximately 5,000 DNA samples from selected groups in Denmark, Finland, Israel
and the U.S. for the study of genes associated with asthma, schizophrenia and
HH. These collaborations typically entail exclusive relationships with
physicians caring for selected patient groups and access to patient family
histories and samples. 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.
Mercator uses DNA samples in linkage and disease association studies,
supplemented by analysis of information from detailed clinical databases, to
discover disease genes.
151
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
Mercator presently has pending eleven U.S. patent applications, a
provisional U.S. patent application and certain corresponding foreign
applications. The 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
University for a U.S. patent application relating to the EPM1 epilepsy gene.
MANAGEMENT OF MERCATOR
DIRECTORS AND EXECUTIVE OFFICERS
Of the current directors and executive officers of Mercator, the following
individuals are expected to serve as directors and executive officers of
Progenitor following the Reorganization and the IPO.
<TABLE>
<CAPTION>
NAME AGE POSITION AT PROGENITOR
- -------------------------------------------------- --- --------------------------------------------------------
<S> <C> <C>
Elliott Sigal, M.D., Ph.D......................... 45 Senior Vice President, Research and Development
Robert R. Momsen.................................. 50 Director
</TABLE>
Dr. Sigal is the President and Chief Executive Officer of Mercator. Mr.
Momsen is a director of Mercator. For more information regarding Dr. Sigal and
Mr. Momsen, and for information on their expected compensation by Progenitor
following the Reorganization, see "Management of Progenitor after the
Reorganization--Directors and Executive Officers" and "The
Reorganization--Interests of Certain Persons in the Reorganization."
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended December 31, 1996,
the compensation paid by Mercator for services rendered in all capacities with
respect to Dr. Sigal.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- -------------------------------------------------------- ---------- ------------- ------------- -------------------
<S> <C> <C> <C> <C>
Elliott Sigal, M.D., Ph.D............................... $ 225,000 $ 75,000 871,310(1) 0
President and Chief Executive Officer
</TABLE>
- ------------------------
(1) Upon the consummation of the Reorganization, Replacement Options
representing the right to acquire shares of Progenitor Common Stock will be
granted to Dr. Sigal, in replacement of such Mercator Options previously
granted. Assuming an Adjusted Purchase Price of $22 million and an IPO
Common Stock Price of $8.50 per share, Replacement Options to acquire
120,180 shares of Progenitor Common Stock at $1.08 per share would be issued
to Dr. Sigal. See "Management of Progenitor after the
Reorganization--Employment Agreements," "The Reorganization--Interests of
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<PAGE>
Certain Persons in the Reorganization" and "Certain Transactions of
Progenitor--Transactions with Directors and Executive Officers."
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options by Mercator to Dr. Sigal during the fiscal year ended December 31, 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR OPTION TERM
UNDERLYING EMPLOYEES EXERCISE ($)(2)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED (#) YEAR(1) ($/SHARE) DATE 5% 10%
- ---------------------------------- ------------ ------------- ----------- ----------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Elliott M. Sigal, M.D., Ph.D. 871,310(1) 43.5% $ 0.15 August 9, 2006 $ 82,194 $ 208,296
</TABLE>
- ------------------------
(1) All such options will become vested upon consummation of the Reorganization
and will be converted into Replacement Options to acquire shares of
Progenitor Common Stock. Assuming an Adjusted Purchase Price of $22 million
and an IPO Common Stock Price of $8.50, Replacement Options to acquire
120,180 shares of Progenitor Common Stock at $1.08 per share will be issued
to Dr. Sigal. In connection with the Reorganization, Progenitor has entered
into an employment agreement with Dr. Sigal that provides for the grant to
him of options to purchase an aggregate of one percent (1%) of all
outstanding Progenitor Common Stock on a fully diluted basis after giving
effect to the Reorganization and the IPO. Such options will have an exercise
price equal to the IPO Common Stock Price and will be subject to vesting in
the amount of twenty-five percent (25%) on the first anniversary of the date
of grant and six and one-quarter percent (6.25%) each quarter thereafter
until fully vested after four years. Based upon an assumed IPO Common Stock
Price of $8.50, such options would entitle Dr. Sigal to acquire 117,385
shares of Progenitor Common Stock.
(2) The potential realizable value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of the options,
assuming that the stock appreciates in value from the date of grant until
the end of the option term at the rate specified (5% or 10%) and that the
option is exercised and sold on the last day of the term for the appreciated
stock price. Potential realizable value is net of the option exercise price.
The assumed rates of appreciation are specified in the rules and regulations
of the Commission and do not represent Mercator's estimate or projection of
future stock price. Actual gains, if any, resulting from stock option
exercises and Mercator Common Stock holdings are dependent on the future
performance of the Mercator Common Stock (or the shares of Progenitor Common
Stock into which such shares are converted upon the consummation of the
Reorganization) and overall stock market conditions. There can be no
assurance that the amounts reflected in this table will be achieved.
FISCAL YEAR-END OPTION VALUES
For Dr. Sigal, the following table shows information about the value of
unexercised options of Mercator as of December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END FISCAL YEAR-END($) (1)
------------------------------------ --------------------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
- ---------------------------------------------------- ----------- ----------------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Elliott M. Sigal, M.D., Ph.D........................ 918,310 0 0 --
</TABLE>
- ------------------------
(1) Based on the fair market value of the Mercator Common Stock as of September
30, 1996 ($0.15 per share), minus the exercise price, multiplied by the
number of shares underlying the option.
153
<PAGE>
(2) All options will vest upon the consummation of the Reorganization.
DIRECTOR'S COMPENSATION
Mr. Momsen did not receive any cash compensation for serving as a member of
the Mercator Board of Directors. Mr. Momsen is a General Partner at InterWest
Partners, a group of venture capital management funds, including funds which own
shares of Mercator Capital Stock.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
Certain employment agreements and information on options granted to and
loans to Dr. Sigal by Mercator are discussed above. See "The
Reorganization--Interests of Certain Persons in the Reorganization" and
"Management of Progenitor After the Reorganization--Employment
Agreements--Elliott Sigal."
PRINCIPAL STOCKHOLDERS OF MERCATOR
The following table sets forth certain information regarding beneficial
ownership of Mercator Capital Stock as of June 20, 1997, by (i) each stockholder
who is known by Progenitor to own beneficially more than 5% of any class or
series of outstanding Mercator Capital Stock, (ii) each director and executive
officer of Mercator and (iii) all directors and executive officers of Mercator
as a group. The information in the table was obtained from the books and records
of Mercator or, where applicable, supplied to Mercator by the beneficial owners
below.
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON STOCK (NUMBER OF SHARES)
(NUMBER OF (PERCENTAGE) FULLY-
SHARES) ----------------------------------------- DILUTED
SHAREHOLDER (PERCENTAGE) SERIES A SERIES B SERIES C SERIES D OWNERSHIP
- ------------------------------------------------------------ ------------ -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Entities affiliated with Robertson, Stephens & Co.(1) ...... -- 300,000 999,999 1,500,000 373,132 26.0%
c/o Robertson, Stephens & Co. 93.9% 30.7% 33.1% 33.3%
555 California Street
Suite 2600
San Francisco, CA 94104
Entities affiliated with InterWest -- -- 1,207,998 1,499,999 373,134 25.2%
Partners(2) .............................................. 37.1% 33.1% 33.3%
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Oak Investment Partners V, Limited Partnership(3) .......... -- -- 999,999 1,500,000 373,133 23.5%
c/o Oak Investment Partners 30.7% 33.1% 33.3%
One Gorham Island
Westport, CT 06880
Phoenix Leasing Incorporated(4) ............................ -- 17,850 46,800 -- -- 0.5%
2401 Kerner Blvd. 5.6% 1.4%
San Rafael, CA 94901
Karen J. Brunke, Ph.D.(5)................................... 227,000 -- -- -- -- 1.9%
7.5%
</TABLE>
154
<PAGE>
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON STOCK (NUMBER OF SHARES)
(NUMBER OF (PERCENTAGE) FULLY-
SHARES) ----------------------------------------- DILUTED
SHAREHOLDER (PERCENTAGE) SERIES A SERIES B SERIES C SERIES D OWNERSHIP
- ------------------------------------------------------------ ------------ -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
David R. Cox, M.D., Ph.D.(6)................................ 254,978 -- -- -- -- 2.1%
8.4%
Montgomery Mars(7).......................................... 229,577 -- -- -- -- 1.9%
7.6%
Elliott Sigal, M.D., Ph.D.(8)............................... 918,310 -- -- -- -- 7.5%
30.0%
All directors and executive officers as a group(9).......... 1,629,865 -- -- -- -- 13.4%
54.0%
</TABLE>
- --------------------------
(1) Includes promissory notes convertible into 373,132 shares of Series D
Preferred Stock. Consists of shares held by RS & Co. IV, L.P. ("RS"), The
Robertson, Stephens Orphan Fund ("RSOF") and Bayview Investors, Ltd.
("Bayview"). The General Partner of RS is RS & Co. Venture Partners IV,
L.P., the General Partners of which consist of individuals including M.
Kathleen Behrens, a director of Mercator, that share voting and investment
power over securities held by RS. The General Partners of RSOF are Bayview
and Robertson, Stephens & Company Investment Management, L.P., the General
Partners of which are Robertson, Stephens Private Equity Group, L.L.C. and
RS & Co. Inc., respectively. The Managing Member of Robertson, Stephens
Private Equity Group, L.L.C. is RS & Co. Inc., the shareholders of which are
a group of individuals. All of the individuals described above disclaim
beneficial ownership of the securities held by RS, RSOF and Bayview.
(2) Includes promissory notes convertible into 373,134 shares of Series D
Preferred Stock. Consists of shares held by InterWest Partners V, L.P.
("Partners") and InterWest Investors V ("Investors"). The General Partner of
Partners is InterWest Management Partners V, L.P., the General Partners of
which consist of individuals including Robert R. Momsen, a director of
Mercator, 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.
(3) Includes promissory notes convertible into 373,133 shares of Series D
Preferred Stock. Consists of shares held by Oak Investment Partners V,
Limited Partnership ("Oak Investment") and Oak V Affiliates Fund ("Oak
Affiliates"). Oak Associates V, L.L.C. is the General Partner of Oak
Investment. The managing members of Oak Associates V, L.L.C. consist of
individuals including Ann H. Lamont, a director of Mercator, that share
voting and investment power over the securities held by Oak Investment. The
General Partners of Oak Affiliates consist of a group of individuals,
including Ann H. Lamont, a director of Mercator, that have shared voting and
investment power over the securities held by Oak Affiliates. All of the
individuals described above disclaim beneficial ownership of the securities
held by Oak Investment and Oak Affiliates.
(4) Includes warrants to purchase 17,850 shares of Series A Preferred Stock and
46,800 shares of Series B Preferred Stock.
(5) Includes options exercisable for 221,000 shares of Common Stock.
(6) Includes options exercisable for 227,478 shares of Common Stock.
(7) Includes options exercisable for 229,577 shares of Common Stock.
(8) Includes options exercisable for 918,310 shares of Common Stock.
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(9) Does not include shares that may be beneficially owned by Mercator directors
M. Kathleen Behrens, Robert R. Momsen and Ann H. Lamont, who are general
partners and managing members of entities affiliated with Robertson,
Stephens & Co., InterWest Partners and Oak Investment Partners V, Limited
Partnership, respectively. See footnotes 1-3.
DESCRIPTION OF PROGENITOR SECURITIES
Progenitor's Certificate of Incorporation, as amended to date, currently
authorizes 44,000,000 shares of capital stock, consisting of 39,000,000 shares
of Common Stock, Class A, $0.001 par value, and 5,000,000 shares of Preferred
Stock, $0.01 par value. In connection with the IPO, and prior to the Effective
Time, Progenitor's Certificate of Incorporation will be restated (as so
restated, the "Progenitor Restated Certificate of Incorporation"). Upon
completion of the IPO, the Progenitor Restated Certificate of Incorporation will
authorize the issuance of 44,000,000 shares of capital stock, consisting of
39,000,000 shares of Progenitor Common Stock, par value $0.001 per share, and
6,000,000 shares of Progenitor Preferred Stock, par value $0.001 per share. Set
forth below is a description of the securities of Progenitor.
PROGENITOR UNITS
Each Progenitor Unit consists of one share of Progenitor Common Stock and
one redeemable Progenitor Warrant. The Progenitor Units will separate
immediately upon issuance, and the Progenitor Common Stock and Progenitor
Warrants that comprise the Progenitor Units will trade as separate securities.
PROGENITOR COMMON STOCK
As of June 20, 1997, assuming the conversion into Progenitor Common Stock of
all outstanding shares of Progenitor Preferred Stock and a convertible debenture
and a portion of the promissory note held by Interneuron described below (see
"--Convertible Debenture and Promissory Note"), the exercise of the stock
purchase right described below (see "--Stock Purchase Right and Warrants"), the
sale of the Amgen Shares pursuant to the Amgen Purchase Agreement (see "Business
of Progenitor--Corporate Agreements--Amgen Agreements"), and the issuance of
2,179,437 shares of Progenitor Common Stock pursuant to the Reorganization
(assuming consummation of the Reorganization at an Adjusted Purchase Price of
$22 million and an IPO Common Stock Price of $8.50, and assuming that none of
the options or warrants to purchase Mercator Capital Stock outstanding as of
such date were exercised prior to the Reorganization), there were 8,988,538
shares of Progenitor Common Stock issued and outstanding held of record by 121
stockholders, 1,068,383 shares of Progenitor Common Stock issuable upon the
exercise of outstanding stock options (including Replacement Options) and 81,743
shares of Progenitor Common Stock issuable upon the exercise of outstanding
warrants (including the Phoenix Warrants).
Holders of Progenitor 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 Progenitor Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election.
Holders of Progenitor Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Progenitor Board of Directors out
of funds legally available therefor, subject to preferences that may be
applicable to any outstanding Progenitor Preferred Stock. In the event of
liquidation, dissolution or winding up of Progenitor, holders of Progenitor
Common Stock are entitled to share ratably in all net assets remaining after
payment of liabilities and the liquidation preference of any outstanding
Progenitor Preferred Stock. Holders of Progenitor Common Stock have no
preemptive, subscription, redemption, conversion or other subscription rights,
and there are no sinking fund provisions applicable to the Progenitor Common
Stock. All currently outstanding shares of Progenitor Common Stock are, and the
shares of Progenitor Common Stock to be issued in connection with the
Reorganization will be, duly authorized, validly issued, fully paid and
nonassessable.
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PROGENITOR WARRANTS
Each Progenitor Warrant will entitle the holder to purchase one share of
Progenitor Common Stock at a price equal to 150% of the IPO Unit Price. The
Progenitor Warrants will, subject to certain conditions, be exercisable at any
time until the fifth anniversary of the effective date of the IPO, unless
earlier redeemed. Upon notice to the Progenitor Warrant holders, Progenitor may
reduce the exercise price or extend the expiration date of the Progenitor
Warrants. The Progenitor Warrants are redeemable by Progenitor at $0.01 per
Progenitor Warrant, upon 30 days written notice, if the average closing bid
price (as defined in the Warrant Agreement described below) per share of the
Progenitor 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 Progenitor Warrant exercise price.
The exercise price of the Progenitor Warrants was determined by negotiation
between Progenitor and the Underwriters in the IPO and should not be construed
to be predictive of the prices of Progenitor's securities or to imply that any
price increases in Progenitor's securities will occur.
The Progenitor Warrants will be issued in registered form under a Warrant
Agreement (the "Warrant Agreement") between Progenitor and the American Stock
Transfer & Trust Company, as warrant agent (the "Warrant Agent"). The shares of
Progenitor Common Stock underlying the Progenitor Warrants, when issued upon
exercise of a Progenitor Warrant, will be fully paid and nonassessable, and
Progenitor 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
Progenitor Warrants or the issuance of Progenitor Common Stock to the holder
upon its exercise, but not any subsequent transfer taxes applicable in the
transfer of the Progenitor Warrants. Progenitor shall not be required upon the
exercise of the Progenitor Warrants to issue fractions of Progenitor Warrants or
Progenitor 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 Progenitor Warrants contain provisions that protect the holders against
dilution by adjustment of the number of shares that may be purchased by the
holders. Such adjustments will occur in the event, among others, that Progenitor
makes certain distributions to holders of Progenitor Common Stock, there is a
reorganization or a reclassification of the Progenitor Common Stock, Progenitor
enters into a merger or consolidation with another company or there is a sale or
transfer of all or substantially all the assets of Progenitor. The holder of a
Progenitor Warrant will not possess any voting or other rights as a stockholder
of Progenitor until such holder exercises the Progenitor Warrant. Upon notice to
the warrantholders, Progenitor has the right to reduce the exercise price or
extend the expiration date of the Progenitor Warrants. The holders may institute
any action, suit or proceeding against Progenitor without obtaining the consent
of the Warrant Agent.
For a holder to exercise the Progenitor Warrants, there must be a current
registration statement in effect with the Commission with respect to the
issuance of shares of Progenitor Common Stock or other securities underlying the
Progenitor Warrants. Progenitor has agreed, subject to certain exceptions, to
use all commercially reasonable efforts to cause a registration statement with
respect to such securities under the Securities Act to be filed and to become
and remain effective in anticipation of and prior to the exercise of the
Progenitor Warrants. Progenitor has filed a registration statement (of which the
IPO Prospectus is a part) pursuant to such undertaking. Until the expiration
date for the exercise of Progenitor Warrants, Progenitor promptly shall give all
record holders of Progenitor Warrants notice of any lapses in the effectiveness
of the IPO Registration Statement. If a current registration statement is not in
effect at the time a Progenitor Warrant is exercised, Progenitor may at its
option redeem the Progenitor Warrant by paying to the holder cash equal to the
difference between the market price of the Progenitor Common Stock on the
exercise date and the exercise price of the Progenitor Warrant. Progenitor will
not be required to honor the exercise of Progenitor Warrants if, in the opinion
of Progenitor's Board of Directors upon advice of counsel, the sale of
securities upon exercise would be unlawful. There can be no assurance that
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Progenitor will be able to file, cause to be declared effective or keep a
registration statement continuously effective until all of the Progenitor
Warrants have been exercised or have expired.
The Warrant Agreement contains provisions permitting Progenitor and the
Warrant Agent, without the consent of any Progenitor 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 Progenitor or the Warrant
Agent in the Progenitor 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 Progenitor or the Warrant Agent in the Progenitor 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 Progenitor Warrants
representing not less than 50% of the Progenitor Warrants then outstanding,
except that no change in the number or nature of the securities purchasable upon
the exercise of any Progenitor Warrant, or increase in the applicable exercise
price therefor, or acceleration of the exercise deadline shall be made without
the consent in writing of the registered holder of each Progenitor Warrant.
No commissions will be paid in connection with the sale of the shares of
Progenitor Common Stock offered upon the exercise of the Progenitor Warrants.
For the life of the Progenitor Warrants, the holders thereof have the
opportunity to profit from a rise in the market price of the Progenitor Common
Stock without assuming the risk of ownership of the shares of Progenitor Common
Stock issuable upon the exercise of the Progenitor Warrants. The Progenitor
Warrant holders may be expected to exercise their Progenitor Warrants at a time
when Progenitor would, in all likelihood, be able to obtain any needed capital
by an offering of Progenitor Common Stock on terms more favorable than those
provided for by the Progenitor Warrants. Progenitor's ability to raise
additional capital during the life of the Progenitor Warrants, and the terms on
which such capital is available, could be adversely affected by the existence of
the Progenitor Warrants.
PROGENITOR PREFERRED STOCK
Progenitor currently has outstanding 2,020,496 shares of its Series A
Preferred Stock and 349,000 shares of its Series B Preferred Stock. Such shares
will automatically convert into Progenitor Common Stock upon consummation of the
IPO. Both the Progenitor Series A and Series B Preferred Stock have antidilution
and conversion adjustment provisions that will increase or decrease the number
of shares of Progenitor Common Stock outstanding as of June 20, 1997 above or
below the numbers of shares set forth herein and will increase or decrease the
number of shares used in calculations for purposes of, among other things,
dilution to new investors, shares held by certain principal stockholders of
Progenitor, shares subject to registration rights and shares eligible for future
sale, in the event that the IPO Common Stock Price is less than or greater than
$8.50 per share, as the case may be. See "Principal Stockholders of Progenitor,"
"--Registration Rights," "Risk Factors--Shares Eligible for Future Sale;
Registration Rights; Possible Adverse Effect on Stock Price" and "Initial Public
Offering."
Under the original terms of Progenitor's Series A and B Preferred Stock, the
actual number of shares of Progenitor Common Stock issuable to each holder of
Progenitor Preferred Stock upon conversion of the Progenitor Series A and Series
B Preferred Stock would equal the product of (a) the number of shares of
Progenitor 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 IPO Common Stock Price. At the assumed IPO Common Stock
Price of $8.50 per share, 3,114,295 shares of Progenitor Common Stock,
consisting of 2,655,614 shares issuable to Interneuron as holder of the
Progenitor Series A Preferred Stock and 458,681 shares issuable to the holders
of the Progenitor Series B Preferred Stock,
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would issue upon conversion of the Progenitor Preferred Stock. The number of
shares issuable upon conversion of such Preferred Stock will increase pursuant
to a guaranteed quarterly return available to holders of the Series A and Series
B Preferred Stock that is determined on each April 7, July 7, October 7 and
January 7.
In July 1997, Progenitor granted an option to Interneuron, the sole owner of
the Progenitor 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 Progenitor Series A Preferred Stock, reducing the number
of shares of Progenitor Common Stock that Interneuron will receive upon
conversion of the Progenitor Series A Preferred Stock upon the closing of the
IPO from 2,655,614 shares to 1,745,649 shares. The holders of Progenitor Series
B Preferred Stock will not be affected by the terms of the option. As a result,
at the assumed IPO Common Stock Price of $8.50 per share, 2,204,330 shares of
Progenitor Common Stock will issue on conversion of the Progenitor Series A and
Series B Preferred Stock. See "Risk Factors--Control of Progenitor By, and
Potential Conflicts of Interest With, Interneuron," "Business--Discovery
Programs" and "--Corporate Agreements" and "Certain Transactions--Relationship
with Interneuron."
On March 7, 1997, the Progenitor Board of Directors authorized the issuance
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 Progenitor Preferred Stock
upon the closing of the IPO.
The Restated Certificate of Incorporation will authorize the issuance of up
to 1,000,000 shares of Progenitor Series D Preferred Stock. Shares of Progenitor
Series D Preferred Stock will be issued to Interneuron upon the closing of the
IPO upon the conversion of the outstanding balance of the Interneuron Bridge
Loan. The Progenitor Series D Preferred Stock will be issued to Interneuron at a
price per share equal to 117.5% of the amount of the IPO Common Stock Price
($9.99 per share assuming the IPO Common Stock Price is $8.50 per share)(the
"Series D Issue Price"). The Progenitor Series D Preferred Stock is entitled to
a cumulative dividend of 7% per annum, payable quarterly in cash, Progenitor
Series D Preferred Stock or Progenitor Common Stock at the option of Interneuron
and has no voting rights except as may be provided by law.
Upon a liquidation, dissolution or winding up of Progenitor, holders of
Progenitor Series D Preferred Stock shall be entitled to receive, prior to and
in preference over the holders of Progenitor Common Stock, an amount per share
equal to the Series D Issue Price plus any accrued but unpaid dividends. Holders
of the Progenitor Series D Preferred Stock have the right to convert such stock
into Progenitor Common Stock or a one-for-one basis at any time subject to
certain antidilution adjustments. In addition, each share of Progenitor Series D
Preferred Stock will automatically convert into one share of Progenitor Common
Stock upon the satisfaction of the following conditions: (i) the closing bid
price of the Progenitor Common Stock (a) on 20 out of 30 trading days prior to
the date of conversion equals or exceeds 150% of the IPO Common Stock Price and
(b) on the five days prior to the date of conversion equals or exceeds 135% of
the IPO Common Stock Price; (ii) at least 24 months have elapsed since the
closing of the IPO; and (iii) such conversion would not cause Interneuron's
ownership of Progenitor's outstanding voting securities to exceed an amount
representing 50% of the total voting power of such securities.
Assuming an IPO Common Stock Price of $8.50 per share, and based on an
outstanding balance of $2.9 million as of June 20, 1997 for the Interneuron
Bridge Loan, Interneuron will receive 293,293 shares of Progenitor Series D
Preferred Stock upon the closing of the IPO. See "Risk Factors--Control of
Progenitor By, and Potential Conflicts of Interest With, Interneuron" and
"Certain Transactions-- Relationship with Interneuron."
Following completion of the IPO and the conversion of all outstanding shares
of Progenitor Preferred Stock, the Progenitor Board of Directors will have the
authority to issue from time to time up to 5,000,000 shares of additional
Progenitor Preferred Stock in one or more series and to fix the powers,
designations,
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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 Progenitor's stockholders. The issuance of
such Progenitor Preferred Stock could adversely affect the rights of holders of
Progenitor Common Stock and could have the effect of delaying, deferring or
preventing a change in control of Progenitor. Progenitor has no present plans to
issue any shares of Progenitor 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, Progenitor granted The Ohio University Foundation
the right to purchase up to 25,000 shares of Progenitor Common Stock in the
event of an initial public offering, merger or other similar corporate
transaction involving Progenitor, at a price equal to 50% of the assumed initial
public offering price per share or other per share consideration. The Ohio
University Foundation has agreed to exercise such right at a price per share of
$4.25 prior to the closing of the IPO. See "Certain Transactions of
Progenitor--The Ohio University Foundation."
As of June 20, 1997, there were warrants outstanding to purchase an
aggregate of 34,901 shares of Progenitor 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 Progenitor 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 Progenitor
Common Stock and $6.875 and the denominator of which is the then current per
share market price of the Progenitor Series B Preferred Stock. These warrants
were issued in connection with a private placement of Progenitor Preferred Stock
for which Paramount, an affiliate of Interneuron, acted as placement agent. See
"Certain Transactions of Progenitor--Relationship with Interneuron." The
Progenitor Series B Warrants expire five years from the date of the IPO. Upon
automatic conversion of the outstanding Progenitor Preferred Stock in connection
with the consummation of the IPO, all such warrants will be converted into
warrants to purchase 45,865 shares of Progenitor Common Stock at an exercise
price of $5.23. The number of shares of Progenitor Common Stock for which such
warrants are exercisable is subject to adjustment if the IPO Common Stock Price
is less than or greater than $8.50 per share in the same manner and according to
the same formula described above for the conversion of Progenitor's currently
outstanding Preferred Stock. See "--Progenitor Preferred Stock." The Progenitor
Series B Warrants do not confer upon the holder thereof any voting or preemptive
rights, or any other rights as a stockholder of Progenitor, prior to exercise.
Upon exercise of such warrants, holders of the underlying shares of Progenitor
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 "Phoenix 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 Phoenix Series A
Warrant). The Phoenix Series A Warrant also contains a cashless conversion right
that allows the holder to receive a number of shares of Mercator Series A
Preferred Stock equal to the number of shares of Mercator Series A Preferred
Stock purchasable pursuant to the Phoenix 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 Phoenix Series A Warrant) and the exercise
price, and the denominator of which is the current per share Fair Market Value.
The Phoenix Series A Warrant expires on the later of August 31, 2003 and the
fifth anniversary of the closing of an initial public offering of Mercator's
capital stock.
On October 28, 1994, Mercator issued a warrant (the "Phoenix Series B
Warrant," and, together with the Phoenix Series A Warrant, the "Phoenix
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 Phoenix Series B Warrant). The Phoenix Series B Warrant
also contains a cashless
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conversion right that allows the holder to receive a number of shares of
Mercator Series B Preferred Stock equal to the number of shares of Mercator
Series B Preferred Stock purchasable pursuant to the Phoenix 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 Phoenix Series B Warrant)
and the exercise price, and the denominator of which is the current per share
Fair Market Value. The Phoenix 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 Phoenix Warrants do not confer upon the holder any voting or preemptive
rights, or any other rights as a shareholder of Progenitor, prior to exercise.
The Reorganization Agreement provides that Mercator will use commercially
reasonable efforts to cause all holders of warrants to purchase Mercator Capital
Stock to exercise such warrants on or prior to the closing of the
Reorganization. Any warrants to purchase shares of Mercator Capital Stock that
were outstanding as of the date of the Reorganization Agreement (February 14,
1997) and are not expired as of the closing of the Reorganization will be
assumed by Progenitor and converted into warrants to purchase the number of
shares of Progenitor Common Stock which the holder would have been entitled to
receive had such warrants been exercised immediately prior to the closing of the
Reorganization, 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 warrants prior to the Reorganization. See "The Reorganization
Agreement--Stock Options and Warrants." Pursuant to the Reorganization, to the
extent they are not exercised, the Phoenix Series A Warrant will be converted
into a warrant to purchase 21,338 shares of Progenitor Common Stock at an
exercise price of $2.34 per share, and the Phoenix Series B Warrant will be
converted into a warrant to purchase 14,540 shares of Progenitor Common Stock at
an exercise price of $8.04 per share, in each case assuming an Adjusted Purchase
Price of $22.0 million and an IPO Common Stock Price of $8.50.
REGISTRATION RIGHTS
The holders of shares of Progenitor Common Stock (the "Registrable
Securities") issuable, after completion of the IPO, 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 IPO
(the "Registration Period"), that Progenitor use its best efforts to register
the Registrable Securities for public resale. In addition, in the event
Progenitor elects to register any Progenitor Common Stock under the Securities
Act, either for its own account or for the account of any other stockholders,
Progenitor 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 Progenitor and all selling expenses
relating to Registrable Securities are to be borne by the holders of the
securities being registered. See "Certain Transactions of Progenitor--
Relationship with Interneuron."
Pursuant to the Amgen Purchase Agreement, Progenitor has granted certain
demand registration rights to Amgen which become operative six months after the
IPO. In addition, Progenitor has granted certain "piggy-back" registration
rights to Amgen at any time Progenitor determines to register any shares of
Progenitor Common Stock, other than pursuant to an initial public offering or in
certain other circumstances. Under the Amgen Purchase Agreement, Progenitor 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 underwriters' cutback provisions. The registration
expenses of any such registration are to be borne by Progenitor subject to
certain limitations.
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CONVERTIBLE DEBENTURE AND PROMISSORY NOTE
On March 31, 1995, Progenitor issued a convertible debenture in the amount
of $387,968 to Interneuron, and procured an additional advance of $28,651 under
such debenture on June 30, 1995. The debenture is convertible immediately prior
to the consummation of the IPO into a number of shares of Progenitor Common
Stock equal to the outstanding principal amount and any accrued interest divided
by the IPO Common Stock Price, plus a cash payment in lieu of fractional shares.
Interneuron has provided and continues to provide advances to Progenitor
evidenced by a promissory note dated March 31, 1996, in the principal amount of
approximately $525,000, as updated from time to time, which has increased to
approximately $8.6 million as of June 20, 1997, payable on the earlier of five
years from the date of the note or the closing of the IPO. Interneuron has
agreed to convert a portion of the indebtedness evidenced by the note
(approximately $8.2 million from an outstanding balance of approximately $8.6
million as of June 20, 1997), including additional advances from April 1, 1996
through to October 1, 1996 and accrued interest thereon, into shares of
Progenitor Common Stock upon the closing of the IPO at a conversion price equal
to the IPO Common Stock Price. All additional advances from October 1, 1996
through to the closing of the IPO that relate to the costs of the IPO will be
repaid from the net proceeds of the IPO (an aggregate of approximately $425,000
of principal and accrued interest as of June 20, 1997). See "Certain
Transactions of Progenitor--Relationship with Interneuron."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Progenitor is subject to the provisions of Section 203 of the 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 Progenitor Restated Certificate of
Incorporation may have the effect of preventing, discouraging or delaying any
change in control of Progenitor. The authorization of undesignated Progenitor
Preferred Stock makes it possible for the Progenitor Board of Directors to issue
Progenitor Preferred Stock with voting or other rights or preferences that could
impede the success of any attempt to change control of Progenitor. See
"--Progenitor 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
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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 Progenitor Restated Certificate of Incorporation provides that
Progenitor 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.
Progenitor has entered into agreements to indemnify its directors and executive
officers, in addition to indemnification provided for in Progenitor's charter
documents. Progenitor will enter into such agreements with those officers and
directors of Mercator who become officers and directors of Progenitor at the
Effective Time. See "The Reorganization--Interests of Certain Persons in the
Reorganization." These agreements, among other things, provide for the
indemnification of Progenitor'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 Progenitor, arising out of such person's services as a
director or executive officer of Progenitor, any subsidiary of Progenitor or any
other company or enterprise to which such person provides services at the
request of Progenitor, to the fullest extent permitted by applicable law.
Progenitor believes that these provisions and agreements will assist Progenitor
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. Progenitor'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 with respect to the IPO (the "Underwriting
Agreement") will provide for indemnification by the Underwriters under certain
circumstances of directors, officers and controlling persons of Progenitor
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 Progenitor
pursuant to the provisions contained in the Certificates of Incorporation and
Bylaws of Progenitor, the DGCL, the Underwriting Agreement, or otherwise,
Progenitor has been advised that in the opinion of the 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 Progenitor of expenses
incurred or paid by a director, officer or controlling person of Progenitor in
the successful defense of any action, suit, or proceeding) is asserted by such
director, officer or controlling person in connection with the Progenitor Common
Stock being registered hereunder, Progenitor 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 IPO, Progenitor intends to obtain liability
insurance insuring Progenitor's officers and directors against liabilities that
they may incur in such capacities.
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TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar for Progenitor Common Stock and Warrant Agent for the
Progenitor Warrants.
APPLICABILITY OF CALIFORNIA LAW TO MERCATOR
Section 2115 of the CGCL makes portions of the CGCL applicable, with certain
exceptions, to corporations incorporated in states other than California, if
such a corporation has (i) more than half of its operations conducted in
California (as measured by factors based on the corporation's levels of
property, payroll and sales determined for California franchise tax purposes)
and (ii) more than half of its outstanding voting securities held of record by
persons having addresses in California. Although Mercator is incorporated in
Delaware, it may be deemed by virtue of such Section 2115 to be subject to
various provisions of the CGCL. The provisions of the CGCL to which Mercator
thus may be subject include, but are not limited to, provisions relating to the
standard of care and indemnification of directors, cumulative voting, the right
of stockholders to inspect corporate records, the corporate requirements to
effectuate corporate reorganizations (including mergers and acquisitions) and
dissenters' rights. Section 2115 provides that, where provisions specified by
Section 2115 apply, they apply to the exclusion of the law of the jurisdiction
in which the subject corporation was incorporated.
Section 2115 does not apply to corporations that do not meet both of the two
criteria noted above or that fall into a statutory exemption. Progenitor is not
currently subject to Section 2115. Upon completion of the Reorganization, the
statutory protections applicable to Mercator pursuant to Section 2115 may not
apply to Progenitor either immediately or at any time in the future.
Although the constitutionality of Section 2115 might be challenged in
certain circumstances insofar as it purports to apply corporate law requirements
of California that are in some respects in conflict with those of Delaware, the
discussion herein assumes that Section 2115 would be applicable to Mercator to
the full extent of its terms and that it would not be applicable to Progenitor
after the Reorganization.
COMPARISON OF STOCKHOLDER RIGHTS
GENERAL
The rights of the holders of Mercator Capital Stock are currently governed
by the Mercator Certificate of Incorporation, the Mercator Bylaws and the DGCL.
In addition, certain of the rights of the holders of Mercator Capital Stock may
be governed by the CGCL by virtue of Section 2115 of the CGCL. As a result of
the Reorganization, holders of Mercator Capital Stock will become stockholders
of Progenitor, and the rights of all such former Mercator stockholders will
thereafter be governed by the Progenitor Restated Certificate of Incorporation
and the Progenitor Amended and Restated Bylaws ("Progenitor Amended Bylaws").
Progenitor is subject to the DGCL and, after the Reorganization, the statutory
protections that may be available to Mercator stockholders under Section 2115 of
the CGCL may not apply to shares of Progenitor Common Stock. See "Applicability
of California Law to Mercator."
The following summary, which does not purport to be complete, sets forth
certain differences between the Progenitor Restated Certificate of Incorporation
and Bylaws and the Mercator Certificate of Incorporation and Bylaws and certain
differences between certain portions of the CGCL specified by Section 2115 of
the CGCL and Delaware law. The summary is based upon the Progenitor Restated
Certificate of Incorporation and Amended Bylaws, which have been approved by
Progenitor and which will be effective immediately prior to the IPO. This
summary is qualified in its entirety by reference to the full text of each of
the Progenitor Restated Certificate of Incorporation, the Progenitor Amended
Bylaws, the Mercator Certificate of Incorporation, the Mercator Bylaws, the DGCL
and the CGCL.
In addition, upon completion of the Reorganization and the IPO, the
percentage ownership of Progenitor by each former Mercator stockholder will be
substantially less than his, her or its current
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percentage ownership of Mercator. See "The Reorganization--Stock Ownership
Following the Reorganization." Accordingly, former Mercator stockholders will
have a significantly smaller voting influence over the affairs of Progenitor
than they currently enjoy over the affairs of Mercator.
MERCATOR PREFERRED STOCK
As of the Effective Time, holders of Mercator Preferred Stock will become
entitled to receive shares of Progenitor Common Stock, as described above. At
that time, they will no longer be entitled to the rights and privileges provided
to Mercator Preferred Stock under the Mercator Certificate of Incorporation. A
brief summary of some of those rights and privileges is set forth below.
DIVIDENDS. Holders of Mercator Preferred Stock are entitled under the
Mercator Certificate of Incorporation to dividend preferences, when, as and if
declared by the Mercator Board of Directors, at annual rates of (i) $.70 per
share with respect to shares of Series A Preferred, (ii) $.18 per share with
respect to shares of Series B Preferred, (iii) $.07 per share with respect to
shares of Series C Preferred and (iv) $.09 per share with respect to shares of
Series D Preferred. All dividends are non-cumulative.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
Mercator, holders of Mercator Preferred Stock are entitled under the Mercator
Certificate of Incorporation to receive certain payments per share, as specified
in the Mercator Certificate of Incorporation, prior and in preference to any
distribution of any assets of Mercator to the holders of Mercator Common Stock.
After the holders of Mercator Preferred Stock have received the full amount of
their liquidation preferences, the holders of Mercator Common Stock and
Preferred Stock are entitled to receive the remaining assets of Mercator
available for distribution, pro rata based on the number of shares of Mercator
Common Stock held by each (assuming conversion of all Mercator Preferred Stock).
UNDER THE AMENDMENT TO THE MERCATOR CERTIFICATE OF INCORPORATION CONTEMPLATED BY
THE MERCATOR CERTIFICATE AMENDMENT PROPOSAL, THE LIQUIDATION RIGHTS DESCRIBED IN
THIS PARAGRAPH WOULD NOT APPLY WITH RESPECT TO THE REORGANIZATION, AND INSTEAD
IN THE REORGANIZATION EACH CLASS AND SERIES OF MERCATOR CAPITAL STOCK WOULD BE
ENTITLED ONLY TO THE PORTION OF THE ADJUSTED PURCHASE PRICE PROVIDED IN THE
REORGANIZATION AGREEMENT. See "The Reorganization--Exchange Ratios."
CONVERSION. Each share of Mercator Preferred Stock is convertible under the
Mercator Certificate of Incorporation into shares of Mercator Common Stock
pursuant to specified formulas that take into account anti-dilution adjustment
provisions. Each share of Series A Preferred Stock is convertible into such
number of shares of Mercator Common Stock as is determined by dividing $10.00
plus all declared but unpaid dividends on each share of Series A Preferred Stock
by the then applicable Series A conversion price (initially $10.00). Each share
of Series B Preferred Stock is convertible into such number of shares of
Mercator Common Stock as is determined by dividing $2.50 plus all declared but
unpaid dividends on each share of Series B Preferred Stock by the then
applicable Series B conversion price (initially $2.50). Each share of Series C
Preferred Stock is convertible into such number of shares of Mercator Common
Stock as is determined by dividing $1.00 plus all declared but unpaid dividends
on each share of Series C Preferred Stock by the then applicable Series C
conversion price (initially $1.00). Each share of Series D Preferred Stock is
convertible into such number of shares of Mercator Common Stock as is determined
by dividing $1.34 plus all declared but unpaid dividends on each share of Series
D Preferred Stock by the then applicable Series D conversion price (initially
$1.34).
VOTING. Under the Mercator Certificate of Incorporation, each holder of
Mercator Preferred Stock has a number of votes equal to the number of full
shares of Mercator Common Stock into which such Mercator Preferred Stock is then
convertible. Each series of Mercator Preferred Stock, voting separately as a
class, is entitled to elect one member of Mercator's Board of Directors. Holders
of Mercator Common Stock, voting separately as a class, are entitled to elect
one member. The remaining members are elected by holders of Mercator Common
Stock and Mercator Preferred Stock voting together as a class.
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The Mercator Certificate of Incorporation also restricts certain corporate
actions without the approval of holders of Mercator Preferred Stock. If at least
100,000 shares of Mercator Preferred Stock are outstanding, Mercator cannot,
without the vote or written consent by the holders of a majority of the then
outstanding shares of Mercator Preferred Stock, voting together as a class: (i)
purchase, redeem or otherwise acquire any of the Mercator Common Stock, except
as allowed under the Mercator Certificate of Incorporation; (ii) declare or pay
dividends; (iii) effect any sale of substantially all of the assets of Mercator
or any consolidation or merger if more than fifty percent of the surviving
entity is not owned by the same persons who were holders of capital stock
immediately prior to the merger, consolidation or sale; (iv) increase or
decrease the number of authorized shares of any series of Mercator Preferred
Stock; (v) authorize or issue any other equity security senior to or on a parity
with any series of Mercator Preferred Stock as to dividend or redemption rights,
liquidation preferences, conversion rights, voting rights or otherwise; (vi)
amend, repeal or waive any material provision of, or add any material provision
to, the Mercator Certificate of Incorporation or Bylaws if such action would
alter or change the rights, privileges or powers of any series of Mercator
Preferred Stock; or (vii) increase or decrease the authorized number of
directors. If at least 100,000 shares of Series D Preferred Stock are
outstanding, Mercator cannot, without the vote or written consent by the holders
of a majority of the then outstanding shares of Series D Preferred, voting
separately as a class: (i) authorize or issue any other equity security senior
to the Series D Preferred Stock as to dividend or redemption rights, liquidation
preferences, conversion rights, voting rights or otherwise; or (ii) amend,
repeal or waive any material provision of, or add any material provision to, the
Mercator Certificate of Incorporation or Bylaws if such action would alter or
change the rights, privileges or powers of the Series D Preferred. UNDER THE
AMENDMENT TO THE MERCATOR CERTIFICATE OF INCORPORATION CONTEMPLATED BY THE
MERCATOR CERTIFICATE AMENDMENT PROPOSAL, THE HOLDERS OF SHARES OF SERIES D
PREFERRED STOCK WOULD NOT BE ENTITLED TO VOTE UPON THE REORGANIZATION OR ANY OF
THE TRANSACTIONS CONTEMPLATED IN CONNECTION THEREWITH.
CONTRACTUAL RIGHTS. Certain contractual rights presently possessed by
holders of Mercator Preferred Stock will cease to exist after the
Reorganization.
STOCKHOLDER MEETINGS
Under the Progenitor Amended Bylaws, written notice of each meeting of
stockholders, specifying the place, date and hour and purpose or purposes of the
meeting, shall be given not less than ten nor more than 60 days before the date
of the meeting to each stockholder entitled to vote thereat; except that where
the matter to be acted on is a merger or consolidation of Progenitor or a sale,
lease or exchange of all or substantially all of its assets, such notice shall
be given not less than 20 nor more than 60 days prior to such meeting. The
Mercator Bylaws contain the same provision relating to notice generally, but do
not contain the special provisions relating to a merger or consolidation of
Mercator or a sale, lease or exchange of all or substantially all of its assets.
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CUMULATIVE VOTING
In an election of directors under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the number of
directors to be elected. A stockholder may then cast all such votes for a single
candidate or may allocate them among as many candidates as the stockholder may
choose. Without cumulative voting, absent any other special provision, the
holders of a majority of the shares present at an annual meeting or any special
meeting held to elect directors would have the power to elect all the directors
to be elected at that meeting, and no person could be elected without the
support of holders of a majority of the shares voting at such meeting. Under the
CGCL, cumulative voting is a right generally available to stockholders, with
certain exceptions. However, under the DGCL cumulative voting in the election of
directors is not mandatory, although corporations may provide for cumulative
voting in their articles.
Mercator stockholders may currently have the right under the CGCL to
cumulative voting. However, after the Reorganization cumulative voting may not
be mandatory.
ELECTION AND NUMBER OF DIRECTORS
The Progenitor Amended Bylaws provide for seven directors, until changed by
resolution of the Progenitor Board of Directors. The Mercator Bylaws provide
that the number of directors will be between four and seven, with the exact
number set by resolution of the Mercator Board of Directors from time to time.
Under the Mercator Bylaws, directors are elected by a plurality of the shares
present in person or represented by proxy.
The Progenitor Restated Certificate of Incorporation provides that directors
need not be elected by written ballot unless so provided in the Progenitor
Amended Bylaws, which do not so provide. The Mercator Bylaws provide that all
elections of directors shall be by written ballot, unless otherwise provided in
the Mercator Certificate of Incorporation, which does not so provide.
REMOVAL OF DIRECTORS
Under the DGCL, subject to certain exceptions, a director of a corporation
may be removed with or without cause, by the holders of a majority of the shares
entitled to vote at an election of directors. Under the CGCL, any director or
the entire board of directors may be removed, with or without cause, with the
approval of a majority of the outstanding shares entitled to vote, provided that
no individual director may be removed (unless the entire board is removed) if
the number of votes cast against such removal would be sufficient to elect the
director under cumulative voting. Although Mercator may currently be subject to
the CGCL in this regard, Progenitor may not be subject to such provisions of
CGCL after the Reorganization.
LOANS TO OFFICERS
The Progenitor Amended Bylaws provide that Progenitor may, upon approval of
the Progenitor Board of Directors alone, make loans of money or property to, or
guarantee the obligations of, any officer (whether or not a director) of
Progenitor or of its parent, or adopt an employee benefit plan authorizing such
loans or guaranties, provided that: (i) the Progenitor Board of Directors
determines that such loan, guaranty, or plan may reasonably be expected to
benefit Progenitor; (ii) the approval by the Progenitor Board of Directors is by
a vote sufficient without counting the vote of any interested director(s); and
(iii) the loan is otherwise made in compliance with Section 143 of the DGCL. The
Mercator Bylaws provide that Mercator can lend money, provide a guarantee or
otherwise assist an officer or employee whenever the Mercator Board of Directors
determines that such loan, guarantee or assistance may reasonably be expected to
benefit Mercator.
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LIMITATION OF LIABILITY OF DIRECTORS
The DGCL permits a corporation to include a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director to
the corporation or its stockholders for monetary damages for a breach of a
director's fiduciary duty, subject to certain limitations. See "Description of
Progenitor Capital Stock--Limitation of Liability." Each of the Mercator and
Progenitor Restated Certificates of Incorporation includes such a provision.
The Mercator Certificate of Incorporation substantially tracks the language
of Section 102(b)(7) of the DGCL, which provides that a corporation may include
in its certificate of incorporation a provision eliminating or limiting the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duties 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, which concerns unlawful payments of dividends, stock
purchases or redemptions; or (iv) for any transaction from which the director
derived an improper personal benefit.
The Progenitor Restated Certificate of Incorporation provides elimination of
liability for monetary damages "[t]o the fullest extent permitted by Delaware
statutory or decisional law, as amended or interpreted." The Progenitor Restated
Certificate of Incorporation states that this provision does not affect the
availability of equitable remedies. See "Description of Progenitor Capital
Stock--Limitation of Liability."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The DGCL permits a corporation to indemnify officers, directors, employees
and agents for actions taken in good faith and in a manner they reasonably
believe to be in, or not opposed to, the best interests of the corporation, and
with respect to any criminal action, which they had no reasonable cause to
believe was unlawful. The DGCL provides that a corporation may advance expenses
of defense (upon receipt of a written undertaking to reimburse the corporation
if indemnification is not appropriate) and must reimburse a successful defendant
for expenses, and permits a corporation to purchase and maintain liability
insurance for its directors and officers. The DGCL provides that indemnification
may not be made for any claim, issue or matter as to which a person has been
adjudged to be liable to the corporation, unless and only to the extent a court
determines that the person is entitled to indemnity for such expenses as the
court deems proper. See "Description of Progenitor Capital Stock--Limitation of
Liability."
The Progenitor Amended Bylaws provide that Progenitor shall indemnify
directors, officers, employees, or agents to the fullest extent authorized by
the DGCL, as the same exists or may hereafter be amended or interpreted (but, in
the case of any such amendment or interpretation, only to the extent that such
amendment or interpretation permits Progenitor to provide broader
indemnification rights than were permitted prior thereto), provided that
Progenitor shall indemnify directors, officers, employees and agents seeking
indemnification in connection with a proceeding initiated by such person only if
the proceeding was authorized by the Board of Directors. See "Description of
Progenitor Capital Stock-- Limitation of Liability."
The Mercator Bylaws provide that Mercator shall indemnify its directors and
executive officers to the fullest extent not prohibited by the DGCL, provided
that Mercator may limit the extent of such indemnification by individual
contracts with its directors and executive officers. The Mercator Bylaws also
provide that Mercator will not indemnify directors and executive officer in
connection with a proceeding initiated by such person unless: (1)
indemnification is expressly required to be made by law, (2) the proceeding was
authorized by the Board of Directors, or (3) such indemnification is provided by
Mercator, in its sole discretion, under the powers vested in it under the DGCL.
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EXECUTION OF CORPORATE INSTRUMENTS
The Progenitor Amended Bylaws provide that, in its discretion, the
Progenitor Board of Directors may submit any contract or act for approval or
ratification of the shareholders at any annual meeting of shareholders, or at
any special meeting of shareholders called for that purpose; and any contract or
act that shall be approved or ratified by the holders of a majority of the
voting power of Progenitor shall be as valid and binding upon Progenitor and
upon the shareholders thereof as though approved or ratified by each and every
shareholder of Progenitor, unless a greater vote is required by law for such
purpose. Mercator's Bylaws do not contain such a provision.
AMENDMENT OF BYLAWS
The Progenitor Restated Certificate of Incorporation provides that the
Progenitor Board of Directors may from time to time make, amend, supplement or
repeal the Progenitor Amended Bylaws. The Progenitor Amended Bylaws themselves
provide that the same can be repealed, altered or amended or new bylaws adopted
by written consent of stockholders or at any meeting of the stockholders, either
annual or special, by the affirmative vote of a majority of the stock entitled
to vote at such meeting. The Progenitor Amended Bylaws also provide that the
Board of Directors has the authority to repeal, alter or amend such Bylaws or
adopt new Bylaws by unanimous written consent or at any annual, regular, or
special meeting by the affirmative vote of a majority of the whole number of
directors, subject to the power of the stockholders to change or repeal such
Bylaws. The Mercator Bylaws provide that stockholders can amend or repeal the
Bylaws. The Mercator Board of Directors only has such power if the Mercator
Certificate of Incorporation so provides, which it does not.
AMENDMENT OF MERCATOR CERTIFICATE OF INCORPORATION
In the Reorganization Agreement, Mercator agreed to use commercially
reasonable efforts to cause its Certificate of Incorporation to be amended
effective prior to the Effective Time, such that (i) the amount to which any
shares of Mercator Common Stock and Mercator Preferred Stock will be entitled in
the Reorganization would be the amounts provided in the Reorganization
Agreement, and (ii) Mercator's Series D Preferred Stock would not be entitled to
vote with respect to the Reorganization or any of the other transactions
contemplated by the Reorganization Agreement or the related agreements (no
shares of Mercator Series D Preferred Stock were outstanding as of the Record
Date). Mercator further agreed to use commercially reasonable efforts to obtain
all requisite Mercator Board of Directors and stockholder approvals, make all
required filings with the Delaware Secretary of State and take all other actions
necessary for such amended Certificate of Incorporation to be effective prior to
the Effective Time. The purposes of the amendment are (i) to conform the
allocation of consideration paid in connection with certain events among the
various classes and series of Mercator Capital Stock currently provided in the
Mercator Certificate of Incorporation to the allocation provided in the
Reorganization Agreement, and (ii) to facilitate the desire of the holders of
the Venture Capital Bridge Notes to delay conversion of their notes until
immediately prior to the Effective Time, which might not be possible in the
absence of such an amendment.
The Mercator Certificate Amendment Proposal would accomplish the required
amendment. The form of the proposed amendment to Mercator's Certificate of
Incorporation is attached as Appendix G to this Proxy Statement/Prospectus.
UNDER THE PROPOSED AMENDMENT, EACH SHARE OF EACH CLASS OR SERIES OF MERCATOR
CAPITAL STOCK MAY RECEIVE MORE OR LESS OF THE ADJUSTED PURCHASE PRICE THAN IT
WOULD UNDER THE EXISTING MERCATOR CERTIFICATE OF INCORPORATION. Approval of the
Mercator Certificate Amendment Proposal is a condition to Progenitor's
obligation to consummate the Reorganization.
THE MERCATOR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERCATOR
CERTIFICATE AMENDMENT PROPOSAL AND UNANIMOUSLY RECOMMENDS THAT HOLDERS OF SHARES
OF MERCATOR CAPITAL STOCK VOTE FOR APPROVAL OF SUCH PROPOSAL.
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OTHER MATTERS
It is not expected that any matters other than those described in this Proxy
Statement/Prospectus will be brought before the Mercator Special Meeting. If any
other matters are presented, however, it is the intention of the persons named
in the Mercator proxy to vote such proxies in accordance with their respective
discretion.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities offered
hereby and the federal income tax consequences of the Reorganization will be
passed upon for Progenitor by Morrison & Foerster LLP, San Francisco,
California. Certain legal matters with respect to the federal income tax
consequences of the Reorganization will be passed upon for Mercator by Wilson
Sonsini Goodrich & Rosati, P.C.
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 Proxy Statement/Prospectus and
Registration Statement have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their report thereon appearing
elsewhere herein and in this Registration Statement, which includes an
explanatory paragraph regarding Progenitor's ability to continue as a going
concern, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The financial statements of Mercator Genetics, Inc. (a development stage
company) at December 31, 1995 and 1996, and for each of the three years in the
period ended December 31, 1996, and for the period from inception (October 9,
1992) to December 31, 1996, appearing in this Proxy Statement/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.
STOCKHOLDER PROPOSALS
For proposals of stockholders of Mercator to be considered for inclusion in
the proxy statement of the 1997 Annual Meeting of Stockholders of Mercator (if
the Reorganization is not consummated), such proposals must be received by the
Secretary of Mercator no later than .
ADDITIONAL INFORMATION
Progenitor has filed with the Commission a Registration Statement on Form
S-4 (including all amendments, exhibits, annexes and schedules thereto, the "S-4
Registration Statement"), pursuant to the Securities Act and the rules and
regulations promulgated thereunder, covering the Progenitor Common Stock (i) to
be issued to holders of outstanding Mercator Capital Stock upon consummation of
the Reorganization and (ii) offered to holders of warrants and options to
purchase shares of Mercator Capital Stock that will be assumed by Progenitor in
the Reorganization. This Proxy Statement/Prospectus, which constitutes a part of
the S-4 Registration Statement, does not contain all of the information set
forth in the S-4 Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the S-4 Registration Statement. Parts
omitted from this Proxy Statement/Prospectus but contained in the S-4
Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street N.W., Washington,
D.C. 20549, and at the regional offices of the Commission at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Citicorp Center, Suite 1400,
500 West Madison
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Street, Chicago, Illinois 60661. Such material may also be accessed
electronically by means of the Commission's Home page on the Internet at
http://www.sec.gov. Copies of such material may also be obtained by mail from
the Public Reference Section of the Commission at 450 Fifth Street, Washington,
D.C. 20549, at prescribed rates.
Statements made in this Proxy Statement/Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With respect
to each such contract, agreement or other document filed as an exhibit to the
S-4 Registration Statement or incorporated by reference herein, reference is
made to the exhibit for a more complete description of the matters involved, and
each such statement shall be deemed qualified in its entirety by such reference.
All information contained herein with respect to Mercator has been supplied
by Mercator, and all information with respect to Progenitor has been supplied by
Progenitor.
171
<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>
When the stock split referred to in note 1.j. to the financial statements has
been consummated, we will be in a position to render the following report.
COOPERS & LYBRAND L.L.P.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
Progenitor, Inc.
We have audited the accompanying balance sheets of Progenitor, Inc. (a
Development Stage Company) as of September 30, 1995 and 1996, and the related
statements of operations, stockholders' deficit, and cash flows for the years
ended September 30, 1994, 1995 and 1996, and for the period from May 8, 1992
(date of inception) to September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Progenitor, Inc. (a Development
Stage Company) as of September 30, 1995 and 1996, and the results of its
operations and its cash flows for the years ended September 30, 1994, 1995 and
1996, and for the period from May 8, 1992 (date of inception) to September 30,
1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company is in the development stage. The Company's lack of
revenues and its need for additional financing to fund its operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Columbus, Ohio
March 10, 1997
F-2
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------- 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
(DATE OF
YEARS ENDED SEPTEMBER 30, INCEPTION) TO
---------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
---------- ---------- ---------- ------------- SIX MONTHS ENDED MAY 8, 1992
MARCH 31, (DATE OF
------------------------ INCEPTION)
1996 1997 TO MARCH 31,
----------- ----------- 1997
(UNAUDITED) (UNAUDITED) ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ -- $2,821,386 $1,332,366 $ 4,153,752 $ 911,962 $ 859,367 $5,013,119
Operating expenses:
Research and development... 4,112,991 4,227,959 3,872,891 16,104,790 1,705,732 2,150,379 18,255,169
General and
administrative........... 1,274,896 1,116,652 1,791,050 5,786,483 690,536 1,226,060 7,012,543
---------- ---------- ---------- ------------- ----------- ----------- ------------
Total operating
expenses............... 5,387,887 5,344,611 5,663,941 21,891,273 2,396,268 3,376,439 25,267,712
---------- ---------- ---------- ------------- ----------- ----------- ------------
Nonrecurring expense......... -- -- 973,525 973,525 -- -- 973,525
Interest expense:
Capital lease.............. 44,257 62,945 59,087 166,289 35,292 22,331 188,620
Debt to parent............. 603,581 289,297 119,617 1,280,499 21,441 264,745 1,545,244
---------- ---------- ---------- ------------- ----------- ----------- ------------
Net loss................. $(6,035,725) $(2,875,467) $(5,483,804) $(20,157,834) ($1,541,039) ($2,804,148) ($22,961,982)
---------- ---------- ---------- ------------- ----------- ----------- ------------
---------- ---------- ---------- ------------- ----------- ----------- ------------
Supplemental net loss per
share (unaudited).......... $ (0.91) $ (0.46)
---------- -----------
---------- -----------
Shares used in computing
supplemental net loss per
share (unaudited).......... 6,047,252 6,103,034
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
FROM MAY 8, 1992 (DATE OF INCEPTION) TO SEPTEMBER 30, 1996
AND (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------------------ -----------------------------------------
SERIES A SERIES B CLASS A CLASS B
--------------------- ------------------ -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- -------- ------- ---------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, May 8, 1992 (Date of inception)
Issued in May 1992 at $.002 per share... -- $ -- -- $ -- 2,412,950 $2,413 -- $--
Issued in May 1992 at $.001 per share... -- -- -- -- -- -- 250,000 250
Issued in December 1992 and January 1993
at $.000 per share under anti-dilution
provisions............................ -- -- -- -- 13,397 13 -- --
Issued in December 1992 and January 1993
at $.02 per share..................... -- -- -- -- 216,588 217 -- --
Repurchased at $.02 per share........... -- -- -- -- (74,267) (74) -- --
Cumulative net loss (May 8, 1992 through
September 30, 1993)................... -- -- -- -- -- -- -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, September 30, 1993............... -- -- -- -- 2,568,668 2,569 250,000 250
Net loss................................ -- -- -- -- -- -- -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, September 30, 1994............... -- -- -- -- 2,568,668 2,569 250,000 250
---------- ------- --------- ------
Issued preferred stock at $6.25 for
conversion of debt to equity.......... 2,020,496 20,205 -- -- -- -- -- --
Conversion of Class B common to Class A
common under anti-dilution
provisions............................ -- -- -- -- 178,750 179 (250,000) (250)
Issued in December 1994 at $.000 per
share under anti-dilution
provisions............................ -- -- -- -- 40,353 40 -- --
Stock options exercised at $.20 per
share................................. -- -- -- -- 1,500 1 -- --
Issued preferred stock in December-April
at $4.47 per share, net of offering
costs................................. -- -- 349,000 3,490 -- -- -- --
Net loss................................ -- -- -- -- -- -- -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, September 30, 1995............... 2,020,496 20,205 349,000 3,490 2,789,271 2,789 -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Stock options exercised at $.20-$6.00
per share............................. -- -- -- -- 38,300 39 -- --
Issued common stock in February 1996 at
$6.00 per share....................... -- -- -- -- 58,333 58 -- --
Net loss................................ -- -- -- -- -- -- -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, September 30, 1996............... 2,020,496 20,205 349,000 3,490 2,885,904 2,886 -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Net loss (unaudited).................... -- -- -- -- -- -- -- --
Stock options exercised at $.10-$2 per
share................................. -- -- -- -- 1,313 1 -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, March 31, 1997 (unaudited)....... 2,020,496 $20,205 349,000 $3,490 2,887,217 $2,887 -- $--
---------- -------- -------- ------- ---------- ------- --------- ------
---------- -------- -------- ------- ---------- ------- --------- ------
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING
PAID-IN DEVELOPMENT
CAPITAL STAGE TOTAL
------------ ------------- -------------
<S> <C> <C> <C>
Balance, May 8, 1992 (Date of inception)
Issued in May 1992 at $.002 per share... $ 2,413 $ -- $ 4,826
Issued in May 1992 at $.001 per share... -- -- 250
Issued in December 1992 and January 1993
at $.000 per share under anti-dilution
provisions............................ (13) -- --
Issued in December 1992 and January 1993
at $.02 per share..................... 4,105 -- 4,322
Repurchased at $.02 per share........... (1,411) -- (1,485)
Cumulative net loss (May 8, 1992 through
September 30, 1993)................... -- (5,762,838) (5,762,838)
------------ ------------- -------------
Balance, September 30, 1993............... 5,094 (5,762,838) (5,754,925)
Net loss................................ -- (6,035,725) (6,035,725)
------------ ------------- -------------
Balance, September 30, 1994............... 5,094 (11,798,563) (11,790,650)
------------ ------------- -------------
Issued preferred stock at $6.25 for
conversion of debt to equity.......... 12,607,895 -- 12,628,100
Conversion of Class B common to Class A
common under anti-dilution
provisions............................ 161,751 -- 161,680
Issued in December 1994 at $.000 per
share under anti-dilution
provisions............................ 214,960 -- 215,000
Stock options exercised at $.20 per
share................................. 299 -- 300
Issued preferred stock in December-April
at $4.47 per share, net of offering
costs................................. 1,556,641 -- 1,560,131
Net loss................................ -- (2,875,467) (2,875,467)
------------ ------------- -------------
Balance, September 30, 1995............... 14,546,640 (14,674,030) (100,906)
------------ ------------- -------------
Stock options exercised at $.20-$6.00
per share............................. 70,212 -- 70,251
Issued common stock in February 1996 at
$6.00 per share....................... 349,940 -- 349,998
Net loss................................ -- (5,483,804) (5,483,804)
------------ ------------- -------------
Balance, September 30, 1996............... 14,966,792 (20,157,834) (5,164,461)
------------ ------------- -------------
Net loss (unaudited).................... -- (2,804,148) (2,804,148)
Stock options exercised at $.10-$2 per
share................................. 5,530 -- 5,531
------------ ------------- -------------
Balance, March 31, 1997 (unaudited)....... $ 14,972,322 $(22,961,982) $ (7,963,078)
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MAY 8, 1992
(DATE OF
YEARS ENDED SEPTEMBER 30, INCEPTION) TO
---------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
---------- ---------- ---------- ------------- SIX MONTHS ENDED MAY 8, 1992
MARCH 31, (DATE OF
------------------------ INCEPTION)
1996 1997 TO MARCH 31,
----------- ----------- 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>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
SIX MONTHS ENDED
MARCH 31
--------------------------
1996 1997
------------ ------------
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss per share......................... $ (2.01) $ (.97) $ (1.82) $ (.52) $ (.92)
Shares used in computing net loss per
share...................................... 2,996,905 2,956,325 3,008,682 2,979,592 3,064,464
</TABLE>
SUPPLEMENTAL (UNAUDITED)
Supplemental unaudited net loss per share is based upon the historical
net loss per share adjusted for (i) the automatic conversion of all outstanding
shares of preferred stock into common stock upon closing of an Offering (ii) the
conversion of a convertible debenture and a portion of the promissory note held
by Interneuron into common stock upon closing of an Offering and (iii) the
issuance of additional shares of common stock to The Ohio University Foundation
in connection with anti-dilution provisions pursuant to a stock purchase right.
All conversions were made assuming an Offering price of $11.00 per unit, with
$8.50 of such price allocated to each share of common stock.
2. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Sponsored research - Ohio University.............................. $ 298,641 $ 342,506
Sponsored research - other........................................ 140,153 199,853
Chiron Corporation................................................ 701,296 --
Initial public offering expenses.................................. -- 249,363
Accrued license fees.............................................. -- 112,883
Other............................................................. 203,628 457,010
------------ ------------
$ 1,343,718 $ 1,361,615
------------ ------------
------------ ------------
</TABLE>
F-8
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES:
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of September 30,
1996, net deferred tax assets totaled approximately $7,988,000 on total net
operating loss carryforwards of approximately $18,425,000 and tax credits of
approximately $618,000 that expire on various dates through 2010. Due to the
uncertainty surrounding the realization of these favorable tax attributes in
future tax returns, all of the net deferred tax assets have been fully offset by
a valuation allowance.
4. STOCK OPTIONS AND WARRANTS:
A. STOCK OPTIONS: Under the Company's Stock Option Plan adopted in 1992,
incentive stock options and nonqualified stock options may be granted. The
number of common shares authorized and reserved for issuance is 500,000. The
outstanding options vest over a period of three to four years. As of September
30, 1995 and 1996, stock options covering 81,695 and 116,042 shares were
exercisable, respectively. Options granted to stockholders with 10% or greater
ownership expire after five years; all other options expire after 10 years.
In May 1996, the Company adopted the 1996 Stock Incentive Plan (the "Plan").
The number of common shares authorized and available for issuance is 850,000.
Under the Plan, incentive stock options, nonqualified stock options, stock
appreciation rights and stock grants may be granted.
Stock option activity is summarized below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OPTION PRICE
----------- -------------
<S> <C> <C>
Outstanding at September 30, 1993.................................. 104,450 $ 0.20-$4.00
Granted.......................................................... 75,875 4.00
Forfeited........................................................ (1,700) 0.20-4.00
-----------
Outstanding at September 30, 1994.................................. 178,625 0.20-4.00
Granted.......................................................... 192,250 4.00-6.00
Forfeited........................................................ (20,472) 0.20-4.00
Exercised........................................................ (1,500) 0.20
-----------
Outstanding at September 30, 1995.................................. 348,903 0.20-6.00
Granted.......................................................... 432,250 6.00-9.00
Forfeited........................................................ (55,353) 0.20-6.00
Exercised........................................................ (38,300) 0.20-6.00
-----------
Outstanding at September 30, 1996.................................. 687,500 $ 0.20-$9.00
-----------
-----------
</TABLE>
In May 1996, the Company amended the terms of stock options covering 80,000
shares by changing the vesting period to three years and stock options covering
12,500 shares by changing the vesting period to four years.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which changes the measurement, recognition and
disclosure standards for stock-based compensation. The Company will adopt the
disclosure requirements of SFAS No. 123 in fiscal year 1997, but will elect to
continue to measure compensation cost following present accounting rules.
In December 1996, the Company cancelled all stock options with exercise
prices of $5.50 or more (stock options covering 581,750 shares) and regranted an
equal number of stock options with an exercise price of $5.50, the estimated
fair value at the time of the regrant.
F-9
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTIONS AND WARRANTS: (CONTINUED)
B. WARRANTS: In June 1995, the Company issued to designees of an affiliate
of the parent company, warrants to purchase a total of 34,901 shares of Series B
convertible preferred stock. The warrants were issued in conjunction with the
private placement offering discussed in Note 8. The warrants are exercisable at
a price of $6.875 per share and expire on the earlier of (i) five years from an
Offering of the Company's common stock, or (ii) June 30, 2005. The Company paid
the affiliate approximately $129,000 as its share of placement agent fees.
5. COMMITMENTS:
The Company has entered into various operating leases for furniture,
fixtures, and equipment which expire through the year 2000.
In April 1994, the Company entered into a sale-lease back equipment lease
financing agreement with a leasing company providing for funding of up to an
aggregate of $2.2 million for equipment purchased prior to September 30, 1996.
During the year ended September 30, 1994, the Company recorded and deferred a
loss on the leased assets of $45,370, which it is amortizing over the life of
the lease. The lease is being treated as a capital lease and is guaranteed by
Interneuron.
In November 1994, the Company entered into a one-year lease for laboratory
and administrative space that expired in December 1995. The lease provides for
monthly rental payments of approximately $11,700. The Company has extended the
lease through 1997. The minimum rental commitments under these agreements are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL LEASE
YEARS ENDING SEPTEMBER 30, LEASES OBLIGATION
- ------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
1997............................................................... $ 155,444 $ 291,921
1998............................................................... 11,909 67,081
1999............................................................... 10,331 32,983
2000............................................................... 3,444 --
---------- -------------
Total lease payments............................................... $ 181,128 $ 391,985
----------
----------
Less amount representing interest.................................. (35,124)
-------------
Present value of future lease payments............................. 356,861
Less current portion............................................... (265,155)
-------------
Noncurrent portion of capital lease obligation..................... $ 91,706
-------------
-------------
</TABLE>
Rent expense approximated $140,000, $186,000 and $263,000 during 1994, 1995
and 1996, respectively, and $777,000 for the period May 8, 1992 (date of
inception) through September 30, 1996.
Subsequent to December 31, 1996, the Company entered into a commitment to
purchase $920,000 of equipment.
6. RELATED-PARTY TRANSACTIONS AND OTHER AGREEMENTS:
A. LOANS TO EXECUTIVES: Under employment agreements with certain
executives, the Company advanced loans to assist in purchasing new homes. As of
September 30, 1995, there were loans to three executives for a total of
$359,744. The first loan of $100,796 is interest-free, with $60,796 due upon the
earlier of April 1997 or the termination of the officer's employment. During
fiscal year 1996, $20,000 of this amount was forgiven at the approval of the
Board of Directors. An additional $10,000 of the remaining balance was forgiven
pursuant to a provision of the promissory note agreement. Of the $70,796 balance
remaining at September 30, 1996, $10,000 will be forgiven upon the completion of
a successful Offering of
F-10
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. RELATED-PARTY TRANSACTIONS AND OTHER AGREEMENTS: (CONTINUED)
the Company's common stock. The second loan of $182,500 bears interest at 7% per
annum, with $142,500 due upon the earlier of the sale of the officer's existing
home, June 1997, or termination of the officer's employment. During 1996, an
additional $25,000 was loaned to this executive. Effective May 1996, this
executive's employment with the Company terminated. Pursuant to the executive's
termination agreement with the Company, $120,000 of the balance of $242,850
(including $35,350 in accrued interest) was forgiven. Additionally, the Board of
Directors forgave $26,424 of the amount, and the remaining balance of $96,426
was repaid by the former executive prior to September 30, 1996. Loans totaling
$76,448 were made to a third executive during 1995. Of this amount, $21,448 is
non-interest-bearing and was repaid by the executive in May 1996. Additionally,
$21,295 (including accrued interest) of the remaining balance was forgiven
during fiscal year 1996 upon the achievement of specified milestones. The Board
of Directors also approved the forgiveness of $8,000 of this loan. The $31,292
balance remaining at September 30, 1996, includes accrued interest of
approximately $5,000 at a rate of 9% per annum.
The Company has recorded $141,000 and $42,000 as of September 30, 1995 and
1996, respectively, as a note receivable reserve in anticipation of the expected
forgiveness of certain remaining loan amounts.
B. CONSULTING AGREEMENTS: The Company has entered into various consulting
agreements which range from one to three years and are subject to renewals,
whereby outside consultants provide scientific advice and administrative
services to the Company. Payments to consultants made during 1994, 1995 and
1996, totaled approximately $309,000, $243,000 and $190,000, respectively, and
$1,104,000 for the period May 8, 1992 (date of inception) through September 30,
1996. Of these amounts, approximately $190,000, $177,000 and $112,000
represented payments to certain stockholders in 1994, 1995 and 1996,
respectively, and $819,000 for the period May 8, 1992 (date of inception)
through September 30, 1996.
C. LICENSE AND RESEARCH AGREEMENTS: The Company entered into a license
agreement and a sponsored research agreement with Ohio University in January
1992, certain terms of which were amended in October 1993. The license agreement
grants the Company the exclusive worldwide license to patent and other rights to
yolk sac stem cells and related technologies in exchange for royalties based on
sales. The research agreement requires the Company to fund specified minimum
levels of research and related expenses, as well as any additional costs
approved in advance by the Company.
In addition, the Company agreed to issue 5% of its equity to The Ohio
University Foundation and agreed to preserve this percentage ownership position
until the parent company's total investment in the Company is at least $10.0
million or the date of an Offering by the Company. The $10.0 million investment
was achieved during 1995, thus the percentage ownership position no longer needs
to be preserved. Until an Offering of the Company is consummated, The Ohio
University Foundation was entitled to increase its interest to 6.25% by
purchasing additional equity at a price equal to 50% of the Offering price of
common stock in any such Offering. This provision was canceled in February 1996,
at which time The Ohio University Foundation entered into a stock purchase
agreement with the Company pursuant to which The Ohio University Foundation
purchased 58,333 shares of common stock for $350,000 ($6.00 per share). If, upon
the consummation of an Offering, the Offering price is less than $12.00 per
share, additional shares of common stock will be issued until The Ohio
University Foundation has paid a maximum of 50% of the Offering price.
Additionally, a stock purchase right was issued to The Ohio University
Foundation to purchase 25,000 shares of the common stock at 50% of the Offering
price.
The license agreement also contains certain requirements related to the
management and operation of the Company, including the nomination of two
designees of The Ohio University Foundation to the Board of Directors of the
Company. The Castle Group, Ltd. ("Castle"), which is controlled by a former
director of the Company and a principal stockholder of Interneuron, has
unconditionally guaranteed to Ohio University the performance of the Company's
obligations under the license agreement until the
F-11
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. RELATED-PARTY TRANSACTIONS AND OTHER AGREEMENTS: (CONTINUED)
earlier of five years or an Offering by the Company. Certain employees of Castle
own common stock of the Company.
In April 1993, the Company entered into a second license agreement and a
sponsored research agreement with Ohio University pursuant to which the Company
agreed to fund research relating to the T7T7 gene delivery system, developing an
active cell membrane transport system. The license agreement grants the Company
the exclusive worldwide license to all patent and other rights derived from this
and related technologies in exchange for royalties based on sales.
In February 1994, the Company entered into a license agreement with Albert
Einstein College of Medicine of Yeshiva University ("AECOM"). The agreement
grants the Company the exclusive worldwide license to all patent and other
rights from research done on retroviral vectors by AECOM in exchange for a
license fee and royalties based on sales.
In September 1994, the Company entered into a license agreement with
Wisconsin Alumni Research Foundation ("WARF"). The agreement grants the Company
a nonexclusive license to certain patents developed by WARF in exchange for a
license fee, maintenance fees, and royalties based on sales.
In November 1994, the Company was awarded a competitive grant of $2.0
million through the Advanced Technology Program ("ATP") of the U.S. Department
of Commerce. The funds will be received over a three-year period commencing June
1, 1995. As of September 30, 1995 and 1996, the Company recorded revenue of
$258,532 and $751,064, respectively and a receivable of $193,898 and $175,498,
respectively, related to this grant.
In March 1995, the Company entered into a license and collaboration
agreement with Chiron Corporation ("Chiron"). As required by the agreement, an
initial cash payment of $2.5 million was paid by Chiron to the Company in April
1995 as a license fee and reimbursement of past research and development
expenses. In addition, the Company reimbursed Chiron the start-up manufacturing
costs incurred related to this agreement of $750,000 through September 30, 1996.
Chiron paid $500,000 to the Company in January 1996 for continued research
funding. The agreement also calls for future payments contingent upon the
achievement of certain milestones.
In May 1995, the Company entered into a sponsored research and license
agreement with Novo Nordisk through its subsidiary, ZymoGenetics, Inc. The
agreement calls for research and license fees to be paid to the Company,
contingent upon certain conditions and the meeting of certain milestones.
Additionally, the Company has entered into various sponsored research
agreements with varying terms up to two years in length. The total sponsored
research expense was $890,000, $601,103 and $544,079 for 1994, 1995 and 1996,
respectively, and $3,234,759 for the period from May 8, 1992 (date of inception)
through September 30, 1996. Payments to Ohio University for sponsored research
totaled $245,888, $398,064 and $108,624, for 1994, 1995 and 1996, respectively,
and $1,389,756 for the period May 8, 1992 (date of inception) through September
30, 1996. In addition, at September 30, 1996, the Company had commitments to
fund additional sponsored research of approximately $420,000.
7. COMMON STOCK:
The Company was authorized to issue two classes of shares of common stock,
designated Class A and Class B. Shares of the Company's Class B common stock
were convertible, at any time at the option of the holder, into shares of Class
A common stock. The conversion ratio was subject to adjustment based on several
factors, including the issuance of additional Class A shares.
Holders of Class B shares were entitled to pro rata dividend, liquidation,
and voting rights based on the number of Class A shares into which such Class B
shares were convertible. Class B shares were automatically converted to Class A
shares upon the receipt by the Company of capital contributions of
F-12
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK: (CONTINUED)
$10.0 million in aggregate amount from the date of incorporation. When this was
achieved in 1995, all Class B shares were converted into a total of 357,500
Class A common shares and the Class B shares were removed from the Company's
authorized shares.
8. PREFERRED STOCK:
In December 1994, the Company's Board of Directors approved the
authorization of 2,120,000 shares of Series A and 880,000 shares of Series B
preferred stock. These preferred shares are convertible into shares of Class A
common stock and have preferential rights in terms of dividends and liquidation
over common stock. Shares of preferred stock have voting rights equal to the
number of shares of their common stock equivalent.
Shares of Series A preferred stock are convertible, at any time at the
option of the holder, into shares of Class A common stock. The initial
conversion ratio is based on a Series A price of $6.25, subject to adjustment
based on several factors. Series A preferred shares are automatically converted
upon an Offering.
Through July 7, 1995, the Company has issued 349,000 shares of Series B
preferred stock in connection with private placements. These private placements
consisted of the sale of units, each unit consisting of shares of preferred
stock of the Company, shares of preferred stock of another subsidiary of
Interneuron, Transcell Technologies, Inc., and a put protection right from
Interneuron. The put protection right provides that on the third anniversary of
the final closing date of the private placement, the owner has the right to sell
to Interneuron a percentage of the preferred stock of the Company that is deemed
to be illiquid, as defined in the agreement. The Company received approximately
$1,560,000, net of offering costs, as its share of the proceeds from the private
placement. Shares of Series B preferred stock are convertible, at any time at
the option of the holder, into shares of Class A common stock. The initial
conversion ratio is based on a Series B price of $6.25, subject to adjustment
based on several factors. Series B preferred shares are automatically converted
upon an Offering.
Shares of authorized common stock have been reserved for the exercise of all
convertible preferred stock outstanding.
9. NOTE PAYABLE TO THE PARENT COMPANY:
The note payable to the parent company, Interneuron, bore interest at a rate
of 1% over the prime lending rate (7 3/4% prime plus 1% at September 30, 1994)
and was payable on demand. Periodic advances were made available under this note
at the discretion of Interneuron. In January 1995, the outstanding balance on
the note payable--parent of $11,495,165 and accrued interest of $1,132,935 was
converted into 2,020,496 shares of Series A preferred stock.
In March 1996, the Company entered into a promissory note with Interneuron,
bearing interest at a rate of 1% over the prime lending rate. The original
amount of this note was $525,473 and has increased to $3,443,050 as of September
30, 1996 which includes accrued interest of $80,680. The note is due on the
earlier of March 31, 2001, or the closing of an Offering.
Since the inception of the Company, Interneuron has paid for certain Company
expenses which were reimbursed by the Company at cost.
10. CONVERTIBLE DEBENTURE--PARENT:
In March 1995, the Company entered into a convertible debenture agreement
with Interneuron, at a rate of 1% over the prime lending rate. The prime lending
rate was 8.75% and 8.25% as of September 30, 1995 and 1996, respectively.
Principal and interest are due at the earlier of five years from the final
closing date or upon an Offering as defined in the agreement. The debenture is
convertible, at any time at the
F-13
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
10. CONVERTIBLE DEBENTURE--PARENT: (CONTINUED)
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 option of Interneuron, into
Progenitor Preferred Stock at a conversion price equal to the lessor of (i)
$6.25 per share or (ii) such lesser price per share at which the Company shall
issue any shares of any series of preferred stock of the Company, provided that
such conversion shall be in an amount representing not less than 10% of the
principal balance then outstanding.
F-14
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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 (Note 8). This relinquishment made by Interneuron may be deemed
taxable income to the Company.
In July 1997, the Company authorized the issuance of up to 1,000,000 shares
of Series D Preferred Stock. Series D Preferred Stock is entitled to a
cumulative dividend of 7% per annum, payable quarterly in cash or common stock,
has no voting rights and is convertible into common shares based upon certain
provisions.
In July 1997, the Company entered into an agreement with Interneuron to
convert the outstanding balance of the Interneuron Bridge Loan (Note 13) into
Series D Preferred Stock upon closing of an Offering. The Interneuron Bridge
Loan converts to Series D Preferred Stock at a price equal to 117.5% of the
Offering price allocated to common shares. Interneuron may elect to convert the
Series D Preferred Stock into a like number of common shares at any time.
However, after 24 months, the Series D Preferred Stock will automatically
convert into common stock if the market value of the Company's common stock
equals or exceeds 150% of the Offering price allocated to common shares.
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,
-----------------------------
1995 1996
------------- -------------- MARCH 31,
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
INCEPTION
(OCTOBER 9,
YEARS ENDED DECEMBER 31, 1992) TO
---------------------------------- DECEMBER 31,
1994 1995 1996 1996
---------- ---------- ---------- ------------ THREE MONTHS ENDED MARCH PERIOD FROM
31, INCEPTION
------------------------ (OCTOBER 9,
1996 1997 1992) TO
----------- ----------- MARCH 31,
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).................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances at 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)
------------- ------------- -------------
Balances at 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
INCEPTION
(OCTOBER 9,
YEARS ENDED DECEMBER 31, 1992) TO
---------------------------------- DECEMBER 31,
1994 1995 1996 1996
---------- ---------- ---------- ------------ THREE MONTHS ENDED MARCH PERIOD FROM
31, INCEPTION
------------------------ (OCTOBER 9,
1996 1997 1992) TO
----------- ----------- MARCH 31,
1997
(UNAUDITED) (UNAUDITED) -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING
ACTIVITIES
Net loss.......................... $(2,834,572) $(5,197,311) $(7,208,039) ($16,609,368) ($1,427,401) ($2,027,583) $(18,636,951)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization... 208,863 377,649 496,564 1,148,992 107,089 149,246 1,298,238
Stock to be issued for
services...................... -- -- 7,783 7,783 -- -- 7,783
Stock issued to employees....... -- -- 9,000 9,000 -- -- 9,000
Interest expense on convertible
notes payable................. -- -- -- -- -- 8,274 8,274
Changes in operating assets and
liabilities:
Notes receivable from
officers.................... (654,376) 302,731 27,039 (324,606) (3,026) 174,606 (150,000)
Other current assets.......... (152,724) 88,058 (125,956) (241,416) (29,373) 176,960 (64,456)
Other assets.................. (15,600) 3,435 10,000 (12,165) -- (84,726) (96,891)
Accounts payable and accrued
liabilities................. 143,213 305,338 97,301 670,683 113,624 107,193 777,876
---------- ---------- ---------- ------------ ----------- ----------- -----------
Net cash used in operating
activities...................... (3,305,196) (4,120,100) (6,686,308) (15,351,097) (1,239,087) (1,496,030) (16,847,127)
---------- ---------- ---------- ------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of available-for-sale
securities...................... (4,589,279) (4,871,197) -- (10,149,989) -- -- (10,149,989)
Sales of available-for-sale
securities...................... 689,513 489,967 -- 1,179,480 -- -- 1,179,480
Maturities of available-for-sale
securities...................... 495,163 7,988,670 486,676 8,970,509 486,676 -- 8,970,509
Capital expenditures.............. (484,212) (674,247) (662,284) (2,465,369) (95,282) (9,182) (2,474,551)
---------- ---------- ---------- ------------ ----------- ----------- -----------
Net cash (used in) provided by
investing activities............ (3,888,815) 2,933,193 (175,608) (2,465,369) 391,394 (9,182) (2,474,551)
---------- ---------- ---------- ------------ ----------- ----------- -----------
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES
Proceeds from issuance of
preferred stock................. 8,019,999 -- 4,526,319 15,561,318 -- -- 15,561,318
Proceeds from issuance of common
stock........................... 800 13,171 190 33,861 (150) 1,852 35,713
Proceeds from convertible notes
payable......................... -- -- 1,500,000 1,500,000 -- 1,300,000 2,800,000
Principal payments of equipment
financing obligations........... (118,657) (236,236) (372,481) (749,542) (85,122) (111,243) (860,785)
Proceeds from equipment
financings...................... 435,520 854,163 200,525 1,909,688 -- -- 1,909,688
---------- ---------- ---------- ------------ ----------- ----------- -----------
Net cash provided by financing
activities...................... 8,337,662 631,098 5,854,553 18,255,325 (85,272) 1,190,609 19,445,934
---------- ---------- ---------- ------------ ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents............ 1,143,651 (555,809) (1,007,363) 438,859 (932,965) (314,603) 124,256
Cash and cash equivalents at
beginning of period............. 858,380 2,002,031 1,446,222 -- 1,446,222 438,859 --
---------- ---------- ---------- ------------ ----------- ----------- -----------
Cash and cash equivalents at end
of period....................... $2,002,031 $1,446,222 $ 438,859 $ 438,859 $ 513,257 $ 124,256 $ 124,256
---------- ---------- ---------- ------------ ----------- ----------- -----------
---------- ---------- ---------- ------------ ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest............ $ 95,033 $ 155,640 $ 180,411 $ 451,651 $ 48,864 $ 40,432 $ 492,083
---------- ---------- ---------- ------------ ----------- ----------- -----------
---------- ---------- ---------- ------------ ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-20
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
1. BASIS OF PRESENTATION
ORGANIZATION AND BUSINESS
Mercator Genetics, Inc. (the "Company" or "Mercator"), was incorporated in
the State of Delaware on October 9, 1992 to engage in the discovery and
development of therapeutics and diagnostics for genetic-based diseases through
the understanding of the genes involved in these diseases. The Company's
activities since incorporation have primarily consisted of establishing its
offices and research facilities, recruiting personnel, conducting research and
development, performing business and financial planning and raising capital.
Accordingly, the Company is considered to be in the development stage, and
expects to incur increasing losses and require additional financial resources to
achieve commercialization of its products.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. At December 31, 1996, cumulative
operating losses since inception amount to $16,609,368 and management
anticipates incurring additional losses for the next several years. The Company
is working on several long-term development projects which involve experimental
and unproven technology, which may require many years and substantial
expenditures to complete, and which may be unsuccessful. Therefore, the
Company's ability to continue as a going concern depends on its ability to raise
additional financing to meet its business plan objectives and, ultimately, to
fund its operations from revenues. Management believes that it will be able to
obtain additional funds through public or private equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources. If adequate funds are not available, the Company may be required to
reduce its level of spending or eliminate one or more of its research or
development programs or obtain funds through arrangements with corporate
partners or others which may require the Company to relinquish certain rights to
its technologies or product candidates.
From time to time, the Company may enter into licensing agreements with
third parties. To the extent the Company commercializes products using the
technology covered by the licenses, the Company may be required to pay royalties
on the revenue from these products.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from these estimates.
INTERIM FINANCIAL INFORMATION
The financial statements at March 31, 1997 and for the three months ended
March 31, 1996 and 1997 are unaudited but include all adjustments (consisting
only of normal recurring adjustments) which the Company considers necessary for
a fair presentation of the financial position at such date and the operating
results and cash flows for those periods. Results for interim periods are not
necessarily indicative of results for the entire year.
F-21
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents; investments with
maturities between three and twelve months are considered to be short-term
investments.
The Company invests its excess cash primarily in deposits with banks and
short-term securities. These securities consist of money market instruments,
U.S. corporate securities and U.S. Treasury bills that mature or are redeemable
within 180 days and, therefore, bear minimal risk.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such determination as of each balance sheet
date. Through December 31, 1996, the Company has classified its entire
investment portfolio as available-for-sale. Available-for-sale securities are
carried at amortized cost which approximates fair value at December 31, 1995 and
1996. The estimated fair value amounts have been determined by the Company using
available market information and commonly used valuation methodologies.
Management exercises judgment in interpreting market data to develop the
estimates of fair value.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary are included in interest income or expense. The cost of
securities sold is based on the specific identification method. Interest and
dividends are included in interest income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally four years. Leasehold improvements are amortized over the
lesser of the lease term or the estimated useful lives of the related assets,
whichever is shorter.
REVENUE RECOGNITION
The Company recognizes revenues from research contracts as earned based upon
the performance requirements of the contracts.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). In accordance with the provisions of SFAS 123, the
Company measures stock-based compensation expense using the intrinsic-value
method as prescribed by Accounting Principle Board Opinion No. 25 and related
interpretations and, accordingly, recognizes no compensation expense for stock
option grants to employees and directors with an exercise price equal to the
fair-market value of the shares at the date of grant. Note 7 contains a summary
of the pro forma impact to the reported net loss for 1996 and 1995 on the basis
that the Company had elected to recognize compensation expense based on the
fair-value method as described in SFAS 123. There was no effect of adopting SFAS
123 on the Company's financial position or results of operations.
F-22
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PER SHARE DATA
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares from stock
options, convertible preferred stock, convertible notes and warrants are
excluded from the computation as their effect is antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1994 and 1995
financial statements to conform with the fiscal 1996 presentation.
3. FINANCIAL INSTRUMENTS
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the amortized cost of available-for-sale
securities, which approximates fair value:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
------------ -----------
<S> <C> <C>
U.S. Treasury securities........................................... $ 486,676 $ --
Repurchase agreements.............................................. 132,000 480,000
U.S. corporate securities.......................................... 1,161,026 90,000
------------ -----------
Total.............................................................. $ 1,779,702 $ 570,000
------------ -----------
------------ -----------
Above amounts are included in the following:
Cash and cash equivalents........................................ $ 1,293,026 $ 570,000
Short-term investments........................................... 486,676 --
------------ -----------
Total.............................................................. $ 1,779,702 $ 570,000
------------ -----------
------------ -----------
Cash and cash equivalents:
Available-for-sale securities.................................... $ 1,293,026 $ 570,000
Cash and bank accounts........................................... 153,196 (131,141)
------------ -----------
Total cash and cash equivalents.................................... $ 1,446,222 $ 438,859
------------ -----------
------------ -----------
</TABLE>
As of December 31, 1996, the average duration of the portfolio is less than one
year and no individual contractual maturity exceeds one year. No material gains
or losses have been realized on the sale of available-for-sale securities.
EQUIPMENT FINANCING OBLIGATIONS
In August 1993, the Company entered into a $1,000,000 equipment lease line
of credit. In October 1994, the Company entered into a $2,000,000 equipment loan
agreement. The equipment lease line of credit and the equipment loan were
terminated in May 1996.
Included in property and equipment are assets with a cost of approximately
$1,666,000 and $1,851,000 at December 31, 1995 and 1996, respectively, acquired
pursuant to equipment financing obligations. These
F-23
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
3. FINANCIAL INSTRUMENTS (CONTINUED)
obligations have interest rates ranging from 14% to 18%. The carrying value of
the obligations approximates fair value based on a discounted cash flow analysis
using the Company's incremental borrowing rate for similar obligations.
Accumulated amortization of assets acquired pursuant to these obligations was
approximately $634,000 and $1,065,000 at December 31, 1995 and 1996,
respectively. Assets acquired under these arrangements secure the related
obligations.
At December 31, 1996, the Company's aggregate future minimum payments under
such obligations, including 10% to 20% buyout options at maturity are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 609,210
1998............................................................................ 450,714
1999............................................................................ 312,829
2000............................................................................ 11,372
2001............................................................................ 5,555
------------
Total minimum payments.......................................................... 1,389,680
Less amount representing interest............................................... (229,534)
------------
Present value of minimum payments............................................... 1,160,146
Less current portion............................................................ (474,272)
------------
$ 685,874
------------
------------
</TABLE>
NOTES RECEIVABLE FROM OFFICERS
In November 1994, the Company loaned $650,000 to an officer of the Company.
The related note bears interest at 7.45% per annum and is secured by real
property. At December 31, 1996, subsequent to the officer's separation from the
Company, the remaining principal balance of the note of $162,500 and $12,106 of
related accrued interest was paid in January 1997.
In September 1995, the Company loaned $150,000 to an officer of the Company.
The related note bears interest at the lesser of 28.2% of the capital gain upon
the sale of the secured property or the Fannie Mae Rate, compounded annually and
so may be zero. As of December 31, 1996, no interest has been accrued on the
loan. The balance is due no later than the first anniversary of the officer's
termination from the Company.
CONVERTIBLE NOTES PAYABLE
In October and December, the Company entered into a bridge financing
agreement with its current investor group whereby the Company issued convertible
demand notes in the aggregate amount of $1,500,000. The intent of the parties
was that this financing was to bridge the Company to either a permanent equity
round of financing or a significant merger transaction with another company. In
lieu of a stated interest rate, the agreement provides that these notes are
convertible at the option of the holder at the time of the next equity
transaction at a price that reflects a discount from the indicated market price
at that time. The time frame for the next equity financing is uncertain and, as
such, the note conversion date is indeterminable. Incremental interest expense
inherent in the notes' discounted conversion feature, which is currently
deferred on the balance sheet, will be charged to operations when the notes
become
F-24
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
3. FINANCIAL INSTRUMENTS (CONTINUED)
convertible at the discounted rate. In connection with the merger transaction
discussed in Note 9, the investor group agreed to modify the bridge financing
agreement to eliminate their right to a discount on conversion in connection
with the proposed transaction.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
------------ -------------
<S> <C> <C>
Laboratory equipment............................................. $ 1,401,228 $ 1,870,155
Office equipment, furniture and fixtures......................... 335,319 509,710
Leasehold improvements........................................... 66,538 85,504
------------ -------------
1,803,085 2,465,369
Less accumulated depreciation and amortization................... (652,428) (1,148,992)
------------ -------------
Property and equipment, net...................................... $ 1,150,657 $ 1,316,377
------------ -------------
------------ -------------
</TABLE>
5. FACILITY LEASE AND OTHER COMMITMENTS
In April 1995, the Company extended through September 1998 its facility
operating lease which originally expired in June 1995. At December 31, 1996,
future noncancelable minimum payments under the operating lease are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------------------------
<S> <C>
1997......................................................................... $ 214,800
1998......................................................................... 161,100
----------
Total minimum payments required................................................ $ 375,900
----------
----------
</TABLE>
The Company has the option to extend the lease for two years and to expand
the facilities leased for a 12-month term ending on September 30, 1999.
Rent expense was approximately $126,000, $135,000, $191,000 and $539,000 for
the years ended December 31, 1994, 1995 and 1996 and for the period from
inception (October 9, 1992) to December 31, 1996, respectively.
The Company sponsors research programs and blood sample collection services
at universities and other research institutions from time to time. The amounts
incurred on the contracted research programs for the years ended December 31,
1995 and 1996, and for the period from inception (October 3, 1992) to December
31, 1996 were approximately $60,000, $1,069,000 and $1,129,000, respectively
(none in 1994). At December 31, 1996, the Company has committed to fund
approximately $887,000 in 1997.
6. RESEARCH COLLABORATION AND LICENSE AGREEMENT
During fiscal 1995, the Company commenced efforts under a research
collaboration and license agreement with Agene Research Institute ("Agene"), in
which Agene agreed to fund certain research and development efforts in the area
of aging in an amount of $1 million over a two-year period through April 1997.
Revenue recognized under the agreement was $375,000 and $500,000 for the years
ended December 31, 1995 and 1996, respectively (none in 1994). Costs incurred
under this agreement of approximately $170,000 and $298,000 for the years ended
December 31, 1995 and 1996, respectively (none in 1994) are included in research
and development expenses. On December 27, 1996, the agreement and associated
research was terminated by mutual agreement between the two parties.
F-25
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
7. REDEEMABLE PREFERRED AND COMMON STOCK
REDEEMABLE PREFERRED STOCK
On April 3, 1996, the Company's stockholders' approved a 5.2-for-one split
of Series B preferred stock. On May 30, 1996, the Company's board of directors
approved a one-for-10 reverse stock split of the outstanding shares of the
Company's common and preferred stock. The share and per share amounts included
in these financial statements are presented on a post-split basis and have been
adjusted to reflect these stock splits.
Series A, B, C and D preferred stockholders are entitled to noncumulative
dividends at an annual rate of $0.70, $0.18, $0.07 and $0.09 per share,
respectively. Dividends will be paid only when declared by the board of
directors out of legally available funds. No dividends have been declared as of
December 31, 1996.
At any time after October 31, 2001 for Series A, B, C and D preferred stock,
upon receipt of the consent of holders of at least 50% of the outstanding shares
of the series of preferred stock, the Company is required to redeem all shares
of the series of preferred stock at $10.00, $2.50, $1.00 and $1.34 per share for
Series A, B, C and D, respectively, plus all declared but unpaid dividends. If
the Company has insufficient funds to redeem all such shares, redemption using
all funds legally available shall be done pro rata among such series of
preferred stockholders based on the number of such shares held at that date.
Series D preferred stockholders are entitled to receive, upon liquidation, a
distribution of $1.34 per share (subject to adjustment for a recapitalization)
plus all declared but unpaid dividends. After payment of the full liquidation
preference of the Series D stockholders, the Series C preferred stockholders are
entitled to receive, upon liquidation, a distribution of $1.00 per share
(subject to adjustment for a recapitalization) plus all declared but unpaid
dividends.
After payment of the full liquidation preference of the Series C and D
stockholders, the Series A and B preferred stockholders are entitled to receive,
upon liquidation, a distribution of $10.00 and $2.50 per share, respectively
(subject to adjustment for a recapitalization) plus all declared but unpaid
dividends. Thereafter, the remaining assets and funds, if any, shall be
distributed among the Series A, B, C and D preferred and common stockholders,
pro rata on an as-converted basis. If, upon liquidation, the assets and funds
distributed among the Series A and B preferred stockholders are insufficient to
permit the entitled payment, the entire assets and funds of the Company legally
available for distribution shall be distributed among these stockholders in
proportion to the relative liquidation rights of each such series.
Each share of Series A, B, C and D preferred stock is, at the option of the
holder, convertible into shares of common stock on a one-for-one basis, subject
to certain adjustments for dilution, if any, resulting from future stock
issuances. Upon the approval of the holders of at least 66 2/3% of the
outstanding shares of each series of preferred stock, the preferred shares will
automatically convert into common stock. Additionally, the preferred shares
automatically convert into common stock concurrent with the closing of an
underwritten public offering of common stock under the Securities Act of 1933 in
which the Company receives at least $10,000,000 in gross proceeds and the price
per share is at least $4.00 (subject to adjustment for a recapitalization or
certain other stock adjustments).
The Series A, B, C and D preferred stockholders have voting rights equal to
the common shares they would own upon conversion.
F-26
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
7. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
COMMON STOCK
The Company has issued 174,056 common shares to the founders, advisors and
employees of the Company, of which certain shares are subject to repurchase
rights which generally expire ratably over four years from the date of issuance.
At December 31, 1996, there were 4,812 shares subject to repurchase.
Included in the common shares outstanding at December 31, 1996 are 84,000
shares of founders common stock. Under a co-sale agreement, which was amended in
April 1996, if any founder proposes to sell or transfer any shares of founders
common stock, holders of Series A, B, C and D redeemable convertible preferred
stock shall have the right to participate as a seller in such sale on the same
terms and conditions offered to the founder.
At December 31, 1996, the Company has reserved a total of 12,083,555 shares
of common stock: 195,500 for issuance under the 1993 Stock Option Plan,
3,787,592 for issuance under the 1996 Stock Option Plan, 319,350, 3,254,796 and
4,526,317 for issuance upon conversion of the Series A, B and C preferred stock
and warrants, respectively.
STOCK OPTION PLANS
The 1993 Stock Option Plan was adopted in July 1993, with subsequent
amendments in November 1993 and December 1994, and provides for the issuance of
options for up to 208,000 shares of common stock to employees, consultants and
directors.
During 1996, the Company's board of directors approved the adoption of the
1996 Stock Option Plan with terms and conditions the same as those of the 1993
Stock Option Plan (collectively, the "Plans"). The 1996 Stock Option Plan
provides for the issuance of options for up to 3,792,000 shares of common stock
to employees, consultants and directors.
Stock options granted under the Plans may be either incentive stock options
or nonqualified stock options. Incentive stock options may be granted to
employees with exercise prices of no less than the fair value and nonqualified
options may be granted to employees, directors or consultants at exercise prices
of no less than 85% of the fair value of the common stock on the grant date, as
determined by the board of directors. If, at the time the Company grants an
option, the optionee directly or by attribution owns stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
the option price shall be at least 110% of the fair value and shall not be
exercisable more than five years after the date of grant. The options expire no
more than 10 years after the date of grant or earlier if employment or
relationship as director or consultant is terminated. The board of directors
shall determine the times during the term when the options may be exercised and
the number of shares for which an option may be granted. Options may be granted
with different vesting terms from time to time but will provide for vesting of
at least 20% of the total number of shares subject to the option per year. The
options may include provisions to exercise the option prior to full vesting. Any
unvested shares so purchased shall be subject to repurchase by the Company at
the original exercise price of the option. Such repurchase rights shall lapse at
a minimum rate of 20% per year over five years from the date the option was
granted.
On August 9, 1996, the Company granted options under both the 1993 and 1996
plans to purchase 1,406,739 shares of the Company's common stock to founders,
advisors and employees. These founders, advisors and employees held options
granted prior to the issuance of the Company's Series C preferred
F-27
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
7. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
stock. The new options vest over the remaining vesting period of the original
options. Generally, options vest over a four-year period.
A summary of 1993 Stock Option Plan activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
-------------------------------------------------------
WEIGHTED AGGREGATE
NUMBER OF EXERCISE AVERAGE PURCHASE
SHARES PRICE EXERCISE PRICE PRICE
----------- ------------- --------------- ----------
<S> <C> <C> <C> <C>
Options granted................................ 14,642 $0.50-$1.00 $ $ 10,071
Options canceled............................... (2,200) 0.50- 1.00 (1,200)
----------- ----------
Balance at December 31, 1993..................... 12,442 0.50- 1.00 8,871
Options exercised.............................. (1,000) 0.50- 1.00 (875)
Options granted................................ 116,369 1.00- 1.30 149,735
Options canceled............................... (150) 0.50 (75)
----------- ----------
Balance at December 31, 1994..................... 127,661 0.50- 1.30 1.23 157,656
Options exercised.............................. (10,954) 0.50- 1.30 1.20 (13,171)
Options granted................................ 75,050 1.30 1.30 97,565
Options canceled............................... (70,605) 0.50- 1.30 1.30 (91,718)
----------- ----------
Balance at December 31, 1995..................... 121,152 0.50- 1.30 1.24 150,332
Options exercised.............................. (546) 0.15- 1.30 0.29 (160)
Options granted................................ 19,150 0.15- 1.30 0.68 12,993
Options canceled............................... (57,069) 0.15- 1.30 1.07 (61,237)
----------- ----------
Balance at December 31, 1996..................... 82,687 0.50-1.30 1.23 101,928
----------- ----------
----------- ----------
</TABLE>
A summary of 1996 Stock Option Plan activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
------------------------------------------------------------
WEIGHTED AGGREGATE
NUMBER OF AVERAGE PURCHASE
SHARES EXERCISE PRICE EXERCISE PRICE PRICE
---------- --------------- ------------------- ----------
<S> <C> <C> <C> <C>
Options granted........................... 2,726,495 $ 0.15 $ 0.15 $ 408,974
Options exercised......................... (4,408) 0.15 0.15 (661)
Options canceled.......................... (13,605) 0.15 0.15 (2,041)
---------- ----------
Balance at December 31, 1996................ 2,708,482 0.15 0.15 406,272
---------- ----------
---------- ----------
</TABLE>
At December 31, 1996, outstanding options for 1,343,517 shares were
exercisable at a weighted average price of $0.18. Shares of common stock
available for future grants under the 1993 and 1996 Stock Option Plans are
112,813 and 1,079,110, respectively. The weighted average remaining contractual
life of options outstanding at December 31, 1996 is 9.58 years.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, computed as if the Company had accounted for its employee stock
options granted or otherwise modified subsequent to December 31, 1994 under the
fair-value-based accounting method of that Statement. The value for these
F-28
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
7. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
options was estimated at the date of grant using the minimum-value method with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Expected dividend yield..................................................... 0.00% 0.00%
Risk-free interest rate..................................................... 6.15% 6.29%
Expected life............................................................... 5.36 years 3.96 years
</TABLE>
The weighted average fair value of options granted in 1995 and 1996 was
$0.35 and $0.03 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
effect of applying SFAS 123 was not material to the Company's reported net loss
or loss per share in 1995 or 1996. Because Statement 123 is applicable only to
options granted subsequent to December 31, 1994, its pro forma effect will not
be fully reflected until 1999.
WARRANTS
In August 1993, in connection with a lease line, the Company issued a
warrant that entitles the holder to purchase 17,850 shares of Series A preferred
stock at an exercise price of $2.80 per share on or before August 31, 2003. In
October 1994, in connection with the equipment loan agreement, the Company
issued a warrant that entitles the holder to purchase 46,800 shares of Series B
preferred stock at an exercise price of $2.50 per share on or before October 28,
2004. The warrants are subject to acceleration upon the occurrence of certain
events. Both warrants were outstanding at December 31, 1996. The Company has
reserved 17,850 shares of Series A preferred stock and 46,800 shares of Series B
preferred stock for issuance under the stock warrants.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes are as
follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................ $ 600,000 $ 1,500,000
Research credits........................................................ 400,000 600,000
Capitalized research and development costs.............................. 2,900,000 4,700,000
------------- -------------
3,900,000 6,800,000
Valuation allowance....................................................... (3,900,000) (6,800,000)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets at December 31,
1995 and 1996 has been established to reflect these uncertainties. The change in
the
F-29
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
8. INCOME TAXES (CONTINUED)
valuation allowance was a net increase of $1,200,000, $2,200,000 and $2,900,000
for the years ended 1994, 1995 and 1996, respectively.
As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $3,800,000. The net operating loss carryforwards
will expire at various dates through 2011, if not utilized. Utilization of the
net operating losses may be subject to a substantial annual limitation due to
the "change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
net operating losses before utilization.
9. SUBSEQUENT EVENTS
On February 14, 1997, the Company entered into an agreement and plan of
reorganization with Progenitor, Inc. ("Progenitor") whereby Progenitor may
purchase the Company through July 31, 1997. The acquisition will occur
simultaneously with the completion of Progenitor's initial public offering
("IPO"). If the IPO is not completed, Progenitor is under no obligation to
purchase Mercator. To support Mercator's research prior to the effective date,
Mercator will receive up to $6.6 million in a convertible bridge promissory note
from Progenitor of which $1.3 million (unaudited) had been received through
March 31, 1997. The bridge note will bear interest at a fixed rate of 10% per
annum and is payable on January 15, 1999 subject to earlier repayment on a
change of control of the Company. The bridge note is convertible into Mercator's
Series D preferred stock at the option of Progenitor under certain circumstances
at a price of $1.34 per share. In order to provide funding to Progenitor for the
bridge financing, Interneuron Pharmaceuticals, Inc. has agreed to provide
Progenitor a line of credit of up to an aggregate maximum amount of $6.6
million.
If the acquisition becomes effective as contemplated, the principal amount
of Mercator's convertible notes payable as of December 31, 1996 of $1,500,000
will convert into Mercator Series D preferred stock at a price of $1.34 per
share, and Mercator's preferred and common stockholders together with Mercator's
outstanding options and warrant holders will receive approximately $22 million
of Progenitor common stock or options or warrants to purchase Progenitor common
stock (valued at a price per share equal to the price paid by the public in
Progenitor's IPO). Alternatively, Progenitor has the option to consummate the
acquisition through the payment of the purchase price in cash, or prior to the
IPO date, in unregistered shares of Progenitor's capital stock or in shares of
another public company on terms to be agreed upon between the parties. The
replacement options and warrants to purchase Progenitor common stock will be
subject to similar terms and conditions as were applicable to the original
options and warrants. The $22 million purchase price will be allocated among the
stockholders and outstanding option and warrant holders as follows: 15.9% to the
common stockholders and holders of outstanding options; 14.75%, 39.07%, 23.46%
and 6.82% to preferred Series A, B, C, and D stock and warrant holders,
respectively. Based upon the number of outstanding shares, options and warrants
as of December 31, 1996, and assuming the conversion of the convertible notes
into 1,119,399 shares of Series D preferred stock, the consideration received
per share by the stock, option and warrant holders would be as follows:
<TABLE>
<S> <C>
Common stock........................................................ $ 1.16
Series A preferred stock............................................ $ 10.16
Series B preferred stock............................................ $ 2.64
Series C preferred stock............................................ $ 1.14
Series D preferred stock............................................ $ 1.34
</TABLE>
F-30
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 AND PERTAINING
TO THE THREE MONTHS ENDED MARCH 31, 1996 IS UNAUDITED)
9. SUBSEQUENT EVENTS (CONTINUED)
If the purchase price is reduced due to breaches of representations,
warranties or covenants or due to IPO and reorganization expenses exceeding
limits specified in the agreement, the Series D stockholders will still receive
$1.34 per share, the common stock and option holders will receive a minimum of
10% of the total purchase price or $0.60 per share based on an assumed total
purchase price of $18 million (the actual percentage will be based on a
calculation specified in the agreement) and the remainder will be allocated
among the Series A, B, and C stock and warrant holders pro rata based upon the
original investment amount for such series.
In May 1997, the Company exercised its option to extend the lease of its
existing facility for a 12-month term ending September 30, 1999 for $17,900 per
month. In addition, the Company also exercised its option to expand its facility
for a 23 month term starting November 1, 1997 to September 30, 1999 for
approximately $8,500 per month.
F-31
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
This AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (this
"Agreement"), dated as of February 14, 1997, is made by and among Progenitor,
Inc., a Delaware corporation ("Progenitor"), MG Merger Sub Corp., a Delaware
corporation and wholly-owned subsidiary of Progenitor ("Reorganization Sub"),
and Mercator Genetics, Inc., a Delaware corporation ("MGI"). An index of certain
of the terms defined herein is contained in SECTION 11.1 hereof.
The Board of Directors of each of Progenitor and MGI has determined that the
acquisition of MGI by Progenitor is in the best interest of such company and its
stockholders and presents an opportunity for the combined company to achieve
long-term strategic and financial benefits, and accordingly each of Progenitor
and MGI desires to enter into this Agreement and the Related Agreements (as
defined below) to which it is to be a party and to effect the Reorganization (as
defined below) upon the terms and subject to the conditions set forth herein,
including delivery on the date hereof of the Pre-Closing Related Agreements (as
defined below) and delivery prior to consummation of the Reorganization of all
Closing Related Agreements (as defined below) to be entered into by parties
other than Progenitor and MGI.
Unless the purchase option provided by SECTION 3.13(a) hereof is elected,
the parties hereto intend that the merger contemplated herein shall qualify as a
reorganization within the meaning of Section 368 of the Internal Revenue Code of
1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE REORGANIZATION
1.1. THE REORGANIZATION. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in SECTION 1.2 hereof),
Reorganization Sub shall be merged with and into MGI, MGI shall be the surviving
corporation (the "Surviving Corporation") and the separate existence of
Reorganization Sub shall thereupon cease (the "Reorganization"). The
Reorganization shall have the effects set forth in Section 259 of the General
Corporation Law of the State of Delaware (the "DGCL").
1.2. EFFECTIVE TIME OF THE REORGANIZATION. The Reorganization shall become
effective when a properly executed Certificate of Merger is duly filed with the
Secretary of State of the State of Delaware, which filing shall be made as soon
as practicable after the closing of the transactions contemplated by this
Agreement in accordance with SECTION 3.8 hereof upon satisfaction or waiver of
the conditions set forth in ARTICLE VIII. When used in this Agreement, the term
"Effective Time" shall mean the date and time at which such Certificate of
Merger has been so filed.
ARTICLE II
THE SURVIVING CORPORATION
2.1. CERTIFICATE OF INCORPORATION. Effective at the Effective Time, the
Certificate of Incorporation of MGI shall be amended to the maximum extent
permissible in order to conform to the terms of the Certificate of Incorporation
of Reorganization Sub (other than with respect to the name of the Surviving
Corporation) and such amended Certificate of Incorporation shall be the
Certificate of Incorporation of the Surviving Corporation, until duly amended in
accordance with the terms thereof and the DGCL. The Certificate of Incorporation
of Reorganization Sub complies with, and any amendment thereto shall comply
with, the terms of SECTION 7.13 hereof.
A-1
<PAGE>
2.2. BYLAWS. The Bylaws of Reorganization Sub as in effect at the
Effective Time shall be the Bylaws of the Surviving Corporation, until duly
amended in accordance with the terms thereof and the DGCL. Such Bylaws comply
with, and any amendment thereto shall comply with, the terms of SECTION 7.13
hereof.
2.3. DIRECTORS AND OFFICERS OF SURVIVING CORPORATION.
(a) The directors of Reorganization Sub shall be the directors of the
Surviving Corporation and shall hold office from the Effective Time until
their respective successors are duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation, or as
otherwise provided by law.
(b) The officers of Reorganization Sub at the Effective Time shall be
the initial officers of the Surviving Corporation and shall hold office from
the Effective Time until removed or until their respective successors are
duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Certificate of Incorporation
and Bylaws of the Surviving Corporation, or as otherwise provided by law.
ARTICLE III
CONVERSION OF SHARES
3.1. DISPOSITION OF REORGANIZATION SUB SHARES. At the Effective Time, by
virtue of the Reorganization and without any action on the part of the holder
thereof, the shares of Reorganization Sub common stock which shall be
outstanding immediately prior to the Effective Time of the Reorganization shall
be converted into a number of shares of common stock of the Surviving
Corporation equal to the number of shares of common stock of Reorganization Sub
then outstanding.
3.2. PURCHASE PRICE; EXCHANGE RATIOS.
(a) At the Effective Time, by virtue of the Reorganization and without
any action on the part of the holder thereof, and subject to SECTION 3.4
hereof, each share of capital stock ("MGI Capital Stock") of MGI (including
shares of MGI Capital Stock issued upon the conversion of the Venture
Capital Bridge Notes (as defined in SECTION 4.2(b) below) in accordance with
SECTION 3.12 hereof) that is issued and outstanding immediately prior to the
Effective Time (other than shares of MGI Capital Stock to be canceled
pursuant to SECTION 3.2(e) and any Dissenting Shares (as defined in SECTION
3.10 below)) shall be converted at the Effective Time into the right to
receive, upon surrender of the certificate formerly representing such shares
of MGI Capital Stock, that number of shares of the common stock of
Progenitor ("Progenitor Common Stock") calculated in accordance with the
Exchange Ratio (as defined below) for such class or series of MGI Capital
Stock.
(b) (i) The aggregate purchase price ("Purchase Price") for all shares
of MGI Capital Stock and all options and warrants to purchase MGI Capital
Stock (including shares issued upon conversion of the Venture Capital Bridge
Notes in accordance with SECTION 3.12 hereof) shall be an amount equal to:
(i) Twenty-Two Million Dollars ($22,000,000), less (ii) both (A) the total
amount, if any, by which Total MGI Reorganization Expenses (as defined
below) exceed Eight Hundred Thousand Dollars ($800,000) and (B) the total
amount, if any, by which Total MGI IPO Expenses (as defined below) exceed
Fifty Thousand Dollars ($50,000).
(ii) The Purchase Price shall be subject to the Purchase Price
Reduction (as defined in SECTION 3.4) as provided in ARTICLE X, and the
Purchase Price after giving effect to any such Purchase Price Reduction
is referred to as the "Adjusted Purchase Price." The Adjusted Purchase
Price shall be paid by delivery of that number of shares of Progenitor
Common Stock (the "Shares") equal to the Adjusted Purchase Price divided
by the Market Value (as defined below). Any of such Shares relating to
options or warrants to acquire MGI Capital Stock outstanding at
A-2
<PAGE>
the Effective Time and to be assumed by Progenitor in the Reorganization
in accordance with SECTION 7.7 shall be reserved for issuance by
Progenitor upon exercise of the assumed option or warrant.
(iii) "Total MGI Reorganization Expenses" means all expenses incurred
or paid by MGI, or which MGI shall be legally obligated to pay or
reimburse, in connection with the Reorganization, including, without
limitation, all legal and investment banking fees (excluding $75,000 in
fees to be paid to Lehman Bros. in the form of shares of Common Stock of
MGI) and costs, one-half of all accounting fees and costs, and all
out-of-pocket costs incurred for photocopying, mailing, courier service,
travel or government fees and filing service fees related to the
Reorganization. Total MGI Reorganization Expenses shall not include any
accounting fees and costs incurred by MGI as a result of complying with
SECTION 7.11 hereof.
(iv) "Total MGI IPO Expenses" means all expenses incurred or paid by
MGI, or which MGI shall be legally obligated to pay or reimburse, in
connection with the proposed initial public offering of Progenitor Common
Stock (the "IPO"), including, without limitation, all legal and
accounting fees and costs, and all out-of-pocket costs related to the
IPO; provided, however, Total MGI IPO Expenses shall not include any such
expenses that are requested by Progenitor, except (i) costs, fees and
expenses of any accountants' comfort letter to be delivered to the
underwriters for the IPO and of any audit by MGI's accountants of its
financial statements, and (ii) costs, fees and expenses of MGI's patent
counsel with respect to expertising portions of the IPO Registration
Statement relating to MGI's intellectual property rights. Total MGI IPO
Expenses shall not include any accounting fees and costs incurred by MGI
as a result of complying with SECTION 7.11 hereof.
(v) "Market Value" shall mean, with respect to Progenitor Common
Stock, the per share price to the public for Progenitor Common Stock
indicated on the final prospectus ("Prospectus") included in the
registration statement (the "IPO Registration Statement") declared
effective by the Securities and Exchange Commission ("SEC") relating to
the IPO. In the event of a unit offering, the Market Value of Progenitor
Common Stock shall be the portion of the price per share paid by the
public attributable to the Progenitor Common Stock as indicated in the
Prospectus. With respect to any Optional Public Equity (as defined in
SECTION 3.13 below), "Market Value" shall have the meaning set forth in
SECTION 3.13(b)(i), below.
(vi) Prior to the Closing, MGI shall provide Progenitor with (A)
final invoices by every law firm, investment banking firm and accounting
firm that has provided services to or on behalf of MGI and its
stockholders in connection with the Reorganization and the IPO; (B) final
or estimated written statements for any other expenses related to the
Reorganization and the IPO known to MGI and includable in Total MGI
Reorganization Expenses and Total MGI IPO Expenses; and (C) a written
representation by the President of MGI that the foregoing invoices and
written statements constitute all of the expenses includable in Total MGI
Reorganization Expenses and Total MGI IPO Expenses (each of which
categories shall be separately identified).
(c) The exchange ratio applicable to each class or series of MGI Capital
Stock in the Reorganization ("Exchange Ratio") shall be calculated as
follows:
(i) COMMON STOCK. The Exchange Ratio for MGI common stock, par
value $.0001 (the "MGI Common Stock"), shall be a fraction equal to (x)
15.90% of the Adjusted Purchase Price, divided by (y) the number of
shares of MGI Common Stock plus all shares of MGI Common Stock subject to
options outstanding at the Effective Time.
(ii) SERIES A PREFERRED STOCK. The Exchange Ratio for MGI Series A
Convertible Preferred Stock, par value $.0001 (the "MGI Series A
Preferred Stock"), shall be a fraction equal to (x) 14.75% of the
Adjusted Purchase Price, divided by (y) the number of shares of MGI
Series A
A-3
<PAGE>
Preferred Stock plus the shares of MGI Series A Preferred Stock subject
to the Phoenix Warrants (as defined in SECTION 4.2(b)) outstanding at the
Effective Time.
(iii) SERIES B PREFERRED STOCK. The Exchange Ratio for MGI Series B
Convertible Preferred Stock, par value $.0001 (the "MGI Series B
Preferred Stock"), shall be a fraction equal to (x) 39.07% of the
Adjusted Purchase Price, divided by (y) the number of shares of MGI
Series B Preferred Stock plus the shares of Series B Preferred Stock
subject to the Phoenix Warrants (as defined in SECTION 4.2(b))
outstanding at the Effective Time.
(iv) SERIES C PREFERRED STOCK. The Exchange Ratio for MGI Series C
Convertible Preferred Stock, par value $.0001 (the "MGI Series C
Preferred Stock"), shall be a fraction equal to (x) 23.46% of the
Adjusted Purchase Price, divided by (y) the number of shares of MGI
Series C Preferred Stock outstanding at the Effective Time.
(v) SERIES D PREFERRED STOCK. The Exchange Ratio for MGI Series D
Convertible Preferred Stock, par value $.0001 (the "MGI Series D
Preferred Stock"), shall be a fraction equal to (x) 6.82% of the Adjusted
Purchase Price, divided by (y) the number of shares of MGI Series D
Preferred Stock outstanding at the Effective Time.
(vi) Notwithstanding any other term of this SECTION 3.2(c), or any
other term of this Agreement, a portion of the Progenitor Common Stock
representing the Adjusted Purchase Price with a Market Value equal to the
amount of any unresolved claims (together with a 10% margin) as
contemplated by ARTICLE X and SECTION 3.4 hereof, if any, shall be held
back in escrow pursuant to the terms hereof and of the Escrow Agreement
(as defined below). Any portion of any Shares of Progenitor Common Stock
subject to such escrow holdback will only be released from escrow and
delivered to the holders of MGI Capital Stock or to holders of options or
warrants to acquire MGI Capital Stock (upon exercise of such options or
warrants) in accordance with such ARTICLE X.
(vii) The Exchange Ratio and Per Share Consideration (as defined in
SECTION 3.2(d) below) applicable pursuant to this SECTION 3.2 for each
class of MGI Capital Stock shall be subject to adjustment in accordance
with the formula set forth in EXHIBIT A.
(d) At the Effective Time, by virtue of the Reorganization and without
any action on the part of the holder thereof, all shares of MGI Capital
Stock shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each certificate previously
representing any such shares of MGI Capital Stock (a "Certificate") shall
thereafter represent the right to that number of shares of Progenitor Common
Stock equal to the applicable Exchange Ratio multiplied by the number of
shares represented by such Certificate (with respect to each such class of
MGI Capital Stock, the "Per Share Consideration"); provided that a portion
of the Per Share Consideration applicable to each class of MGI Capital Stock
shall be held in escrow if and to the extent required by SECTION 3.2(c)(vi)
and ARTICLE X hereof and will not be delivered to the holders of MGI Capital
Stock or holders of options and warrants to acquire MGI Capital Stock (upon
exercise of such options or warrants), and shall be subject to cancellation
or return to Progenitor pursuant to ARTICLE X, unless and until released
from escrow in accordance with ARTICLE X. Each Certificate representing MGI
Capital Stock shall be exchanged for the Per Share Consideration upon the
surrender of such Certificate in accordance with the provisions hereof.
(e) At the Effective Time, by virtue of the Reorganization and without
any action on the part of the holder thereof, each share of MGI Capital
Stock held in the treasury of MGI and each share of MGI Capital Stock held
by Progenitor or any subsidiary of Progenitor immediately prior to the
Effective Time shall be canceled and retired and shall cease to exist, and
no shares of Progenitor Common Stock shall be issued in exchange therefor.
All shares of Progenitor Common Stock owned by MGI shall become treasury
stock of Progenitor.
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(f) The Purchase Price shall be subject to reduction prior to or at the
Effective Time in an amount up to ten percent (10%) of the Purchase Price
(the "Maximum Reduction") pursuant to the terms of ARTICLE X below. To the
extent that all or any portion of claims for such indemnification shall
remain unresolved or unliquidated prior to the Effective Time, shares of
Progenitor Common Stock with a Market Value equal to the amount of any
unresolved claims (together with a 10% margin) as contemplated by ARTICLE X
and SECTION 3.4 hereof shall be subject to an escrow holdback pursuant to
the terms of ARTICLE X hereof and of the Escrow Agreement; provided,
however, that in no event shall the sum of any and all Purchase Price
Reductions and the Escrow Consideration exceed the Maximum Reduction.
(g) At the Effective Time, by virtue of the Reorganization and without
any action on the part of the holder thereof, all options and warrants to
purchase MGI Capital Stock then outstanding shall become options or
warrants, as the case may be, to acquire Progenitor Common Stock in
accordance with SECTION 7.7.
3.3 EXCHANGE OF SHARES.
(a) Prior to the Effective Time, Progenitor shall select, and enter into
an agreement with, a bank or trust company to act as Exchange Agent
hereunder (the "Exchange Agent"). Within a reasonable period of time after
the Effective Time, Progenitor shall make available, and each holder of
shares of MGI Capital Stock (other than Dissenting Shares as defined in
SECTION 3.10) will be entitled to receive upon surrender to the Exchange
Agent of one or more Certificates, the Per Share Consideration into which
such shares of MGI Capital Stock are converted in the Reorganization
(subject to the holdback of Shares of Progenitor Common Stock, if any, in
accordance with ARTICLE X hereof).
(b) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of MGI Capital Stock a
letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such form
and have such other provisions as Progenitor may reasonably specify that are
not inconsistent with the terms of this Agreement) and instructions for use
in effecting the surrender of the Certificates in exchange for the Per Share
Consideration. Upon surrender of a Certificate for cancellation to the
Exchange Agent together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in exchange therefor
the Per Share Consideration which such holder has the right to receive in
respect of the Certificate so surrendered pursuant to the provisions of this
ARTICLE III (subject to the holdback of Shares of Progenitor Common Stock,
if any, in accordance with ARTICLE X hereof).
(c) In the event that any Certificate representing MGI Capital Stock
shall have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming such Certificate representing MGI
Capital Stock to be lost, stolen or destroyed, Progenitor will issue or
cause to be issued in exchange for such lost, stolen or destroyed
Certificate the Per Share Consideration into which the shares of MGI Capital
Stock represented by the Certificate are converted in the Reorganization in
accordance with this ARTICLE III. When authorizing such issuance in exchange
therefor, Progenitor may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
Certificate to give Progenitor a bond in such sum as it may direct as
indemnity, or such other form of indemnity, as it shall direct, against any
claim that may be made against Progenitor with respect to the Certificate
alleged to have been lost, stolen or destroyed.
(d) Notwithstanding anything else herein, Progenitor shall not be
required to deliver to any person otherwise entitled to receive Shares in
exchange for Certificates representing MGI Capital Stock or pursuant to
options or warrants to purchase MGI Capital Stock unless and until such
person shall have delivered to Progenitor a duly and validly executed
Investment Agreement (as defined in SECTION 7.14 below).
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3.4 ESCROW.
(a) In the event that Progenitor shall have asserted claims with respect
to an adjustment of the Purchase Price under ARTICLE X, any portion of such
claims that is resolved prior to the Effective Time shall cause a reduction
(the "Purchase Price Reduction") of the Purchase Price (provided that (i)
such reduction, if any, shall in no event exceed in the aggregate the
Maximum Reduction and (ii) no such reduction shall be made unless it exceeds
the Threshold Amount) and any portion of such claims that is not resolved
prior to the Effective Time (whether because the related claims remain
unliquidated or otherwise) shall require the deposit of Progenitor Common
Stock with an escrow agent (the "Escrow Agent") pursuant to an Escrow
Agreement in substantially the form of EXHIBIT B (the "Escrow Agreement") to
secure such unresolved claims pursuant to ARTICLE X. Shares of Progenitor
Common Stock (or cash or other securities in the case of an acquisition of
MGI for which cash or such other securities constitutes the Purchase Price)
with a Market Value equal to one hundred and ten percent (110%) of the
amount of any such unresolved claims (the "Escrow Consideration") will be
deposited with the Escrow Agent; provided however, that (i) the Market Value
of such Shares may not exceed the Maximum Reduction (less all Purchase Price
Reductions applicable under SECTION 3.2(f)), and (ii) no Shares (or other
consideration) shall be deposited in escrow unless the aggregate amount of
any Purchase Price Reduction (or any claims resolved prior to the Effective
Time, in the event there is no Purchase Price Reduction) and the unresolved
claims exceeds the Threshold Amount (as defined in SECTION 10.1 below). The
Shares to be held in escrow shall be determined on an individual recipient
basis, pro rata according to such person's allocable portion of the Adjusted
Purchase Price.
(b) If the Purchase Price is paid in Shares, Progenitor will include on
its balance sheet as issued and outstanding such Shares and treat the MGI
stockholders as the owners of all Escrow Consideration (other than Escrow
Consideration to be issued to MGI optionholders and warrantholders upon the
exercise of their options or warrants, which will be reserved for their
benefit) to be held by the Escrow Agent unless and until any of such Escrow
Consideration is used in satisfaction of an obligation pursuant to ARTICLE
X. With respect to any dividend paid by Progenitor to its stockholders while
any Shares or other securities are held by the Escrow Agent, Progenitor
shall file a Form 1099 for each person who has Shares held by the Escrow
Agent at the time the dividend is paid reporting that person's dividend
amount.
3.5 DIVIDENDS; TRANSFER TAXES. In the event the Purchase Price is paid in
Shares: (a) no dividends that are declared after the Effective Time will be paid
to persons entitled to receive Progenitor Common Stock until such persons
surrender their Certificates; (b) upon such surrender, there shall be paid to
the person in whose name the certificates representing such securities shall be
issued, any dividends which shall have become payable with respect to such
securities between the Effective Time and the time of such surrender; (c) in no
event shall the person entitled to receive such dividends be entitled to receive
interest on such dividends; and (d) if any certificates for any securities are
to be issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of such exchange that
the person requesting such exchange shall (i) pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of certificates for
such securities in a name other than that of the registered holder of the
Certificate surrendered, or (ii) establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable. Notwithstanding anything
in this Agreement to the contrary, neither the Exchange Agent nor any party
hereto shall be liable to a holder of shares of MGI Capital Stock for any Per
Share Consideration, or dividends on the Per Share Consideration or, in
accordance with SECTION 3.6 hereof, the cash payment for fractional interests,
delivered to a public official pursuant to applicable escheat laws following the
passage of time specified therein.
3.6 NO FRACTIONAL SHARES. No fractional shares of Progenitor Common Stock
shall be issued pursuant to the Reorganization (including, without limitation,
with respect to any shares to be delivered to or from escrow pursuant to ARTICLE
X hereof). In lieu of the issuance of any such fractional shares pursuant to
SECTION 3.2, cash adjustments will be paid to holders in respect of any
fractional share that would
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otherwise be issuable. The amount of such adjustment shall be the product of
such fraction of a share of Progenitor Common Stock multiplied by the Market
Value thereof.
3.7 CLOSING OF MGI TRANSFER BOOKS. At the Effective Time, the stock
transfer books of MGI shall be closed and no transfer of shares of MGI Capital
Stock shall thereafter be made. If, after the Effective Time, Certificates are
presented to the Surviving Corporation, they shall be canceled and exchanged for
the Per Share Consideration in accordance with the terms hereof. At and after
the Effective Time, the holders of shares of MGI Capital Stock to be exchanged
for the Per Share Consideration pursuant to this Agreement shall cease to have
any rights as stockholders of MGI, except for the right to surrender such
Certificates in exchange for the Per Share Consideration as provided hereunder
or such dissenters' rights as are provided under applicable law.
3.8 CLOSING. Unless this Agreement shall have been terminated, the closing
of the transactions contemplated by this Agreement (the "Closing") shall take
place at the offices of Morrison & Foerster LLP, 425 Market Street, San
Francisco, California 94105 simultaneously with the closing of Progenitor's IPO
or such other date prior to the Agreement Deadline (as defined in SECTION 9.1(b)
below) as the parties may agree upon in the event that there is no IPO (the
"Closing Date").
(a) At the Closing, MGI shall deliver to Progenitor (in addition to any
other items contemplated by the terms of this Agreement or the Related
Agreements to be delivered by MGI at the Closing) the following:
(i) RESOLUTIONS. Copies of resolutions of the Board of Directors
of MGI certified by a Secretary, Assistant Secretary, or other
appropriate officer of MGI, authorizing the execution, delivery and
performance of this Agreement and the Related Agreements to which it is
or is to be a party and the transactions contemplated hereby and thereby
and copies of resolutions of the meeting of Stockholders of MGI (or
written consent in lieu thereof), certified by a Secretary, Assistant
Secretary or other appropriate officer of MGI, authorizing the execution,
delivery and performance of this Agreement and the Related Agreements to
which it is or is to be a party and the transactions contemplated hereby
and thereby (including without limitation approval of parachute payments,
if any, as contemplated by SECTION 7.27), together with a certificate of
the Secretary of MGI as to the number of Dissenting Shares.
(ii) RESIGNATIONS. Resignations of all officers and directors of
MGI from their positions as such, in each case effective as of the
Effective Time.
(iii) GOOD STANDING. Good Standing certificates for the States of
California and Delaware.
(iv) AMENDMENT OF CERTIFICATE OF INCORPORATION. Copy of
Certificate of Amendment to Certificate of Incorporation of MGI,
certified by the Secretary of State of the State of Delaware, providing
for amendment of MGI's Certificate of Incorporation as contemplated by
SECTION 3.14.
(v) EXERCISES AND CONVERSIONS. Evidence of the submission for
conversion of each of the Venture Capital Bridge Notes, as contemplated
by SECTION 3.12, and of the exercise of all warrants to purchase MGI
Capital Stock, as contemplated by SECTION 7.21.
(vi) COMFORT LETTER. Any comfort letter or update called for by
SECTION 6.4.
(vii) AFFILIATE AGREEMENTS. Any Affiliate Agreements called for by
SECTION 6.6.
(viii) INVESTMENT AGREEMENTS. If the Adjusted Purchase Price is to
be paid in Shares, the Investment Agreements contemplated by SECTION
7.14.
(ix) EMPLOYMENT AGREEMENT. The Employment Agreement called for by
SECTION 7.15.
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(x) CERTAIN RIGHTS. Evidence of the termination or resolution of
those rights, if any, described in Section 7.16.
(xi) ESCROW AGREEMENT. The executed Escrow Agreement called for
by SECTION 7.17.
(xii) CONSENTS. All consents received on the part of MGI in
connection with this Agreement and the Related Agreements, as
contemplated by SECTION 7.18.
(xiii) INTELLECTUAL PROPERTY ASSIGNMENTS. Any assignments called
for by SECTION 7.19, if applicable.
(xiv) NON-SOLICITATION AGREEMENTS. The Non-Solicitation Agreements
called for by SECTION 7.26.
(xv) ADVISOR AGREEMENTS. Any advisor and scientist agreements
executed pursuant to SECTION 7.28.
(xvi) OFFICER'S CERTIFICATE. A certificate of the President or a
Vice President of MGI as to the satisfaction of the condition in SECTION
8.3(a).
(xvii) OPINION OF COUNSEL. If the Adjusted Purchase Price is to be
paid in Shares, opinions of Wilson, Sonsini, Goodrich & Rosati and
Morrison & Foerster LLP, as called for in SECTIONS 8.2(b) and 8.3(b),
and, regardless of the means of payment of the Adjusted Purchase Price,
the opinion of Wilson, Sonsini, Goodrich & Rosati, as called for in
SECTION 8.3(b).
(xviii) CONDITIONS PRECEDENT. Evidence reasonably satisfactory to
Progenitor that all conditions to Progenitor's obligations hereunder have
been satisfied in all material respects.
The foregoing delivery requirements are solely in connection with the
Closing and are not to be deemed covenants under this Agreement for any purpose,
unless, and only to the extent, otherwise explicitly specified herein.
(b) At the Closing, Progenitor shall deliver to MGI (in addition to any
other items contemplated by the terms of this Agreement or the Related
Agreements to be delivered by Progenitor at the Closing) the following:
(i) RESOLUTIONS. Copies of resolutions of Progenitor and
Reorganization Sub certified by a Secretary, Assistant Secretary, or
other appropriate officer of Progenitor and Reorganization Sub, as
applicable, authorizing the execution, delivery and performance of this
Agreement and the Related Agreements to which Progenitor is or will be a
party and the transactions contemplated hereby or thereby.
(ii) OPINIONS OF COUNSEL. If the Adjusted Purchase Price is paid in
Shares, opinions of Morrison & Foerster LLP and Wilson, Sonsini, Goodrich
& Rosati as called for in SECTIONS 8.2(b) and 8.3(b), and, regardless of
the means of payment of the Adjusted Purchase Price, the opinions of
Morrison & Foerster LLP, as called for in SECTION 8.2(b).
(iii) CONDITIONS PRECEDENT. Evidence reasonably satisfactory to MGI
that all conditions to MGI's obligations hereunder have been satisfied in
all material respects.
(iv) OFFICER'S CERTIFICATE. A certificate of the President or a
Vice President of Progenitor as to the satisfaction of the condition in
SECTION 8.2(a).
(v) CLAIMS CERTIFICATE. A certificate setting forth any and all
claims under ARTICLE X hereof, showing the amount of any claims
previously agreed between MGI and Progenitor and the amount of any
unresolved claims.
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The foregoing delivery requirements are solely in connection with the
Closing and are not to be deemed covenants under this Agreement for any purpose,
unless, and only to the extent, otherwise explicitly specified herein.
3.9 SUPPLEMENTARY ACTION. If at any time after the Effective Time, any
further assignments or assurances in law or any other things are necessary or
desirable to vest or to perfect or confirm of record in the Surviving
Corporation the title to any property or rights of MGI, or otherwise to carry
out the provisions of this Agreement or the Related Agreements, the officers and
directors of the Surviving Corporation are hereby authorized and empowered on
behalf of MGI in the name of and on behalf of MGI to execute and deliver any and
all things necessary or proper to vest or to perfect or confirm title to such
property or rights in the Surviving Corporation, and otherwise to carry out the
purposes and provisions of this Agreement and the Related Agreements.
3.10 DISSENTING SHARES.
(a) If holders of MGI Capital Stock are entitled to dissent from the
Reorganization and demand appraisal of any such MGI Capital Stock under
applicable law (each person electing to exercise such rights, a "Dissenting
Holder"), any shares of MGI Capital Stock held by a Dissenting Holder as to
which appraisal has been so demanded ("Dissenting Shares") shall not be
converted as described in SECTION 3.2, but shall from and after the
Effective Time represent only the right to receive such consideration as may
be determined to be due such Dissenting Holder pursuant to applicable law;
provided, however, that each share of MGI Capital Stock held by a Dissenting
Holder who shall, after the Effective Time, withdraw its demand for
appraisal or lose its rights of appraisal with respect to such shares of MGI
Capital Stock, in either case pursuant to applicable law, shall not be
deemed a Dissenting Share, but shall be deemed to be converted, as of the
Effective Time, into the right to receive the Per Share Consideration.
(b) MGI shall use commercially reasonable efforts, in consultation with
Progenitor, to assure that there are no Dissenting Shares, subject to the
provisions of this clause (b). In addition, MGI shall give Progenitor (i)
prompt notice of any written demands for appraisal of any shares of MGI
Capital Stock, withdrawals of such demands or failures to perfect appraisal
rights resulting in a loss of such rights, and any other instruments
received by MGI which relate to any such demand for appraisal, and (ii) the
opportunity to participate in all negotiations and proceedings which take
place prior to the Effective Time with respect to demands or potential
demands for appraisal. MGI shall not voluntarily make any payment with
respect to any demands or potential demands for appraisal of MGI Capital
Stock or offer to settle or settle any such demands or potential demands.
Progenitor shall be responsible for any settlement of claims with respect to
any Dissenting Shares, which settlements may be paid in cash, Progenitor
Common Stock or such other consideration as Progenitor may determine.
(c) Notwithstanding any other provision of this Agreement to the
contrary, the Per Share Consideration applicable to each class of MGI
Capital Stock, and all other payments required to be made under this
Agreement based upon the Purchase Price hereunder, will be calculated based
on the number of outstanding shares including the Dissenting Shares, but
Progenitor shall have no obligation to deliver any Progenitor Common Stock
in respect of Dissenting Shares.
3.11 REGISTRATION STATEMENT.
(a) Unless Progenitor shall have elected to cease pursuit of or postpone
the IPO pursuant to SECTION 6.12, Progenitor shall prepare and file with the
SEC a Registration Statement on Form S-4 (the "S-4 Registration Statement")
and use commercially reasonable efforts to have the S-4 Registration
Statement declared effective. Progenitor shall also use commercially
reasonable efforts to take any action required to be taken under state
securities or blue sky laws in connection with the issuance of the shares of
Progenitor Common Stock pursuant hereto. MGI shall furnish Progenitor with
all information concerning MGI and the holders of its capital stock and
shall take such other action as
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Progenitor may reasonably request in connection with such S-4 Registration
Statement and issuance of shares of Progenitor Common Stock, including
causing to be prepared and provided to Progenitor such financial statements
of MGI as may be reasonably requested by Progenitor. Whenever any event
occurs which may reasonably be required to be set forth in an amendment to
the S-4 Registration Statement or any filing required to be made with the
SEC, MGI shall promptly inform Progenitor and shall cooperate in filing with
the SEC such amendment.
(b) In the event Progenitor completes the IPO but is not able to
register the issuance of the shares of Progenitor Common Stock to be issued
pursuant to this Agreement, in whole or in part, for any reason not within
Progenitor's ability to control after using its commercially reasonable
efforts as required pursuant to paragraph (a), notwithstanding Progenitor's
commercially reasonable efforts, MGI's obligation to consummate the
Reorganization will not be diminished and all shares the issuance of which
is not registered will instead be issued to the stockholders of MGI in a
private placement or in such other transaction as may be available pursuant
to an exemption from the registration requirements of the Securities Act. In
such event, MGI shall use commercially reasonable efforts to cooperate in
all respects with any required filings or other actions that are necessary
to assure the availability of such an exemption from registration, and MGI
shall use commercially reasonable efforts to have the stockholders of MGI
provide and execute any investment representations or other agreements
reasonably required with respect thereto. Further, in such event, Progenitor
will execute a Registration Rights Agreement on behalf of each such
stockholder, as contemplated by SECTION 7.25 hereof.
3.12 CONVERSION OF VENTURE CAPITAL BRIDGE NOTES.
(a) Prior to the Effective Time, the holders of the Venture Capital
Bridge Notes shall submit such notes to MGI for conversion effective
immediately prior to the Effective Time into that number of shares of MGI
Series D Preferred Stock with a value equal to the face amount of such
Venture Capital Bridge Notes (without any 150% premium, interest or other
additional amount) with such shares of MGI Series D Preferred Stock being
valued at $1.34 per share.
(b) Notwithstanding anything herein to the contrary, any conversion of
the Venture Capital Bridge Notes will be done in such a way that either (i)
no vote of the holders of the resulting MGI Capital Stock with respect to
the Reorganization and the other transactions contemplated hereby and by the
Related Agreements is required or (ii) any such vote of each holder that may
be required shall have been obtained in favor of the Reorganization and such
other transactions prior to the Effective Time.
3.13 PURCHASE OPTIONS.
(a) Notwithstanding any other provision of this Agreement or the Related
Agreements to the contrary, Progenitor shall have the option at any time to
acquire MGI by paying the Adjusted Purchase Price in cash and all references
in this Agreement and the Related Agreements to terms and conditions
applicable to the payment of the Adjusted Purchase Price with shares of
Progenitor Common Stock shall be deemed modified or amended in order to
permit the consummation of such acquisition by means of a cash payment for
all outstanding MGI Capital Stock (including any outstanding warrants or
options) based upon the Adjusted Purchase Price set forth in this Agreement.
In the event that Progenitor elects to acquire MGI by payment of cash:
(i) the parties shall complete a reverse triangular merger in which
the Per Share Consideration applicable to each class of MGI Capital Stock
under this Agreement shall be paid in cash;
(ii) options (both vested and unvested) and warrants to acquire MGI
Capital Stock shall be "cashed out" at the applicable Per Share
Consideration for the underlying capital stock net of any exercise price
for such options or warrants; and
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(iii) terms and conditions of this Agreement that would not be
applicable in such a cash-out merger, such as the requirement for the
delivery of opinions of tax counsel, shall not be applicable.
(b) In the event that Progenitor elects not to consummate the IPO prior
to the applicable Agreement Deadline, Progenitor shall also have the option
prior to such deadline to consummate the acquisition of MGI by payment of
the Adjusted Purchase Price hereunder with either (A) unregistered shares of
Progenitor's capital stock, or (B) public equity securities mutually
acceptable to Progenitor and MGI ("Optional Public Equity").
(i) If Progenitor elects to acquire MGI using Optional Public
Equity, the terms and conditions of this Agreement shall remain
applicable to the maximum extent practicable to the reorganization by
which such Optional Public Equity is issued including the Per Share
Consideration applicable to such shares of MGI Capital Stock, the
substitution of warrants and options to acquire the Optional Public
Equity in lieu of MGI Capital Stock and the other related obligations
provided for in this Agreement concerning the registration with the SEC
of the issuance of such Optional Public Equity. Without limiting the
generality of the foregoing, MGI shall be required to seek stockholder
approval of a Reorganization involving Optional Public Equity to the same
extent and in the same manner as it is required to seek stockholder
approval of a Reorganization involving Shares of Progenitor Common Stock,
and Progenitor will be required to register such Optional Public Equity
upon issuance. In addition, in such event, MGI will receive
representations and warranties from the issuer of such Optional Public
Equity that are substantially similar to those representations and
warranties given by Progenitor in this Agreement. The Market Value of the
Optional Public Equity shall be the average closing price thereof for the
twenty (20) trading days ending two days prior to the Closing. It shall
be a condition to the obligation of MGI and Progenitor to effect the
reorganization using Optional Public Equity that MGI and Progenitor shall
have received opinions of their respective counsel under SECTIONS 8.2(b)
and 8.3(b) hereof that the reorganization will be treated for federal
income tax purposes as a reorganization within the meaning of Section
368(a) of the Code and that the issuer of the Optional Public Equity and
MGI will each be a party to the reorganization within the meaning of
Section 368(b) of the Code.
(ii) If Progenitor elects to acquire MGI using unregistered shares of
Progenitor's capital stock, (A) such substitution of consideration shall
be subject to terms and conditions to be agreed upon by Progenitor and
MGI regarding the Progenitor capital stock to be issued and the method
for determining the Market Value thereof and (B) Progenitor will execute
a Registration Rights Agreement on behalf of each MGI stockholder as
contemplated by SECTION 7.25 hereof. All other terms and conditions of
this Agreement including the Adjusted Purchase Price shall remain
applicable to such acquisition to the maximum extent practicable, except
those which by their terms are inapplicable such as provisions relating
to the IPO.
(c) Any form of consideration used to pay the Adjusted Purchase Price
shall be subject to the terms and conditions of this Agreement and the
Related Agreements, including, without limitation, the escrow provisions of
ARTICLE X of this Agreement.
3.14 AMENDMENT OF CERTIFICATE OF INCORPORATION. MGI shall use commercially
reasonable efforts to cause its Certificate of Incorporation to be amended
effective prior to the Effective Time, such that (i) Section IV.C of MGI's
Certificate of Incorporation shall not apply to the Reorganization and the
amount to which any shares of MGI Capital Stock will be entitled in the
Reorganization will be the amounts provided in this Agreement, and (ii) MGI's
Series D Preferred Stock will not be entitled to vote with respect to the
Reorganization or any of the other transactions contemplated by this Agreement
or the Related Agreements. In furtherance of the foregoing, MGI will use
commercially reasonable efforts to obtain all requisite Board and stockholder
approvals, make all required filings with the Delaware Secretary
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of State and take all other actions necessary for such amended Certificate of
Incorporation to be effective at such time.
3.15 MGI WAIVER AND CONSENT. MGI hereby waives all rights of first refusal
and all other rights to acquire any securities to be sold or otherwise
transferred by any stockholder of MGI in connection with the Reorganization and
the other transactions contemplated by the Reorganization Agreement and the
Related Agreements, including without limitation any such rights as may be
applicable under the Bylaws of MGI.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF MGI
Except as set forth in the disclosure schedule delivered to Progenitor at or
prior to the execution of this Agreement ("MGI Disclosure Schedule"), MGI
represents and warrants to Progenitor and Reorganization Sub as follows:
4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. MGI is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to carry
on its business as now conducted and as proposed to be conducted. MGI is duly
qualified to transact business and is in good standing in California and each
other jurisdiction in which the failure to so qualify would have a Material
Adverse Effect.
4.2 CAPITALIZATION AND VOTING RIGHTS.
(a) The authorized capital stock of MGI as of the date of this Agreement
consists of:
(i) PREFERRED STOCK. 320,000 shares designated Series A Preferred
Stock, 3,254,800 shares designated Series B Preferred Stock, 4,526,317
shares designated Series C Preferred Stock, and 12,373,134 shares
designated Series D Preferred Stock, (collectively, the "MGI Preferred
Stock"). 301,500 shares of MGI Series A Preferred Stock, 3,207,996 shares
of MGI Series B Preferred Stock, 4,526,317 shares of MGI Series C
Preferred Stock and no shares of MGI Series D Preferred Stock are
outstanding. The rights, privileges and preferences of the MGI Preferred
Stock are as stated in MGI's Certificate of Incorporation, as amended to
date; and
(ii) COMMON STOCK. 27,000,000 shares of the MGI Common Stock, of
which 237,614 shares are issued and outstanding.
(b) In addition, as of the date of this Agreement: except as set forth
in SECTION 4.2(b) of the MGI Disclosure Schedule, (i) there are 4,000,000
shares of the MGI Common Stock reserved for issuance under MGI's stock
option plans, under which options to purchase 2,782,879 shares of MGI Common
Stock are outstanding and unexercised; (ii) MGI has outstanding warrants to
purchase 17,850 shares of MGI Series A Preferred Stock at $2.80 per share
and 46,800 shares of MGI Series B Preferred Stock at $2.50 per share (in
each case, giving full effect to all anti-dilution adjustments that have
occurred prior to the date hereof or that occur with respect to the
Reorganization and other transactions contemplated hereby and by the Related
Agreements) (collectively, the "Phoenix Warrants"); (iii) MGI has
outstanding notes totaling $1,499,999.99 convertible into debt or preferred
stock of MGI at one hundred fifty percent (150%) of the value of such notes
(collectively, the "Venture Capital Bridge Notes"); (iv) there is not (A)
any subscription, warrant, option, convertible security or other right
(contingent or otherwise) to purchase or acquire any shares of capital stock
of MGI, (B) any commitment of MGI to issue any subscription, warrant,
option, convertible security or other such right to issue or distribute to
holders of any shares of its capital stock any evidences of indebtedness or
assets of MGI, or (C) any obligation of MGI (contingent or otherwise) to
purchase, redeem or otherwise acquire any shares of its capital stock or any
interest therein or to pay any
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dividend or make any other distribution in respect thereof; and (v) no
person is entitled to any preemptive or similar right with respect to the
issuance of any capital stock of MGI.
(c) MGI owns no subsidiaries.
4.3 AUTHORIZATION. MGI has full right, authority and power to enter into
this Agreement and the Related Agreements and subject to approval of the
stockholders of MGI, all corporate action on the part of MGI and its officers,
directors and stockholders necessary for the authorization, execution and
delivery of this Agreement and the Related Agreements and the performance of all
obligations of MGI hereunder has been taken and this Agreement and the Related
Agreements constitute valid and legally binding obligations of MGI enforceable
in accordance with their terms, except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
affecting enforcement of creditors' rights, (b) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies, and (c) to the extent the enforceability of the indemnification
provisions contained in this Agreement and the Related Agreements may be limited
by applicable laws.
4.4 VALID ISSUANCE OF STOCK. The outstanding MGI Capital Stock (a) is duly
and validly issued, fully paid, and nonassessable, (b) is not subject to
preemptive or any other similar rights of the stockholders of MGI or others, (c)
is free of all restrictions on transfer other than restrictions on transfer
imposed under this Agreement and the Related Agreements and under applicable
state and federal securities laws, and (d) was issued in accordance with the
registration or qualification provisions of the Securities Act and any relevant
state securities laws or pursuant to valid exemptions therefrom. SECTION 4.4 of
the MGI Disclosure Schedule contains a complete list of the name, and number and
class of shares of MGI Capital Stock held by each stockholder of MGI.
4.5 GOVERNMENTAL CONSENTS. Except for the filing and recordation of a
Certificate of Merger as required by the DGCL, no consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
MGI is required in connection with the consummation of the transactions
contemplated by this Agreement and the Related Agreements, except for such
filings as may be required to be made pursuant to applicable federal or state
securities laws or with any stock exchange (or the Nasdaq National Market or
other quotation system of the National Association of Securities Dealers, Inc.)
on which the Progenitor Common Stock may be listed.
4.6 LITIGATION. There is no action, suit, proceeding or, to the knowledge
of MGI, investigation pending or threatened against MGI as of the date of this
Agreement that questions the validity of this Agreement or the Related
Agreements, or the right of MGI to enter into such Agreement or such Related
Agreements, or to consummate the transactions contemplated hereby or thereby, or
that might result, either individually or in the aggregate, in any Material
Adverse Effect, nor is MGI aware that there is any basis for the foregoing. MGI
is not as of the date of this Agreement a party or subject to the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality.
4.7 COMPLIANCE WITH OTHER INSTRUMENTS. MGI is not as of the date of this
Agreement in violation or default of any provision of its Certificate of
Incorporation or Bylaws (each as amended to date), or of any instrument,
judgment, order, writ, decree or contract to which it is a party or by which it
is bound, or, to the best of MGI's knowledge as of the date of this Agreement,
of any provision of any federal or state statute, rule or regulation applicable
to MGI, which violation or default would have a Material Adverse Effect. The
execution, delivery and performance of this Agreement and the Related
Agreements, and the consummation of the transactions contemplated hereby and
thereby, will not result in any violation of its Certificate of Incorporation or
Bylaws or any other such material violation or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision, instrument, judgment, order, writ, decree or
contract or an event that results in the creation of any lien, charge or
encumbrance upon any assets of MGI or the suspension, revocation, impairment,
forfeiture, or non-renewal of any material permit, license, authorization, or
approval applicable to MGI, its business or
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operations or any of its assets or properties. There is no such violation or
default as of the date of this Agreement which, with the passage of time or
giving of notice or both, would constitute a violation or default that would
have a Material Adverse Effect.
4.8 CORPORATE DOCUMENTS. The Certificate of Incorporation and Bylaws of
MGI in effect as of the date of this Agreement are in the form attached hereto
as SECTION 4.8 of the MGI Disclosure Schedule.
4.9 REPORTS AND FINANCIAL STATEMENTS. MGI has furnished or, in the case of
the period ended December 31, 1996 will have furnished prior to Closing, to
Progenitor MGI's financial statements (consolidated balance sheets, consolidated
statements of income, consolidated statements of stockholders' equity and
consolidated statements of cash flows) at and for each of the twelve-month
periods ended December 31, 1992, December 31, 1993, December 31, 1994, December
31, 1995 and December 31, 1996 (collectively, the "MGI Financial Statements")
and all schedules, work papers, valuation reports and other supporting
information pertaining to such Financial Statements. The MGI Financial
Statements have been audited by Ernst & Young, LLP, MGI's independent
accountants. Each of the balance sheets (including the related notes) included
in the MGI Financial Statements fairly presents, or will present, the financial
position of MGI as of the respective dates thereof, and the other related
statements (including the related notes) included therein fairly present, or
will present, the results of operations and cash flows of MGI for the respective
periods or as of the respective dates set forth therein, all in conformity with
generally accepted accounting principles consistently applied during the periods
involved.
4.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1996, MGI:
(a) has not taken any of the actions prohibited in SECTION 6.1 or SECTION 6.2
hereof; (b) has not suffered any change, or any event involving a prospective
change, in its business, assets, financial condition or results of operation
which has had, or is reasonably likely to have, in the aggregate a Material
Adverse Effect; and (c) subsequent to the date hereof, except as permitted by
SECTION 6.1 or SECTION 6.2 hereof, will not conduct its business and operations
other than in the ordinary course of business and consistent with past
practices.
4.11 INFORMATION IN REGISTRATION STATEMENTS AND INFORMATION STATEMENT. The
information provided in writing by and relating to MGI to be contained in (a)
the IPO Registration Statement, (b) the S-4 Registration Statement or, if
applicable in accordance with SECTION 7.4 hereof, the Private Placement
Memorandum (as defined in SECTION 7.4(b)), and (c) the information statement
(the "Information Statement") to be distributed in connection with MGI's
solicitation of stockholder votes upon this Agreement and the Related Agreements
(or solicitation of proxies for a meeting) and related matters will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading.
4.12 CONTRACTS.
(a) Each of the material contracts, instruments, mortgages, notes,
security agreements, leases, agreements or understandings, whether written
or oral, to which MGI is a party that relates to or affects the assets or
operations of MGI, or to which MGI or its respective assets or operations
may be bound or subject (the "Contracts") is listed in SECTION 4.12(a) of
the MGI Disclosure Schedule. Each of the Contracts is a valid and binding
obligation of MGI and is in full force and effect with respect to MGI and,
to the best knowledge of MGI, with respect to all other parties thereto.
Except to the extent that the consummation of the transactions contemplated
by this Agreement or the Related Agreements may require the consent of third
parties, to the knowledge of MGI, there are no existing defaults by MGI
under the Contracts or, to the knowledge of MGI, by any other party thereto,
and, to the knowledge of MGI, no event of default has occurred, and no
event, condition or occurrence exists, that (whether with or without notice,
lapse of time, the declaration of default or other similar event) would
constitute a default by MGI thereunder. SECTION 4.12(a) of the MGI
Disclosure Schedule lists all consents of third parties required for the
consummation of the transactions contemplated by this Agreement or the
Related Agreements.
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(b) MGI is not a party to any oral or written (i) consulting agreement,
(ii) joint venture, (iii) noncompetition or similar agreement that restricts
MGI from engaging in a line of business, (iv) agreement with any executive
officer or other employee of MGI the benefits of which are contingent, or
the terms of which are altered, upon the occurrence of a transaction
involving MGI of the nature contemplated by this Agreement or the Related
Agreements, or (v) agreement with respect to any officer of MGI providing
any compensation guaranty. MGI has no agreement or plan, including any stock
option plan, stock appreciation rights plan, restricted stock plan or stock
purchase plan, any of the benefits of which will be increased, or the
vesting of the benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the Related
Agreements or the value of any of the benefits of which will be calculated
on the basis of any of the transactions contemplated by this Agreement or
the Related Agreements.
(c) As of the date of this Agreement, MGI has no agreements or
arrangements to sell or otherwise dispose of, or lease, acquire or otherwise
invest in, any property, lines of business or other assets other than the
transactions contemplated by this Agreement. Prior to and at the Effective
Time, MGI will have no agreements or arrangements to sell or otherwise
dispose of, or lease, acquire or otherwise invest in, any property, lines of
business or other assets other than (i) the transactions contemplated by
this Agreement, and (ii) transactions or agreements made in accordance with
SECTION 6.1 hereof.
4.13 EMPLOYEE BENEFIT PLANS.
(a) SECTION 4.13(a) of the MGI Disclosure Schedule sets forth a true and
complete list of each written or oral employee benefit plan (including,
without limitation, any "employee benefit plan" as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), policy or agreement (including, without limitation, any
employment agreement or severance agreement) that is maintained (all of the
foregoing, the "MGI Plans"), or is or was contributed to by MGI or pursuant
to which MGI is still potentially liable for payments, benefits or claims. A
copy of each MGI Plan as currently in effect and, if applicable, the most
recent Annual Report, Actuarial Report or Valuation, Summary Plan
Description, Trust Agreement and a Determination Letter issued by the IRS
for each MGI Plan have heretofore been delivered to Progenitor or its
counsel. Neither MGI nor any trade or business, whether or not incorporated
(an "ERISA Affiliate"), which together with MGI would be deemed a "single
employer" within the meaning of Section 4001 of ERISA, has maintained or
contributed to any plan subject to Title IV of ERISA or Section 412 of the
Code (including any "multiemployer plan," as defined in Section 3(37) of
ERISA ("Multiemployer Plan")) during the six calendar years preceding the
date of this Agreement.
(b) Each MGI Plan which is an "employee benefit plan," as defined in
Section 3(3) of ERISA, complies by its terms and in operation with the
requirements provided by any and all statutes, orders or governmental rules
or regulations currently in effect and applicable to MGI Plans, including
but not limited to ERISA and the Code.
(c) All reports, forms and other Reports required to be filed with any
government entity with respect to any MGI Plan (including without
limitation, summary plan descriptions, Forms 5500 and summary annual
reports) have been timely filed and are accurate.
(d) Each MGI Plan intended to qualify under Section 401(a) of the Code
has been determined by the Internal Revenue Service to so qualify after
January 1, 1985, and each trust maintained pursuant thereto has been
determined by the Internal Revenue Service to be exempt from taxation under
Section 501 of the Code. Nothing has occurred since the date of the Internal
Revenue Service's favorable determination letter that could adversely affect
the qualification of the MGI Plan and its related trust. MGI and each ERISA
Affiliate of MGI have timely and properly applied for a written
determination by the Internal Revenue Service on the qualification of each
such MGI Plan and its
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related trust under Section 401(a) of the Code, as amended by the Tax Reform
Act of 1986 and subsequent legislation enacted through the date hereof, and
Section 501 of the Code.
(e) All contributions or other amounts payable by MGI as of the
Effective Time with respect to each MGI Plan and in respect of current or
prior plan years have been or will be (prior to the Effective Time) either
paid or accrued on the Financial Statements of MGI in accordance with past
practice and the recommended contribution in any actuarial report.
(f) No MGI Plan provides benefits, including without limitation death or
medical benefits (whether or not insured), with respect to current or former
employees for periods extending beyond their retirement or other termination
of service (other than (i) continuation group health coverage pursuant to
Section 4980B of the Code, (ii) death benefits or retirement benefits under
any "employee pension plan," as that term is defined in Section 3(2) of
ERISA, (iii) deferred compensation benefits with respect to which there is
an accrual of liability on the books of MGI or its ERISA Affiliates, or (iv)
benefits the full cost of which is borne by the current or former employee
(or his or her beneficiary)).
(g) All insurance premiums (including premiums to the Pension Benefit
Guaranty Corporation) have been paid in full, subject only to normal
retrospective adjustments in the ordinary course, with regard to MGI Plans
for plan years ending on or before the date hereof.
(h) No MGI Plan subject to Title IV of ERISA, and no employee benefit
plan maintained by an ERISA Affiliate of MGI and subject to Title IV of
ERISA, has benefit liabilities (as defined in Section 4001(a)(16) of ERISA)
exceeding the assets of such plan or has been completely or partially
terminated.
(i) With respect to each MGI Plan:
(i) no prohibited transactions (as defined in Section 406 or 407 of
ERISA or Section 4975 of the Code) have occurred for which a statutory
exemption is not available;
(ii) no reportable event (as defined in Section 4043 of ERISA) has
occurred as to which a notice would be required to be filed with the
Pension Benefit Guaranty Corporation;
(iii) no action or claims (other than routine claims for benefits
made in the ordinary course of Plan administration for which Plan
administrative review procedures have not been exhausted) are pending or,
to the knowledge of MGI, threatened or imminent against or with respect
to MGI Plan, any employer who is participating (or who has participated)
in any Plan or any fiduciary (as defined in Section 3(21) of ERISA), of
the MGI Plan; and
(iv) neither MGI nor any fiduciary has any knowledge of any facts
which could give rise to any such action or claim.
(j) Neither MGI nor any ERISA Affiliate of MGI has any liability or is
threatened with any liability (whether joint or several) (i) for the
termination of any single employer plan under Sections 4062 or 4064 of ERISA
or any multiple employer plan under Section 4063 of ERISA, (ii) for any lien
imposed under Section 302(f) of ERISA or Section 412(n) of the Code, (iii)
for any interest payments required under Section 302(e) of ERISA or Section
412(m) of the Code, (iv) for any excise tax imposed by Sections 4971, 4975,
4976, 4977 or 4979 of the Code, (v) for any minimum funding contributions
under Section 302(c)(11) of ERISA or Section 412(c)(11) of the Code, (vi) to
a fine under Section 502 of ERISA, or (vii) for any transaction within the
meaning of Section 4069 of ERISA.
(k) MGI has not incurred any withdrawal liability with respect to any
Multiemployer Plan within the meaning of Sections 4201 and 4204 of ERISA,
and no liabilities exist with respect to withdrawals
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from any Multiemployer Plans which could subject MGI to any controlled group
liability under Section 4001(b) of ERISA.
(l) All of the MGI Plans, to the extent applicable, are in compliance
with the continuation of group health coverage provisions contained in
Section 4980B of the Code and Section 601 through 608 of ERISA.
4.14 TAX MATTERS. MGI makes the following representations and warranties
with respect to tax matters.
(a) DEFINITIONS. For purposes of this SECTION 4.14 and SECTION 5.12,
the following definitions shall apply:
(i) The term "MGI Group" shall mean, individually and collectively,
(A) MGI and (B) any individual, trust, corporation, partnership or any
other entity as to which MGI is liable for Taxes incurred by such
individual or entity either as a transferee, or pursuant to Treasury
Regulations Section 1.1502-6, or pursuant to any other provision of
federal, territorial, state, local or foreign law or regulations.
(ii) The term "Taxes" shall mean all taxes, however denominated,
including any interest, penalties or other additions to tax that may
become payable in respect thereof, imposed by any federal, territorial,
state, local or foreign government or any agency or political subdivision
of any such government, which taxes shall include, without limiting the
generality of the foregoing, all income or profits taxes (including, but
not limited to, federal income taxes and state income taxes), payroll and
employee withholding taxes, unemployment insurance, social security
taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise
taxes, gross receipts taxes, business license taxes, occupation taxes,
real and personal property taxes, stamp taxes, transfer taxes, workers'
compensation, Pension Benefit Guaranty Corporation premiums and other
governmental charges, and other obligations of the same or of a similar
nature to any of the foregoing, which the MGI Group is required to pay,
withhold or collect.
(iii) The term "Returns" shall mean all reports, estimates,
declarations of estimated tax, information statements and returns
relating to, or required to be filed in connection with, any Taxes,
including information returns or reports with respect to backup
withholding and other payments to third parties.
(b) RETURNS FILED AND TAXES PAID. (i) All Returns required to be
filed by or on behalf of members of the MGI Group have been duly filed on
a timely basis and such Returns are true, complete and correct, (ii) all
Taxes shown to be payable on the Returns or on subsequent assessments
with respect thereto have been paid in full on a timely basis, and (iii)
no other Taxes are payable by the MGI Group with respect to items or
periods covered by such Returns (whether or not shown on or reportable on
such Returns) or with respect to any period prior to the date of this
Agreement. Each member of the MGI Group has withheld and paid over all
Taxes required to have been withheld and paid over, and complied with all
information reporting and backup withholding requirements, including
maintenance of required records with respect thereto, in connection with
amounts paid or owing to any employee, creditor, independent contractor,
or other third party. There are no liens on any of the assets of any
member of the MGI Group with respect to Taxes, other than liens for Taxes
not yet due and payable or for Taxes that a member of the MGI Group is
contesting in good faith through appropriate proceedings and for which
appropriate reserves have been established.
(c) TAX RESERVES. The amount of the MGI Group's liability for
unpaid Taxes for all periods ending on or before December 31, 1996 does
not in the aggregate exceed the amount of the current liability accruals
for Taxes (excluding reserves for deferred Taxes) reflected on the
consolidated balance sheet of MGI for the period ending December 31,
1996, and the amount of
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the MGI Group's liability for unpaid Taxes for all periods ending on or
before the Effective Time shall not in the aggregate materially exceed
the amount of the current liability accruals for Taxes (excluding
reserves for deferred Taxes), as such accruals are reflected on the
consolidated balance sheet of MGI for the period ending December 31,
1996, plus additions thereto accrued through the Effective Time that are
consistent with past practices and in the ordinary course of business.
(d) TAX SHARING AGREEMENTS. MGI is not (nor has it ever been) a
party to any tax sharing agreement.
(e) TAX ELECTIONS AND SPECIAL TAX STATUS. No member of the MGI
Group is or has been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code during the applicable
period specified in Section 897(c)(1)(A)(ii) of the Code and Progenitor
is not required to withhold tax on the conversion of MGI Capital Stock
pursuant to this Agreement by reason of Section 1445 of the Code. No
member of the MGI Group is a "consenting corporation" under Section
341(f) of the Code. No member of the MGI Group has participated in an
international boycott as defined in Section 999 of the Code. No member of
the MGI Group has agreed, or is required to make, any adjustment under
Section 481(a) of the Code by reason of a change in accounting method or
otherwise. No member of the MGI Group has a permanent establishment in
any foreign country, as defined in any applicable Tax treaty or
convention between the United States of America and such foreign country,
and no member of the MGI Group is a party to any joint venture,
partnership, or other agreement, contract, or arrangement (either in
writing or verbally, formally or informally) which could be treated as a
partnership for federal income tax purposes.
(f) EXCESS PARACHUTE PAYMENT. No member of the MGI Group is a party
to any agreement, contract or arrangement (either in writing or verbally,
formally or informally) that, considered individually or collectively
with any other such agreement, contract or arrangement, would result in
the payment of any "excess parachute payment" within the meaning of
Section 280G of the Code. The disclosure provided to the stockholders of
MGI in respect of each and every transaction to be consummated in
connection with this Agreement, whether performed prior to, at or
following Closing, and the resolutions adopted after review of the
foregoing, are sufficient to comply with the provisions of Section 280G
of the Code (and both its adopted and proposed Treasury Regulations) that
allow for approval by appropriate persons and exemption from the
provisions of Section 280G of the Code of transactions that might
otherwise result in the payment of any "excess parachute payment" within
the meaning of Section 280G of the Code.
4.15 COMPLIANCE WITH APPLICABLE LAW. MGI holds all licenses, franchises,
permits, variances, exemptions, orders, approvals and authorizations necessary
for the lawful conduct of its business under and pursuant to, and the business
of MGI is not being conducted in violation of, any provision of any federal,
state, local or foreign statute, law, ordinance, rule, regulation, judgment,
decree, order, concession, grant, franchise, permit or license or other
governmental authorization or approval applicable to MGI, except to the extent
that the failure or violation would not in the aggregate have a Material Adverse
Effect.
4.16 SUBSIDIARIES. No member of the MGI Group has at any time maintained
any interest in a foreign subsidiary giving rise to information reporting
requirements under Section 6038 of the Code, or Treasury Regulations promulgated
thereunder, and no foreign person has at any time maintained an interest in any
member of the MGI Group giving rise to information reporting under Section 6038A
of the Code, or Treasury Regulations promulgated thereunder.
4.17 INTERESTED PARTY TRANSACTIONS. MGI is not indebted to any director,
officer, employee or agent of MGI (except for amounts due as normal salaries and
bonuses and in reimbursement of ordinary expenses), and no such person is
indebted to MGI, and there have been no other transactions of the type required
to be disclosed pursuant to Items 402 and 404 of Regulation S-K promulgated
under the
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Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") since December 31, 1993.
4.18 LABOR AND EMPLOYMENT MATTERS.
(a) MGI is and has been in compliance in all material respects with all
applicable laws respecting employment and employment practices, terms and
conditions of employment and wages and hours, including, without limitation,
the Immigration Reform and Control Act, the Worker Adjustment and Retraining
Notification Act, and such laws respecting employment discrimination, equal
opportunity, affirmative action, worker's compensation, occupational safety
and health requirements and unemployment insurance and related matters, and
is not engaged in and has not engaged in any unfair labor practice. To the
best knowledge of MGI, no investigation or review by or before any
governmental entity concerning any violations of any such applicable laws is
pending or, to the knowledge of MGI, threatened, nor has any such
investigation occurred during the last seven years, and no governmental
entity has provided any notice to MGI asserting an intention to conduct any
such investigation. There is no labor strike, dispute, slowdown or stoppage
actually pending or, to the knowledge of MGI, threatened against MGI. No
union representation question or union organizational activity exists
respecting the employees of MGI. MGI has not experienced any work stoppage
or other labor difficulty. No collective bargaining agreement exists which
is binding on MGI.
(b) In the event of termination of the employment of any officers,
directors, employees or agents of MGI, neither MGI, Progenitor, the
Surviving Corporation, nor any other subsidiaries of Progenitor, will
pursuant to any agreement or by reason of anything done prior to the
Effective Time by MGI be liable to any of said officers, directors,
employees or agents for so-called "severance pay" or any other similar
payments or benefits, including, without limitation, post-employment
healthcare (other than pursuant to COBRA) or insurance benefits.
(c) MGI does not have any written contract of employment or other
employment agreement with any of its employees that is not terminable at
will by MGI.
4.19 OWNERSHIP OF SHARES OF PROGENITOR COMMON STOCK. Neither MGI nor, to
its knowledge, any of its affiliates or associates (as such terms are defined
under the Exchange Act), (a) beneficially owns, directly or indirectly, or (b)
is party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of Progenitor
Common Stock, except for shares of Progenitor Common Stock in the aggregate
representing less than one percent (1%) of the outstanding shares of Progenitor
Common Stock.
4.20 INSURANCE. MGI is insured by insurers reasonably believed by MGI to
be of recognized financial responsibility against such losses and risks and in
such amounts as are customary in the business in which it is engaged. All
material policies of insurance and fidelity or surety bonds insuring MGI or its
respective business, assets, employees, officers and directors are in full force
and effect. There are no material claims by MGI under any such policy or
instrument as to which any insurance company is denying liability or defending
under a reservation of rights clause.
4.21 PRODUCTS. There are no products, and have never been any products,
manufactured or sold by MGI, either directly or through any agent, dealer or
distributor in any jurisdiction.
4.22 ENVIRONMENTAL PROTECTION.
(a) Neither MGI, nor any MGI Property (as defined in SUBSECTION (d)
below) is or has been in violation of any federal, state or local law,
ordinance or regulation concerning industrial hygiene or environmental
conditions, including, but not limited to, soil and groundwater conditions
("Environmental Laws"). Set forth in SECTION 4.22(a) of the MGI Disclosure
Schedule is a list of all permits, licenses, qualifications, designations,
declarations, orders, authorizations or other operating authority held or
maintained by MGI. MGI holds all permits, licenses, qualifications,
designations, declarations,
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orders, authorizations and other operating authorities required under any
applicable Environmental Law in connection with the business or operations
of MGI, and each such permit, license or other operating authority is in
full force and effect.
(b) MGI has not reported any, nor has it had knowledge of any
circumstances giving rise to any reporting requirement under applicable
Environmental Laws as to any, spills or releases of any Hazardous Materials
on, under or about any MGI Property, nor has MGI received any notices of
spills or releases of Hazardous Materials on, under or about any MGI
Property. "Hazardous Material" shall mean any substance, chemical, waste or
other material which is listed, defined or otherwise identified as
hazardous, toxic or dangerous under any applicable law; as well as any
petroleum, petroleum product or by-product, crude oil, natural gas, natural
gas liquids, liquefied natural gas, or synthetic gas useable for fuel, and
"source," "special nuclear," and "by-product" material as defined in the
Atomic Energy Act of 1954, 42 U.S.C. SectionSection 2011 et seq.
(c) There is no proceeding or investigation pending or, to the knowledge
of MGI, threatened by any governmental entity or other person with respect
to the presence of Hazardous Material on, under or about MGI Properties or
the migration thereof from or to other property. MGI has never been required
by any governmental entity to treat, clean up, or otherwise dispose of,
remove or neutralize any Hazardous Material on, under or about any MGI
Property.
(d) Neither MGI, any former subsidiary of MGI, nor to MGI's knowledge,
any other person has engaged in any activity that might reasonably be
expected to involve the generation, use, manufacture, treatment,
transportation, storage in tanks or otherwise, or disposal of Hazardous
Material on or from any property that MGI or any of its former subsidiaries
now owns or leases or has previously owned or leased or in which MGI or any
such former subsidiary now holds or has previously held any security
interest, mortgage, or other lien or interest ("MGI Property"), and no (i)
presence, release, threatened release, discharge, spillage or migration of
Hazardous Material, (ii) condition that has resulted or could result in any
use, ownership or transfer restriction, or (iii) condition of actual or
potential nuisance has occurred on or from such MGI Property, and to the
knowledge of MGI, no condition exists that could give rise to any suit,
claim, action, proceeding or investigation by any person or governmental
entity against MGI, or any other person or such MGI Property as a result of
or in connection with (a) any of the foregoing events, (b) any failure to
obtain any required permits or approvals of any governmental entity, (c) the
violation of any terms or conditions of such permits, or (d) any other
violation of Environmental Laws.
(e) To the knowledge of MGI, there are no substances or conditions in or
on MGI Property which are reasonably likely to support claims or causes of
action under any applicable Environmental Law.
(f) For purposes of this SECTION 4.22, the term "Material Adverse
Effect" includes (i) any material injunction or criminal action or
proceeding against or involving MGI, and (ii) any requirement that executive
officers of Progenitor or MGI or Progenitor's subsidiaries be subjected to a
consent decree or become individually involved in any proceeding in CLAUSE
(i) above.
4.23 INTELLECTUAL PROPERTY RIGHTS.
(a) SECTION 4.23(a) of the MGI Disclosure Schedule sets forth an
accurate and complete list of all (i) patents, applications for patents,
registrations of trademarks (including service marks) and applications
therefor and registrations of copyrights and applications therefor that are
owned by MGI, (ii) other Intellectual Property Rights (as defined below)
that are owned by MGI, (iii) unexpired licenses relating to Intellectual
Property Rights that have been granted to or by MGI (the "Licenses"), and
(iv) other material agreements relating to Intellectual Property Rights.
(b) MGI owns and has the exclusive right to use, and to license others
to use, all MGI Intellectual Property Rights. Such ownership and right to
use, and to license others to use, are free
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and clear of, and without liability under, all liens and security interests
of third parties. MGI has all Intellectual Property Rights necessary to
carry out MGI's current activities and the future activities anticipated by
MGI as of the date hereof.
(c) Each of the Licenses is a valid and binding obligation of MGI and is
in full force and effect with respect to MGI and, to the best knowledge of
MGI, with respect to all other parties thereto. Except to the extent that
the consummation of the transactions contemplated by this Agreement or the
Related Agreements may require the consent of third parties, to the
knowledge of MGI there are no existing defaults by MGI under the Licenses
or, to the knowledge of MGI, by any other party thereto, and, to the
knowledge of MGI, no event of default has occurred, and no event, condition
or occurrence exists that (whether with or without notice, lapse of time,
the declaration of default or other similar event) would constitute a
default by MGI thereunder.
(d) MGI has taken reasonable steps sufficient to safeguard and maintain
the secrecy and confidentiality of, and MGI's proprietary rights in, the
unpatented know-how, technology, proprietary processes, formulae and other
information that is utilized in the conduct of MGI's business, including,
without limitation, the know-how, technology, proprietary processes,
formulae, and other information listed as trade secrets in SECTION 4.23(d)
of the MGI Disclosure Schedule. Without limitation of the generality of the
foregoing, MGI has obtained confidentiality and inventions assignment
agreements from all MGI's past and present employees and independent
contractors involved in the creation or development of MGI Intellectual
Property Rights (including, without limitation, from all employees and
contractors who are inventors, authors, creators or developers of MGI
Intellectual Property Rights).
(e) There are no royalties, honoraria, fees or other payments payable by
MGI to any person by reason of the ownership, use, license, sale or
disposition of any of MGI Intellectual Property Rights.
(f) MGI (i) knows of no infringement in the conduct of MGI's business or
the contemplated business of MGI as anticipated by MGI on the date hereof of
the right or claimed right of any other party with respect to any
Intellectual Property Rights known to MGI, and (ii) has no knowledge of any
alleged or claimed infringement by any product or process manufactured,
used, sold or under development by or for MGI in the conduct of MGI's
business.
(g) MGI is not using any confidential information, trade secret or other
proprietary information which it has not been authorized to use.
(h) No independent contractors who have performed services related to
MGI's business have any right, title or interest in MGI Intellectual
Property Rights.
(i) The execution, delivery and performance of this Agreement and the
Related Agreements to which it is a party by MGI, and the consummation by
MGI of the transactions contemplated hereby and thereby, will not breach,
violate or conflict with any agreement governing MGI Intellectual Property
Rights, will not cause the forfeiture or termination or give rise to a right
of forfeiture or termination of MGI Intellectual Property Rights or in any
way impair the right of MGI to use, sell, license or dispose of, or bring
any action for the infringement of, MGI Intellectual Property Rights or any
portion thereof.
(j) For purposes of this SECTION 4.23, "use," with respect to
Intellectual Property Rights, includes make, reproduce, display or perform
(publicly or otherwise), prepare derivative works based on, sell,
distribute, license, sublicense, distribute, disclose and otherwise exploit
such Intellectual Property Rights and products incorporating or subject to
such Intellectual Property Rights.
(k) As used in this Agreement, the term "Intellectual Property Rights"
means (i) intellectual property rights, including, without limitation,
patents, patent applications, patent rights, trademarks, trademark
applications, trade names, service marks, service mark applications,
copyrights, copyright
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applications, publication rights, computer programs and other computer
software (including source codes and object codes), inventions, know-how,
trade secrets, technology, proprietary processes and formulae and (ii) all
licenses and other rights held by or on behalf of a party in any third party
product, intellectual property, proprietary or personal rights,
documentation or tangible or intangible property, including without
limitation, the types of intellectual property and intangible proprietary
information described in CLAUSE (i). As used in this Agreement, the term
"MGI Intellectual Property Rights" means all Intellectual Property Rights
that are part of the conduct of the business of MGI.
4.24 REAL PROPERTY.
(a) SECTION 4.24(a) of the MGI Disclosure Schedule lists all of the real
property leased or currently used by MGI in the course of its business (the
"MGI Real Property"). SECTION 4.24(a) of the MGI Disclosure Schedule also
lists all material real property used by MGI in the course of its business
at any time since December 31, 1992, other than MGI Real Property. MGI does
not own any real property.
(b) All MGI Real Property is in all material respects suitable and
adequate for the uses for which it is currently devoted. MGI has a valid
leasehold interest in all MGI Real Property, in each case free and clear of
all Material Encumbrances. "Material Encumbrance" means any mortgage, lien,
pledge, encumbrance, security interest, deed of trust, option, encroachment,
reservation, order, decree, judgment, condition, restriction, charge, Other
Agreement (as defined below), claim or equity of any kind, except for any of
the foregoing which (i) secures a liability which is accurately reflected in
the financial statements of the party whose interest in property is affected
thereby; (ii) liens for taxes not yet due; (iii) easements or other similar
rights which do not in the aggregate materially interfere with the present
use of the property affected thereby; and (iv) other encumbrances. "Other
Agreements" means any agreement or arrangement between two or more persons
(or entities) with respect to their relative rights and obligations or with
respect to a thing done or to be done (whether or not conditional,
executory, express, implied, in writing or meeting the requirements of
contract), including, without limitation, contracts, leases, promissory
notes, covenants, easements, rights of way, commitments or understanding.
(c) All buildings, structures, fixtures and other improvements used in
MGI's business and located on MGI Real Property are in good repair, free of
defects (latent or patent), and fit for the uses to which they are currently
devoted. To the knowledge of MGI, all such buildings, structures, fixtures
and improvements on MGI's Real Property conform to all applicable laws.
(d) None of the MGI Real Property is subject to any Other Agreement or
other restriction of any nature whatsoever (recorded or unrecorded)
preventing or limiting MGI's right to use it in the manner that such
property is currently being used or that it is contemplated to be used.
(e) No portion of the MGI Real Property or any building, structure,
fixture or improvement thereon is the subject of, or affected by, any
condemnation, eminent domain or inverse condemnation proceeding currently
instituted or pending, and MGI has no knowledge that any of the foregoing
are, or will be, the subject of, or affected by, any such proceeding.
(f) The MGI Real Property has direct and unobstructed access to adequate
electric, gas, water, sewer and telephone lines, and public streets, all of
which are adequate for the uses to which the MGI Real Property is currently
devoted.
4.25 COMPLETE COPIES OF REQUESTED REPORTS. MGI has delivered or made
available true and complete copies of each document that has been requested by
Progenitor or its counsel in connection with their legal and accounting review
of MGI. The minute books of MGI made available to Progenitor contain a complete
and accurate summary of all meetings of directors and stockholders or actions by
written consent since the time of incorporation of MGI through the date of this
Agreement.
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4.26 SHARE OWNERSHIP. MGI's stockholders, and the capital stock held
thereby, as of the date of this Agreement are as set forth in SECTION 4.26 of
the MGI Disclosure Schedule.
4.27 SUPPLIERS. No material supplier of MGI has indicated to MGI that it
will stop, or materially decrease the rate of, supplying materials, products or
services to MGI. MGI has not knowingly breached any agreement with, or engaged
in any fraudulent conduct with respect to, any material supplier of MGI.
4.28 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by MGI herein or in any schedule hereto, including the MGI Disclosure
Schedule, or certificate furnished by MGI pursuant to this Agreement or any
Related Agreement, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements contained
herein or therein, in light of the circumstances under which they were made, not
misleading. To the extent such representations permit omissions of items
otherwise required to be discussed because they are not material or do not or
would not have a Material Adverse Effect on MGI, such omissions in the aggregate
would not and do not have a Material Adverse Effect on MGI.
4.29 TAKEOVER STATUTE. MGI and its Board of Directors have taken all
actions necessary so that the restrictions contained in Section 203 of the DGCL
applicable to a "business combination" will not apply to the Reorganization in
accordance with the terms hereof.
4.30 VOTING ARRANGEMENTS. To the knowledge of MGI and except as provided
herein, there are no outstanding stockholder agreements, voting trusts, proxies
or other arrangements or understandings among the stockholders of MGI relating
to the voting of their respective shares.
4.31 OWNERSHIP OF SHARES. As of the date hereof, MGI (a) does not
beneficially own, directly or indirectly, and (b) is not a party to any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing in each case, shares of capital stock of another company
that in the aggregate represents ten percent (10%) or more of the outstanding
shares of capital stock of such other company.
4.32 NO UNDISCLOSED LIABILITIES. Except to the extent specifically
reflected or reserved against in the MGI Financial Statements as of December 31,
1996, (i) as of the date of this Agreement, MGI does not have any material
liabilities or obligations of any nature, whether absolute, accrued, contingent
or otherwise, other than obligations which have arisen after December 31, 1996
in the ordinary course of business and consistent with past practices in the
amounts set forth in the MGI Disclosure Schedule; and, (ii) as of the Effective
Time, MGI will not have any such material liabilities or obligations other than
(A) liabilities and obligations which have arisen since December 31, 1996, in
the ordinary course of business and consistent with past practices, and (B) any
such liabilities or obligations incurred after the date hereof not in violation
of SECTION 6.1 hereof.
4.33 PERSONAL PROPERTY. MGI has good and marketable title, free and clear
of all title defects, security interests, pledges, options, claims, liens,
encumbrances and restrictions of any nature whatsoever (including, without
limitations, leases, chattel mortgages, conditional sale contracts, purchase
money security interests, collateral security arrangements, and other title or
interest-retaining agreements) to all inventory, receivables, furniture,
machinery, equipment and other personal property, tangible or otherwise,
reflected in the MGI Financial Statements as of December 31, 1996 or used in
MGI's business as of the date of such Financial Statements even if not reflected
thereon, except for (i) acquisitions and dispositions since December 31, 1996 in
the ordinary course of business and consistent with past practices, and (ii)
liens for current taxes and assessments not delinquent. All such personal
property used in the conduct of MGI's business is in good operating condition
and repair, reasonable wear and tear excepted.
4.34 GUARANTEES AND SURETYSHIPS. MGI has no powers of attorney outstanding
(other than those issued in the ordinary course of business with respect to tax
matters), and MGI has no obligations or liabilities (absolute or contingent) as
guarantor, surety, co-signer, endorser, co-maker, indemnitor or otherwise
respecting the obligations or liabilities of any person, corporation,
partnership, joint venture,
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association, organization, or other entity (other than pursuant to
indemnification obligations in SECTION 7.13 below).
4.35 BROKERS. Except for its financial advisor, Lehman Brothers
Incorporated, no broker, finder or financial advisor is entitled to any
brokerage, finder's or other fee or commission in connection with the
Reorganization or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of MGI, and a true and complete copy of all
engagement letters or agreements between MGI and Lehman Brothers Incorporated
and between MGI and any third party for whom any amounts payable contingent upon
consummation of the Reorganization, have previously been delivered to
Progenitor.
4.36 COMPLETE DISCLOSURE. There are no facts known to MGI which a would
result in a Material Adverse Effect with respect to MGI.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PROGENITOR
Except as set forth in the disclosure letter delivered to MGI at or prior to
the execution of this Agreement ("Progenitor Disclosure Schedule"), Progenitor
and Reorganization Sub represent and warrant to MGI as follows:
5.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Progenitor is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has all requisite corporate power to carry on its
business as it is now being conducted. Progenitor is duly qualified to transact
business and is in good standing in Ohio and each other jurisdiction in which
the failure to so qualify would have a Material Adverse Effect.
5.2 CAPITALIZATION AND VOTING RIGHTS.
(a) The authorized capital stock of Progenitor as of the date of this
Agreement consists of:
(i) PREFERRED STOCK. 3,000,000 shares of Preferred Stock, $.01 par
value per share of which 2,120,000 shares have been designated Series A
Preferred Stock (the "Progenitor Series A Preferred Stock") and 880,000
shares have been designated Series B Preferred Stock (the "Progenitor
Series B Preferred Stock," and together with the Progenitor Series A
Preferred Stock, the "Progenitor Preferred Stock"). The rights,
privileges and preferences of the Progenitor Preferred Stock are as
stated in Progenitor's Certificate of Incorporation, as amended to date;
and
(ii) COMMON STOCK. 39,000,000 shares of the Progenitor Common
Stock, of which 5,771,808 share are issued and outstanding.
(b) In addition, as of the date of this Agreement: except as set forth
in SECTION 5.2(b) of the Progenitor Disclosure Schedule, (i) there are
2,700,000 shares of the Progenitor Common Stock reserved for issuance under
Progenitor's 1992 Stock Option Plan and 1996 Stock Incentive Plan, under
which options to purchase 1,394,550 shares of Progenitor Common Stock are
outstanding; (ii) an additional 200,000 shares of Progenitor Common Stock
are available for issuance under Progenitor's 1996 Employee Stock Purchase
Plan; (iii) Progenitor has outstanding warrants to purchase 34,901 shares of
Progenitor Series B Preferred Stock; (iv) there is not (a) any subscription,
warrant, option, convertible security or other right (contingent or
otherwise) to purchase or acquire any shares of capital stock of Progenitor,
(b) any commitment of Progenitor to issue any subscription, warrant, option,
convertible security or other such right or issue or distribute to holders
of any shares of its capital stock any evidences of indebtedness or assets
of Progenitor or (c) any obligation of Progenitor (contingent or otherwise)
to purchase, redeem or otherwise acquire any share of its capital stock or
any interest therein or to pay any dividend or make any other distribution
in respect thereof; and
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(v) no person is entitled to any preemptive or similar right with respect to
the issuance of any capital stock of Progenitor.
(c) All outstanding shares of Progenitor's Common Stock and Preferred
Stock as of the date of this Agreement are duly and validly authorized and
issued, fully paid and nonassessable and were issued in accordance with the
registration or qualification provisions of the Securities Act and any
relevant state securities laws or pursuant to valid exemptions therefrom.
5.3 AUTHORIZATION. All corporate action on the part of each of Progenitor
and Reorganization Sub, and their respective officers, directors and
stockholders, necessary for the authorization, execution and delivery of this
Agreement and the Related Agreements, the performance of all obligations of
Progenitor and Reorganization Sub hereunder and thereunder and the issuance and
delivery of the Progenitor Common Stock being exchanged hereunder has been taken
and this Agreement and the Related Agreements (to the extent such parties are
parties to them) constitute valid and legally binding obligations of Progenitor
and Reorganization Sub enforceable in accordance with their terms, except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors' rights,
(b) as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, and (c) to the extent the
enforceability of the indemnification provisions contained in this Agreement and
the Related Agreements may be limited by applicable laws.
5.4 VALID ISSUANCE OF STOCK. The Progenitor Common Stock that is acquired
hereunder, when issued, sold and delivered in accordance with the terms of this
Agreement for the consideration expressed herein, will be duly and validly
issued, fully paid, and nonassessable, and not subject to preemptive or any
other similar rights of the stockholders of Progenitor or others, and free, at
the time of issuance, of all restrictions on transfer other than restrictions on
transfer imposed under this Agreement and under applicable state and federal
securities laws.
5.5 GOVERNMENT CONSENTS. Except for the filing and recordation of a
Certificate of Merger as required by the DGCL, no consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
Progenitor is required in connection with the consummation of the transactions
contemplated by this Agreement or the Related Agreements, other than such
filings as may be required to be made in connection with the IPO or the
Reorganization pursuant to applicable federal or state securities laws or with
any stock exchange (or the Nasdaq National Market or other quotation system of
the National Association of Securities Dealers, Inc.) on which the Progenitor
Common Stock may become listed.
5.6 LITIGATION. There is no action, suit, proceeding or investigation
pending or threatened against Progenitor as of the date of this Agreement that
questions the validity of this Agreement or the Related Agreements, or the right
of Progenitor to enter into such Agreement or the Related Agreements, or to
consummate the transactions contemplated hereby, or that might result, either
individually or in the aggregate, in any Material Adverse Effect nor is
Progenitor aware that there is any basis for the foregoing. Progenitor is not as
of the date of this Agreement a party or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality.
5.7 CONTRACTS. Each of the material contracts, whether written or oral, to
which Progenitor or any of its subsidiaries is a party that relates or affects
the assets or operations of Progenitor or any of its subsidiaries or to which
Progenitor or any of its subsidiaries or their respective assets or operations
may be bound or subject is a valid and binding obligation of Progenitor and in
full force and effect with respect to Progenitor or such subsidiary and, to the
best knowledge of Progenitor, with respect to all other parties thereto.
5.8 COMPLIANCE WITH OTHER INSTRUMENTS. Progenitor is not as of the date of
this Agreement in violation or default of any provision of its Certificate of
Incorporation or Bylaws (each as amended to
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date), or of any instrument, judgment, order, writ, decree or contract to which
it is a party or by which it is bound, or, to the best of its knowledge as of
the date of this Agreement, of any provision of any federal or state statute,
rule or regulation applicable to Progenitor, which violation or default would
have a Material Adverse Effect. The execution, delivery and performance of this
Agreement and the Related Agreements (to the extent Progenitor is a party
thereto), and the consummation of the transactions contemplated hereby, will not
result in any such material violation or be in conflict with or constitute, with
or without the passage of time and giving of notice, either a default under any
such provision, instrument, judgment, order, writ, decree or contract or an
event that results in the creation of any lien, charge or encumbrance upon any
assets of Progenitor or the suspension, revocation, impairment, forfeiture, or
non-renewal of any material permit, license, authorization, or approval
applicable to Progenitor, its business or operations or any of its assets or
properties. There is no such violation or default as of the date of this
Agreement which, with the passage of time or giving of notice or both, would
constitute a violation or default that would have a Material Adverse Effect.
5.9 REGISTRATION RIGHTS. Except as provided in this Agreement, the Company
has not granted or agreed to grant any registration rights, including piggyback
rights, to any person.
5.10 CORPORATE DOCUMENTS. The Certificate of Incorporation and Bylaws of
Progenitor in effect as of the date of this Agreement are in the form attached
hereto as SECTION 5.10 of the Progenitor Disclosure Schedule.
5.11 TITLE TO PROPERTY AND ASSETS. Progenitor owns its property and assets
free and clear of all mortgages, liens, loans and encumbrances, except such
encumbrances and liens that arise in the ordinary course of business and do not
materially impair Progenitor's ownership or use of such property or assets. With
respect to the property and assets it leases, Progenitor is in compliance as of
the date of this Agreement with such leases and holds as of the date of this
Agreement a valid leasehold interest free of any liens, claims or encumbrances.
5.12 TAXES. Progenitor has filed all Returns as required by law as of the
date of this Agreement. These Returns are true and correct in all material
respects. Progenitor has paid all Taxes due as of the date of this Agreement.
The provision for Taxes of Progenitor is adequate for Taxes due or accrued as of
the date of this Agreement. No controversy with any government or government
agency regarding Taxes is pending as of the date of this Agreement as to which
Progenitor has received notice or, to the best of Progenitor's knowledge, is
threatened as of the date of this Agreement.
5.13 ABSENCE OF CHANGES. Since December 31, 1996, Progenitor has not
suffered any change or any event involving a prospective change in its business,
assets, financial condition or results of operation which has had or is
reasonably likely to have, in the aggregate, a Material Adverse Effect.
5.14 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Each of the S-4 Registration Statement and the IPO Registration
Statement (i) will be prepared as of the date it is declared effective by
the SEC in all material respects in accordance with the requirements of the
Securities Act and (ii) will not as of the date it is declared effective by
the SEC (or if amended or superseded by a filing subsequent to its
effectiveness, then on the date of such filing) contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements, in light of the
circumstances under which they were made, not misleading; provided that
Progenitor makes no such representations with respect to any information
pertaining to MGI provided by MGI.
(b) Progenitor has provided to MGI (i) the unaudited balance sheet of
Progenitor as of September 30, 1996 and the related statements of operations
for the fiscal years ended September 30, 1996 and September 30, 1995, and
(ii) the unaudited balance sheet of Progenitor as of December 31, 1996, and
the related unaudited statements of operations, changes in stockholders'
equity and cash flows of Progenitor for the quarter ended December 31, 1996
(collectively, the "Progenitor Unaudited
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Financial Statements"). At least thirty (30) days prior to Closing,
Progenitor will provide to MGI the audited balance sheet of Progenitor as of
September 30, 1996, and the related audited statements of operations,
changes in stockholders' equity and cash flows of Progenitor for the fiscal
years ended September 30, 1995 and September 30, 1996 (the "Progenitor
Audited Financial Statements"). Each of the Unaudited Financial Statements
fairly presents, and the Audited Financial Statements (including the notes
thereto) when provided by Progenitor will fairly present, the financial
position of Progenitor as of their respective dates and the results of
operations and changes in cash flows for the respective periods set forth
therein and has been prepared (or, in the case of the Audited Financial
Statements, will be prepared) in accordance with generally accepted
accounting principles consistently applied, except as otherwise noted
therein and subject, in the case of the Progenitor Unaudited Financial
Statements, to any normal adjustments that would not in the aggregate be
material in amount or effect arising as a result of the audit thereof
including in connection with the finalization of the footnotes thereto.
(c) As of the date of this Agreement, there has been no material change
in Progenitor's business or operations from the information presented in
Progenitor's registration statement on Form S-1 (File No. 333-05369) other
than (i) as set forth in the Progenitor Disclosure Schedule, or (ii) changes
in Progenitor's financial position and results of operation as reflected in
the Progenitor Audited Financial Statements or the Progenitor Unaudited
Financial Statements or otherwise in the ordinary course of business since
the dates thereof. Progenitor will accurately describe in the IPO
Registration Statement (or otherwise notify MGI in writing of) any
additional such material changes that occur prior to the Effective Time.
5.15 INTELLECTUAL PROPERTY RIGHTS.
Except as set forth in the Progenitor Disclosure Schedule:
(a) Progenitor owns and has the right to use, and to license others to
use, all Progenitor Intellectual Property Rights (as defined below). Such
ownership and right to use, and to license others to use, are free and clear
of, and without liability under, all liens and security interests of third
parties. Progenitor has all Intellectual Property Rights necessary to carry
out Progenitor's current, former and anticipated future activities.
(b) Progenitor has taken reasonable steps sufficient to safeguard and
maintain the secrecy and confidentiality of, and Progenitor's proprietary
rights in, the unpatented know-how, technology, proprietary processes,
formulae and other information that is utilized in the conduct of
Progenitor's business. Without limitation of the generality of the
foregoing, Progenitor has obtained confidentiality and inventions assignment
agreements from all Progenitor's past and present employees and independent
contractors involved in the creation or development of Progenitor
Intellectual Property Rights (including, without limitation, from all
employees and contractors who are inventors, authors, creators or developers
of Progenitor Intellectual Property Rights).
(c) There are no royalties, honoraria, fees or other payments payable by
Progenitor to any person by reason of the ownership, use, license, sale or
disposition of any Progenitor Intellectual Property Rights.
(d) Progenitor does not know of (i) any infringement in the conduct of
Progenitor's business the right or claimed right of any other party with
respect to any Intellectual Property Rights known to Progenitor, or (ii) any
alleged or claimed infringement by any product or process manufactured,
used, sold or under development by or for Progenitor in the conduct of
Progenitor's business.
(e) No independent contractors who have performed services related to
Progenitor's business have any right, title or interest in Progenitor
Intellectual Property Rights.
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(f) The execution, delivery and performance of this Agreement and the
Related Agreements by Progenitor, and the consummation by Progenitor of the
transactions contemplated hereby and thereby, will not breach, violate or
conflict with any agreement governing Progenitor Intellectual Property
Rights, will not cause the forfeiture or termination or give rise to a right
of forfeiture or termination of Progenitor Intellectual Property Rights or
in any way impair the right of Progenitor to use, sell, license or dispose
of, or bring any action for the infringement of, Progenitor Intellectual
Property Rights or any portion thereof.
(g) For purposes of this SECTION 5.15, "use," with respect to
Intellectual Property Rights, includes make, reproduce, display or perform
(publicly or otherwise), prepare derivative works based on, sell,
distribute, license, sublicense, distribute, disclose and otherwise exploit
such Intellectual Property Rights and products incorporating or subject to
such Intellectual Property Rights.
(h) As used in this Agreement, the term "Progenitor Intellectual
Property Rights" means all Intellectual Property Rights (as defined in
SECTION 4.23(k)) that are part of the conduct of the business of Progenitor.
5.16 COMPLETE COPIES OF REQUESTED DOCUMENTS. Progenitor has delivered or
made available true and complete copies of each document that has been requested
by MGI or its counsel in connection with their legal and accounting review of
Progenitor and its subsidiaries. The minute books of Progenitor made available
to MGI contain a complete and accurate summary of all meetings of directors and
stockholders or actions by written consent since the time of incorporation of
Progenitor through the date of this Agreement.
5.17 EMPLOYEE BENEFIT PLANS.
(a) SECTION 5.17(a) of the Progenitor Disclosure Schedule sets forth a
true and complete list of each written or oral employee benefit plan
(including, without limitation, any "employee benefit plan" as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) that is maintained (the "Progenitor Plans"), or is or was
contributed to by Progenitor or any of its subsidiaries or pursuant to which
Progenitor or any of its subsidiaries is still potentially liable for
payments, benefits or claims. A copy of each Progenitor Plan as currently in
effect and, if applicable, the most recent Annual Report, Actuarial Report
or Valuation, Summary Plan Description, Trust Agreement and a Determination
Letter issued by the IRS for each Progenitor Plan have heretofore been
delivered to MGI or its counsel. Neither Progenitor nor any trade or
business, whether or not incorporated (an "ERISA Affiliate"), which together
with Progenitor would be deemed a "single employer" within the meaning of
Section 4001 of ERISA, has maintained or contributed to any plan subject to
Title IV of ERISA or Section 412 of the Internal Revenue Code of 1986, as
amended (the "Code") (including any "multiemployer plan," as defined in
Section 3(37) of ERISA ("Multiemployer Plan")) during the six calendar years
preceding the date of this Agreement.
(b) Each Progenitor Plan which is an "employee benefit plan," as defined
in Section 3(3) of ERISA, complies by its terms and in operation with the
requirements provided by any and all statutes, orders or governmental rules
or regulations currently in effect and applicable to Progenitor Plans,
including but not limited to ERISA and the Code.
(c) All reports, forms and other Reports required to be filed with any
government entity with respect to any Progenitor Plan (including without
limitation, summary plan descriptions, Forms 5500 and summary annual
reports) have been timely filed and are accurate.
(d) Each Progenitor Plan intended to qualify under Section 401(a) of the
Code has been determined by the Internal Revenue Service to so qualify after
January 1, 1985, and each trust maintained pursuant thereto has been
determined by the Internal Revenue Service to be exempt from taxation under
Section 501 of the Code. Nothing has occurred since the date of the Internal
Revenue Service's favorable determination letter that could adversely affect
the qualification of the Progenitor
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Plan and its related trust. Progenitor and each ERISA Affiliate of
Progenitor have timely and properly applied for a written determination by
the Internal Revenue Service on the qualification of each such Progenitor
Plan and its related trust under Section 401(a) of the Code, as amended by
the Tax Reform Act of 1986 and subsequent legislation enacted through the
date hereof, and Section 501 of the Code.
(e) All contributions or other amounts payable by Progenitor or its
subsidiaries as of the Effective Time with respect to each Progenitor Plan
and in respect of current or prior plan years have been or will be (prior to
the Effective Time) either paid or accrued on the Financial Statements of
Progenitor in accordance with past practice and the recommended contribution
in any actuarial report.
(f) No Progenitor Plan provides benefits, including without limitation
death or medical benefits (whether or not insured), with respect to current
or former employees for periods extending beyond their retirement or other
termination of service (other than (i) continuation group health coverage
pursuant to Section 4980B of the Code, (ii) death benefits or retirement
benefits under any "employee pension plan," as that term is defined in
Section 3(2) of ERISA, (iii) deferred compensation benefits with respect to
which there is an accrual of liability on the books of Progenitor or its
ERISA Affiliates, or (iv) benefits the full cost of which is borne by the
current or former employee (or his or her beneficiary)).
5.18 ENVIRONMENTAL PROTECTION.
(a) None of Progenitor, Progenitor's subsidiaries, or any Progenitor
Property (as defined in SUBSECTION (d) below) is or has been in violation of
any federal, state or local law, ordinance or regulation concerning
industrial hygiene or environmental conditions, including, but not limited
to, soil and groundwater conditions ("Environmental Laws").
(b) Neither Progenitor nor any of its subsidiaries has reported any, or
has had knowledge of any circumstances giving rise to any reporting
requirement under applicable Environmental Laws as to any, spills or
releases of any Hazardous Materials on, under or about any Progenitor
Property, nor has Progenitor or any of its subsidiaries received any notices
of spills or releases of Hazardous Materials on, under or about any
Progenitor Property. "Hazardous Material" shall mean any substance,
chemical, waste or other material which is listed, defined or otherwise
identified as hazardous, toxic or dangerous under any applicable law; as
well as any petroleum, petroleum product or by-product, crude oil, natural
gas, natural gas liquids, liquefied natural gas, or synthetic gas useable
for fuel, and "source," "special nuclear," and "by-product" material as
defined in the Atomic Energy Act of 1954, 42 U.S.C. Sections 2011 ET SEQ.
(c) There is no proceeding or investigation pending or, to the knowledge
of Progenitor, threatened by any governmental entity or other person with
respect to the presence of Hazardous Material on, under or about Progenitor
Properties or the migration thereof from or to other property. Neither
Progenitor nor any of its subsidiaries has ever been required by any
governmental entity to treat, clean up, or otherwise dispose of, remove or
neutralize any Hazardous Material on, under or about any Progenitor
Property.
(d) Neither Progenitor, any current or former subsidiary of Progenitor,
nor to Progenitor's knowledge, any other person has engaged in any activity
that might reasonably be expected to involve the generation, use,
manufacture, treatment, transportation, storage in tanks or otherwise, or
disposal of Hazardous Material on or from any property that Progenitor or
any of its current or former subsidiaries now owns or leases or has
previously owned or leased or in which Progenitor or any such subsidiary now
holds or has previously held any security interest, mortgage, or other lien
or interest ("Progenitor Property"), and no (i) presence, release,
threatened release, discharge, spillage or migration of Hazardous Material,
(ii) condition that has resulted or could result in any use, ownership or
transfer restriction, or (iii) condition of actual or potential nuisance has
occurred on or from such
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Progenitor Property, and to the knowledge of Progenitor, no condition exists
that could give rise to any suit, claim, action, proceeding or investigation
by any person or governmental entity against Progenitor, any of its
subsidiaries or any other person or such Progenitor Property as a result of
or in connection with (a) any of the foregoing events, (b) any failure to
obtain any required permits or approvals of any governmental entity, (c) the
violation of any terms or conditions of such permits, or (d) any other
violation of Environmental Laws.
(e) To the knowledge of Progenitor, there are no substances or
conditions in or on Progenitor Property which are reasonably likely to
support claims or causes of action under any applicable Environmental Law.
(f) For purposes of this SECTION 5.18, the term "Material Adverse
Effect" includes (i) any material injunction or criminal action or
proceeding against or involving Progenitor or its subsidiaries and (ii) any
requirement that executive officers of Progenitor or MGI or Progenitor's
subsidiaries be subjected to a consent decree or become individually
involved in any proceeding in CLAUSE (i) above.
5.19 INSURANCE. Progenitor and each of its subsidiaries are insured by
insurers reasonably believed by Progenitor to be of recognized financial
responsibility against such losses and risks and in such amounts as are
customary in the businesses in which they are engaged. All material policies of
insurance and fidelity or surety bonds insuring Progenitor or any of its
subsidiaries or their respective businesses, assets, employees, officers and
directors are in full force and effect. There are no material claims by
Progenitor or any of its subsidiaries under any such policy or instrument as to
which any insurance company is denying liability or defending under a
reservation of rights clause.
5.20 NO UNDISCLOSED LIABILITIES. Except to the extent specifically
reflected or reserved against in the Progenitor Financial Statements as of
December 31, 1996, Progenitor does not have any material liabilities or
obligations of any nature, whether absolute, accrued, contingent or otherwise,
other than obligations which have arisen after December 31, 1996 in the ordinary
course of business and consistent with past practices.
5.21 FINANCIAL RESOURCES. Progenitor has secured funding commitments from
Interneuron that are sufficient to satisfy Progenitor's obligations under this
Agreement and the Loan Agreement.
5.22 COMPLETE DISCLOSURE. There are no facts known to Progenitor which
would result in a Material Adverse Effect with respect to Progenitor.
ARTICLE VI
COVENANTS
6.1 CONDUCT OF BUSINESS BY MGI PENDING THE REORGANIZATION. During the
period from the date of this Agreement and continuing until the Effective Time,
except as agreed to in writing by Progenitor (subject to SECTION 6.14):
(a) the business of MGI shall be conducted only in accordance with the
operating budget of MGI (the "MGI Budget"), included as SCHEDULE D to the
Loan Agreement (as defined in SECTION 6.10 below) and only in the ordinary
and usual course of business and consistent with past practices except as
specifically set forth in this Agreement;
(b) MGI shall not (i) except as contemplated by SECTION 3.12(b) or
SECTION 7.16 hereof, amend its Certificate of Incorporation or Bylaws; or
(ii) split, combine or reclassify any shares of its outstanding capital
stock or declare, set aside or pay any dividend or other distribution
payable in cash, stock or property in respect of its capital stock, or
directly or indirectly redeem, purchase or otherwise acquire any shares of
its capital stock or other securities, other than in connection with the use
of shares of capital stock to pay the exercise price or tax withholdings in
connection with its stock-based employee benefit plans in the ordinary
course of business and consistent with past practices;
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(c) except as set forth in SECTION 6.10, SECTION 6.11 AND SECTION 6.17,
below, MGI shall not (i) authorize for issuance, issue, sell, pledge,
dispose of, encumber, deliver or agree or commit to issue, sell, pledge, or
deliver any additional shares of, or rights of any kind to acquire any
shares of, its capital stock of any class or exchangeable into shares of
stock of any class or any bond, debenture, note or other indebtedness having
the right to vote (or convertible into or exercisable for securities having
the right to vote) (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase or otherwise),
except for unissued shares of MGI Capital Stock reserved for issuance upon
the exercise of the stock options or pursuant to MGI's employee stock plans
or the Phoenix Warrants; (ii) except as set forth in the MGI Budget,
acquire, dispose of, transfer, lease, license, mortgage, pledge or encumber
any fixed or other assets, other than in the ordinary course of business and
consistent with past practices; (iii) except as set forth in the MGI Budget,
incur, assume or prepay any indebtedness, liability or obligation or any
other liabilities or issue any debt securities, other than in the ordinary
course of business and consistent with past practices (and other than the
obligations under the Loan Agreement); (iv) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person, other than in the
ordinary course of business and consistent with past practices; or (v) make
any loans, advances or capital contributions to, or investments in, any
other person, other than in the ordinary course of business and consistent
with past practices;
(d) MGI shall use commercially reasonable efforts to preserve intact the
business organization of MGI, to keep available the services of its present
officers and key employees, and to preserve the goodwill of those having
business relationships with it;
(e) MGI shall pay debts and taxes when due subject to good faith
disputes thereof, and pay or perform other obligations when due;
(f) MGI shall use commercially reasonable efforts to not take or omit to
take any action, and shall not agree, in writing or otherwise, to take or
omit to take any action, which would make any representation or warranty of
MGI, respectively, herein untrue or incorrect;
(g) MGI shall not enter into any contract or commitment, or violate,
amend or otherwise modify or waive any of the terms of any contract or
commitment, other than in the ordinary course of business and consistent
with past practices;
(h) MGI shall not transfer to any person or entity any Intellectual
Property Rights;
(i) MGI shall not enter into or amend any agreements pursuant to which
any other party is granted research, distribution, marketing or other rights
of any type or scope;
(j) MGI shall not enter into any operating lease other than in the
ordinary course of business and consistent with past practices, and in no
event in excess of an aggregate of $10,000 over the term of any and all such
leases;
(k) MGI shall not pay, discharge or satisfy, in an amount in excess of
$10,000 in any one case or $25,000 in the aggregate, any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise) arising other than in the ordinary course of business;
(l) MGI shall not make any capital expenditures, capital additions or
capital improvements in an amount in excess of $10,000 in any one case or
$25,000 in the aggregate;
(m) MGI shall not reduce the amount of any insurance coverage provided
by existing insurance policies;
(n) except as set forth in SECTIONS 6.11 and 6.15, below, MGI shall not
(i) hire any new employee, (ii) pay any special bonus or special
remuneration to any employee or member of the Board of
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Directors, or (iii) increase the salaries, wage rates, fringe benefits or
other compensation of its members of the Board of Directors, officers or
employees;
(o) except as set forth in SECTION 6.11 below, MGI shall not grant any
severance or termination pay (i) to any director or officer or (ii) to any
other employee;
(p) MGI shall not commence a lawsuit other than (i) for the routine
collection of bills, (ii) in such cases where it in good faith determines
that failure to commence suit would result in the material impairment of a
valuable aspect of its business, provided that it consults with Progenitor
prior to the filing of such a suit, or (iii) for a breach of this Agreement
or Related Agreements;
(q) MGI shall not acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets of,
or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof, or otherwise
acquire or agree to acquire or engage in discussions relating to the
acquisition of any assets that are material, individually or in the
aggregate, to its business, taken as a whole;
(r) MGI shall not other than in the ordinary course of business and
consistent with past practices, make or change any material election in
respect of Taxes, adopt or change any accounting method in respect of Taxes,
file any material Return or any amendment to a material Return, enter into
any closing agreement, settle any claim or assessment in respect of Taxes,
or consent to any extension or waiver of the limitation period applicable to
any claim or assessment in respect to Taxes;
(s) MGI shall give all notices and other information required prior to
the Effective Time under any applicable law in connection with the
transactions provided for in this Agreement and the Related Agreements;
(t) MGI shall not revalue any of its assets, including without
limitation, writing down the value of inventory or writing off notes or
accounts receivable, except as required under generally accepted accounting
practices and in the ordinary course of business consistent with past
practices;
(u) MGI shall not enter into any agreement or arrangement with any
holder of 5% or more of the equity securities of MGI, any director or any
officer, or any person or entity related to any thereof, except as permitted
by the terms of SECTION 6.2, 6.11 and 6.15 hereof; and
(v) MGI shall not enter into any contract, agreement, commitment or
arrangement with respect to any of the items prohibited by this SECTION 6.1.
6.2 COMPENSATION PLANS; EMPLOYMENT MATTERS.
(a) During the period from the date of this Agreement and continuing
until the Effective Time, except as contemplated in SECTIONS 6.11 and 6.15
and except as set forth in SECTION 6.2 of the MGI Disclosure Schedule, MGI
will not, without the prior written consent of Progenitor (except as
required by applicable law or pursuant to existing contractual arrangements
and subject to SECTION 6.14): (a) enter into, adopt or amend any bonus,
profit sharing, compensation, stock option, pension, retirement, deferred
compensation, employment, severance or other employee benefit plan,
agreement, trust, plan, fund or other arrangement between MGI and one or
more of its officers, directors or employees (collectively, "Compensation
Plans"), (b) institute any new employee benefit, welfare program or
Compensation Plan, (c) make any change in any Compensation Plan or other
employee welfare or benefit arrangement, or enter into any employment or
similar agreement or arrangement with any employee, or (d) enter into or
renew any contract, agreement, commitment or arrangement providing for the
payment to any director, officer or employee of compensation or benefits
contingent, or the terms of which are materially altered in favor of such
individual, upon the occurrence of any of the transactions contemplated by
this Agreement and the Related Agreements.
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(b) MGI shall notify Progenitor immediately, either orally to the Chief
Executive Officer of Progenitor or in writing, regarding any other change of
which it has knowledge concerning the scientists or scientific advisors of
MGI including any resignation or other materially adverse change in such
person's relationship with MGI.
6.3 VISITATION RIGHTS. Progenitor shall be permitted to designate one
representative to attend, and shall receive notice of, all MGI Board of
Directors and Committee meetings (including telephonic meetings) during the
period prior to the Effective Time and shall receive copies of all
correspondence (including written consents) relating to any such meeting. The
foregoing shall not apply to any portion of a meeting (or correspondence)
relating to MGI's compliance with the terms of this Agreement or the enforcement
of its obligations hereunder.
6.4 LETTERS OF MGI'S AUDITORS. MGI shall use commercially reasonable
efforts to cause to be delivered to Progenitor and the underwriters with respect
to the IPO and to Progenitor in connection with the Reorganization, letters of
Ernst & Young LLP ("E&Y"), MGI's independent auditors, in connection with and on
the respective effective dates of the IPO Registration Statement and the S-4
Registration Statement, in form and substance reasonably satisfactory to
Progenitor and the underwriters, and in scope and substance consistent with
applicable professional standards for letters delivered by independent public
accountants in connection with registration statements similar to the IPO
Registration Statement and S-4 Registration Statement, respectively. MGI shall
use commercially reasonable efforts to cause to be delivered to Progenitor
updates, dated the Closing Date, of such letters of its independent auditors
described in the preceding sentence and any consents or other documents required
to be obtained from MGI's independent auditors with respect to the Registration
Statement.
6.5 LEGAL CONDITIONS TO REORGANIZATION AND IPO. Subject to SECTION 6.12,
each of MGI and Progenitor shall, and Progenitor shall cause its subsidiaries
to, use commercially reasonable efforts (a) to take, or cause to be taken, all
actions necessary to comply promptly with all legal requirements that may be
imposed on such party or its subsidiaries with respect to the Reorganization and
the consummation of the transactions contemplated by this Agreement and the
Related Agreements, subject to the appropriate vote or consent of stockholders,
and (b) to obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any governmental
entity or any other public or private third party that is required to be
obtained or made by such party or any of its subsidiaries in connection with the
Reorganization and the transactions contemplated by this Agreement and the
Related Agreements; provided, however, that a party shall not be obligated to
take any action pursuant to the foregoing if the taking of such action or such
compliance or the obtaining of such consent, authorization, order, approval or
exemption would result in the imposition of a condition or restriction on such
party or on the Surviving Corporation of the type referred to in SECTION 8.1(c).
Each of MGI and Progenitor will promptly cooperate with and furnish information
to the other in connection with any such burden suffered by, or requirement
imposed upon, any of them or any of their subsidiaries in connection with the
foregoing.
6.6 AFFILIATES. Progenitor and MGI shall agree upon a list identifying all
persons, if any, who at the time the Reorganization is submitted for approval to
the stockholders of MGI may be deemed "affiliates" of MGI for purposes of Rule
145 under the Securities Act ("Affiliates"). MGI shall provide to Progenitor all
information reasonably requested by Progenitor in connection with such list. MGI
shall use commercially reasonable efforts to cause each Affiliate to deliver to
Progenitor, prior to the date the Information Statement is distributed, a
written agreement ("Affiliate Agreement"), in the form of EXHIBIT C hereto, that
such Affiliate will not sell, pledge, transfer or otherwise dispose of any
Shares, except pursuant to an effective registration statement or in compliance
with Rule 145 or an exemption from the registration requirements of the
Securities Act.
6.7 CURRENT INFORMATION; ADVICE OF CHANGES; GOVERNMENT FILINGS. From the
date of this Agreement to the Effective Time, MGI will cause one or more of its
designated representatives to confer on a regular
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and frequent basis (not less than weekly) with representatives of Progenitor and
to report the general status of its ongoing operations and to deliver to
Progenitor (not less than monthly) unaudited consolidated balance sheets and
related consolidated statements of income, changes in stockholders equity and
changes in financial position for the period since the last such report as well
as copies of the detailed ledger and other expenditure items, and projected
expenditures contemplated by SCHEDULE C to the Loan Agreement. Each party shall
promptly advise the other both orally and in writing of any change or event
having, or which, insofar as can reasonably be foreseen, could have, a Material
Adverse Effect on such party or which would cause or constitute a breach of any
of the representations, warranties or covenants of such party contained herein.
Except where prohibited by applicable statutes and regulations, and subject to
SECTION 7.1 hereof, each party shall promptly provide the other (or its counsel)
with copies of all other filings made by such party with any state or federal
government entity in connection with this Agreement or the Related Agreements or
the transactions contemplated hereby or thereby.
6.8 ACCOUNTING METHODS. Except as otherwise contemplated by SECTION 7.11,
MGI shall not change its methods or policies of accounting in effect at November
30, 1996, except as required by changes in generally accepted accounting
principles as concurred in by such party's independent auditors. MGI will not
change its fiscal year.
6.9 1996 FINANCIAL STATEMENTS. MGI shall deliver to Progenitor its
unaudited Financial Statements for the period ending December 31, 1996 on or
before February 25, 1997, and its audited Financial Statements for the period
ending December 31, 1996 on or before February 25, 1997. Progenitor shall
deliver to MGI its unaudited Financial Statements for the period ending December
31, 1996 on or before February 21, 1997.
6.10 PROGENITOR BRIDGE LOANS. Progenitor shall provide MGI bridge loan
financing pursuant to and subject to the terms and conditions of that certain
Loan Agreement between Progenitor and MGI dated as of the date hereof attached
as EXHIBIT D hereto (the "Loan Agreement"). Advances under such Loan Agreement
shall be secured pursuant to that certain Security Agreement between Progenitor
and MGI dated as of the date hereof attached as EXHIBIT E hereto (the "Security
Agreement") and shall be evidenced by a Promissory Note dated as of the date
hereof attached as EXHIBIT F hereto (the "Promissory Note"). In the event that
Progenitor elects to extend the Agreement Deadline as contemplated by SECTION
9.1(b) below to June 30, 1997, Progenitor shall be obligated to provide
additional funding, in the amount set forth in and pursuant to and subject to
the terms and conditions of the Loan Agreement. In the event that Progenitor
elects to extend the Agreement Deadline as contemplated by SECTION 9.1(b) below
to July 31, 1997, Progenitor shall be obligated to provide additional funding,
in the amount set forth in and pursuant to and subject to the terms and
conditions of the Loan Agreement. The amount or amounts to be extended pursuant
to the two preceding sentences, as applicable, shall be referred to,
respectively, as the "Initial Supplemental Funding" and the "Second Supplemental
Funding" and together as the "Supplemental Fundings." All obligations of
Progenitor to provide MGI bridge loan financing shall be governed by the Loan
Agreement and not by this SECTION 6.10.
6.11 EMPLOYEE RETENTION PLAN. Progenitor shall cause MGI from and after
the Effective Time to honor the terms and conditions of the employee retention
plan (the "Employee Retention Plan") and the salary protection plans (the
"Salary Protection Plans") for employees and senior executives and management to
be adopted by MGI prior to the Effective Time, provided that such plans comply
with all requirements of ERISA, are consistent with the summaries thereof
previously provided to Progenitor attached hereto as EXHIBIT G, shall be
included in the meaning of "MGI Plan" for all purposes hereof and shall be in
form and substance reasonably acceptable to Progenitor. Progenitor shall honor
those certain option vesting acceleration commitments for employees and senior
executives and management made by MGI prior to the date of this Agreement, the
terms of which are described in EXHIBIT G attached hereto (the "Option Vesting
Commitments"), provided that such commitments apply only to those options
existing at the Effective Time that are converted in the Reorganization into
options to purchase shares of Progenitor Common Stock. Amounts payable by MGI to
any of its employees pursuant to the Employee
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Retention Plan and the Salary Protection Plans shall be paid in accordance with
the terms of such plans; provided, that all such amounts shall be allocated
solely in accordance with an allocation schedule agreed upon by Progenitor and
provided, further, that with respect to the Employee Retention Plan, the exact
amounts within the ranges provided for therein shall be subject to the approval
of Progenitor.
6.12 PURSUIT OF INITIAL PUBLIC OFFERING. Progenitor may elect in its sole
discretion to cease pursuit of the IPO or to postpone the IPO until after
expiration of the Agreement Deadline if it determines that continued pursuit of
the IPO is inadvisable.
6.13 CERTAIN COLLABORATIONS. Notwithstanding any other term of this
ARTICLE VI, MGI may enter into strategic collaborations with third parties in
the ordinary course of business upon prior discussion with Progenitor and
receipt of approval by Progenitor.
6.14 PROGENITOR APPROVAL. Progenitor agrees not to withhold unreasonably
its approval of any action proposed to be taken by MGI for which Progenitor's
approval is required under this ARTICLE VI; except that Progenitor may in its
sole discretion approve the terms of any financing arrangement or the issuance
of any equity (except as otherwise set forth in SECTION 6.15). The parties agree
that the reasonableness of Progenitor's approval shall be determined in light of
MGI's requirements as a continuing business on the one hand and Progenitor's
objective of consummating the Reorganization and continuing the pursuit of the
IPO on the other hand.
6.15 RETENTION OF ADDITIONAL EMPLOYEES. Subject to prior consultation with
Progenitor and notwithstanding anything in SECTION 6.1 or SECTION 6.2 to the
contrary, MGI shall be free to hire additional employees in the ordinary course
of business prior to the Effective Time and to grant stock options to acquire
MGI Common Stock to any such new employee (in usual and customary amounts and
with an exercise price that is equal to the fair market value thereof on the
date of grant). MGI shall use commercially reasonable efforts to consult with
Progenitor regarding the retention of any such new employee. All such options
outstanding shall be included in the calculation of the Per Share Consideration
applicable to MGI Common Stock as provided in SECTION 3.2.
6.16 NO INCONSISTENT ACTION. Progenitor and its subsidiaries shall use
commercially reasonable efforts to not fail to take or omit to take any action,
and Progenitor shall not agree, in writing or otherwise, to take or omit to take
any action, which would make any representation or warranty of Progenitor herein
untrue or incorrect.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 ACCESS AND INFORMATION.
(a) MGI and Progenitor, and Progenitor's subsidiaries, shall each afford
to the other and to the other's financial advisors, legal counsel,
accountants, consultants and other representatives access during normal
business hours throughout the period from the date hereof to the Effective
Time to all of its books, records, properties, facilities, personnel
commitments and records (including but not limited to Returns) and, during
such period, each shall furnish promptly to the other all information
concerning its business, properties and personnel as such other party may
reasonably request. No investigation pursuant to this SECTION 7.1 shall
affect any representations or warranties made herein or the conditions to
the obligations of the respective parties to consummate the Reorganization.
(b) All information furnished by MGI to Progenitor or furnished by
Progenitor to MGI pursuant hereto shall be treated as the sole property of
the party furnishing the information until consummation of the
Reorganization contemplated hereby. The parties will hold any such
information which is nonpublic in confidence to the extent required by, and
in accordance with the Confidentiality
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Agreement between the parties, dated November 25, 1996 (the "Confidentiality
Agreement"), and such Confidentiality Agreement shall survive the
termination of this Agreement.
7.2 NO SOLICITATION OF TRANSACTIONS. From the date hereof until the
earlier of termination of this Agreement or consummation of the Reorganization,
MGI will not, directly or indirectly, whether through any director, officer,
employee, financial advisor, legal counsel, accountant, other agent or
representative (as used in this SECTION 7.2, "affiliates") or otherwise, (a)
initiate, solicit or encourage, or take any other action to facilitate any
inquiries or the making of any proposal with respect to, or (b) engage or
participate in negotiations concerning, provide any nonpublic information or
data to, or have any discussions with, any person other than a party hereto or
their affiliates relating to, any (i) acquisition, (ii) tender offer (including
a self-tender offer), (iii) exchange offer, (iv) merger, (v) consolidation, (vi)
acquisition of beneficial ownership of (or the right to vote securities
representing) ten percent (10%) or more of the total voting power of MGI, (vii)
dissolution, (viii) business combination, (ix) purchase of all or any
significant portion of the assets or any division of (or any equity interest in)
MGI or any subsidiary, or (x) any similar transaction other than the
Reorganization (such proposals, announcements, or transactions being referred to
as "Acquisition Proposals"). MGI will notify Progenitor orally (within one
business day) and in writing (as promptly as practicable) if any such
Acquisition Proposals (including the identity of the persons making such
proposals and the terms of such proposals) are received and furnish to
Progenitor a copy of any written proposal relating thereto.
7.3 REGISTRATION STATEMENT. MGI shall fully cooperate with respect to all
requirements to facilitate the IPO Registration Statement and the S-4
Registration Statement (or, if applicable, the Private Placement Memorandum),
including expedited preparation of its audited financial statements by Ernst &
Young LLP for the year ended December 31, 1996, and the years ended December 31,
1995 and December 31, 1994 or otherwise as may be requested, assistance with
respect to Progenitor's preparation of pro forma financial statements and
unaudited interim financial statement information and other matters incidental
to the IPO, including support in due diligence and the road show. MGI shall
furnish Progenitor with all information concerning MGI and the holders of its
capital stock and shall take such other action as Progenitor may reasonably
request in connection with the IPO and the Reorganization, including as may be
needed with respect to preparation of the IPO Registration Statement and the S-4
Registration Statement, the filing of such Registration Statements with the SEC,
and the response to any SEC comments relating thereto.
7.4 INFORMATION STATEMENT; STOCKHOLDER APPROVAL.
(a) MGI, acting through its Board of Directors, shall, in accordance
with the requirements of the IPO and the Reorganization and the requirements
of applicable law and MGI's Certificate of Incorporation and Bylaws:
(i) promptly and duly call, give notice of, convene and hold as soon
as practicable a meeting (or solicit an action by written consent in lieu
thereof) of its stockholders for the purpose of voting to approve and
adopt (A) this Agreement and the Related Agreements, and (B) an amendment
to the Certificate of Incorporation of MGI as described in SECTION 3.14
above, the language of such amendment to be agreed upon by Progenitor and
MGI; and use commercially reasonable efforts to obtain such stockholders'
approval; and
(ii) except to the extent required in the exercise of the fiduciary
duties of the Board of Directors of MGI under applicable law as advised
by independent counsel, recommend approval and adoption of this Agreement
and the Related Agreements by the stockholders of MGI, and include in the
Information Statement such recommendation, and take all lawful action to
solicit such approval.
(b) As promptly as practicable, MGI shall prepare an Information
Statement and Progenitor shall prepare either a prospectus as part of the
S-4 Registration Statement (the "S-4 Prospectus") or a
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private placement memorandum (the "Private Placement Memorandum"), as
Progenitor may elect, subject to SECTION 3.11 (either the S-4 Prospectus or
the Private Placement Memorandum, the "Progenitor Disclosure Document"), and
MGI shall cause the Information Statement and Progenitor Disclosure Document
to be mailed to MGI stockholders. At the stockholders' meeting (or pursuant
to any written consent in lieu thereof) of MGI, Progenitor shall vote or
cause to be voted in favor of approval and adoption of this Agreement and
the Related Agreements all shares of MGI Capital Stock which it beneficially
owns at such time, if any. Whenever any event occurs which should be set
forth in an amendment or a supplement to the Information Statement or
Progenitor Disclosure Document, each party will promptly inform the other
and will cooperate in mailing to MGI's stockholders such amendment or
supplement. The Information Statement and Progenitor Disclosure Document,
and all amendments and supplements thereto, shall comply with applicable law
and be in form and substance satisfactory to Progenitor and MGI.
7.5 PRINCIPAL STOCKHOLDER AGREEMENTS. Each of the stockholders listed on
EXHIBIT J hereto (each a "Principal Stockholder") is, simultaneously with the
execution and delivery of this Agreement, executing and delivering an agreement
in the form attached hereto as EXHIBIT K (each a "Principal Stockholder
Agreement") and a release in the form attached hereto as EXHIBIT L (each a
"Principal Stockholder Release").
7.6 CERTAIN EMPLOYEE BENEFIT PLAN MATTERS.
(a) MGI hereby confirms to Progenitor that (i) all MGI stock options
under the MGI 1993 Stock Option Plan and 1996 Stock Option Plan
(collectively, the "MGI Stock Options") shall carry over and become options
to acquire Progenitor Common Stock, and (ii) except as set forth on the MGI
Disclosure Schedule, the MGI Stock Options' vesting or exercisability will
not be accelerated.
(b) MGI shall take no action from and after the date hereof to deposit
into any trust (including any "rabbi trust") amounts in respect of any
employee benefit obligations.
7.7 STOCK OPTIONS AND WARRANTS.
(a) As of the Effective Time, any warrants which are outstanding as of
the date hereof and have not expired as of the Effective Time, and any stock
options which are not expired as of Effective Time, shall be assumed by
Progenitor and converted into options or warrants, as the case may be, to
purchase the Per Share Consideration (rounded up, if the Adjusted Purchase
Price is paid in securities, to the nearest whole share), which the holder
thereof would have been entitled to receive under ARTICLE III had the stock
options or warrants been exercised immediately prior to the Effective Time
at an aggregate exercise price equal to the former aggregate exercise price;
provided, however, that in the case of any MGI stock option to which Section
421 of the Code applies by reason of its qualification under Section 422 of
the Code, the conversion formula shall be adjusted, if necessary, to comply
with Section 424(a) of the Code to the effect that the number of shares
shall be rounded down to the nearest whole share and the exercise price
shall be rounded up to the nearest penny. Except as provided above, the
converted stock options or warrants, as the case may be, shall be subject to
the same terms and conditions (including, without limitation, expiration
date, vesting and exercise provisions) as were applicable to such stock
options or warrants, as the case may be, immediately prior to the Effective
Time (giving effect to any accelerated vesting applicable as a result of the
consummation of the Reorganization).
(b) No such option or warrant shall be converted into a stock option or
warrant to purchase a partial share of Progenitor Common Stock.
(c) The consummation of the Reorganization shall not be treated as a
termination of employment for purposes of such stock options.
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(d) Progenitor agrees that as soon as practicable, but in no event more
than 90 days (or 45 days, in the event Optional Public Equity is selected)
following the Effective Time or the IPO (whichever is later), it will cause
to be filed one or more registration statements on Form S-8 under the
Securities Act, or amendments to its existing registration statements on
Form S-8 or amendments to the S-4 Registration Statement, in order to
register the shares of Progenitor Common Stock issuable upon exercise of the
aforesaid converted MGI Stock Options. The filing of any such registration
statement shall in no way reduce or minimize the obligations of the MGI
Stockholders under any lock-up or other agreement restricting the
disposition of any shares of Progenitor Common Stock entered into in
connection with the IPO.
7.8 PUBLIC ANNOUNCEMENTS. So long as this Agreement is in effect,
Progenitor and MGI agree that they will each obtain the approval of the other
party prior to issuing any press release or any other written communication
(including any written communication to employees) with respect to this or the
Related Agreements or the transaction contemplated hereby or thereby, and that
they will use commercially reasonable efforts to consult with one another before
otherwise making any statement made in a public forum or responding to any press
inquiry with respect to this Agreement or the Related Agreements or the
transactions contemplated hereby or thereby, except in each case as may be
required by law or any governmental agency.
7.9 EXPENSES. Except for the adjustment of the Purchase Price with respect
to Total MGI Reorganization Expenses or Total MGI IPO Expenses, all costs and
expenses incurred in connection with this Agreement and the Related Agreements
and the transactions contemplated hereby and thereby (whether or not the
Reorganization is consummated) shall be paid by the party incurring such
expenses, except as otherwise provided herein or in the Related Agreements.
7.10 ADDITIONAL AGREEMENTS.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to cooperate with one another and use all commercially
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement and the Related Agreements, including using
commercially reasonable efforts to obtain all necessary permits, waivers,
consents, approvals, orders and authorizations of or any exemptions by, all
third parties and governmental bodies, and to effect all necessary
registrations and filings.
(b) Each party will keep the other party apprised of the status of any
inquiries made of such party by the SEC, or any other governmental agency or
authority or members of their respective staffs with respect to this
Agreement and the Related Agreements or the transactions contemplated herein
and therein.
7.11 MGI ACCRUALS AND RESERVES. Prior to the Closing Date, MGI shall
review and, to the extent determined necessary or advisable, consistent with
generally accepted accounting principles and the accounting rules, regulations
and interpretations of the SEC and its staff, modify and change its accrual,
reserve and provision policies and practices to (a) reflect the Surviving
Corporation's plans with respect to the conduct of MGI's business following the
Reorganization and (b) make adequate provision (for the costs and expenses
relating thereto) so as to be applied consistently on a mutually satisfactory
basis with those of Progenitor. The parties agree to cooperate in preparing for
the implementation of the adjustments contemplated by this SECTION 7.11.
Notwithstanding the foregoing, MGI shall not be obligated to take in any respect
any such action pursuant to this SECTION 7.11 (other than pursuant to the
preceding sentence) unless and until Progenitor acknowledges that all conditions
to its obligation to consummate the Reorganization have been satisfied and that
it intends to consummate the Reorganization.
7.12 TAKEOVER STATUTES. If any "fair price," "moratorium," "control share
acquisition" or other similar antitakeover statute shall become applicable to
the transactions contemplated hereby, MGI and the
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members of the Board of Directors of MGI shall grant such approvals and take
such actions as are necessary so that the Reorganization and the transactions
contemplated hereby may be commenced as promptly as practicable in the terms
contemplated hereby and otherwise act to eliminate or minimize the effects of
such statute or regulation in the transaction contemplated hereby.
7.13 INDEMNIFICATION. Progenitor agrees and acknowledges that, following
the Effective Time, the officers and directors of MGI shall be entitled to be
indemnified by the Surviving Corporation in their capacities as officers or
directors of MGI prior to the Effective Time to the extent provided by MGI's
Certificate of Incorporation, MGI's Bylaws and the indemnification agreements
entered into with officers and directors in effect as of the date hereof, as
well as to any such rights provided by the DGCL. Progenitor shall, and shall
cause the Surviving Corporation to, honor such rights of indemnification for at
least six years following the Effective Time, and the Certificate of
Incorporation and Bylaws of the Surviving Corporation shall contain
substantially the same provisions set forth in ARTICLE V of MGI's Certificate of
Incorporation and ARTICLE XI of MGI's Bylaws and shall not be amended in any
manner adverse to MGI's officers and directors with respect to such matters for
at least six years following the Effective Time. Notwithstanding the foregoing,
officers and directors of MGI shall not be entitled to receive indemnification
pursuant to such Certificate, Bylaws, laws or otherwise with respect to any
Purchase Price Reduction or any holdback of Escrow Consideration pursuant to
ARTICLE X hereof as to any claim to which Progenitor or any Progenitor
Indemnitee is entitled to indemnification pursuant to ARTICLE X of this
Agreement. For a period of six years after the Effective Time, Progenitor will
maintain in effect directors' and officers' liability insurance covering the
officers and directors of MGI with respect to the IPO on the same terms as those
applicable to the then current officers and directors of Progenitor.
7.14 INVESTMENT AGREEMENT. If the Adjusted Purchase Price is paid in
Shares, then MGI shall use commercially reasonable efforts to provide to
Progenitor, prior to the initial filing of the IPO Registration Statement with
the SEC, duly executed Investment Agreements substantially in the form attached
as EXHIBIT M (each an "Investment Agreement") from each MGI stockholder and any
holder of options or warrants to purchase MGI Common Stock. Progenitor shall be
entitled to place appropriate legends on the certificates evidencing Shares
issued pursuant to this Agreement pursuant to the terms of the Investment
Agreement or any Affiliate Agreement applicable to any such Shares, and to issue
appropriate stop transfer instructions to the transfer agent consistent with the
terms of the Investment and Affiliate Agreements.
7.15 EMPLOYMENT AGREEMENT. Progenitor and Elliot Sigal have entered into
an Employment Agreement, as of the date of this Agreement, in the form set forth
in EXHIBIT N.
7.16 TERMINATION OR RESOLUTION OF CERTAIN AGREEMENTS. MGI shall use
commercially reasonable efforts to cause the termination, prior to the Closing,
of any redemption rights, registration rights, preemptive rights or rights of
first refusal relating to any security of MGI (including, without limitation,
any security or other instrument convertible into or exercisable for any
security of MGI), including but not limited to the rights of preferred
stockholders under the co-sale agreement between the preferred stockholders and
founders, the registration rights in the Phoenix Warrants, and the right of
first refusal in the bylaws, except to the extent set forth in this Agreement.
7.17 ESCROW AGREEMENT. The Representative (as defined in SECTION 10.3)
shall enter into the Escrow Agreement substantially in the form attached as
EXHIBIT B.
7.18 CONSENTS OF THIRD PARTIES. MGI shall use commercially reasonable
efforts to provide to Progenitor duly executed copies of all third-party
consents, approvals, assignments, waivers, authorizations or other certificates
contemplated or required by this Agreement or any Related Agreement or any
material contracts, leases or other agreements of MGI.
7.19 ASSIGNMENTS OF INTELLECTUAL PROPERTY. MGI shall use all commercially
reasonable efforts to cause its stockholders, employees and independent
contractors (including former employees and independent
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contractors) to execute such assignments and other documentation as may be
reasonably requested by Progenitor to effectively transfer or confirm the
transfer of all right, title and interest to the MGI Intellectual Property
Rights to MGI and/or Progenitor as its successor. Without limitation of the
generality of the foregoing, MGI shall use commercially reasonable efforts to
obtain confidentiality and inventions assignment agreements in customary form
consistent with such provisions in the Employment Agent (other than any
noncompete provisions therein) from all MGI's past and present employees and
independent contractors involved in the creation or development of MGI
Intellectual Property Rights, to the extent not already obtained.
7.20 APPLICATION; BLUE SKY LAWS. In the event that the S-4 Registration
Statement does not become effective, then to the extent required under
applicable law, Progenitor shall file a permit application for review by the
Department of Corporations. MGI shall assist in the preparation of the
application by providing pertinent information concerning MGI for inclusion
therein and by reviewing and commenting on drafts of these documents supplied to
MGI by Progenitor. Progenitor shall take such reasonable steps as may be
necessary or appropriate to comply with the securities and blue sky laws of all
jurisdictions which are applicable to the issuance of Progenitor Common Stock
pursuant hereto. MGI shall use commercially reasonable efforts to assist
Progenitor in complying with the securities and blue sky laws of such
jurisdictions.
7.21 WARRANTS. MGI shall use commercially reasonable efforts to cause all
holders of all warrants to purchase MGI Capital Stock to exercise such
securities for underlying MGI Capital Stock on or prior to the Closing Date.
7.22 CONVERSION OF VENTURE CAPITAL BRIDGE NOTES. MGI shall use
commercially reasonable efforts to cause all the holders of the Venture Capital
Bridge Notes to convert such Venture Capital Bridge Notes for shares of MGI
Series D Preferred Stock as set forth in SECTION 3.12.
7.23 BOARD OF DIRECTORS. Progenitor and MGI shall reach agreement on one
mutually acceptable designee who Progenitor shall cause to be elected to the
Board promptly upon or immediately after the Effective Time, provided that
Progenitor shall not thereafter have any obligation to nominate or take any
other steps to cause such designee to be elected to Progenitor's Board.
7.24 MARKET STAND-OFF. In the event the Purchase Price is paid in Shares,
the Shares shall be subject to the "lock-up" restrictions contained in the
Investment Agreement.
7.25 REGISTRATION RIGHTS. If the Purchase Price is paid in Shares and
there is no IPO on or prior to the Effective Time or Progenitor does not
register the Shares issuable under this Agreement on the S-4 Registration
Statement pursuant to SECTION 3.11(b), holders of the Shares shall be entitled
to the registration rights contained in that certain registration rights
agreement attached hereto as EXHIBIT P (the "Registration Rights Agreement").
7.26 NON-SOLICITATION AGREEMENTS. MGI shall use commercially reasonable
efforts to cause those officers and employees of MGI listed on EXHIBIT Q to
execute Non-Solicitation Agreements in substantially the form set forth in
EXHIBIT R (a "Non-Solicitation Agreement").
7.27 PARACHUTE PAYMENTS. MGI shall use commercially reasonable efforts to
obtain the requisite stockholder approval for any payments that may be
considered parachute payments under Section 280G of the Code in the absence of
stockholder approval, such approval to be computed as provided in Section
280G(b)(5)(B) of the Code and the Treasury Regulations proposed thereunder.
7.28 SCIENTIFIC ADVISORS. MGI shall use commercially reasonable efforts to
facilitate Progenitor reaching agreement with designated scientific advisors and
key scientists of MGI regarding continued employment or affiliation with the
Surviving Corporation as identified in the Progenitor Disclosure Schedule.
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ARTICLE VIII
CONDITIONS TO CONSUMMATION OF THE REORGANIZATION
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
REORGANIZATION. The respective obligations of each party to effect the
Reorganization shall be subject to the satisfaction at or prior to the Effective
Time of the following conditions, any one of which may be waived by both MGI and
Progenitor:
(a) This Agreement and the Related Agreements and the transactions
contemplated hereby and thereby shall have been approved and adopted by the
favorable vote of a majority of the shares of outstanding capital stock of
MGI entitled to vote thereon at a stockholders meeting at which a quorum is
present (or by written consent in lieu thereof) in accordance with
applicable law.
(b) No preliminary or permanent injunction or other order by any
federal, state or foreign court of competent jurisdiction which prohibits
the consummation of the Reorganization shall have been issued and remain in
effect. No statute, rule, regulation, executive order, stay, decree, or
judgment shall have been enacted, entered, issued, promulgated or enforced
by any court or governmental authority which prohibits or restricts the
consummation of the Reorganization. Other than the filing of the Certificate
of Merger with the Secretary of State of Delaware, all authorizations,
consents, orders or approvals of, or declarations or filings with, and all
expirations of waiting periods imposed by, any governmental entity (all of
the foregoing, "Consents") which are necessary for the consummation of the
Reorganization, other than Consents the failure to obtain which would not
materially, adversely affect the consummation of the Reorganization or in
the aggregate have a Material Adverse Effect on the Surviving Corporation
and its subsidiaries, taken as a whole, shall have been filed, occurred or
been obtained (all such permits, approvals, filings and consents and the
lapse of all such waiting periods being referred to as the "Requisite
Regulatory Approvals") and all such Requisite Regulatory Approvals shall be
in full force and effect. In the event the Adjusted Purchase Price is paid
in Shares, Progenitor shall have received all state securities or blue sky
permits and other authorizations necessary to issue the Shares in exchange
for the shares of MGI Capital Stock and to consummate the Reorganization.
(c) There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
Reorganization, by any federal or state governmental entity which, in
connection with the grant of a Requisite Regulatory Approval, imposes any
condition or restriction upon the Surviving Corporation or its subsidiaries
(or, in the case of any disposition of assets required in connection with
such Requisite Regulatory Approval, upon Progenitor or its subsidiaries or
MGI), including, without limitation, requirements relating to the
disposition of assets, which in any such case would so materially adversely
impact the economic or business benefits of the transactions contemplated by
this Agreement as to render inadvisable the consummation of the
Reorganization.
8.2 CONDITIONS TO OBLIGATION OF MGI TO EFFECT THE REORGANIZATION. The
obligation of MGI to effect the Reorganization shall be further subject to the
satisfaction at or prior to the Effective Time of the following additional
conditions, which may be waived by MGI:
(a) Progenitor shall have performed in all material respects its
obligations under this Agreement and the Related Agreements required to be
performed by it at or prior to the Effective Time and the representations
and warranties of Progenitor contained in this Agreement and the Related
Agreements shall be true and correct in all material respects at and as of
the Effective Time as if made at and as of such time (provided that any such
representation and warranty made as of a specific date shall be true as of
such specific date), and MGI shall have received a certificate of the
President or Vice President of Progenitor as to the satisfaction of this
condition.
(b) If the Purchase Price is paid in Shares, MGI shall have received an
opinion of Wilson, Sonsini, Goodrich & Rosati, counsel to MGI, dated the
Closing Date, substantially to the effect that,
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on the basis of facts, representations, and assumptions set forth in such
opinion which are consistent with the state of facts existing at the Closing
Date, the Reorganization will be treated for federal income tax purposes as
a reorganization within the meaning of Section 368(a) of the Code and that
Progenitor and MGI will each be a party to the reorganization within the
meaning of Section 368(b) of the Code. In rendering any such opinion, such
counsel may require and, to the extent they deem necessary and appropriate,
may rely upon representations made in certificates of officers of Progenitor
and officers and stockholders of MGI. In addition, MGI shall have received
the opinion, dated the Closing Date, of Morrison & Foerster LLP, counsel for
Progenitor, covering the matters set forth in EXHIBIT S.
8.3 CONDITIONS TO OBLIGATION OF PROGENITOR TO EFFECT THE
REORGANIZATION. The obligations of Progenitor to effect the Reorganization
shall be further subject to the satisfaction at or prior to the Effective Time
of the following additional conditions, which may be waived by Progenitor:
(a) MGI shall have performed in all material respects its obligations
under this Agreement and the Related Agreements and the Principal
Stockholders shall have performed in all material respects the agreements
contained in Sections 2, 3, 4 and 5 and the first sentence of Section 1 of
the Principal Stockholder Agreement, in each case required to be performed
and complied with by them at or prior to the Effective Time, and the
representations and warranties of MGI contained in this Agreement and the
Related Agreements shall be true and correct in all material respects at and
as of the Effective Time as if made at and as of such time (provided that
any such representation and warranty made as of a specific date shall be
true as of such specific date), and Progenitor shall have received a
Certificate of the President or Vice President of MGI as to the satisfaction
of this condition.
(b) If the Purchase Price is paid in Shares, Progenitor shall have
received the opinion of Morrison & Foerster LLP, counsel to Progenitor,
dated the Closing Date and addressed to Progenitor, to the effect that, on
the basis of facts, representations, and assumptions set forth in such
opinion which are consistent with the state of facts existing at the
Effective Time, the Reorganization will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Code, and that Progenitor and MGI will each be a party to that
reorganization within the meaning of Section 368(b) of the Code. In
rendering any such opinion, such counsel may require and, to the extent they
deem necessary and appropriate, may rely upon representations made in
certificates of officers of Progenitor and officers and stockholders of MGI.
In addition, Progenitor shall have received the opinion, dated the Closing
Date, of Wilson, Sonsini, Goodrich & Rosati, counsel for MGI, covering the
matters set forth in EXHIBIT T.
(c) The IPO shall have been completed, unless Progenitor shall have
elected to consummate the Reorganization pursuant to one of the alternative
purchase options set forth in SECTION 3.13 above.
(d) There shall not be Dissenting Shares constituting more than one
percent (1%) of the MGI Common Stock calculated on a fully diluted basis.
(e) If the Adjusted Purchase Price is paid in Shares, then Progenitor
shall have received duly executed Investment Agreements from each MGI
stockholder and each holder of options or warrants to purchase MGI Common
Stock.
(f) All of the holders of the Venture Capital Bridge Notes shall have
converted such Venture Capital Bridge Notes for shares of MGI Series D
Preferred Stock as set forth in SECTION 3.12.
(g) MGI shall have obtained the consent of Phoenix Leasing Incorporated
to the extent required to consummate the Reorganization and all other
transactions contemplated by this Agreement, provided that any costs of
obtaining such consents beyond ordinary legal costs shall be included in
Total MGI Reorganization Expenses hereunder.
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ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
9.1 TERMINATION. This Agreement may be terminated and the Reorganization
contemplated hereby abandoned at any time prior to the Effective Time, whether
before or after approval by the stockholders of MGI or Progenitor:
(a) by mutual written consent of Progenitor and MGI;
(b) automatically, on May 31, 1997, if the Reorganization shall not have
been consummated on or before such date, unless Progenitor shall have
provided the Initial Supplemental Funding under SECTION 6.10, in which case
on June 30, 1997, or the Second Supplemental Funding under SECTION 6.10, in
which case on July 31, 1997 (whichever is applicable, the "Agreement
Deadline");
(c) by MGI, if there shall have been any material breach of a
representation and warranty or material obligation of Progenitor hereunder
such that the condition to closing set forth in SECTION 8.2(a) would not be
satisfied as of the time of such breach and, if such breach is curable, such
default shall have not been remedied within ten (10) days after receipt by
Progenitor of notice in writing from MGI specifying such breach; provided,
that such ten (10) day period shall be extended for so long as Progenitor
shall be making all reasonable attempts to cure such breach, unless the
breach is not susceptible of a cure;
(d) by Progenitor, if there shall have been any Event of Default under
(and as defined in) the Loan Agreement;
(e) by either Progenitor or MGI, if any court of competent jurisdiction
in the United States or other United States governmental body shall have
issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the Reorganization and such order,
decree, ruling or any other action shall have become final and
non-appealable; provided, that the party seeking to terminate this Agreement
pursuant to this CLAUSE (e) shall have used commercially reasonable efforts
to remove such order, decree or ruling;
(f) by Progenitor, upon written notice to MGI, if any approval of the
stockholders of MGI required for the consummation of the Reorganization
submitted for approval shall not have been obtained by reason of the failure
to obtain the required vote at a duly held meeting of stockholders (or
pursuant to a written consent in lieu thereof); or
(g) by Progenitor at any time if it elects not to pursue the IPO
(provided, however, that the right to terminate under this SECTION 9.1(g)
shall be subject to and conditioned upon Progenitor fulfilling its
obligation to extend to MGI the Residual Loan Amount pursuant to the Loan
Agreement).
9.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
as provided above, this Agreement shall forthwith become of no further effect
and, except for a termination resulting from a breach by a party of this
Agreement, there shall be no liability or obligation on the part of either
Progenitor or MGI or their respective officers or directors (except as set forth
in the Loan Agreement, Security Agreement and Promissory Note, in SECTION 7.1(b)
hereof and except for SECTION 7.9 and ARTICLE XI hereof, each of which shall
survive the termination). Moreover, in the event of termination of this
Agreement, nothing herein shall prejudice the ability of the non-breaching party
from seeking damages from any other party for any breach of this Agreement,
including, without limitation, attorneys' fees and the right to pursue any
remedy at law or in equity. Upon request after termination, each party will
redeliver or, at the option of the party receiving such request, destroy all
reports, work papers and other material of any other party relating to the
transactions contemplated hereby, whether obtained before or after the execution
hereof, to the party furnishing same.
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9.3 AMENDMENT. This Agreement may be amended by action taken by Progenitor
and MGI at any time before or after approval hereof by the stockholders of MGI,
but, after any such approval, no amendment shall be made which (i) alters the
Adjusted Purchase Price, (ii) which in any way materially adversely affects the
rights of such stockholders, or (iii) which requires stockholder approval under
the terms of this Agreement, without the further approval of such stockholders.
This Agreement may not be amended except by an instrument in writing signed on
behalf of MGI, Progenitor and Reorganization Sub.
9.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Such waiver shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
ARTICLE X
PURCHASE PRICE ADJUSTMENT AND INDEMNIFICATION
10.1 INDEMNIFICATION BY MGI STOCKHOLDERS.
(a) The Purchase Price shall be subject to the Purchase Price Reduction
in an amount up to 10% of such price (subject to the terms of this ARTICLE
X) for any claims, damages, losses, costs, expenses, liabilities (absolute,
accrued, contingent or otherwise), and reasonable legal fees and expenses
incurred or suffered by Progenitor, the Surviving Corporation,
Reorganization Sub and each of their officers, directors, employees, agents,
representatives and affiliates (collectively, the "Progenitor Indemnitees"
and individually each a "Progenitor Indemnitee"), directly or indirectly,
caused by or arising out of any untruth, inaccuracy, error in, or breach of
any covenant, representation or warranty of MGI contained in this Agreement
(collectively, "Losses"), and the Progenitor Indemnitees shall be
indemnified by MGI and the MGI stockholders and option holders against such
Losses by means of the Purchase Price Reduction and the related holdback
escrow of Shares on the terms and conditions hereinafter set forth; provided
that claims for Losses must be asserted prior to the Effective Time by
written notice to MGI including reasonable detail and the estimated amount
of Losses. Notwithstanding any other provision of this Agreement, for the
purposes of determining whether a Loss has occurred or may occur, the
representations and warranties of MGI herein and in the Related Agreements
shall be deemed to survive until immediately after the Effective Time.
(b) Losses shall only be counted as a Purchase Price Reduction in the
event that the aggregate amount of Losses indemnifiable hereunder exceeds
$100,000 (the "Threshold Amount") in which case Losses shall be the full
amount including the initial $100,000. All indemnification requests of
Progenitor Indemnitees shall be made by or through Progenitor. The
obligations of any stockholder of MGI or holder of MGI options to indemnify
Progenitor Indemnitees hereunder shall be determined without regard to any
right to indemnification to which any stockholder of MGI or holder of MGI
options may have in his or her capacity as an officer, director, employee,
agent, or any other capacity of MGI and no stockholder of MGI or holder of
MGI options shall be entitled to any indemnification from the Surviving
Corporation for amounts paid hereunder.
(c) The escrow provisions herein shall not require Progenitor to deposit
with the Escrow Agent any Shares allocable to the conversion in the
Reorganization of options or warrants to acquire MGI Capital Stock, which
Shares in any event shall not be issued until such options have been duly
and validly exercised. In the event any such options or warrants are so
exercised prior to resolution of all claims hereunder, following payment of
the exercise price for all Shares subject to such exercise and subject to
the terms and conditions hereof and of the options or warrants, Progenitor
shall deliver to
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the Escrow Agent Shares representing the option or warrant holder's pro rata
portion of the Escrow Consideration, and shall deliver the remaining Shares
to the option or warrant holder.
(d) The Purchase Price Reduction and the related holdback escrow of
Shares shall be the sole and exclusive remedy of the Progenitor Indemnitees
for any Losses, and the Progenitor Indemnitees will not bring claims against
any stockholder, officer, director, employee, agent, representative or
affiliate of MGI for any such Losses except in accordance with this ARTICLE
X, except in each case for Losses arising from or related to actual fraud or
intentional misrepresentation.
10.2 AGREEMENT OF MGI STOCKHOLDERS. By voting to approve this Agreement,
surrendering his or her Certificate(s) evidencing MGI Capital Stock or accepting
options for Progenitor Shares, each stockholder of MGI and holder of MGI
options, other than Dissenting Holders, acknowledges and agrees that (i) the
consideration to which such stockholder or option holder is entitled hereunder
is subject to the Purchase Price Reduction and as contemplated in this ARTICLE
X, (ii) all amounts for which indemnification claims are made and are not
resolved at the Effective Time under this ARTICLE X shall be placed in escrow
(together with a 10% margin) (not in excess of the Maximum Reduction) pursuant
to an Escrow Agreement to be entered into on behalf of the stockholders by the
Representative, as of the Effective Time, in the form of EXHIBIT B attached
hereto and (iii) the Escrow Agent shall be, and is hereby, authorized from time
to time to deliver all or any portion of the Escrow Consideration (as defined in
SECTION 3.4 above) so deposited in satisfaction of the obligations hereunder and
as otherwise provided pursuant to this ARTICLE X and as contemplated in the
Escrow Agreement. The Escrow Consideration, if in the form of shares of
Progenitor Common Stock or Optional Public Equity, shall be valued at the Market
Value per share as of the Effective Time, for purposes of determining the number
of shares to be canceled in satisfaction of indemnification obligations
hereunder.
10.3 CLAIM PROCEDURES.
(a) Progenitor shall be entitled to bring claims hereunder on behalf of
itself or any other Progenitor Indemnitee, provided such claims are brought
at or prior to the Effective Time in accordance with the terms hereof, and
provided, further, that claims may be brought at or prior to the Effective
Time for Losses that may not mature, become liquidated or otherwise accrue
until after the Effective Time. Any claims delivered to MGI or the
Representative after the Effective Time shall be null and void and shall not
be eligible to effect either a Purchase Price Reduction or a claim on the
Escrow Consideration.
(b) If any Progenitor Indemnitee at any time after the date hereof shall
have any liquidated claim of any Losses or knowledge of any events or
circumstances that might give rise to a Loss, in each case assuming
consummation of the Reorganization, it shall promptly request that
Progenitor give written notice regarding such claim to MGI as soon as
reasonably practical, including a brief description of the facts upon which
such claim is based and the amount thereof. Any such notice with respect to
an unliquidated, unmatured or unaccrued claim of any Losses may also include
a demand for a reserve to be held in respect of such claim. Any claim made
by Progenitor for Losses that are unliquidated, unmatured or unaccrued or
for claims that are unresolved as of the Effective Time shall not reduce the
Purchase Price to be paid on the Closing Date, but at the Effective Time an
amount of the Purchase Price with a value equal to all such claims, together
with a 10% margin (but, together with all Purchase Price Reductions, in no
event greater than the Maximum Reduction), shall be held in escrow until
such Losses are fully liquidated, matured or accrued or otherwise resolved.
The parties hereto agree to use commercially reasonable efforts to resolve
any claim for Losses (whether liquidated or unliquidated) prior to the
Effective Time by means of a Purchase Price Reduction. The parties further
agree to make reasonable estimates of any Losses that have not become
liquidated prior to the Effective Time in order to reach agreement about
claims that will be allowed pursuant to this ARTICLE X.
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(c) Following delivery by Progenitor of a notice of a claim as described
in paragraph (b) above, MGI prior to the Effective Time, or the
Representative after the Effective Time, may notify Progenitor in writing
within fifteen (15) days of such delivery (or for notices delivered at least
five (5) business days prior to the Effective Time, prior to the Effective
Time) that it disputes the existence or amount of such claim. If MGI or the
Representative provides such a notice, the parties shall attempt to resolve
such dispute within 15 days. In the event that no such notice is provided
within such initial period or such an agreement is reached, an amount equal
to the value of the Losses claimed or agreed, as the case may be, shall (i)
if prior to the Effective Time, be offset against the Purchase Price (but
only if the aggregate amount of all such Losses exceeds the Threshold
Amount, and in no event shall such aggregate amount exceed the Maximum
Reduction), or (ii) if after the Effective Time, be distributed from amounts
held in escrow to Progenitor Indemnitee (but only if the aggregate amount of
all such Losses, together with all claims agreed prior to the Effective Time
(without regard to whether a Purchase Price Reduction actually was
effected), exceeds the Threshold Amount, and in no event shall such
aggregate amount, together with all Purchase Price Reductions, exceed the
Maximum Reduction). If such notice is provided but no agreement has been
reached then Progenitor and MGI prior to the Effective Time, or the
Representative after the Effective Time, may, not earlier than thirty (30)
days after the date of the initial claim notice, submit the dispute to
confidential, binding arbitration in San Francisco, California before a
panel of three arbitrators, one of which shall be appointed by Progenitor,
one of which shall be appointed by MGI (or the Representative after the
Effective Time), and the third of which shall be selected by the other two
arbitrators, pursuant to the procedures and rules for commercial arbitration
of the American Arbitration Association. If such arbitrators shall determine
that any amounts in respect of the Losses (whether liquidated or
unliquidated) are to be delivered to a Progenitor Indemnitee or set aside in
a reserve for any unliquidated claim, the Escrow Agent shall promptly
following receipt of a copy of such determination comply therewith.
(d) For purposes of this SECTION 10.3, the parties shall use their
commercially reasonable efforts to determine prior to the Effective Time the
amount of Losses resulting (before or after the Closing) from any breaches
which are the subject of any claim, and any amounts so determined (provided
(i) the total exceeds the Threshold Amount and (ii) the total shall not
exceed the Maximum Reduction) will be deducted from the Purchase Price to be
paid on the Closing Date. If, prior to the Closing Date, part but not all of
a claim has been resolved, or a minimum amount of the Loss relating to such
claim has been determined, then the applicable amount shall be deducted from
the Purchase Price to be paid on the Closing Date (provided that such
amount, together with all other resolved claims or portions of claims,
exceeds the Threshold Amount) and the remainder shall be resolved following
the Effective Time and, following such resolution, the amount of such
remainder, if any, shall be deducted from the Escrow Consideration, all
subject to SECTION 10.4 below.
(e) All costs, fees and expenses incurred by MGI prior to the Effective
Time pursuant to this ARTICLE X shall be Total MGI Reorganization Expenses
and all costs, fees and expenses incurred by the Representative after the
Effective Time pursuant to this ARTICLE X shall be paid by means of a
deduction from the Escrow Consideration. Subject to SECTION 10.4 below, ten
percent (10%) of the amount of any unliquidated or unresolved claim shall be
established as a reserve for payment of any such costs, fees and expenses
and the unused balance thereof shall be released upon resolution of all
outstanding claims under this ARTICLE X. All costs, fees and expenses
incurred by Progenitor with respect to any claim under this ARTICLE X shall
be the responsibility of Progenitor unless otherwise determined by the
parties.
(f) Upon resolution of any claim, the Escrow Agent shall distribute to
the MGI stockholders and to Progenitor in respect of portions of the Escrow
Consideration allocable to the MGI stock options, on a pro rata basis
(giving effect to the Exchange Ratio and shares of MGI Capital Stock
surrendered in connection with the Reorganization), all remaining unreserved
Escrow Consideration,
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less an amount equal in value to the dollar amount (assuming such shares
remain valued at the Market Value as of the Effective Time) of all claims
pursuant to SECTION 10.1 that are still in process (i) that are then-payable
liquidated claims, (ii) for which a reserve established pursuant to
PARAGRAPH (b) then exists, or (iii) that are still in the process of
resolution pursuant to this ARTICLE X, together in each case with a 10%
margin; provided that any fractional Share to be so distributed shall
instead be retained in escrow and accumulated with subsequent fractional
shares, until a whole share can be distributed.
(g) After the Effective Time, (i) as each matter referred to in SECTION
10.1 is resolved or otherwise concluded and (ii) as each undisputed
unliquidated claim which remains unliquidated as of the Effective Time is
liquidated, the Escrow Agent shall distribute to the claiming party or
parties shares of Escrow Consideration with a Market Value in an amount
equal to the liquidated or agreed upon value of the claim made by the
claiming party and to the MGI stockholders and to Progenitor on behalf of
the option holders their respective pro rata portion of the amount in escrow
then determined by the Escrow Agent to be free of any rights of any
Progenitor Indemnitee, as provided in paragraph (f) above, and, when all
such matters are resolved and such claims are liquidated, the obligations
under ARTICLE X hereof shall terminate.
(h) Whenever any amounts of Escrow Consideration are distributed to MGI
stockholders, portions of the Escrow Consideration allocable to stock
options shall be distributed to Progenitor for subsequent issuance upon
subsequent exercise of such stock options.
(i) The escrow shall be terminated when all of the amounts in escrow
shall have been disbursed in accordance with the provisions hereof and the
Escrow Agreement. The parties agree to use commercially reasonable efforts
to cause the Escrow Agreement to terminate and all claims thereunder to be
resolved prior to the six-month anniversary of the Effective Time.
(j) As of the Effective Time, the MGI stockholders shall, by virtue of
the approval of this Agreement by the requisite vote of the stockholders, be
deemed, for themselves and their heirs and representatives and successors,
to have constituted and appointed, effective from the Effective Time, Robert
Momsen, as their agent and attorney-in-fact (the "Representative") to enter
into the Escrow Agreement, and to take all action required or permitted
under the Escrow Agreement or this Agreement with respect to the interests
and rights of the MGI stockholders. In the event of the death, physical or
mental incapacity or resignation of the Representative, a replacement
Representative shall be appointed as provided in the Escrow Agreement.
(k) In taking any action whatsoever hereunder, the Representative shall
be protected in relying upon any notice, paper or other document reasonably
believed by him to be genuine, or upon any evidence reasonably deemed by him
to be sufficient. The Representative may consult with counsel in connection
with his duties hereunder and shall be fully protected in any act taken,
suffered or permitted by him in good faith or in accordance with the advice
of counsel. The Representative shall not be liable to the MGI stockholders
for the performance of any act or the failure to act so long as he acted or
failed to act in good faith within what he reasonably believed to be the
scope of his authority and for a purpose which he reasonably believed to be
in the best interests of the MGI stockholders.
10.4 GENERAL. Notwithstanding the foregoing, (i) in no event shall any
Purchase Price Reduction be made unless the aggregate amount of claims for
Losses hereunder agreed to by the parties or determined by the arbitrators
exceeds the Threshold Amount, and (ii) in no event shall any of the Shares be
placed in escrow for unresolved claims unless either (a) a Purchase Price
Reduction was made, or (b) the aggregate amount of resolved and unresolved
claims under this ARTICLE X exceeds the Threshold Amount. In the event that
claims resolved prior to the Effective Time total less than the Threshold
Amount, and unresolved claims totaling, together with the resolved claims, more
than the Threshold Amount have been asserted, an amount of Shares equivalent to
the amount of the resolved claims shall be placed in escrow and reserved for
release to Progenitor in the event Losses determined with respect to the
unresolved
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claims, together with the resolved claims, exceed the Threshold Amount. In
addition, in no event shall the aggregate Purchase Price Reduction together with
the Escrow Consideration exceed the Maximum Reduction.
ARTICLE XI
GENERAL PROVISIONS
11.1 CERTAIN DEFINITIONS.
(a) As used in this Agreement,
(i) the term "Material Adverse Effect" means, with respect to MGI or
Progenitor, as the case may be, a material adverse effect on the
business, assets, operations or results of operation or condition
(financial or otherwise) of MGI or Progenitor, as the case may be, in
Progenitor's case including its subsidiaries taken as a whole, and in
MGI's case excluding any material adverse effect resulting from actions
taken by Progenitor including, without limitation, actions to enforce its
rights hereunder or under the Related Agreements, or on its ability to
perform its obligations hereunder;
(ii) the word "subsidiary" when used with respect to any party means
any corporation or other organization, whether incorporated or
unincorporated, of which such party or any other subsidiary of such party
is a general partner (excluding partnerships the general partnership
interests of which held by such party or any subsidiary of such party do
not have a majority of the voting interests in such partnership) or of
which at least a majority of the securities or other interests having by
their terms ordinary voting power to elect a majority of the Board of
Directors or others performing similar functions with respect to such
corporations or other organizations is directly or indirectly owned or
controlled by such party and/or by any one or more of the subsidiaries;
(iii) the term "Related Agreements" shall mean (i) each of the
Principal Stockholder Agreements, each of the Principal Stockholder
Releases, the Loan Agreement, the Promissory Note, the Security
Agreement, the Employment Agreement and the Release Agreement
(collectively, the "Pre-Closing Related Agreements") and (ii) the Escrow
Agreement, each of the Non-Solicitation Agreements, each of the Affiliate
Agreements, each of the Investment Agreements and the Registration Rights
Agreement (collectively, the "Closing Related Agreements").
(b) As used in this Agreement, the following defined terms shall have
the meanings referred to below:
INDEX OF DEFINED TERMS
"Acquisition Proposals" has the meaning set forth in SECTION 7.2.
"Adjusted Purchase Price" has the meaning set forth in SECTION 3.2(b)(ii).
"Affiliate Agreement" has the meaning set forth in SECTION 6.6.
"Affiliates" has the meaning set forth in SECTION 6.6.
"Agreement Deadline" has the meaning set forth in SECTION 9.1(b).
"Certificate" has the meaning set forth in SECTION 3.2(d).
"Closing" has the meaning set forth in SECTION 3.8.
"Closing Date" has the meaning set forth in SECTION 3.8.
"Closing Related Agreements" has the meaning set forth in SECTION
11.1(a)(iii).
"Contracts" has the meaning set forth in SECTION 4.12(a).
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"Code" has the meaning set forth in the Recitals to this Agreement.
"Compensation Plans" has the meaning set forth in SECTION 6.2(a).
"Consents" has the meaning set forth in SECTION 8.1(b).
"DGCL" has the meaning set forth in SECTION 1.1.
"Dissenting Holder" has the meaning set forth in SECTION 3.10.
"Dissenting Shares" has the meaning set forth in SECTION 3.10.
"E&Y" has the meaning set forth in SECTION 6.4.
"Effective Time" has the meaning set forth in SECTION 1.2.
"Employment Agreement" shall mean the Employment Agreement between
Progenitor and Elliot Sigal, referred to in SECTION 7.15.
"Employee Retention Plan" has the meaning set forth in SECTION 6.11.
"Environmental Laws" has the meaning set forth in SECTION 4.22(a).
"ERISA" has the meaning set forth in SECTION 4.13(a).
"ERISA Affiliate" has the meaning set forth in SECTION 4.13(a).
"Escrow Agent" has the meaning set forth in SECTION 3.4(a).
"Escrow Agreement" was the meaning set forth in SECTION 3.4(a).
"Escrow Consideration" has the meaning set forth in SECTION 3.4(a).
"Exchange Act" has the meaning set forth in SECTION 4.17.
"Exchange Agent" has the meaning set forth in SECTION 3.3(a).
"Exchange Ratio" has the meaning set forth in SECTION 3.2(c).
"Hazardous Material" has the meaning set forth in SECTION 4.22(b).
"Information Statement" has the meaning set forth in SECTION 4.11.
"Intellectual Property Rights" has the meaning set forth in SECTION 4.23(k).
"IPO" has the meaning set forth in SECTION 3.2(b)(iv).
"IPO Registration Statement" has the meaning set forth in SECTION 3.2(b)(v).
"Licenses" has the meaning set forth in SECTION 4.23(a).
"Loan Agreement" has the meaning set forth in SECTION 6.10.
"Losses" has the meaning set forth in SECTION 10.1.
"Market Value" has the meaning set forth in SECTION 3.2(b)(v).
"Material Adverse Effect" has the meaning set forth in SECTION 11.1(a)(i).
"Material Encumbrance" has the meaning set forth in SECTION 4.24(b).
"Maximum Reduction" has the meaning set forth in SECTION 3.2(f).
"MGI" means Mercator Genetics, Inc., a Delaware corporation.
"MGI Capital Stock" has the meaning set forth in SECTION 3.2(a).
"MGI Common Stock" has the meaning set forth in SECTION 3.2(c)(i).
"MGI Disclosure Schedule" has the meaning set forth in the introductory
paragraph of ARTICLE IV.
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"MGI Financial Statements" has the meaning set forth in SECTION 4.9.
"MGI Group" has the meaning set forth in SECTION 4.14 (a)(i).
"MGI Intellectual Property Rights" has the meaning set forth in SECTION
4.23(k).
"MGI Plans" has the meaning set forth in SECTION 4.13(a).
"MGI Preferred Stock" has the meaning set forth in SECTION 4.2(a)(i).
"MGI Property" has the meaning set forth in SECTION 4.22(d).
"MGI Real Property" has the meaning set forth in SECTION 4.24(a).
"MGI Series A Preferred Stock" has the meaning set forth in SECTION
3.2(c)(ii).
"MGI Series B Preferred Stock" has the meaning set forth in SECTION
3.2(c)(iii).
"MGI Series C Preferred Stock" has the meaning set forth in SECTION
3.2(c)(iv).
"MGI Series D Preferred Stock" has the meaning set forth in SECTION
3.2(c)(v).
"Optional Public Equity" has the meaning set forth in SECTION 3.13(b).
"Other Agreements" has the meaning set forth in SECTION 4.24(b).
"Multiemployer Plan" has the meaning set forth in SECTION 4.13(a).
"Per Share Consideration" has the meaning set forth in SECTION 3.2(d).
"Phoenix Warrants" has the meaning set forth in SECTION 4.2(b).
"Pre-Closing Related Agreements" has the meaning set forth in SECTION
11.1(a)(iii).
"Principal Stockholder Agreement" has the meaning set forth in SECTION 7.5.
"Principal Stockholder Release" has the meaning set forth in SECTION 7.5.
"Private Placement Memorandum" has the meaning set forth in SECTION 7.4(b).
"Progenitor" means Progenitor, Inc., a Delaware corporation.
"Progenitor Audited Financial Statements" has the meaning set forth in
SECTION 5.14(b).
"Progenitor Disclosure Schedule" has the meaning set forth in the first
paragraph of ARTICLE V.
"Progenitor Indemnitee" has the meaning set forth in SECTION 10.1.
"Progenitor Intellectual Property Rights" has the meaning set forth in
SECTION 5.15(h).
"Progenitor Preferred Stock" has the meaning set forth in SECTION 5.2(a)(i).
"Progenitor Series A Preferred Stock" has the meaning set forth in SECTION
5.2(a)(i).
"Progenitor Series B Preferred Stock" has the meaning set forth in SECTION
5.2(a)(i).
"Progenitor Unaudited Financial Statements" has the meaning set forth in
SECTION 5.14(b).
"Promissory Note" has the meaning set forth in SECTION 6.10.
"Prospectus" has the meaning set forth in SECTION 3.2(b)(v).
"Purchase Price" has the meaning set forth in SECTION 3.2(b)(i).
"Purchase Price Reduction" has the meaning set forth in SECTION 3.4(a).
"Registration Rights Agreement" has the meaning set forth in SECTION 7.25.
"Related Agreements" has the meaning set forth in SECTION 11.1(a)(iii).
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"Reorganization Sub" means MG Merger Sub Corp., a Delaware corporation and
wholly owned subsidiary of Progenitor.
"Representative" has the meaning set forth in SECTION 10.3(j).
"Requisite Regulatory Approvals" has the meaning set forth in SECTION
8.1(b).
"Returns" has the meaning set forth in SECTION 4.14(a)(iii).
"S-4 Prospectus" has the meaning set forth in SECTION 7.4.
"S-4 Registration Statement" has the meaning set forth in SECTION 3.11(a).
"SEC" has the meaning set forth in SECTION 3.2(b)(v).
"Securities Act" has the meaning set forth in SECTION 3.11.
"Security Agreement" has the meaning set forth in SECTION 6.10.
"Shares" has the meaning set forth in SECTION 3.2(b)(ii).
"Supplemental Funding" has the meaning set forth in SECTION 6.10.
"Surviving Corporation" has the meaning set forth in SECTION 1.1.
"Taxes" has the meaning set forth in SECTION 4.14(a)(ii).
"Total MGI IPO Expenses" has the meaning set forth in SECTION 3.2(b)(iv).
"Total MGI Reorganization Expenses" has the meaning set forth in SECTION
3.2(b)(iii).
"Venture Capital Bridge Notes" has the meaning set forth in SECTION 4.2(b).
11.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. No representations or
warranties contained herein shall survive beyond the Effective Time, except that
the representations and warranties shall be deemed to survive to the extent
necessary to permit the resolution of any outstanding claims under ARTICLE X
that are commenced on or prior to the Effective Time.
11.3 NOTICES. All notices, claims, demands and other communications
hereunder shall be in writing and shall be deemed given upon delivery if
delivered personally or when sent if by confirmed telex or telecopy or five (5)
days after having been sent if mailed by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) If to Progenitor, to:
Progenitor, Inc.
1507 Chambers Road
Columbus, Ohio 43212
Attention: Chief Executive Officer
Fax: (614) 488-0404
with a copy to:
Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105
Attention: Gavin B. Grover, Esq.
Fax: (415) 268-7522
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(b) If to MGI, to:
Mercator Genetics, Inc.
4040 Campbell Avenue
Menlo Park, California 94025
Fax: (415) 617-0883
Attention: President
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: John V. Roos, Esq.
Fax: (415) 496-4006
11.4 DESCRIPTIVE HEADINGS. The headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
11.5 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (including the Related
Agreements and the Exhibits, Disclosure Schedules and all the documents referred
to herein or therein) and the Confidentiality Agreement (a) constitute the
entire agreement and supersede all other prior agreements and understandings,
both written and oral, among the parties or any of them, with respect to the
subject matter hereof; (b) are not intended to confer upon any other person any
rights or remedies hereunder (provided, however, that (i) the holders of options
and warrants are intended beneficiaries of the covenants and agreements
contained in SECTION 7.7; (ii) the employees of MGI are intended beneficiaries
of the covenants contained in SECTION 6.11; (iii) the officers and directors of
MGI are intended beneficiaries of the covenants contained in SECTION 7.3; and
(iv) the Progenitor Indemnities are intended beneficiaries of the covenants
contained in ARTICLE X); and (c) shall not be assigned by operation of law or
otherwise, provided that Progenitor may assign its rights and obligations
hereunder to a direct or indirect subsidiary of Progenitor.
11.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to the
provisions thereof relating to conflicts of law.
11.7 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
11.8 VALIDITY. The invalidity or unenforceability of any provision of this
Agreement shall not effect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
11.9 JURISDICTION AND VENUE. Each party hereto hereby agrees that any
proceeding relating to this Agreement and the Reorganization shall be brought in
a state court of Delaware. Each party hereto hereby consents to personal
jurisdiction in any such action brought in any such Delaware court, consents to
service of process by registered mail made upon such party and such party's
agent and waives any objection to venue in any such Delaware court or to any
claim that such Delaware court is an inconvenient forum.
11.10 INVESTIGATION. The respective representations of warranty of
Progenitor and MGI contained herein or in the certificates or other documents
delivered prior to the Closing shall not be deemed waived or otherwise affected
by any investigation made by any party hereto.
11.11 CONSENTS. For purposes of any provision of this Agreement requiring,
permitting or providing for the consent of Progenitor or MGI, the written
consent of the Chief Executive Officer of Progenitor or MGI, as the case may be
shall be sufficient to constitute such consent.
11.12 SEVERABILITY. If any provision of this Agreement is held to be
unenforceable for any reason, such provision and all other related provisions
shall be modified, if possible, or voided, as necessary, in
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order to effectuate the intent of the parties to the extent possible. In any
event, all other provisions of this Agreement shall be deemed valid and
enforceable.
11.13 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any of the Progenitor Common Stock in which the Purchase Price
may be paid).
11.14 SPECIFIC ENFORCEMENT. The parties acknowledge and agree that if any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur and it
would be extremely impracticable and difficult to measure damages. Accordingly,
in addition to any other rights and remedies to which the parties may be
entitled by law or equity, the parties shall be entitled to an injunction or
injunctions to prevent or cure breached of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof, and the parties
expressly waive (a) the defense that a remedy in damages will be adequate and
(b) any requirement, in an action for specific performance, for the posting of a
bond.
11.15 ATTORNEYS' FEES. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
IN WITNESS WHEREOF, each of parties hereto has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
PROGENITOR, INC.
By: _______/s/_MARK N.K. BAGNALL______
Name: ________Mark N.K. Bagnall_______
Title: _Vice President and Chief
Financial Officer_
MG MERGER SUB CORP.
By: _______/s/_MARK N.K. BAGNALL______
Name: ________Mark N.K. Bagnall_______
Title: ____Chief Financial Officer____
MERCATOR GENETICS, INC.
By: _________/s/_ELLIOTT SIGAL________
Name: ___Elliott Sigal, M.D., Ph.D.___
Title: __President and Chief Executive
Officer_______________________________
A-53
<PAGE>
APPENDIX B
FORM OF ESCROW AGREEMENT
ESCROW AGREEMENT
This ESCROW AGREEMENT is made as of this day of , 1997, among
Progenitor, Inc., a Delaware corporation ("Progenitor"), Mercator Genetics,
Inc., a Delaware corporation ("Mercator"), MG Merger Sub Corp., a Delaware
corporation and wholly-owned subsidiary of Progenitor ("Reorganization Sub"),
(the "Escrow Agent") and Robert Momsen, solely in his capacity as
representative of the holders of Mercator's capital stock (the
"Representative").
WHEREAS, pursuant to an Agreement and Plan of Reorganization (the
"Reorganization Agreement") between Progenitor, Reorganization Sub and Mercator
dated as of February , 1997, a copy of which has been delivered to the Escrow
Agent, effective as of the date hereof, Mercator shall be merged into
Reorganization Sub, with Mercator as the surviving corporation (the
"Reorganization"), the outstanding shares of Mercator capital stock and all
options and warrants to purchase shares of Mercator capital stock shall be
converted into the Adjusted Purchase Price (as defined in the Reorganization
Agreement), and the outstanding options to acquire Mercator capital stock shall
be assumed by, and become options to purchase shares of the common stock of,
Progenitor; capitalized terms not otherwise defined herein having the meanings
set forth in the Reorganization Agreement;
WHEREAS, pursuant to the Reorganization Agreement, upon the effective time
of the Reorganization (the "Effective Time"), the Escrow Consideration shall be
deposited in escrow and subsequently distributed as contemplated in the
Reorganization Agreement and in this Agreement;
WHEREAS, the holders of Mercator's capital stock and stock options (the
"Holders") have agreed to indemnify Progenitor, Reorganization Sub and the other
Progenitor Indemnitees and provide for certain other payments to Progenitor to
the extent and in the manner provided in the Reorganization Agreement in part by
means of an escrow (the "Escrow") to be established hereunder as of the
Effective Time consisting of the Escrow Consideration in the event that there
are any unliquidated or disputed claims as of the Effective Time; and
WHEREAS, the Escrow Agent is willing to act as Escrow Agent hereunder.
NOW, THEREFORE, in order to induce Progenitor and Reorganization Sub to
consummate the transactions contemplated by the Reorganization Agreement and in
consideration of the premises and mutual covenants and agreements hereinafter
set forth, and of other good and valuable consideration, effective as of the
date hereof the parties hereto agree as follows:
1. APPOINTMENT OF ESCROW AGENT.
Progenitor, Mercator and Representative hereby appoint Escrow Agent as
escrow agent to serve in such capacity in accordance with the terms and
conditions set forth in this Escrow Agreement. Escrow Agent hereby accepts such
appointment.
2. ESTABLISHMENT OF THE ESCROW.
(a) At the Effective Time, Progenitor shall deliver irrevocably (subject
to the terms hereof) to the Escrow Agent the Escrow Consideration. The
Escrow Consideration shall also be deemed to include any dividends, interest
or earnings thereon from time to time held in the Escrow by the Escrow Agent
pursuant to the terms hereof, less any payments or distributions made
hereunder. The Escrow Consideration shall be held in escrow and disbursed by
the Escrow Agent, subject to the terms and conditions hereinafter set forth
and the terms and conditions set forth in the Reorganization Agreement. The
Escrow Agent agrees not to commingle the Escrow Consideration with any other
funds held by the Escrow Agent.
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<PAGE>
(b) The parties hereto agree that the Holders shall be treated as the
owners of the corpus of the trust created under this Agreement, excluding
any funds disbursed to Progenitor or a Progenitor Indemnitee, pursuant to
the provisions hereof for all purposes, including without limitation voting
on any matters brought before Progenitor stockholders, and shall file all of
their respective returns, reports and similar information in a manner
consistent with such ownership. The Holders shall be responsible for any tax
liability and tax reporting obligations attributable to the placement of the
Escrow Consideration in the Escrow and the payment of any interest or other
amounts payable with respect to the Escrow Consideration. The
Representative, on behalf of the Holders, agrees to provide the Escrow Agent
with executed Forms W-9 or W-8, as applicable.
3. REPRESENTATIVE OF THE HOLDERS.
(a) From and after the establishment of the Escrow, as provided in
SECTION 2 hereof, the Holders shall be represented hereunder by the
Representative. In the event that the Representative shall die, become
physically or mentally incapacitated, or resign or otherwise terminate his
status as such, his successor shall be selected by the vote or written
consent of not less than a majority in interest of the Holders. Any such
successor shall execute and agree to the terms and conditions of this
Agreement. The Representative is authorized to act on behalf of the Holders
as provided in this Agreement and the Reorganization Agreement without
further authority from the Holders. The Representative shall not be entitled
to be compensated for acting as Representative hereunder; provided, that the
reasonable fees and expenses (including legal fees and expenses) incurred by
the Representative in performing his duties hereunder and under the
Reorganization Agreement shall be reimbursed from the Escrow.
(b) The Representative shall be solely responsible for maintaining a
list of the names and addresses of the Holders having an interest in the
Escrow and each Holder's pro rata interest therein. The Representative shall
make such list available to Progenitor and the Escrow Agent from time to
time promptly upon request. With respect to any distribution of funds from
the Escrow to the Holders, the Representative shall timely provide to the
Escrow Agent the names and addresses of such Holders and the amount of the
Escrow to be distributed to each such Holder. Progenitor and the Escrow
Agent may rely for all purposes on any such information provided by the
Representative and shall be fully protected in relying thereon. The Holders
shall have no claim against Progenitor or the Escrow Agent based upon the
inaccuracy of any such information.
(c) Nothing in this Agreement shall require Progenitor to deposit with
the Escrow Agent any Shares allocable to the conversion in the
Reorganization of options or warrants to acquire MGI Capital Stock, which
Shares in any event shall not be issued until such options have been duly
and validly exercised. In the event any such options or warrants are so
exercised prior to resolution of all claims hereunder, following payment of
the exercise price for all Shares subject to such exercise and subject to
the terms and conditions hereof and of the options or warrants, Progenitor
shall deliver to the Escrow Agent Shares representing the option or warrant
holder's pro rata portion of the Escrow Consideration, and shall deliver the
remaining Shares to the option or warrant holder.
4. DISTRIBUTIONS ON, CHANGES IN, AND EXCHANGES OF, ESCROW
CONSIDERATION. Any shares issued on or in exchange for any securities held in
the Escrow as a result of any stock dividend, stock split-up, consolidation of
shares, reclassification or merger or consolidation shall become part of the
Escrow Consideration and be held hereunder on the same terms as the shares on or
in exchange for which such shares shall have been issued.
5. INVESTMENT OF ESCROW CONSIDERATION. The Escrow Agent shall, to the
extent the Escrow Consideration consists of cash and except to the extent that
amounts in the Escrow are required to satisfy a claim for payment, invest the
Escrow Consideration in Authorized Investments. "Authorized Investments" shall
mean (a) direct obligations of the United States of America (including
certificates or other instruments evidencing ownership interests in such
obligations) or obligations the timely payment of the principal and
B-2
<PAGE>
interest on which are fully guaranteed by the United States of America or any
daily or weekly withdrawal money market fund investing solely in such
obligations or interest bearing demand or time deposits and banker's acceptance
in any bank (including the Escrow Agent and its affiliates) which is rated one
of the two highest rating categories by Moody's or Standard & Poors. The Escrow
Agent shall hold all monies collected on account of interest earnings in the
Escrow and such earnings shall become part of the Escrow.
6. CLAIMS AGAINST THE ESCROW.
(a) If and whenever Progenitor, acting on its behalf or on behalf of
Reorganization Sub or any other Progenitor Indemnitee, shall claim
indemnification or other payment in respect of a liquidated claim to be
satisfied out of the Escrow pursuant to the Reorganization Agreement,
Progenitor shall as soon as reasonably practical send written notice of the
same to the Escrow Agent and the Representative (or his successor, as
provided above). Such notice shall include a brief description of the facts
upon which such claim is based in reasonable detail and an estimate of the
amount of the related Losses. In the event of an unliquidated, unmatured or
unaccrued claim pursuant to the Reorganization Agreement, Progenitor shall
provide written notice to the Representative and the Escrow Agent of the
claim, including a brief description of the facts upon which such claim is
based in reasonable detail and an estimate of the amount of the related
Losses, which notice may include a demand that a reserve amount be held in
respect of such claim. Any claim that is unliquidated, unmatured or
unaccrued shall not be paid unless otherwise agreed in writing by the
Representative and the claimant (except as provided in paragraph (f) below),
and, pending liquidation or other resolution of such claim, the Escrow Agent
shall set aside Escrow Consideration with a value equal to such claim
(together with a 10% margin) (but in no event greater than the Maximum
Reduction) within the Escrow to address such claim until such claim is fully
liquidated, matured or accrued.
(b) For the purpose of paying claims hereunder, the Escrow
Consideration, (i) if in the form of shares of Progenitor Common Stock,
shall be valued at the per share price to the public for Progenitor Common
Stock indicated on the final prospectus ("Prospectus") included in the
registration statement declared effective by the Securities and Exchange
Commission relating to the initial public offering of Progenitor Common
Stock, provided, that, in the event of a unit offering, the shares of
Progenitor Common Stock shall be valued at the portion of the price per
share paid by the public attributable to the Progenitor Common Stock as
indicated in the Prospectus, and (ii) if in the form of other securities,
shall be the average closing price per share for the twenty (20) trading
days ending two (2) days prior to the date hereof; provided, in either case,
that, such per share value shall be adjusted to reflect any subsequent
dividend, stock-split, consolidation of shares, reclassification or
Reorganization or consolidation.
(c) If the Representative shall object to any such claim, he shall send
written notice of his objection to the Escrow Agent and Progenitor within
fifteen (15) days after Progenitor's delivery of its notice as aforesaid and
Progenitor and the Representative shall attempt to resolve such dispute
within fifteen (15) days.
(d) In the event that no such notice is provided by the Representative
within such initial fifteen day period, the Representative, on behalf of the
Holders, shall be deemed to have acknowledged the correctness of such claim
for the full amount thereof and the Escrow Agent shall transfer to
Progenitor out of the Escrow, subject to the limits of, and as provided in,
the following sentence and on behalf of the claiming party, Escrow
Consideration (pro rata from the account of each Holder based on the
interest of each such Holder therein) with a value equal to the amount of
such claim. Transfer to Progenitor of the Escrow Consideration shall be
made, in the case of a liquidated claim, promptly following such initial
fifteen day period, or, in the case of an unliquidated claim, promptly
following the date upon which the claim is fully liquidated or otherwise
settled, provided that, notwithstanding anything herein to the contrary, no
transfers will be made unless the aggregate amount of all Losses, together
with all claims agreed prior to the Effective Time (without regard to
B-3
<PAGE>
whether a Purchase Price Reduction actually was effected), exceeds the
Threshold Amount, and in no event shall such aggregate amount exceed the
Maximum Reduction.
(e) If the Representative shall timely notify Progenitor and the Escrow
Agent in writing of his good faith objection to a claim of indemnification
or other payment or a demand for the creation of reserve for any
unliquidated claim (or the amount thereof), the Escrow Agent shall hold the
disputed amount of Escrow Consideration in the Escrow until the rights of
the Holders and the claiming party or parties with respect thereto have been
agreed upon between the Representative and Progenitor. In the event such an
agreement is reached, the claiming party or parties shall cause Progenitor
to provide to the Escrow Agent a written notice and the Representative shall
sign such notice acknowledging that such agreement has been reached and
authorizing the Escrow Agent to release and transfer to Progenitor Escrow
Consideration having a value equal to the agreed amount specified in the
notice in the same manner set forth for undisputed claims as provided in,
and subject to the limitations of, paragraph (d) hereof.
(f) If notice is provided but no such agreement has been reached, then
either Progenitor or the Representative may, not earlier than thirty (30)
days after the date of the initial claim notice, submit the dispute to
confidential, binding arbitration in San Francisco, California, before a
panel of three (3) arbitrators, one (1) of which to be selected by each of
Progenitor and the Representative, and the third to be selected by the other
two (2) arbitrators, pursuant to the procedures and rules for commercial
arbitration of the American Arbitration Association. The Escrow Agent may
rely on the order or other determination of any such arbitrators. If such
arbitrators shall determine that any part of the Escrow Consideration is to
be delivered to a Progenitor Indemnitee or is to be set aside in a reserve
for any unliquidated claim, the Escrow Agent shall promptly following
receipt of a copy of such determination establish such reserve or deliver to
such Progenitor Indemnitee Escrow Consideration with a value equal to the
lesser of (i) the amount of the claim or claims as awarded to be satisfied,
or (ii) the entire amount remaining in the Escrow, subject in each case to
the limitation set forth in paragraph (d) above. Any disputed amounts not
awarded shall promptly be transferred to the unreserved portion of the
Escrow.
(g) All costs, fees and expenses incurred by the Representative in
connection with the Escrow shall be paid by means of a deduction from the
Escrow Account. Ten percent (10%) of the amount of any unliquidated or
unresolved claim shall be established as a reserve for payment of any such
costs, fees and expenses and the unused balance thereof shall be released
upon resolution of all outstanding claims under this Agreement. All costs,
fees and expenses incurred by Progenitor with respect to any claim under
this Agreement shall be the responsibility of Progenitor unless otherwise
determined by the parties.
(h) Upon resolution of any claim, the Escrow Agent shall distribute to
the Mercator stockholders and to Progenitor in respect of portions of the
Escrow Consideration allocable to the Mercator stock options, on a pro rata
basis (giving effect to the Exchange Ratio and shares of MGI Capital Stock
surrendered in connection with the Reorganization), all remaining unreserved
Escrow Consideration, less an amount equal in value to the dollar amount
(assuming such shares remain valued at the Market Value as of the Effective
Time) of all claims pursuant to Section 10.1 of the Reorganization Agreement
that are still in process (i) that are then-payable liquidated claims, (ii)
for which a reserve established pursuant to paragraph (b) then exists, or
(iii) that are still in the process of resolution pursuant to Article X of
the Reorganization Agreement, together in each case with a 10% margin;
provided that any fractional Share to be so distributed shall instead be
retained in escrow and accumulated with subsequent fractional shares, until
a whole share can be distributed.
(i) After the Effective Time, (i) as each claim for Losses is resolved
or otherwise concluded and (ii) as each undisputed unliquidated claim is
liquidated, the Escrow Agent shall distribute to the claiming party or
parties shares of Escrow Consideration with a Market Value in an amount
equal to
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<PAGE>
the liquidated or agreed upon value of the claim made by the claiming party
and to the Mercator stockholders and to Progenitor on behalf of the option
holders their respective pro rata portion of the amount in escrow then
determined by the Escrow Agent to be free of any rights of any Progenitor
Indemnitee, as provided in paragraph (h) above.
(j) Whenever any amounts of Escrow Consideration are distributed to
Mercator stockholders, portions of the Escrow Consideration allocable to
stock options shall be distributed to Progenitor for subsequent issuance
upon subsequent exercise of such stock options.
(k) For the purpose of the above procedures with respect to notices, the
term "delivery" shall mean, in the case of notices sent by mail, the time at
which such notice is mailed, in the case of notices delivered personally,
the time at which such notice is delivered and, in the case of notices sent
by telecopy, the time at which such notice is sent.
7. TERMINATION OF ESCROW. The Escrow provided for hereunder shall
terminate when all amounts in Escrow have been disbursed in accordance with the
provisions of Article X of the Reorganization Agreement and this Escrow
Agreement. Progenitor, Mercator and the Representative agree to use commercially
reasonable efforts to cause this Escrow Agreement to terminate and all claims
hereunder to be resolved prior to the six-month anniversary of the Effective
Time.
8. ESCROW AGENT.
(a) The Escrow Agent shall be entitled to receive compensation for its
services as Escrow Agent as set forth in EXHIBIT A hereto. Such compensation
shall be paid by Progenitor.
(b) The Escrow Agent's duties and responsibilities shall be limited to
those expressly set forth in this Escrow Agreement, and it shall not be
subject to, or obliged to recognize, any other agreement between the parties
hereto even though reference thereto may be made herein; provided, however,
that with the Escrow Agent's written consent, this Escrow Agreement may be
amended at any time or times by an instrument in writing signed by or on
behalf of Progenitor, Reorganization Sub (or after the Reorganization,
Surviving Corporation), the Representative and the Escrow Agent. The Escrow
Agent may withhold such consent only if such amendment would adversely
affect the rights or liabilities of the Escrow Agent.
(c) The Escrow Agent is authorized, in its reasonable discretion, to
disregard any and all notices or instructions given by any of the parties
hereto or by any other person, firm or corporation, except only (i) such
notices or instructions as are herein specifically provided for, and (ii)
orders or process of any court or arbitrator with jurisdiction. If any
property in the Escrow is at any time attached, garnished or levied upon or
under any court order or in case the payment, assignment, transfer,
conveyance or delivery of any such property shall be stayed or enjoined by
any court order, or in case any order, judgment or decree shall be made or
entered by any court affecting such property or any part thereof, then, and
in any of such events, the Escrow Agent is authorized, in its sole
discretion, to rely upon and comply with any such order, writ, judgment or
decree which it is advised by legal counsel of its own choosing is binding
upon it; and if it complies with any such order, writ, judgment or decree it
shall not be liable to any of the parties hereto or to any other person,
firm or corporation by reason of such compliance even though such order,
writ, judgment or decree may be subsequently reversed, modified, annulled,
set aside or vacated.
(d) The Escrow Agent shall not be personally liable for any act taken or
omitted hereunder if taken or omitted by it in good faith. In taking any
action whatsoever hereunder, the Escrow Agent shall be protected in relying
upon any notice, paper or other document reasonably believed by it to be
genuine, or upon any evidence reasonably deemed by it to be sufficient. The
Escrow Agent may consult with counsel in connection with its duties
hereunder and shall be fully protected in any act taken, suffered or
permitted by it in good faith in accordance with the advice of counsel. It
shall also be fully protected in relying upon any written notice, demand,
certificate or document which it in good
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<PAGE>
faith believes to be genuine. The Escrow Agent shall not be responsible for
the sufficiency or accuracy of the form, execution, validity or genuineness
of documents now or hereafter deposited hereunder, nor shall it be
responsible or liable in any respect on account of the identity, authority
or rights of the persons executing and delivering or purporting to execute
or deliver any such document.
(e) If the Escrow Agent believes it to be reasonably necessary to
consult with counsel concerning any of its duties in connection with this
Escrow Agreement, or in case it becomes involved in litigation on account of
being Escrow Agent hereunder or on account of having received property
subject hereto, then in either case, the Escrow Agent's costs, expenses, and
reasonable attorneys' fees shall be paid by Progenitor.
(f) Progenitor hereby indemnifies and holds harmless the Escrow Agent
from and against any and all losses which the Escrow Agent may suffer or
incur by reason of any action, claim or proceeding brought against the
Escrow Agent arising out of or relating in any way to this Agreement or any
transaction to which this Agreement relates unless such action, claim or
proceeding is the result of the gross negligence or willful misconduct of
the Escrow Agent.
(g) By its execution and delivery of this Escrow Agreement, the Escrow
Agent acknowledges that its terms and provisions are acceptable and it
agrees to carry out the provisions hereof on its part.
9. RESIGNATION, REMOVAL OF ESCROW AGENT. The Escrow Agent may at any time
resign by giving sixty (60) days' written notice of resignation to the
Representative and Progenitor. The Representative and Progenitor may jointly at
any time remove the Escrow Agent by giving written notice to the Escrow Agent.
If the Escrow Agent shall resign or be removed, a successor Escrow Agent, which
shall be either a bank, trust company or other financial institution, having an
office in San Francisco, California satisfactory to both Progenitor and the
Representative, shall be appointed by written instrument executed and delivered
by both Progenitor and the Representative to the Escrow Agent and to such
successor Escrow Agent, and upon the resignation or removal of the predecessor
Escrow Agent, the successor Escrow Agent shall, without any further act, deed or
conveyance, become vested with all the right, title and interest to all property
held hereunder, of such predecessor Escrow Agent; but nevertheless such
predecessor Escrow Agent shall, on the written request of the Representative,
Progenitor or such successor Escrow Agent execute and deliver to such successor
Escrow Agent an instrument transferring to such successor Escrow Agent all
right, title and interest hereunder in and to the property in the Escrow and all
other rights hereunder, of such predecessor Escrow Agent. If no successor Escrow
Agent has been appointed at the end of sixty (60) days after notice of
resignation by the Escrow Agent, the Escrow Agent hereunder may seek relief from
an appropriate court in the County of San Francisco, in interpleader proceedings
in which Progenitor and the Representative shall be joined as parties.
10. GOVERNING AGREEMENT; AMENDMENTS. The Escrow Agent hereby acknowledges
receipt of a copy of the Reorganization Agreement; however, except for reference
thereto for definitions of certain words or terms not defined herein, the Escrow
Agent is not charged with any duties or responsibilities with respect to the
Reorganization Agreement notwithstanding any provision of the Reorganization
Agreement to the contrary. No change in, addition to, or waiver of the terms and
conditions hereof shall be binding upon any of the parties hereto unless
approved in writing by the other parties hereto.
11. NOTICES. All notices, claims, demands and other communications
hereunder shall be in writing and shall be deemed given if delivered personally
or by telecopy or mailed by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
(a) If to Progenitor, Reorganization Sub (or the Surviving Corporation),
or any other Indemnitee, to:
Progenitor, Inc.
1507 Chambers Road
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<PAGE>
Columbus, Ohio 43212
Attention: Chief Executive Officer
Telecopy Number: (614) 488-0404
with a copy to:
Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105
Attention: Gavin B. Grover, Esq.
Telecopy Number: (415) 268-7522
(b) If to Escrow Agent, to:
____________________________
____________________________
____________________________
Attention: ____________
Telecopy Number:_(___)__________
(c) If to Representative, to:
Robert Momsen
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, California 94025
Telecopy Number: (415) 854-4706
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Drive
Palo Alto, California 94304
Attention: John V. Roos, Esq.
Telecopy Number: (415) 496-4006
12. BINDING EFFECT. This Escrow Agreement shall be binding upon and inure
to the benefit of the parties, their successors, heirs and assigns.
13. COUNTERPARTS. This Escrow Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
the day and year first above written.
<TABLE>
<S> <C>
Attest: PROGENITOR, INC.
By:
Title:
Attest: MG MERGER SUB CORP.
By:
Title:
Attest: MERCATOR GENETICS, INC.
By:
Title:
ESCROW AGENT
By:
Title:
REPRESENTATIVE
solely in his capacity as Representative
</TABLE>
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<PAGE>
EXHIBIT A
SCHEDULE OF FEES
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<PAGE>
APPENDIX C
EXHIBIT A TO REORGANIZATION AGREEMENT
The percentages set forth in Sections 3.2(c)(i) through 3.2(c)(v) are
calculated assuming an Adjusted Purchase Price of $22 million. If the Adjusted
Purchase Price is less than $22 million, then the percentages would be adjusted
as follows:
(i) The percentage of the Adjusted Purchase Price applicable to the
shares of Common Stock of Mercator outstanding pursuant to Section 3.2(c)(i)
shall be prorated between 10% and 15.90% based upon the amount of the
Adjusted Purchase Price; i.e. such percentage denominated as "y" shall be
equal to (1.475x - 16,550,000) DIVIDED BY 1,000,000, where x = the Adjusted
Purchase Price; provided, however, that in no event shall such percentage
represented by "y" be less than 10.0%.
(ii) The percentage applicable to the outstanding shares of Series D
Preferred Stock pursuant to Section 3.2(c)(v) above shall be such as yields
an aggregate payment of $1.5 million, i.e. $1.5 million DIVIDED BY Adjusted
Purchase Price.
(iii) The remaining percentage of the Adjusted Purchase Price (after
deducting the percentages referred to in clauses (i) and (ii) above from
100%) shall be apportioned among the Series A, Series B and Series C
Preferred Stock in order to return the original investment amount to each
class of such series of Preferred Stock on a pro rata basis up to 100% of
such original investment amount (i.e. any shortfall to be borne pro rata by
each series based upon the original investment amount for such series--each
series will have the same shortfall percentage based upon the original
investment amount), and any excess above such original investment shall be
shared pro rata based upon the number of outstanding shares of Series A,
Series B and Series C Preferred Stock (including any shares subject to
outstanding warrants) at the Effective Time, in each case assuming the
following original investment amounts and the following outstanding share
numbers:
<TABLE>
<CAPTION>
ORIGINAL % OF A, B & C
INVESTMENT ORIGINAL % A, B & C
SERIES AMOUNT INVESTMENT NO. SHARES SHARES
- ---------- ---------------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
A $3,193,500 20.1396% 319,350 3.94%
($10.00/share)
B $8,136,990 51.315438% 3,254,796 40.18%
($2.50/share)
C $4,526,317 28.5449% 4,526,317 55.88%
($1.00/share)
---------------- ------------- ---------- -----------
TOTAL: $15,856,807 100% 8,100,463 100%
</TABLE>
Examples:
(A) If the Adjusted Purchase Price is $18 million, then the percentages
would be as follows:
3.2(c)(i)(Common): 10.0%
[Calculation: ((1.475 X $18.0 million) - 16,550,000) DIVIDED BY
1.0 million = 10.0]
3.2(c)(v)(Series D): 8.33%
[Calculation: $1.5 million divided by $18.0 million = 8.33%]
3.2(c)(ii)(Series A): 16.45%
3.2(c)(iii)(Series B): 41.91%
3.2(c)(iv)(Series C): 23.31%
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[Aggregate Calculation: 100% - 10% - 8.33% = 81.67% of the
Adjusted Purchase Price is remaining for the Series A, B and C,
or $14,700,600. Such amount is less than the aggregate original
investment amount of $15,856,807, and therefore the division is
pro rata based strictly on the original investment percentages:
Series A = 81.67% X 20.1396% = 16.45%
Series B = 81.67% X 51.315438% = 41.91%
Series C = 81.67% X 28.5449% = 23.31%]
(B) If the Adjusted Purchase Price is $21 million, then the percentages
would be as follows:
3.2(c)(i)(Common): 14.43%
[Calculation: ((1.475 x $21.0 million) - 16.55 million)
DIVIDED BY 1.0 million = 14.43]
3.2(c)(v)(Series D): 7.14%
[Calculation: $1.5 million divided by $21.0 million = 7.14%]
3.2(c)(ii)(Series A): 15.32%
3.2(c)(iii)(Series B): 39.92%
3.2(c)(iv)(Series C): 23.19%
[Aggregate Calculation: 100% - 14.43% - 7.14% = 78.43% of the
Adjusted Purchase Price is remaining for the Series A, B and C,
or $16,470,300. Such amount is more than the aggregate ABC
original investment amount of $15,856,807, by an excess portion
of $613,493 (the "Excess"). Therefore, each series receives its
original investment amount plus its pro rata portion of the
Excess based on its percentages of the A,B,C shares:
Series A = $3,193,500 + 3.94%(613,493) = $3,217,671.62 or 15.32%
of the Adjusted Purchase Price
Series B = $8,136,990 + 40.18%(613,493) = $8,383,491 or 39.92% of
the Adjusted Purchase Price
Series C = $4,526,317 + 55.88%(613,493) = $4,869,137 or 23.19% of
the Adjusted Purchase Price]
In the event that any portion of the Purchase Price is subject to holdback
and deposit into Escrow, the above percentages shall be calculated based upon
the amount of the Adjusted Purchase Price not subject to holdback. Any
subsequent release of Progenitor Shares from the Escrow holdback shall be
calculated in a manner to result in a net adjustment in the above percentages
based upon what would be the new Adjusted Purchase Price after giving effect to
the release of Progenitor Shares from Escrow.
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APPENDIX D
FORM OF LOCKUP AGREEMENT
INVESTMENT AGREEMENT
THIS INVESTMENT AGREEMENT ("Investment Agreement") is entered into as of
, 1997 between Progenitor, Inc., a Delaware corporation
("Progenitor"), and the undersigned stockholder or debt holder (the
"Stockholder") of Mercator Genetics, Inc., a Delaware corporation ("MGI").
A. Progenitor, MG Merger Sub Corp., a Delaware corporation and a wholly-owned
subsidiary of Progenitor ("Reorganization Sub"), and MGI have entered into
an Agreement and Plan of Reorganization, dated as of February , 1997 (the
"Reorganization Agreement"). Any terms not defined herein shall have the
meanings given them in the Reorganization Agreement.
B. The Reorganization Agreement provides for the merger of MGI into
Reorganization Sub (the "Reorganization"). Upon the consummation of the
Reorganization, the Stockholder will become the owner of shares of
Progenitor Common Stock (the "Shares").
AGREEMENT
1. STOCKHOLDER REPRESENTATIONS AND AGREEMENTS. With the intention that
Progenitor and tax counsel for Progenitor and MGI rely hereupon, Stockholder
hereby represents, warrants and agrees that:
1.1 DISCLOSURE DOCUMENTS. Stockholder has received a copy of the
Progenitor S-4 Registration Statement.
1.2 INTENT. Stockholder does not now have, and as of the Effective
Time will not have, any present plan or intention (a "Plan of Transfer") to
engage in a sale, exchange, transfer, distribution, pledge, disposition or
any other transaction which would result in a direct or indirect disposition
or reduction in risk of ownership (a "Sale") of more than fifty percent
(50%) of the Shares that Stockholder may acquire pursuant to the
Reorganization Agreement. For purposes of this representation, a Sale of
Shares shall be considered to have occurred pursuant to a Plan of Transfer
if such Sale occurs in a transaction that is in contemplation of, or related
or pursuant to, the Reorganization or the Reorganization Agreement (a
"Related Transaction"). In addition, MGI shares with respect to which a
pre-Reorganization Sale occurs in a Related Transaction, shall be considered
to be outstanding MGI shares that are exchanged for Progenitor Shares which
are disposed of pursuant to a Plan of Transfer. If any of Stockholder's
representations in this SECTION 1.3 ceases to be true at any time prior to
the Effective Time of the Reorganization, Stockholder will deliver to each
of Progenitor and MGI, prior to the Effective Time of the Reorganization, a
written statement to that effect, signed by Stockholder.
1.3 OBSERVATION OF SECURITIES ACT. Stockholder will observe and comply
with the Securities Act and the General Rules and Regulations thereunder in
connection with any offer, sale, pledge, transfer or other disposition of
the Shares or any part thereof including the prospectus delivery
requirements of Section 10 of the Securities Act.
2. REGISTRATION. Progenitor shall have the obligation to register the
Shares issued to Stockholders subject to the terms set forth in the
Reorganization Agreement.
3. MARKET STAND-OFF. Stockholder hereby agrees that, in connection with
the IPO, it shall not,
directly or indirectly, sell, offer, contract to sell, grant any option to
purchase, transfer the economic risk of ownership in, make any short sale,
pledge or otherwise dispose of, any Shares, without the prior written consent of
the managing underwriters of the IPO; PROVIDED, that the Shares shall be subject
to release from this restriction in accordance with the following schedule, to
the extent otherwise permissible under the requirements for a tax-free
reorganization: one-third of such Shares shall be released one hundred eighty
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(180) days after the effective date of the IPO; one-third of such Shares shall
be released two hundred seventy (270) days after the effective date of the IPO;
and one-third of such Shares shall be released three hundred sixty-five (365)
days after the effective date of the IPO; PROVIDED, FURTHER, that all such
Shares shall be released one hundred eighty (180) days after the effective date
of the IPO if Stockholder's employment by MGI is terminated by MGI prior to such
one hundred eightieth day, and all such Shares shall be released on the
effective date of termination if Stockholder's employment by MGI is terminated
by MGI after such one hundred eightieth day (except in either case where the
termination is in connection with a transfer to Progenitor in at least an
equivalent position, provided that such transfer does not require the
Stockholder to relocate). This restriction shall be binding upon any transferee
of the Shares and the certificates for the Shares shall bear a legend to such
effect. In order to enforce the foregoing covenant, Progenitor may impose
stop-transfer instructions with respect to the Shares until the end of such
period.
4. WAIVER. No waiver by any party hereto of any condition or of any breach
of any provision of this Investment Agreement shall be effective unless in
writing.
5. NOTICES. All notices, requests, demands or other communications which
are required or may be given pursuant to the terms of this Investment Agreement
shall be in writing and shall be deemed to have been duly given on the date of
delivery by hand or upon receipt if mailed by registered or certified mail,
postage prepaid, return requested, or sent by express courier, or by facsimile
upon written confirmation of receipt by the recipient of such notice to the
party at the address set forth below, or such other address as may be hereafter
be designated in writing by the party:
<TABLE>
<S> <C>
IF TO THE STOCKHOLDER: At the address set forth below the
signature of the Stockholder
below.
IF TO PROGENITOR: Progenitor, Inc.
1507 Chambers Road
Columbus, Ohio 43212
Attention: Chief Executive Officer
Fax: (614) 488-0404
with a copy to: Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105
Attention: Gavin B. Grover, Esq.
Fax: (415) 268-7522
</TABLE>
6. COUNTERPARTS. This Investment Agreement may be executed in two or more
partially or fully executed counterparts, each of which shall be deemed an
original and shall bind the signatory, but all of which together shall
constitute but one and the same instrument. The execution and delivery of a
Signature Page--Investment Agreement in the form annexed to this Investment
Agreement by any party hereto who shall have been furnished the final form of
this Agreement shall constitute the execution and delivery of this Agreement by
such party.
7. SUCCESSORS AND ASSIGNS. This Investment Agreement shall be enforceable
by and shall inure to the benefit of and be binding upon, the parties hereto and
their respective successor and assigns. As used herein, the terms "successors
and assigns" shall mean, where the context so permits, heirs, executors,
administrators, trustees and successor trustees, and personal and other
representatives.
8. GOVERNING LAW. This Investment Agreement shall be governed by and
construed, interpreted and enforced in accordance with the laws of the State of
Delaware, without regards to the principles of conflicts of laws.
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9. SEVERABILITY. If any provision of this Investment Agreement is held to
be unenforceable for any reason, such provision and all other related provisions
shall be modified rather than voided, if possible, in order to achieve the
intent of the parties to this Investment Agreement to the extent possible. In
any event, all other unrelated provisions of this Investment Agreement shall be
deemed valid and enforceable to the full extent.
10. EFFECT OF HEADING. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Investment
Agreement.
SIGNATURE PAGE--INVESTMENT AGREEMENT
11. DEFINITIONS. All capitalized terms used herein shall have the meaning
defined in the Reorganization Agreement, unless otherwise defined herein.
12. THIRD PARTY RELIANCE. Counsel to the parties shall be entitled to rely
upon this Investment Agreement as needed in the rendering of opinions as
provided for in the Reorganization Agreement.
IN WITNESS WHEREOF, the parties have caused this Investment Agreement to be
executed as of the date first above written.
PROGENITOR, INC., a Delaware corporation
By: -----------------------------------------
Its: -----------------------------------------
STOCKHOLDER
---------------------------------------------
Its (if applicable)
-----------------------------
Print name: ----------------------------------
Address: ------------------------------------
---------------------------------------------
---------------------------------------------
---------------------------------------------
---------------------------------------------
(Print Taxpayer Identification Number)
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APPENDIX E
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
SECTION 1300 REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the date
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commission of Corporations under the subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of shareholders to
act upon the reorganization summarizes this section and Sections 1301, 1302,
1303 and 1304; provided, however, that this provision does not apply to any
shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of shares described
in subparagraph (A) or (B) if demands for payment are filed with respect to
5 percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
(AMENDED BY STATS. 1990, c. (A.B. 2259), SECTION 2; STATS. 1993, c. 543
(A.B.2063), SECTION 13.).
SECTION 1301 NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND
FOR PURCHASE; TIME; CONTENTS
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date
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of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and
this section, a statement of the price determined by the corporation to
represent the fair market value of the dissenting shares, and a brief
description of the procedure to be followed if the shareholder desires to
exercise the shareholder's right under such sections. The statement of price
constitutes an offer by the corporation to purchase at the price stated any
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
(ADDED BY STATS. 1975, c. 682 , SECTION 7, EFF. JAN. 1, 1977. AMENDED BY
STATS. 1976, c. 641, SECTION 21.6, EFF. JAN. 1, 1977; STATS. 1980, c. 501, p.
1052, SECTION 5; STATS. 1980, c. 1155, p. 3831, SECTION 1.)
SECTION 1302 SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFIED
SECURITIES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977, AMENDED BY
STATS. 1986, c. 766, SECTION 23.)
SECTION 1303 PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET
VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory
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<PAGE>
or contractual conditions to the reorganization are satisfied, whichever is
later, and in the case of certificated securities, subject to surrender of the
certificates therefor, unless provided otherwise by agreement.
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977, AMENDED BY
STATS. 1980, c. 501, p. 1053 SECTION 6; STATS. 1986, c. 766 SECTION 24.)
SECTION 1304 ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF ISSUES;
APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is an issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is an
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977.)
SECTION 1305 REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at a legal rate from
the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities, and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal costs exceeds the price offered
by the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of
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compliance with Sections 1300, 1301 and 1302 if the value awarded by the court
for the shares is more than 125 percent of the price offered by the corporation
under subdivision (a) of Section 1301).
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977, AMENDED BY
STATS. 1976, c. 641, SECTION 22, EFF. JAN. 1, 1977; STATS. 1977, c. 235, p.
1068, SECTION 16; STATS. 1986, c. 766, SECTION 25.)
SECTION 1306 PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977.)
SECTION 1307 DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977)
SECTION 1308 RIGHTS OF DISSENTING SHARES PENDING VALUATION; WITHDRAWAL OF DEMAND
FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977.)
SECTION 1309 TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be entitled to require the corporation to purchase their shares
upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977.)
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SECTION 1310 SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977.)
SECTION 1311 EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977, AMENDED BY
STATS. 1988, c. 919, SECTION 8.)
SECTION 1312 RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
(ADDED BY STATS. 1975, c. 682, SECTION 7, EFF. JAN. 1, 1977. AMENDED BY
STATS. 1976, c. 641, SECTION 22.5, EFF. JAN. 1, 1977; STATS. 1988, c. 919,
SECTION 9.)
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APPENDIX F
SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the holders of the surviving corporation as provided in
subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to Sections
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
F-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within ten days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in favor
of or consented to the merger or consolidation of the date that the merger
or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock
of such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section, provided that, if the notice is given on or after the effective
date of the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within twenty days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the effective
date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or series
of stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to all
such holders on or within ten days after such effective date; provided,
however, that if such second notice is sent more than twenty days following
the sending of the first notice, such second notice need only be sent to
each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit
F-2
<PAGE>
of the secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to
receive either notice, each constituent corporation may fix, in advance, a
record date that shall be not more than 10 days prior to the date the notice
is given; provided that, if the notice is given on or after the effective
date of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and (d)
hereof, upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement setting
forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by one or more publications at least one week before the day
of the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion,
F-3
<PAGE>
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the surviving
or resulting corporation pursuant to subsection (f) of this section and who has
submitted his certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
F-4
<PAGE>
APPENDIX G
PROPOSED FORM OF AMENDMENT OF
MERCATOR CERTIFICATE OF INCORPORATION
RESOLVED, that a new sub-section (f) be added to Article IV.C.2, as follows:
(f) Notwithstanding anything herein to the contrary, the foregoing
provisions with respect to distributions and payments upon Liquidating Events
shall not apply to the reorganization of the Corporation and the transactions
contemplated in connection therewith (collectively, the "Progenitor
Reorganization") pursuant to the Agreement and Plan of Reorganization among the
Corporation, Progenitor, Inc. and MG Merger Sub Corp. dated as of February 14,
1997, as amended (as the same may be amended, supplemented or modified, the
"Progenitor Reorganization Agreement"), and all distributions and payments to be
made to holders of Preferred Stock or Common Stock in connection with the
Progenitor Reorganization shall be determined in accordance with the provisions
of the Progenitor Reorganization Agreement; PROVIDED, that the provisions of
this sub-section (f) shall not apply to any distributions or payments in respect
of any Liquidating Event other than the Progenitor Reorganization.
RESOLVED, that the following be inserted at the end of Article IV.C.5(b):
Notwithstanding anything herein to the contrary, holders of shares of Series
D Preferred Stock shall not be entitled to vote with respect to the Progenitor
Reorganization, and the Corporation may, without the vote or written consent of
any holder of any shares of Series D Preferred Stock, effect the Progenitor
Reorganization upon the terms described in the Reorganization Agreement;
PROVIDED, that the provisions of this sentence shall not apply to any
reorganization other than the Progenitor Reorganization.
G-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 ("Section 145") of the Delaware General Corporation Law ("DGCL")
provides a detailed statutory framework covering indemnification of officers and
directors against liabilities and expenses arising out of legal proceedings
brought against them by reason of their being or having been directors or
officers. Section 145 generally provides that a director or officer of a
corporation (i) shall be indemnified by the corporation for all expenses of such
legal proceedings when he is successful on the merits, (ii) may be indemnified
by the corporation for the expenses, judgments, fines and amounts paid in
settlement of such proceedings (other than a derivative suit), even if he is not
successful on the merits, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, and (iii) may be
indemnified by the corporation for the expenses of a derivative suit (a suit by
a stockholder alleging a breach by a director or officer of a duty owed to the
corporation), even if he is not successful on the merits, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. No indemnification may be made under clause (iii)
above, however, if the director or officer is adjudged liable for negligence or
misconduct in the performance of his duties to the corporation, unless a
corporation determines that, despite such adjudication, but in view of all the
circumstances, he is entitled to indemnification. The indemnification described
in clauses (ii) and (iii) above may be made only upon a determination that
indemnification is proper because the applicable standard of conduct has been
met. Such a determination may be made by a majority of a quorum of disinterested
directors, independent legal counsel, the stockholders or a court of competent
jurisdiction. The Certificate of Incorporation and Bylaws of the Registrant
provides that the Registrant shall indemnify to the fullest extent permitted by
Section 145, as it now exists or as amended, all persons whom it may indemnify
pursuant thereto.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
Certificate of Incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit. The Certificate of Incorporation and Bylaws of the Registrant 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.
Prior to the closing of the Reorganization, the Registrant intends to obtain
liability insurance insuring the Registrant's officers and directors against
liabilities that they may incur in such capacities. Interneuron maintains
liability insurance insuring its officers and directors against liabilities that
they may incur in such capacities.
The Registrant has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in its charter
documents. These agreements, among other things, provide for the indemnification
of the Registrant's directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of the Registrant, arising out of such person's services as a director or
executive officer of the Registrant, any subsidiary of the Registrant or any
other company or enterprise to which such person provides services at the
request of the Registrant to the fullest extent permitted by applicable law. The
Registrant believes that these provisions and agreements will assist it in
attracting and retaining qualified persons to serve as directors and executive
officers.
II-1
<PAGE>
The Investors' Agreements provide for cross-indemnification of stockholders
of the Registrant whose shares with registration rights are included in a
registration under the Securities Act, and of the Registrant, its officers and
directors for certain liabilities arising in connection with such registration.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
2.1 Amended and Restated Agreement and Plan of Reorganization dated as of February 14, 1997, by
and between the Registrant, MG Merger Sub Corp. and Mercator Genetics, Inc. ("Mercator")
(included as Appendix A to the Proxy Statement/Prospectus filed as part of this
Registration Statement).
2.2 Form of Escrow Agreement (included as Appendix B to the Proxy Statement/ Prospectus filed as
part of this Registration Statement).
2.3 Exhibit A to the Reorganization Agreement (included as Appendix C to the Proxy
Statement/Prospectus filed as part of this Registration Statement).
2.4 Form of Lockup Agreement (included as Appendix D to the Proxy Statement/ Prospectus filed as
part of this Registration Statement).
***2.5 Form of Principal Stockholder Agreement.
***3.1 Certificate of Incorporation of the Registrant, dated as of February 25, 1992.
***3.2 Certificate of Amendment of Certificate of Incorporation of the Registrant, dated as of
August 3, 1994.
***3.3 Certificate of Amendment of Certificate of Incorporation of the Registrant, dated as of March
10, 1997.
***3.4 Bylaws of the Registrant.
3.5 Form of Restated Certificate of Incorporation of Registrant (filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (File No. 333-05369) (the "IPO Registration
Statement") and incorporated herein by reference).
3.6 Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the IPO Registration
Statement and incorporated herein by reference) (to be effective immediately prior to the
IPO to which the IPO Registration Statement relates).
**4.1 Specimen Stock Certificate of the Registrant.
4.2 Reference is made to Exhibits 3.1 and 3.2.
**4.3 Warrant Agreement for Series A Preferred Stock issued by Mercator Genetics, Inc. to Phoenix
Leasing Incorporated, dated August 31, 1993.
**4.4 Warrant Agreement for Series B Preferred Stock issued by Mercator Genetics, Inc. to Phoenix
Leasing Incorporated, dated October 28, 1994.
*4.5 Form of Warrant Agreement for Purchase of Common Stock.
*4.6 Form of Warrant Agreement.
*5.1 Opinion of Morrison & Foerster LLP.
8.1 Tax Opinion of Morrison & Foerster LLP.
8.2 Tax Opinion of Wilson Sonsini Goodrich & Rosati, PC.
**10.1 Form of Indemnification Agreement entered into between the Registrant and its directors and
executive officers.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
**10.2 The Registrant's 1992 Stock Option Plan.
**10.3 Form of Incentive Stock Option Agreement under the 1992 Stock Option Plan.
**10.4 Form of Non-Qualified Stock Option Agreement under the 1992 Stock Option Plan.
**10.5 The Registrant's 1996 Stock Incentive Plan, as amended and restated as of March 7, 1997, and
form of Stock Option Agreement.
**10.6 Form of Investors' Rights Agreement, entered into among the Registrant, Interneuron
Pharmaceuticals, Inc., Transcell Technologies, Inc., and the holders of the Registrant's
Preferred Stock, Series B.
**/+10.7 License Agreement, dated as of January 28, 1992, by and between Scimark Corp., The Castle
Group Ltd. and Ohio University, as amended October 15, 1993.
**/+10.8 Sponsored Research Agreement, dated January 31, 1992 by and between Scimark Corp. and Ohio
University, as amended October 15, 1993, February 16, 1994, November 16, 1994 and November
22, 1995.
**/+10.9 License Agreement, dated as of April 1, 1993, by and between the Registrant and Ohio
University.
**10.11 License Agreement, dated as of June 8, 1994, by and between the Registrant and Associated
Universities, Inc.
**/+10.12 Standard License Agreement, dated as of September 1, 1994, by and between the Registrant and
the Wisconsin Alumni Research Foundation, as amended June 2, 1995.
**/+10.13 License and Collaboration Agreement, dated as of March 31, 1995, by and between the
Registrant and Chiron Corporation, as amended April 10, 1996.
**/+10.14 Sponsored Research and License Agreement, dated as of May 1, 1995, by and between the
Registrant and Novo Nordisk A/S, as amended January 17, 1996 and March 17, 1996.
**/+10.15 License Agreement, dated as of July 17, 1995, by and between the Registrant and Vanderbilt
University.
**/+10.16 License Agreement, dated as of May 30, 1996, by and between the Registrant and AMRAD
Developments PTY Ltd.
**10.17 Lease Agreement, dated as of November 1994, by and between the Registrant and Thomas R.
Eggers.
**10.18 Lease, Service and Affiliation Agreement, entered into as of February 1995, by and between
the Registrant and The Ohio State University.
**10.19 Employment Agreement, dated January 3, 1993, by and between the Registrant and Douglass B.
Given.
**10.20 Form of Intercompany Services Agreement by and between the Registrant and Interneuron
Pharmaceuticals, Inc.
**10.21 Form of Tax Allocation Agreement by and between the Registrant and Interneuron
Pharmaceuticals, Inc.
**10.22 The Registrant's 1996 Employee Stock Purchase Plan.
**/+10.23 License Agreement, dated as of December 31, 1996, by and between the Registrant and Amgen
Inc.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
**/+10.24 Stock Purchase Agreement, dated as of December 31, 1996, by and between the Registrant and
Amgen Inc.
**/+10.25 License Agreement, dated as of January 8, 1997, by and between the Registrant and Brookhaven
National Laboratory, Associated Universities, Inc.
**/+10.26 Amended and Restated Sponsored Research and License Agreement, dated as of February 21, 1997,
by and between the Registrant and Novo Nordisk A/S.
**10.27 The Registrant's 1997 Stock Option Plan.
**/+10.28 License Agreement, dated as of February 1, 1997, by and between Mercator and the Board of
Trustees of The Leland Stanford Junior University.
**10.29 Lease Agreement, dated July 29, 1993, by and between Mercator and WVP Income Plus, III, as
amended August 11, 1993, February 7, 1994, October 10, 1994, April 27, 1995 and May 29,
1997.
**10.30 Form of Indemnification Agreement entered into between Mercator and its directors and
executive officers.
**10.31 Employment Agreement, dated as of February 14, 1997, by and between the Registrant, Mercator
and Elliott Sigal.
+10.32 Scientific Collaboration Agreement, dated February 21, 1997, by and between Mercator and
Affymetrix, Inc. (filed as Exhibit 10.33 to the IPO Registration Statement and incorporated
herein by reference).
+10.33 Scientific Collaboration Agreement, dated March 3,1997, by and between Mercator and
Affymetrix, Inc. (filed as Exhibit 10.34 to the IPO Registration Statement and incorporated
herein by reference).
+10.34 Progenitor-Pangea Collaboration Agreement, dated as of March 13, 1997, by and between the
Registrant and Pangea Systems, Inc. (filed as Exhibit 10.35 to the IPO Registration
Statement and incorporated herein by reference).
***10.35 Bridge Loan Agreement, dated as of February 14, 1997, by and between the Registrant and
Mercator.
***10.36 Convertible Bridge Promissory Note, dated as of February 14, 1997, executed by Mercator in
favor of the Registrant.
*10.37 Loan Agreement, dated as of February 14, 1997, and amendment thereto dated as of July 2,
1997, by and between the Registrant and Interneuron Pharmaceuticals, Inc.
10.38 Employment Agreement, dated as of May 1997, by and between the Registrant and Douglass B.
Given (filed as Exhibit 10.36 to the IPO Registration Statement and incorporated herein by
reference).
+10.39 Exclusive License Agreement and Option, dated as of April 1, 1997, by and between The
National Jewish Medical Research Center and the Registrant (filed as Exhibit 10.37 to the
IPO Registration Statement and incorporated herein by reference).
+10.40 Sponsored Research Agreement, dated May 1, 1997, by and between the Ontario Cancer
Institute/Princess Margaret Hospital and the Registrant (filed as Exhibit 10.38 to the IPO
Registration Statement and incorporated herein by reference).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
+10.41 Sponsored Research Agreement, dated April 15, 1997, by and between the University of
Cambridge and the Registrant (filed as Exhibit 10.39 to the IPO Registration Statement and
incorporated herein by reference).
+10.42 Sponsored Research Agreement, dated May 1, 1997, by and between the Board of Regents of the
University of Nebraska (doing business as the University of Nebraska Medical Center) and
the Registrant (filed as Exhibit 10.40 to the IPO Registration Statement and incorporated
herein by reference).
+10.43 Sponsored Research Agreement, dated May 1, 1997, by and between Ohio University and the
Registrant (filed as Exhibit 10.41 to the IPO Registration Statement and incorporated
herein by reference).
10.44 Interneuron Option Agreement, dated July 2, 1997, by and between the Registrant and
Interneuron Pharmaceuticals, Inc. (filed as Exhibit 10.42 to the IPO Registration Statement
and incorporated herein by reference).
**11.1 Statement re Computation of Per Share Earnings.
**21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
23.2 Consent of Ernst & Young LLP, independent auditors.
*23.3 Consent of Morrison & Foerster LLP (included in Exhibit 5.1).
23.4 Consent of Morrison & Foerster LLP (included in Exhibit 8.1).
23.5 Consent of Wilson Sonsini Goodrich & Rosati, PC (included in Exhibit 8.2).
***23.6 Consent of Robert R. Momsen.
***24.1 Power of Attorney of certain officers and directors.
**27.1 Financial Data Schedule of the Registrant.
27.2 Financial Data Schedule of Mercator.
***99.1 Form of Proxy Card of Mercator.
</TABLE>
- ------------------------
* To be filed by amendment.
** Incorporated by reference to the identically numbered exhibit to the IPO
Registration Statement.
*** Exhibit previously filed.
+ Documents for which confidential treatment has been requested.
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(2) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this Registration Statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
II-5
<PAGE>
(3) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 (the "Act")
and is used in connection with an offering of securities subject to Rule 415,
will be filed as part of an amendment to the Registration Statement and will not
be used until such amendment is effective, and that for purposes of determining
any liability under the Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(4) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(5) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(6) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions hereof, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant 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 Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Columbus, State of Ohio, on July 3, 1997.
PROGENITOR, INC.
By: /s/ MARK N. K. BAGNALL
-----------------------------------------
Mark N. K. Bagnall
VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ DOUGLASS B. GIVEN* Officer and Director
- ------------------------------ (Principal Executive July 3, 1997
Douglass B. Given, M.D., Ph.D. Officer)
Vice President, Finance
/s/ MARK N. K. BAGNALL and Chief Financial
- ------------------------------ Officer (Principal July 3, 1997
Mark N. K. Bagnall Financial and Accounting
Officer)
/s/ ROBERT P. AXLINE*
- ------------------------------ Director July 3, 1997
Robert P. Axline
/s/ GLENN L. COOPER*
- ------------------------------ Director July 3, 1997
Glenn L. Cooper, M.D.
/s/ ALEXANDER M. HAIG, JR.*
- ------------------------------ Director July 3, 1997
Alexander M. Haig, Jr.
/s/ MORRIS LASTER*
- ------------------------------ Director July 3, 1997
Morris Laster, M.D.
/s/ JERRY P. PEPPERS*
- ------------------------------ Director July 3, 1997
Jerry P. Peppers
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DAVID B. SHARROCK*
- ------------------------------ Director July 3, 1997
David B. Sharrock
</TABLE>
*By: /s/ MARK N. K. BAGNALL
-------------------------
Mark N. K. Bagnall
ATTORNEY-IN-FACT
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
2.1 Amended and Restated Agreement and Plan of Reorganization dated as of February 14, 1997, by
and between the Registrant, MG Merger Sub Corp. and Mercator Genetics, Inc. ("Mercator")
(included as Appendix A to the Proxy Statement/Prospectus filed as part of this
Registration Statement).
2.2 Form of Escrow Agreement (included as Appendix B to the Proxy Statement/ Prospectus filed as
part of this Registration Statement).
2.3 Exhibit A to the Reorganization Agreement (included as Appendix C to the Proxy
Statement/Prospectus filed as part of this Registration Statement).
2.4 Form of Lockup Agreement (included as Appendix D to the Proxy Statement/ Prospectus filed as
part of this Registration Statement).
***2.5 Form of Principal Stockholder Agreement.
***3.1 Certificate of Incorporation of the Registrant, dated as of February 25, 1992.
***3.2 Certificate of Amendment of Certificate of Incorporation of the Registrant, dated as of
August 3, 1994.
***3.3 Certificate of Amendment of Certificate of Incorporation of the Registrant, dated as of March
10, 1997.
***3.4 Bylaws of the Registrant.
3.5 Form of Restated Certificate of Incorporation of Registrant (filed as Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (File No. 333-05369) (the "IPO Registration
Statement") and incorporated herein by reference).
3.6 Amended and Restated Bylaws of the Registrant (filed as Exhibit 3.2 to the IPO Registration
Statement and incorporated herein by reference) (to be effective immediately prior to the
IPO to which the IPO Registration Statement relates).
**4.1 Specimen Stock Certificate of the Registrant.
4.2 Reference is made to Exhibits 3.1 and 3.2.
**4.3 Warrant Agreement for Series A Preferred Stock issued by Mercator Genetics, Inc. to Phoenix
Leasing Incorporated, dated August 31, 1993.
**4.4 Warrant Agreement for Series B Preferred Stock issued by Mercator Genetics, Inc. to Phoenix
Leasing Incorporated, dated October 28, 1994.
*4.5 Form of Warrant for Purchase of Common Stock.
*4.6 Form of Warrant Agreement.
*5.1 Opinion of Morrison & Foerster LLP.
8.1 Tax Opinion of Morrison & Foerster LLP.
8.2 Tax Opinion of Wilson Sonsini Goodrich & Rosati, PC.
**10.1 Form of Indemnification Agreement entered into between the Registrant and its directors and
executive officers.
**10.2 The Registrant's 1992 Stock Option Plan.
**10.3 Form of Incentive Stock Option Agreement under the 1992 Stock Option Plan.
**10.4 Form of Non-Qualified Stock Option Agreement under the 1992 Stock Option Plan.
**10.5 The Registrant's 1996 Stock Incentive Plan, as amended and restated as of March 7, 1997, and
form of Stock Option Agreement.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
**10.6 Form of Investors' Rights Agreement, entered into among the Registrant, Interneuron
Pharmaceuticals, Inc., Transcell Technologies, Inc., and the holders of the Registrant's
Preferred Stock, Series B.
**/+10.7 License Agreement, dated as of January 28, 1992, by and between Scimark Corp., The Castle
Group Ltd. and Ohio University, as amended October 15, 1993.
**/+10.8 Sponsored Research Agreement, dated January 31, 1992 by and between Scimark Corp. and Ohio
University, as amended October 15, 1993, February 16, 1994, November 16, 1994 and November
22, 1995.
**/+10.9 License Agreement, dated as of April 1, 1993, by and between the Registrant and Ohio
University.
**10.11 License Agreement, dated as of June 8, 1994, by and between the Registrant and Associated
Universities, Inc.
**/+10.12 Standard License Agreement, dated as of September 1, 1994, by and between the Registrant and
the Wisconsin Alumni Research Foundation, as amended June 2, 1995.
**/+10.13 License and Collaboration Agreement, dated as of March 31, 1995, by and between the
Registrant and Chiron Corporation, as amended April 10, 1996.
**/+10.14 Sponsored Research and License Agreement, dated as of May 1, 1995, by and between the
Registrant and Novo Nordisk A/S, as amended January 17, 1996 and March 17, 1996.
**/+10.15 License Agreement, dated as of July 17, 1995, by and between the Registrant and Vanderbilt
University.
**/+10.16 License Agreement, dated as of May 30, 1996, by and between the Registrant and AMRAD
Developments PTY Ltd.
**10.17 Lease Agreement, dated as of November 1994, by and between the Registrant and Thomas R.
Eggers.
**10.18 Lease, Service and Affiliation Agreement, entered into as of February 1995, by and between
the Registrant and The Ohio State University.
**10.19 Employment Agreement, dated January 3, 1993, by and between the Registrant and Douglass B.
Given.
**10.20 Form of Intercompany Services Agreement by and between the Registrant and Interneuron
Pharmaceuticals, Inc.
**10.21 Form of Tax Allocation Agreement by and between the Registrant and Interneuron
Pharmaceuticals, Inc.
**10.22 The Registrant's 1996 Employee Stock Purchase Plan.
**/+10.23 License Agreement, dated as of December 31, 1996, by and between the Registrant and Amgen
Inc.
**/+10.24 Stock Purchase Agreement, dated as of December 31, 1996, by and between the Registrant and
Amgen Inc.
**/+10.25 License Agreement, dated as of January 8, 1997, by and between the Registrant and Brookhaven
National Laboratory, Associated Universities, Inc.
**/+10.26 Amended and Restated Sponsored Research and License Agreement, dated as of February 21, 1997,
by and between the Registrant and Novo Nordisk A/S.
**10.27 The Registrant's 1997 Stock Option Plan.
**/+10.28 License Agreement, dated as of February 1, 1997, by and between Mercator and the Board of
Trustees of The Leland Stanford Junior University.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
**10.29 Lease Agreement, dated July 29, 1993, by and between Mercator and WVP Income Plus, III, as
amended August 11, 1993, February 7, 1994, October 10, 1994, April 27, 1995 and May 29,
1997.
**10.30 Form of Indemnification Agreement entered into between Mercator and its directors and
executive officers.
**10.31 Employment Agreement, dated as of February 14, 1997, by and between the Registrant, Mercator
and Elliott Sigal.
+10.32 Scientific Collaboration Agreement, dated February 21, 1997, by and between Mercator and
Affymetrix, Inc. (filed as Exhibit 10.33 to the IPO Registration Statement and incorporated
herein by reference).
+10.33 Scientific Collaboration Agreement, dated March 3,1997, by and between Mercator and
Affymetrix, Inc. (filed as Exhibit 10.34 to the IPO Registration Statement and incorporated
herein by reference).
+10.34 Progenitor-Pangea Collaboration Agreement, dated as of March 13, 1997, by and between the
Registrant and Pangea Systems, Inc. (filed as Exhibit 10.35 to the IPO Registration
Statement and incorporated herein by reference).
***10.35 Bridge Loan Agreement, dated as of February 14, 1997, by and between the Registrant and
Mercator.
***10.36 Convertible Bridge Promissory Note, dated as of February 14, 1997, executed by Mercator in
favor of the Registrant.
*10.37 Loan Agreement, dated as of February 14, 1997, and amendment thereto dated as of July 2,
1997, by and between the Registrant and Interneuron Pharmaceuticals, Inc.
10.38 Employment Agreement, dated as of May 1997, by and between the Registrant and Douglass B.
Given (filed as Exhibit 10.36 to the IPO Registration Statement and incorporated herein by
reference).
+10.39 Exclusive License Agreement and Option, dated as of April 1, 1997, by and between The
National Jewish Medical and Research Center and the Registrant (filed as Exhibit 10.37 to
the IPO Registration Statement and incorporated herein by reference).
+10.40 Sponsored Research Agreement, dated May 1, 1997, by and between the Ontario Cancer
Institute/Princess Margaret Hospital and the Registrant (filed as Exhibit 10.38 to the IPO
Registration Statement and incorporated herein by reference).
+10.41 Sponsored Research Agreement, dated April 15, 1997, by and between the University of
Cambridge and the Registrant (filed as Exhibit 10.39 to the IPO Registration Statement and
incorporated herein by reference).
+10.42 Sponsored Research Agreement, dated May 1, 1997, by and between the Board of Regents of the
University of Nebraska (doing business as the University of Nebraska Medical Center) and
the Registrant (filed as Exhibit 10.40 to the IPO Registration Statement and incorporated
herein by reference).
+10.43 Sponsored Research Agreement, dated May 1, 1997, by and between Ohio University and the
Registrant (filed as Exhibit 10.41 to the IPO Registration Statement and incorporated
herein by reference).
10.44 Interneuron Option Agreement, dated July 2, 1997, by and between the Company and Interneuron
Pharmaceuticals, Inc. (filed as Exhibit 10.42 to the IPO Registration Statement and
incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- ---------------------------------------------------------------------------------------------
<C> <S> <C>
**11.1 Statement re Computation of Per Share Earnings.
**21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
23.2 Consent of Ernst & Young LLP, independent auditors.
*23.3 Consent of Morrison & Foerster LLP (included in Exhibit 5.1).
23.4 Consent of Morrison & Foerster LLP (included in Exhibit 8.1).
23.5 Consent of Wilson Sonsini Goodrich & Rosati, PC (included in Exhibit 8.2).
***23.6 Consent of Robert R. Momsen.
***24.1 Power of Attorney of certain officers and directors.
**27.1 Financial Data Schedule of the Registrant.
27.2 Financial Data Schedule of Mercator.
***99.1 Form of Proxy Card of Mercator.
</TABLE>
- ------------------------
* To be filed by amendment.
** Incorporated by reference to the identically numbered exhibit to the IPO
Registration Statement.
*** Exhibit previously filed.
+ Documents for which confidential treatment has been requested.
<PAGE>
Exhibit 8.1
MORRISON & FOERSTER LLP
425 MARKET STREET
SAN FRANCISCO, CA 94105-2482
July 2, 1997
Progenitor, Inc.
1507 Chambers Road
Columbus, Ohio 43212
Re: Merger among Progenitor, Inc., MG Merger Sub Corp. and Mercator
Genetics, Inc.
Ladies and Gentlemen:
We have acted as counsel to Progenitor, Inc. in connection with the
Registration Statement on Form S-4 (the "Registration Statement") of
Progenitor, Inc., a Delaware corporation ("Progenitor"), which includes the
Proxy Statement/Prospectus of Progenitor and Mercator Genetics, Inc., a
Delaware corporation ("MGI"). Unless otherwise indicated, any capitalized
terms used herein and not otherwise defined have the meaning ascribed to them
in the Proxy Statement/Prospectus. We hereby confirm that, assuming the due
receipt of certificates of Progenitor, MGI and certain MGI shareholders, as
described under the caption "THE REORGANIZATION--CERTAIN FEDERAL INCOME TAX
CONSEQUENCES," in the Proxy Statement/Prospectus, the discussion under the
caption "THE REORGANIZATION--CERTAIN FEDERAL INCOME TAX CONSEQUENCES," in the
Proxy Statement/Prospectus, subject to the limitations, qualifications and
conditions stated in such discussion, expresses our opinion as to the material
United States federal income tax consequences to Progenitor, MGI and the
shareholders of MGI if the Mercator Certificate Amendment is adopted and
the Merger is effected according to the terms of the Agreement.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "THE
REORGANIZATION--CERTAIN FEDERAL INCOME TAX CONSEQUENCES," in the Proxy
Statement/Prospectus. In giving this consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Morrison & Foerster LLP
<PAGE>
Exhibit 8.2
[WILSON, SONSINI, GOODRICH & ROSATI P.C. LETTERHEAD]
July 2, 1997
Mercator Genetics, Inc.
4040 Campbell Avenue
Menlo Park, California 94025
Re: MERGER AMONG PROGENITOR, INC., MG MERGER SUB CORP. AND MERCATOR
GENETICS, INC.
Ladies and Gentlemen:
We have acted as counsel to Mercator Genetics, Inc., a Delaware corporation
("MGI") in connection with the Registration Statement on Form S-4 filed with the
Securities and Exchange Commission (which contains a prospectus and joint proxy
statement of Progenitor, Inc., a Delaware corporation ("Progenitor") and MGI)
(the "Registration Statement"). Unless otherwise indicated, any capitalized
terms used herein and not otherwise defined have the meaning ascribed to them in
the Registration Statement. We hereby confirm that, assuming the due receipt of
certificates of Progenitor, MGI and certain MGI shareholders, as described under
the caption "THE REORGANIZATION--Certain Federal Income Tax Consequences,"
in the Registration Statement, the discussion under the caption "THE
REORGANIZATION -- Certain Federal Income Tax Consequences," in the
Registration Statement, subject to the limitations, qualifications and
conditions stated therein, expresses our opinion as to the material United
States federal income tax consequences to Progenitor, MGI and the shareholders
of MGI if the Mercator Certificate Amendement is adopted and the Merger is
effected according to the terms of the Agreement.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Internal Revenue Code
of 1986, as amended, existing judicial decisions, administrative regulations and
published rulings and procedures. Our opinion is not binding upon the Internal
Revenue Service or the courts, and there is no assurance that the Internal
Revenue Service will not successfully assert a contrary position. Furthermore,
no assurance can be given that future legislative, judicial or administrative
changes, on either a prospective or retroactive basis, would not adversely
affect the accuracy of the conclusions stated herein. Nevertheless, we
undertake no responsibility to advise you of any new developments in the
application or interpretation of the federal income tax laws.
This opinion addresses only the matters set forth herein, and does not
address any other federal, state, local or foreign tax consequences that may
result from the
<PAGE>
Mercator Genetics, Inc.
Exhibit 8.2
July 2, 1997
Page Two
Merger and the adoption of the Mercator Certificate Amendment or any other
transaction (including any transaction undertaken in connection with the
Merger and the adoption of the Mercator Certificate Amendment).
No opinion is expressed as to any transaction other than the adoption of
the Mercator Certificate Amendment and the Merger as described in the
Agreement or to any transaction whatsoever, including the adoption of the
Mercator Certificate Amendment and the Merger, if all the transactions
described in the Agreement are not consummated in accordance with the terms
of such Agreement and without waiver or breach of any material provision
thereof or if all of the representations, warranties, statements and
assumptions upon which we relied are not true and accurate at all relevant
times. In the event any one of the statements, representations, warranties
or assumptions upon which we have relied to issue this opinion is incorrect,
our opinion might be adversely affected and may not be relied upon.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "THE
REORGANIZATION--Certain Federal Income Tax Consequences," in the Registration
Statement. In giving this consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended.
Very truly yours,
/s/ Wilson, Sonsini, Goodrich & Rosati P.C.
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 (File
No. 333-23389) of our report, which includes an explanatory paragraph regarding
the Company's ability to continue as a going concern, dated March 10, 1997 on
our audits of the financial statements of Progenitor, Inc. (a Development Stage
Company). We also consent to the reference to our firm under the caption
"Experts."
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
July 2, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary Mercator
Selected Historical Financial Data," "Mercator Selected Historical Financial
Data" and "Experts" and to the use of our report dated February 14, 1997, with
respect to the financial statements of Mercator Genetics, Inc. (a development
stage company) included in the Proxy Statement of Mercator Genetics, Inc. and in
the Prospectus of Progenitor, Inc. that are made a part of Amendment No. 2 to
the Registration Statement (Form S-4 No. 333-23389) of Progenitor, Inc.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 1, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE THREE MONTHS-ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 124,256
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 938,712
<PP&E> 2,474,550
<DEPRECIATION> 1,298,238
<TOTAL-ASSETS> 2,361,916
<CURRENT-LIABILITIES> 3,492,114
<BONDS> 0
15,561,318
0
<COMMON> 52,496
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,361,916
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,984,688
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48,706
<INCOME-PRETAX> (2,027,583)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,027,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,027,583)
<EPS-PRIMARY> (8.66)
<EPS-DILUTED> (8.66)
</TABLE>
