<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1997
REGISTRATION NO. 333-05369
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PROGENITOR, INC.
(Exact name of Registrant as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2836 31-1344193
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
------------------------------
1507 CHAMBERS ROAD
COLUMBUS, OHIO 43212
(614) 488-6688
(Address and telephone number of Registrant's principal executive offices)
------------------------------
DOUGLASS B. GIVEN, M.D., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PROGENITOR, INC.
1507 CHAMBERS ROAD
COLUMBUS, OHIO 43212
(614) 488-6688
(Name, address and telephone number of agent for service for Registrant)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
GAVIN B. GROVER, ESQ. CHARLES W. MULANEY, JR., ESQ.
KRISTIAN E. WIGGERT, ESQ. RODD M. SCHREIBER, ESQ.
EDA S.L. TAN, ESQ. SKADDEN, ARPS, SLATE,
MORRISON & FOERSTER LLP MEAGHER & FLOM (ILLINOIS)
425 MARKET STREET 333 WEST WACKER DRIVE
SAN FRANCISCO, CALIFORNIA 94105 CHICAGO, ILLINOIS 60606
(415) 268-7000 (312) 407-0700
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such State.
<PAGE>
PROSPECTUS
2,750,000 SHARES
[LOGO]
COMMON STOCK
----------------
All of the shares of Common Stock offered hereby (the "Offering") are being
sold by Progenitor, Inc. (the "Company"). Prior to the Offering, there has been
no public market for the Common Stock. It is currently estimated that the
initial public offering price will be between $10.00 and $12.00 per share. See
"Underwriting" for a list of the factors to be considered in determining the
initial public offering price. Application has been made to list the Common
Stock on the Nasdaq National Market under the symbol "PGEN."
Amgen Inc. ("Amgen") has agreed to purchase directly from the Company $5.5
million of Common Stock (the "Amgen Shares") at the initial public offering
price concurrently with the closing of the Offering pursuant to a stock purchase
agreement with the Company. See "Business--Corporate Agreements--Amgen
Agreements."
---------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Discounts and Proceeds to
Price to Public Commissions(1) Company(2)
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total(3)............................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $950,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
412,500 additional shares of Common Stock on the same terms and conditions
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
---------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters, subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1997.
---------------------
LEHMAN BROTHERS GENESIS MERCHANT GROUP
SECURITIES
, 1997
<PAGE>
A color schematic diagram entitled "The Company's Genomics System". At the top
of the diagram are three circular black & white icons, labeled and representing,
left to right, "Developmental Biology", "Genomics Technologies" and "Disease
Genetics". This top area of the diagram is labeled "Gene Discovery". Lines
descend from each icon (blue, violet, and green, respectively) merging to form
an arrow (dark blue) at the bottom of the diagram. The region where the lines
merge is labeled "Further Elucidation of Gene Function" and the area at the tip
of the arrow is labeled "Therapeutic Targets". Below this area is a table with a
column at the left labeled "Discoveries" and a column at the right labeled
"Development/Commercial Rights" (see text below). The background image is an
enlargement of a photomicrograph of transfected mammalian cells. The diagram and
the table are shadowed with white rectangular regions.
<TABLE>
<S> <C>
DISCOVERIES DEVELOPMENT / COMMERCIAL RIGHTS
B219 Leptin Receptor Amgen/Licensed, with Retained
Rights
Red Blood Cell Growth Factor Novo Nordisk/Exclusive Rights
DEL-1 Angiogenesis/Osteogenesis Company Worldwide Rights
Gene
Hereditary Hemochromatosis Gene Company Worldwide Rights
EPM 1 Epilepsy Gene Company Worldwide Rights
T7T7 Gene Therapy Chiron/Licensed, with Retained
Rights
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK
OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
Progenitor, Mercator, and the Progenitor logo are trademarks of the Company.
This Prospectus may contain trademarks, trade names and service marks of other
parties.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, OR THE CONTEXT OTHERWISE REQUIRES,
REFERENCES IN THIS PROSPECTUS TO "PROGENITOR" REFER TO PROGENITOR, INC. PRIOR TO
THE COMPLETION OF THE MERGER OF A WHOLLY-OWNED SUBSIDIARY OF PROGENITOR WITH AND
INTO MERCATOR GENETICS, INC. ("MERCATOR") WITH MERCATOR AS THE SURVIVING ENTITY
(THE "ACQUISITION"). REFERENCES HEREIN TO "MERCATOR" REFER TO MERCATOR PRIOR TO
THE ACQUISITION. REFERENCES TO THE "COMPANY" REFER TO PROGENITOR AFTER THE
ACQUISITION AND INCLUDE THE COMBINED OPERATIONS OF PROGENITOR AND MERCATOR. THE
CLOSING OF THE OFFERING IS CONTINGENT UPON THE CLOSING OF THE ACQUISITION. SEE
"BUSINESS--OVERVIEW" AND "--MERCATOR ACQUISITION." CERTAIN OF THE STATEMENTS
CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS ARE FORWARD-LOOKING
STATEMENTS. THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS."
THE COMPANY
Progenitor is engaged in the discovery and functional characterization of
genes to identify targets for the development of new pharmaceuticals. The
Company's initial focus is on the identification of genes important in blood and
immune cell development, blood vessel development, bone formation, asthma and
schizophrenia. Using its core developmental biology approach and an array of
genomics technologies, Progenitor has identified several potential therapeutic
targets, and intends to accelerate its discovery of potential targets by
accessing complementary gene discovery and characterization technologies.
Consistent with this strategy, Progenitor will complete the acquisition of
Mercator concurrently with the closing of the Offering. Through the Acquisition,
Progenitor gains a complementary gene discovery approach, disease genetics,
established discovery programs and worldwide rights to two genes. The Company
intends to use its integrated genomics system to provide its partners with
in-depth functional information in support of each therapeutic target. Such
well-characterized targets may have the potential to expedite product
development and to reduce development costs.
Using its developmental biology approach, the Company has identified the
B219 leptin receptor gene, for which it has received two notices of allowance
from the United States Patent and Trademark Office ("USPTO"). The B219 leptin
receptor may have therapeutic applications in obesity, diabetes and certain
blood and immune cell disorders. The Company also has discovered a red blood
cell growth factor activity that may have therapeutic applications in cancer,
anemias and other diseases. In addition, the Company has discovered, with its
collaborators, a gene that the Company believes may play a role in blood vessel
development and bone formation, and may be useful for the development of new
therapies for cancer and osteoporosis. Using its disease genetics approach, the
Company has identified a gene associated with iron overload, one of the most
common genetic disorders. The Company has received a notice of allowance from
the USPTO for a patent application relating to certain diagnostic markers for
this condition. In addition, the Company has exclusive worldwide rights to the
EPM1 epilepsy gene, which also was discovered using this disease genetics
approach.
The Company intends to enter into partnerships with biopharmaceutical firms
to support gene discovery programs in specific disease areas and, in parallel,
to develop certain gene discoveries to a later stage internally before
partnering. The Company has entered into a license agreement with Amgen Inc.
("Amgen") relating to certain aspects of the Company's leptin receptor
technology, while retaining certain rights, including rights to small molecule
screening and cell sorting, for development with potential partners. In
connection with this license agreement, Amgen has agreed to purchase directly
from the Company $5.5 million of Common Stock at the initial public offering
price concurrently with the closing of the Offering. The Company is
collaborating with Novo Nordisk A/S ("Novo Nordisk") in the isolation,
development and commercialization of the Company's red blood cell growth factor
activity. Under these agreements, the Company is entitled to receive milestone
and royalty payments in connection with the development and commercialization of
any products.
Developmental biology is the study of the genetic events that control cell
growth and differentiation. Because genes responsible for growth and
differentiation are expressed at higher levels in developing
3
<PAGE>
systems, the Company believes that developing cells and tissues provide a rich
and largely unexploited resource for the discovery and characterization of genes
with fundamental biological roles. These genes may have significance in the
treatment of diseases characterized by abnormal cell growth and differentiation,
such as cancer, blood and immune system disorders and osteoporosis. The Company
believes that its expertise in manipulating and analyzing developing cells and
tissues may allow it to isolate and characterize the function of these genes.
The Company's disease genetics approach incorporates enhanced positional cloning
techniques for the discovery of genes associated with complex diseases, and
facilitates evaluation of genes discovered using developmental biology.
Moreover, the Company's disease genetics approach can identify genes directly
associated with a specific disease that can be functionally characterized using
developmental biology.
Progenitor was incorporated in Delaware in February 1992 as a majority-owned
subsidiary of Interneuron Pharmaceuticals, Inc. ("Interneuron"), and commenced
operations in May 1992. Following the closing of the Offering and the
Acquisition, Interneuron is expected to own approximately 43% of the Company's
Common Stock (approximately 41% if the Underwriters' over-allotment option is
exercised in full). The Company's executive offices are located at 1507 Chambers
Road, Columbus, Ohio 43212, and its telephone number is (614) 488-6688. See
"Certain Transactions--Relationship with Interneuron."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered........................... 2,750,000 shares
Common Stock to be outstanding after the
Offering..................................... 10,614,998 shares (1)
Use of proceeds................................ For research and development, expansion of
facilities and acquisition of equipment,
expenses relating to the Acquisition,
repayment of a bridge loan from
Interneuron, repayment to Interneuron for
certain costs of the Offering and working
capital and general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol......... PGEN
</TABLE>
- ------------------------
(1) Based on shares outstanding as of February 28, 1997. Includes: (i) 1,679,255
shares of Common Stock to be issued to Mercator stockholders in the
Acquisition (assuming Final Acquisition Consideration (as defined below) of
$22.0 million for Mercator) upon the closing of the Offering; (ii) 500,000
shares of Common Stock to be sold by the Company to Amgen for $4.5 million in
cash and a $1.0 million promissory note pursuant to a stock purchase
agreement dated as of December 31, 1996 (the "Amgen Purchase Agreement"),
concurrently with the closing of the Offering; (iii) 25,000 shares of Common
Stock to be purchased by The Ohio University Foundation at a price of $5.50
per share, pursuant to a stock purchase right; and (iv) 5,303 shares of
Common Stock to be issued to The Ohio University Foundation pursuant to an
anti-dilution adjustment in connection with the Offering. Excludes: (i)
1,786,775 shares of Common Stock reserved for grants or awards under the
Company's 1992 Stock Option Plan, 1996 Stock Incentive Plan and 1996 Employee
Stock Purchase Plan, of which (a) options to purchase 695,962 shares of
Common Stock were outstanding as of February 28, 1997 under such stock plans,
with a weighted average exercise price of $5.13 per share, and (b) options to
purchase 926,150 shares of Common Stock are to be granted under the 1996
Stock Incentive Plan upon the closing of the Offering, with an exercise price
equal to the initial public offering price; (ii) 293,022 shares of Common
Stock issuable upon exercise of replacement options to be issued to
stockholders of Mercator under the 1997 Stock Option Plan in connection with
the Acquisition (the "Replacement Options"), with a weighted average exercise
price of $1.72 per share; (iii) 31,952 shares of Common Stock issuable upon
exercise of warrants outstanding as of February 28, 1997, with an exercise
price of $7.50 per share; and (iv) 27,723 shares of Common Stock issuable
upon exercise of outstanding Mercator warrants, which will be converted into
warrants to purchase Common Stock in connection with the Acquisition (the
"Mercator Warrants"), with a weighted average exercise price of $6.02 per
share. The number of shares of Common Stock to be issued (i) in the
Acquisition, (ii) to Amgen and (iii) to The Ohio University Foundation will
depend upon a variety of factors including the initial public offering price.
See "Capitalization," "Business--Corporate Agreements," "--Mercator
Acquisition," "Management--Stock Plans," "Certain Transactions" and
"Description of Capital Stock."
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED(1)
HISTORICAL ----------------------------
-------------------------------------------------------------- THREE MONTHS
THREE MONTHS ENDED YEAR ENDED ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
---------------------------------- ---------------------- ------------- ------------
1994 1995 1996 1995 1996 1996 1996
---------- ---------- ---------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PROGENITOR STATEMENT OF OPERATIONS
DATA:
Revenues.......................... $ -- $ 2,821 $ 1,332 $ 202 $ 676 $ 1,832 $ 801
Expenses:
Research and development........ 4,113 4,228 3,873 809 1,066 9,981 2,782
General and administrative...... 1,275 1,116 2,765(2) 355 445 4,358 854
Interest, net................... 648 352 178 24 120 124 39
---------- ---------- ---------- ---------- ---------- ------------- ------------
Total expenses................ 6,036 5,696 6,816 1,188 1,631 14,463 3,675
---------- ---------- ---------- ---------- ---------- ------------- ------------
Net loss.......................... $ (6,036) $ (2,875) $ (5,484) $ (986) $ (955) $ (12,631) $ (2,874)
---------- ---------- ---------- ---------- ---------- ------------- ------------
---------- ---------- ---------- ---------- ---------- ------------- ------------
Net loss per share................ $ (0.95) $ (0.17) $ (1.15) $ (0.26)
---------- ---------- ------------- ------------
---------- ---------- ------------- ------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Shares used in computing net loss per
share................................. 5,758,615 5,784,327 10,973,391 10,999,103
---------- ---------- ------------- ------------
---------- ---------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
----------------------------------------------
PRO FORMA
PROGENITOR FOR ACQUISITION PRO FORMA AS
ACTUAL AND CONVERSIONS(3) ADJUSTED(4)
---------- ------------------ ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................ $ 197 $ 636 $ 32,384
Working capital.................................................................. (944) (2,334) 29,414
Total assets..................................................................... 1,829 4,162 35,910
Long-term obligations............................................................ 5,921 787 715
Deficit accumulated during development stage..................................... (21,113) (43,099) (43,099)
Total stockholders' equity (deficit)............................................. (6,120) (898) 30,922
</TABLE>
- ------------------------------
(1) Assumes the Acquisition, debt and equity conversions, and the Offering
occurred as of October 1, 1995.
(2) Includes $974,000 for costs expensed in accordance with accounting
requirements related to the initial filing of the Registration Statement
with the Securities and Exchange Commission on June 6, 1996.
(3) Gives pro forma effect as if the following had occurred as of December 31,
1996: (i) the Acquisition as if it had occurred on December 31, 1996; (ii)
the automatic conversion of all outstanding shares of Progenitor's Preferred
Stock into an aggregate of 2,170,893 shares of Common Stock upon the closing
of the Offering; (iii) the conversion of a convertible debenture and a
portion of the promissory note held by Interneuron into an aggregate of
529,124 shares of Common Stock (based on outstanding balances of $5.8
million as of December 31, 1996) upon the closing of the Offering; and (iv)
the issuance of 5,303 shares of Common Stock to The Ohio University
Foundation pursuant to an anti-dilution adjustment in connection with the
Offering. See "Capitalization," "Certain Transactions--The Ohio University
Foundation" and "Description of Capital Stock--Stock Purchase Right and
Warrants."
(4) Pro forma as adjusted for the Offering to give effect to: (i) the issuance
and sale of the 2,750,000 shares of Common Stock offered hereby (after
deducting estimated underwriting discounts and commissions and the estimated
expenses of the Offering) and the receipt and application of the estimated
net proceeds therefrom; (ii) the sale of 500,000 shares of Common Stock to
Amgen for $4.5 million in cash and a $1.0 million promissory note,
concurrently with the closing of the Offering; and (iii) the sale of 25,000
shares of Common Stock to The Ohio University Foundation at a price of $5.50
per share, pursuant to a stock purchase right, concurrently with the closing
of the Offering. See "Use of Proceeds," "Capitalization,"
"Business--Corporate Agreements," "Certain Transactions" and "Description of
Capital Stock."
------------------------------
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS, INCLUDING
FINANCIAL INFORMATION, SHARE AND PER SHARE DATA: (I) ASSUMES THE CLOSING OF THE
OFFERING OCCURRED AS OF FEBRUARY 28, 1997 WITH AN INITIAL PUBLIC OFFERING PRICE
OF $11.00 PER SHARE; (II) REFLECTS THE CONSUMMATION OF A 1-FOR-2 REVERSE STOCK
SPLIT TO BE EFFECTED PRIOR TO OR CONCURRENTLY WITH THE OFFERING; (III) REFLECTS
THE AUTOMATIC CONVERSION OF ALL OUTSTANDING SHARES OF PROGENITOR'S PREFERRED
STOCK INTO AN AGGREGATE OF 2,170,893 SHARES OF COMMON STOCK UPON THE CLOSING OF
THE OFFERING; AND (IV) REFLECTS THE CONVERSION OF A CONVERTIBLE DEBENTURE AND A
PORTION OF THE PROMISSORY NOTE HELD BY INTERNEURON INTO AN AGGREGATE OF 597,331
SHARES OF COMMON STOCK (BASED ON OUTSTANDING BALANCES OF $6.6 MILLION AS OF
FEBRUARY 28, 1997) UPON THE CLOSING OF THE OFFERING. THE NUMBERS OF SHARES OF
COMMON STOCK TO BE ISSUED UPON CONVERSION OF PROGENITOR'S PREFERRED STOCK AND
THE INTERNEURON CONVERTIBLE DEBENTURE AND A PORTION OF THE PROMISSORY NOTE WILL
DEPEND UPON A NUMBER OF FACTORS, INCLUDING THE DATE OF THE CLOSING OF THE
OFFERING AND THE INITIAL PUBLIC OFFERING PRICE. SEE "BUSINESS--CORPORATE
AGREEMENTS," "--MERCATOR ACQUISITION," "CERTAIN TRANSACTIONS," "DESCRIPTION OF
CAPITAL STOCK" AND "UNDERWRITING."
5
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, INCLUDING
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR
STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT
LIMITATION, STATEMENTS IN "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS" AND ELSEWHERE IN
THIS PROSPECTUS REGARDING, AMONG OTHER THINGS, UNCERTAINTIES RELATING TO THE
TECHNOLOGICAL APPROACHES OF THE COMPANY; HISTORY OF OPERATING LOSSES AND
ANTICIPATION OF FUTURE LOSSES; UNCERTAINTY OF PRODUCT DEVELOPMENT; NEED FOR
ADDITIONAL CAPITAL AND UNCERTAINTY OF ADDITIONAL FUNDING; DEPENDENCE ON
COLLABORATORS AND LICENSEES; INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE;
UNCERTAINTY OF PATENT AND PROPRIETARY RIGHTS; RISKS ASSOCIATED WITH THE
ACQUISITION OF MERCATOR; MANAGEMENT OF GROWTH, AND RISKS OF ACQUIRING NEW
TECHNOLOGIES; UNCERTAINTIES RELATED TO CLINICAL TRIALS; GOVERNMENT REGULATION
AND UNCERTAINTY OF OBTAINING REGULATORY APPROVAL; DEPENDENCE ON KEY PERSONNEL;
DEPENDENCE ON RESEARCH COLLABORATORS AND SCIENTIFIC ADVISORS; CONTROL OF THE
COMPANY BY, AND POTENTIAL CONFLICTS OF INTEREST WITH, INTERNEURON; UNCERTAINTY
OF HEALTH CARE REFORM MEASURES AND THIRD-PARTY REIMBURSEMENT; AND RISK OF
PRODUCT LIABILITY. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. IT
IS IMPORTANT TO NOTE THAT THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. AMONG THE FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FACTORS DETAILED
BELOW. ACCORDINGLY, IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY.
UNCERTAINTIES RELATING TO THE TECHNOLOGICAL APPROACHES OF THE COMPANY. To
date, the Company has not developed or commercialized any products. There can be
no assurance that the Company's genomics approaches will enable it to discover
genes with functions relevant to the treatment of diseases. There is limited
scientific understanding relating to the role of genes in diseases and
relatively few products based on genetic discoveries have been developed and
commercialized to date. Accordingly, even if the Company is successful in
identifying genes associated with specific diseases, there can be no assurance
that the Company will be successful in marketing its discoveries to
biopharmaceutical firms for use in the development of therapeutic and diagnostic
products or that any such resulting products will be commercialized
successfully.
The development of products based on the Company's discoveries also will be
subject to the risks of failure inherent in the development of products based on
new technologies. These risks include the possibility that any such products
will be found to be ineffective or toxic, or otherwise fail to receive necessary
regulatory approvals; that any such products will be difficult to manufacture on
a commercial scale or will be uneconomical to market; that proprietary rights of
third parties will preclude the Company or its licensees and collaborators from
marketing any such products; or that third parties will market superior or
equivalent products. As a result, there can be no assurance that the Company's
research and development activities or those of its licensees and collaborators
will result in any commercially viable products. See "--Uncertainty of Patents
and Proprietary Rights," "Business--The Company's Genomics System," "--Corporate
Agreements," "--Technology Agreements" and "--License Agreements."
Genomics, biotechnology, developmental biology, disease genetics and
pharmaceutical technologies have undergone and are expected to continue to
undergo rapid and significant change. The Company's future success will depend
in large part on its ability to maintain a competitive position with respect to
these technologies. Rapid technological developments by the Company or others
may result in the Company's technologies becoming obsolete before the Company
recovers any expenses it incurs in connection with its related development
programs. See "--Intense Competition; Rapid Technological Change" and
"Business--Competition."
HISTORY OF OPERATING LOSSES; ANTICIPATION OF FUTURE LOSSES. Progenitor is a
development stage company that commenced operations in May 1992. As of December
31, 1996, Progenitor had an accumulated deficit of approximately $21.1 million
and a working capital deficit of $944,000. As of December 31, 1996, the Company
had an accumulated deficit of approximately $43.1 million on a pro forma basis
(including
6
<PAGE>
the results of Mercator). In connection with the Acquisition, the Company
expects to incur several nonrecurring charges in the quarter ended June 30, 1997
which in the aggregate are currently estimated to be approximately $30.0
million, including the write-off of costs related to the purchase of in-process
research and development, severance, employee retention and relocation, other
employee benefit costs, the consolidation of operations, the elimination of
duplicate systems and facilities, and other integration costs. These amounts are
preliminary estimates only and could be materially higher. Factors that could
increase such costs include delays beyond May 31, 1997 in the completion of the
Offering, any unexpected employee turnover, unforeseen delays in addressing
duplicate facilities once the Acquisition has been completed and the associated
costs of hiring temporary employees and consultants, and any additional fees and
charges to obtain consents, regulatory approvals or permits. In addition, there
can be no assurance that the Company will not incur additional charges in
subsequent periods to reflect other costs associated with the Acquisition or
from the integration of operations after the Acquisition. Neither the Company
nor any of its collaborative partners or licensees has yet developed products
that have generated any revenues to the Company or entered clinical trials that
would lead to revenues to the Company if successful. To date, all of the
Company's revenues have resulted from payments from collaborative and license
agreements and a development grant from a governmental agency. The Company
expects to incur substantial additional losses over the next several years as it
expands its research and development activities. Payments from collaborators and
licensees, payments under governmental grants and investment income are expected
to be the only sources of revenue for the foreseeable future. The Company has
not yet generated any revenues from the achievement of milestones under its
corporate agreements. Royalties or other revenues from commercial sales of
products, if any, are not expected for a number of years. To achieve profitable
operations, the Company, alone or with others, must successfully discover and
functionally characterize medically relevant genes and thereafter use these
discoveries to develop products, conduct preclinical studies and clinical
trials, obtain required regulatory approvals and successfully manufacture,
introduce and market such products. There can be no assurance that any of these
requirements will be met. The time required to reach or sustain profitability is
highly uncertain and there can be no assurance that the Company will be able to
achieve profitability on a sustained basis, if at all. Moreover, if
profitability is achieved, the level of profitability cannot be predicted and
may vary significantly from quarter to quarter. See "--Risks Associated with the
Acquisition of Mercator" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
UNCERTAINTY OF PRODUCT DEVELOPMENT. Significant discovery, research and
development efforts will be required prior to the time any of the Company's gene
discoveries may lead to product candidates or result in products that may be
brought to the market. Products, if any, resulting from the Company's research
and development programs are not expected to be commercially available for a
number of years. Significant additional research and development efforts and
extensive preclinical studies and clinical trials will be required prior to
submission of any regulatory application for commercial use. There can be no
assurance that the Company or any collaborator or licensee will be permitted to
undertake clinical trials of any potential products, if developed, that
sufficient numbers of patients can be enrolled for such trials, or that such
clinical trials will demonstrate that the products tested are safe and
efficacious. Even if clinical trials are successful, there can be no assurance
that the Company or any collaborator or licensee will obtain regulatory approval
for any product, that an approved product can be produced and distributed in
commercial quantities at reasonable costs or gain acceptance for use by
physicians and other health care providers, or that any potential products will
be marketed successfully at prices that would permit the Company to operate
profitably. The failure of any of these events to occur could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--The Company's Genomics System," "--Discovery
Programs" and "--Government Regulation."
NEED FOR ADDITIONAL CAPITAL; UNCERTAINTY OF ADDITIONAL FUNDING. The Company
expects negative cash flow from operations to continue for the foreseeable
future. The Company will require substantial additional funds to continue
research and development, conduct preclinical studies and clinical trials,
conduct activities relating to commercialization of rights it has retained in
corporate agreements, if any, and expand administrative capabilities. The
Company estimates that at its planned rate of spending, existing cash and cash
equivalents, together with the net proceeds from the Offering, and the proceeds
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from the sale of the Amgen Shares, and the interest income earned on such
proceeds, will be sufficient to fund operations for the next 18 months. There
can be no assurance, however, that the Company's assumptions regarding its
future levels of expenditures and operating losses will prove accurate. The
Company's future funding requirements will depend on many factors, including any
expansion or acceleration and the breadth of the Company's research and
development programs; the results of research and development, preclinical
studies and clinical trials conducted by the Company or its collaborative
partners or licensees, if any; the acquisition and licensing of products and
technologies if any; the acquisition of or businesses, if any; the Company's
ability to establish and maintain corporate relationships and academic
collaborations; the Company's ability to integrate the operations of Mercator
with those of Progenitor; the Company's ability to manage growth; competing
technological and market developments; the time and costs involved in filing,
prosecuting, defending and enforcing patent and intellectual property claims;
the receipt of licensing or milestone fees from any current or future
collaborative and license arrangements, if established; the continued funding of
governmental research grants; the timing of regulatory approvals; and other
factors. To the extent undertaken by the Company, the time and costs involved in
conducting preclinical studies and clinical trials, seeking regulatory
approvals, and scaling-up manufacturing and commercialization activities also
would increase the Company's funding requirements.
The Company will need to raise substantial additional capital to fund
operations. Prior to the Offering, Interneuron has funded substantially all of
the Company's operations. Interneuron, however, is under no obligation to
provide, and the Company does not expect that Interneuron will provide, any
additional funds in the future. The Company intends to seek additional funding
through public or private equity or debt financing and from collaborators and
licensees. There can be no assurance that additional financing will be available
when needed, or that, if available, such financing will be available on terms
acceptable to the Company. If additional funds are raised by issuing equity
securities, dilution to existing stockholders will result. In addition, in the
event that additional funds are obtained through arrangements with collaborators
or licensees, such arrangements may require the Company to relinquish rights to
certain of its technologies or potential products that it would otherwise seek
to develop or commercialize itself. If funding is insufficient at any time in
the future, the Company may be required to delay, scale back or eliminate some
or all of its research and development programs or cease operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions."
DEPENDENCE ON COLLABORATORS AND LICENSEES. The Company's strategy for
development and commercialization of drugs and other products from its
discoveries depends upon the establishment of corporate relationships. The
Company expects to rely on these relationships in order to research and develop
potential products, conduct preclinical studies and clinical trials, obtain
regulatory approvals, and manufacture and market any resulting products. The
Company has entered into agreements with Amgen, Chiron Corporation ("Chiron")
and Novo Nordisk. The Company's revenues will be dependent on the success of the
products developed through these and future corporate relationships. The failure
of the Company's collaborators and licensees to develop, obtain regulatory
approval for, and market products incorporating the Company's discoveries would
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that any collaborators and
licensees will commit sufficient development resources, technology, regulatory
expertise, manufacturing, marketing and other resources towards developing,
promoting and commercializing products incorporating the Company's discoveries.
Further, competitive conflicts may arise among these third parties that could
prevent them from working cooperatively with the Company. The amount and timing
of resources devoted to these activities by such parties could depend on the
achievement of milestones by the Company and generally will be controlled by
such parties. In addition, the Company's corporate agreements generally provide
the Company's collaborators and licensees with the right to terminate the
agreement in part or in full under certain circumstances. Any such termination
would substantially reduce the likelihood that the applicable product candidate
or candidates would be developed, would obtain regulatory approvals and would be
manufactured and successfully commercialized and any such termination could,
therefore, have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's milestone payments or
royalties from sales of products by collaborators or
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licensees, if any, may be less than the revenues the Company could have
generated had it commercialized and marketed products itself. There can be no
assurance that the Company will be successful in establishing additional or
maintaining existing collaborative or licensing arrangements, that any
collaborators or licensees will be successful in developing and commercializing
products or that the Company will receive milestone payments or generate
revenues from royalties sufficient to offset the Company's significant
investment in research and development and other costs. If the Company chooses
in the future to engage directly in the development, manufacturing and marketing
of certain products, it will require substantial additional funds, personnel and
production and other facilities. There can be no assurance that any of these
resources will be available to the Company on acceptable terms, if at all. See
"--Need for Additional Capital; Uncertainty of Additional Funding,"
"Business--Corporate Agreements," "--Technology Agreements" and "--License
Agreements."
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE. Research in the field of
genomics is highly competitive. Competitors of the Company in the genomics area
include, among others, public companies such as Genome Therapeutics Corp., Human
Genome Sciences, Inc., Incyte Pharmaceuticals, Inc., Microcide Pharmaceuticals,
Inc., Millennium Pharmaceuticals, Inc. ("Millennium"), Myriad Genetics, Inc. and
Sequana Therapeutics, Inc., as well as private companies and major
pharmaceutical companies and universities and other research institutions,
including those receiving funding from the federally funded Human Genome
Project. A number of entities are attempting to rapidly identify and patent
randomly-sequenced genes and gene fragments. In addition, certain other entities
are pursuing a gene identification, characterization and product development
strategy based on gene mapping. The Company's competitors may discover,
characterize or develop important genes in advance of the Company, which could
have a material adverse effect on any related Company discovery program. The
Company expects competition to intensify in genomics research as technical
advances in the field are made and become more widely known.
The Company is subject to significant competition from organizations that
are pursuing the same or similar technologies as those which constitute the
Company's discovery platforms, and from organizations that are pursuing
pharmaceutical or other products that are or may be competitive with the
Company's or its collaborators' or licensees' potential products. Many of the
organizations competing with the Company have greater capital resources, larger
research and development staffs and facilities, greater experience in drug
discovery and development, the regulatory approval process and pharmaceutical
product manufacturing, and greater marketing capabilities than the Company.
The Company is and will continue to be reliant on its collaborators and
licensees for support of its programs, including support for its preclinical and
clinical development, manufacturing and marketing. The Company's present and
future collaborators and licensees are now conducting or are expected to
conduct, multiple product development efforts within each disease or technology
area that is the subject of the relationship with the Company. Any product
candidate or technology of the Company may therefore be subject to internal
competition with a potential product under development or a technology platform
under evaluation by a collaborator or licensee. See "--Dependence on
Collaborators and Licensees," "Business--Overview," "--The Company's Genomics
System" and "--Competition."
UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS. The Company's success will
depend to a significant extent on its ability to obtain and enforce patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. Because the patent positions of
biotechnology and pharmaceutical companies can be highly uncertain and
frequently involve complex legal and factual questions, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted with certainty. Commercialization of pharmaceutical products
can be subject to substantial delays as a result of the time required for
product development, testing and regulatory approval. The value of any patents
issued or licensed to the Company may depend upon the remaining term of patent
protection available at the time any products covered by such patents are
commercialized.
The Company actively pursues a policy of seeking patent protection for a
number of its proprietary products and technologies. Progenitor has licensed
from Ohio University two issued U.S. patents and pending U.S. patent
applications relating to stem cell technology and to gene delivery technology,
along
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with certain corresponding foreign patent applications and one issued foreign
patent. Progenitor presently has eight pending U.S. patent applications which
disclose certain leptin receptors (including various isoforms of the leptin
receptor), nucleic acid molecules encoding the receptors, genetically-engineered
cells and antibodies to the receptors. Among these are two patent applications
filed in September and December 1994, for which the USPTO issued two notices of
allowance, one in September 1996 and one in January 1997, for claims relating to
nucleic acid molecules that encode the B219 leptin receptor. Also, in March
1996, Progenitor's international patent application, corresponding to the
September and December 1994 U.S. applications, was published. The Company
believes that there may be significant litigation regarding patent and other
intellectual property rights relating to leptin and leptin receptors. The
Company is aware that Millennium has filed at least one patent application
relating to a receptor for leptin and its use in obesity applications, and has
licensed to Hoffmann-La Roche Inc. rights to develop certain therapeutics for
obesity using Millennium's discovery of a leptin receptor.
In June 1996, Millennium filed a "Protest" in the USPTO in connection with
the Progenitor applications relating to leptin receptors, particularly the
applications filed in September and December 1994. A Protest is a procedure
available for use by a third party to provide the patent examiner who is
reviewing the involved application or applications with what the third party
believes to be relevant information. The Protest procedure does not afford any
right to the third party to participate in the patent prosecution process beyond
the filing of its written protest. Millennium's Protest primarily argued that
any claims allowed to Progenitor should not be so broad as to cover Millennium's
own leptin receptor. Notwithstanding the Protest, the USPTO recently issued two
notices of allowance for claims in the September and December 1994 applications
relating to nucleic acid molecules encoding the leptin receptor.
There can be no assurance that Millennium's patent application, or
additional patent applications filed by Millennium or others, will not result in
issued patents covering a leptin receptor, the leptin protein or other ligands,
or any of their respective uses, including obesity. There can be no assurance
that the invention by Millennium will be accorded an invention date later than
the Company's invention date, that any patent will issue to the Company or that
any such patent issued to the Company would be broad enough to cover leptin
receptors of Millennium or others. The Company's failure to obtain a patent on a
leptin receptor, or its failure to obtain a patent that covers the leptin
receptors of Millennium or others, or the issuance of a patent to a third party
covering a leptin receptor, the leptin protein or other ligands, or any of their
respective uses, including obesity, could have a material adverse effect on the
Company's business, financial condition and results of operations.
A number of other groups are attempting to identify partial gene sequences
and full-length genes, the functions of which have not been characterized. The
public availability of partial gene sequence information before the Company
applies for patent protection on a corresponding full-length gene could
adversely affect the Company's ability to obtain patent protection with respect
to such a gene. To the extent any patents issue to other parties on such partial
or full-length genes, and as other patents issue with the expansion of the
biotechnology industry, the risk increases that the potential products and
processes of the Company or its collaborators or licensees may give rise to
claims of patent infringement.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to human therapeutic uses. Substantial periods of time pass before the USPTO
responds to patent applications. In addition, the coverage claimed in a patent
application can be significantly reduced before a patent is issued.
Consequently, the Company does not know whether any of its pending or future
patent applications will result in the issuance of patents or, if any patents
are issued, whether the patents will be subjected to further proceedings
limiting their scope, and whether they will provide significant proprietary
protection or competitive advantage, or will be circumvented or invalidated.
Because patent applications in the U.S. are maintained in secrecy until patents
issue and patent applications in certain other countries generally are not
published until more than 18 months after they are filed, and since publication
of discoveries in scientific or patent literature often lags behind actual
discoveries, the Company cannot be certain that it or any licensor was the first
creator of inventions covered by
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pending patent applications or that it or such licensor was the first to file
patent applications on such inventions.
There can be no assurance that the Company's patents, if issued, would not
be found invalid or unenforceable by a court or that such patents would cover
products or technologies of the Company's competitors. Competitors or potential
competitors may have filed patent applications or received patents, and may
obtain additional patents and proprietary rights relating to compounds or
processes competitive with those of the Company. To protect its proprietary
rights, the Company may be required to participate in interference proceedings
declared by the USPTO to determine priority of invention, which may result in
substantial cost to the Company. Moreover, even if the Company's patents issue,
there can be no assurance that they will provide sufficient proprietary
protection or will not be later limited, circumvented or invalidated.
Accordingly, there can be no assurance that the Company will develop proprietary
technologies that are patentable, that the Company's patent applications will
result in patents being issued or that, if issued, patents will afford
protection against competitors with similar technology or products, nor can
there be any assurance that the Company's patents will not be held invalid by a
court of competent jurisdiction.
In addition to patent protection, the Company also relies to a significant
extent upon trade secret protection for its confidential and proprietary
information, including many of the Company's key discovery technologies. There
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology. To protect its trade
secrets, Progenitor has required its employees, consultants, scientific advisors
and parties to collaboration and licensing agreements to execute confidentiality
agreements upon the commencement of employment, the consulting relationship or
the collaboration or licensing arrangement, as the case may be, with Progenitor.
In the case of employees, the agreements also provide that all inventions
resulting from work performed by them while employed by Progenitor will be the
exclusive property of Progenitor. Mercator has confidentiality and inventions
assignment agreements with all existing employees but has not entered into such
agreements with all of its former employees and consultants. The Company will
continue to require its employees, consultants, scientific advisors and
collaborators and licensees to execute confidentiality agreements and inventions
assignment agreements (in the case of its employees) upon the commencement of
employment, the consulting relationship or the collaboration or license with the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection of the Company's trade secrets or adequate remedies in the
event of unauthorized use or disclosure of such information, that the Company
can meaningfully protect its rights in such unpatented proprietary technology
through other means, that any obligation to maintain the confidentiality of such
proprietary technology will not be breached by employees, consultants, advisors,
collaborators, licensees or others, that former Mercator employees or
consultants will not disclose proprietary information of Mercator without being
in breach of any confidentiality restriction, or that others will not
independently develop the same or substantially equivalent technology. The loss
of trade secret protection of any of the Company's key discovery technologies
would materially and adversely affect the Company's competitive position and
could have a material adverse effect on the Company's business, financial
condition and results of operations. Finally, disputes may arise as to the
ownership of proprietary rights to the extent that outside collaborators,
licensees or consultants apply technological information developed independently
by them or others to Company projects or apply Company technology to other
projects and, if adversely determined, such disputes could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company may incur substantial costs if it is required to defend itself
in patent suits brought by third parties or if the Company initiates such a suit
to enforce the Company's patents or to determine the validity, scope or
enforceability of other parties' proprietary rights. Any legal action against
the Company or its collaborators or licensees claiming damages and seeking to
enjoin commercial activities relating to the affected products and processes
could, in addition to subjecting the Company to potential liability for damages,
require the Company or its collaborators or licensees to obtain a license or
licenses in order to continue to manufacture or market the affected products and
processes or require the Company or its
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collaborators or licensees to cease doing so. There can be no assurance that the
Company or its collaborators or licensees would prevail in any such action or
that any license required under any such patents would be made available on
commercially acceptable terms, if at all. Any adverse outcome of such litigation
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, if the Company becomes
involved in such litigation, it could consume a substantial portion of the
Company's managerial and financial resources. The Company is unable to predict
how courts will resolve any future issues relating to the validity, scope or
enforceability of its patents should they be challenged.
It is uncertain whether any third-party patents will require the Company to
alter its products or processes, obtain licenses, cease certain activities or
pay substantial damages. If any licenses are required, there can be no assurance
that the Company will be able to obtain any such license on commercially
acceptable terms, if at all. Failure by the Company or its collaborators and
licensees to obtain a license to any technology required to commercialize the
Company's discoveries may have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Patents
and Proprietary Rights."
MANAGEMENT OF GROWTH; RISK OF ACQUIRING NEW TECHNOLOGIES. One of the
Company's strategies is to maintain its technological competitiveness by
accessing new equipment and advanced technologies. The expansion of the
Company's scientific infrastructure may involve the retention of additional
personnel, the establishment of new or expanded facilities and the acquisition
of technology rights, products, equipment, businesses or assets of other
companies. There can be no assurance that the Company's management personnel,
systems, procedures and controls will be adequate to support the expansion of
the Company's operations. The acquisition of additional personnel, technology
rights, products, equipment, businesses or assets of other companies, as well as
the entry into new areas of scientific research, will require the dedication of
management resources in order to achieve the strategic objectives associated
with such growth and expansion. There can be no assurance that the Company will
be able to manage successfully the growth and expansion of its operations.
Failure of the Company to manage its growth, or any specific acquisition of
additional capabilities, could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH THE ACQUISITION OF MERCATOR. On February 14, 1997,
Progenitor entered into a definitive Agreement and Plan of Reorganization, as
amended (as the same may be amended, supplemented or modified, the "Acquisition
Agreement") with Mercator under which the operations of the respective companies
will be combined by means of a merger of a wholly-owned subsidiary of Progenitor
with and into Mercator, contingent upon the completion of the Offering. In
completing the Acquisition, Progenitor will rely upon certain representations
and warranties made by Mercator with respect to Mercator and its operations as
well as Progenitor's own due diligence investigation. There can be no assurance
that such representations and warranties are true in all respects or that
Progenitor's due diligence uncovered all materially adverse facts relating to
the assets, research capabilities and operations of Mercator. The
representations and warranties of Mercator do not survive the closing of the
Acquisition and the Company will not have any remedy for breaches of
representations and warranties identified after the closing. Furthermore, the
Acquisition involves the integration of two companies that have previously
operated independently at different locations with separate work forces. No
assurance can be given that difficulties encountered in integrating the
operations of Mercator will be overcome, or that the specific benefits expected
from the integration of Mercator, including the addition of new research
capabilities, equipment and technologies, will be achieved or that any
anticipated cost savings will be realized. The acquisition of Mercator also
involves a number of special risks, including assimilation of new operations and
personnel; the diversion of resources from the Company's existing business,
research capabilities, equipment and technologies; coordination of
geographically separated facilities and work forces; management challenges
associated with the integration of the companies in addition to the other
requirements associated with growth of the Company's scientific infrastructure
and research capabilities; assimilation of new management personnel; and
maintenance of standards, controls, procedures and policies. The process of
integrating Mercator's operations, including its personnel, could cause
interruption of, or loss of
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momentum in, the activities of the Company's business and operations, including
those of the businesses acquired.
In connection with the Acquisition, the Company expects to incur several
one-time charges in the quarter ended June 30, 1997 which in the aggregate are
currently estimated to be approximately $30.0 million, including the write-off
of $25.0 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 May 31, 1997 in the completion of the
Offering, any unexpected employee turnover, unforeseen delays in addressing
duplicate facilities once the Acquisition has been completed and the associated
costs of hiring temporary employees and consultants, and any additional fees and
charges to obtain consents, regulatory approvals or permits. In addition, there
can be no assurance that the Company will not incur additional charges in
subsequent periods to reflect other costs associated with the Acquisition or
from the integration of operations after the Acquisition. There can be no
assurance that the Acquisition will not have a material adverse effect on the
business, financial condition and results of operations of the Company or that
the Company will realize the benefits and strategic objectives sought through
the Acquisition. Costs associated with the Acquisition, or liabilities and
expenses associated with the operations of Mercator, that exceed the
expectations of Progenitor, could have a material adverse effect on the
Company's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Business--Human Resources" and
"--Facilities."
Under Section 382 of the Internal Revenue Code of 1986, as amended,
utilization of prior net operating loss carryforwards is limited after an
ownership change to an annual amount equal to the value of the loss
corporation's stock immediately before the date of the ownership change,
multiplied by the federal long-term tax exempt rate. To date, the Company has
not incurred an ownership change under Section 382. As a result of the actions
contemplated by the Offering, the Acquisition and the related transactions, the
Company is likely to incur such a change of ownership, in which case the
Company's ability to use the losses incurred prior to the date of the Offering
may be limited as to timing, pursuant to the Internal Revenue Code Section 382.
UNCERTAINTIES RELATED TO CLINICAL TRIALS. Before seeking regulatory
approval for the commercial sale of any products that may be developed
incorporating the Company's discoveries, the Company or its collaborators or
licensees will be required to demonstrate through preclinical studies and
clinical trials that such products are safe and effective for use in the target
indications. To date, no product candidates incorporating the Company's
discoveries have entered clinical trials. The results from preclinical studies
and early clinical trials may not be indicative of results that will be obtained
in large-scale testing, and there can be no assurance that any clinical trials,
if undertaken, will demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals or will result in marketable products. Clinical
trials also are often conducted with patients having advanced stages of disease.
During the course of treatment, these patients can die or suffer other adverse
medical effects for reasons that may not be related to the product candidate
being tested but which can nevertheless affect clinical trial results. A number
of companies in the biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after achieving promising results in earlier
trials. If products developed by the Company or its collaborators or licensees
are not shown to be safe and effective in clinical trials, the resulting delays
in developing other product candidates and conducting related preclinical
studies and clinical trials, as well as the need for additional financing, would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--The Company's Genomics System" and
"--Discovery Programs."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL. Prior to
marketing, any new drug or other product developed by the Company or its
collaborators or licensees must undergo an extensive regulatory approval process
in the United States and other countries. This regulatory process, which
includes preclinical studies and clinical trials and also may include
post-marketing studies of each product candidate to establish its safety and
efficacy, usually takes many years and requires the use of substantial
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resources. Preclinical studies include laboratory evaluations and will require
animal tests conducted in accordance with the United States Food and Drug
Administration's ("FDA") current Good Laboratory Practices ("cGLP") regulations
to assess the product's potential safety and efficacy. Data obtained from
preclinical studies and clinical trials are susceptible to varying
interpretations that could delay, limit or prevent regulatory approval. Delays
or rejections also may be encountered based upon changes in FDA policies for
drug or biologic approval during the period of product development and FDA
regulatory review of each new drug application ("NDA") submitted in the case of
new pharmaceutical agents, or product license application ("PLA") in the case of
biologics. Product development of new pharmaceuticals is highly uncertain, and
unanticipated developments, clinical or regulatory delays, unexpected adverse
side effects or inadequate therapeutic efficacy could slow or prevent the
product development efforts of the Company and its collaborators or licensees,
and have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that regulatory
approval will be obtained for any drugs or other products developed by the
Company or its collaborators or licensees. Furthermore, regulatory approval may
entail limitations on the indicated use of a drug or other product. Because
certain of the products likely to result from the Company's discovery programs
involve the application of new technologies and may be based upon a new
therapeutic approach, such products may be subject to substantial additional
review by various government regulatory authorities other than the FDA and, as a
result, regulatory approvals may be obtained more slowly than for products using
conventional technologies. Under current guidelines, proposals to conduct
clinical research involving gene therapy at institutions supported by the
National Institutes of Health ("NIH") must be 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 the Company or its collaborators or licensees
conform to the FDA's current good manufacturing practice ("cGMP") regulations
which must be followed at all times. In complying with cGMP requirements,
manufacturers must expend time, money and effort on a continuing basis in
production, record keeping and quality control. Manufacturing establishments,
both domestic and foreign, are subject to inspection by or under the authority
of the FDA and by other federal, state and local agencies. Failure to pass such
inspections may subject the manufacturer to possible FDA actions such as the
suspension of manufacturing, seizure of the product, withdrawal of approval or
other regulatory sanctions. The FDA also may require the manufacturer to recall
a product from the market.
Discovery of previously unknown problems with a product may have adverse
effects on the Company's business, including withdrawal of the product from the
market. Violations of regulatory requirements at any stage, including during
preclinical studies and clinical trials, the approval process or post-approval,
may result in various adverse consequences to the Company, including the FDA's
delay in approval of or refusal to approve a product, withdrawal of an approved
product from the market or the imposition of criminal penalties against the
manufacturer and NDA or PLA holder. The Company has not submitted an
investigational new drug application ("IND") for any product candidate, and no
product candidate has been approved for commercialization in the U.S. or
elsewhere. The Company intends to rely primarily on its collaborators or
licensees to file INDs and generally direct the regulatory approval process. No
assurance can be given that the Company or any of its collaborators or licensees
will be able to conduct clinical trials or obtain the necessary approvals from
the FDA or other regulatory authorities for any products. Failure to obtain
required governmental approvals will delay or preclude the Company's
collaborators or licensees from marketing drugs or other products developed by
the Company or will limit the commercial use of such products and could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Government Regulation."
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DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent upon the
principal members of its scientific and management staff and the services of Dr.
Douglass B. Given, President and Chief Executive Officer, and Dr. H. Ralph
Snodgrass, Vice President, Research and Chief Scientific Officer, in particular.
The loss of either of these persons could have a material adverse effect on the
Company's business, financial condition and results of operations. In order to
support the Company's existing operations, the Company will be required to hire
and retain additional management, administrative and financial personnel.
Recruiting and retaining qualified scientific personnel and advisors to perform
research and development work in the future also will be critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain such personnel and advisors on acceptable terms given the
competition among numerous pharmaceutical, biotechnology and other companies,
universities and other research institutions for experienced personnel and
advisors. In addition, the Company's anticipated growth and expansion, including
the Acquisition, is expected to place increased demands on the Company's
resources and management skills. The failure of the Company's existing personnel
to handle such increased demands or the Company's failure to attract and to
retain additional personnel with such capabilities could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "--Risks Associated with the Acquisition of Mercator," "Business--Human
Resources" and "Management."
DEPENDENCE ON RESEARCH COLLABORATORS AND SCIENTIFIC ADVISORS. The Company
has relationships with collaborators at academic and other institutions who
conduct research in cooperation with the Company. Such collaborators are not
employees of the Company. All of the Company's consultants are employed by
employers other than the Company and may have commitments to, or consulting or
advisory contracts with, other entities that may limit their availability to the
Company. As a result, the Company has limited control over their activities and,
except as otherwise required by its collaboration and consulting agreements, can
expect only limited amounts of their time to be dedicated to the Company's
activities. The potential success of the Company's discovery programs depends in
part on continued collaborations with researchers at academic and other
institutions. There can be no assurance that the Company will be able to
negotiate additional acceptable collaborations at academic and other
institutions or that its existing collaborations will be maintained or be
successful.
The Company's research collaborators and scientific advisors sign agreements
which provide for confidentiality of the Company's proprietary information and
results of studies, but not all of Mercator's former employees and consultants
have signed such agreements. There can be no assurance that the Company will be
able to maintain the confidentiality of its technology and other confidential
information in connection with every collaboration, and any unauthorized
dissemination of the Company's confidential information could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Uncertainty of Patents and Proprietary Rights."
CONTROL OF COMPANY BY, AND POTENTIAL CONFLICTS OF INTEREST WITH,
INTERNEURON. Following the closing of the Offering and the Acquisition,
Interneuron is expected to own approximately 43% of the outstanding Common Stock
(approximately 41% if the Underwriters' over-allotment option is exercised in
full). The actual ownership percentage of Interneuron in the Company after the
Offering will depend upon a variety of factors, including: (i) the amount of the
Final Acquisition Consideration payable with respect to the Acquisition; (ii)
the outstanding balances of loans from Interneuron to the Company that will be
converted into Common Stock upon the closing of the Offering; (iii) the initial
public offering price which will determine the number of shares of Common Stock
to be issued in the Acquisition, to be issued upon conversion of outstanding
balances of loans from Interneuron to the Company, to be issued in respect of
the Amgen Purchase Agreement, and to be issued to Interneuron in connection with
the conversion provisions of its Series A Preferred Stock upon the closing of
the Offering; and (iv) the passage of measurement dates for determining the
guaranteed quarterly return to the holders of the Series A Preferred Stock on
each of April 7, July 7, October 7 and January 7. Interneuron is and will
continue to be the Company's largest stockholder. Accordingly, Interneuron will
continue to have substantial influence over the election of directors of the
Company and other matters submitted to a stockholder vote, including
extraordinary corporate transactions such as a merger or sale of substantially
all of the Company's assets.
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In addition, the Company and Interneuron intend to enter into an intercompany
services agreement that will provide among other things that in the event of any
future equity offering by the Company, Interneuron will have the right to
purchase (at the same price and on the same terms as such equity offering) a
portion of the shares being offered so as to maintain its fully-diluted interest
in the Company immediately prior to such equity offering, subject to certain
limitations. Interneuron may elect to increase its ownership percentage in the
Company through other means, including additional equity investments or the
purchase of Common Stock in the open market. Interneuron, however, has not made
any commitment to purchase additional securities and there can be no assurance
that it will do so. Interneuron's ownership of a substantial block of the
Company's voting stock could have the effect of delaying or preventing sales of
additional securities of the Company or a sale of the Company or other change of
control supported by the other stockholders of the Company. In addition, the
Company may be subject to various risks arising from Interneuron's influence
over the Company, including conflicts of interest relating to new business
opportunities that could be pursued by the Company or by Interneuron and its
other affiliates, and significant corporate transactions for which stockholder
approval is required. See "Certain Transactions--Relationship with Interneuron,"
"Principal Stockholders" and "Description of Capital Stock--Preferred Stock."
UNCERTAINTY OF HEALTH CARE REFORM MEASURES AND THIRD-PARTY
REIMBURSEMENT. The business and financial condition of pharmaceutical and
biotechnology companies will continue to be affected by the efforts of
third-party payors, such as government health administration authorities,
private health insurers and other organizations, to contain or reduce the cost
of health care. In the U.S. and in certain foreign jurisdictions there have
been, and the Company expects that there will continue to be, a number of
legislative and regulatory proposals aimed at changing the health care system.
While the Company cannot predict whether any such legislative or regulatory
proposals will be adopted or the effect that such proposals may have on its
business, the consideration or approval of such proposals could have a material
adverse effect on the trading and market price of the Common Stock or on the
Company's ability to raise capital or to complete additional corporate
agreements, and the adoption of such proposals could have a material adverse
effect on the Company's business, financial condition and results of operations.
In both domestic and foreign markets, successful commercial sales of the
Company's or its collaborators' or licensees' potential products will depend in
part on the availability of reimbursement from government and health
administrative authorities, private health insurers or other third-party payors.
Third-party payors are increasingly challenging the price and cost-effectiveness
of medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. Future legislation
and regulations affecting the pricing of pharmaceuticals could further limit
reimbursement for medical products and services. There can be no assurance that
any of the Company's potential products will be considered cost-effective or
that adequate third-party reimbursement will be available to enable the Company,
its collaborators or licensees to maintain price levels sufficient to realize an
appropriate return on its investment. In addition, the trend toward managed
health care in the U.S. and the concurrent growth of managed care organizations,
such as health maintenance organizations, which could control or significantly
influence the purchase of health care services and products, as well as
legislative proposals to reduce government insurance programs, could result in
pricing pressure for any products that might be developed by the Company. If
adequate reimbursement is not provided by government and other third-party
payors for the Company's or its collaborators' or licensees' potential products,
there would be a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Government Regulation."
RISK OF PRODUCT LIABILITY. The testing, manufacture, marketing and sale of
pharmaceutical and other products entail the inherent risk of liability claims
or product recalls and associated adverse publicity. Clinical trials and sales
by the Company or its collaborators or licensees of potential products
incorporating the Company's discoveries may expose the Company to potential
liability resulting from the use of such products. Such liability might result
from claims made directly by consumers or by regulatory agencies, pharmaceutical
companies or others selling such products. The Company currently has a limited
amount of clinical trial and product liability insurance coverage through
Interneuron. The Company will seek to obtain its own coverage upon completion of
the Offering and to maintain and appropriately increase such
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coverage as clinical development of any product candidates progresses and if and
when its products are ready to be commercialized. There can be no assurance that
the Company will be able to obtain such insurance or, if obtained, that such
insurance can be acquired at a reasonable cost or in sufficient amounts to
protect the Company against such liability. Certain of the Company's license
agreements require it to indemnify licensors against product liability claims
arising from products developed using the licensed technology. Also, certain of
these agreements and other collaborative and license agreements require the
Company to maintain minimum levels of insurance coverage. The failure to
maintain product liability coverage, the occurrence of any product liability
claim or a recall of products of the Company or its collaborators or licensees
could inhibit or prevent commercialization of products being developed by the
Company and could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, to the extent any
product liability claim exceeds the amount of any insurance coverage, the
Company's business, financial condition and results of operations could be
materially and adversely affected. See "Business--Corporate Agreements,"
"--Technology Agreements," "--License Agreements" and "--Product Liability
Insurance."
NO PRIOR TRADING MARKET; NO ASSURANCE OF ACTIVE TRADING MARKET; POTENTIAL
VOLATILITY OF STOCK PRICE. Prior to the Offering, there has been no public
market for the Common Stock and there can be no assurance that an active public
market for the Common Stock will develop or be sustained after the Offering. The
initial public offering price will be determined through negotiations between
the Company and representatives of the Underwriters and there can be no
assurance that future market prices for the Common Stock will equal or exceed
the initial public offering price. The stock market has experienced significant
price and volume fluctuations that are often unrelated to the operating
performance of particular companies. In addition, the market prices of
securities of other biotechnology companies in the past have been highly
volatile and the market price of the Company's Common Stock also may experience
such volatility. Factors such as the results of preclinical studies and clinical
trials by the Company or its collaborative partners, licensees or competitors,
evidence of the safety or efficacy of products of the Company or its
competitors, announcements of technological innovations or new discoveries,
product opportunities or products by the Company or its competitors, changes in
governmental regulations or third-party reimbursement policies, developments in
patent or other proprietary rights of the Company or its competitors,
fluctuations in the Company's operating results and changes in general market
conditions for biotechnology stocks could have an adverse impact on the future
price of the Common Stock. See "Underwriting."
ANTI-TAKEOVER CONSIDERATIONS. After the Offering, the Company will have the
authority to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the powers, designations, preferences and relative rights
thereof without any further vote or action by the Company's stockholders. The
Company has no current plans to issue shares of Preferred Stock. However, the
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock would dilute the voting power of
holders of Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company. In addition, all outstanding
options under the Company's 1992 Stock Option Plan and 1996 Stock Incentive Plan
become exercisable, and purchase dates under the 1996 Employee Stock Purchase
Plan could be accelerated, upon certain changes in control of the Company. The
Company is subject to the provisions of Section 203 of the Delaware General
Corporation Law, which could delay or make more difficult a merger, tender offer
or proxy contest involving the Company and may have the effect of discouraging
takeovers which could be in the best interest of certain stockholders. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. There can be no assurance that this provision, the rights
of option holders and the Company's ability to issue Preferred Stock will not
have an adverse effect on the market value of the Company's stock in the future.
See "Management--Stock Plans" and "Description of Capital Stock."
HAZARDOUS AND RADIOACTIVE MATERIALS; ENVIRONMENTAL MATTERS. Research and
development conducted by the Company involves the controlled use of hazardous
materials, chemicals, biological materials and
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radioactive compounds. The Company, and its collaborators and licensees, as
applicable, are subject to international, federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such substances and certain waste products. The Company believes that the safety
procedures relating to its in-house research and development and production
efforts are in material compliance with the standards currently prescribed by
such laws and regulations. However, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of an
accident, the Company could be held liable for any resulting damages, and any
such liability could exceed the Company's resources. Moreover, there can be no
assurance that the Company's collaborators and licensees are and will continue
to be in compliance with such standards or that the Company will not be required
to incur significant costs in the future to comply with new or modified
standards. In such events, there would be a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Government Regulation."
MANAGEMENT DISCRETION AS TO USE OF PROCEEDS. The Company intends to use the
net proceeds of the Offering, together with the cash proceeds received from the
sale of the Amgen Shares, primarily for research and development. In addition,
the Company intends to use a portion of such net proceeds as follows: (i)
approximately $3.0 million to repay the Interneuron Bridge Loan (as defined
below); (ii) approximately $1.0 million to pay expenses relating to employee
benefit and retention plans relating to the Acquisition; and (iii) approximately
$500,000 to reimburse Interneuron for certain costs of the Offering incurred
after October 1, 1996. In the event the Company consolidates its operations in
California, the Company may use approximately $2.5 million of such net proceeds
to facilitate employee relocation, plant closing and consolidation. The Company
anticipates using the balance of such net proceeds for the expansion or upgrade
of facilities, acquisition of equipment and for working capital and other
general corporate purposes. The Company also may use such proceeds for other
purposes, including the acquisition of technology rights, products, equipment,
businesses or assets of other companies. No such transactions involving a
material amount of consideration are being negotiated as of the date of this
Prospectus. Accordingly, management will retain broad discretion over the use of
such net proceeds. There can be no assurance as to the timing or application of
such proceeds, or that the application thereof will not have a material adverse
effect on the Company's future business, financial condition or results of
operations. See "Use of Proceeds," "Certain Transactions" and "Description of
Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POSSIBLE ADVERSE
EFFECT ON STOCK PRICE. Prior to the Offering, there has not been any public
market for the Common Stock and there can be no assurance that a significant
public market for the Common Stock will be developed or be sustained after the
Offering. Sales of substantial amounts of Common Stock in the public market
after the Offering, or the possibility of such sales occurring, could adversely
affect prevailing market prices for the Common Stock or the future ability of
the Company to raise capital through an offering of equity securities.
After the Offering, the Company will have outstanding 10,614,998 shares of
Common Stock (11,027,498 shares if the Underwriters' over-allotment option is
exercised in full), including the shares of Common Stock to be issued to
Mercator stockholders in the Acquisition, the Amgen Shares and the 25,000 shares
to be purchased by The Ohio University Foundation. Of these shares, the
2,750,000 shares of Common Stock offered hereby will be freely tradeable without
restriction in the public market under the Securities Act of 1933, as amended
(the "Securities Act"), unless such shares are held by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act. The
shares of the Company's Common Stock to be issued in connection with the
Acquisition will be registered under the Company's Registration Statement on
Form S-4. However, 1,650,123 of such shares issued to "affiliates" of Mercator
within the meaning of Rule 145 under the Securities Act will be subject to
certain volume, manner of sale and other limitations under Rules 144 and 145.
The remaining 6,185,743 shares of Common Stock outstanding upon completion
of the Offering will be "restricted securities" as that term is defined in Rule
144 ("Restricted Shares"). The Restricted Shares were issued and sold by the
Company in private transactions in reliance upon exemptions from registration
under the Securities Act. Restricted Shares may not be sold in the public market
unless they are registered under the Securities Act or are sold pursuant to Rule
144 or another exemption from registration.
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Pursuant to "lockup" agreements, all of the Company's executive officers and
directors and certain stockholders, who collectively hold 1,007,581 of such
Restricted Shares, have agreed not to offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any such shares for a period of 180
days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. Interneuron will hold 4,529,745 Restricted Shares and has
agreed pursuant to a lockup agreement not to offer, sell or otherwise dispose of
any of its Restricted Shares for a period of 365 days from the date of this
Prospectus without the prior written consent of Lehman Brothers Inc. The Company
also has agreed that it will not offer, sell or otherwise dispose of Common
Stock for a period of 180 days from the date of this Prospectus, other than
pursuant to existing stock option plans, without the prior written consent of
Lehman Brothers Inc. In addition, Amgen has agreed not to offer, sell or
otherwise dispose of, for a period of 180 days from the date of this Prospectus,
any of the Amgen Shares without the prior written consent of the Company, and
the Company has agreed in the Underwriting Agreement that it will not grant such
consent without the prior written consent of Lehman Brothers Inc. To date,
substantially all stockholders and optionholders of Mercator have entered into
lockup agreements ("Mercator Lockup Agreements"), pursuant to which they have
agreed not to offer, sell or otherwise dispose of shares of the Company's Common
Stock acquired in the Acquisition (including upon the exercise of any
Replacement Options after the Acquisition) without the prior written consent of
Lehman Brothers Inc. Such restrictions lapse as to one-third of all shares
beneficially owned by a holder after each of 180 days, 270 days and 365 days
following completion of the Acquisition. It is a condition to the closing of the
Acquisition that all stockholders and optionholders of Mercator enter into such
Mercator Lockup Agreements, although there can be no assurance that such persons
will do so.
Upon termination of the agreements described above, approximately 692,362,
550,041 and 5,579,786 of such shares will be eligible for immediate sale in the
public market beginning 181 days, 271 and 366 days, respectively, after the date
of this Prospectus, subject to certain volume, manner of sale and other
limitations under Rules 144 and 145 and approximately 843,360, 9,711 and 40,014
of such shares will be eligible for immediate sale in the public market
beginning 181, 271 and 366 days after the date of this Prospectus without
limitation under Rule 144(k). Lehman Brothers Inc. may, at any time without
notice, release all or any portion of the shares subject to such agreements.
As of February 28, 1996, options to purchase a total of 988,984 shares were
outstanding under the Company's stock option plans (including the 1997 Stock
Option Plan). Of such shares, approximately 730,112, 97,674 and 97,674 shares
are subject to lockup agreements for a period of 180, 270 and 365 days from the
date of this Prospectus, and the remaining 63,524 shares will be available for
sale in the public market 90 days after the date of this Prospectus pursuant to
Rule 701. As of February 28, 1996, 1,786,775 shares were available or were to be
reserved for future option grants under such plans, and options to purchase
926,150 shares of Common Stock were to be granted under the 1996 Stock Incentive
Plan upon the closing of the Offering.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares of the Company are aggregated) who
has beneficially owned Restricted Shares for at least one year (including the
holding period of any prior owner who is not an affiliate of the Company) would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (approximately 106,150 shares immediately after the Offering), or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner who is not an affiliate of the
Company) is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701
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under the Act, which permit non-affiliates to sell their Rule 701 shares without
having to comply with the public information, holding period, volume limitation
or notice provisions of Rule 144 and permit affiliates to sell their Rule 701
shares without having to comply with Rule 144's holding period restrictions, in
each case commencing 90 days after the date of this Prospectus.
After the effective date of the Offering, the Company intends to file
registration statements on Form S-8 to register an aggregate of 695,962 shares
of Common Stock reserved for issuance upon exercise of outstanding options, an
aggregate of 926,150 shares of Common Stock reserved for issuance pursuant to
options to be granted upon the closing of the Offering with an exercise price
equal to the initial public offering price, an aggregate of 1,786,775 shares of
Common Stock to be reserved for grants or awards under its 1992 Stock Option
Plan, 1996 Stock Incentive Plan and 1996 Employee Stock Purchase Plan and an
aggregate of 293,022 shares of Common Stock subject to Replacement Options that
are reserved for issuance under its 1997 Stock Option Plan. Such registration
statements will become effective automatically upon filing. Shares issued under
the foregoing plans after the filing of the registration statements on Form S-8
may be sold in the open market subject, in the case of certain holders, to the
Rule 144 limitations applicable to affiliates, the above-referenced lockup
agreements and vesting restrictions imposed by the Company.
After the closing of the Offering, 31,952 shares of Common Stock issuable
upon exercise of outstanding warrants will be entitled to certain rights with
respect to the registration of such shares under the Securities Act. Certain
registration rights also have been granted to Amgen in connection with the
purchase of the Amgen Shares. See "Description of Capital Stock--Registration
Rights" and "Shares Eligible for Future Sale."
DILUTION. Investors purchasing shares of Common Stock in the Offering will
incur immediate and substantial dilution equal to $8.07 per share based upon
certain assumptions, including an initial public offering price of $11.00 per
share. If the Common Stock is sold at a price of less than $11.00 per share, the
per share amount of dilution will be lower, however, investors purchasing in the
Offering will own a lesser percentage of the total shares of Common Stock
outstanding as a result of the issuance of additional shares of Common Stock to
stockholders of Mercator in connection with the Acquisition as well as the
issuance of additional shares of Common Stock to Interneuron and other holders
of Progenitor's Preferred Stock upon conversion into Common Stock of such
Preferred Stock and the repayment of amounts owed to Interneuron. See
"Dilution."
ABSENCE OF DIVIDENDS. The Company has never declared or paid cash dividends
on its Common Stock. The Company currently intends to retain any future earnings
to finance the growth and development of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. See "Dividend
Policy."
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USE OF PROCEEDS
The aggregate net proceeds from the sale of the 2,750,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $11.00 per
share are estimated to be approximately $27.2 million ($31.4 million if the
Underwriters' over-allotment option is exercised in full), after deducting
estimated underwriting discounts and commissions and estimated expenses of the
Offering payable by the Company. The Company will also receive $4.5 million in
cash and a $1.0 million promissory note from the sale of the Amgen Shares, and
approximately $137,000 in cash from the sale of 25,000 shares of Common Stock to
The Ohio University Foundation, pursuant to a stock purchase right.
The Company intends to use the net proceeds of the Offering together with
the cash proceeds received from sale of the Amgen Shares, primarily for research
and development. In addition, the Company intends to use a portion of such net
proceeds as follows: (i) approximately $3.0 million to repay the Interneuron
Bridge Loan (as defined below); (ii) approximately $1.0 million to pay expenses
relating to employee benefit and retention plans relating to the Acquisition;
and (iii) approximately $500,000 to reimburse Interneuron for certain costs of
the Offering incurred after October 1, 1996. In the event the Company
consolidates its operations in California, the Company may use approximately
$2.5 million of such net proceeds to facilitate employee relocation, and for the
consolidation of operations and elimination of duplicate systems and facilities.
The Company anticipates using the balance of such net proceeds for the expansion
or upgrade of facilities, acquisition of equipment and for working capital and
other general corporate purposes. The Company also may use a portion of the net
proceeds of the Offering to acquire technology rights, products, equipment,
businesses or assets of other companies. No such transactions involving a
material amount of consideration are being negotiated as of the date of this
Prospectus. In connection with the Company's bridge financing of Mercator prior
to the closing of the Acquisition, Interneuron has agreed to provide to the
Company a line of credit of up to an aggregate maximum amount of $6.6 million
bearing interest at the rate of 10% per annum becoming due upon the closing of
the Acquisition (the "Interneuron Bridge Loan"). The amounts actually expended
for each purpose will depend on numerous factors, including any expansion or
acceleration of the Company's research and development programs; the results of
research and development, preclinical studies and clinical trials conducted by
the Company or its collaborative partners or licensees, if any; the acquisition
and licensing of products and technologies; the Company's ability to establish
and maintain relationships with corporate and academic collaborators; the
ability of the Company to integrate the operations of Mercator with those of
Progenitor; the Company's ability to manage growth; competing technological and
market developments; the time and costs involved in filing, prosecuting,
defending and enforcing patent and intellectual property claims; the receipt of
licensing or milestone fees from any current or future collaborative
arrangements, if established; the continued funding of governmental research
grants; the timing of regulatory approvals, if any; and other factors. The
Company estimates that, at its planned rate of spending, subject to the factors
described above, the net proceeds of the Offering, together with the proceeds
from the sale of the Amgen Shares, and the interest income earned on such
proceeds, together with existing cash and cash equivalents, will be sufficient
to meet its funding requirements for the next 18 months. There can be no
assurance, however, that the Company's assumptions regarding its future levels
of expenditures and operating losses will prove accurate. Pending such uses, the
Company intends to invest the net proceeds of the Offering in investment grade,
interest-bearing securities. See "Risk Factors-- History of Operating Losses;
Anticipation of Future Losses," "--Need for Additional Capital; Uncertainty of
Additional Funding," "--Management Discretion as to Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Certain Transactions" and
"Description of Capital Stock."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on shares of its
Common Stock. The Company currently intends to retain any future earnings for
its business and, therefore, does not anticipate paying any cash dividends in
the foreseeable future. Any payment of cash dividends would be made at the
discretion of the Board of Directors after taking into account various factors,
including the Company's financial condition, results of operations, current and
anticipated cash needs and plans for expansion.
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CAPITALIZATION
The following table sets forth (i) the actual capitalization of Progenitor
as of December 31, 1996 as if the 1-for-2 reverse stock split had occurred prior
to December 31, 1996; (ii) the Company's pro forma capitalization as of December
31, 1996 as if the Acquisition had occurred as of December 31, 1996 (assuming
Final Acquisition Consideration (as defined below) of $22.0 million for
Mercator) and giving effect to (a) the automatic conversion of all outstanding
shares of Progenitor's Preferred Stock into an aggregate of 2,170,893 shares of
Common Stock upon the closing of the Offering, (b) the conversion of a
convertible debenture and a portion of the promissory note held by Interneuron
into an aggregate of 529,124 shares of Common Stock (based on outstanding
balances of $5.8 million as of December 31, 1996), and (c) the issuance of 5,303
shares of Common Stock to The Ohio University Foundation pursuant to an
anti-dilution adjustment in connection with the Offering; and (iii) on a pro
forma as adjusted basis to reflect (a) the issuance and sale of the 2,750,000
shares of Common Stock offered hereby (after deducting estimated underwriting
discounts and commissions and the estimated expenses of the Offering) and the
receipt and application of the estimated net proceeds therefrom, (b) the sale of
500,000 shares of Common Stock to Amgen, concurrently with the closing of the
Offering, and (c) the sale of 25,000 shares of Common Stock to The Ohio
University Foundation at a price of $5.50 per share, pursuant to a stock
purchase right, concurrently with the closing of the Offering. The number of
shares of Common Stock to be issued (i) upon conversion of Progenitor's
Preferred Stock, (ii) upon conversion of the Interneuron convertible debenture
and a portion of the promissory note, (iii) in the Acquisition, (iv) to Amgen
and (v) to The Ohio University Foundation will depend upon a number of factors
including the date of the closing of the Offering and the initial public
offering price. See "Use of Proceeds," "Business--Corporate Agreements,"
"--Mercator Acquisition," "Certain Transactions" and "Description of Capital
Stock."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------------
PRO FORMA
PROGENITOR FOR ACQUISITION PRO FORMA
ACTUAL AND CONVERSIONS AS ADJUSTED
----------- --------------- -----------
<S> <C> <C> <C>
Cash and cash equivalents............................................... $ 197 $ 636 $ 32,384
Long-term obligations (1)............................................... $ 5,921 $ 787 $ 715
Stockholders' equity (deficit):
Preferred Stock, Series A $0.01 par value: 2,120,000 shares
authorized; 2,020,496 shares issued and outstanding, actual; no
shares authorized, issued or outstanding, pro forma and pro forma as
adjusted............................................................ 20 -- --
Preferred Stock, Series B $0.01 par value: 880,000 shares authorized;
349,000 shares issued and outstanding, actual; no shares authorized,
issued or outstanding, pro forma and pro forma as adjusted.......... 3 -- --
Common Stock $0.001 par value: 39,000,000 shares authorized; 2,885,904
shares issued and outstanding, actual; 7,270,479 shares issued and
outstanding, pro forma; and 10,545,479 shares issued and
outstanding, pro forma as adjusted (2).............................. 3 7 10
Shareholder promissory note receivable................................ -- -- (1,000)
Additional paid-in capital............................................ 14,967 42,194 75,011
Deficit accumulated during development stage.......................... (21,113) (43,099) (43,099)
----------- --------------- -----------
Total stockholders' equity (deficit)................................ (6,120) (898) 30,922
----------- --------------- -----------
Total capitalization.............................................. $ (199) $ (111) $ 31,637
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
- ------------------------------
(1) See Notes 5, 9 and 10 to the Progenitor Financial Statements.
(2) Excludes: (i) 1,786,775 shares of Common Stock reserved for grants or awards
under the Company's 1992 Stock Option Plan, 1996 Stock Incentive Plan and
1996 Employee Stock Purchase Plan, of which (a) options to purchase 695,962
shares of Common Stock were outstanding as of February 28, 1997 under such
stock plans, with a weighted average exercise price of $5.13 per share, and
(b) options to purchase 926,150 shares of Common Stock are to be granted
under the 1996 Stock Incentive Plan upon the closing of the Offering, with
an exercise price equal to the initial public offering price; (ii) 293,022
shares of Common Stock to be issuable upon exercise of Replacement Options
to be issued under the 1997 Stock Option Plan in connection with the
Acquisition, with a weighted average exercise price of $1.72 per share;
(iii) 31,952 shares of Common Stock issuable upon exercise of warrants
outstanding as of February 28, 1997, with an exercise price of $7.50 per
share; and (iv) 27,723 shares of Common Stock issuable upon exercise of the
Mercator Warrants, with a weighted average exercise price of $6.02 per
share. See "Management--Stock Plans," "Certain Transactions" and
"Description of Capital Stock."
22
<PAGE>
DILUTION
Pro forma net tangible book value per share is equal to the Company's net
tangible assets (tangible assets of the Company less total liabilities) divided
by 7,270,479 shares of Common Stock outstanding as of December 31, 1996 (as if
the 1-for-2 reverse split of the Company's Common Stock had occurred prior to
December 31, 1996), assuming (i) the Acquisition occurred as of December 31,
1996, (ii) the automatic conversion of all outstanding shares of Progenitor's
Preferred Stock into an aggregate of 2,170,893 shares of Common Stock upon the
closing of the Offering, (iii) the conversion of a convertible debenture and a
portion of the promissory note held by Interneuron into an aggregate of 529,124
shares of Common Stock (based on outstanding balances of $5.8 million as of
December 31, 1996) upon the closing of the Offering, and (iv) the issuance of
5,303 shares of Common Stock to The Ohio University Foundation pursuant to an
anti-dilution adjustment in connection with the Offering. The number of shares
of Common Stock to be issued (i) in the Acquisition, (ii) upon conversion of
Progenitor's Preferred Stock, (iii) upon conversion of the Interneuron
convertible debenture and a portion of the promissory note, (iv) to Amgen and
(v) to The Ohio University Foundation will depend upon a number of factors
including the date of the closing of the Offering and the initial public
offering price. See "Business--Corporate Agreements," "--Mercator Acquisition,"
"Description of Capital Stock" and "Certain Transactions--Relationship with
Interneuron."
The pro forma net tangible deficit of the Company prior to the Offering as
of December 31, 1996 was approximately $898,000 or $0.12 per share. Without
taking into account any other changes in pro forma net tangible deficit other
than to give effect to (i) the issuance and sale of the 2,750,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$11.00 per share and the receipt and application of the estimated net proceeds
therefrom, (ii) the sale of 500,000 shares of Common Stock to Amgen for $4.5
million in cash and a $1.0 million promissory note, concurrently with the
closing of the Offering, and (iii) the sale of 25,000 shares of Common Stock to
The Ohio University Foundation at a price of $5.50 per share, pursuant to a
stock purchase right, concurrently with the closing of the Offering, the pro
forma net tangible book value of the Company as of December 31, 1996 would have
been approximately $30.9 million or $2.93 per share. This represents an
immediate increase in pro forma net tangible book value of $3.05 per share to
existing stockholders and an immediate dilution of $8.07 per share to new
investors. The following table sets forth the per share dilution to new
investors in the Offering:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $ 11.00
Pro forma net tangible deficit per share as of December 31,
1996............................................................ $ (0.12)
Increase per share attributable to new investors.................. 3.05
---------
Pro forma net tangible book value per share after the Offering...... 2.93
---------
Dilution per share to new investors................................. $ 8.07
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996, the differences between existing stockholders, former Mercator
stockholders, Amgen, and new investors with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price paid per share (assuming an initial public offering price of
$11.00 per share and before deducting estimated underwriting discounts and
commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 5,616,224 53.3% $ 21,010,000 27.9% $ 3.74
Former Mercator stockholders.......... 1,679,255 15.9 18,472,000 24.6 11.00
Amgen................................. 500,000 4.7 5,500,000 7.3 11.00
New investors......................... 2,750,000 26.1 30,250,000 40.2 11.00
------------ ----- ------------- -----
Total............................. 10,545,479 100.0% $ 75,232,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
23
<PAGE>
The foregoing tables reflect no exercise of outstanding options or warrants
subsequent to December 31, 1996. As of February 28, 1997, there were (i)
1,786,775 shares of Common Stock reserved for grants or awards under the
Company's 1992 Stock Option Plan, 1996 Stock Incentive Plan and 1996 Employee
Stock Purchase Plan, of which (a) options to purchase 695,962 shares of Common
Stock were outstanding under such stock plans, with a weighted average exercise
price of $5.13 per share, and (b) options to purchase 926,150 shares of Common
Stock are to be granted under the 1996 Stock Incentive Plan upon the closing of
the Offering, with an exercise price equal to the initial public offering price;
(ii) 293,022 shares of Common Stock issuable upon exercise of Replacement
Options to be issued under the 1997 Stock Option Plan in connection with the
Acquisition, with a weighted average exercise price of $1.72 per share; (iii)
31,952 shares of Common Stock issuable upon exercise of outstanding warrants,
with an exercise price of $7.50 per share; and (iv) 27,723 shares of Common
Stock issuable upon exercise of the Mercator Warrants, with a weighted average
exercise price of $6.02 per share. See "Capitalization," "Business-- Corporate
Agreements," "Management--Stock Plans" and "Description of Capital
Stock--Preferred Stock."
24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following pro forma financial statements are presented assuming (i) that
the consummation of the Acquisition was accounted for using the purchase method
of accounting, (ii) the automatic conversion of all outstanding shares of
Progenitor's Preferred Stock into an aggregate of 2,170,893 shares of Common
Stock upon the closing of the Offering, the conversion of a convertible
debenture and a portion of the promissory note held by Interneuron into an
aggregate of 529,124 shares of Common Stock (based on outstanding balances of
$5.8 million as of December 31, 1996) upon the closing of the Offering, and the
issuance of 5,303 shares of Common Stock to The Ohio University Foundation
pursuant to an anti-dilution adjustment, in connection with the Offering
(collectively, the "Conversions"), and (iii) the issuance and sale of 2,750,000
shares of Common Stock offered hereby (after deducting estimated underwriting
discounts and commissions and the estimated expenses of the Offering) and the
receipt and application of the estimated net proceeds therefrom, the sale of the
Amgen Shares for $4.5 million in cash and a $1.0 million promissory note,
concurrently with the closing of the Offering, and the sale of 25,000 shares of
Common Stock to The Ohio University Foundation at a price of $5.50 per share,
pursuant to a stock purchase right, concurrently with the closing of the
Offering (collectively, the "Offering Adjustments"). The number of shares of
Common Stock to be issued in the Acquisition, upon the Conversions and upon the
Offering Adjustments will depend upon a variety of factors including the date of
the closing of the Offering and the initial public offering price. See
"Business--Corporate Agreements," "Certain Transactions--Relationship with
Interneuron" and "Description of Capital Stock."
The pro forma balance sheet assumes that the Acquisition, Conversions and
Offering Adjustments were consummated as of December 31, 1996. The pro forma
statements of operations have been prepared by combining the historical
financial statements of Progenitor for the fiscal year ended September 30, 1996
and for the three months ended December 31, 1996 with the historical financial
statements of Mercator for the year ended December 31, 1996 and for the three
months ended December 31, 1996, respectively. The pro forma statements of
operations assume that the Acquisition, Conversions and Offering Adjustments
were consummated as of October 1, 1995.
The pro forma statements of financial position and results of operations
exclude certain non-recurring items such as estimated costs of severance, the
elimination of duplicate systems and facilities, employee retention, and other
employee benefit and integration costs related to the combination of operations
of Progenitor and Mercator subsequent to the consummation of the Acquisition. In
addition, the Company will likely incur additional costs of being a public
reporting entity. Such increases in costs, particularly insurance and annual
financial reporting costs, have not been included in the pro forma statements of
operations for either period presented. See "Risk Factors--History of Operating
Losses; Anticipation of Future Losses" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
In management's opinion, all material adjustments necessary to reflect the
transactions are presented in the pro forma adjustments. The pro forma financial
statements do not represent what the Company's actual results of operations
would have been had the transactions occurred on such dates nor does it purport
to predict or indicate the Company's financial position or results of operations
at any future date or for any future period. The pro forma financial statements
should be read in conjunction with the historical financial statements of both
Progenitor and Mercator and the related notes thereto included elsewhere in this
Prospectus and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
25
<PAGE>
PRO FORMA BALANCE SHEETS
AS OF DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO
FORMA
PRO DEBT AND FOR
ACQUI- FORMA EQUITY ACQUI-
ACTUAL SITION FOR CONVERSION SITION OFFERING
------------------------ ADJUST- ACQUI- ADJUST- AND ADJUST-
PROGENITOR MERCATOR(1) MENTS(2) SITION MENTS(3) CONVERSIONS MENTS(4)
----------- ----------- ----------- --------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 197 $ 439 $ -- $ 636 $ -- $ 636 $ 31,748
Accounts receivable............... 676 -- -- 676 -- 676 --
Current portion of notes
receivable from officers........ -- 175 -- 175 -- 175 --
Deferred interest expense......... -- 750 (750) -- -- -- --
Prepaid expenses and other current
assets.......................... 211 241 -- 452 -- 452 --
----------- ----------- ----------- --------- ----------- ----------- -----------
Total current assets............ 1,084 1,605 (750) 1,939 -- 1,939 31,748
----------- ----------- ----------- --------- ----------- ----------- -----------
Property and equipment at cost...... 1,384 2,465 (1,149) 2,700 -- 2,700 --
Less accumulated depreciation... (749) (1,149) 1,149 (749) -- (749) --
----------- ----------- ----------- --------- ----------- ----------- -----------
635 1,316 -- 1,951 -- 1,951 --
Notes receivable from officers, net
and other......................... 110 162 -- 272 -- 272 --
----------- ----------- ----------- --------- ----------- ----------- -----------
Total assets.................... $ 1,829 $ 3,083 $ (750) $ 4,162 $ -- $ 4,162 $ 31,748
----------- ----------- ----------- --------- ----------- ----------- -----------
----------- ----------- ----------- --------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.................. $ 273 $ 588 $ 1,100 $ 1,961 $ -- $ 1,961 $ --
Accrued expenses.................. 1,490 83 -- 1,573 -- 1,573 --
Convertible notes payable......... -- 2,250 (2,250 ) -- -- -- --
Equipment financing obligations--
current......................... 265 474 -- 739 -- 739 --
----------- ----------- ----------- --------- ----------- ----------- -----------
Total current liabilities....... 2,028 3,395 (1,150 ) 4,273 -- 4,273 --
Note payable--Interneuron........... 5,407 -- -- 5,407 (5,335 ) 72 (72)
Convertible
debenture--Interneuron............ 485 -- -- 485 (485 ) -- --
Equipment financing obligations..... 29 686 -- 715 -- 715 --
----------- ----------- ----------- --------- ----------- ----------- -----------
Total liabilities............... 7,949 4,081 (1,150 ) 10,880 (5,820 ) 5,060 (72)
----------- ----------- ----------- --------- ----------- ----------- -----------
Redeemable preferred stock,
Series A.......................... -- 3,015 (3,015 ) -- -- -- --
Redeemable preferred stock,
Series B.......................... -- 8,020 (8,020 ) -- -- -- --
Redeemable preferred stock,
Series C.......................... -- 4,526 (4,526 ) -- -- -- --
Redeemable preferred stock,
Series D.......................... -- -- -- -- -- -- --
Stockholders' equity (deficit):
Preferred stock, Series A......... 20 -- -- 20 (20 ) -- --
Preferred stock, Series B......... 3 -- -- 3 (3 ) -- --
Common stock, Class A............. 3 -- 2 5 2 7 3
Common stock...................... -- 50 (50 ) -- -- -- --
Shareholder promissory note
receivable...................... -- -- -- -- -- -- (1,000)
Additional paid-in capital........ 14,967 -- 21,327 36,294 5,900 42,194 32,817
Deficit accumulated during
development stage............... (21,113 ) (16,609 ) (5,318 ) (43,040) (59 ) (43,099 ) --
----------- ----------- ----------- --------- ----------- ----------- -----------
Total stockholders' equity
(deficit)..................... (6,120 ) (16,559 ) 15,961 (6,718) 5,820 (898 ) 31,820
----------- ----------- ----------- --------- ----------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit)..................... $ 1,829 $ 3,083 $ (750 ) $ 4,162 $ -- $ 4,162 $ 31,748
----------- ----------- ----------- --------- ----------- ----------- -----------
----------- ----------- ----------- --------- ----------- ----------- -----------
<CAPTION>
PRO
FORMA AS
ADJUSTED
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......... $ 32,384
Accounts receivable............... 676
Current portion of notes
receivable from officers........ 175
Deferred interest expense......... --
Prepaid expenses and other current
assets.......................... 452
-----------
Total current assets............ 33,687
-----------
Property and equipment at cost...... 2,700
Less accumulated depreciation... (749)
-----------
1,951
Notes receivable from officers, net
and other......................... 272
-----------
Total assets.................... $ 35,910
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.................. $ 1,961
Accrued expenses.................. 1,573
Convertible notes payable......... --
Equipment financing obligations--
current......................... 739
-----------
Total current liabilities....... 4,273
Note payable--Interneuron........... --
Convertible
debenture--Interneuron............ --
Equipment financing obligations..... 715
-----------
Total liabilities............... 4,988
-----------
Redeemable preferred stock,
Series A.......................... --
Redeemable preferred stock,
Series B.......................... --
Redeemable preferred stock,
Series C.......................... --
Redeemable preferred stock,
Series D.......................... --
Stockholders' equity (deficit):
Preferred stock, Series A......... --
Preferred stock, Series B......... --
Common stock, Class A............. 10
Common stock...................... --
Shareholder promissory note
receivable...................... (1,000 )
Additional paid-in capital........ 75,011
Deficit accumulated during
development stage............... (43,099 )
-----------
Total stockholders' equity
(deficit)..................... 30,922
-----------
Total liabilities and
stockholders' equity
(deficit)..................... $ 35,910
-----------
-----------
</TABLE>
26
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
ACTUAL
---------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED DEBT AND
SEPTEMBER 30, DECEMBER 31, PRO FORMA EQUITY
1996 1996 FOR CONVERSION PRO FORMA
FOR THE YEAR ENDED SEPTEMBER 30, 1996 PROGENITOR MERCATOR(1) ACQUISITION ADJUSTMENTS AS ADJUSTED
- ------------------------------------------ ------------- ------------ ----------- -------------- -------------
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 1,332 $ 500 $ 1,832 $ -- $ 1,832
Operating expenses:
Research and development................ 3,873 6,049 9,922 59(5) 9,981
General and administrative.............. 1,791 1,593 3,384 -- 3,384
------------- ------------ ----------- ----- -------------
Total operating expenses.............. 5,664 7,642 13,306 59 13,365
------------- ------------ ----------- ----- -------------
Nonrecurring expense...................... 974 -- 974 -- 974
Interest expense, net..................... 178 66 244 (120)(6) 124
------------- ------------ ----------- ----- -------------
Net loss................................ $ (5,484) $ (7,208) $ (12,692) $ 61 $ (12,631)
------------- ------------ ----------- ----- -------------
------------- ------------ ----------- ----- -------------
Supplemental net loss per share........... $ (0.95)
-------------
-------------
Shares used in computing supplemental net
loss per share........................... 5,758,615(7)
-------------
-------------
Pro forma net loss per share.............. $ (1.15)
-------------
-------------
Shares used in computing pro forma net
loss per share........................... 10,973,391(7)
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
ACTUAL
-------------------------
FOR THE THREE MONTHS DEBT AND
ENDED DECEMBER 31, 1996 PRO FORMA EQUITY
------------------------- FOR CONVERSION PRO FORMA
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 PROGENITOR MERCATOR(1) ACQUISITION ADJUSTMENTS AS ADJUSTED
- -------------------------------------------- ------------ ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 676 $ 125 $ 801 $ -- $ 801
Operating expenses:
Research and development.................. 1,066 1,657 2,723 59(5) 2,782
General and administrative................ 445 409 854 -- 854
------------ ----------- ----------- ----- -------------
Total operating expenses................ 1,511 2,066 3,577 59 3,636
------------ ----------- ----------- ----- -------------
Interest expense, net....................... 120 30 150 (111)(6) 39
------------ ----------- ----------- ----- -------------
Net loss.................................. $ (955) $ (1,971) $ (2,926) $ 52 $ (2,874)
------------ ----------- ----------- ----- -------------
------------ ----------- ----------- ----- -------------
Supplemental net loss per share............. $ (0.17)
------------
------------
Shares used in computing supplemental net
loss per share............................. 5,784,327(7)
------------
------------
Pro forma net loss per share................ $ (0.26)
-------------
-------------
Shares used in computing pro forma net loss
per share.................................. 10,999,103(7)
-------------
-------------
</TABLE>
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
(1) Reflects the actual financial statements of Mercator for the date or period
indicated. Progenitor will consummate the Acquisition upon the closing of
the Offering.
(2) In connection with the Acquisition, the allocation of the purchase price to
the assets and liabilities of Mercator at estimated fair values is as
follows:
<TABLE>
<S> <C> <C>
Purchase Price:
Common stock, stock options and warrants to be issued:
1,679,255 shares of common stock.......................... $ 18,472
Stock options for 293,022 shares of common stock.......... 2,719
Warrants for 27,723 shares of common stock................ 138
Estimated acquisition fees and costs........................ 1,100
---------
Total purchase price...................................... $ 22,429
---------
---------
Allocation of purchase price:
In-process research and development......................... $ 21,927
Estimated fair value of Mercator net assets as of
December 31, 1996......................................... 502
---------
Total..................................................... $ 22,429
---------
---------
</TABLE>
For pro forma financial statement purposes, the purchase price was estimated
using an assumed initial public offering price of $11.00 per share. The
actual purchase price will be determined by a valuation of the Common Stock,
stock options and warrants issued at the time of the closing of the
Offering.
The Acquisition was reflected in the unaudited pro forma balance sheet as
follows:
<TABLE>
<S> <C> <C>
To establish fair value of property and equipment........... $ (1,149)
To eliminate Mercator accumulated depreciation.............. 1,149
Eliminate deferred interest expense......................... (750)
Accounts payable incurred for acquisition costs............. (1,100)
Eliminate Mercator convertible notes payable, net........... 2,250
Eliminate Mercator redeemable preferred stock, Series A..... 3,015
Eliminate Mercator redeemable preferred stock, Series B..... 8,020
Eliminate Mercator redeemable preferred stock, Series C..... 4,526
Reflect par value of the 1,679,255 shares of common stock
issued..................................................... (2)
Eliminate Mercator common stock............................. 50
Reflect the issuance of common stock, options and warrants
in additional paid-in capital.............................. (21,327)
Deficit accumulated during the development stage:
Reflect charge for purchased in-process
research and development................................ 21,927
Eliminate Mercator deficit accumulated
during the development stage............................ (16,609)
---------
Subtotal................................................ 5,318
---------
Total................................................. $ 0
---------
---------
</TABLE>
The allocation of the Mercator purchase price among the identifiable tangible
and intangible assets is based on preliminary estimates of the fair market
value of those assets. The technological feasibility of the purchased
in-process research and development technology has not yet been established
and the technology has no alternative future use. Final determination of the
allocation of the purchase price
28
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
will be based on independent appraisals expected to be completed shortly
after the Acquisition is consummated. Accordingly, final amounts could
differ from those used herein and the impact of such difference in the
Company's financial statements could be material.
In addition, the Company will provide additional funding to Mercator prior to
the closing of the Offering, funded in stages based upon a plan sufficient
to meet the working capital obligations of Mercator. The additional funding
will be part of Progenitor's purchase price consideration; however, such
consideration has not been reflected in the December 31, 1996 unaudited pro
forma balance sheet as no funding had commenced as of such date. Prior to
the closing of the Offering, Progenitor anticipates that approximately
$3,000 will be funded to Mercator, and that the amount allocated to in-
process research and development to be written off in connection with the
Acquisition would be approximately $25,000.
In connection with the Acquisition, the Company expects to incur several
nonrecurring charges in the quarter ended June 30, 1997 which in the
aggregate is currently estimated to be $30,000, including the write-off of
costs related to the purchase of in-process research and development,
severance, employee retention and relocation, and other employee benefit
costs, the consolidation of operations, the elimination of duplicate systems
and facilities, and other integration costs. Factors that could increase
such costs include delays in the closing of the Offering beyond May 31,
1997, any unexpected employee turnover, unforeseen delays in consolidating
duplicate facilities once the Acquisition has been completed and the
associated costs of hiring temporary employees and consultants, and any
additional fees and charges to obtain consents, regulatory approvals or
permits. The costs of the write-off of in-process research and development
have been considered in the purchase price allocation above, while the
remaining costs have been excluded from the pro forma presentation. In
addition, the charge for purchased in-process research and development
($21,927) has been excluded from the pro forma statement of operations as it
is a material nonrecurring charge which will be reflected in the statement
of operations of the Company within the year following the Acquisition.
(3) Reflects the following Conversions which will occur upon the closing of the
Offering:
<TABLE>
<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
2,170,893 shares of Common Stock:
$ (20)
Preferred stock, Series A..........................................
$ (3)
Preferred stock, Series B..........................................
(b) The conversion of a convertible debenture and a portion of the
promissory note held by Interneuron into an aggregate of 529,124
shares of Common Stock:
$ (5,335)
Note payable--Interneuron..........................................
$ (485)
Convertible debenture--Interneuron.................................
(c) Issuance of 5,303 shares of Common Stock to The Ohio University $ (59)
Foundation in connection with an anti-dilution adjustment pursuant
to a stock purchase right..........................................
(d) To reflect the par value and additional paid-in capital as a result
of items (a) through (c) above:
$ 2
Common Stock, Class A (par value of $0.001) for a total issuance of
2,705,320 shares of Common Stock.................................
$ 5,900
Additional paid-in capital.........................................
</TABLE>
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE DATA)
The Conversions described above will occur upon the closing of the Offering.
The number of shares of Common Stock to be issued upon the Conversions is
dependent on the initial public offering price. A decrease of $1.00 from the
assumed initial public offering price of $11.00 per share would cause an
increase of 276,368 in the number of shares issued under the Conversions.
Since the Preferred Stock has a guaranteed quarterly return that is
determined on each of April 7, July 7, October 7 and January 7, the passage
of any such dates will alter the conversion ratio and the number of shares
of Common Stock issuable upon such Conversion.
(4) Reflects the Offering Adjustments as follows:
<TABLE>
<S> <C> <C>
(a) To record the receipt and application of cash and cash equivalents:
$ 27,183
The issuance and sale of the 2,750,000 shares of Common Stock
offered hereby (after deducting estimated underwriting
discounts and commissions and the estimated expenses of the
Offering)......................................................
4,500
The receipt of $4,500 in cash in connection with the purchase of
the Amgen Shares...............................................
137
The sale of 25,000 shares of Common Stock to The Ohio University
Foundation at a price of $5.50 per share.......................
(72)
The repayment of the remaining portion of the promissory note
payable to Interneuron.........................................
---------
$ 31,748
---------
---------
(b) To reflect the shareholder promissory note receivable from Amgen... $ (1,000)
(c) To reflect the par value and additional paid-in capital as a result
of item (a) above:
$ 3
Common Stock, Class A (par value of $.001) for consideration of a
total issuance of 3,275,000 shares of Common Stock.............
$ 32,817
Additional paid-in capital.......................................
</TABLE>
(5) Reflects research and development expense regarding the additional shares
issued to The Ohio University Foundation pursuant to an anti-dilution
adjustment in connection with the Offering relating to previous research and
technology arrangements.
(6) Eliminates interest expense relating to a convertible debenture and portion
of promissory note held by Interneuron which will convert to Common Stock
upon the closing of the Offering.
(7) Supplemental loss per share amounts are computed using the weighted-average
number of shares outstanding of Common Stock and Common Stock equivalents.
Common Stock equivalents are excluded from the computation when their effect
is anti-dilutive; however, pursuant to the requirements of the Securities
and Exchange Commission, Common Stock equivalent shares relating to stock
options and warrants (using the treasury stock method) that were issued
during the 12-month period prior to the filing of this Registration
Statement are included for all periods presented whether or not they are
anti-dilutive. In addition, the supplemental net loss per share amounts have
been presented to reflect net loss per share had the Conversions occurred as
of October 1, 1995.
Pro forma net loss per share amounts are based upon the supplemental net
loss per share amounts adjusted for the Acquisition and the Offering
Adjustments assuming the Acquisition and the Offering occurred as of October
1, 1995.
30
<PAGE>
PROGENITOR SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of
Progenitor. The selected financial statement of operations data for each of the
three years in the period ended September 30, 1996 and the balance sheet data as
of September 30, 1995 and 1996 are derived from the financial statements of
Progenitor, which have been audited by Coopers & Lybrand L.L.P., independent
accountants, that are included elsewhere in this Prospectus and are qualified by
reference to such financial statements and the notes related thereto. Coopers &
Lybrand L.L.P.'s report on these financial statements which appears elsewhere
herein, includes an explanatory paragraph with respect to Progenitor's ability
to continue as a going concern described in Note 1 to the Progenitor Financial
Statements. The selected statement of operations data for the period from May 8,
1992 (date of inception) to September 30, 1992 and for the year ended September
30, 1993, and the balance sheet data as of September 30, 1992, 1993, and 1994,
are derived from financial statements audited by Coopers & Lybrand L.L.P. that
are not included herein. The statement of operations data for the three months
ended December 31, 1995 and 1996 and for the period from May 8, 1992 (date of
inception) to December 31, 1996 and the balance sheet data as of December 31,
1996, have been derived from unaudited financial statements which include all
adjustments, consisting solely of normal recurring adjustments, which management
considers necessary to fairly present the financial data set forth herein. The
results for the three months ended December 31, 1995 and 1996, are not
necessarily indicative of the results to be expected for future periods. The
selected historical financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Progenitor Financial Statements and related Notes thereto
and other financial information included elsewhere herein.
<TABLE>
<CAPTION>
MAY 8, 1992
MAY 8, 1992 THREE MONTHS (DATE OF
(DATE OF ENDED INCEPTION)
INCEPTION) TO YEARS ENDED SEPTEMBER 30, DECEMBER 31, TO
SEPTEMBER 30, ------------------------------------------ -------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1995 1996 1996
------------- --------- --------- --------- --------- --------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $ -- $ -- $ -- $ 2,821 $ 1,332 $ 202 $ 676 $ 4,829
Operating Expenses:
Research and development....... 775 3,116 4,113 4,228 3,873 809 1,066 17,171
General and administrative..... 264 1,339 1,275 1,116 1,791 355 445 6,230
------------- --------- --------- --------- --------- --------- --------- ------------
Total operating expenses........... 1,039 4,455 5,388 5,344 5,664 1,164 1,511 23,401
------------- --------- --------- --------- --------- --------- --------- ------------
Nonrecurring expense............... -- -- -- -- 974 -- -- 974
Interest expense................... 23 246 648 352 178 24 120 1,567
------------- --------- --------- --------- --------- --------- --------- ------------
Net loss........................... $ (1,062) $ (4,701) $ (6,036) $ (2,875) $ (5,484) $ (986) $ (955) $ (21,113)
------------- --------- --------- --------- --------- --------- --------- ------------
------------- --------- --------- --------- --------- --------- --------- ------------
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF
-------------------------------------------------------- DECEMBER 31,
1992 1993 1994 1995 1996 1996
--------- --------- ---------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 35 $ 11 $ 10 $ 1,174 $ 22 $ 197
Working capital......................... (379) (562) (988) (269) (1,755) (944)
Total assets............................ 568 979 977 2,395 920 1,829
Long-term obligations................... 1,210 6,150 11,767 705 4,010 5,921
Deficit accumulated during development
stage................................. (1,062) (5,763) (11,799) (14,674) (20,158) (21,113)
Total stockholders' deficit............. (1,057) (5,755) (11,791) (101) (5,164) (6,120)
</TABLE>
31
<PAGE>
MERCATOR SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data of
Mercator. The selected financial statement of operations data for each of the
three years in the period ended December 31, 1996 and for the period from
inception (October 9, 1992) to December 31, 1996, and the balance sheet data as
of December 31, 1995 and 1996, are derived from the financial statements of
Mercator, which have been audited by Ernst & Young LLP, independent auditors,
that are included elsewhere in this Prospectus and are qualified by reference to
such financial statements and the notes related thereto. Ernst & Young LLP's
report on these financial statements which appears elsewhere herein, includes an
explanatory paragraph with respect to Mercator's ability to continue as a going
concern described in Note 1 to the Mercator Financial Statements. The selected
statement of operations data for the period from October 9, 1992 (date of
inception) to December 31, 1993 and the balance sheet data as of December 31,
1993 and 1994, are derived from financial statements audited by Ernst & Young
LLP that are not included herein. The selected historical financial data should
be read in conjunction with the Mercator Financial Statements and related Notes
thereto and other financial data included elsewhere herein.
<TABLE>
<CAPTION>
OCTOBER 9,
OCTOBER 9, 1992 1992
(DATE OF (DATE OF
INCEPTION) TO YEARS ENDED DECEMBER 31, INCEPTION) TO
DECEMBER 31, ------------------------------- DECEMBER 31,
1993 1994 1995 1996 1996
--------------- --------- --------- --------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ -- $ -- $ 375 $ 500 $ 875
Operating costs and expenses:
Research and development............................. 1,222 2,330 4,183 6,049 13,784
General and administrative........................... 180 639 1,524 1,593 3,936
------- --------- --------- --------- --------------
Total operating costs and expenses..................... 1,402 2,969 5,707 7,642 17,720
------- --------- --------- --------- --------------
Loss from operations................................... (1,402) (2,969) (5,332) (7,142) (16,845)
Interest income........................................ 54 229 291 114 688
Interest expense....................................... (21) (95) (156) (180) (452)
------- --------- --------- --------- --------------
Net loss............................................... $ (1,369) $ (2,835) $ (5,197) $ (7,208) $ (16,609)
------- --------- --------- --------- --------------
------- --------- --------- --------- --------------
Net loss per share..................................... $ (14.38) $ (28.62) $ (48.70) $ (55.27)
------- --------- --------- ---------
------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 858 $ 2,002 $ 1,446 $ 439
Short-term investments.............................................. 690 4,094 487 --
Working capital..................................................... 1,393 6,355 1,112 (1,790)
Total assets........................................................ 2,187 7,834 3,573 3,083
Long-term obligations and redeemable preferred stock................ 3,331 11,580 12,004 16,247
Deficit accumulated during development stage........................ (1,369) (4,204) (9,401) (16,609)
</TABLE>
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH EACH OF
THE PROGENITOR AND MERCATOR FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
A development stage company, Progenitor was incorporated in February 1992
and commenced operations in May 1992. Progenitor has devoted substantially all
of its resources since inception to research and development programs. To date,
all of Progenitor's revenues have resulted from payments from collaborators and
licensees and a grant from the U.S. Department of Commerce's National Institute
of Standards and Technology Advanced Technology Program ("ATP") that was awarded
to Progenitor in November 1994. Payments from collaborators, license fees,
payments under governmental grants and investment income, in each case, if any,
are expected to be the only sources of revenue for the foreseeable future.
Certain payments under collaborative and license arrangements are contingent
upon the Company meeting certain milestones. Payments under collaborative or
licensing arrangements, if any, will be subject to significant fluctuation in
both timing and amount and therefore the Company's results of operations for any
period may not be comparable to the results of operations for any other period.
The Company has not yet received any royalties or other revenues from the sale
of products or services and does not expect to receive any such revenues for the
next several years, if at all. As of December 31, 1996, Progenitor had a total
stockholders' deficit of $6.1 million, including an accumulated deficit of $21.1
million. See "Risk Factors--History of Operating Losses; Anticipation of Future
Losses."
Interneuron provided the initial funding of Progenitor and had invested
$18.6 million in Progenitor in equity and debt financings through December 31,
1996. Following the close of the Offering and the Acquisition, Interneuron is
expected to own approximately 43% (approximately 41% if the Underwriters'
over-allotment option is exercised in full) of the outstanding Common Stock of
the Company. Accordingly, Interneuron is and will continue to be the Company's
largest stockholder. Interneuron has no obligation to invest any additional
funds in the Company, and the Company does not expect Interneuron to do so.
Progenitor raised an additional $1.6 million in net proceeds through a private
placement of Preferred Stock in fiscal 1995. The Company intends to seek
additional funding through public or private equity or debt financing and
collaborative and license arrangements. There can be no assurance, however, that
additional financing will be available when needed, or that, if available, such
financing will be available on terms acceptable to the Company. See "Risk
Factors--Need for Additional Capital; Uncertainty of Additional Funding,"
"--Control of Company By, and Potential Conflicts of Interest With, Interneuron"
and "Certain Transactions--Relationship With Interneuron."
On February 14, 1997, Progenitor entered into the Acquisition Agreement.
Progenitor intends to close the Acquisition by issuing 1,679,255 shares of
Common Stock to the Mercator stockholders (assuming Final Acquisition
Consideration of $22.0 million for Mercator). See "Business--Mercator
Acquisition."
Significant discovery, research and development efforts will be required
prior to the time any of the Company's gene discoveries may lead to product
candidates or result in products that may be brought to the market, if at all.
Products, if any, resulting from the Company's research and development programs
are not expected to be commercially available for a number of years, if at all,
even if any are successfully developed and proven safe and effective.
Significant additional research and development efforts and extensive
preclinical studies and clinical trials will be required prior to submission of
any regulatory application for commercial use. See "Risk Factors--Uncertainty of
Product Development."
The Company intends to use the net proceeds of the Offering, together with
the cash proceeds received from sale of the Amgen Shares, primarily for research
and development. In addition, the Company intends to use a portion of such net
proceeds as follows: (i) approximately $3.0 million to repay the Interneuron
Bridge Loan; (ii) approximately $1.0 million to pay expenses relating to
employee benefit and retention plans relating to the Acquisition; and (iii)
approximately $500,000 to reimburse Interneuron
33
<PAGE>
for certain costs of the Offering incurred after October 1, 1996. In the event
the Company consolidates its operations in California, the Company may use
approximately $2.5 million of such net proceeds to facilitate employee
relocation, plant closing and consolidation. The Company anticipates using the
balance of such net proceeds for the expansion or upgrade of facilities,
acquisition of equipment and for working capital and other general corporate
purposes.
PRO FORMA FOR ACQUISITION
As of December 31, 1996, the Company, on a pro forma basis (including
Mercator) had an accumulated deficit of approximately $43.1 million. The Company
expects to incur substantial additional losses over the next several years as it
expands its research and development activities. In connection with the
Acquisition, the Company expects to incur several nonrecurring charges in the
quarter ended June 30, 1997, which in the aggregate are currently estimated to
be approximately $30.0 million, including the write-off of $25.0 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 Offering beyond May 31, 1997, any
unexpected employee turnover, unforeseen delays in consolidating duplicate
facilities once the Acquisition has been completed and the associated costs of
hiring temporary employees and consultants, and any additional fees and charges
to obtain consents, regulatory approvals or permits. In addition, the Company
will likely incur material additional costs associated with being a public
reporting entity. Such increases in costs will primarily relate to communication
with stockholders, insurance and annual financial reporting costs. See "Risk
Factors--Risks Associated with the Acquisition of Mercator" and
"Business--Facilities."
RESULTS OF OPERATIONS
PROGENITOR THREE MONTHS ENDED DECEMBER 31, 1995 AND 1996
Revenues for the three months ended December 31, 1995 and 1996 were $202,000
and $676,000, respectively. Progenitor recognized $194,000 of revenue related to
Progenitor's ATP grant in the first three months of fiscal 1996. For the first
three months of fiscal 1997, Progenitor recognized $500,000 in revenue as a
result of entering into a license agreement with Amgen. In addition, $176,000 of
revenues related to Progenitor's ATP grant were recognized during the first
three months of fiscal 1997.
Research and development expenses increased from $809,000 for the three
months ended December 31, 1995 to $1,066,000 for the three months ended December
31, 1996. The increase is due to the addition of five scientific staff members
and related recruiting costs, costs associated with additional sponsored
research agreements entered into during September 1996, and increased legal fees
associated with intellectual property work related to the Amgen license
agreement and collaborative and license agreements in process.
General and administrative expenses were $355,000 for the three months ended
December 31, 1995 and $444,000 for the three months ended December 31, 1996. The
increase is due primarily to new administration personnel and overall increases
in annual salaries.
Interest expense increased from $24,000 during the three months ended
December 31, 1995 to $120,000 for the three months ended December 31, 1996
primarily as a result of increased borrowings under the promissory note payable
to Interneuron.
PROGENITOR FISCAL YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
Progenitor recognized no revenues for fiscal 1994. Revenues increased to
$2.8 million in fiscal 1995, primarily attributable to an initial cash payment
of $2.5 million under Progenitor's collaboration agreement with Chiron and
recognition of $260,000 of revenues related to a payment under Progenitor's ATP
34
<PAGE>
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. The Company expects research and
development expenses to increase in the future. However, continued growth in
such expenses will be dependent on the availability of capital.
General and administrative expenses were $1.3 million for fiscal 1994,
decreased to $1.1 million for fiscal 1995, and increased to $1.8 million for
fiscal 1996. The slight decrease between fiscal 1994 and fiscal 1995 resulted
primarily from a credit from Interneuron for overbilled employee benefit
expenses incurred prior to fiscal 1995, which was offset against similar
expenses in 1995. The fiscal 1996 increase was largely due to increases in
annual salaries, recruitment and relocation fees associated with new
administrative personnel, consulting and legal fees, travel expenses and
occupancy charges. The Company expects general and administrative expenses to
increase in the future as it expands its operations and hires additional
employees.
Interest expense decreased from $648,000 for fiscal 1994 to $352,000 for
fiscal 1995, and to $179,000 for fiscal 1996. The decrease in interest expense
in fiscal 1995 was due to a lower average debt balance resulting from the
conversion into equity of $11.5 million of Progenitor's debt payable to
Interneuron and the receipt by Progenitor of a cash payment of $2.5 million in
fiscal 1995 under its collaboration agreement with Chiron. Interest expense
incurred by Progenitor in fiscal 1996 resulted from debt funding provided to
Progenitor by Interneuron which resumed upon depletion of the cash received from
Chiron in fiscal 1995. Progenitor began incurring interest expense related to
equipment financings in fiscal 1994. The Company expects to continue financing
equipment purchases through sale-leaseback arrangements, if favorable terms are
available, which could result in an increase in interest expense.
During fiscal 1996, Progenitor incurred $974,000 of nonrecurring expense
related to its initial filing of the Registration Statement in connection with
the Offering.
No income tax provision or benefit has been provided for federal income tax
purposes as Progenitor has incurred losses since inception. As of September 30,
1996, Progenitor had deferred tax assets of $8.0 million. Because of
uncertainties surrounding the realization of these favorable tax attributes in
future tax periods, all of the net deferred tax assets have been fully offset by
a valuation allowance. As of September 30, 1996, Progenitor had total net
operating loss carryforwards of $18.4 million and tax credits of approximately
$618,000, both of which expire on dates through 2010. Under Section 382 of the
Internal Revenue Code of 1986, as amended, utilization of prior net operating
loss carryforwards is limited after an ownership change to an annual amount
equal to the value of the loss corporation's stock immediately before the date
of the ownership change, multiplied by the federal long-term tax exempt rate. To
date, Progenitor has not incurred an ownership change under Section 382. As a
result of the actions contemplated by the Offering, the Acquisition and the
related transactions, Progenitor is likely to incur such a change of ownership,
in which case Progenitor's ability to use the losses incurred prior to the date
of the Offering may be limited as to timing, pursuant to the Internal Revenue
Code Section 382.
35
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
PROGENITOR
Since inception, Progenitor has financed its operations primarily through
debt and equity financings from Interneuron of $18.6 million through December
31, 1996, a private financing of $1.6 million in net proceeds from the sale of
Progenitor's Preferred Stock in fiscal 1995 and a private financing from The
Ohio University Foundation in February 1996 of $350,000. In addition, Progenitor
received payments of $2.5 million and $500,000 from Chiron in April 1995 and
January 1996, respectively, and received payments of $65,000 and $769,000 in
fiscal 1995 and fiscal 1996, respectively, under the ATP grant. Progenitor also
completed sale-leaseback transactions generating $88,000 and $117,000 in cash
during fiscal 1995 and fiscal 1996, respectively. Progenitor used these sources
of financing to fund its operations. During fiscal 1995 and fiscal 1996,
respectively, Progenitor used $1.6 million and $4.8 million of cash in operating
activities. As of December 31, 1996, Progenitor had cash and cash equivalents
totaling $197,000.
The Company expects negative cash flow from operations to continue for the
foreseeable future. The Company will require substantial additional funds to
continue research and development, conduct preclinical studies and clinical
trials, conduct activities relating to commercialization of rights it has
retained in collaborative or license agreements, if any, and expand
administrative capabilities. The Company estimates that, at its planned rate of
spending, its existing cash and cash equivalents, together with the net proceeds
from the Offering, the proceeds from the sale of the Amgen Shares, and the
interest income earned on such proceeds, will be sufficient to meet its funding
requirements for the next 18 months. There can be no assurance, however, that
the Company's assumptions regarding its future levels of expenditures and
operating losses will prove accurate. The Company's future funding requirements
will depend on many factors, including any expansion or acceleration of the
Company's research and development programs; the results of research and
development, preclinical studies and clinical trials conducted by the Company or
its collaborative partners or licensees, if any; the acquisition and licensing
of products and technologies or businesses, if any; the Company's ability to
establish and maintain corporate relationships and academic collaborations; the
Company's ability to integrate the operations of Mercator with those of
Progenitor; the Company's ability to manage growth; competing technological and
market developments; the time and costs involved in filing, prosecuting,
defending and enforcing patent and intellectual property claims; the receipt of
licensing or milestone fees from any current or future collaborative and
licensing arrangements, if established; the continued funding of governmental
research grants; the timing of regulatory approvals, if any; and other factors.
To the extent undertaken by the Company, the time and costs involved in
conducting preclinical studies and clinical trials, seeking regulatory
approvals, and scaling-up manufacturing and commercialization activities also
would increase the Company's funding requirements.
The Company will need to raise substantial additional capital to fund
operations. Prior to the Offering, Interneuron has funded substantially all of
Progenitor's operations. Interneuron, however, is under no obligation to
provide, and the Company does not expect that Interneuron will provide, any
additional funds in the future. The Company intends to seek additional funding
through public or private equity or debt financing and collaborative
arrangements. There can be no assurance that additional financing will be
available when needed, or that, if available, such financing will be available
on terms acceptable to the Company. If additional funds are raised by issuing
equity securities, dilution to existing stockholders will result. In addition,
in the event that additional funds are obtained through collaborative or license
arrangements, such arrangements may require the Company to relinquish rights to
certain of its technologies or potential products that it would otherwise seek
to develop or commercialize itself. If funding is insufficient at any time in
the future, the Company may be required to delay, scale back or eliminate some
or all of its research and development programs or cease operations. See "Risk
Factors-- Need for Additional Capital; Uncertainty of Additional Funding."
FUNDING FOR MERCATOR PRIOR TO THE ACQUISITION
In connection with the Acquisition, the Company has committed an aggregate
maximum amount of $6.6 million to fund Mercator's interim working capital needs
(the "Mercator Bridge Financing"),
36
<PAGE>
estimated to be $800,000 per month. The Mercator Bridge Financing will bear
interest at a fixed rate of 10% per annum and would be payable on January 15,
1999, or on such earlier date as provided in the Agreement. Upon closing of the
Offering, the Mercator Bridge Financing will increase Progenitor's purchase
price consideration.
In order to provide funding for the Mercator Bridge Financing, Interneuron
has agreed to provide Progenitor a line of credit of up to an aggregate maximum
amount of $6.6 million bearing interest at 10% per annum (the "Interneuron
Bridge Loan"). The outstanding principal and accrued interest on the Interneuron
Bridge Loan will be repaid upon the closing of the Offering from the net
proceeds of the Offering. See "Use of Proceeds."
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In October, 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION," which establishes an alternative method of accounting
for employee stock compensation plans based on a fair value methodology.
However, the statement allows an entity to continue to use the accounting
prescribed by APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES."
The Company will adopt the disclosure requirements of SFAS No. 123 in fiscal
year 1997, but will elect to continue to measure compensation cost following the
accounting prescribed in APB Opinion No. 25.
37
<PAGE>
BUSINESS
OVERVIEW
Progenitor is engaged in the discovery and functional characterization of
genes to identify targets for the development of new pharmaceuticals. The
Company's initial focus is on the identification of genes important in blood and
immune cell development ("hematopoiesis"), blood vessel development
("angiogenesis"), bone formation ("osteogenesis"), asthma and schizophrenia.
Using its core developmental biology approach and an array of genomics
technologies, Progenitor has identified several potential therapeutic targets,
and intends to accelerate its discovery of potential targets by accessing
complementary gene discovery and characterization technologies. Consistent with
this strategy, Progenitor will complete the acquisition of Mercator concurrently
with the closing of the Offering. Through the Acquisition, Progenitor gains a
complementary gene discovery approach, disease genetics, established discovery
programs and worldwide rights to two genes. The Company intends to use its
integrated genomics system to provide its partners with in-depth functional
information in support of each therapeutic target. Such well-characterized
targets may have the potential to expedite product development and to reduce
development costs.
Using its developmental biology approach and integrated genomics
technologies, Progenitor discovered the B219 leptin receptor gene, for which it
has received two notices of allowance from the USPTO. The B219 leptin receptor
may have therapeutic applications in obesity, diabetes and certain blood and
immune system disorders. Progenitor has entered into a license agreement wth
Amgen relating to certain aspects of the Company's leptin receptor technology.
The Company is seeking collaborations for its retained rights to the leptin
receptor technology, including small-molecule screening and cell sorting.
Progenitor also has discovered a red blood cell growth factor activity that may
have therapeutic applications in cancer, anemias and other diseases, and is
collaborating with Novo Nordisk in the isolation, development and
commercialization of the associated growth factor. In addition, Progenitor has
discovered, in collaboration with Vanderbilt University ("Vanderbilt"), the
developmentally-regulated endothelial locus-1 ("DEL-1") gene, which the Company
believes has roles in angiogenesis and osteogenesis. Progenitor and Vanderbilt
have filed joint patent applications with respect to DEL-1.
On February 14, 1997, Progenitor entered into an agreement to acquire
Mercator concurrently with the closing of the Offering. In addition to obtaining
a disease genetics approach to gene discovery, Progenitor will obtain
technologies that will enhance and extend its genomics capabilities. Progenitor
also will obtain worldwide rights to a gene associated with hereditary
hemochromatosis ("HH"), an iron overload disease, and the EPM1 epilepsy gene,
both discovered using this disease genetics approach. Mercator has seven pending
U.S. patent applications and certain corresponding foreign applications relating
to its genomics technologies and discoveries, and has received notices of
allowance from the USPTO for a patent application relating to the diagnosis of
HH using specific gene markers, and for an application relating to its automated
genomic sequencing technology. A provisional patent application relating to the
EPM1 epilepsy gene is pending in the USPTO. See "--Mercator Acquisition."
BUSINESS STRATEGY
The Company's objective is to identify and functionally characterize genes
as therapeutic targets, and to commercialize those targets through partnerships
with biopharmaceutical firms. A further objective of the Company is to provide
its partners with a comprehensive package of in-depth functional information in
support of each target. The information package may include patents and patent
applications, proof of principle and accompanying data from assays and model
systems, and high-throughput functional assays for drug candidate design and
testing. The Company believes that such a package may increase the likelihood of
obtaining corporate partnerships because it has the potential to expedite
development to the clinical testing stage, and to reduce the need to pay
multiple royalties for separate technology components.
38
<PAGE>
Key elements of the Company's business strategy to achieve this objective
include:
EMPLOY ITS INTEGRATED GENOMICS SYSTEM. The Company intends to implement its
integrated genomics system to accelerate the discovery and characterization of
therapeutic targets for the development of new pharmaceuticals. Using its
complementary gene discovery approaches in developmental biology and disease
genetics, and applying its genomics technologies, the Company believes it can
generate more potential targets with more in-depth functional characterization
than could be achieved through a single approach.
EMPLOY FLEXIBLE DEVELOPMENT AND COMMERCIALIZATION APPROACH. The Company
intends to use a two-tiered approach to developing and commercializing its gene
discoveries. The Company intends to enter into partnerships with
biopharmaceutical firms to support gene discovery programs in specific disease
areas. In parallel, the Company intends to continue to identify and characterize
promising genes that can be developed to a later stage internally before
partnering. Such genes may command higher milestone and royalty payments than
genes derived from programs underwritten by third parties.
PURSUE PATENT PROTECTION. The Company will continue to seek protection for
its discoveries and proprietary technologies through the maintenance of trade
secrets and by filing applications for patents, where appropriate. The Company
believes that its integrated system may improve its ability to identify gene
sequences correlated with biological functions and, therefore, may enhance the
likelihood of ultimately securing patent protection for its discoveries of novel
genes and related proteins and their uses.
MAINTAIN TECHNOLOGICAL COMPETITIVENESS. The Company intends to continue to
access the best available genomics technologies in order to maintain its
competitiveness and ensure a sustainable flow of therapeutic targets. The
Company has entered into and intends to continue to enter into multiple
collaborations, licensing agreements and other business arrangements to gain
access to such technologies.
THE COMPANY'S GENOMICS SYSTEM
Genomics generally refers to technologies and methods directed toward the
identification of the location, structure and function of genes of a given
organism. Many genomics initiatives have focused largely on determining the
location and structure of genes. The Company focuses on elucidating gene
function using approaches that the Company believes may accelerate discovery of
genes with medical relevance. The Company's system combines developmental
biology and disease genetics approaches with genomics capabilities, including
sequencing, positional cloning, statistical analysis, model organisms and assay
development.
Developmental biology is the study of the genetic events that control cell
growth and differentiation in an organism from its beginning as a fertilized egg
through maturation. In the course of development, precursor cells differentiate
into specialized adult cells in discrete stages that are marked by changes in
the expression of a few fundamental genes. The timing and level of expression of
such genes is what distinguishes one cell type from another. Because such genes
are expressed at higher levels during development, and thus may be found more
easily in developing cells and tissues than in mature systems, the Company
believes that developing cells and tissues provide a rich and largely
unexploited source of genes with fundamental biological roles. These genes may
have significance in the treatment and management of diseases characterized by
abnormal cell growth and differentiation, such as cancer, blood and immune
system disorders and osteoporosis. The Company believes that its expertise in
manipulating and analyzing developing cells and tissues may allow it to isolate
and characterize the function of these genes. The Company used its developmental
biology approach to identify the B219 leptin receptor and DEL-1.
The Company combines its developmental biology expertise with expertise in
disease genetics. Disease genetics facilitates the discovery of multiple genes
associated with complex diseases, such as asthma, schizophrenia and epilepsy.
The Company's disease genetics approach incorporates enhanced positional cloning
techniques, carefully selected patient populations, technologies for discovery
and analysis of multiple genetic markers, mutation analyses, and statistically
powerful methods to expedite
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discovery of genes potentially associated with a given disease. The Company used
its disease genetics approach in the discovery of its HH gene. This approach
also was used in the discovery of the EPM1 epilepsy gene.
Bioinformatics serves as an essential interface between the Company's gene
discovery approaches. The Company's bioinformatics system provides a means to
assess gene discoveries in relation to information in public databases, to
correlate discoveries with known sequences, to capture additional intellectual
property based on discovered genes and to expedite evaluation and recognition of
gene discoveries as therapeutic targets. The Company also uses its
bioinformatics system as a discovery tool to capitalize on the wealth of
information being generated by the Human Genome Project and other genomics
programs.
The Company believes that its integrated genomics system provides it with
the capabilities necessary to discover and characterize new candidate genes as
therapeutic targets for major unmet medical needs. Developmental biology
provides the Company access to fundamental genes involved in cell growth and
differentiation. Disease genetics methods facilitate evaluation of genes
discovered using developmental biology. Moreover, the Company's disease genetics
approach provides it with genes directly associated with a specific disease that
can be functionally characterized using developmental biology.
A table entitled "The Company's Genomics System". The table consists of 3
columns and 3 rows. The rows are labeled, top to bottom, with circular icons
(repeated from the inside front cover) and the words "Developmental Biology",
"Genomics Technologies" and "Disease Genetics". The columns are labeled (left to
right) within arrow-shaped bars (pointing left to right): "Discovery Resources",
"Discovery Tools" and "Further Elucidation of Gene Function". The text of the
table is as follows:
<TABLE>
<CAPTION>
FURTHER ELUCIDATION OF GENE
DISCOVERY RESOURCES DISCOVERY TOOLS FUNCTION
<S> <C> <C> <C>
DEVELOPMENTAL BIOLOGY -Stem Cells -Receptor Technologies -Murine Developmental Assays
-Developing Tissues -Gene Expression Analysis - Transgenic and Gene
Knock-Out Technologies
-Disease Models
-Gene Delivery and
Expression
GENOMICS TECHNOLOGIES -Genomics Databases -Bioinformatics
-Computational Biology
- Screening Algorithms
DISEASE GENETICS - Patient DNA Collections -High-Throughput Genomic Sequencing
-Chromosome Analysis
-Gene Mapping
-Genetic Analysis
</TABLE>
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DISCOVERY RESOURCES
The Company believes that, taken together, the following resources provide a
unique platform for the discovery and functional characterization of candidate
genes for therapeutic development.
STEM CELLS
The Company has developed proprietary lines of mouse ("murine") yolk sac
stem cells and murine embryonic stem ("ES") cells, and methods for using them.
These methods enable the Company to take multiple "molecular snapshots" in order
to identify, isolate and study the function of genes associated with critical
stages of development. Because these genes control fundamental changes in the
cells that form major organs, the Company believes that they may be useful in
the treatment and management of diseases characterized by abnormal changes in
the cells of such organs.
The Company uses proprietary techniques to isolate, grow, maintain and
differentiate in culture stem cells derived from the murine yolk sac, a tissue
that surrounds the organism during early development. The yolk sac is a source
of novel hematopoietic and angiogenic genes that may be expressed exclusively or
at enhanced levels during early development. The Company used cultured murine
yolk sac stem cell lines to identify its BFU-e red blood cell growth factor
activity. In May 1995, the Company entered into a collaboration with Novo
Nordisk relating to this growth factor. In November 1996, the Company's licensor
received a notice of allowance from the USPTO for a patent application relating
to cellular compositions derived from the human and murine yolk sac and methods
of obtaining and using such compositions. See "Risk Factors--Dependence on
Collaborators and Licensees" and "--Uncertainty of Patents and Proprietary
Rights," and "--Corporate Agreements--Novo Nordisk Agreement."
In addition to yolk sac stem cells, the Company uses proprietary methods to
exploit murine ES cells for the discovery of novel genes. ES cells have the
capacity to develop into all cells and tissues of the adult organism. This
development occurs in discrete stages that are marked by changes in the
expression of a few fundamental genes. In developing tissues, the genetic
transition from one stage to another is blurred because cells within a tissue
co-exist in a number of different stages. The Company has developed methods to
eliminate this blurring through the isolation, identification, and study of the
differentiation, function and gene expression of single precursor cells.
Furthermore, the Company uses its murine ES system as an in vitro
differentiation model for experimentally manipulating and studying the function
of novel genes from various sources in the context of organ formation. The
Company believes that these proprietary stem cell lines and related methods may
yield potential therapeutic targets for blood, immune, vascular and bone
diseases as well as other disorders.
DEVELOPING TISSUES
The Company uses a variety of developing tissues, including tissues from the
murine liver, pancreas, brain and bone, as sources for the discovery of novel
genes. For example, the B219 leptin receptor was discovered in early
hematopoietic cells found in the developing murine liver, which is a rich source
of genes important in blood and immune system development. The Company also
selectively targets and isolates murine tissue-specific precursor cells. For
example, early endothelial precursor cells are purified and studied for changes
in gene expression as they develop into blood vessels. The Company believes that
genes responsible for blood vessel development may have therapeutic potential in
cancer, cardiovascular disorders and other diseases characterized by abnormal
blood vessel formation or degeneration.
PATIENT DNA COLLECTIONS
The Company uses multiple strategic populations to identify genes associated
with complex diseases. These populations include genetically isolated
populations that have intermarried for centuries, as well as large populations
that have been accessed through national databases. The Company believes that
the analysis of these types of populations provides it with the ability to
narrow the chromosomal regions that are selected for study, which may decrease
the time required to locate genes associated with complex diseases. Clinical
collaborations are in place to obtain approximately 5,500 DNA samples from
selected groups in Denmark, Finland, Israel and the U.S. for the study of genes
associated with asthma, schizophrenia and HH. As of February 28, 1997,
approximately 60% of the samples from these collaborations had
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been collected, and the Company anticipates obtaining the balance within the
next 18 months. These collaborations typically entail relationships with
physicians caring for selected patient groups and access to patient family
histories and samples. Most of these agreements allow the Company to re-study
patients as the research program proceeds. Stringent criteria are applied to
select patients most likely to have a genetic predisposition to a particular
disease, thus reducing the complexity of gene isolation. Once a patient
population is selected, blood samples from patients, their families and control
groups within the population are used for DNA extraction and the establishment
of permanent cell lines. These cell lines become continuing sources for DNA and
RNA extraction and chromosomal analyses. The Company uses DNA samples in linkage
and disease association studies, supplemented by analysis of information from
detailed clinical databases, to discover disease genes.
DISCOVERY TOOLS
The Company employs a variety of discovery tools in order to identify
candidate genes with medical relevance from its discovery resources.
GROWTH FACTOR RECEPTOR TECHNOLOGIES
The Company has developed proprietary gene cloning and screening techniques,
and related bioinformatics capabilities, to identify novel members of a family
of genes that encode receptors for growth factors involved in blood cell
formation as well as in the growth and development of neural and other tissues.
The Company used these technologies to facilitate the discovery of the B219
leptin receptor. The Company intends to use its discovered receptors to identify
and clone novel growth factors, to screen for small molecules that activate or
inhibit receptor functions, and to identify and purify bone marrow cell
populations with potential therapeutic characteristics. In addition, the Company
will seek to identify the therapeutic activities of various forms of these
receptors.
GENE EXPRESSION ANALYSIS
The Company uses a range of molecular biology technologies in proprietary
ways to reveal the expression of genes in single stem cells, developing tissues,
and adult normal and diseased tissues. The Company believes that the use of
these technologies, which allow comparisons of the timing and levels of gene
expression in such cells and tissues, may yield important insights on the
genetic basis of development and disease. The Company applied gene expression
analysis in its discovery of the B219 leptin receptor and DEL-1. The Company
continues to apply these technologies to its various discovery resources, and
has identified several novel genes involved in hematopoiesis and angiogenesis,
which will be subjected to further functional characterization. The Company is
developing bioinformatics applications and high-throughput systems to further
exploit its capabilities in the analysis of gene expression.
BIOINFORMATICS
The Company has implemented and intends to continue to upgrade and integrate
its bioinformatics system to capture, manage and analyze the data from its
discovery programs and to serve as an interface between its developmental
biology and disease genetics approaches. Bioinformatics allows the Company to
correlate and analyze data on its potential gene targets with data from public
and proprietary databases using a combination of standard and proprietary
computational tools and screening algorithms. This correlation and analysis may
provide new insights and guidance to discovery programs, contributing both to
the isolation of new genes and to the elucidation of gene and protein function
and the determination of their novelty. The Company's bioinformatics
capabilities and computational biology tools also allow gene discovery through
analysis of data from the Human Genome Project and other genomic databases.
In order to enhance its bioinformatics capabilities, the Company recently
entered into a purchase and license agreement with Pangea Systems, Inc.
("Pangea") under which it acquired a custom bioinformatics hardware and software
system, technical support, bioinformatics and data management consulting
services and access to system enhancements. This system is compatible with and
expands the Company's existing bioinformatics and general laboratory data
management capabilities. In addition, the Company has entered into a separate
collaboration agreement with Pangea under which the Company will explore
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<PAGE>
potential collaborations that would combine the Company's developmental biology
expertise with Pangea software to produce new bioinformatics products. The
Company also will serve as a beta test site for, and gain an option for
discounted purchase of, new bioinformatics products. See "Technology
Agreements-- Pangea Agreements."
HIGH-THROUGHPUT GENOMIC SEQUENCING
The Company has developed an automated, proprietary system for sequencing
large regions of genomic DNA, and has adapted this for sequencing complementary
DNA ("cDNA"), a DNA molecule that encodes a protein. This system integrates
directed sequencing and bioinformatics to facilitate analysis and comparison of
large regions of human chromosomes and genes discovered in developing cells,
tissues and organs. The Company believes that this system's efficiency in
generating complete human genomic DNA sequences (based on labor and capital
costs incurred to produce a given amount of such sequences) is comparable to
that of systems used by the world's largest, best-equipped genome centers. In
February 1997, the Company received a notice of allowance from the USPTO for a
patent application relating to portions of this genomic sequencing process.
CHROMOSOME ANALYSIS AND GENE MAPPING
The Company possesses a number of technologies that expedite positional
cloning of disease genes from human populations and evaluation of genes
discovered through developmental biology. These include physical mapping to
locate markers, chromosome separation to analyze separately each parental
chromosome for inheritance patterns, and clone coverage to obtain a proprietary
series of overlapping contiguous clones spanning the chromosomal region believed
to contain a disease gene. In addition to these technologies, the Company has
developed a high-throughput approach for identifying and assaying new markers in
any region of genomic DNA. This marker development approach is critical to the
implementation of disease association studies.
GENETIC ANALYSIS
The Company implements several analytical methods for the identification of
genes associated with complex diseases. These methods include linkage analysis,
identity-by-descent and population-based disease association. Linkage analysis
involves determination of the likelihood that a specific genetic marker is
associated with an inherited disease trait. Identity-by-descent analyzes whether
affected individuals carry a particular chromosomal region more often than would
be expected by chance. Identification of such a region that is
identical-by-descent reduces the amount of chromosomal material that must be
searched to locate a specific gene. Population-based disease association
represents a statistically powerful comparison of affected and unaffected
individuals from a given population to determine whether a particular
chromosomal region is found at a higher frequency among affected individuals
than unaffected individuals. The Company believes disease association may be
applicable to a broad range of population types and diseases, including complex
diseases. To provide it with the flexibility necessary to address complicated
patterns of gene inheritance and expression, the Company has developed the
ability to apply alternative analytical methods to a given disease gene
discovery program. The Company used a combination of these methods to discover
its HH gene.
FURTHER ELUCIDATION OF GENE FUNCTION
Many of the tools the Company uses for gene discovery and initial functional
characterization also are used in the further elucidation of gene function. The
Company has built and will continue to supplement a set of developmental and
adult models and systems for in-depth evaluation of the biological roles of its
discoveries. In combination, developmental biology and disease genetics
approaches to gene identification provide initial information on gene function
and medical relevance. A more thorough understanding of biological functions and
therapeutic implications is necessary to determine the appropriateness of genes
as therapeutic targets. The Company has assembled a group of well-characterized
cellular, developmental and adult models and methods to study the role of genes
in tissue and organ formation in order to determine their therapeutic relevance.
These include murine Xenopus (frog) and zebrafish assays, transgenic and gene
knockout technologies and methods of gene delivery and protein expression.
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<PAGE>
The Company believes that genes discovered using developmental biology and
disease genetics are equally amenable to further functional characterization
using these biological models. For example, developing cells, tissues and model
systems allow direct evaluation of the role and potential utility of a gene by
over-expressing or inhibiting the expression of the gene during cell growth,
early organization of tissues and organ formation. In addition, the Company uses
animal and human models of disease, such as tumor implants in animals or tissue
samples from cancer patients, to study the expression and potential therapeutic
relevance of its discoveries. By using this range of models, the Company has
been able to predict and to elucidate further the role of the B219 leptin
receptor in adult hematopoiesis, and the role of DEL-1 in angiogenesis and
osteogenesis.
The Company believes that access to a variety of cellular and animal models
and species is important because different models may reveal different gene
functions. Multiple models also may provide the breadth and flexibility
necessary to develop appropriate assays and screens for exploring diverse
potential effects of genes and high-throughput functional assays for drug
candidate design and testing.
The Company uses the following to accelerate the further elucidation of gene
function:
MURINE DEVELOPMENTAL ASSAYS
The Company's murine ES and yolk sac stem cell lines and related proprietary
methods serve as assay systems for the functional characterization of genes.
Murine stem cells can be manipulated in order to study the effects of the
addition or deletion of specific genes on normal cell function during
development, either in vitro or in vivo, and the effects of candidate molecules
on the genes in question. The Company currently is using this technology to
identify and characterize novel genes, receptors and related proteins involved
in the development of the blood and vascular systems. In addition, the Company
has licensed an ES cell-based assay system from the National Jewish Center for
Immunology and Respiratory Medicine ("National Jewish Center") to support
cloning of an identified murine BFU-e red blood cell growth factor and its human
equivalent. The Company also uses certain murine yolk sac stem cell lines to
evaluate the effects of discovered genes on endothelial cell growth and blood
vessel formation.
The Company has entered into two collaborations to exploit murine
development to evaluate candidate genes from its discovery programs. The first
collaboration, with Cambridge University, allows the Company to prioritize gene
sequences for further functional characterization and to obtain whole-body
evaluation of gene expression during murine development using in situ DNA
hybridization. In situ DNA hybridization, which uses complementary binding of
DNA strands to indicate gene expression at specific sites throughout an animal,
was instrumental in the discovery by Cambridge University researchers of two
genes involved in the early formation of mammalian tissues.
In the second collaboration, with Ohio University, transgenic mice are used
as tools to study the effects of over- and under-expression of genes during
early stages of development through adulthood, which the Company believes may
provide results relevant to human gene function and medical applications.
XENOPUS DEVELOPMENTAL ASSAYS
The Company has entered into a collaboration to identify and funnctionallly
characterize novel hematopoietic genes using developing XENOPUS systems. The
XENOPUS system is useful for assessment of mammalian gene function, particulary
hematopoietic genes, because it can be manipulated easily and produces a large
volume of eggs for insertion and analysis of numerous individual genes.
Therefore, the biological effects of a broad range of mammalian genes can be
assessed in a rapid, high-throughput, reproducible system. Candidate genes that
demonstrate functional activity in this system are subjected to further
characterization.
ZEBRAFISH DEVELOPMENTAL ASSAYS
As part of a research collaboration with Ohio University, the Company has
accessed the use of the zebrafish as an additional high-throughput developmental
biology assay system for gene characterization. Zebrafish have a number of
useful attributes for developmental biology assay systems, including a clear
44
<PAGE>
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.
The Company also has entered into 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 technology maps the expression of known genes during cell differentiation
that when combined with subtractive techniques, allows for the isolation of
novel cDNAs from single, well-characterized dells. These methods provide for
much cleaner sampling of gene expression than can be accomplished in larger
cultures of mixed or non-synchronized cells and facilitate the discovery of
medically relevant genes and their functional characterization.
TRANSGENIC AND GENE KNOCK-OUT TECHNOLOGIES
Transgenic and gene knock-out animal models allow the Company to distinguish
the effects of the gain or loss of function of individual genes from the
background of genetic and cellular activity. Transgenic animals provide a means
to evaluate the functional effects of the selective over-expression of a gene in
living systems. The classical transgenic approach is to produce adult animals
that express a given gene at continuous, high levels. This approach is
time-consuming and unsuitable for high-throughput analyses. The Company's
transgenic technologies minimize these drawbacks through over-expression of
genes at selected stages in early development, and evaluation of the effects on
tissue and organ formation. The Company also produces developmental and adult
gene knock-out models through genetic manipulation of ES cells. These models
allow the Company to evaluate the biological effects of eliminating expression
of a gene of interest. The Company uses a range of techniques to evaluate the
effects of gene over-expression, or lack of expression, in major organs of
mature animal models.
GENE DELIVERY AND EXPRESSION
Gene delivery and expression technologies permit the Company to study the
function of newly discovered genes in a range of cellular and animal models.
Among a variety of systems the Company uses is a proprietary gene delivery
system, T7T7, which the Company developed in collaboration with Ohio University.
T7T7 is a nonviral system that can induce expression of the gene it carries in a
cell's cytoplasm (the area surrounding the nucleus). The T7T7 system works in
both cell cultures and whole organisms, and in both dividing and nondividing
cells. The Company currently is collaborating with Chiron to explore potential
commercialization of the T7T7 system in clinical gene therapy applications. See
"--Corporate Agreements--Chiron Agreement" and "--Patents and Proprietary
Rights."
DISCOVERY PROGRAMS
The Company has established gene discovery programs for the identification
of medically relevant genes in the areas of hematopoiesis, angiogenesis,
osteogenesis and diseases such as HH, asthma, schizophrenia and epilepsy. To
date, these programs have produced five notices of allowance from the USPTO,
three ongoing corporate collaborations and the identification of three novel
gene and protein candidates.
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<PAGE>
A diagram entitled "The Company's Discovery Programs". The diagram lists the
Company's discovery programs in a column on the far left, labeled "Program".
Across the top of the diagram, left to right, are labels indicating development
partner or licensee (if any) and R&D stage of each program, as follows:
"Partner/Licensee", "Discovery Phase", "Gene Identification", "Further
Elucidation of Gene Function" and "Target Development". Arrows extend, left to
right, from each label in the left column to indicate the stage of R&D of each
program, as follows: "Leptin Receptor (protein)"/AMGEN--arrow to "Target
Development"; "Red Blood Cell Growth Factor"/NOVO NORDISK--arrow to "Discovery
Phase"; "T717 Gene Therapy"/CHIRON--arrow to "Target Development; "HH
Diagnostic"--arrow to "Target Development"; "HH/Anemia Therapeutic"--arrow to
"Further Elucidation of Gene Function"; "Leptin Receptor (screening,
sorting)--arrow to "Further Elucidation of Gene Function"; "DEL-1 Gene"-- arrow
to "Further Elucidation of Gene Function"; "Asthma"--arrow to "Discovery Phase";
"Schizophrenia"--arrow to "Discovery Phase"; "Angiogenesis"--arrow to "Gene
Identification"; "Epilepsy (EPM1 Gene)--arrow to "Further Elucidation of Gene
Function"; "Hematopoiesis"--arrow to "Gene Identification". The first 3 programs
and corresponding arrows are in an upper area labeled "Partnered/Licensed
Programs"; the remainder are in the lower area labeled "Programs to be
Partnered".
LEPTIN RECEPTORS
Abnormalities in the expression of leptin and the functioning of leptin
receptors have been implicated in obesity, diabetes and other metabolic
disorders. The Company used its proprietary receptor discovery technology and
murine developmental tissue resources to identify gene sequences that encode
various forms of the B219 leptin receptor. In September and December 1994, the
Company filed U.S. patent applications relating to the B219 leptin receptor, and
recently received notices of allowance from the USPTO for claims within these
applications relating to genes encoding the leptin receptor. In December 1996,
the Company licensed certain aspects of its leptin receptor technology to Amgen
for human therapeutic, diagnostic and prophylactic uses. The Company has
retained exclusive rights to the leptin receptor technology for certain other
uses, including small molecule screening and cell sorting. The Company is
seeking collaborators in these two areas. See "Risk Factors--Dependence on
Collaborators and Licensees," "--Corporate Agreements--Amgen Agreements" and
"--Patents and Proprietary Rights."
The Company recently published findings suggesting that leptin receptors may
play a broad and fundamental biological role. In particular, the Company has
demonstrated in vitro that leptin stimulates the growth and differentiation of
certain hematopoietic cells, including stem cell populations found in adult bone
marrow. In order to characterize further the function of leptin receptors, the
Company is investigating the role of leptin in the hematopoietic and immune
systems, for potential adjunct therapies for cancer and treatments for anemias
and other disorders of the blood and immune system.
RED BLOOD CELL GROWTH FACTOR
The Company believes there is a large and growing market for agents that
stimulate new red blood cell development for patients with inherited anemias and
for patients who are undergoing kidney dialysis, cancer chemotherapy or bone
marrow transplantation. The Company has identified a growth factor activity
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<PAGE>
that stimulates the formation and development of red blood cells from
burst-forming units-erythroid ("BFU-e"), which are the earliest red blood cell
precursors found in adult bone marrow. The identified activity is distinct from
that of erythropoietin and other known growth factors. The Company is
collaborating with Novo Nordisk, through its subsidiary, ZymoGenetics, Inc.
("ZymoGenetics"), for research, development and commercialization efforts
relating to the BFU-e red blood cell growth factor activity identified by the
Company. The Company, along with Novo Nordisk, is seeking to purify the murine
BFU-e red blood cell growth factor and clone its gene and its human equivalent.
See "Risk Factors-- Dependence on Collaborators and Licensees," "--Corporate
Agreements--Novo Nordisk Agreement" and "--Patents and Proprietary Rights."
HEREDITARY HEMOCHROMATOSIS
Hereditary hemochromatosis is an iron overload disease that can lead to
life-threatening conditions such as cirrhosis, liver cancer, diabetes, heart
failure and arthritis. HH is one of the most common genetic disorders, with an
estimated one million affected individuals in the U.S. If the disease is
detected early, the simple treatment of blood removal can prevent serious liver
disease and death. HH is under-diagnosed because it is difficult to correlate
early symptoms, such as general fatigue and abdominal pain, with the disease. In
addition, the confirmatory test for the disease is liver biopsy, an invasive
procedure. The Company targeted HH because it believes that an accurate,
non-invasive diagnosis of HH is an unmet medical need with significant
implications for patient care.
Using its disease genetics approach, the Company has discovered a gene
associated with HH. The Company has pending U.S. and foreign patent applications
relating to certain diagnostic markers for HH, and has received a notice of
allowance from the USPTO for one such application. The Company also has pending
patent applications relating to mutations in its HH gene and relating to the
gene itself. In addition, the Company has pending a patent application on the
transcript map of all genes in the region of the HH gene.
The Company is seeking corporate collaborations to commercialize a
diagnostic test for HH. The Company believes that its HH gene also may yield new
clues regarding the biology of iron metabolism. The Company intends to develop
functional data on the HH gene in this area in an effort to provide insight into
novel therapeutic applications for certain anemias and other diseases associated
with iron metabolism. The Company is seeking collaborations to develop and
commercialize these therapeutic applications. See "--Patents and Proprietary
Rights."
DEL-1 GENE IN ANGIOGENESIS AND OSTEOGENESIS
The Company believes that drugs designed to inhibit the growth of new blood
vessels may represent an important therapeutic approach to treating cancer. The
Company, in collaboration with Vanderbilt, has discovered DEL-1, a gene that
encodes a novel cell-surface protein ("Del-1") involved in the early growth and
development of blood vessels and bone. Since DEL-1 is not expressed in most
normal adult tissues, and Del-1 is accessible in the lining of blood vessels,
the Company believes that Del-1 may be a highly specific, accessible and stable
target for the development of cancer therapeutics, diagnostics and imaging
agents. The Company has shown that mice implanted with human tumors express the
murine DEL-1 gene in developing blood vessels that feed the tumor. The Company
also has demonstrated that a variety of human tumor samples have a higher level
of DEL-1 expression than normal, noncancerous tissues.
Progenitor and Vanderbilt have filed jointly two U.S. patent applications
relating to the DEL-1 nucleotide sequences, the proteins they encode, methods of
expressing functional gene products, methods of using DEL-1 and Del-1, and
genetically-engineered cells. A corresponding international patent application
was published in December 1996. The Company has an exclusive, worldwide license
to Vanderbilt's commercial rights under these patent applications.
The Company also is investigating DEL-1 expression in bone and cartilage
formation for potential therapeutic applications in bone growth and repair, and
osteoporosis. The Company is seeking collaborations to pursue the research,
development and commercialization of DEL-1 and Del-1.
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<PAGE>
EPILEPSY
Epilepsy is a neurological disorder that affects approximately 150 million
people worldwide. In February 1997, the Company obtained an exclusive, worldwide
license to the EPM1 epilepsy gene from Stanford University ("Stanford"). The
EPM1 gene, discovered using a disease genetics approach, implicates a new
biochemical pathway for epilepsy that the Company believes may serve as a target
for therapeutics and diagnostics for the disease. The Company intends to
investigate the EPM1 gene for the development of such therapeutics and
diagnostics. See "--License Agreements--Stanford University."
ASTHMA
Asthma is a respiratory disease that affects approximately 12 million people
in the U.S. Current medications address only symptoms, leaving an unmet medical
need for treatments of the causes of asthma. The Company is attempting to
identify and characterize novel genes as potential therapeutic targets for such
treatments. To this end, the Company is conducting gene identification
activities using its disease genetics approach. In November 1995, the Company
began a program to collect up to 3,000 samples for the identification of genes
associated with asthma from carefully selected populations in Denmark, Israel
and the U.S. As of February 28, 1997, the Company had collected over 1,400
patient samples. In the initial studies performed by the Company using a portion
of the population samples, linkages have been established to specific
chromosomal regions. The Company is applying disease association methods and
chromosome analysis technologies to some of these regions to identify candidate
disease genes for evaluation. The Company is seeking a corporate collaboration
for this program.
SCHIZOPHRENIA
Schizophrenia is a disabling psychiatric disease that affects approximately
50 million people worldwide. Current therapies for schizophrenia include
antipsychotic drugs that treat the symptoms of the disease, often with poor
response or severe side effects. The Company is using its disease genetics
approach to identify genes that play a role in schizophrenia. In March 1996, the
Company began a program to collect patient samples for the identification of
genes associated with schizophrenia. As of February 28, 1997, the Company had
collected over 600 samples, and anticipates collecting up to 1,500 over the
course of the program. Patient samples are being obtained through a number of
research collaborations, including a collaboration with the University Central
Hospital in Finland. This collaboration provides access to the geographically
isolated population of Finland, which is recognized to be a powerful resource
for the study of inherited diseases. The Company's schizophrenia program also
includes populations in the U.S. and Denmark, involving hundreds of affected
sibling pairs and their parents. In addition, samples from more than 70 families
have been obtained from the U.S. National Institute of Mental Health collection
program. The Company is seeking a corporate collaboration for this program.
ANGIOGENESIS
The Company believes that genes important in blood vessel development may
provide unique targets for therapeutic and diagnostic approaches to cancer and
to other diseases characterized by abnormal blood vessel growth, such as
diabetic retinopathy and macular degeneration, diseases that are leading causes
of blindness. As of January 1997, the Company, in collaboration with Vanderbilt,
had identified fifteen novel gene sequences in addition to the DEL-1 gene that
are expressed during the early stages of blood vessel development. These
identified sequences and their biological significance are being evaluated for
functional and therapeutic relevance in collaboration with Vanderbilt. If these
gene sequences are determined to be therapeutically relevant, the Company will
seek to exercise its rights under its agreement with Vanderbilt and enter into
commercial collaborations for further development of these gene sequences as
therapeutic targets. See "--DEL-1 Gene in Angiogenesis and Bone Development" and
"--License Agreements--Vanderbilt Agreement."
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HEMATOPOIESIS
The Company believes that substantial medical needs remain in the treatment
of cancer, hematopoietic and immune system disorders and diseases of the central
nervous system, and that early developmental systems, such as ES, yolk sac and
developing liver cells, provide a key discovery source for therapeutic targets
for these diseases. The Company has developed selective, stage-specific cDNA
libraries from these sources that may enable it to discover novel hematopoietic
growth factors and regulatory molecules for cancer adjunct therapy and other
potential indications. The Company's developmental systems enable gene isolation
during differentiation of rare hematopoietic precursor cells that appear only
briefly during development. The Company, together with its collaborators at the
National Jewish Center and the Ontario Cancer Center, will seek to isolate novel
genes from these cells, determine their function and identify therapeutic uses
for its discoveries.
T7T7 GENE THERAPY
The Company is collaborating with Chiron to explore clinical uses of the
T7T7 gene delivery system. In this collaboration, Chiron has agreed to develop
and potentially to commercialize the T7T7 system for selected applications. The
Company has retained the right to market and license the T7T7 system for other
applications and to use and license joint technologies of the collaboration as
well as technological improvements to the T7T7 system made by Chiron. The
initial T7T7-based gene therapy product being developed by Chiron is intended
for treatment of solid-tumor cancers. See "Risk Factors--Dependence on
Collaborators and Licensees" and "--Corporate Agreements--Chiron Agreement."
With respect to all of the above programs, there can be no assurance that
the Company will be successful in entering into additional collaborative
agreements or that any drugs or other products will be developed or
commercialized, that patents will issue from any of the Company's applications
with respect to such programs or that, if issued, any resulting patents will
provide the Company with meaningful protection or rights. See "Risk
Factors--Early Stage of Development; Uncertainty of Final Product Development,"
"--Dependence on Collaborators and Licensees," "--Uncertainty of Patents and
Proprietary Rights" and "--Dependence upon Research Collaborators and Scientific
Advisors."
CORPORATE AGREEMENTS
AMGEN AGREEMENTS
On December 31, 1996, the Company entered into a license agreement with
Amgen relating to certain aspects of the Company's leptin receptor technology.
The agreement grants Amgen an exclusive, worldwide license, with the right to
grant sublicenses, to use the Company's patent rights relating to the leptin
receptor and antibodies to the leptin receptor to develop products with human
therapeutic, diagnostic and prophylactic uses. In addition, Amgen received a
non-exclusive, worldwide license, with the right to grant sublicenses, to other
patent rights that are necessary or useful to Amgen in the development and
commercialization of the leptin receptor technology in Amgen's field of use. The
Company retained exclusive rights to use its leptin receptor technology for the
following uses: (i) any ex vivo uses for ligand and small molecule drug
screening; (ii) any ex vivo uses for cell sorting; (iii) any anti-sense uses for
human therapeutic, diagnostic and/or prophylactic applications; and (iv) any in
vivo human therapeutic, diagnostic and/or prophylactic applications of
antibodies to the leptin receptor. The Company also retained a non-exclusive
right, with a right to grant licenses, to the leptin receptor technology for
human diagnostic uses to the extent necessary to develop and commercialize
products under the Company's exclusive retained rights, and a non-exclusive
right, without the right to grant licenses, to the licensed technology in
Amgen's field of use for research and development purposes only. Amgen has sole
discretion over the development and commercialization of licensed products.
The license agreement terminates upon the expiration of the last to expire
of any patents that might issue relating to the licensed technology. Amgen may
terminate the agreement earlier by providing written notice of its election to
discontinue all development and commercialization activities relating to the
licensed technology, and also may terminate, in whole or in part, any of the
licenses granted to it under the
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agreement by providing 60 days written notice of termination. In addition, the
Company may terminate the agreement earlier in the event of a material breach by
Amgen of its obligations or any of its representations and warranties under the
agreement. Upon a termination, other than as a result of a material breach by
the Company, Amgen's license rights revert to the Company.
The Company received a $500,000 license fee upon execution of the agreement.
In addition, in the event that Amgen pursues the development of products related
to the licensed technology, the Company would be entitled to receive up to an
additional $22.0 million upon attainment of certain development, regulatory and
commercialization milestones, plus potential royalties on product sales.
Additional milestone payments of up to $12.0 million, plus royalty payments,
could be made to the Company for the development and commercialization of a
subsequent product. An additional $2.0 million in milestone payments, plus
royalties, could be paid to the Company for the regulatory approval and
commercialization of a diagnostic test. There can be no assurance that Amgen
will pursue the development of products related to the licensed technology, or,
if it decides to pursue such development, that it will be successful in
developing or commercializing any products using the Company's leptin receptor
technology or that the license agreement will not terminate prior to its
expiration. As such, there can be no assurance that any milestones will be
achieved or that any royalties or other payments contemplated by the license
agreement will ever be made. See "Risk Factors--Dependence on Collaborators and
Licensees."
In connection with the license agreement, the Company and Amgen entered into
the Amgen Purchase Agreement, which provides for the purchase by Amgen of the
Amgen Shares concurrently with the closing of the Offering. Pursuant to the
Amgen Purchase Agreement, Amgen has agreed for a period of time to limit its
ownership interest in the Common Stock below a specified percentage. Pursuant to
the Amgen Purchase Agreement, Amgen also will receive certain registration
rights with respect to the Amgen Shares. See "Description of Capital
Stock--Registration Rights."
NOVO NORDISK AGREEMENT
In May 1995, the Company and Novo Nordisk, through its subsidiary
ZymoGenetics, entered into a research, development and commercialization
agreement under which Novo Nordisk received an exclusive, worldwide license to
any and all rights of the Company related to the BFU-e red blood cell growth
factor activity identified by the Company for use in any and all human
therapeutic and small molecule drug design uses. An amended and restated
agreement was executed between the parties in January 1997. Under the agreement,
the development effort is divided into two stages. During the first stage, which
has not yet commenced, Novo Nordisk and the Company will attempt to purify,
clone and sequence a BFU-e red blood cell growth factor and other growth factors
with similar hematopoietic functions. If this stage is successfully completed,
Novo Nordisk will have the right to decide whether to proceed to the second
stage, in which the Company may conduct research to establish the biological
function of the growth factor. During the second stage, if commenced, Novo
Nordisk has the option to engage the Company for additional research, which may
entitle the Company to receive up to $4.0 million in research fees from Novo
Nordisk.
The agreement with Novo Nordisk terminates upon the expiration of the last
patent that might issue relating to the Company's growth factor discoveries.
Novo Nordisk also has a right to earlier termination of the agreement upon 30
days notice. If Novo Nordisk exercises this right prior to paying a license fee,
it would be obligated to grant to the Company an exclusive worldwide license to
all of Novo Nordisk's rights arising from the research conducted pursuant to the
agreement to make, use and sell related products. In the event that Novo Nordisk
and the Company had developed joint technology under the agreement prior to such
early termination, the Company would be obligated to pay Novo Nordisk royalties
for any sales of products made using the licensed technology.
If Novo Nordisk decides to develop any licensed products, it will be
obligated to pay the Company a one-time license fee of $2.0 million and up to an
additional $22.0 million for each product if certain clinical testing,
regulatory and marketing approval milestones are met. In addition, the Company
has the right to receive royalties for sales of any resulting products. In the
event that all milestones are reached with
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respect to the BFU-e red blood cell growth factor, the Company would receive an
aggregate of $28.0 million under the agreement, plus royalties on any net
product sales. Novo Nordisk has the right to manufacture and market any such
products on an exclusive worldwide basis. There can be no assurance that the
Company or Novo Nordisk will successfully clone the murine BFU-e red blood cell
growth factor or its human equivalent, or, if the factor is cloned, that Novo
Nordisk will continue the program, that the license agreement will not otherwise
be terminated prior to its expiration, that the Company will be able to clarify
the biological function of the growth factor or that Novo Nordisk will be
successful in developing and commercializing any drugs or other products
utilizing the BFU-e red blood cell growth factor. As such, there can be no
assurance that any milestones will be achieved, or that any royalties or other
payments contemplated by the agreement will ever be made. See "Risk
Factors--Dependence on Collaborators and Licensees."
CHIRON AGREEMENT
In March 1995, the Company entered into an agreement with Chiron for the
development and commercialization of the T7T7 gene delivery system for selected
applications. The agreement grants Chiron an exclusive, worldwide license to the
T7T7 gene delivery system for (i) all products carrying a single specified gene,
which has potential applications for tumor ablation; (ii) four infectious
disease vaccine constructs; (iii) products used for the prevention, therapy or
diagnosis of human restenosis; (iv) five additional constructs designated by
Chiron; and (v) additional constructs, with certain limitations, that may be
designated by Chiron upon payment of a fee for each such additional construct.
The Company also may grant licenses to third parties to constructs for fields of
use not licensed to and not in conflict with the exclusive licenses granted to
Chiron. Any such third-party licenses are subject to Chiron's right of first
refusal for any construct of the T7T7 gene delivery system not already covered
by the agreement for the development of a noninfectious disease vaccine.
Pursuant to the agreement, Chiron and the Company may develop jointly the T7T7
tumor ablation product for the treatment of cancer. The parties will own jointly
all preclinical and clinical data from the collaboration, which may be used by
either party for any purpose subject to the exclusive licenses granted to
Chiron. The Company has the right to collaborate and jointly invest in Chiron's
development efforts on the tumor ablation product, with the Company's level of
participation in any resulting product revenues based on its relative
contribution to development costs. Under the agreement, Chiron has committed to
use reasonable efforts to commercialize one or more licensed products and has
certain manufacturing rights and obligations for any resulting products. If
Chiron chooses to abandon development of a construct, its license rights
terminate with respect to that construct. Subject to the foregoing rights, the
agreement provides that each party will retain ownership of all inventions (and
any related patents) made solely by its employees and arising from the
activities performed under the agreement.
The agreement terminates upon the later of the expiration of the patents
upon which it is based or, within any given country, ten years after the first
commercial sale of a product developed under the agreement within such country.
In such events, Chiron's affected license rights become fully paid and non-
exclusive. Chiron also may terminate the agreement earlier with respect to any
particular construct upon 30 days notice, and either party may terminate the
agreement in the event of a material breach by the other party of its
obligations under the agreement. In such events, Chiron's license rights would
revert to the Company, but Chiron would retain exclusive rights to inventions
and discoveries made solely by its employees, and joint rights to discoveries
made jointly with the Company. Chiron also would be required to pay the Company
all royalties accrued before termination.
The Company received a $2.5 million payment upon execution of the agreement
as a license fee and reimbursement of past research and development expenses,
and an additional $500,000 in January 1996 for continued funding of the
Company's research and development expenses. The Company has paid Chiron
$750,000 pursuant to the agreement, in full satisfaction of the Company's
obligation to reimburse Chiron for certain start-up manufacturing costs. Under
the agreement, the Company is entitled to receive up to an additional $4.3
million in various fees and milestone payments for each licensed product if all
specified research, clinical development, regulatory and marketing approval
milestones are achieved, plus additional
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fees for development of specific constructs and for the first product developed.
The agreement encompasses a minimum of eleven potential products that Chiron may
develop. In the event that all such milestones are achieved and all contemplated
products reach market, the Company would receive an aggregate of $51.3 million
(including payments already received) plus royalties on net product sales. There
can be no assurance that the Company and Chiron will be successful in developing
or commercializing any drugs or products utilizing the T7T7 gene delivery system
or that the agreement will not terminate prior to its expiration. As such, there
can be no assurance that any milestones will be achieved or that any royalties
or other payments contemplated by the agreement will ever be made. See "Risk
Factors--Dependence on Collaborators and Licensees."
TECHNOLOGY AGREEMENTS
AFFYMETRIX AGREEMENTS
The Company has entered into two agreements with Affymetrix, Inc.
("Affymetrix") with respect to a technology that has the potential to expedite
the discovery of candidate genes in disease association studies. Pursuant to one
agreement, Affymetrix and the Company have agreed to use a DNA-enrichment method
developed by the Company in combination with Affymetrix' GeneChip-TM- technology
to evaluate the utility of this combined technology for identifying DNA
variations in expressed genes. Once identified, the Company believes that such
variations may accelerate the identification of candidate genes and chromosomal
regions that are implicated in human disease. In connection with a separate
agreement, the Company recently has completed a study that validates the use of
the combined technology in identifying chromosomal regions that harbor gene
mutations in human cancers. The Company believes that the combined technology
may be applicable to a wide range of diseases that exhibit genetic
predisposition.
PANGEA AGREEMENTS
The Company has entered into purchase and collaboration agreements with
Pangea relating to the licensing and further development of advanced
bioinformatics technology. Pursuant to the agreements, the Company purchased
bioinformatics products that combine hardware and software for use in
information management and high-throughput analysis. The Company will serve as a
principal test site for new systems and technologies developed by Pangea, and
will be eligible to purchase new products at a substantial discount. The Company
and Pangea also will explore potential collaborations that would combine the
Company's developmental biology expertise with Pangea software to produce new
bioinformatics products.
LICENSE AGREEMENTS
VANDERBILT UNIVERSITY
In July 1995, the Company entered into a license agreement with Vanderbilt
pursuant to which the Company obtained an exclusive worldwide license to
Vanderbilt's commercial rights under a jointly owned patent application to
develop and market products and processes utilizing technology relating to DEL-1
and Del-1. Under this agreement, the Company is obligated to pay royalties on
any resulting product sales. Vanderbilt University may terminate the agreement
after three years if the Company has not made adequate efforts to commercialize
products based on the gene.
STANFORD UNIVERSITY
In February 1997, the Company entered into a license agreement with Stanford
for an exclusive worldwide license to Stanford's commercial rights under a
patent application relating to the EPM1 epilepsy gene, which allows the Company
to develop and market diagnostic and therapeutic products relating to the gene.
Under this agreement, the Company is obligated to pay certain patent expenses,
royalty milestones on patents, and royalties on any resulting products.
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OHIO UNIVERSITY
The Company entered into licensing agreements with Ohio University as of
January 1992 relating to yolk sac stem cells and as of April 1993 relating to
the T7T7 gene delivery system. The licensing agreements, as amended, grant the
Company an exclusive worldwide license to the yolk sac stem cells and T7T7 gene
delivery system, respectively, and related technologies covered in Ohio
University's existing patents and patent applications, as well as any technology
developed from related sponsored research. In exchange, the Company is obligated
to pay Ohio University certain license and research fees as well as royalties
based on net sales of any resulting products. In addition, under the 1992
license agreement and the terms of a related stock purchase agreement, The Ohio
University Foundation received a 5% equity interest in the Company subject to
certain anti-dilution protection and was granted the right to purchase 25,000
shares of the Company's Common Stock in the event of an initial public offering,
merger or other similar corporate transaction at a price equal to 50% of the
anticipated public offering price or merger or other consideration, as
applicable. The Ohio University Foundation has agreed to exercise such right to
purchase 25,000 shares immediately prior to the Offering at a price equal to
$5.50 per share. The Ohio University Foundation also has the right to designate
two representatives to the Board of Directors of the Company until the Company
consummates an initial public offering. See "Certain Transactions--The Ohio
University Foundation."
ADVANCED TECHNOLOGY PROGRAM GRANT
In November 1994, the Company was awarded a $2.0 million, three-year grant
to study yolk sac-derived endothelial cells for therapeutic applications under
the ATP. The grant specifies the research and development of therapeutics based
on an understanding of the biology of development of endothelial cells. The
research agreements between the Company and its subcontractors under the ATP
grant (the University of Colorado, The University of Wisconsin, Ohio University,
Vanderbilt University and Bio Support, Inc.) require that all parties assign
rights to any inventions made by them under the grant to the Company. The ATP
grant provides that the Company retains full rights to any intellectual property
developed as part of the project.
The ATP grant is administered by United States Department of Commerce. As of
February 28, 1997, the Company had received $1,120,465 under the ATP grant, and
$116,997 in additional funds were payable to the Company. Under the terms of the
grant, the Company is scheduled to receive an additional $292,000 payable in two
installments for the period from February 28, 1997 through May 31, 1997. The
balance of the grant, $518,000, is payable in equal quarterly installments
during the period from June 1, 1997 to May 31, 1998. The grant is subject to
yearly appropriations by the United States Congress for the ATP program, and
legislation has been introduced to eliminate the program. The National Institute
of Standards and Technology has informed the Company that, although it could not
comment on the availability of funds for the Company's grant for the year ending
May 31, 1998, there are sufficient funds in the ATP grant program's current
budget to support grant payments for currently funded grants for the year ending
May 31, 1997, and that therefore it is likely that the Company will receive
grant payments expected through May 31, 1997. There can be no assurance,
however, that funding for the ATP program will not be reduced or eliminated at
any time.
PATENTS AND PROPRIETARY RIGHTS
Patents and licenses are important to the Company's businesses. The
Company's policy is to file patent applications to protect technology,
inventions and improvements to inventions that are considered important to the
development of its business. The Company also relies on trade secrets, know-how,
continuing technological innovations and licensing opportunities to develop and
maintain its competitive position. To date, the Company has filed or exclusively
licensed a number of pending patent applications in the USPTO relating to its
various technologies and discoveries, as well as foreign counterparts of certain
of these applications in Europe, Japan and certain other countries. At the
present time, Progenitor owns, or has exclusively licensed a number of pending
U.S. patent applications, and certain corresponding foreign applications,
relating to its various technologies and discoveries. These pending patent
applications include
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the following: eight U.S. applications, owned by Progenitor, relating to certain
leptin receptors (including various isoforms of the leptin receptor), including
two patent applications filed in September and December 1994 relating to nucleic
acid molecules that encode the B219 leptin receptor, for which the USPTO issued
two notices of allowance, one in September 1996, and one in January 1997; two
U.S. patent applications, co-owned with and licensed from Vanderbilt, relating
to DEL-1; one U.S. application, licensed from Ohio University, relating to the
T7T7 gene delivery system; and one allowed U.S. application, licensed from Ohio
University, relating to yolk sac stem cells. No U.S. or foreign patent has
issued to Progenitor to date. However, Progenitor has an exclusive license from
Ohio University to one issued U.S. patent covering a method of providing
tissue-specific expression of exogenous genetic material in a mammal by
genetically transformed embryonic carrier cells such as yolk sac cells, and one
issued U.S. patent relating to the T7T7 gene delivery system. Progenitor also
has licensed, on a nonexclusive basis, from Associated Universities, Inc. and
the Wisconsin Alumni Research Foundation, respectively, two issued U.S. patents
relating to the T7T7 gene delivery program.
Through its pending acquisition of Mercator, Progenitor will obtain
Mercator's patent and proprietary rights. Mercator presently has pending seven
U.S. patent applications and certain corresponding foreign applications. These
patent applications relate to the following four basic inventions: (i) a method
for conducting large-scale genomic sequencing, for which Mercator has received a
notice of allowance from the USPTO; (ii) a method for diagnosing HH utilizing
genetic markers associated with the HH gene region, for which Mercator has
received a notice of allowance from the USPTO; (iii) HH diagnostic markers and
methods; and (iv) an HH gene, cloned versions of the gene, expression of the
gene product in recombinant form, and various uses of the gene in the
development of research tools, diagnostics and therapeutics. Also, among the
seven pending applications, Mercator has a patent application relating to a
transcript map of all genes in the region of the HH gene. In addition, Mercator
has an exclusive license from Stanford for a provisional U.S. patent application
relating to the EPM1 epilepsy gene.
Mercator also has developed a number of research methods and tools that
currently are held as trade secrets. Examples of these technologies are an
improved, integrated approach to clone coverage and physical mapping,
high-throughput genotyping systems, proprietary screening probes that allow
improved gene isolation across a given genomic region, a large-scale method for
evaluating DNA sequence variation across many individuals, and computer software
to speed the discovery of sequence differences in genomic DNA.
The Company's success will depend to a significant extent on its ability to
obtain and enforce patents, maintain trade secret protection and operate without
infringing on the proprietary rights of third parties. Because the patent
positions of biotechnology and pharmaceutical companies can be highly uncertain
and frequently involve complex legal and factual questions, the breadth of
claims allowed in biotechnology and pharmaceutical patents or their
enforceability cannot be predicted with certainty. Commercialization of
pharmaceutical products can be subject to substantial delays as a result of the
time required for product development, testing and regulatory approval. The
value of any patents issued or licensed to the Company may depend upon the
remaining term of patent protection available at the time products that utilize
the patented technology are commercialized.
In March 1996, Progenitor's international patent application disclosing
certain aspects of its leptin receptor technology was published. The Company
believes that there may be significant litigation regarding patent and other
intellectual property rights relating to leptin and leptin receptors. The
Company is aware that Millennium has filed a patent application relating to a
receptor for leptin and its use in obesity applications, and has licensed to
Hoffmann-La Roche Inc. rights to develop certain therapeutics for obesity using
Millennium's discovery of a leptin receptor. There can be no assurance that
Millennium's patent application, or additional patent applications filed by
Millennium or others, will not result in issued patents covering a leptin
receptor, the leptin protein or other ligands, or any of their respective uses
including obesity. There can be no assurance that the invention by Millennium
will be accorded an invention date later than Progenitor's invention date, that
any patent will issue to Progenitor or that any such patent issued to Progenitor
would be broad enough to cover leptin receptors of Millennium or others.
Progenitor's failure to obtain a patent on a leptin receptor, or its failure to
obtain a patent that covers the leptin
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receptors of Millennium or others, or the issuance of a patent to a third party
covering a leptin receptor, the leptin protein or other ligands, or any of their
respective uses, could have a material adverse effect on the Company's business,
financial condition and results of operations.
A number of other groups are attempting to identify partial gene sequences
and full-length genes, the functions of which have not been characterized. The
public availability of partial gene sequence information before the Company
applies for patent protection on a corresponding full-length gene could
adversely affect the Company's ability to obtain patent protection with respect
to such a gene. To the extent any patents issue to other parties on such partial
or full-length genes, and as other patents issue with the expansion of the
biotechnology industry, the risk increases that the potential products and
processes of the Company or its collaborators or licensees may give rise to
claims of patent infringement.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to human therapeutic uses. Substantial periods of time pass before the USPTO
responds to patent applications. In addition, the coverage claimed in a patent
application can be significantly reduced before a patent is issued.
Consequently, the Company does not know whether any of its pending or future
patent applications will result in the issuance of patents or, if any patents
are issued, whether the patents will be subjected to further proceedings
limiting their scope, and whether they will provide significant proprietary
protection or competitive advantage, or will be circumvented or invalidated.
Because patent applications in the United States are maintained in secrecy until
patents issue and patent applications in certain other countries generally are
not published until more than 18 months after they are filed, and since
publication of discoveries in scientific or patent literature often lags behind
actual discoveries, the Company cannot be certain that it or any licensor was
the first creator of inventions covered by pending patent applications or that
it or such licensor was the first to file patent applications on such
inventions.
There can be no assurance that the Company's patents, if issued, would not
be held invalid or unenforceable by a court or that such patents would cover
products or technologies of the Company's competitors. Competitors or potential
competitors may have filed patent applications or received patents, and may
obtain additional patents and proprietary rights relating to compounds or
processes competitive with those of the Company. To protect its proprietary
rights, the Company may be required to participate in interference proceedings
declared by the USPTO to determine priority of invention, which may result in
substantial cost to the Company. Moreover, even if the Company's patents issue,
there can be no assurance that they will provide sufficient proprietary
protection or will not be later limited, circumvented or invalidated.
Accordingly, there can be no assurance that the Company will develop proprietary
technologies that are patentable, that the Company's patent applications will
result in patents being issued or that, if issued, patents will afford
protection against competitors with similar technology or products, nor can
there be any assurance that the Company's patents will not be held invalid by a
court of competent jurisdiction.
In addition to patent protection, the Company also relies to a significant
extent upon trade secret protection for its unpatented confidential and
proprietary information, including many of the Company's key discovery
technologies. There can be no assurance that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets or disclose such
technology. To protect its trade secrets, the Company requires its employees,
consultants, scientific advisors and parties to collaboration and licensing
agreements to execute confidentiality agreements upon the commencement of
employment, the consulting relationship or the collaboration or licensing
arrangement with the Company. In the case of employees, the agreements also
provide that all inventions resulting from work performed by them while employed
by the Company will be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection of
the Company's trade secrets or adequate remedies in the event of unauthorized
use or disclosure of such information, that the Company can meaningfully protect
its rights in such unpatented proprietary technology through other means, that
any obligation to maintain the confidentiality of such proprietary technology
will not be breached by employees, consultants, advisors, collaborators
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or licensees or others, or that others will not independently develop
substantially equivalent technology. The loss of trade secret protection of any
of the Company's key discovery technologies would materially and adversely
affect the Company's competitive position and could have a material adverse
effect on the Company's business, financial condition and results of operations.
Finally, disputes may arise as to the ownership of proprietary rights to the
extent that outside collaborators, licensees or consultants apply technological
information developed independently by them or others to Company projects or
apply Company technology to other projects and, if adversely determined, such
disputes could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company may incur substantial costs if it is required to defend itself
in patent suits brought by third parties or if the Company initiates such a suit
to enforce the Company's patents or to determine the validity, scope or
enforceability of other parties' proprietary rights. Any legal action against
the Company or its collaborators or licensees claiming damages and seeking to
enjoin commercial activities relating to the affected products and processes
could, in addition to subjecting the Company to potential liability for damages,
require the Company or its collaborators or licensees to obtain a license or
licenses in order to continue to manufacture or market the affected products and
processes or require the Company or its collaborators or licensees to cease
doing so. There can be no assurance that the Company or its collaborators or
licensees would prevail in any such action or that any license required under
any such patents would be made available on commercially acceptable terms, if at
all. Any adverse outcome of such litigation could have a material adverse effect
on the Company's business, financial position and results of operations. In
addition, if the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's managerial and financial resources. The
Company is unable to predict how courts will resolve any future issues relating
to the validity, scope or enforceability of its patents should they be
challenged.
It is uncertain whether any third-party patents will require the Company to
alter its products or processes, obtain licenses, cease certain activities or
pay substantial damages. If any licenses are required, there can be no assurance
that the Company will be able to obtain any such license on commercially
acceptable terms, if at all. Failure by the Company or its collaborators and
licensees to obtain a license to any technology required to commercialize the
Company's discoveries may have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Uncertainty of Patents and Proprietary Rights."
COMPETITION
Research in the field of genomics is highly competitive. Competitors of the
Company in the genomics area include, among others, public companies such as
Genome Therapeutics Corp., Human Genome Sciences, Inc., Incyte Pharmaceuticals,
Inc., Microcide Pharmaceuticals, Inc., Millennium, Myriad Genetics, Inc. and
Sequana Therapeutics, Inc., as well as private companies and major
pharmaceutical companies and universities and other research institutions,
including those receiving funding from the federally funded Human Genome
Project. The Company's competitors may discover, characterize or develop
important genes in advance of the Company, which could have a material adverse
effect on any related Company discovery program. The Company expects competition
to intensify in genomics research as technical advances in the field are made
and become more widely known.
In addition, the Company faces, and will continue to face, intense
competition from pharmaceutical and biotechnology companies, as well as academic
and research institutions and governmental agencies. The Company is subject to
significant competition from organizations that are pursuing the same or similar
technologies as those which constitute the Company's discovery approaches, and
from organizations that are pursuing pharmaceutical or diagnostic products that
are competitive with the Company's or its collaborators' potential products.
Many of the organizations competing with the Company have greater capital
resources, larger research and development staffs and facilities, greater
experience in drug discovery and development, the regulatory approval process
and pharmaceutical product manufacturing, and greater marketing capabilities
than the Company. See "Risk Factors--Intense Competition; Rapid Technological
Change."
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The Company is and will continue to be reliant on its collaborators and
licensees for support of its programs, including preclinical and clinical
development, manufacturing and marketing of its initial products. The Company's
present and future collaborators and licensees are now conducting or are
expected to conduct, multiple product development efforts within disease or
technology areas that are the subject of their respective alliances with the
Company. Any product candidate or technology of the Company may therefore be
subject to internal competition with a potential product under development or a
technology platform under evaluation by a collaborator or licensee. See "Risk
Factors--Dependence on Collaborators and Licensees."
GOVERNMENT REGULATION
Prior to marketing, any new drug or other product developed by the Company
or its collaborators or licensees must undergo an extensive regulatory approval
process in the U.S. and other countries. This regulatory process, which includes
preclinical studies and clinical trial, and also may include post-marketing
studies of each product candidate to establish its safety and efficacy, usually
takes many years and requires the use of substantial resources. Preclinical
studies include laboratory evaluations and will require animal tests conducted
in accordance with the FDA's cGLP regulations to assess the product's potential
safety and efficacy. Data obtained from preclinical studies and clinical trials
are susceptible to varying interpretations that could delay, limit or prevent
regulatory approval. Delays or rejections also may be encountered based upon
changes in the FDA's policies for drug or biologic approval during the period of
product development and FDA regulatory review of each NDA submitted in the case
of new pharmaceutical agents, or PLA in the case of biologics. Product
development of new pharmaceuticals is highly uncertain, and unanticipated
developments, clinical or regulatory delays, unexpected adverse side effects or
inadequate therapeutic efficacy could slow or prevent the product development
efforts of the Company and its collaborators or licensees, and have a materially
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that regulatory approval will be obtained
for any drugs or other products developed by the Company or its collaborators or
licensees. Furthermore, regulatory approval may entail limitations on the
indicated use of a drug or other product. Because certain of the products likely
to result from the Company's discovery programs involve the application of new
technologies and may be based upon a new therapeutic approach, such products may
be subject to substantial additional review by various government regulatory
authorities other than the FDA and, as a result, regulatory approvals may be
obtained more slowly than for products using conventional technologies. Under
current guidelines, proposals to conduct clinical research involving gene
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 the Company or its collaborators or licensees
conform to the FDA's cGMP regulations which must be followed at all times. In
complying with cGMP requirements, manufacturers must expend time, money and
effort on a continuing basis in production, record keeping and quality control.
Manufacturing establishments, both domestic and foreign, are subject to
inspection by or under the authority of the FDA and by other federal, state and
local agencies. Failure to pass such inspections may subject the manufacturer to
possible FDA actions such as the suspension of manufacturing, seizure of the
product, withdrawal of approval or other regulatory sanctions. The FDA also may
require the manufacturer to recall a product from the market.
Discovery of previously unknown problems with a product may have adverse
effects on the Company's business, including withdrawal of the product from the
market. Violations of regulatory requirements at any stage, including during
preclinical studies and clinical trials, the approval process or post-approval,
may
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result in various adverse consequences to the Company, including the FDA's delay
in approval of or refusal to approve a product, withdrawal of an approved
product from the market or the imposition of criminal penalties against the
manufacturer and NDA or PLA holder. The Company has not submitted an IND for any
product candidate, and no product candidate has been approved for
commercialization in the U.S. or elsewhere. The Company intends to rely
primarily on its collaborators or licensees to file INDs and generally direct
the regulatory approval process. No assurance can be given that the Company or
any of its collaborators or licensees will be able to conduct clinical trials or
obtain the necessary approvals from the FDA or other regulatory authorities for
any products. Failure to obtain required governmental approvals will delay or
preclude the Company's collaborators or licensees from marketing drugs or other
products developed by the Company or will limit the commercial use of such
products and could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other federal, state and local regulations. The Company's
research and development activities involve the controlled use of hazardous
materials, chemicals, biological materials and radioactive compounds. Although
the Company believes that its safety procedures for handling and disposing of
such materials comply with the current standards prescribed by state and federal
laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident, the
Company could be held liable for any resulting damages and any such liability
could exceed the Company's resources. See "Risk Factors--Government Regulation"
and "--Hazardous and Radioactive Materials; Environmental Matters."
PRODUCT LIABILITY INSURANCE
The testing, manufacture, marketing and sale of pharmaceutical and other
products entail the inherent risk of liability claims or product recalls and
associated adverse publicity. Clinical trials and sales by the Company or its
collaborators or licensees of potential products incorporating the Company's
discoveries may expose the Company to potential liability resulting from the use
of such products. Such liability might result from claims made directly by
consumers or by regulatory agencies, pharmaceutical companies or others selling
such products. The Company currently has a limited amount of clinical trial and
product liability insurance coverage through Interneuron. The Company will seek
to obtain its own coverage upon the closing of the Offering and to maintain and
appropriately increase such coverage as clinical development of any product
candidates progresses and if and when its products are ready to be
commercialized. There can be no assurance that the Company will be able to
obtain such insurance or, if obtained, that such insurance can be acquired at a
reasonable cost or in sufficient amounts to protect the Company against such
liability. Certain of the Company's license agreements require the Company to
indemnify licensors against product liability claims arising from products
developed using the licensed technology. Also, certain of these agreements and
other collaborative and license agreements require the Company to maintain
minimum levels of insurance coverage. The failure to maintain product liability
coverage, or the occurrence of any product liability claim, or a recall of any
products of the Company or its collaborators or licensees could inhibit or
prevent commercialization of products being developed by the Company and could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, to the extent any product liability
claim exceeds the amount of any insurance coverage, the Company's business,
financial condition and results of operations could be materially and adversely
affected. See "Risk Factors--Risk of Product Liability."
HUMAN RESOURCES
As of February 28, 1997, the Company had 68 full-time employees, of whom 22
hold Ph.D. or M.D. degrees. Of the Company's full-time employees, 56 are engaged
in research and development activities and 12 are engaged in business
development, finance and administration. None of the Company's employees is
covered by a collective bargaining agreement, and the Company has never
experienced any strike or work stoppage. The Company believes its relations with
its employees to be good.
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In order to support its operations, the Company must hire and retain
additional research, management, administrative and financial personnel. In
addition, in connection with the Acquisition and the potential relocation of the
Company's facilities, the Company may be required to expend substantial
additional resources to create a combined personnel base. The Company's success
will depend in large part on its ability to attract and retain key employees and
scientific advisors. Competition among biotechnology and pharmaceutical and
other companies for highly skilled scientific and management personnel is
intense. There can be no assurance that the Company will be successful in
retaining its existing personnel or advisors, or in attracting additional
qualified employees. See "Risk Factors--Dependence on Collaborators and
Licensees," "--Dependence on Research Collaborators and Scientific Advisors,"
"--Dependence on Key Personnel" and "Risks Associated with the Acquisition of
Mercator."
FACILITIES
The Company currently occupies approximately 19,000 square feet of
laboratory and office space in a single facility in Columbus, Ohio. Total lease
payments for fiscal 1996 were $154,175. Payments for the quarter ended December
31, 1996 were $37,548. In addition, the Company leases a separate facility for
laboratory animals with approximately 7,000 square feet of space from The Ohio
State University. Space in this facility is leased on 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 quarter ended December 31, 1996 were $27,549.
The current lease on the laboratory and office facility expires on December 31,
1997. The Company also leases and occupies facilities consisting of
approximately 25,000 square feet of research laboratory and office space located
in Menlo Park, California. The lease expires in 1998 and contains provisions for
two one-year renewal options and an option to lease an additional 10,000 square
feet. In the event that the Company does not exercise its option to lease the
additional space and the space remains vacant, the Company retains a reccurring
right of first refusal. Total base payments for fiscal 1996 were $176,040.
Payments for the quarter ended December 31, 1996 were $48,690. The Company
expects that, with these expansion rights, its current facilities will be
adequate to serve its needs for the foreseeable future. Although the Company
believes that these facilities will be adequate to meet its projected needs for
the next two years, it may be required to locate additional or alternative
facilities within this time frame.
In connection with the acquisition of Mercator, the Company is considering
relocating its facilities in whole or in part to the San Francisco Bay Area.
Such a relocation could involve substantial nonrecurring charges including lease
termination costs, costs of moving records and equipment and employee severance
and relocation payments. These and related charges could have a material adverse
effect on the Company's results of operations. See "Risk Factors--Risks
Associated with the Acquisition of Mercator" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SCIENTIFIC ADVISORY BOARD
The Company has established a group of scientists and physicians to advise
it on scientific and medical matters in the areas of the Company's business. The
Progenitor Scientific Advisory Board (the "SAB") includes experts in
developmental biology, hematopoiesis, hematologic oncology, cardiovascular
medicine, immunology, mammalian recombinant gene transfer and transgenics. The
Company periodically consults with members of the SAB regarding the Company's
current and future research and development activities and focus.
The Progenitor Scientific Advisory Board is composed of the following
individuals by scientific discipline:
HEMOTOLOGY/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
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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.
Gerome E. Groopman, M.D., is Chief of the Division of Hematology/Oncology at
the New England Deaconess Hospital in Boston, and Professor of Medicine at
Harvard Medical School. Dr. Groopman's major research interests include the
relationship among retroviruses, immune function and cancer in AIDS,
hematopoiesis, polypeptide growth factors and lymphokines. Dr. Groopman
currently serves as Chairman of the FDA Biological Response Modifiers Advisory
Committee, as a director of the American Foundation for AIDS research and on the
National Heart, Lung and Blood Institute's AIDS Advisory Committee.
DEVELOPMENTAL BIOLOGY
Robert Auerbach, Ph.D., is the Harold R. Wolfe Professor of Zoology,
University of Wisconsin-Madison, and Director, Center of Developmental Biology.
Dr. Auerbach has authored more than 150 publications and has a particular
interest in hematopoietic and endothelial differentiation during embryogenesis
including development of the extraembryonic yolk sac.
Morris Laster, M.D., joined the Castle Group, Ltd. to identify and
commercialize new technologies. Dr. Laster was instrumental in founding
Progenitor, Inc., Neose Pharmaceuticals, Inc., and Xenograft, Inc. Dr. Laster
received his medical degree from Downstate Medical Center in New York and
performed a surgical internship at Case Western Reserve University.
Thomas Quertermous, M.D., is Professor of Molecular Physiology and
Biophysics, Vanderbilt University, Professor of Medicine, Vanderbilt University
Medical School, and Chief, Division of Cardiology, Vanderbilt University
Hospital. He was previously a member of the Clinical and Research faculty at
Harvard Medical School and the Massachusetts General Hospital. Dr. Quertermous
heads a leading laboratory studying the molecular basis of endothelial cell
biology.
Axim Surani, Ph.D., is Professor of Developmental Biology, Cambridge
University, 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, CO, 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 Assistant Professor in Pediatrics, Harvard Medical
School, and is a member in the Program in Cell and Developmental Biology. Dr.
Zon is an Institute Investigator of the Howard Hughes Medical Institute. Dr.
Zon's laboratory studies the molecular biology of hematopoiesis and events in
the development of the hemotopoietic system during embryogenesis.
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The current Mercator Scientific Advisory Board is composed of the following
individuals:
J. MICHAEL BISHOP, M.D., is highly recognized for his contribution in the
field of tumor viruses. Dr. Bishop received the Nobel prize (with Harold E.
Varmus) in Physiology and Medicine in 1989 for his work on oncogenes. He is
currently a Professor of Biochemistry & Biophysics at the University of
California at San Francisco, where he also serves as Director of the C.W. Hooper
Research Foundation in the Department of Microbiology and Immunology. Dr. Bishop
is also a member of the National Academy of Sciences.
DAVID R. COX, M.D., PH.D., a co-founder of the Company and director, is a
medical geneticist whose research over the past 15 years has focused on somatic
cell genetics, human molecular genetics and gene mapping. Dr. Cox is co-director
of the Stanford Human Genome Center at Stanford University and is also a
Professor of Genetics at Stanford University. Dr. Cox is a member of the
Ethical, Legal, and Social Implications Working Group of the NIH and is also a
member of the Council of the International Human Genome Organization.
DENNIS T. DRAYNA, PH.D., a co-founder of Mercator was employed at Genentech
Inc. from 1985 to 1992, where he isolated a number of human genes involved in
lipid metabolism and localized genes involved in premature aging. Dr. Drayna was
postdoctoral fellow at the Howard Hughes Medical Institute at the University of
Utah, where he developed several technologies relating to human genetics and
linkage analysis. Dr. Drayna received a Ph.D. in Microbiology and Molecular
Genetics from Harvard University. Dr. Drayna is currently a visiting
investigator at the Genome Technology Branch of the National Human Genome
Research Institute.
PHILLIP HIETER, PH.D., is a recognized leader in the molecular biology and
genetics of yeast, as well as chromosome structure and function. He is active in
the human genome effort, including membership on the Human Genome Committee of
the American Society of Human Genetics. Dr. Hieter serves as Professor of
Molecular Biology and Genetics at the Johns Hopkins University School of
Medicine. He has been elected to the Board of Directors of the Genetic Society
of America.
ROBERT LEWIS, M.D., is Executive Vice President and Chief Scientific Officer
at Cell Therapeutics. He is the former President of Discovery Research, Syntex
USA. Prior to joining Syntex (1986-1995), Dr. Lewis was a faculty member at
Harvard Medical School. Dr. Lewis is well-known for his research in immunology,
especially for his work on mast cells and asthma.
ARNO G. MOTULSKY, M.D., is a physician-scientist who has been a leading
figure in human and medical genetics research for the past four decades. He is
an expert in the genetics of common chronic disease. Dr. Motulsky currently
serves as Professor of Medicine and Genetics at the University of Washington
School of Medicine and is a member of the National Academy of Sciences and of
the Institute of Medicine.
RICHARD M. MYERS, PH.D., is a co-founder of the Company. Dr. Myers has
focused his research on transcriptional regulation, mutation detection, human
genetics, and molecular biology. He is also the developer of a number of
techniques for finding mutations in DNA. Most recently, Dr. Myers positionally
cloned a gene associated with a particular type of epilepsy. Dr. Myers is
Professor of Genetics at Stanford University School of Medicine and the Director
of The Stanford Human Genome Center.
NEIL RISCH, PH.D., is recognized worldwide as a leader in the field of
genetic epidemiology and biostatistics. Dr. Risch is especially well-known for
statistical analysis applied to complex diseases, including psychiatric
disorders and cancer. He recently became affiliated with Stanford University
where he serves as Professor of Genetics in the School of Medicine. Prior to
this, Dr. Risch served as a Professor of Public Health and Genetics at Yale
University.
MERCATOR ACQUISITION
Progenitor and Mercator entered into the Acquisition Agreement, pursuant to
which a subsidiary of Progenitor will be merged with and into Mercator, with
Mercator as the surviving corporation.
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In the Acquisition, the aggregate purchase price will be paid in shares of
Common Stock, based on the initial public offering price. The aggregate value of
the Common Stock issued for all shares of Mercator capital stock (including
shares of Common Stock issuable upon exercise of all options and warrants to
purchase Mercator capital stock assumed by Progenitor) will be an amount equal
to (i) $22.0 million, less (ii) both (a) the total amount, if any, by which
Total Mercator Reorganization Expenses (as defined in the Acquisition Agreement)
exceed $800,000 and (b) the total amount, if any, by which Total Mercator IPO
Expenses (as defined in the Acquisition Agreement) exceed $50,000, and further
less (iii) the amount (not to exceed $2.2 million), if any, of certain claims by
Progenitor and various indemnitees for certain breaches of the covenants,
representations and warranties of Mercator in the Acquisition Agreement (the
value of such Common Stock, as so adjusted, the "Final Acquisition
Consideration"). The allocation of the Final Acquisition Consideration among the
shares of the various classes and series of Mercator capital stock and
outstanding options and warrants will be determined in accordance with a formula
set forth in the Acquisition Agreement.
The representations and warranties of Mercator in the Acquisition Agreement
do not survive the closing of the Acquisition and the Company will not have any
remedy for breaches of representations and warranties identified after the
closing. See "Risk Factors--Risks Associated with the Acquisition of Mercator."
The shares of Common Stock to be issued in the Acquisition are subject to a
separate registration statement on Form S-4. Progenitor expects to issue
1,679,255 shares of Common Stock to the Mercator stockholders, and Replacement
Options to acquire 293,022 shares of Common Stock to the optionholders of
Mercator assuming Final Acquisition Consideration of $22.0 million and an
initial public offering price of $11.00 per share.
In connection with the Acquisition, the Company has committed an aggregate
maximum amount of $6.6 million to fund Mercator's interim working capital needs
(the "Mercator Bridge Financing"), estimated to be $800,000 per month. Upon the
closing of the Offering, the Mercator Bridge Financing will increase
Progenitor's purchase price consideration.
In order to provide funding for the Mercator Bridge Financing, Interneuron
has agreed to provide Progenitor a line of credit up to an aggregate maximum
amount of $6.6 million bearing interest at 10% per annum (the "Interneuron
Bridge Loan"). The outstanding principal and accrued interest on the Interneuron
Bridge Loan will be repaid upon the closing of the Offering from the net
proceeds of the Offering. See "Use of Proceeds" and "Certain
Transactions--Relationship with Interneuron."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company following the
consummation of the Acquisition and the Offering are anticipated to be:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Douglass B. Given, M.D., Ph.D................ 45 President, Chief Executive Officer and Director
Elliott Sigal, M.D., Ph.D.................... 45 Senior Vice President, Research and Development
Mark N.K. Bagnall............................ 40 Vice President, Finance and Chief Financial Officer
H. Ralph Snodgrass, Ph.D..................... 47 Vice President, Research and Chief Scientific Officer
Stephen J. Williams, Ph.D.................... 43 Vice President, Corporate Development
Glenn L. Cooper, M.D. (1).................... 44 Chairman of the Board
Robert P. Axline (2)......................... 61 Director
Alexander. M. Haig, Jr....................... 72 Director
Morris Laster, M.D........................... 32 Director
Robert R. Momsen............................. 50 Director
Jerry P. Peppers (2)......................... 51 Director
David B. Sharrock (1)........................ 61 Director
</TABLE>
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
DOUGLASS B. GIVEN, M.D., PH.D. has served as President, Chief Executive
Officer and a Director of the Company since June 1994 and served as Executive
Vice President and Chief Operating Officer from January 1993 to June 1994. Prior
to joining the Company, Dr. Given was Vice President at the Schering Plough
Research Institute, a pharmaceutical research facility, from March 1989 to
December 1992. Dr. Given also serves as a Director of the Edison BioTechnology
Center, is on the Dean's Advisory Council of the University of Chicago and is on
the Dean's Advisory Council of The Ohio State University. Dr. Given received an
M.D. and Ph.D. in Biological Sciences from the University of Chicago, performed
his postdoctoral training in Internal Medicine and Infectious Diseases at
Harvard Medical School and Massachusetts General Hospital and received an M.B.A.
from the Wharton School of Business at the University of Pennsylvania.
ELLIOTT SIGAL, M.D., PH.D. will serve as Senior Vice President, Research and
Development of the Company upon consummation of the Acquisition. Dr. Sigal
joined Mercator in September 1995 as Vice President of Research and Development
and was named President and Chief Executive Officer in January 1996. In 1992,
Dr. Sigal joined Syntex, Inc. ("Syntex"), a pharmaceutical company, and was its
Executive Director of Cell Biology from 1993 to 1995. At Syntex, Dr. Sigal was
appointed the Program Leader for the Atherosclerosis and COX-2 programs, and
Senior Scientist, Institute of Biochemistry and Cell Biology in 1992, and, in
1995, was appointed Executive Director of the Center for Inflammation Research.
After the acquisition of Syntex by Roche Bioscience, a biopharmaceutical firm,
he served as Vice President of Inflammation and Immunology at Roche Bioscience.
Dr. Sigal is currently an Associate Adjunct Professor of Medicine and Associate
Staff Member of the Cardiovascular Research Institute at the University of
California, San Francisco. Prior to completing medical school at the University
of Chicago, Dr. Sigal studied business and engineering at Purdue University
where he obtained a B.Sc., M.S. and Ph.D. in industrial engineering.
MARK N. K. BAGNALL has served as Vice President, Finance and Chief Financial
Officer of the Company since August 1996. Prior to joining the Company, Mr.
Bagnall served as Vice President of Finance, Chief Financial Officer and
Secretary of Somatix Therapy Corporation ("Somatix"), a biotechnology company,
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from July 1992. Previously, he served as Treasurer and Secretary of Somatix from
January 1991 to July 1992, and of its predecessor, Hana Biologics, Inc., from
January 1990 to January 1991. Mr. Bagnall is a Certified Public Accountant.
H. RALPH SNODGRASS, PH.D. has served as Chief Scientific Officer since May
1996 and has served as Vice President, Research since he joined the Company in
July 1993. Prior to joining the Company, Dr. Snodgrass was Assistant Professor
of Microbiology and Immunology at the University of North Carolina, Chapel Hill
from January 1988 to June 1993. From 1982 to 1988 Dr. Snodgrass headed a
research laboratory for the study of T cell development and stem cell biology at
the Basel Institute for Immunology in Switzerland. Dr. Snodgrass has held
appointments at The Ohio State University as Clinical Associate Professor,
Division of Bone Marrow Transplantation, Department of Internal Medicine since
July 1994, and as Adjunct Associate Professor, Department of Medical
Microbiology and Immunology since July 1995. Dr. Snodgrass received his Ph.D. in
Immunology from the University of Pennsylvania and performed his postdoctoral
training at The Fox Chase Cancer Center, Philadelphia.
STEPHEN J. WILLIAMS, PH.D. has served as Vice President, Corporate
Development since May 1996 and previously served as Vice President, Business
Development from June 1994 to May 1996. Prior to joining the Company, Dr.
Williams was Medical Director, Strategic Product Planning at Bristol-Myers
Squibb, a pharmaceutical company, from March 1993 to June 1994; and Associate
Director, New Product Planning at DuPont Merck Pharmaceutical Company from
January 1991 to March 1993. Dr. Williams received his Ph.D. in Pharmacology from
Duke University.
GLENN L. COOPER, M.D. has served as Chairman of the Board of Directors of
the Company since June 1994, and has been a director since December 1992. Dr.
Cooper has been President, Chief Executive Officer and a director of Interneuron
since May 1993 and served as President and Chief Executive Officer of the
Company from September 1992 until June 1994. Prior to joining the Company in
1992, Dr. Cooper was Executive Vice President and Chief Operating Officer of
Sphinx Pharmaceuticals Corporation from August 1990. Dr. Cooper serves as
Chairman of the Boards of Directors of Intercardia, Inc. and Transcell
Technologies, Inc., and is a director of InterNutria, Inc., each of which is a
subsidiary of Interneuron. Dr. Cooper received his M.D. from Tufts University
School of Medicine and performed his postdoctoral training in Internal Medicine
and Infectious Diseases at the New England Deaconess Hospital and Massachusetts
General Hospital.
ROBERT P. AXLINE has been a Director of the Company since June 1992 as a
designee of The Ohio University Foundation. Mr. Axline has been President of
Image Data Systems Inc. since 1995 and Chairman of Plastic Card Systems Inc.
since 1987. Both companies are engaged in the manufacture and sale of plastic
identification card machines and supplies.
ALEXANDER M. HAIG, JR. has been a Director of the Company since December
1992. General Haig has served as Chairman and President of Worldwide Associates,
Inc., a marketing consulting firm, since 1984. Previously, General Haig served
as Secretary of State of the United States from January 1981 to July 1982, and
President and Chief Operating Officer of United Technologies Corporation from
November 1979 to January 1981, where he remains a Senior Consultant. General
Haig also has served as Supreme Allied Commander of NATO and White House Chief
of Staff under the Nixon and Ford Administrations. General Haig also serves on
the Board of Directors of Interneuron, MGM Grand, Inc. and America Online, Inc.
MORRIS LASTER, M.D. has served as a Director of the Company since its
inception, and served as Chief Executive Officer 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 bio-medical venture and
management company based in Jerusalem, Israel, affiliated with Paramount Capital
Investment. Dr. Laster received his M.D. from Downstate Medical Center, New
York, and postdoctoral training in surgery at Case Western Reserve University
Hospital.
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ROBERT R. MOMSEN has served as a Director of Mercator since February 1995.
Mr. Momsen has been a General Partner at InterWest Partners, a group of venture
capital management funds, since August 1982. Mr. Momsen also serves as a
Director of several public companies, including ArthroCare Corp. (a medical
equipment supply company), COR Therapeutics, Inc. (a pharmaceutical company),
Coulter Pharmaceutical, Inc. (a biotechnology products and services company),
Innovative Devices, Inc. (a pharmaceutical consultancy), Urologix, Inc. (a
medical device company) and Ventritex, Inc. (a medical device company). He
received his B.S. and M.B.A. degrees from Stanford University.
JERRY P. PEPPERS joined the Company's Board of Directors in June 1992 as a
designee of The Ohio University Foundation. He is a partner in the law firm of
Winthrop, Stimson, Putnam & Roberts, where he has served as an attorney since
1971. Mr. Peppers received his J.D. from Duke University.
DAVID B. SHARROCK has been a Director of the Company since January 1994 and
a Director of Interneuron since January 1995. Mr. Sharrock has been associated
with Marion Merrell Dow, a pharmaceutical company, or its predecessors since
1958, most recently as Executive Vice President and Chief Operating Officer and
Director from January 1990 until his retirement in December 1993. Since that
time he has served as an independent consultant. Mr. Sharrock also serves as a
Director of Cincinnati Bell Inc., Unitog Company, Inc. and Intercardia, Inc.
KEY SCIENTIFIC PERSONNEL
The Company employs the following key scientific personnel:
KAREN J. BRUNKE, PH.D. will serve as Vice President of Scientific Affairs of
the Company upon consummation of the Acquisition. Dr. Brunke has served as Vice
President of Clinical Research at Mercator since July 1996 and was Director of
Clinical Research since she joined Mercator in February 1995. Dr. Brunke was in
Research Management at Sandoz Agro, Inc., an agricultural and biological
products company, from 1985 to 1994, most recently as Director of Plant
Biotechnology. Dr. Brunke was an NCI postdoctoral fellow at the Institute for
Cancer Research at The Fox Chase Cancer Center. Dr. Brunke received her Ph.D. in
Microbiology from the University of Pennsylvania.
RICHARD S. BRODY, PH.D. has served as Senior Scientist and Head of Protein
Chemistry at the Company since October 1996. From March 1995 to October 1996,
Dr. Brody was the Research Leader, Biotechnology Department at Battelle Memorial
Institute ("Battelle"), and from 1990 to 1995, he served as Senior Research
Scientist, Immunology Department at Battelle. Dr. Brody received his Ph.D. in
Chemistry from Harvard University and performed his postdoctoral training in
Biochemistry at The Ohio State University.
JOSEPH A. CIOFFI, PH.D. has served as Director, Genomics of the Company
since September 1996, and previously served as Manager, Department of Molecular
Biology and Project Leader of the Company's Novel Hematopoietic Receptor
Discovery Program. Dr. Cioffi joined Progenitor in December 1992 as a Research
Scientist. Prior to joining the Company, Dr. Cioffi held positions at the Edison
Biotechnology Institute at Ohio University, first as a Postdoctoral Fellow and
then as a Staff Scientist. Dr. Cioffi received B.S. and M.S. degrees in Animal
Science from Cornell University and a Ph.D. in Physiology from the University of
Illinois, Urbana-Champaign.
ANDREAS GNIRKE, PH.D. joined Mercator in 1994 as a Scientist and has served
as Head, Genomic Technology and Senior Scientist of Mercator since July 1996.
Prior to joining Mercator, Dr. Gnirke held postdoctoral positions in genome
analysis at Washington University in St. Louis and at the University of
Washington in Seattle. Dr. Gnirke received his Ph.D. in Biochemistry from the
Free University of Berlin.
ADEL A. MIKHAIL, PH.D. has served as Director, Biology of the Company since
September 1996. Dr. Mikhail joined Progenitor at its inception in 1992 as a
Research Scientist. Previously, Dr. Mikhail served as Project Director at Ohio
University for contract research sponsored by the United States Army Medical
Research Institute of Infectious Diseases. Dr. Mikhail received an M.S. in
Neurobiology and a Ph.D. in Biology from Ohio University.
RANDALL SCHATZMAN, PH.D. has served as Executive Director, Biology of
Mercator since July 1996 and was Director of Molecular Biology at Mercator from
March 1996. Prior to joining Mercator,
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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 recently been hired as Director of Bioinformatics
of the Company. Prior to joining the Company, Dr. Pouliot served as Senior
Product Development Scientist, Bioinformatics, at Molecular Simulations Inc., a
developer of scientific software. From February 1994 to July 1996, Dr. Pouliot
served as Biocomputational Scientist at Sequana Therapeutics, Inc., a genomics
company. From September 1992 to December 1993, Dr. Pouliot was a
Biocomputational Scientist at the Genethon human genome laboratory near Paris,
France. Dr. Pouliot received his B.Sc., M.Sc. and Ph.D. degrees from the
Department of Biology of McGill University, Montreal, Canada.
ROGER K. WOLFF, PH.D. has served as Director of Genetics at Mercator since
July 1996. Dr. Wolff joined Mercator in 1993 and served as Project Leader for
the HH gene discovery program. Dr. Wolff trained as a postdoctoral fellow at the
University of California, San Francisco and received his Ph.D. in Human Genetics
from the University of Utah.
THOMAS J. ZUPANCIC, PH.D. has served as Director, Gene Discovery of the
Company since September 1996 and previously served as a Senior Research
Scientist, having joined the Company in February 1994. Prior to joining the
Company, Dr. Zupancic was a Principal Research Scientist in the Biotechnology
Department at Battelle Memorial Institute. Previously, he was a Research
Associate at Eli Lilly & Co, a pharmaceutical company. Dr. Zupancic received a
B.S. in Genetics from The Ohio State University, and a Ph.D. in Molecular and
Developmental Biology from Indiana University, where he was a National Science
Foundation Graduate Fellow.
EMPLOYMENT AGREEMENTS
DOUGLASS B. GIVEN. The Company has entered into a new employment agreement
(the "Revised Given Employment Agreement") with Dr. Given. The Revised Given
Employment Agreement replaces the employment agreement entered into on January
3, 1993, which terminated January 3, 1997.
Pursuant to the Revised Given Employment Agreement, Dr. Given will receive
(i) a base salary of $275,000 per annum (increasing to $300,000 per annum upon
the closing of the Offering), (ii) an annual bonus of up to 40% of his base
salary upon the achievement of certain performance goals determined by the Board
of Directors, (iii) executive disability benefits providing for payment of 60%
of his base salary, and the ability to purchase coverage for an additional 20%
of his base salary, (iv) a term life insurance policy of $1.0 million, and (v)
additional stock options to purchase 310,000 shares of Common Stock at an
exercise price per share equal to the initial public offering price.
Additionally, Dr Given will receive assistance with relocation expenses, as more
fully described in "Certain Transactions--Transactions with Directors and
Executive Officers."
Under the Revised Given Employment Agreement, if Dr. Given's employment is
terminated without cause or upon forced resignation, death or disability, the
Company will pay Dr. Given a lump sum equal to 12 months base salary, a bonus
equal to a percentage of 12 months base salary that is equal to the average of
the actual annual bonus percentage for the two years immediately prior to the
termination date, 18 months COBRA premiums and 18 months executive disability
premiums. In addition, all of the stock options granted to Dr. Given which would
have vested over the two year period immediately following the date of
termination of his employment will instead vest on the same dates they would
have vested if he had continued to be employed by the Company during such two
year period or will vest at such earlier date or dates as may be necessary by
the terms of the plan pursuant to which the options were granted in order to
prevent such options from lapsing.
If Dr. Given's employment is terminated with cause, the Company will pay Dr.
Given a lump sum equal to six months base salary, six months maximum bonus
payments, nine months COBRA premiums and nine months executive disability plan
premiums. In addition, all of the stock options granted to
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Dr. Given would have vested over the one year period immediately following the
date of termination of his employment will instead vest on the same dates they
would have vested if he had continued to be employed by the Company during such
one year period or will vest at such earlier date or dates as may be necessary
by the terms of the plan pursuant to which the options were granted in order to
prevent such options from lapsing.
Upon a "change in control" (as defined in the Revised Given Employment
Agreement) of the Company, Dr. Given will receive a lump sum equal to 12 months
base salary and 12 months maximum bonus payments. In addition, all unvested
stock options granted to Dr. Given will accelerate and vest immediately.
ELLIOTT SIGAL. The Company signed an employment agreement (the "Revised
Sigal Employment Agreement") with Dr. Sigal on February 14, 1997, effective upon
the consummation of the Acquisition (the "Effective Date"), to serve as the
Senior Vice President of Research and Development of the Company. Dr. Sigal has
agreed to supervise and manage the preclinical and clinical development areas of
the Company and oversee its research function, which will be headed by Dr.
Snodgrass.
Pursuant to the Revised Sigal Employment Agreement, Dr. Sigal will receive
(i) a base salary of $225,000 per annum, (ii) annual bonuses based upon
achievement of reasonable objectives established by the Board or its
Compensation Committee in the range of up to 30% of his base salary, (iii)
certain additional benefits, including life insurance benefits in the amount of
$450,000, and (iv) stock options to purchase shares of Common Stock equal to 1%
of the outstanding Common Stock of the Company on a fully-diluted basis on the
Effective Date, which options will be exercisable at the initial public offering
price and will be granted in addition to the Replacement Options to be issued to
Dr. Sigal in connection with the Acquisition. The options to be granted upon the
closing of the Offering will have an exercise price equal to the initial public
offering price with 25% vesting one year after the date of grant and 6.25%
vesting each quarter thereafter until fully vested four years after the date of
grant. Such options are subject to accelerated vesting upon a change of control
of the Company in the event that other options granted to a senior manager of
the Company (other than the President and Chief Executive Officer) are provided
with similar accelerated vesting upon a change of control, and are subject to
partial vesting upon termination of Dr. Sigal's employment by the Company other
than for "cause" (or death or disability) or upon termination of employment by
Dr. Sigal for "good reason" (in each case as defined in the Revised Sigal
Employment Agreement). Options granted to Drs. Snodgrass and Williams, as well
as Mr. Bagnall, will become subject to accelerated vesting commitments in
connection with a change of control that also would then be available to Dr.
Sigal by the terms of the Revised Sigal Employment Agreement.
The Revised Sigal Employment Agreement provides that, from and after the
Effective Date, the Company will replace Mercator as the lender under a
Promissory Note dated September 7, 1995 (the "Sigal Note"), pursuant to which
Mercator loaned $150,000 to Dr. Sigal for a down payment on the purchase price
of his principal residence (the "Property"). The Sigal Note is secured by the
Property. The Sigal Note accrues interest at a rate equal to the lesser of (i)
28.2% of the capital gains realized upon a sale of the Property (a different
calculation applies if the Sigal Note becomes payable prior to a sale of the
Property) and (ii) the cumulative interest on the unpaid principal balance of
the Sigal Note accruing at 7.65% compounded annually. The interest paid by Dr.
Sigal to Mercator as a result of Dr. Sigal's retirement or termination of
employment with Mercator shall be deducted from such interest calculation. The
outstanding balance due on the Sigal Note is due on the earlier of: (a) any sale
or transfer of the Property; (b) the refinancing of any loan secured by a first
mortgage on the Property; (c) the first anniversary of Dr. Sigal's retirement or
termination of employment with the Company; (d) the date on which Dr. Sigal
ceases to be the holder of record of title to the Property; (e) any sale or
transfer by Dr. Sigal of any or all of Mercator capital stock owned by him; and
(f) the occurrence of an "acceleration event," as defined therein.
The Revised Sigal Employment Agreement provides generally that if his period
of employment is terminated without "cause," the Company shall: (i) pay to Dr.
Sigal all accrued compensation and continue his benefits through the last
business day of the 30 days' notice period; (ii) pay to Dr. Sigal on the last
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business day of such notice period a lump sum equal to six months salary; (iii)
pay Dr. Sigal's COBRA premiums for six months following the last business day of
such notice period ("Benefit Continuation Period"); and (iv) to the extent
permitted by the applicable plans, continue Dr. Sigal's life insurance and
disability insurance coverage during the Benefit Continuation Period (items (i)
through (iv) collectively referred to as "Separation Benefits"). If the Company
terminates Dr. Sigal's employment for "cause," the Company shall pay Dr. Sigal
all accrued compensation through the date of termination. Dr. Sigal may
terminate his employment for any reason, with or without cause, by providing the
Company 30 days' advance written notice. The Company shall have the option, in
its complete discretion, to make Dr. Sigal's termination effective at any time
prior to the end of such notice period. In either event, the Company shall pay
Dr. Sigal all accrued compensation through the last day of the notice period,
not to exceed 30 days. Dr. Sigal may terminate his employment for "good reason"
(as defined in the Revised Sigal Employment Agreement), provided Dr. Sigal gives
the Company 30 days' advance written notice of the reason for termination and
his intent to terminate. During this period, the Company shall have an
opportunity to correct the condition constituting "good reason." If not
remedied, the Company shall provide Dr. Sigal the Separation Benefits.
In August 1995, Mercator entered into an employment contract with Dr. Sigal,
pursuant to which Dr. Sigal agreed to serve as Vice President of Research and
Development of Mercator. In January 1996, Dr. Sigal was promoted to President
and Chief Executive Officer of Mercator. In February 1996, Mercator entered into
a letter agreement with Dr. Sigal setting forth Dr. Sigal's compensation package
(the "Compensation Letter"). The Compensation Letter superseded portions of the
prior Sigal employment agreement and provides that all of Dr. Sigal's stock
options will accelerate vesting upon a change of control involving Mercator
which, as defined, would include the Acquisition. All such options will be
converted into Replacement Options as a result of the Acquisition. In connection
with the completion of the Acquisition, Dr. Sigal will receive fully vested
Replacement Options under the 1997 Plan to purchase 4,949 and 91,733 shares of
the Company's Common Stock with exercise prices of $12.34 and $1.42,
respectively, assuming an initial public offering price of $11.00 per share of
the Company's Common Stock and Final Acquisition Consideration of $22.0 million.
The Compensation Letter and, to the extent still operative, the prior Sigal
employment agreement, will terminate upon consummation of the Acquisition,
pursuant to the terms of the Revised Sigal Employment Agreement. Pursuant to the
Revised Sigal Employment Agreement, Dr. Sigal has released all prior contractual
and compensation claims he has or may have against Mercator and the Company and
their respective affiliates.
On March 5, 1997, the Compensation Committee approved certain change of
control and severance provisions for Drs. Snodgrass and Williams and Mr.
Bagnall. Such provisions will provide that upon termination of the executive's
employment without cause, he will receive a severance payment equal to nine
months of his base rate of compensation and acceleration of all outstanding
options that would have vested during the nine-month period after such
termination of employment, and the Company will pay the executive's COBRA
premiums over the same nine month period. In addition, such provisions provide
that the executive would be entitled to full acceleration of all outstanding
stock options upon termination of the executive's employment within one year of
certain events defined as a change of control of the Company and a severance
payment equal to one year of his base salary.
The Company currently has no employment agreements with other employees.
BOARD OF DIRECTORS COMMITTEES AND OTHER INFORMATION
At present, all directors are elected annually and serve until the next
meeting of stockholders or until the election and qualification of their
successors. In addition, The Ohio University Foundation is entitled to designate
two directors. Messrs. Axline and Peppers currently serve as the designees of
The Ohio University Foundation. The rights of The Ohio University Foundation to
designate two members of the Board of Directors will terminate upon the closing
of the Offering. Pursuant to the intercompany services agreement to be entered
into by the Company with Interneuron, Interneuron will have the right to
nominate one designee for election to the Company's Board of Directors, for so
long as Interneuron
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reports the Company's financial results on a consolidated basis, on an equity
basis or otherwise on a basis pursuant to which a portion of the Company's
results of operations appears in the financial results of operations of
Interneuron. See "Certain Transactions--Relationship with Interneuron" and
"--The Ohio University Foundation." Pursuant to the Acquisition Agreement, the
Company will cause Robert R. Momsen to be elected to its Board of Directors
effective on or prior to consummation of the Acquisition.
Effective August 9, 1996, the Board of Directors established an Audit
Committee and a Compensation Committee. The Audit Committee, which consists of
Messrs. Axline and Peppers, is responsible for overseeing the actions by the
Company's independent auditors and reviewing the Company's internal financial
and accounting controls and policies. The Compensation Committee, which consists
of Dr. Cooper and Mr. Sharrock, is responsible for determining salaries,
incentives and other forms of compensation for officers and other employees of
the Company and will administer various incentive compensation and benefit
plans.
All executive officers serve at the discretion of the Board of Directors,
subject to the terms of any employment agreements. The Company has entered into
employment agreements with Dr. Given and Dr. Sigal, which will be effective upon
the closing of the Offering. There are no family relationships among the
Company's directors and executive officers. See "--Employment Agreements."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently is composed of Dr. Cooper and Mr.
Sharrock, neither of whom is an executive officer of the Company. Dr. Cooper
serves as Chairman of the Board of Directors. On February 1, 1994, Mr. Sharrock
entered into a consulting agreement with Progenitor, Interneuron and Transcell
Technologies, Inc., a subsidiary of Interneuron ("Transcell"), pursuant to which
Mr. Sharrock agreed to provide consulting services on the development and
commercialization of each company's technology. Such agreement was amended
effective as of December 31, 1996 with Progenitor. See "--Directors'
Compensation" and "Certain Transactions--Transactions with Directors and
Executive Officers."
DIRECTORS' COMPENSATION
Effective after the Offering, the Company's non-employee directors (other
than those who are employees of Interneuron) will receive cash compensation in
the amount of $2,000 for attendance at meetings of the Board of Directors and
any committee thereof, and directors may be reimbursed for certain expenses in
connection with attendance at Board of Directors and committee meetings. A total
of 300,000 shares of Common Stock under the Company's 1996 Stock Incentive Plan
have been reserved for issuance to non-employee directors of the Company (other
than those who are employees of Interneuron) pursuant to compensation policies
for such directors to be adopted by the Company in the future. To date none of
such shares has been granted.
Pursuant to a letter agreement dated January 26, 1994, Progenitor has paid
Mr. Sharrock $2,000 for each meeting of the Board that he attends. Upon
execution of this agreement, Progenitor also granted Mr. Sharrock options to
purchase 2,500 shares of Common Stock, at an exercise price of $4.00 per share,
one-third of which vests each January 21 beginning January 21, 1995. During
fiscal 1996, the Company paid Mr. Sharrock $8,000 pursuant to this arrangement
and accrued an additional $2,000 in fees.
Progenitor, along with Interneuron and Transcell, is a party to a consulting
agreement with Mr. Sharrock, entered into on February 1, 1994, pursuant to which
Mr. Sharrock receives $2,000 per day in exchange for his service as a consultant
on the development and commercialization of each company's technology.
Collectively, the three companies must use Mr. Sharrock's services for a minimum
of 20 days per year during the term of the agreement. Progenitor paid Mr.
Sharrock $10,500 during fiscal 1996 under this arrangement. The agreement
provides that Mr. Sharrock will not compete with Progenitor during the term of
the agreement and for a period of one year thereafter. This agreement terminates
on February 1, 1998, and provides for automatic one-year extensions with respect
to each company unless Mr. Sharrock or such company gives notice at least sixty
days prior to expiration of the then-current term. Progenitor has
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amended such agreement effective as of December 31, 1996 with Mr. Sharrock such
that cash compensation paid to him for attendance of meetings of the Board of
Directors or any committee thereof pursuant to the Company's director
compensation policy will be in lieu of such consulting fees and will be credited
towards the aggregate 20 days of consulting per year required to be granted to
Mr. Sharrock under the consulting agreement.
During fiscal 1996, Progenitor was party to a consulting agreement with Dr.
Laster, pursuant to which Progenitor paid him $500 per month for his services as
a scientific advisor. Dr. Laster received $6,000 pursuant to this agreement in
fiscal 1996.
On March 7, 1997, the Compensation Committee approved grants to each of the
non-employee directors of the Company, effective upon the closing of the
Offering, of additional options to acquire 25,000 shares of Common Stock of the
Company at the initial public offering price. In addition, the Compensation
Committee also approved acceleration of vesting of previously granted stock
options to such non-employee directors, effective upon the closing of the
Offering.
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended September 30, 1996
the compensation paid by Progenitor for services rendered in all capacities with
respect to its Chief Executive Officer and each of its other executive officers
with annual compensation in excess of $100,000 (the Chief Executive Officer and
such other executive officers are hereinafter referred to as the "Named
Executive Officers"). It is expected that Dr. Sigal will serve as the Company's
Senior Vice President of Research and Development following the Acquisition. See
"--Directors and Executive Officers." Information regarding the compensation
paid by Mercator to Dr. Sigal in the fiscal year ended December 31, 1996 is
provided in footnote (9) to the following table:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ---------------
COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS (#) COMPENSATION
- ------------------------------------------------------------ ----------- ---------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Douglass B. Given, M.D., Ph.D. ............................ 1996 $ 219,231 $ -- 100,000(1) $ 31,065(2)
President and Chief Executive Officer 1995 $185,000 $46,250 95,000(1) 1,065(3)
Doros Platika, M.D. ........................................ 1996 110,769 -- -- 146,424(4)
Executive Vice President, Research and Development 1995 153,000 35,700 40,000(5)
H. Ralph Snodgrass, Ph.D. ................................. 1996 150,385 -- 100,000(1) --
Vice President, Research and Chief Scientific Officer 1995 123,000 30,000 30,000(1)(6)
Stephen J. Williams, Ph.D. ................................ 1996 149,615 -- 75,000(1) 50,743(7)
Vice President, Corporate Development 1995 135,000 -- 17,500(1)
Mark N.K. Bagnall(8) ...................................... 1996 18,404 25,000 110,000(1) --
Vice President, Finance and Chief Financial Officer
</TABLE>
- ------------------------
(1) All of the options granted during fiscal 1996 were cancelled and regranted
at new exercise prices. Such cancellation and regrant of options was
effected as of December 30, 1996. Drs. Given, Snodgrass and Williams also
had 95,000, 30,000 and 17,500 options, respectively, which were originally
granted as of September 14, 1995, cancelled and regranted with an exercise
price of $5.50 per share from an original exercise price of $6.00 per share.
See "--Cancellation and Regrant of Options."
(2) Consists of (i) $1,065 in premiums paid by the Company on a term life
insurance policy for Dr. Given and (ii) an aggregate amount of $30,000 of
indebtedness which was forgiven by the Company effective in fiscal 1996. See
"Certain Transactions--Transactions with Directors and Executive Officers."
(3) Consists of premiums paid by the Company on a term life insurance policy for
Dr. Given.
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(4) Dr. Platika's employment with the Company terminated effective as of May 24,
1996, pursuant to a Separation Agreement and Release. Prior to termination,
the Company had forgiven loans as of July 23, 1996 in the amount of $26,424,
out of an outstanding balance of $242,850, including accrued interest. In
connection with such Release, the Company agreed to forgive an additional
$120,000 of such indebtedness, provided that Dr. Platika repaid the balance
of $96,426 to the Company, which was paid as of July 23, 1996. See "Certain
Transactions--Transactions with Directors and Executive Officers."
(5) Includes options exercisable for 7,500 shares of Common Stock, all of which
vested on September 14, 1995, the date of grant. As a result of the
termination of Dr. Platika's employment pursuant to the Separation Agreement
and Release, options granted during fiscal 1995 that were vested as of May
24, 1996 remained exercisable until August 24, 1996, and all other options
granted during fiscal 1995 terminated effective May 24, 1996 in accordance
with the terms of the 1992 Stock Option Plan. See "Certain
Transactions--Transactions with Directors and Executive Officers."
(6) Includes options exercisable for 12,500 shares of Common Stock, all of which
vest upon the earliest of the achievement of performance milestones relating
to the leptin receptor program or the BFU-e red blood cell growth factor
program, or September 14, 2002.
(7) Consists of an aggregate principal amount of $28,000, including interest of
$1,295, of indebtedness which was forgiven effective in fiscal 1996 and
$21,448 of indebtedness which was repaid by Dr. Williams to the Company
effective in fiscal 1996 in lieu of a bonus. See "Certain Transactions--
Transactions with Directors and Executive Officers."
(8) Represents the salary received by Mr. Bagnall from August 20, 1996, the date
of commencement of his employment with the Company, until September 30,
1996. Mr. Bagnall currently receives a salary of $165,000 per year. Upon
joining the Company, (i) Mr. Bagnall was paid a signing bonus of $25,000,
and was granted options to purchase 110,000 shares, with options to purchase
27,500 shares vesting immediately and the balance of options to purchase
82,500 shares vesting equally over three years on each anniversary of the
date of grant, with an original exercise price of $9.00 per share, and (ii)
Mr. Bagnall was provided an interest-free loan in the principal amount of
$50,000.
(9) For the fiscal year ended December 31, 1996, Mercator paid a salary to Dr.
Sigal of $225,000, a bonus of $75,000, and awarded options to purchase
871,310 shares of Mercator common stock at an exercise price of $0.15 per
share. Upon the consummation of the Acquisition, Replacement Options
representing the right to acquire 91,733 shares of Common Stock will be
granted to Dr. Sigal, in replacement of such Mercator options previously
granted, with an exercise price of $1.42 per share, assuming Final
Acquisition Consideration of $22.0 million. See "--Employment
Agreements--Elliott Sigal."
STOCK PLANS
1992 STOCK OPTION PLAN
The 1992 Stock Option Plan was adopted and approved by the Board of
Directors in December 1992 and by the stockholders of the Company in February
1993. The plan was amended with the approval of the Board of Directors and the
stockholders in September 1995 to increase the number of shares of Common Stock
available for grant. A total of 500,000 shares of Common Stock have been
reserved for issuance under the 1992 Stock Option Plan, as amended. As of
February 28, 1997, options to purchase 41,113 shares of Common Stock granted
under the 1992 Stock Option Plan had been exercised, options to purchase 310,962
shares of Common Stock were outstanding and options to purchase 147,925 shares
of Common Stock remained available for grant. The outstanding options were held
by 45 individuals and were exercisable at a weighted average exercise price of
$4.68 per share. Outstanding options to purchase an aggregate of 70,963 shares
were held by employees who are not officers or directors of the Company. The
1992 Stock Option Plan will terminate in 2002, unless sooner terminated by the
Board of Directors.
The Board of Directors currently administers the 1992 Stock Option Plan. The
Board has designated a Compensation Committee and intends to delegate to it the
administration of the 1992 Stock Option Plan. Awards under the 1992 Stock Option
Plan may consist of (i) options to purchase Common Stock that are designed to
qualify, under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), as "incentive stock options" ("Incentive Stock Options") or (ii)
options to purchase Common Stock that are
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not described in Sections 422 or 423 of the Code ("Non-Qualified Stock Options"
and, collectively with Incentive Stock Options, "Options").
The Board of Directors has discretion to grant Incentive Stock Options to
employees and officers (including officers who are directors) of the Company and
Non-Qualified Stock Options to employees, officers (including officers who are
directors), directors, independent contractors and consultants of the Company.
The Board may set the terms of such grants, subject to applicable restrictions
in the 1992 Stock Option Plan. Incentive Stock Option grants are subject to the
following limitations: (i) the term of any Incentive Stock Option may not be
longer than ten years, provided that the term of any Incentive Stock Option
granted to an individual possessing more than 10% of the combined voting power
of the Company or an affiliate (a "10% Holder") may not be longer than five
years; (ii) the aggregate fair market value of all shares underlying Incentive
Stock Options granted to an individual that first become exercisable in any
calendar year may not exceed $100,000; and (iii) the exercise price of Incentive
Stock Options may not be less than the fair market value of the underlying
shares on the grant date, provided that the exercise price of any Incentive
Stock Option granted to a 10% Holder may not be less than 110% of the fair
market value of the underlying shares on the grant date. With respect to
Non-Qualified Stock Options, the Board has discretion to grant such Options with
an exercise price below the fair market value of the Common Stock. As of October
31, 1996, no such below-market grants had been made.
During an optionee's lifetime, an Option is exercisable only by the optionee
and no Option may be transferred by the optionee other than by will or the laws
of descent and distribution. An optionee whose relationship with the Company or
any related corporation ceases for any reason (other than termination because of
death or total disability) may exercise, in the three-month period following
such cessation (unless such Options terminate or expire sooner by their terms),
or such longer period as determined by the Board, that portion of the optionee's
Options that is exercisable at the time of such cessation. In the event the
optionee dies or becomes totally disabled, the Options vested as of the date of
death or total disability may be exercised prior to the earlier of such Options'
specified expiration date or one year from the date of the optionee's death or
disability.
Unexercised Options granted under the 1992 Stock Option Plan terminate upon
the occurrence of certain events, including a dissolution, liquidation or merger
or consolidation of the Company in which the Company is not the surviving
corporation. All outstanding Options vest and become immediately exercisable
prior to the effective time of any such event. In a merger or consolidation in
which the Company is the surviving corporation, Options will be deemed to apply
to the numbers of shares to which the holders thereof prior to such merger would
be entitled. The converted Options would continue to vest in accordance with the
vesting schedule set by the Board for such Options.
The Board of Directors may amend the 1992 Stock Option Plan, insofar as
permitted by law, with respect to any shares of Common Stock reserved for
issuance but not yet subject to Options. Shares subject to Options granted under
the 1992 Stock Option Plan that have lapsed or terminated may again be subject
to Options granted under the 1992 Stock Option Plan. Furthermore, the Board may
offer to exchange new Options for existing Options, with the shares subject to
the existing Options being again available for grant under the 1992 Stock Option
Plan.
1996 STOCK INCENTIVE PLAN
The 1996 Stock Incentive Plan was adopted and approved by the Board of
Directors in May 1996 and by the stockholders of the Company in August 1996. The
1996 Stock Incentive Plan was amended in March 1997 (as so amended, the "1996
Plan") to increase the number of shares available for the grant of options
thereunder. A total of 2,850,000 shares of Common Stock have been reserved for
issuance under the 1996 Plan. As of February 28, 1997, no options issued under
the 1996 Plan had been exercised, options to purchase 385,000 shares of Common
Stock were outstanding and options to purchase 2,465,000 shares of Common Stock
remained available for grant, of which options to purchase 926,150 shares of
Common Stock at the initial public offering price will be granted upon the
closing of the Offering. Currently outstanding options under the 1996 Plan were
held by four Named Executive Officers and were exercisable
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at an exercise price of $5.50 per share. A total of 300,000 shares of Common
Stock under the 1996 Plan have been reserved for issuance to non-employee
directors of the Company (other than those who are employees of Interneuron)
pursuant to director compensation policies to be adopted by the Company in the
future. The 1996 Plan will terminate in May 2006, unless sooner terminated by
the Board of Directors.
Effective upon the adoption and approval of the 1996 Plan by the
stockholders of the Company, the Board of Directors has delegated administration
of the 1996 Plan to the Compensation Committee (the "Committee"). Awards under
the 1996 Plan may consist of (i) Incentive Stock Options, (ii) Non-Qualified
Stock Options, (iii) the sale or bonus grant of restricted shares of Common
Stock ("Restricted Stock"), (iv) the grant of stock appreciation rights
("SARs"), either alone or together with Options, (v) the grant of dividend
equivalent rights measured by dividends paid with respect to the Common Stock
("DERs"), and (vi) the grant of any of the abovementioned options, rights or
shares based upon attainment of certain performance criteria ("Performance
Shares").
The Committee has discretion to grant Options, Restricted Stock, SARs, DERs
and Performance Shares to employees, officers (including officers who are
directors of the Company), directors and consultants of the Company, provided
that only employees and officers of the Company may receive Incentive Stock
Options. The Committee may set the terms of such grants, subject to applicable
restrictions in the 1996 Plan. Incentive Stock Option and Non-Qualified Stock
Option grants are subject to the same limitations under the 1996 Plan as those
discussed above for the 1992 Stock Option Plan. With respect to Non-Qualified
Stock Options, the Committee has discretion to grant such Options with an
exercise price below the fair market value of the Common Stock. As of October
31, 1996, no such below-market grants had been made.
Upon certain changes in control of the Company (as defined in the 1996
Plan), or upon the merger or consolidation, reverse merger, dissolution,
liquidation or sale of all or substantially all of the assets of the Company,
all outstanding Options, SARs, Restricted Stock, DERs and Performance Shares
will, unless otherwise determined by the plan administrator, become fully
vested, nonforfeitable and exercisable, and any Restricted Stock will be
released from all restrictions on transfer and all repurchase and forfeiture
restrictions. Each Option, SAR or DER shall remain exercisable for the remaining
term of the Option, SAR or DER, except that each Option, SAR or DER shall
terminate as of the effective date of a merger or consolidation, reverse merger,
dissolution, liquidation or sale of all or substantially all of the assets of
the Company.
The Board of Directors may amend the 1996 Plan, and any agreements
evidencing awards granted thereunder, at any time and for any reason, subject to
certain restrictions on the ability to adversely affect awards previously
granted thereunder and to any legal requirement to obtain stockholder approval.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan"),
was approved by the Board of Directors and stockholders in August 1996, and is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code in order to provide employees of the Company with an opportunity to
purchase Common Stock through payroll deductions. An aggregate of 100,000 shares
of the Company's Common Stock has been reserved for issuance under the Stock
Purchase Plan and available for purchase thereunder, subject to adjustment in
the event of a stock split, stock dividend or other similar change in the Common
Stock or the capital structure of the Company. All employees of the Company (and
employees of "subsidiary corporations" and "parent corporations" of the Company
(as defined by the Code) designated by the administrator of the Stock Purchase
Plan) whose customary employment is for more than five months in any calendar
year and more than 20 hours per week are eligible to participate in the Stock
Purchase Plan. Employees of Interneuron are not expected to participate in the
Stock Purchase Plan. Non-employee directors, consultants, and employees subject
to the rules or laws of a foreign jurisdiction that prohibit or make impractical
the participation of such employees in the Stock Purchase Plan are not eligible
to participate in the Stock Purchase Plan.
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The Stock Purchase Plan designates Purchase Periods, Accrual Periods and
Exercise Dates. Purchase Periods are generally overlapping periods of 24 months.
A Purchase Period will initiate and additional Purchase Periods will commence
each subsequent April 1 and October 1. The initial Purchase Period will begin on
the effective date of the Stock Purchase Plan, which is the date on which the
Company and the Underwriters agree as to the pricing with respect to the
Offering, and end on March 31, 1999. Accrual Periods are generally six month
periods, with the initial Accrual Period commencing on the effective date of the
Stock Purchase Plan and ending on September 30, 1997. Thereafter, Accrual
Periods will commence each April 1 and October 1. Exercise Dates are the last
day of each Accrual Period. In the event of a merger of the Company with or into
another corporation, the sale of all or substantially all of the assets of the
Company, or certain other transactions in which the stockholders of the Company
before the transaction own less than 50% of the total combined voting power of
the Company's outstanding securities following the transaction, the
administrator of the Stock Purchase Plan may elect to shorten the Purchase
Period then in progress.
On the first day of each Purchase Period, a participating employee is
granted a purchase right which is a form of option to be automatically exercised
on the forthcoming Exercise Dates within the Purchase Period during which
deductions are to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan.
When the purchase right is exercised, the participant's withheld salary is used
to purchase shares of Common Stock of the Company. The price per share at which
shares of Common Stock are to be purchased under the Stock Purchase Plan during
any Accrual Period is the lesser of (a) 85% of the fair market value of the
Common Stock on the date of the grant of the option (the commencement of the
Purchase Period) or (b) 85% of the fair market value of the Common Stock on the
Exercise Date (the last day of an Accrual Period). The participant's purchase
right is exercised in this manner on all four Exercise Dates arising in the
Purchase Period unless, on the first day of any Accrual Period, the fair market
value of the Common Stock is lower than the fair market value of the Common
Stock on the first day of the Purchase Period. If so, the participant's
participation in the original Purchase Period is terminated, and the participant
is automatically enrolled in the new Purchase Period effective the same date.
Payroll deductions may range from 1% to 10% (in whole percentage increments)
of a participant's regular base pay, exclusive of overtime, bonuses,
shift-premiums or commissions. Participants may not make direct cash payments to
their accounts. The maximum number of shares of Common Stock which any employee
may purchase under the Stock Purchase Plan during an Accrual Period is 5,000
shares. Certain additional limitations on the amount of Common Stock which may
be purchased during any calendar year are imposed by the Code.
The Stock Purchase Plan will be administered by the Board of Directors or a
committee designated by the Board, which will have the authority to terminate or
amend the Stock Purchase Plan (subject to specified restrictions) and otherwise
to administer the Stock Purchase Plan and to resolve all questions relating to
the administration of the Stock Purchase Plan.
1997 STOCK OPTION PLAN
In March 1997, the Board of Directors of the Company approved the 1997 Stock
Option Plan (the "1997 Plan"). The purpose of the 1997 Plan is to allow the
Company to comply with its obligations under the Acquisition Agreement to issue
the Replacement Options to those who held options to purchase Mercator's common
stock ("Mercator Options") prior to the Acquisition. The intent and effect of
the 1997 Plan is to give holders of Mercator Options the right to acquire shares
of the Company's Common Stock in lieu of, but not in addition to, the shares of
Mercator's common stock underlying unexercised Mercator Options held by them
immediately prior to the closing of the Acquisition. The 1997 Plan will provide
Replacement Options for holders of Mercator Options under Mercator's 1993 and
1996 Stock Option Plans (the "Mercator Plans").
ADMINISTRATION. The 1997 Plan shall be administered by the Company's Board
of Directors unless and until the Board delegates administration to the
Compensation Committee. Subject to the provisions of
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<PAGE>
the 1997 Plan, the Board shall have the power to construe and interpret the 1997
Plan and Replacement Options granted thereunder, and to establish, amend and
revoke rules and regulations for its administration. The Board, in the exercise
of this power, may correct any defect, omission or inconsistency in the 1997
Plan or in any option agreement thereunder, in a manner and to the extent it
shall deem necessary or expedient to make the 1997 Plan fully effective, and may
amend the 1997 Plan as provided therein.
TYPES OF AWARDS. Awards under the 1997 Plan will consist solely of the
issuance of Replacement Options to each holder of Mercator Options. With respect
to all Mercator Options that are designed to qualify as Incentive Stock Options,
the corresponding Replacement Options also shall be designed to qualify as
Incentive Stock Options. With respect to all Mercator Options that are
Non-Qualified Stock Options, the corresponding Replacement Options also shall be
Non-Qualified Stock Options. Incentive Stock Options shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Replacement Options
are granted only by such person. Non-Qualified Stock Options shall not be
transferable except by will or by the laws of descent and distribution or
pursuant to a qualified domestic relations order, and shall be exercisable
during the lifetime of the person to whom such options are granted only by such
person or any transferee pursuant to a qualified domestic relations order. No
Replacement Options will be issued under the 1997 Plan to any holder of a
Mercator Option unless and until such holder has either (i) returned the
agreement evidencing such Mercator Option to the Company for cancellation, or
(ii) delivered to the Company (a) evidence reasonably satisfactory to the
Company the loss, theft or destruction of such option agreement and (b)
indemnity or security reasonably satisfactory to the Company.
AVAILABLE SHARES. A total of up to 550,000 shares of the Company's Common
Stock have been reserved for issuance under the 1997 Plan. Assuming an initial
public offering price of $11.00 per share, and Final Acquisition Consideration
for Mercator of $22.0 million, 293,022 shares of Common Stock would be reserved
for issuance upon exercise of the Replacement Options under the 1997 Plan. The
number of shares actually covered by Replacement Options may be less than the
number of shares reserved under the 1997 Plan to the extent that Mercator
Options are exercised prior to the closing of the Acquisition. The number of
shares of the Company that correspond to Mercator Options also will depend upon
the price at which the Company's Common Stock is offered to the public in the
Offering. See "Capitalization" and "Business--Mercator Acquisition."
ELIGIBLE INDIVIDUALS. Only holders of Mercator Options are eligible to
receive Replacement Options under the 1997 Plan. All such holders of Incentive
Stock Options were, at the time their Mercator Options were awarded, employees
of Mercator. All such holders of Non-Qualified Stock Options were, at the time
their Mercator Options were awarded, employees, consultants or directors of
Mercator.
TERMS OF REPLACEMENT OPTIONS
The Terms of Replacement Options granted under the 1997 Plan will be as set
forth below:
a) NUMBER OF SHARES COVERED. Each Replacement Option will cover a number
of shares of the Company's Common Stock (rounded up to the nearest whole
share) equal to the number of shares of Mercator common stock covered by
the corresponding Mercator Option multiplied by the exchange ratio
applicable to the Mercator common stock in the Acquisition (the "Exchange
Ratio").
b) EXERCISE PRICE. The exercise price per share of the Company's Common
Stock (rounded down to the nearest penny) covered by each Replacement
Option will equal the per share exercise price of the corresponding
Mercator Option divided by the Exchange Ratio.
c) OPTION TERM. The term of each Replacement Option will be the same as
the remaining term of the corresponding Mercator Option. The maximum term
of the Mercator Options is ten years from the date of initial grant of
such Mercator Options.
d) VESTING. The vesting restrictions contained in each Replacement Option
will be the same as the vesting restrictions contained in the
corresponding Mercator Options. Replacement Options are
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<PAGE>
subject to accelerated vesting for any optionee terminated within one
year of the date of the Acquisition other than for "cause."
e) EARLY PURCHASE RIGHTS. Holders of Replacement Options have the right
(the "Early Purchase Right") to purchase all or part of the Common Stock
of the Company subject to their options prior to full vesting. Shares
purchased pursuant to the Early Purchase Right are subject to a
repurchase option in favor of the Company (the "Repurchase Option") that
expires in accordance with the same schedule as Replacement Options would
have vested had the option holder not exercised the Early Purchase Right.
The Repurchase Option is exercisable (i) within 90 days of the
termination of the optionholder's relationship with the Company or (ii)
upon a dissolution of the Company.
f) CERTAIN ADJUSTMENTS. The number of shares covered by, and the exercise
price of, each Replacement Option may, in the Board's discretion, be
adjusted appropriately to reflect any change in the capitalization of the
Company resulting from any acquisition, recapitalization, stock split-up
or combination of shares, or the payment of a stock dividend or other
increase or decrease in the the Company's Common Stock effected without
receipt of consideration by the Company.
g) CONSIDERATION. The purchase price of stock acquired pursuant to a
Replacement Option shall be paid, to the extent permitted by applicable
statutes and regulations, either (1) in cash at the time the Replacement
Option is exercised, or (2) at the discretion of the Board or the
Committee, either at the time of the grant or exercise of the Replacement
Option (but in the case of an Incentive Stock Option, only at the time of
grant), (a) by delivery to the Company of other Common Stock of the
Company, (b) according to a deferred payment or other arrangement (which
may include, without limiting the generality of the foregoing, the use of
other Common Stock of the Company) with the person to whom the
Replacement Option is granted or to whom the Replacement Option is
transferred pursuant to the 1997 Plan, or (c) in any form of legal
consideration that may be acceptable to the Board.
h) EXERCISE OF OPTIONS. In the event of termination of continuous status
as employee, director or consultant otherwise than by reason of death or
disability, the optionee may exercise his or her Replacement Option (to
the extent that the optionee was entitled to exercise it at the date of
termination) within such period of time ending on the earlier of (i)
three (3) months after termination of optionee's continuous status as
employee, director or consultant (or such longer or shorter period, but
in no event less than 30 days, specified in the written agreement
evidencing the terms of an individual option grant ("Option Agreement")),
or (ii) the expiration of the term of the option as set forth in the
Option Agreement.
i) DISABILITY OR DEATH OF OPTIONEE. In the event of termination of
continuous status as employee, director or consultant by reason of
disability, the optionee may exercise his or her Replacement Option (to
the extent that the optionee was entitled to exercise it at the date of
termination) within such period of time ending on the earlier of (i)
twelve (12) months after termination of optionee's continuous status as
employee, director or consultant (or such longer or shorter period, but
in no event less than six (6) months, specified in the Option Agreement),
or (ii) the expiration of the term of the option as set forth in the
Option Agreement. In the event of termination of continuous status as
employee, director or consultant by reason of death, the optionee's
estate or person who acquired the right to exercise the option may
exercise the Replacement Option (to the extent that the optionee was
entitled to exercise it at the date of death) within such period of time
ending on the earlier of (i) eighteen (18) months after termination of
optionee's continuous status as employee, director or consultant (or such
longer or shorter period, but in no event less than six (6) months,
specified in the Option Agreement), or (ii) the expiration of the term of
the option as set forth in the Option Agreement.
j) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the optionee may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such Replacement
Option by any of the following means or by a combination of such
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means: (i) tendering a cash payment; (ii) authorizing the Company to
withhold shares from the shares of the Company's Common Stock otherwise
issuable to the participant as a result of the exercise of the Option; or
(iii) delivering to the Company owned and unencumbered shares of the
Common Stock of the Company.
k) ADJUSTMENTS UPON CHANGES IN STOCK. If any change is made in the stock
subject to the 1997 Plan, or subject to any Replacement Option (through
merger, consolidation, acquisition, recapitalization, stock dividend,
dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure
or otherwise), the 1997 Plan and outstanding Replacement Options will be
appropriately adjusted in the class(es) and maximum number of shares
subject to the 1997 Plan and the class(es) and number of shares and price
per share of stock subject to outstanding Replacement Options. In the
event of: (i) a merger or consolidation in which the Company is not the
surviving corporation, or (ii) a reverse merger in which the Company is
the surviving corporation but the shares of the Company's Common Stock
outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash
or otherwise, then to the extent permitted by applicable law: (a) any
surviving corporation shall assume any Replacement Options outstanding
under the 1997 Plan or shall substitute similar options for those
outstanding under the 1997 Plan, or (b) such Replacement Options shall
continue in full force and effect. In the event any surviving corporation
refuses to assume or continue such Replacement Options, or to substitute
similar options for those outstanding under the 1997 Plan, then such
Replacement Options shall be terminated if not exercised prior to such
event. In the event of a dissolution or liquidation of the Company, any
Replacement Options outstanding under the 1997 Plan shall terminate if
not exercised prior to such event.
AMENDMENT. The Company's Board may amend the 1997 Plan at any time, subject
to any requirement under law or the 1997 Plan to obtain stockholder approval.
SECTION 424(A) COMPLIANCE. Replacement Options issued under the 1997 Plan
are intended to comply with all applicable conditions of Section 424(a) of the
Code. To the extent any provision of the 1997 Plan, or any action of the Board,
fails to so comply, such provision or action will be deemed null and void to the
extent that is permitted by applicable law and the Board deems reasonable.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options by Progenitor to the Named Executive Officers during the fiscal year
ended September 30, 1996. Information regarding the stock option grants by
Mercator to Dr. Sigal during the fiscal year ended December 31, 1996 is provided
in footnote (6) to the following table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM($)(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR(1) ($/SHARE)(2) DATE 5% 10%
- --------------------------------------------- ------------ --------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Douglass B. Given, M.D., Ph.D................ 100,000(4) 25.0% $ 5.50 5/13/06 $ 345,892 $ 876,558
H. Ralph Snodgrass, Ph.D..................... 100,000(4) 25.0 5.50 5/13/06 345,892 876,558
Stephen J. Williams, Ph.D.................... 75,000(4) 18.8 5.50 5/13/06 259,419 657,419
Mark N.K. Bagnall............................ 110,000(5) 27.5 5.50 8/20/06 380,481 964,214
</TABLE>
- ------------------------
(1) Based on an aggregate of 400,000 options granted to employees in fiscal
1996.
(2) All options were granted at an exercise price of $9.00 per share equal to
the fair market value of the Common Stock on the date of grant, as
determined by the Board of Directors. Such options were cancelled and
regranted on December 30, 1996, at the exercise price of $5.50 per share.
See "--Cancellation and Regrant of Options."
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(3) The potential realizable value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of the options,
assuming that the stock appreciates in value from the date of grant
compounded annually until the end of the option term at the rate specified
(5% or 10%) and that the option is exercised and sold on the last day of the
option term for the appreciated stock price. Potential realizable value is
net of the option exercise price. The assumed rates of appreciation are
specified in the rules and regulations of the Commission and do not
represent the Company's estimate or projection of future stock price. Actual
gains, if any, resulting from stock option exercises and Common Stock
holdings are dependent on the future performance of the Common Stock and
overall stock market conditions. There can be no assurance that the amounts
reflected in this table will be achieved.
(4) Consists of options that vest equally over three years on each anniversary
of the date of grant, May 13, 1996.
(5) Consists of options that were granted on the date of employment, August 20,
1996, with options to purchase 27,500 shares vesting immediately and the
balance of options to purchase 82,500 shares vesting equally over three
years on each anniversary of the date of grant.
(6) For the fiscal year ended December 31, 1996, Mercator awarded Dr. Sigal
options to purchase 871,310 shares of Mercator common stock at an exercise
price of $0.15 per share. All such options will become vested upon
consummation of the Acquisition and will be converted into Replacement
Options to acquire 91,733 shares of the Company's Common Stock at $1.42 per
share assuming consummation of the Acquisition for Final Acquisition
Consideration of $22.0 million. In connection with the Acquisition, the
Company has entered into an employment agreement with Dr. Sigal pursuant to
which he will be granted options to purchase an aggregate of 1% of the
Company's Common Stock on a fully-diluted basis after giving effect to the
Acquisition and the Offering. Such options will have an exercise price equal
to the initial public offering price and will be subject to vesting in the
amount of 25% on the first anniversary of the date of grant and 6.25% each
quarter thereafter until fully vested after four years. Based upon an
assumed initial public offering price of $11.00 per share, such options
would entitle Dr. Sigal to acquire 143,761 shares of Common Stock.
FISCAL YEAR-END OPTION VALUES
For each of the Named Executive Officers, the following table shows
information about the value of unexercised options of Progenitor as of September
30, 1996. No options were exercised by the Named Executive Officers during
fiscal 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR-END(#) FISCAL YEAR-END($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Douglass B. Given, M.D., Ph.D............................. 39,916 171,584 $ 12,375 $ 12,375
H. Ralph Snodgrass, Ph.D.................................. 19,583 130,417 47,125 11,875
Stephen J. Williams, Ph.D................................. 15,833 96,667 15,000 15,000
Mark N.K. Bagnall......................................... 27,500 82,500 0 0
</TABLE>
- ------------------------
(1) Based on the fair market value of the Common Stock as of September 30, 1996
($5.50 per share), minus the exercise price, multiplied by the number of
shares underlying the option after giving effect to the subsequent repricing
of the options. See "--Cancellation and Regrant of Options."
CANCELLATION AND REGRANT OF OPTIONS
On December 30, 1996, the Compensation Committee approved the cancellation
and regrant of options previously granted to certain executive officers,
directors and key employees. The Compensation Committee concluded that the
relationship between the exercise price of those options and the recent fair
market value of the Company's Common Stock did not provide effective equity
incentives for such
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<PAGE>
executive officers, directors and key employees. Equity incentives are a
significant component of the total compensation package of the Company's
employees and play a substantial role in the Company's ability to retain the
services of individuals essential to the Company's long-term success. The
Compensation Committee concluded that the Company's ability to retain key
employees would be impaired significantly unless value was restored to their
options. Accordingly, the Compensation Committee determined it was necessary to
cancel and regrant the options at exercise prices that reflect current fair
market value to provide realistic incentives for the executive officers,
directors and employees to whom such options had been granted. All stock options
with exercise prices of $5.50 or more were cancelled and regranted at an
exercise price of $5.50 per share, the fair market value on December 30, 1996,
as determined by the Compensation Committee. The vesting periods applicable to
these cancelled options relate back to the dates of the prior grants.
With respect to the Named Executive Officers, all of the Company's options
granted during fiscal 1996 were cancelled and regranted at an exercise price of
$5.50 per share. Drs. Given, Snodgrass and Williams also had 95,000, 30,000 and
17,500 options, respectively, originally granted as of September 14, 1995, which
were cancelled and regranted at an exercise price of $5.50 per share from an
original exercise price of $6.00 per share. In addition, the 7,500 options
granted to each of Messrs. Axline, Haig, Peppers and Sharrock in fiscal 1996
were cancelled and regranted at an exercise price of $5.50 per share from an
original exercise price of $6.00 per share. The 110,000 options granted to Mr.
Bagnall in fiscal 1996 were cancelled and regranted at an exercise price of
$5.50 per share from an original exercise price of $9.00 per share.
CERTAIN TRANSACTIONS
RELATIONSHIP WITH INTERNEURON
Progenitor was incorporated in February 1992 as a majority-owned subsidiary
of Interneuron and assumed all rights and obligations of Scimark Corp. under the
January 1992 research and licensing agreement with Ohio University. See
"Business--License Agreements--Ohio University." Upon Progenitor's organization,
Interneuron purchased 2,081,250 shares of Common Stock for $0.002 per share.
Progenitor also issued 112,500 and 56,250 shares of Common Stock, respectively,
to Morris Laster, M.D., a director of the Company, and Steven Kanzer, then
Assistant Secretary of the Company, for a purchase price of $0.002 per share.
Lindsay Rosenwald, M.D., the Chairman of the Board and a principal stockholder
of Interneuron, was the Company's President until September 1992, and was a
director of the Company until May 1996. Dr. Rosenwald also owns the Castle Group
Ltd. ("Castle"), a venture capital firm. Dr. Laster was the Company's Chief
Executive Officer until September 1992, and Dr. Laster and Mr. Kanzer were and
continue to be employees of Castle.
From Progenitor's inception through December 1994, Interneuron funded
Progenitor's operations through advances evidenced by promissory notes payable
on demand and bearing interest at 1% over the prime rate. In December 1994, upon
the initial closing of the private placement referred to below, the aggregate
amount of such advances of approximately $11.5 million, plus accrued interest of
approximately $1.1 million, was converted by Interneuron into an aggregate of
2,020,496 shares of Series A Preferred Stock of the Company at a conversion
price of $6.25 per share. These shares will convert into an estimated 1,851,164
shares of Common Stock upon the closing of the Offering based upon an assumed
initial public offering price of $11.00 per share. See "Description of Capital
Stock--Preferred Stock."
Between December 1994 and July 1995, Progenitor issued and sold an aggregate
of 349,000 shares of Series B Preferred Stock in a private placement. These
shares will convert into an estimated 319,729 shares of Common Stock upon the
closing of the Offering based upon an assumed initial public offering price of
$11.00 per share. See "Description of Capital Stock--Preferred Stock." The
private placement was a sale of units, each unit consisting of shares of Series
B Preferred Stock of the Company, shares of preferred stock of Transcell, a
subsidiary of Interneuron, a put protection right from Interneuron and warrants
to purchase Interneuron's common stock. The put protection right provides that
on the third anniversary of the final closing date of the private placement,
holders of such Series B Preferred Stock have the right to sell to Interneuron
their Series B Preferred Stock of Progenitor at a purchase price equal to the
purchase
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<PAGE>
price of such shares in the private placement. The put protection right will
expire upon the closing of the Offering. Of the approximately $4.4 million gross
proceeds of the private placement, Progenitor received approximately $1.6
million, net of placement agent fees, and Interneuron received approximately
$833,000 as its consideration for the issuance of warrants for its Common Stock
and the put protection right. Of this amount, Interneuron loaned approximately
$417,000 to Progenitor in exchange for a convertible debenture dated March 31,
1995, bearing interest at 1% over the prime rate. The principal amount of this
debenture and accrued interest thereon (approximately $492,000 as of February
28, 1997), automatically will be converted at the closing of the Offering into
shares of Common Stock at a conversion price equal to the initial public
offering price for the Common Stock. See "Description of Capital
Stock--Convertible Debenture and Promissory Note."
Paramount Capital, Inc. ("Paramount") acted as the placement agent for the
private placement and D.H. Blair & Co., Inc. ("Blair") was a selected dealer.
Paramount is owned by Dr. Rosenwald. Progenitor paid Paramount approximately
$129,000 as its share of placement agent fees. Pursuant to Paramount's rights
under its placement agent agreement, designees of Paramount received in the
private placement warrants to purchase an aggregate of 22,201 shares of Series B
Preferred Stock (representing the right to purchase 20,317 shares of Common
Stock following the closing of the Offering based upon an assumed initial public
price of $11.00 per share). Dr. Rosenwald received warrants to purchase 12,274
of these shares of Series B Preferred Stock (representing the right to purchase
an estimated 11,245 shares of Common Stock upon the closing of the Offering
based upon an assumed initial public offering price of $11.00 per share). Blair
is owned substantially by family members of J. Morton Davis (including members
of Dr. Rosenwald's family), a principal stockholder of Interneuron. Blair
received fees for acting as selected dealer, aggregating $45,094. Designees of
Blair also received in the private placement warrants to purchase an aggregate
of 12,700 shares of Series B Preferred Stock (representing the right to purchase
11,635 shares of Common Stock upon the closing of the Offering based upon an
assumed initial public offering price of $11.00 per share). All of these
warrants are exercisable until five years after the closing of the Offering at
an exercise price of $7.50 per share of Common Stock, and pursuant to a cashless
exercise provision may be exercised without the need to pay any cash. The
Company also agreed to indemnify Paramount and Blair against certain
liabilities, including liabilities under the Securities Act in connection with
the private placement. See "Description of Capital Stock--Stock Purchase Right
and Warrants."
Since March 1996, Interneuron has continued to provide advances to
Progenitor. These advances are evidenced by a promissory note dated March 31,
1996, in the principal amount of approximately $525,000, as updated from time to
time, payable on the earlier of five years from the date of the note or the
closing of the Offering. Interneuron has agreed to convert a portion of the
indebtedness evidenced by the note (approximately $6.1 million from an
outstanding balance of approximately $6.2 million as of February 28, 1997),
including additional advances from April 1, 1996, and all accrued interest (an
aggregate of approximately $85,000 of principal and accrued interest as of
February 28, 1997) into shares of the Company's Common Stock at a conversion
price equal to the initial public offering price for the Common Stock except
that advances for costs of the Offering incurred from October 1, 1996 will be
repaid from the net proceeds of the Offering. See "Use of Proceeds" and
"Description of Capital Stock--Convertible Debenture and Promissory Note."
Based on the amount owed by Progenitor to Interneuron under the promissory
note as of February 28, 1997, and as a result of the conversion upon the closing
of the Offering of the Series A Preferred Stock, convertible debenture and
promissory note held by Interneuron (assuming an initial public offering price
of $11.00 per share of Common Stock), Interneuron is expected to own
approximately 4,529,745 shares, or approximately 43% of the outstanding Common
Stock (approximately 41% if the Underwriters' over-allotment option is exercised
in full) after the closing of the Offering and the Acquisition. The actual
ownership percentage of Interneuron will depend upon a variety of factors,
including: (i) the amount of the Final Acquisition Consideration payable with
respect to the Acquisition; (ii) the outstanding balances of loans from
Interneuron to the Company that will be converted into Common Stock upon the
closing of the Offering; (iii) the initial public offering price which will
determine the number of shares of Common Stock to be issued in the Acquisition,
to be issued upon conversion of outstanding balances of loans from
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Interneuron to the Company, to be issued in respect of the Amgen Purchase
Agreement, and to be issued to Interneuron in connection with the conversion
provisions of its Series A Preferred Stock upon the closing of the Offering; and
(iv) the recognition of guaranteed quarterly returns earned by the holders of
the Series A Preferred Stock on each of April 7, July 7, October 7, and January
7. The number of shares of Common Stock issuable to Interneuron upon conversion
of such Preferred Stock and indebtedness will increase to the extent that the
initial public offering price is less than the anticipated price of $11.00 per
share. The number of Amgen Shares issuable to Amgen pursuant to the Amgen
Purchase Agreement and the number of shares issuable to the stockholders of
Mercator in the Acquisition also will increase to the extent the per share price
of the initial public offering is less than $11.00 per share. At an initial
public offering price of $9.00 per share, Interneuron would own 5,073,856 shares
upon the closing of the Offering and the Acquisition or approximately 43% of the
outstanding Common Stock at such time (approximately 42% if the Underwriters'
over-allotment option is exercise in full).
During fiscal 1995, Interneuron paid for certain expenses of Progenitor
which were reimbursed by Progenitor at cost. In addition, Interneuron guaranteed
the Company's office lease (which guarantee will be released upon the closing of
the Offering as to obligations arising after the closing of the Offering) and
its equipment leases. Prior to the closing of the Offering, the Company and
Interneuron intend to enter into a tax allocation agreement to provide, among
other things, for the payment of tax liabilities, the entitlement to tax
refunds, and the allocation of responsibility and cooperation in the filing of
tax returns. In addition, the Company and Interneuron intend to enter into an
intercompany services agreement which will provide, among other things, for: the
participation of the Company and its employees in certain programs administered
by Interneuron, at cost, such as certain insurance programs; and the provision
of certain services by Interneuron at the Company's request at agreed upon
prices in areas such as clinical and regulatory affairs, quality control,
finance, administration, human resources and management information systems. The
intercompany services agreement also will provide that in the event of any
future equity offering by the Company, Interneuron will have the right to
purchase (at the same price and on the same terms as such equity offering) a
portion of the shares being offered so as to maintain its fully-diluted interest
in the Company immediately prior to such equity offering, subject to certain
limitations. The intercompany services agreement also will provide that all
future transactions between the Company and Interneuron must be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and must be approved or ratified by a majority of the independent members of the
Company's Board of Directors. As defined in the intercompany services agreement,
independent directors are those who are not employees, officers, directors or
affiliates of, or persons with other material financial interests involving
Interneuron, the Company or any of their respective affiliates.
The intercompany services agreement also will provide to Interneuron the
right to nominate one designee for election to the Company's Board of Directors,
for so long as Interneuron reports the Company's financial results on a
consolidated basis, on an equity basis or otherwise on a basis pursuant to which
a portion of the Company's results of operations appear in the financial results
of operations of Interneuron. After the Offering, Interneuron will continue to
have substantial influence in the election of directors of the Company and
voting with respect to matters submitted to stockholders, including
extraordinary corporate transactions such as a merger or sale of substantially
all of the Company's assets. Interneuron's ownership of a substantial block of
the Company's voting stock could have the effect of delaying or preventing sales
of additional securities of the Company or a sale of the Company or other change
of control supported by the other stockholders of the Company. In addition, the
Company may be subject to various risks arising from Interneuron's influence
over the Company, including conflicts of interest relating to new business
opportunities that could be pursued by the Company or by Interneuron and its
other affiliates, and significant corporate transactions for which stockholder
approval is required. See "Risk Factors--Control of Company By, and Potential
Conflicts of Interest With, Interneuron."
In connection with the Mercator Bridge Financing prior to the closing of the
Acquisition, Interneuron has agreed to loan to the Company up to an aggregate of
$6.6 million pursuant to a promissory note secured by the Company's assets. The
Interneuron Bridge Loan bears interest at a rate of 10% per annum and is
repayable in full on maturity at January 15, 1999 in the event there is no
initial public offering. The
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principal and accrued interest on the Interneuron Bridge Loan will be repaid out
of the proceeds of the Offering. The outstanding principal balance of the
Interneuron Bridge Loan outstanding at consummation of the Offering will depend
upon the timing of the Offering's completion. The principal balance outstanding
at February 28, 1997 was $400,000 and is expected to increase by approximately
$800,000 per month in order to fund the operations of Mercator pending
completion of the Acquisition. See "Use of Proceeds."
Interneuron has no obligation to invest any further funds in the Company or
otherwise provide funding to the Company after the Offering, and the Company
does not expect Interneuron to do so. The Company intends to seek additional
funding through public or private equity or debt financing and collaborative
arrangements. There can be no assurance that additional financing will be
available when needed, or that, if available, such financing will be available
on terms acceptable to the Company. See "Risk Factors--Need for Additional
Capital; Uncertainty of Additional Funding."
Interneuron has entered into a lock-up agreement which limits its ability to
sell shares of the Company's Common Stock during the 365-day period following
the date of this Prospectus. See "Shares Eligible for Future Sale" and
"Underwriting."
THE OHIO UNIVERSITY FOUNDATION
Upon the Company's formation in February 1992, The Ohio University
Foundation purchased 125,000 shares of Common Stock at a purchase price of
$0.002 per share, and Dr. Thomas Wagner, an employee of Ohio University and an
affiliate of The Ohio University Foundation, purchased 125,000 shares of Common
Stock at $0.002 per share. Pursuant to certain antidilution rights, The Ohio
University Foundation was issued an additional 53,750 shares of Common Stock
from fiscal 1992 through fiscal 1994. Also, in December 1994, Dr. Wagner
received an additional 53,750 shares of Common Stock pursuant to similar
antidilution provisions contained in a related stock purchase agreement. In
February 1996, The Ohio University Foundation purchased an additional 58,333
shares of Common Stock for a purchase price of $6.00 per share pursuant to a
stock purchase agreement. In the event that the initial public offering price
for the Common Stock is less than $12.00 per share, pursuant to such stock
purchase agreement, The Ohio University Foundation will be entitled to receive
additional shares of Common Stock such that the effective price per share paid
by The Ohio University Foundation under the agreement is equal to 50% of the
initial public offering price for the Common Stock. Assuming an initial public
offering price of $11.00 per share, 5,303 additional shares of Common Stock will
be issued to The Ohio University Foundation pursuant to such stock purchase
agreement. In connection with the February 1996 issuance of 58,333 shares, the
Company and The Ohio University Foundation amended certain provisions of the
1992 stock purchase agreement in exchange for which Progenitor granted The Ohio
University Foundation the right to purchase 25,000 shares of the Company's
Common Stock at a price equal to 50% of the initial public offering price. The
Ohio University Foundation has agreed to exercise such right to purchase 25,000
shares immediately prior to the Offering at a price equal to $5.50 per share.
Ohio University entered into license and sponsored research agreements with
the Company (or its predecessor) in January 1992 and April 1993. The April 1993
sponsored research agreement terminated as of June 30, 1996 upon completion of
the research thereunder. Pursuant to the initial license agreement, The Ohio
University Foundation has the right to designate two members of the Board of
Directors until the completion of the Company's initial public offering. Messrs.
Axline and Peppers are Trustees of The Ohio University Foundation and serve as
The Ohio University Foundation's designees to the Company's Board of Directors.
Under the Ohio University license and sponsored research agreements, Progenitor
paid Ohio University an aggregate of approximately $570,000, $246,000, $397,000,
$109,000 and $41,000 in fiscal 1993, 1994, 1995, 1996 and for the three months
ended December 31, 1996, respectively. Ohio University also is entitled to
receive royalties based on any sales of licensed products resulting from such
arrangements. Under a consulting agreement with Dr. Wagner entered into in
February 1992, Progenitor paid Dr. Wagner consulting fees of approximately
$93,000, $93,000, $113,000, $60,000 and $15,000 during fiscal 1993, 1994, 1995,
1996 and for the three months ended December 31, 1996, respectively. See
"Business--License Agreements."
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TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
On January 3, 1993, the Company entered into an employment agreement with
Dr. Given. Under the agreement, Dr. Given received the right to a $100,000 loan
bearing interest at 7% annually for the purchase of a home in Ohio. Upon the
granting of the loan, the Company waived the charging of interest on the loan,
and certain other provisions of the agreement relating to the loan, and received
from Dr. Given an interest-free promissory note in the amount of $100,796
secured by the property purchased. The note requires Dr. Given to repay at least
$60,796 of the loan on or before April 1, 1997. Of this portion, $20,000 was
forgiven effective in fiscal 1996 at the approval of the Board of Directors. The
$40,000 second portion of the promissory note is payable on or before April 15,
1997 or upon the termination of Dr. Given's employment and is subject to
forgiveness in increments upon the achievement of certain performance
milestones, including a successful initial public offering of the Company's
Common Stock. As of February 28, 1997, the Company had forgiven, effective in
fiscal 1996, $10,000 of the loan pursuant to this provision. In December 1996
and January 1997, an aggregate income tax gross-up payment of $19,636 was made
to Dr. Given in respect of such prior loan forgiveness. On January 17, 1997, an
additional $35,398 was forgiven in connection with the completion of the license
agreement with Amgen. An income tax gross-up payment of $27,198 was made in
connection with such forgiveness. Upon completion of the Offering, the remaining
balance of the promissory note is subject to forgiveness and will also be
subject to such gross-up payments. Dr. Given's employment agreement terminated
on January 3, 1997 except with respect to these loan provisions.
The Company has entered into the Revised Given Employment Agreement with Dr.
Given. See "Management--Employment Agreements." In addition to the compensation
package described in "Management--Employment Agreements," Dr. Given will receive
assistance with expenses related to possible relocation to California. Under the
Revised Given Employment Agreement, Dr. Given will receive $144,000, payable in
$4,000 monthly increments over three years for use in repaying any mortgage loan
obtained in connection with a new home in California.
The Company will also loan up to $200,000 at 7% interest to Dr. Given for
the purpose of buying a new home in California ("Home Loan"). During the first
three years of the Home Loan, interest will accrue rather than compound and no
payments will be due during such period. After the initial three year period,
interest only payments will be due monthly, with the accrued interest to be
amortized and paid in 36 equal installments over the subsequent three years,
together with interest then currently accruing. The Home Loan will be secured by
a subordinated second deed of trust on the new home. Portions of the Home Loan
will be repayable as follows: (a) installments of 25% of the original principal
balance plus accrued interest will be forgiven by the Company upon the closing
of each single transaction providing the Company with committed funds of at
least $2,000,000 in the form of either equity, convertible debt or net proceeds
to the Company (and the Company will also pay to Dr. Given an amount necessary
to gross up for federal and state income taxes on the forgiven loan amounts);
(b) within 30 days after the sale of Company securities held by Dr. Given which
were acquired pursuant to options granted to him, in an amount equal to 25% of
the net proceeds received by Dr. Given from such a sale; (c) upon the sale of
the new home; and (d) in full upon the earlier of the fifth anniversary of the
making of the Home Loan or one year after the termination of Dr. Given's
employment with the Company.
In connection with the Revised Given Employment Agreement, the Company will
also pay the monthly mortgage payments on Dr. Given's Ohio home from the date
Dr. Given acquires a new home in California until the earlier of one year after
Dr. Given acquires a new home in California or the sale of the Ohio home. The
Company will also reimburse additional customary relocation expenses.
Effective as of May 24, 1996, Dr. Doros Platika's employment terminated
pursuant to a Separation Agreement and Release (the "Release") among the
Company, Dr. Platika and Interneuron. The Release obligates Dr. Platika to
provide services to the Company in a consulting capacity for a minimum of twenty
hours per month for the six-month period following May 24, 1996. Dr. Platika
also agreed not to compete with the Company for a period of two years after his
termination. The Release also contains arrangements with respect to loans made
by the Company to Dr. Platika and certain stock options to acquire securities of
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the Company and Interneuron. Prior to termination, the Company had made loans to
Dr. Platika that had a balance of $242,850, including accrued interest as of
July 23, 1996, which amount reflects the forgiveness effective in fiscal 1996 of
$26,424 of such loans previously approved by the Board of Directors. Pursuant to
the Release, an additional $120,000 of this balance was forgiven subject to Dr.
Platika's payment to the Company of withholding payments required with respect
thereto and with respect to the loans to Dr. Platika previously forgiven by the
Company effective in fiscal 1996. The remaining balance of $96,426, along with
applicable withholding payments, was paid by Dr. Platika as of July 23, 1996.
The Company will incur a charge to operations equal to the amount of loan
forgiveness in connection with the Release. Prior to the Release, the Company
had granted Dr. Platika options to purchase a total of 77,500 shares of Common
Stock, at exercise prices ranging from $0.20 to $6.00 per share. Of these,
options to purchase a total of 23,750 shares of Common Stock had previously
vested. The Release provides for the vesting as of June 1, 1996 of options to
purchase 6,875 shares of Common Stock at $0.20 per share and the vesting as of
June 15, 1996 of options to acquire 2,500 shares of Common Stock at $4.00 per
share. All of Dr. Platika's other unvested options were canceled pursuant to the
Release. As of August 23, 1996, Dr. Platika had exercised all of his 33,125
vested options. In connection with the Release, Interneuron agreed to accelerate
vesting of stock options to purchase 2,500 shares of Interneuron Common Stock at
a price per share of $8.75, which options were exercisable by Dr. Platika on or
prior to August 24, 1996. As of August 15, 1996, Dr. Platika had exercised all
of these Interneuron options.
The Revised Sigal Employment Agreement provides for the grant to Dr. Sigal
of options to acquire the Company's Common Stock in the amount of 1% of the
outstanding shares of Common Stock on a fully diluted basis after the closing of
the Offering. See "Management--Employment Agreements--Elliott Sigal."
The Company has granted stock options to its directors and executive
officers on several occasions since the beginning of fiscal 1993, all of which
vest over a four-year period from the date of grant, except as indicated below.
In fiscal 1993, Dr. Snodgrass received options to purchase 5,000 shares of
Common Stock at an exercise price of $0.20 per share, and options to purchase
5,000 shares of Common Stock at an exercise price of $2.00 per share.
During fiscal 1994, Mr. Sharrock received options to purchase 2,500 shares
of Common Stock at an exercise price of $4.00 per share, which vest over three
years. Also in fiscal 1994, the Company granted Drs. Cooper, Given, Snodgrass
and Williams options to purchase 8,500, 16,500, 10,000 and 20,000 shares of
Common Stock, respectively, at an exercise price of $4.00 per share.
In September 1995, the Company granted options to Drs. Given, Snodgrass and
Williams to purchase 45,000, 17,500 and 17,500 shares, respectively, at an
exercise price of $6.00 per share, which originally were intended to vest on
September 14, 2002. These options were amended by the Board of Directors on May
13, 1996, so that one-third of such options vest on each anniversary date of the
date of grant. In September 1995, the Company granted to Dr. Given options to
purchase an additional 50,000 shares at an exercise price of $6.00 per share,
which also vest over three years from the date of grant. In September 1995 the
Company also granted to Dr. Snodgrass options to purchase 12,500 shares of
Common Stock, all of which vest upon the earliest of the achievement of
performance milestones relating to the leptin receptor program or the BFU-e
growth factor program, or September 14, 2002.
On February 21, 1996, each of Messrs. Axline, Haig, Peppers and Sharrock
received options to purchase 7,500 shares of Common Stock at an exercise price
of $6.00 per share.
All of the option grants described above were made pursuant to the 1992
Stock Option Plan.
Certain options previously granted to Named Executive Officers and directors
of the Company were cancelled and regranted on December 30, 1996. See
"Management--Cancellation and Regrant of Options."
On March 7, 1997, the Board of Directors approved an amendment to the 1996
Stock Incentive Plan to increase by 2,000,000 the number of shares of Common
Stock reserved and available for issuance pursuant to stock options granted
thereunder.
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Upon the closing of the Offering, Drs. Given, Snodgrass and Williams, and
Mr. Bagnall will be granted options to purchase 310,000, 70,000, 67,500 and
70,000 shares of the Company's Common Stock, respectively, at an exercise price
equal to the initial public offering price. Such options will vest quarterly
over a period of three years from the date of grant, subject to accelerated
vesting in certain circumstances under the terms of each officer's employment
agreement or employment letter, as applicable.
The Compensation Committee also approved on December 30, 1996 an incentive
bonus program for executive officers of the Company providing for bonus payments
based upon a percentage of base salary based upon various performance milestones
primarily related to the Acquisition and the Offering. The amount of such bonus
payments to Drs. Given, Snodgrass and Williams and to Mr. Bagnall will be
approximately $150,000, $95,000, $95,000 and $95,000, respectively, assuming an
initial public offering price of $11.00 per share and an aggregate offering of
2,750,000 shares.
INSIDER TRANSACTIONS
The Company has adopted a policy that all future transactions between the
Company and its executive officers, directors and other affiliates must be
approved by a majority of the disinterested members of the Company's Board of
Directors, and must be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties. In addition, this policy requires that
any loans by the Company to its executive officers, directors or other
affiliates be for bona fide business purposes only. A determination of which
directors are disinterested with respect to a particular transaction will depend
upon the totality of circumstances including whether the directors possess a
direct or indirect material interest in the transaction or in another party
involved in the transaction.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 28, 1997, (assuming the
consummation of the Acquisition for Final Acquisition Consideration of $22.0
million and the sale of Amgen Shares to Amgen), and as adjusted to reflect the
sale of the 2,750,000 shares of Common Stock being offered hereby, by (i) each
stockholder who is known by the Company to own beneficially more than 5% of the
Company's outstanding Common Stock; (ii) each director and Named Executive
Officer of the Company; and (iii) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
NUMBER OF OWNED(2)
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
Glenn L. Cooper, M.D.(3) .................................... 4,595,409 62.6% 43.3%
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Interneuron Pharmaceuticals, Inc. ........................... 4,529,745 61.7 42.7
One Ledgemont Center
99 Hayden Avenue
Lexington, Massachusetts 02173
Entities affiliated with Robertson, Stephens & Co. Group, 718,146 9.8 6.8
L.L.C.(4) .................................................
c/o Robertson, Stephens & Co.
555 California Street, Suite 2600
San Francisco, CA 94104
Entities affiliated with InterWest Partners(5) .............. 490,956 6.7 4.6
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Robert R. Momsen(6) ......................................... 490,956 6.7 4.6
c/o InterWest Partners
3000 Sand Hill Road
Building 3, Suite 255
Menlo Park, CA 94025
Entities affiliated with Oak Investment Partners(7) ......... 441,021 6.0 4.2
c/o Oak Investment Partners
One Gorham Island
Westport, CT 06880
Douglass B. Given, M.D., Ph.D.(8)............................ 122,823 1.7 1.2
Morris Laster, M.D........................................... 112,500 1.5 1.1
Elliott Sigal, M.D., Ph.D.(9)................................ 96,682 1.3 *
Mark N.K. Bagnall(10)........................................ 27,500 * *
H. Ralph Snodgrass, Ph.D.(11)................................ 19,583 * *
Stephen J. Williams, Ph.D.(12)............................... 15,833 * *
David B. Sharrock(13)........................................ 4,375 * *
Robert P. Axline(14)......................................... 1,875 * *
</TABLE>
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<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
NUMBER OF OWNED(2)
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------- ----------- ------------ ------------
Alexander M. Haig, Jr.(15)................................... 1,875 * *
<S> <C> <C> <C>
Jerry P. Peppers(16)......................................... 1,875 * *
4,903,648 65.7 45.7
All executive officers and directors as a group
(11 persons)(17)...........................................
</TABLE>
- ------------------------
* Less than one percent.
(1) To the Company's knowledge, except as indicated in the footnotes to this
table and subject to applicable community property laws, each of the persons
named in this table has sole voting and investment power with respect to all
shares of Common Stock indicated opposite such person's name.
(2) Percentage of beneficial ownership is based on 7,339,998 shares of Common
Stock outstanding as of February 28, 1997, assuming (i) the conversion of a
convertible debenture and a portion of the promissory note held by
Interneuron and all outstanding shares of Progenitor's Preferred Stock into
Common Stock (based on outstanding balances of $6.6 million as of February
28, 1997), (ii) the issuance of 1,679,255 shares of Common Stock to the
Mercator stockholders pursuant to the Acquisition (assuming Final
Acquisition Consideration of $22.0 million for Mercator), (iii) the issuance
of 5,303 shares of Common Stock to The Ohio University Foundation, pursuant
to certain anti-dilution adjustment rights, and (iv) 10,614,998 shares of
Common Stock outstanding after completion of the Offering, reflecting (a)
the sale of 2,750,000 shares of Common Stock being offered hereby, (b) the
purchase by The Ohio University Foundation of 25,000 shares of Common Stock,
pursuant to a stock purchase right, and (c) the issuance to Amgen of the
Amgen Shares. See "Capitalization" and "Description of Capital Stock."
Shares of Common Stock subject to options, warrants (including the Mercator
Warrants) and convertible notes and other purchase rights currently
exercisable or convertible, or exercisable or convertible within 60 days of
February 28, 1997 are deemed outstanding for computing the percentage of the
person or entity holding such securities but are not deemed outstanding for
computing the percentage of any other person or entity.
(3) Includes 4,529,745 shares held by Interneuron, options exercisable for
4,250 shares of Common Stock held by Dr. Cooper and options exercisable for
2,000 shares of Common Stock held by Dr. Cooper's wife. Dr. Cooper is
President, Chief Executive Officer and a director of Interneuron. Dr. Cooper
disclaims beneficial ownership of the shares held by Interneuron.
(4) Consists of 497,743 shares held by RS & Co. IV, L.P. ("RS"), 132,566 shares
held by The Robertson, Stephens Orphan Fund ("RSOF") and 87,837 shares held
by Bayview Investors, Ltd. ("Bayview"). The General Partner of RS is RS &
Co. Venture Partners IV, L.P., the General Partners of which consist of
individuals including M. Kathleen Behrens, a director of Mercator, that
share voting and investment power over securities held by RS. The General
Partners of RSOF are Bayview and Robertson, Stephens & Company Investment
Management, L.P., the General Partners of which are Robertson, Stephens
Private Equity Group, L.L.C. and RS & Co. Inc., respectively. The Managing
Member of Robertson, Stephens Private Equity Group, L.L.C. is RS & Co. Inc.,
the shareholders of which are a group of individuals. All of the individuals
described above disclaim beneficial ownership of the securities held by RS,
RSOF and Bayview.
(5) Consists of 487,722 shares held by InterWest Partners V, L.P. ("Partners")
and 3,234 shares held by InterWest Investors V ("Investors"). The General
Partner of Partners is InterWest Management Partners V, L.P., the General
Partners of which consist of individuals including Robert R. Momsen, a
director of Mercator (who has also agreed to become a director of the
Company), that share voting and investment power over securities held by
Partners. The General Partners of Investors consist of individuals including
Robert R. Momsen that share voting and investment power over securities held
by Investors. All of the individuals described above disclaim beneficial
ownership of the securities held by Partners and Investors, except to the
extent of their pro rata partnership interests therein.
(6) Consists of 487,722 shares held by Partners and 3,234 shares held by
Investors. Mr. Momsen is a General Partner of both Partners and Investors.
Mr. Momsen disclaims beneficial ownership of the securities held by Partners
and Investors except to the extent of his pro rata partnership interests
therein.
(7) Consists of 431,319 shares held by Oak Investment Partners V, Limited
Partnership ("Oak Investment") and 9,702 shares held by Oak V Affiliates
Fund ("Oak Affiliates"). Oak Associates V, L.L.C. is
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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.
(8) Includes 82,907 shares held by a limited partnership of which Dr. Given is
a general partner and options exercisable for 39,916 shares of Common Stock.
(9) Includes options exercisable for 96,682 shares of Common Stock. Dr. Sigal
has agreed to become an executive officer of the Company upon the closing of
the Offering.
(10) Includes options exercisable for 27,500 shares of Common Stock
(11) Includes options exercisable for 19,583 shares of Common Stock.
(12) Includes options exercisable for 15,833 shares of Common Stock.
(13) Includes options exercisable for 4,375 shares of Common Stock.
(14) Includes options exercisable for 1,875 shares of Common Stock.
(15) Includes options exercisable for 1,875 shares of Common Stock.
(16) Includes options exercisable for 1,875 shares of Common Stock.
(17) Includes options exercisable for 119,082 shares of Common Stock. See
footnotes 3, 8 and 10-16 above. Does not include shares beneficially owned
by Mr. Momsen or Dr. Sigal.
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DESCRIPTION OF CAPITAL STOCK
The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation") currently authorizes 44,000,000 shares of capital stock,
consisting of 39,000,000 shares of Common Stock, Class A, $0.001 par value, and
5,000,000 shares of Preferred Stock, $0.01 par value. In connection with the
Offering, the Company's Certificate of Incorporation will be restated (the
"Restated Certificate of Incorporation"). Upon the closing of the Offering, the
Restated Certificate of Incorporation will authorize the issuance of 44,000,000
shares of capital stock, consisting of 39,000,000 shares of Common Stock, par
value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value
$0.001 per share. Set forth below is a description of the capital stock of the
Company.
COMMON STOCK
As of February 28, 1997, assuming the conversion of all outstanding shares
of Progenitor's Preferred Stock and a convertible debenture and a portion of the
promissory note held by Interneuron into Common Stock, the exercise of the stock
purchase right described below, the sale of the Amgen Shares pursuant to the
Amgen Purchase Agreement and the issuance of 1,679,255 shares of Common Stock
pursuant to the Acquisition, there were 7,864,998 shares of Common Stock issued
and outstanding held of record by 118 stockholders, 988,984 shares of Common
Stock issuable upon the exercise of outstanding stock options (including
Replacement Options) and 59,675 shares of Common Stock issuable upon the
exercise of outstanding warrants (including the Mercator Warrants).
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders and are not entitled to cumulative
voting rights with respect to the election of directors. Accordingly, holders of
a majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor,
subject to preferences that may be applicable to any outstanding Preferred
Stock. In the event of liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all net assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption, conversion or other subscription rights, and there are
no sinking fund provisions applicable to the Common Stock. All currently
outstanding shares of Common Stock are, and the shares of Common Stock being
issued and sold in the Offering will be, duly authorized, validly issued, fully
paid and nonassessable.
PREFERRED STOCK
The Company currently has outstanding 2,020,496 shares of Series A Preferred
Stock and 349,000 shares of Series B Preferred Stock. Such shares will
automatically convert into Common Stock upon consummation of the Offering. Both
the Series A and Series B Preferred Stock have antidilution and conversion
adjustment provisions that will increase or decrease the number of shares of
Common Stock outstanding as of February 28, 1997 above or below the number of
shares set forth herein and will increase or decrease the number of shares used
in calculations for purposes of, among other things, dilution to new investors,
shares held by certain principal stockholders, shares subject to registration
rights and shares eligible for future sale, in the event that the initial public
offering price of the Common Stock is less than or greater than $11.00 per
share, as the case may be. See "Dilution," "Principal Stockholders,"
"--Registration Rights" and "Shares Eligible for Future Sale."
The actual number of shares of Common Stock issuable to each holder of
Preferred Stock upon conversion of the Series A and Series B Preferred Stock
will equal the product of (a) the number of shares of Preferred Stock held by
such holder and (b) the greater of (x) one or (y) a fraction, the numerator of
which is $12.50 and the denominator of which is 1.2403 multiplied by the initial
public offering price. At the assumed initial public offering price of $11.00
per share of Common Stock, 2,170,893 shares of Common Stock will issue upon
conversion of the Preferred Stock. The number of shares issuable upon conversion
of such Preferred Stock will increase pursuant to a guaranteed quarterly return
available to holders of the Series A and Series B Preferred Stock that is
determined on each of April 7, July 7, October 7 and January 7.
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On March 7, 1997, the Board of Directors authorized the designation of
2,000,000 shares of Series C Preferred Stock. In the event that the Offering is
not consummated, Interneuron has the option to convert the convertible debenture
and a portion of the promissory note held by Interneuron into such Series C
Preferred Stock.
Following completion of the Offering and the conversion of all outstanding
shares of Preferred Stock, the Board of Directors will have the authority to
issue from time to time up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the powers, designations, preferences and relative,
participating, optional or other rights thereof, including dividend rights,
conversion rights, voting rights, redemption terms, liquidation preferences and
the number of shares constituting each such series, without any further vote or
action by the Company's stockholders. The issuance of Preferred Stock could
adversely affect the rights of holders of Common Stock and could have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
STOCK PURCHASE RIGHT AND WARRANTS
Pursuant to a Stock Purchase Agreement entered into on March 27, 1992, as
amended on February 26, 1996, the Company granted The Ohio University Foundation
the right to purchase up to 25,000 shares of Common Stock in the event of an
initial public offering, merger or other similar corporate transaction involving
the Company, at a price equal to 50% of the assumed initial public offering
price per share or other per share consideration. The Ohio University Foundation
has agreed to exercise such right at a price per share of $5.50 prior to the
closing of the Offering. See "Certain Transactions--The Ohio University
Foundation."
As of February 28, 1997, there were warrants outstanding to purchase an
aggregate of 31,952 shares of Series B Preferred Stock at an exercise price of
$7.50 per share. The warrants also contain a cashless exercise right that allows
the holder to receive the number of shares of Series B Preferred Stock subject
to the warrant multiplied by a fraction, the numerator of which is the
difference between the then current per share market price of the Common Stock
and $7.50 and the denominator of which is the then current per share market
price of the Series B Preferred Stock. These warrants were issued in connection
with a private placement of Preferred Stock for which Paramount, an affiliate of
Interneuron, acted as placement agent. See "Certain Transactions--Relationship
with Interneuron." The warrants expire five years from the date of the Offering.
Upon automatic conversion of the outstanding Preferred Stock in connection with
the closing of the Offering, all such warrants will be converted into warrants
to purchase shares of Common Stock. The number of shares of Common Stock for
which such warrants are exercisable is subject to adjustment if the initial
public offering price for the Common Stock is less than or greater than $11.00
per share in the same manner and according to the same formula described above
for the conversion of the Company's currently outstanding Preferred Stock. See
"--Preferred Stock." The warrants do not confer upon the holder thereof any
voting or preemptive rights, or any other rights as a stockholder of the Company
prior to exercise. Upon exercise of such warrants, holders of the underlying
shares of Common Stock will be entitled to certain registration rights with
respect to such shares. See "--Registration Rights."
On August 1, 1993, Mercator issued a warrant (the "Series A Warrant") to
purchase up to 17,850 shares of its Series A Preferred Stock to Phoenix Leasing
Incorporated ("Phoenix") at an initial exercise price of $2.80 per share (as
such price may be adjusted pursuant to the Series A Warrant). The Series A
Warrant also contains a cashless conversion right that allows the holder to
receive a number of shares of Series A Preferred Stock equal to the number of
Series A Preferred Stock purchasable pursuant to the Series A Warrant multiplied
by a fraction, the numerator of which is the difference between the current per
share Fair Market Value (as defined in the Series A Warrant) and the exercise
price, and the denominator of which is the current per share Fair Market Value.
The Series A Warrant expires on the later of August 31, 2003 and the fifth
anniversary of the closing of an initial public offering of Mercator's capital
stock.
On October 28, 1994, Mercator issued a warrant (the "Series B Warrant," and
together with the Series A Warrant, the "Mercator Warrants") to purchase up to
46,800 shares of its Series B Preferred Stock to Phoenix at an initial exercise
price of $2.50 per share (as such price may be adjusted pursuant to the Series B
Warrant). The Series B Warrant also contains a cashless conversion right that
allows the
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holder to receive a number of shares of Series B Preferred Stock equal to the
number of Series B Preferred Stock purchasable pursuant to the Series B Warrant
multiplied by a fraction, the numerator of which is the difference between the
current per share Fair Market Value (as defined in the Series B Warrant) and the
exercise price, and the denominator of which is the current per share Fair
Market Value. The Series B Warrant expires on the later of October 28, 2004 and
the fifth anniversary of the closing of an initial public offering of Mercator's
capital stock.
The Mercator Warrants do not confer upon the holder any voting or preemptive
rights, or any other rights as a shareholder of the Company prior to exercise.
The Acquisition Agreement provides that Mercator will use commercially
reasonable efforts to cause all holders of Mercator Warrants to exercise such
Mercator Warrants on or prior to the closing of the Acquisition. Any Mercator
Warrants that are outstanding as of February 14, 1997 and not expired as of the
closing of the Acquisition will be assumed by the Company and converted into
warrants to purchase the number of shares of Common Stock which the holder would
have been entitled to receive had the Mercator Warrants been exercised
immediately prior to the closing of the Acquisition at an aggregate exercise
price equal to the former aggregate exercise price and subject to the same terms
and conditions as were applicable to such Mercator Warrants prior to the
Acquisition. Pursuant to the Acquisition, to the extent they are not exercised,
the Series A Warrant will be converted into a warrant to purchase 16,488 shares
of Common Stock at an exercise price of $3.03 per share, and the Series B
Warrant will be converted into a warrant to purchase 11,235 shares of Common
Stock at an exercise price of $10.41 per share, in each case assuming Final
Acquisition Consideration of $22.0 million for Mercator.
REGISTRATION RIGHTS
The holders of shares of Common Stock (the "Registrable Securities")
issuable, after completion of the Offering, upon exercise of outstanding
warrants to purchase an aggregate of 31,952 shares of Common Stock (assuming an
initial public offering price of $11.00 per share of Common Stock) are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. Pursuant to the registration rights, subject to certain
exceptions and limitations, the holders of at least 50% of the Registrable
Securities may require, on one occasion during the four-year period commencing
12 months after the closing of the Offering (the "Registration Period"), that
the Company use its best efforts to register the Registrable Securities for
public resale. In addition, in the event the Company elects to register any
Common Stock under the Securities Act, either for its own account or for the
account of any other stockholders, the Company is required to notify, and
subject to certain marketing and other limitations, is required to include in
such registration the Registrable Securities of holders requesting registration.
All registration expenses of any such registration are to be borne by the
Company and all selling expenses relating to Registrable Securities are to be
borne by the holders of the securities being registered. See "Certain
Transactions--Relationship with Interneuron."
Pursuant to the Amgen Purchase Agreement, the Company has granted certain
demand registration rights to Amgen which become operative six months after the
Offering. In addition, the Company has granted certain "piggy-back" registration
rights to Amgen at any time the Company determines to register any shares of
Common Stock, other than pursuant to an initial public offering or in certain
other circumstances. Under the Amgen Purchase Agreement, the Company is required
to use reasonable efforts to effect such registration of all or a portion of the
Amgen Shares as may be requested by Amgen subject to certain limitations,
including underwriter's cutback provisions. The registration expenses of any
such registration are to be borne by the Company subject to certain limitations.
CONVERTIBLE DEBENTURE AND PROMISSORY NOTE
On March 31, 1995, the Company issued a convertible debenture in the amount
of $387,968 to Interneuron, and procured an additional advance of $28,651 under
such debenture on June 30, 1995. The debenture is convertible immediately prior
to the closing of the Offering into a number of shares of Common Stock equal to
the outstanding principal amount and any accrued interest divided by the initial
public offering price for the Common Stock, plus a cash payment in lieu of
fractional shares.
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Interneuron has provided and continues to provide advances to the Company
through a promissory note dated March 31, 1996, in the principal amount of
approximately $525,000, which has increased to approximately $6.2 million as of
February 28, 1997, payable on the earlier of five years from the date of the
note or the closing of the Offering. Interneuron has agreed to convert a portion
of the indebtedness evidenced by the note (approximately $6.1 million from an
outstanding balance of approximately $6.2 million as of February 28, 1997),
including additional advances from April 1, 1996 through to October 1, 1996 and
accrued interest thereon, into shares of Common Stock upon the closing of the
Offering at a conversion price equal to the initial public offering price. All
additional advances from October 1, 1996 through the closing of the Offering
that relate to the costs of the Offering will be repaid from the net proceeds of
the Offering (an aggregate of approximately $85,000 of principal and accrued
interest as of February 28, 1997). See "Use of Proceeds" and "Certain
Transactions--Relationship with Interneuron."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"), an anti-takeover law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is, or the transaction in which the
person became an interested stockholder was, approved in a prescribed manner or
another prescribed exemption applies. For purposes of Section 203, a "business
combination" is defined broadly to include a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. In
general, an "interested stockholder" is a person who, together with affiliates
and associates, owns (or within the three years prior to such transaction, did
own) 15% or more of the corporation's voting stock.
In addition, certain provisions of the Company's Restated Certificate of
Incorporation may have the effect of preventing, discouraging or delaying any
change in control of the Company. The authorization of undesignated Preferred
Stock makes it possible for the Board of Directors to issue Preferred Stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of the Company. See "--Preferred Stock."
LIMITATION OF LIABILITY
Section 145 ("Section 145") of the DGCL provides a detailed statutory
framework covering indemnification of officers and directors against liabilities
and expenses arising out of legal proceedings brought against them by reason of
their being or having been directors or officers. Section 145 generally provides
that a director or officer of a corporation (i) shall be indemnified by the
corporation for all expenses of such legal proceedings when he is successful on
the merits, (ii) may be indemnified by the corporation for the expenses,
judgments, fines and amounts paid in settlement of such proceedings (other than
a derivative suit), even if he is not successful on the merits, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful, and
(iii) may be indemnified by the corporation for the expenses of a derivative
suit (a suit by a stockholder alleging a breach by a director or officer of a
duty owed to the corporation), even if he is not successful on the merits, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. No indemnification may be made
under clause (iii) above, however, if the director or officer is adjudged liable
for negligence or misconduct in the performance of his duties to the
corporation, unless a corporation determines that, despite such adjudication,
but in view of all the circumstances, he is entitled to indemnification. The
indemnification described in clauses (ii) and (iii) above may be made only upon
a determination that indemnification is proper because the applicable standard
of conduct has been met. Such a determination may be made by a majority of a
quorum of disinterested directors, independent legal counsel, the stockholders
or a court of competent jurisdiction.
The Company's Restated Certificate of Incorporation will provide that the
Company shall indemnify to the fullest extent permitted by Section 145, as it
now exists or as amended, all persons whom it may indemnify pursuant thereto.
The Company has entered into agreements to indemnify its directors and
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executive officers, in addition to indemnification provided for in the Company's
charter documents. These agreements, among other things, provide for the
indemnification of the Company's directors and executive officers for certain
expenses (including attorneys' fees), judgments, fines and settlement amounts
incurred by any such person in any action or proceeding, including any action by
or in the right of the Company, arising out of such person's services as a
director or executive officer of the Company, any subsidiary of the Company or
any other company or enterprise to which such person provides services at the
request of the Company to the fullest extent permitted by applicable law. The
Company believes that these provisions and agreements will assist the Company in
attracting and retaining qualified persons to serve as directors and executive
officers.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit. The Company's Restated Certificate of Incorporation will provide for
the elimination of personal liability of a director for breach of fiduciary
duty, as permitted by Section 102(b)(7) of the DGCL.
The Underwriting Agreement provides for indemnification by the Underwriters
under certain circumstances of directors, officers and controlling persons of
the Company against certain liabilities, including liabilities under the
Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions contained in the Certificate of Incorporation and
Bylaws of the Company, the DGCL, the Underwriting Agreement, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer or controlling person in connection with the
Common Stock being registered hereunder, the Company will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Prior to the closing of the Offering, the Company intends to obtain
liability insurance insuring the Company's officers and directors against
liabilities that they may incur in such capacities.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company has been appointed as the transfer
agent and registrar for the Company's Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for the Common
Stock and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after the Offering. Sales of
substantial amounts of Common Stock in the public market after the Offering, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities.
After the Offering, the Company will have outstanding 10,614,998 shares of
Common Stock (11,027,498 shares if the Underwriters' over-allotment option is
exercised in full), including the shares of Common Stock to be issued to
Mercator stockholders in the Acquisition, the Amgen Shares and the 25,000 shares
to be purchased by The Ohio University Foundation. Of these shares, the
2,750,000 shares of Common Stock offered hereby will be freely tradeable without
restriction in the public market under the Securities Act of 1933, as amended
(the "Securities Act"), unless such shares are held by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act. The
shares of the Company's Common Stock to be issued in connection with the
Acquisition will be registered under the Company's Registration Statement on the
Form S-4. However, 1,650,123 of such shares issued to "affiliates" of Mercator
within the meaning of Rule 145 under the Securities Act will be subject to
certain volume, manner of sale and other limitations under Rules 144 and 145.
The remaining 6,185,743 shares of Common Stock outstanding upon completion
of the Offering will be "restricted securities" as that term is defined in Rule
144 ("Restricted Shares"). The Restricted Shares were issued and sold by the
Company in private transactions in reliance upon exemptions from registration
under the Securities Act. Restricted Shares may not be sold in the public market
unless they are registered under the Securities Act or are sold pursuant to Rule
144 or another exemption from registration.
Pursuant to "lockup" agreements, all of the Company's executive officers and
directors and certain stockholders, who collectively hold 1,007,581 of such
Restricted Shares, have agreed not to offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any such shares for a period of 180
days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. Interneuron will hold 4,529,745 Restricted Shares and has
agreed pursuant to a lockup agreement not to offer, sell or otherwise dispose of
any of its Restricted Shares for a period of 365 days from the date of this
Prospectus without the prior written consent of Lehman Brothers Inc. The Company
also has agreed that it will not offer, sell or otherwise dispose of Common
Stock for a period of 180 days from the date of this Prospectus, other than
pursuant to existing stock option plans, without the prior written consent of
Lehman Brothers Inc. In addition, Amgen has agreed not to offer, sell or
otherwise dispose of, for a period of 180 days from the date of this Prospectus,
any of the Amgen Shares without the prior written consent of the Company, and
the Company has agreed in the Underwriting Agreement that it will not grant such
consent without the prior written consent of Lehman Brothers Inc. To date,
substantially all stockholders and optionholders of Mercator have entered into
Mercator Lockup Agreements with Progenitor, pursuant to which they have agreed
not to offer, sell or otherwise dispose of shares of the Company's Common Stock
acquired in the Acquisition (including upon the exercise of any Replacement
Options after the Acquisition) without the prior written consent of Lehman
Brothers Inc. Such restrictions lapse as to one-third of all shares beneficially
owned by a holder after each of 180 days, 270 days and 365 days following
completion of the Acquisition. It is a condition to the closing of the
Acquisition that all stockholders and optionholders of Mercator enter into such
Mercator Lockup Agreements, although there can be no assurance that such persons
will do so.
Upon termination of the agreements described above, approximately 692,362,
550,041 and 5,579,786 of such shares will be eligible for immediate sale in the
public market beginning 181 days, 271 and 366 days, respectively, after the date
of this Prospectus, subject to certain volume, manner of sale and other
limitations under Rules 144 and 145 and approximately 843,360, 9,711 and 40,014
of such shares will be eligible for immediate sale in the public market
beginning 181, 271 and 366 days after the date of this Prospectus without
limitation under Rule 144(k). Lehman Brothers Inc. may, at any time without
notice, release all or any portion of the shares subject to such agreements. See
"Underwriting."
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As of February 28, 1996, options to purchase a total of 988,984 shares were
outstanding under the Company's stock option plans (including the 1997 Stock
Option Plan). Of such shares, approximately 730,112, 97,674 and 97,674 shares
are subject to lockup agreements for a period of 180 days, 270 days and 365 days
from the date of this Prospectus, and the remaining 63,524 shares will be
available for sale in the public market 90 days after the date of this
Prospectus pursuant to Rule 701. As of February 28, 1996, 1,786,775 shares were
available or were to be reserved for future option grants under such plans, and
options to purchase 926,150 shares of Common Stock were to be granted under the
1996 Stock Incentive Plan upon the closing of the Offering.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares of the Company are aggregated) who
has beneficially owned Restricted Shares for at least one year (including the
holding period of any prior owner who is not an affiliate of the Company) would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of
Common Stock (approximately 106,150 shares immediately after the Offering), or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner who is not an affiliate of the
Company) is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701 under the Securities
Act, which permit non-affiliates to sell their Rule 701 shares without having to
comply with the public information, holding period, volume limitation or notice
provisions of Rule 144 and permit affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding period restrictions, in each
case commencing 90 days after the date of this Prospectus.
After the effective date of the Offering, the Company intends to file
registration statements on Form S-8 to register an aggregate of 695,962 shares
of Common Stock reserved for issuance upon exercise of outstanding options, an
aggregate of 926,150 shares of Common Stock reserved for issuance pursuant to
options to be granted upon the closing of the Offering with an exercise price
equal to the initial public offering price, an aggregate of 1,786,775 shares of
Common Stock to be reserved for grants or awards under its 1992 Stock Option
Plan, 1996 Stock Incentive Plan and 1996 Employee Stock Purchase Plan and an
aggregate of 293,022 shares of Common Stock subject to Replacement Options that
are reserved for issuance under its 1997 Stock Option Plan. Such registration
statements will become effective automatically upon filing. Shares issued under
the foregoing plans after the filing of the registration statements on Form S-8
may be sold in the open market subject, in the case of certain holders, to the
Rule 144 limitations applicable to affiliates, the above-referenced lockup
agreements and vesting restrictions imposed by the Company.
After the closing of the Offering, 31,952 shares of Common Stock issuable
upon exercise of outstanding warrants will be entitled to certain rights with
respect to the registration of such shares under the Securities Act. Certain
registration rights also have been granted to Amgen in connection with the
purchase of the Amgen Shares. See "Description of Capital Stock--Registration
Rights."
95
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement, of which this Prospectus is a part, the Underwriters named below (the
"Underwriters"), for whom Lehman Brothers Inc. and Genesis Merchant Group
Securities are acting as representatives (the "Representatives"), have severally
agreed to purchase from the Company, and the Company has agreed to sell to each
Underwriter, the number of shares of Common Stock set forth opposite the name of
each such Underwriter below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Lehman Brothers Inc........................................................
Genesis Merchant Group Securities..........................................
-----------------
Total...................................................................... 2,750,000
-----------------
-----------------
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock directly to the public initially at
the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such initial public offering price less a
selling concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other brokers and dealers. After the initial offering to the
public, the offering price and other selling terms may be changed by the
Representatives.
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the shares of Common Stock offered hereby are
subject to approval of certain legal matters by counsel and to certain other
conditions, including the condition that no stop order suspending the
effectiveness of the Registration Statement is in effect and no proceedings for
such purpose are pending or threatened by the Securities and Exchange Commission
and that there has been no material adverse change or any development involving
a prospective material adverse change in the condition of the Company from that
set forth in the Registration Statement otherwise than as set forth or
contemplated in this Prospectus, and that certain certificates, opinions and
letters have been received from the Company, its counsel and independent
auditors. The Underwriters are obligated to take and pay for all of the above
shares of Common Stock if any such shares are taken.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 412,500 shares of Common Stock exercisable solely to cover
over-allotments at the initial public offering price, less the underwriting
discounts and commissions shown on the cover page of the Prospectus. Such option
may be exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that the option is exercised, each Underwriter will be
committed to purchase a number of the additional shares of Common Stock
proportionate to each Underwriter's initial commitment as indicated in the
preceding table.
At the request of the Company, the Underwriters have reserved 100,000 shares
of Common Stock for sale to employees, directors and other persons and entities
associated with the Company. The number of shares of Common Stock available for
sale to the general public will be reduced to the extent that the reserved
shares of Common Stock are purchased by persons or entities designated by the
Company. Any reserved shares of Common Stock that are not purchased by persons
or entities designated by the
96
<PAGE>
Company will be offered by the Underwriters to the general public on the same
basis as other shares of Common Stock offered hereby.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Company, its executive officers, directors and certain employees of the
Company and other stockholders of the Company have agreed, with certain limited
exceptions and except for the shares of Common Stock to be sold in the Offering
by the Company, not to sell or otherwise dispose of (or enter into any
transaction that is designed to result in the disposition of) directly or
indirectly, other than to the Underwriters pursuant to the Underwriting
Agreement, shares of Common Stock, or any security convertible into or
exchangeable or exercisable for Common Stock, for a period of 180 days (365 days
in the case of Interneuron) after the date of this Prospectus without the prior
written consent of Lehman Brothers Inc.
Amgen has agreed not to offer, sell or otherwise dispose of, for a period of
180 days from the date of this Prospectus, any of the Amgen Shares without the
prior written consent of the Company. The Company has agreed in the Underwriting
Agreement not to waive the sale restrictions imposed on Amgen without the prior
written consent of Lehman Brothers Inc.
As a condition to consummation of the Acquisition and receipt of the Common
Stock or options resulting from the transaction, all stockholders and
optionholders of Mercator must enter into the Mercator Lockup Agreements with
the Company pursuant to which they will agree not to sell or otherwise dispose
of, directly or indirectly, any shares of Common Stock (or any security
convertible into or exercisable for Common Stock) for a period of 365 days after
the date of the Acquisition without the prior written consent of Lehman Brothers
Inc., except that such restriction shall lapse as to one-third of the shares
after 180 days and as to an additional one-third of the shares after 270 days.
Shares or options held by any Mercator employee who is terminated other than for
"cause" will be subject to such restrictions only for the initial 180 day period
after the Acquisition.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiations between the
Company and the Representatives. The material factors to be considered in
determining the initial public offering price of the Common Stock, in addition
to prevailing market conditions will be the Company's historical performance,
capital structure, estimates of the business potential and the earnings
prospects of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market values of companies in
related businesses.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives also may elect to reduce any short position by exercising
all or part of the over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such
97
<PAGE>
purchases. The imposition of a penalty bid might have an effect on the price of
a security to the extent that it were to discourage resales of the security by
purchasers in the Offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Lehman Brothers Inc. acted as financial advisor to Mercator in connection
with the sale of Mercator to Progenitor. Pursuant to the terms of its engagement
by Mercator, Lehman Brothers Inc. received a retainer fee of $75,000 and is due
to receive 51,884 shares of Mercator common stock and will receive an additional
fee of $510,000 upon consummation of the Acquisition.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
and certain matters relating to the Offering will be passed upon for the Company
by Morrison & Foerster LLP, San Francisco, California. Certain legal matters
relating to the Offering will be passed upon for the Underwriters by Skadden,
Arps, Slate, Meagher & Flom (Illinois).
EXPERTS
The financial statements of Progenitor, Inc. (a Development Stage Company)
as of September 30, 1995 and 1996 and for each of the three years in the period
ended September 30, 1996, and for the period from May 8, 1992 (date of
inception) to September 30, 1996, appearing in this Prospectus and Registration
Statement have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon appearing elsewhere herein and
in this Registration Statement, which includes an explanatory paragraph
regarding Progenitor's ability to continue as a going concern, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Mercator Genetics, Inc. (a development stage
company) at December 31, 1995 and 1996, and for each of the three years in the
period ended December 31, 1996, and for the period from inception (October 9,
1992) to December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon (which contains an explanatory paragraph with
respect to Mercator's ability to continue as a going concern described in Note 1
to the financial statements) appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The statements in this Prospectus under the captions "Risk
Factors--Uncertainty of Patents and Proprietary Rights"; "Business--The
Company's Genomics System"; "Business--Discovery Programs"; and
"Business--Patents and Proprietary Rights," relating to U.S. patent matters,
have been reviewed and approved by Pennie & Edmonds LLP, New York, New York,
patent counsel to Progenitor, and have been included herein in reliance upon the
review and approval by such firm as experts in U.S. patent law.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form S-1, including amendments thereto, under the
Securities Act with respect to the Securities offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules filed therewith. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. Copies of the Registration Statement, including
the exhibits and schedules thereto, may be inspected without charge at the
principal office of the Securities
98
<PAGE>
and Exchange Commission at 450 Fifth Street, N.W, Room 1024, Washington, D.C.
20549, and at the following regional offices of the Securities and Exchange
Commission: Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, Seven World Trade
Center, New York, New York 10048. Copies can be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W,
Room 1024, Washington, D.C. 20549. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent public accountants
and will make available copies of quarterly reports for the first three quarters
of each fiscal year containing unaudited financial information.
99
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Progenitor Financial Statements as of September 30, 1995 and 1996 and December 31, 1996 (unaudited) and for
the Years Ended September 30, 1994, 1995 and 1996 and the three months ended December 31, 1995 and 1996
(unaudited)
Report of Independent Accountants........................................................................ F-2
Balance Sheets........................................................................................... F-3
Statements of Operations................................................................................. F-4
Statements of Stockholders' Deficit...................................................................... F-5
Statements of Cash Flows................................................................................. F-6
Notes to the Financial Statements........................................................................ F-7
Mercator Financial Statements as of December 31, 1995 and 1996 and for the Years Ended December 31, 1994,
1995 and 1996
Report of Independent Auditors........................................................................... F-15
Balance Sheets........................................................................................... F-16
Statements of Operations................................................................................. F-17
Statement of Redeemable Preferred Stock, Common Stock and Accumulated Deficit............................ F-18
Statements of Cash Flows................................................................................. F-19
Notes to Financial Statements............................................................................ F-20
</TABLE>
F-1
<PAGE>
When the stock split referred to in footnote 1.j. to the financial statements
has been consummated, we will be in a position to render the following report.
COOPERS & LYBRAND L.L.P.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
Progenitor, Inc.
We have audited the accompanying balance sheets of Progenitor, Inc. (a
Development Stage Company) as of September 30, 1995 and 1996, and the related
statements of operations, stockholders' deficit, and cash flows for the years
ended September 30, 1994, 1995 and 1996, and for the period from May 8, 1992
(date of inception) to September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Progenitor, Inc. (a Development
Stage Company) as of September 30, 1995 and 1996, and the results of its
operations and its cash flows for the years ended September 30, 1994, 1995 and
1996, and for the period from May 8, 1992 (date of inception) to September 30,
1996, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company is in the development stage. The Company's lack of
revenues and its need for additional financing to fund its operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Columbus, Ohio
March 10, 1997
F-2
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------ DECEMBER 31,
1995 1996 1996
-------------- -------------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents........................................ $ 1,173,743 $ 22,315 $ 197,444
Accounts receivable.............................................. 193,898 175,498 675,498
Accounts receivable--parent...................................... 131,600 -- --
Prepaid expenses and other current assets........................ 22,618 120,827 210,687
-------------- -------------- --------------
Total current assets........................................... 1,521,859 318,640 1,083,629
-------------- -------------- --------------
Property and equipment, at cost:
Equipment........................................................ 1,063,602 1,216,219 1,384,136
Less accumulated depreciation.................................. (409,120) (674,847) (748,509)
-------------- -------------- --------------
654,482 541,372 635,627
Notes receivable from officers, net................................ 218,734 59,645 109,645
-------------- -------------- --------------
Total assets................................................... $ 2,395,075 $ 919,657 $ 1,828,901
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................................. $ 232,656 $ 446,915 $ 273,053
Accrued expenses................................................. 1,343,718 1,361,615 1,489,413
Capital lease obligations--current............................... 214,485 265,155 265,155
-------------- -------------- --------------
Total current liabilities...................................... 1,790,859 2,073,685 2,027,621
-------------- -------------- --------------
Note payable--parent............................................... -- 3,443,050 5,406,648
Convertible debenture--parent...................................... 436,740 475,677 485,390
Capital lease obligations.......................................... 268,382 91,706 28,880
-------------- -------------- --------------
Total liabilities............................................ 2,495,981 6,084,118 7,948,539
-------------- -------------- --------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, Series A, $.01 par value: 2,120,000 shares
authorized; 2,020,496 shares issued and outstanding as of
September 30, 1995 and 1996 and December 31, 1996.............. 20,205 20,205 20,205
Preferred stock, Series B, $.01 par value: 880,000 shares
authorized; 349,000 shares issued and outstanding as of
September 30, 1995 and 1996 and December 31, 1996.............. 3,490 3,490 3,490
Common stock, Class A, $.001 par value: 39,000,000 shares
authorized; 2,789,271, 2,885,904 and 2,885,904 shares issued
and outstanding as of September 30, 1995 and 1996 and December
31, 1996, respectively......................................... 2,789 2,886 2,886
Additional paid-in capital....................................... 14,546,640 14,966,792 14,966,792
Deficit accumulated during development stage..................... (14,674,030) (20,157,834) (21,113,011)
-------------- -------------- --------------
Total stockholders' deficit.................................... (100,906) (5,164,461) (6,119,638)
-------------- -------------- --------------
Total liabilities and stockholders' deficit.................... $ 2,395,075 $ 919,657 $ 1,828,901
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MAY 8, 1992
(DATE OF
YEARS ENDED SEPTEMBER 30, INCEPTION) TO
---------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
---------- ---------- ---------- ------------- THREE MONTHS ENDED MAY 8, 1992
DECEMBER 31, (DATE OF
------------------------ INCEPTION)
1995 1996 TO DECEMBER
----------- ----------- 31, 1996
(UNAUDITED) (UNAUDITED) ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ -- $2,821,386 $1,332,366 $ 4,153,752 $ 201,612 $ 675,505 $4,829,257
Operating expenses:
Research and development... 4,112,991 4,227,959 3,872,891 16,104,790 808,864 1,066,143 17,170,933
General and
administrative........... 1,274,896 1,116,652 1,791,050 5,786,483 354,883 444,383 6,230,866
---------- ---------- ---------- ------------- ----------- ----------- ------------
Total operating
expenses............... 5,387,887 5,344,611 5,663,941 21,891,273 1,163,747 1,510,526 23,401,799
---------- ---------- ---------- ------------- ----------- ----------- ------------
Nonrecurring expense......... -- -- 973,525 973,525 -- -- 973,525
Interest expense:
Capital lease.............. 44,257 62,945 59,087 166,289 13,320 9,440 175,729
Debt to parent............. 603,581 289,297 119,617 1,280,499 10,643 110,716 1,391,215
---------- ---------- ---------- ------------- ----------- ----------- ------------
Net loss................. $(6,035,725) $(2,875,467) $(5,483,804) $(20,157,834) $(986,098) $(955,177) ($21,113,011)
---------- ---------- ---------- ------------- ----------- ----------- ------------
---------- ---------- ---------- ------------- ----------- ----------- ------------
Supplemental net loss per
share (unaudited).......... $ (0.95) $ (0.17)
---------- -----------
---------- -----------
Shares used in computing
supplemental net loss per
share (unaudited).......... 5,758,615 5,784,327
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' DEFICIT
FROM MAY 8, 1992 (DATE OF INCEPTION) TO SEPTEMBER 30, 1996
AND (UNAUDITED) FOR THE THREE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------------------ -----------------------------------------
SERIES A SERIES B CLASS A CLASS B
--------------------- ------------------ -------------------- ------------------
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).................... -- -- -- -- -- -- -- --
---------- -------- -------- ------- ---------- ------- --------- ------
Balance, December 31, 1996 (unaudited).... 2,020,496 $20,205 349,000 $3,490 2,885,904 $2,886 -- $--
---------- -------- -------- ------- ---------- ------- --------- ------
---------- -------- -------- ------- ---------- ------- --------- ------
<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).................... -- (955,177) (955,177)
------------ ------------- -------------
Balance, December 31, 1996 (unaudited).... $ 14,966,792 $(21,113,011) $ (6,119,638)
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MAY 8, 1992
(DATE OF
YEARS ENDED SEPTEMBER 30, INCEPTION) TO
---------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
---------- ---------- ---------- ------------- THREE MONTHS ENDED MAY 8, 1992
DECEMBER 31, (DATE OF
------------------------ INCEPTION)
1995 1996 TO DECEMBER
----------- ----------- 31,
1996
(UNAUDITED) (UNAUDITED) ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss....................... $(6,035,725) $(2,875,467) $(5,483,804) $(20,157,834) $(986,098) $(955,177) ($21,113,011)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 289,340 262,263 292,086 1,041,754 68,967 73,662 1,115,416
Gain on sale of equipment.... -- -- (23,247) (23,247) -- -- (23,247)
Noncash expense for anti-
dilution stock issuances... -- 376,680 -- 376,680 -- -- 376,680
Changes in operating assets
and liabilities:
Notes receivable officers,
net...................... (66,146) (16,638) 159,089 (59,645) 19,806 (50,000) (109,645)
Accounts receivable........ -- (193,898) 18,400 (175,498) -- (500,000) (675,498)
Accounts
receivable--parent....... -- (131,600) 131,600 -- 34,610 -- --
Prepaid expenses and other
current assets........... 7,000 (19,618) (98,209) (120,827) (13,537) (89,860) (210,687)
Accounts payable........... 59,847 59,490 87,998 320,654 6,860 (47,601) 273,053
Accrued expenses........... 274,529 664,324 17,897 1,361,615 (210,776) 127,798 1,489,413
Accrued interest--parent... 603,581 261,350 119,617 1,252,552 10,644 110,736 1,363,288
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash used in operating
activities................. (4,867,574) (1,613,114) (4,778,573) (16,183,796) (1,069,524) (1,330,442) (17,514,238)
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash flows from investing
activities:
Purchase of property and
equipment.................... (294,623) (154,814) (83,467) (1,487,617) (31,908) (294,178) (1,781,795)
Proceeds from sale of
equipment.................... -- -- 54,000 54,000 -- -- 54,000
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash used in investing
activities................. (294,623) (154,814) (29,467) (1,433,617) (31,908) (294,178) (1,727,795)
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash flows from financing
activities:
Proceeds from note payable--
parent....................... 4,570,771 1,041,972 3,362,369 14,857,534 -- 1,862,575 16,720,109
Proceeds from convertible
debenture--parent............ -- 436,740 -- 436,740 -- -- 436,740
Proceeds from issuance of
stock, net................... -- 1,560,431 420,250 1,988,594 101 -- 1,988,594
Proceeds from sale leaseback... 662,602 87,771 117,325 867,698 -- -- 867,698
Principal payments on capital
lease obligation............. (72,719) (194,787) (243,332) (510,838) (51,354) (62,826) (573,664)
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash provided by (used in)
financing activities....... 5,160,654 2,932,127 3,656,612 17,639,728 (51,253) 1,799,749 19,439,477
---------- ---------- ---------- ------------- ----------- ----------- ------------
Net (decrease) increase in
cash and cash
equivalents................ (1,543) 1,164,199 (1,151,428) 22,315 (1,152,685) 175,129 197,444
Cash and cash equivalents,
beginning of period............ 11,087 9,544 1,173,743 -- 1,173,743 22,315 --
---------- ---------- ---------- ------------- ----------- ----------- ------------
Cash and cash equivalents,
end of period.............. $ 9,544 $1,173,743 $ 22,315 $ 22,315 $ 21,058 $ 197,444 $ 197,444
---------- ---------- ---------- ------------- ----------- ----------- ------------
---------- ---------- ---------- ------------- ----------- ----------- ------------
Supplemental disclosure of cash
flow information:
Cash paid for interest, net.... $ 22,937 $ 84,265 $ 59,087 $ 166,289
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Supplemental schedule of noncash
investing and financing
activities:
</TABLE>
In 1995, the parent company converted debt of $11,495,165 and accrued
interest of $1,132,935 into 2,020,496 shares of Series A preferred stock
(see Note 9). In 1996, the Company purchased fixed assets with accounts
payable in the amount of $126,261. As of September 30, 1996, the amount
was included in accounts payable.
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. ORGANIZATION: Progenitor, Inc. (the "Company"), a Delaware Corporation,
is a functional genomics company engaged in the discovery and functional
characterization of genes to identify therapeutic targets for the treatment of
major diseases.
B. BASIS OF PRESENTATION: The accompanying financial statements have been
prepared on a going-concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
During the year ended September 30, 1996, the Company arranged for the
financing of its operating activities by borrowing approximately $3,443,000 from
its parent company, Interneuron Pharmaceuticals, Inc. ("Interneuron"), by
raising approximately $420,000 from the issuance of common stock, and receiving
approximately $1,250,000 from government grants and licensing fees. Significant
additional research and development activities, clinical testing, and regulatory
approvals must be completed before commercial sales, if any, will commence. The
Company is actively pursuing research and development grants and negotiating
equity and corporate partnership arrangements to fund its research and
development activities.
C. PROPERTY AND EQUIPMENT: Depreciation is computed using the
straight-line method over the estimated useful lives of the depreciable assets.
Equipment leased under capital leases is amortized using the straight-line
method over the lease term. Maintenance and repairs are charged to expense as
incurred, while renewals and improvements are capitalized. The asset cost and
accumulated depreciation is removed for assets sold or retired, and any
resulting gain or loss is reflected in the statement of operations. Equipment
includes $795,743 and $865,540 of equipment under capital lease and accumulated
amortization of $298,741 and $516,551 as of September 30, 1995 and 1996,
respectively.
D. REVENUE RECOGNITION: The Company recognizes revenue under strategic
alliances as certain agreed upon milestones are achieved or license fees are
earned.
E. RESEARCH AND DEVELOPMENT COSTS: All costs related to research and
development are expensed as incurred.
F. CASH AND CASH EQUIVALENTS: For purposes of the statements of cash
flows, cash and cash equivalents consist of cash in banks, highly liquid debt
instruments and money market funds with original maturities of three months or
less.
G. INTERIM FINANCIAL STATEMENTS (UNAUDITED): The interim financial
statements reflect all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of the Company's management, necessary for a
fair presentation of the financial position and results of operations for the
periods presented. Revenues and expenses for any interim period are not
necessarily indicative of results for a full year.
H. RECLASSIFICATIONS: Certain reclassifications have been made to the
prior year's financial statements to conform to the current year presentation.
I. USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
J. STOCK SPLIT: In May 1996, the Board of Directors authorized a 1-for-2
reverse stock split on Class A common shares effective prior to the effective
date of an initial public offering ("Offering"). All references to Class A
common shares, underlying stock options, warrants and per share data have been
restated to reflect the reverse stock split.
K. NET LOSS PER SHARE:
HISTORICAL
Net loss per share is computed using the weighted average number of
shares of common shares outstanding. Common equivalent shares from stock options
and warrants are excluded from the computation as their effect is anti-dilutive,
except that, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin, common and common equivalent shares issued at prices below the
anticipated Offering price during the 12 months immediately preceding the filing
date of an Offering have been included in the calculation as if they were
outstanding for all periods presented (using the treasury stock method and the
anticipated Offering price).
The following table depicts the net loss per share and the shares used in
computing net loss per share on a historical basis:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
THREE MONTHS ENDED
DECEMBER 31
--------------------------
1995 1996
------------ ------------
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C> <C> <C> <C>
Net loss per share......................... $ (1.97) $ (0.95) $ (1.79) $ (0.33) $ (.31)
Shares used in computing net loss per
share...................................... 3,057,396 3,016,817 3,065,795 3,027,999 3,091,507
</TABLE>
SUPPLEMENTAL (UNAUDITED)
Supplemental unaudited net loss per share is based upon the historical
net loss per share adjusted for (i) the automatic conversion of all outstanding
shares of preferred stock into common stock upon closing of an Offering (ii) the
conversion of a convertible debenture and a portion of the promissory note held
by Interneuron into common stock upon closing of an Offering and (iii) the
issuance of additional shares of common stock to The Ohio University Foundation
in connection with anti-dilution provisions pursuant to a stock purchase right.
All conversions were made assuming an Offering price of $11.00 per share.
2. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Sponsored research - Ohio University.............................. $ 298,641 $ 342,506
Sponsored research - other........................................ 140,153 199,853
Chiron Corporation................................................ 701,296 --
Initial public offering expenses.................................. -- 249,363
Accrued license fees.............................................. -- 112,883
Other............................................................. 203,628 457,010
------------ ------------
$ 1,343,718 $ 1,361,615
------------ ------------
------------ ------------
</TABLE>
F-8
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES:
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of September 30,
1996, net deferred tax assets totaled approximately $7,988,000 on total net
operating loss carryforwards of approximately $18,425,000 and tax credits of
approximately $618,000 that expire on various dates through 2010. Due to the
uncertainty surrounding the realization of these favorable tax attributes in
future tax returns, all of the net deferred tax assets have been fully offset by
a valuation allowance.
4. STOCK OPTIONS AND WARRANTS:
A. STOCK OPTIONS: Under the Company's Stock Option Plan adopted in 1992,
incentive stock options and nonqualified stock options may be granted. The
number of common shares authorized and reserved for issuance is 500,000. The
outstanding options vest over a period of three to four years. As of September
30, 1995 and 1996, stock options covering 81,695 and 116,042 shares were
exercisable, respectively. Options granted to stockholders with 10% or greater
ownership expire after five years; all other options expire after 10 years.
In May 1996, the Company adopted the 1996 Stock Incentive Plan (the "Plan").
The number of common shares authorized and available for issuance is 850,000.
Under the Plan, incentive stock options, nonqualified stock options, stock
appreciation rights and stock grants may be granted.
Stock option activity is summarized below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OPTION PRICE
----------- -------------
<S> <C> <C>
Outstanding at September 30, 1993.................................. 104,450 $ 0.20-$4.00
Granted.......................................................... 75,875 4.00
Forfeited........................................................ (1,700) 0.20-4.00
-----------
Outstanding at September 30, 1994.................................. 178,625 0.20-4.00
Granted.......................................................... 192,250 4.00-6.00
Forfeited........................................................ (20,472) 0.20-4.00
Exercised........................................................ (1,500) 0.20
-----------
Outstanding at September 30, 1995.................................. 348,903 0.20-6.00
Granted.......................................................... 432,250 6.00-9.00
Forfeited........................................................ (55,353) 0.20-6.00
Exercised........................................................ (38,300) 0.20-6.00
-----------
Outstanding at September 30, 1996.................................. 687,500 $ 0.20-$9.00
-----------
-----------
</TABLE>
In May 1996, the Company amended the terms of stock options covering 80,000
shares by changing the vesting period to three years and stock options covering
12,500 shares by changing the vesting period to four years.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which changes the measurement, recognition and
disclosure standards for stock-based compensation. The Company will adopt the
disclosure requirements of SFAS No. 123 in fiscal year 1997, but will elect to
continue to measure compensation cost following present accounting rules.
In December 1996, the Company cancelled all stock options with exercise
prices of $5.50 or more (stock options covering 581,750 shares) and regranted an
equal number of stock options with an exercise price of $5.50, the estimated
fair value at the time of the regrant.
F-9
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
4. STOCK OPTIONS AND WARRANTS: (CONTINUED)
B. WARRANTS: In June 1995, the Company issued to designees of an affiliate
of the parent company, warrants to purchase a total of 34,901 shares of Series B
convertible preferred stock. The warrants were issued in conjunction with the
private placement offering discussed in Note 8. The warrants are exercisable at
a price of $6.875 per share and expire on the earlier of (i) five years from an
Offering of the Company's common stock, or (ii) June 30, 2005. The Company paid
the affiliate approximately $129,000 as its share of placement agent fees.
5. COMMITMENTS:
The Company has entered into various operating leases for furniture,
fixtures, and equipment which expire through the year 2000.
In April 1994, the Company entered into a sale-lease back equipment lease
financing agreement with a leasing company providing for funding of up to an
aggregate of $2.2 million for equipment purchased prior to September 30, 1996.
During the year ended September 30, 1994, the Company recorded and deferred a
loss on the leased assets of $45,370, which it is amortizing over the life of
the lease. The lease is being treated as a capital lease and is guaranteed by
Interneuron.
In November 1994, the Company entered into a one-year lease for laboratory
and administrative space that expired in December 1995. The lease provides for
monthly rental payments of approximately $11,700. The Company has extended the
lease through 1997. The minimum rental commitments under these agreements are as
follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL LEASE
YEARS ENDING SEPTEMBER 30, LEASES OBLIGATION
- ------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
1997............................................................... $ 155,444 $ 291,921
1998............................................................... 11,909 67,081
1999............................................................... 10,331 32,983
2000............................................................... 3,444 --
---------- -------------
Total lease payments............................................... $ 181,128 $ 391,985
----------
----------
Less amount representing interest.................................. (35,124)
-------------
Present value of future lease payments............................. 356,861
Less current portion............................................... (265,155)
-------------
Noncurrent portion of capital lease obligation..................... $ 91,706
-------------
-------------
</TABLE>
Rent expense approximated $140,000, $186,000 and $263,000 during 1994, 1995
and 1996, respectively, and $777,000 for the period May 8, 1992 (date of
inception) through September 30, 1996.
Subsequent to December 31, 1996, the Company entered into a commitment to
purchase $920,000 of equipment.
6. RELATED-PARTY TRANSACTIONS AND OTHER AGREEMENTS:
A. LOANS TO EXECUTIVES: Under employment agreements with certain
executives, the Company advanced loans to assist in purchasing new homes. As of
September 30, 1995, there were loans to three executives for a total of
$359,744. The first loan of $100,796 is interest-free, with $60,796 due upon the
earlier of April 1997 or the termination of the officer's employment. During
fiscal year 1996, $20,000 of this amount was forgiven at the approval of the
Board of Directors. An additional $10,000 of the remaining balance was forgiven
pursuant to a provision of the promissory note agreement. Of the $70,796 balance
remaining at September 30, 1996, $10,000 will be forgiven upon the completion of
a successful Offering of
F-10
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. RELATED-PARTY TRANSACTIONS AND OTHER AGREEMENTS: (CONTINUED)
the Company's common stock. The second loan of $182,500 bears interest at 7% per
annum, with $142,500 due upon the earlier of the sale of the officer's existing
home, June 1997, or termination of the officer's employment. During 1996, an
additional $25,000 was loaned to this executive. Effective May 1996, this
executive's employment with the Company terminated. Pursuant to the executive's
termination agreement with the Company, $120,000 of the balance of $242,850
(including $35,350 in accrued interest) was forgiven. Additionally, the Board of
Directors forgave $26,424 of the amount, and the remaining balance of $96,426
was repaid by the former executive prior to September 30, 1996. Loans totaling
$76,448 were made to a third executive during 1995. Of this amount, $21,448 is
non-interest-bearing and was repaid by the executive in May 1996. Additionally,
$21,295 (including accrued interest) of the remaining balance was forgiven
during fiscal year 1996 upon the achievement of specified milestones. The Board
of Directors also approved the forgiveness of $8,000 of this loan. The $31,292
balance remaining at September 30, 1996, includes accrued interest of
approximately $5,000 at a rate of 9% per annum.
The Company has recorded $141,000 and $42,000 as of September 30, 1995 and
1996, respectively, as a note receivable reserve in anticipation of the expected
forgiveness of certain remaining loan amounts.
B. CONSULTING AGREEMENTS: The Company has entered into various consulting
agreements which range from one to three years and are subject to renewals,
whereby outside consultants provide scientific advice and administrative
services to the Company. Payments to consultants made during 1994, 1995 and
1996, totaled approximately $309,000, $243,000 and $190,000, respectively, and
$1,104,000 for the period May 8, 1992 (date of inception) through September 30,
1996. Of these amounts, approximately $190,000, $177,000 and $112,000
represented payments to certain stockholders in 1994, 1995 and 1996,
respectively, and $819,000 for the period May 8, 1992 (date of inception)
through September 30, 1996.
C. LICENSE AND RESEARCH AGREEMENTS: The Company entered into a license
agreement and a sponsored research agreement with Ohio University in January
1992, certain terms of which were amended in October 1993. The license agreement
grants the Company the exclusive worldwide license to patent and other rights to
yolk sac stem cells and related technologies in exchange for royalties based on
sales. The research agreement requires the Company to fund specified minimum
levels of research and related expenses, as well as any additional costs
approved in advance by the Company.
In addition, the Company agreed to issue 5% of its equity to The Ohio
University Foundation and agreed to preserve this percentage ownership position
until the parent company's total investment in the Company is at least $10.0
million or the date of an Offering by the Company. The $10.0 million investment
was achieved during 1995, thus the percentage ownership position no longer needs
to be preserved. Until an Offering of the Company is consummated, The Ohio
University Foundation was entitled to increase its interest to 6.25% by
purchasing additional equity at a price equal to 50% of the Offering price of
common stock in any such Offering. This provision was canceled in February 1996,
at which time The Ohio University Foundation entered into a stock purchase
agreement with the Company pursuant to which The Ohio University Foundation
purchased 58,333 shares of common stock for $350,000 ($6.00 per share). If, upon
the consummation of an Offering, the Offering price is less than $12.00 per
share, additional shares of common stock will be issued until The Ohio
University Foundation has paid a maximum of 50% of the Offering price.
Additionally, a stock purchase right was issued to The Ohio University
Foundation to purchase 25,000 shares of the common stock at 50% of the Offering
price.
The license agreement also contains certain requirements related to the
management and operation of the Company, including the nomination of two
designees of The Ohio University Foundation to the Board of Directors of the
Company. The Castle Group, Ltd. ("Castle"), which is controlled by a former
director of the Company and a principal stockholder of Interneuron, has
unconditionally guaranteed to Ohio University the performance of the Company's
obligations under the license agreement until the
F-11
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. RELATED-PARTY TRANSACTIONS AND OTHER AGREEMENTS: (CONTINUED)
earlier of five years or an Offering by the Company. Certain employees of Castle
own common stock of the Company.
In April 1993, the Company entered into a second license agreement and a
sponsored research agreement with Ohio University pursuant to which the Company
agreed to fund research relating to the T7T7 gene delivery system, developing an
active cell membrane transport system. The license agreement grants the Company
the exclusive worldwide license to all patent and other rights derived from this
and related technologies in exchange for royalties based on sales.
In February 1994, the Company entered into a license agreement with Albert
Einstein College of Medicine of Yeshiva University ("AECOM"). The agreement
grants the Company the exclusive worldwide license to all patent and other
rights from research done on retroviral vectors by AECOM in exchange for a
license fee and royalties based on sales.
In September 1994, the Company entered into a license agreement with
Wisconsin Alumni Research Foundation ("WARF"). The agreement grants the Company
a nonexclusive license to certain patents developed by WARF in exchange for a
license fee, maintenance fees, and royalties based on sales.
In November 1994, the Company was awarded a competitive grant of $2.0
million through the Advanced Technology Program ("ATP") of the U.S. Department
of Commerce. The funds will be received over a three-year period commencing June
1, 1995. As of September 30, 1995 and 1996, the Company recorded revenue of
$258,532 and $751,064, respectively and a receivable of $193,898 and $175,498,
respectively, related to this grant.
In March 1995, the Company entered into a license and collaboration
agreement with Chiron Corporation ("Chiron"). As required by the agreement, an
initial cash payment of $2.5 million was paid by Chiron to the Company in April
1995 as a license fee and reimbursement of past research and development
expenses. In addition, the Company reimbursed Chiron the start-up manufacturing
costs incurred related to this agreement of $750,000 through September 30, 1996.
Chiron paid $500,000 to the Company in January 1996 for continued research
funding. The agreement also calls for future payments contingent upon the
achievement of certain milestones.
In May 1995, the Company entered into a sponsored research and license
agreement with Novo Nordisk through its subsidiary, ZymoGenetics, Inc. The
agreement calls for research and license fees to be paid to the Company,
contingent upon certain conditions and the meeting of certain milestones.
Additionally, the Company has entered into various sponsored research
agreements with varying terms up to two years in length. The total sponsored
research expense was $890,000, $601,103 and $544,079 for 1994, 1995 and 1996,
respectively, and $3,234,759 for the period from May 8, 1992 (date of inception)
through September 30, 1996. Payments to Ohio University for sponsored research
totaled $245,888, $398,064 and $108,624, for 1994, 1995 and 1996, respectively,
and $1,389,756 for the period May 8, 1992 (date of inception) through September
30, 1996. In addition, at September 30, 1996, the Company had commitments to
fund additional sponsored research of approximately $420,000.
7. COMMON STOCK:
The Company was authorized to issue two classes of shares of common stock,
designated Class A and Class B. Shares of the Company's Class B common stock
were convertible, at any time at the option of the holder, into shares of Class
A common stock. The conversion ratio was subject to adjustment based on several
factors, including the issuance of additional Class A shares.
Holders of Class B shares were entitled to pro rata dividend, liquidation,
and voting rights based on the number of Class A shares into which such Class B
shares were convertible. Class B shares were automatically converted to Class A
shares upon the receipt by the Company of capital contributions of
F-12
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK: (CONTINUED)
$10.0 million in aggregate amount from the date of incorporation. When this was
achieved in 1995, all Class B shares were converted into a total of 357,500
Class A common shares and the Class B shares were removed from the Company's
authorized shares.
8. PREFERRED STOCK:
In December 1994, the Company's Board of Directors approved the
authorization of 2,120,000 shares of Series A and 880,000 shares of Series B
preferred stock. These preferred shares are convertible into shares of Class A
common stock and have preferential rights in terms of dividends and liquidation
over common stock. Shares of preferred stock have voting rights equal to the
number of shares of their common stock equivalent.
Shares of Series A preferred stock are convertible, at any time at the
option of the holder, into shares of Class A common stock. The initial
conversion ratio is based on a Series A price of $6.25, subject to adjustment
based on several factors. Series A preferred shares are automatically converted
upon an Offering.
Through July 7, 1995, the Company has issued 349,000 shares of Series B
preferred stock in connection with private placements. These private placements
consisted of the sale of units, each unit consisting of shares of preferred
stock of the Company, shares of preferred stock of another subsidiary of
Interneuron, Transcell Technologies, Inc., and a put protection right from
Interneuron. The put protection right provides that on the third anniversary of
the final closing date of the private placement, the owner has the right to sell
to Interneuron a percentage of the preferred stock of the Company that is deemed
to be illiquid, as defined in the agreement. The Company received approximately
$1,560,000, net of offering costs, as its share of the proceeds from the private
placement. Shares of Series B preferred stock are convertible, at any time at
the option of the holder, into shares of Class A common stock. The initial
conversion ratio is based on a Series B price of $6.25, subject to adjustment
based on several factors. Series B preferred shares are automatically converted
upon an Offering.
Shares of authorized common stock have been reserved for the exercise of all
convertible preferred stock outstanding.
9. NOTE PAYABLE TO THE PARENT COMPANY:
The note payable to the parent company, Interneuron, bore interest at a rate
of 1% over the prime lending rate (7 3/4% prime plus 1% at September 30, 1994)
and was payable on demand. Periodic advances were made available under this note
at the discretion of Interneuron. In January 1995, the outstanding balance on
the note payable--parent of $11,495,165 and accrued interest of $1,132,935 was
converted into 2,020,496 shares of Series A preferred stock.
In March 1996, the Company entered into a promissory note with Interneuron,
bearing interest at a rate of 1% over the prime lending rate. The original
amount of this note was $525,473 and has increased to $3,443,050 as of September
30, 1996 which includes accrued interest of $80,680. The note is due on the
earlier of March 31, 2001, or the closing of an Offering.
Since the inception of the Company, Interneuron has paid for certain Company
expenses which were reimbursed by the Company at cost.
10. CONVERTIBLE DEBENTURE--PARENT:
In March 1995, the Company entered into a convertible debenture agreement
with Interneuron, at a rate of 1% over the prime lending rate. The prime lending
rate was 8.75% and 8.25% as of September 30, 1995 and 1996, respectively.
Principal and interest are due at the earlier of five years from the final
closing date or upon an Offering as defined in the agreement. The debenture is
convertible, at any time at the option of the holder, into shares of Class A
common stock. The conversion price is equal to the fair market
F-13
<PAGE>
PROGENITOR, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
10. CONVERTIBLE DEBENTURE--PARENT: (CONTINUED)
value of the common stock at the time of the conversion. The debenture is
automatically converted upon an Offering. As of September 30, 1995 and 1996, the
outstanding convertible debenture balance included accrued interest of $20,121
and $59,058, respectively.
11. EMPLOYEE BENEFITS:
Employees of the Company are eligible to participate in the Interneuron
Pharmaceuticals, Inc. 401(k) Savings Plan under which employees may defer a
portion of their annual compensation. Company contributions to the 401(k)
Savings Plan may be made on a discretionary basis. As of September 30, 1996, no
Company contributions have been made.
12. NONRECURRING EXPENSE:
During fiscal 1996, the Company incurred $973,525 of costs related to an
Offering which was filed on a Form S-1 Registration Statement with the
Securities and Exchange Commission on June 6, 1996. Such costs were expensed in
accordance with accounting requirements during fiscal 1996.
13. SUBSEQUENT EVENTS:
In December 1996, the Company entered into a license agreement with Amgen
Inc. (Amgen). Progenitor recorded revenue of $500,000 in December, 1996, in
consideration for the licenses granted. The agreement also provides for a
license maintenance fee as well as milestone and royalty payments to be received
contingent upon the achievement of certain milestone driven events.
Additionally, in December 1996, the Company entered into a stock purchase
agreement with Amgen. Under the agreement, Amgen has committed to purchase $5.5
million of the Company's stock concurrently with the closing of the Offering,
with $4.5 million paid in cash and $1 million in the form of a non interest
bearing promissory note. The promissory note will become due in two payments,
with $500,000 due in December 1997, and $500,000 due in December 1998.
On February 14, 1997, the Company entered into an agreement to purchase
Mercator Genetics, Inc. ("Mercator") for approximately $22 million in common
stock (valued at a price per share equal to the price paid by the public in
connection with the Offering). The acquisition will occur simultaneously in
connection with an Offering of the Company. In addition, the Company will
provide additional bridge loan financing to Mercator in the form of a
Convertible Bridge Promissory Note in the aggregate amount of up to $6.6
million, funded in stages based upon a plan sufficient to meet the working
capital obligations of Mercator. The Convertible Bridge Promissory Note will
bear interest at a fixed rate of 10% per annum and would be payable on January
15, 1999, or on such earlier date as provided in the agreement. The Convertible
Bridge Promissory Note is convertible into Mercator's Series D Preferred Stock,
at the option of the Company, at a price of $1.34 per share, subject to certain
restrictions. Upon closing of an Offering, the bridge loan would become part of
the purchase price consideration for Mercator.
In connection with the Company's bridge financing to Mercator prior to the
closing of the acquisition, the Company has entered into a Bridge Line of Credit
Letter Agreement with Interneuron dated February 14, 1997, providing for loans
of up to an aggregate of $6.6 million pursuant to a promissory note (the
"Interneuron Bridge Loan"), secured by the Company's assets including its
security interest in the assets of Mercator pursuant to the Mercator Convertible
Bridge Promissory Note. The Interneuron Bridge Loan bears interest at a fixed
rate of 10% per annum and the outstanding principal and accrued interest will be
repaid at the earlier of (1) the closing of an Offering (to be repaid out of the
proceeds therefrom), or (2) January 15, 1999. The Interneuron Bridge Loan is
convertible, upon certain conditions and at the option of Interneuron, into
Progenitor Preferred Stock at a conversion price equal to the lessor of (i)
$6.25 per share or (ii) such lesser price per share at which the Company shall
issue any shares of any series of preferred stock of the Company, provided that
such conversion shall be in an amount representing not less than 10% of the
principal balance then outstanding.
F-14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Mercator Genetics, Inc.
We have audited the accompanying balance sheets of Mercator Genetics, Inc. (a
development stage company) as of December 31, 1995 and 1996, and the related
statements of operations, cash flows and statement of redeemable preferred
stock, common stock and accumulated deficit for each of the three years in the
period ended December 31, 1996 and for the period from inception (October 9,
1992) to December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mercator Genetics, Inc. (a
development stage company) at December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the period from inception (October 9, 1992) to
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations raise substantial doubt about its ability to continue as
a going concern. Management's plans as to these matters are also described in
Note 1. The 1996 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Palo Alto, California
February 14, 1997
F-15
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 1,446,222 $ 438,859
Short-term investments............................................................ 486,676 --
Current portion of notes receivable from officers................................. -- 174,606
Deferred interest expense......................................................... -- 750,000
Other current assets.............................................................. 115,460 241,416
------------- -------------
Total current assets................................................................ 2,048,358 1,604,881
Property and equipment, net......................................................... 1,150,657 1,316,377
Notes receivable from officers...................................................... 351,645 150,000
Other assets........................................................................ 22,165 12,165
------------- -------------
$ 3,572,825 $ 3,083,423
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 573,382 $ 670,683
Convertible notes payable......................................................... -- 2,250,000
Current portion of equipment financing obligations................................ 362,823 474,272
------------- -------------
Total current liabilities........................................................... 936,205 3,394,955
Long-term portion of equipment financing obligations................................ 969,279 685,874
Commitments and contingencies
Redeemable preferred stock, $0.001 par value, 20,474,251 shares authorized
(15,000,000 shares in 1995), issuable in series:
Redeemable Series A, 320,000 shares authorized, 301,500 shares issued and
outstanding -- amount paid in................................................... 3,015,000 3,015,000
Redeemable Series B, 3,254,800 shares authorized, 3,207,996 shares issued and
outstanding -- amount paid in................................................... 8,019,999 8,019,999
Redeemable Series C, 4,526,317 shares authorized (no shares in 1995), 4,526,317
shares issued and outstanding (no shares in 1995) -- amount paid in............. -- 4,526,319
Redeemable Series D, 12,373,134 shares authorized, no shares issued and
outstanding (no shares in 1995)................................................. -- --
Common stock, $0.001 par value, 27,000,000 shares authorized (25,000,000 shares in
1995):............................................................................
Shares issued and outstanding -- 174,056 (110,304 shares in 1995) -- amount paid
in.............................................................................. 33,671 42,861
Shares to be issued -- 51,884 (no shares in 1995) -- amount to be paid in......... -- 7,783
Deficit accumulated during the development stage.................................... (9,401,329) (16,609,368)
------------- -------------
$ 3,572,825 $ 3,083,423
------------- -------------
------------- -------------
</TABLE>
See accompanying notes.
F-16
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 9,
YEARS ENDED DECEMBER 31, 1992) TO
------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues............................................ $ -- $ 375,000 $ 500,000 $ 875,000
Operating costs and expenses:
Research and development.......................... 2,330,100 4,182,836 6,049,081 13,783,966
General and administrative........................ 638,200 1,524,386 1,592,840 3,935,914
------------- ------------- ------------- --------------
Total operating costs and expenses.................. 2,968,300 5,707,222 7,641,921 17,719,880
------------- ------------- ------------- --------------
Loss from operations................................ (2,968,300) (5,332,222) (7,141,921) (16,844,880)
Interest income..................................... 228,761 290,551 114,293 687,163
Interest expense.................................... (95,033) (155,640) (180,411) (451,651)
------------- ------------- ------------- --------------
Net loss............................................ $ (2,834,572) $ (5,197,311) $ (7,208,039) $ (16,609,368)
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
Net loss per share (Note 2)......................... $ (28.62) $ (48.70) $ (55.27)
------------- ------------- -------------
------------- ------------- -------------
Shares used in computing net loss per share (Note
2)................................................ 99,043 106,731 130,423
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes
F-17
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF REDEEMABLE PREFERRED STOCK, COMMON STOCK AND ACCUMULATED DEFICIT
PERIOD FROM INCEPTION (OCTOBER 9, 1992) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE PREFERRED STOCK
---------------------------------------------------------------------------------
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
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<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)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
F-18
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(OCTOBER 9,
YEARS ENDED DECEMBER 31, 1992) TO
------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss................................................... $ (2,834,572) $ (5,197,311) $ (7,208,039) $ (16,609,368)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 208,863 377,649 496,564 1,148,992
Stock to be issued for services.......................... -- -- 7,783 7,783
Stock issued to employees................................ -- -- 9,000 9,000
Changes in operating assets and liabilities:
Notes receivable from officers......................... (654,376) 302,731 27,039 (324,606)
Other current assets................................... (152,724) 88,058 (125,956) (241,416)
Other assets........................................... (15,600) 3,435 10,000 (12,165)
Accounts payable and accrued liabilities............... 143,213 305,338 97,301 670,683
------------- ------------- ------------- --------------
Net cash used in operating activities...................... (3,305,196) (4,120,100) (6,686,308) (15,351,097)
------------- ------------- ------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities................. (4,589,279) (4,871,197) -- (10,149,989)
Sales of available-for-sale securities..................... 689,513 489,967 -- 1,179,480
Maturities of available-for-sale securities................ 495,163 7,988,670 486,676 8,970,509
Capital expenditures....................................... (484,212) (674,247) (662,284) (2,465,369)
------------- ------------- ------------- --------------
Net cash (used in) provided by investing activities........ (3,888,815) 2,933,193 (175,608) (2,465,369)
------------- ------------- ------------- --------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of preferred stock.................. 8,019,999 -- 4,526,319 15,561,318
Proceeds from issuance of common stock..................... 800 13,171 190 33,861
Proceeds from convertible notes payable.................... -- -- 1,500,000 1,500,000
Principal payments of equipment financing obligations...... (118,657) (236,236) (372,481) (749,542)
Proceeds from equipment financings......................... 435,520 854,163 200,525 1,909,688
------------- ------------- ------------- --------------
Net cash provided by financing activities.................. 8,337,662 631,098 5,854,553 18,255,325
------------- ------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents....... 1,143,651 (555,809) (1,007,363) 438,859
Cash and cash equivalents at beginning of period........... 858,380 2,002,031 1,446,222 --
------------- ------------- ------------- --------------
Cash and cash equivalents at end of period................. $ 2,002,031 $ 1,446,222 $ 438,859 $ 438,859
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest..................................... $ 95,033 $ 155,640 $ 180,411 $ 451,651
------------- ------------- ------------- --------------
------------- ------------- ------------- --------------
</TABLE>
See accompanying notes.
F-19
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BASIS OF PRESENTATION
ORGANIZATION AND BUSINESS
Mercator Genetics, Inc. (the "Company" or "Mercator"), was incorporated in
the State of Delaware on October 9, 1992 to engage in the discovery and
development of therapeutics and diagnostics for genetic-based diseases through
the understanding of the genes involved in these diseases. The Company's
activities since incorporation have primarily consisted of establishing its
offices and research facilities, recruiting personnel, conducting research and
development, performing business and financial planning and raising capital.
Accordingly, the Company is considered to be in the development stage, and
expects to incur increasing losses and require additional financial resources to
achieve commercialization of its products.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. At December 31, 1996, cumulative
operating losses since inception amount to $16,609,368 and management
anticipates incurring additional losses for the next several years. The Company
is working on several long-term development projects which involve experimental
and unproven technology, which may require many years and substantial
expenditures to complete, and which may be unsuccessful. Therefore, the
Company's ability to continue as a going concern depends on its ability to raise
additional financing to meet its business plan objectives and, ultimately, to
fund its operations from revenues. Management believes that it will be able to
obtain additional funds through public or private equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources. If adequate funds are not available, the Company may be required to
reduce its level of spending or eliminate one or more of its research or
development programs or obtain funds through arrangements with corporate
partners or others which may require the Company to relinquish certain rights to
its technologies or product candidates.
From time to time, the Company may enter into licensing agreements with
third parties. To the extent the Company commercializes products using the
technology covered by the licenses, the Company may be required to pay royalties
on the revenue from these products.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual
results could differ from these estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents; investments with
maturities between three and twelve months are considered to be short-term
investments.
The Company invests its excess cash primarily in deposits with banks and
short-term securities. These securities consist of money market instruments,
U.S. corporate securities and U.S. Treasury bills that mature or are redeemable
within 180 days and, therefore, bear minimal risk.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such determination as of each balance sheet
date. Through December 31, 1996, the Company has classified its entire
investment portfolio as available-for-sale. Available-for-sale securities are
carried at amortized cost which approximates fair value at December 31, 1995 and
1996. The estimated fair value
F-20
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts have been determined by the Company using available market information
and commonly used valuation methodologies. Management exercises judgment in
interpreting market data to develop the estimates of fair value.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary are included in interest income or expense. The cost of
securities sold is based on the specific identification method. Interest and
dividends are included in interest income.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally four years. Leasehold improvements are amortized over the
lesser of the lease term or the estimated useful lives of the related assets,
whichever is shorter.
REVENUE RECOGNITION
The Company recognizes revenues from research contracts as earned based upon
the performance requirements of the contracts.
STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). In accordance with the provisions of SFAS 123, the
Company measures stock-based compensation expense using the intrinsic-value
method as prescribed by Accounting Principle Board Opinion No. 25 and related
interpretations and, accordingly, recognizes no compensation expense for stock
option grants to employees and directors with an exercise price equal to the
fair-market value of the shares at the date of grant. Note 7 contains a summary
of the pro forma impact to the reported net loss for 1996 and 1995 on the basis
that the Company had elected to recognize compensation expense based on the
fair-value method as described in SFAS 123. There was no effect of adopting SFAS
123 on the Company's financial position or results of operations.
PER SHARE DATA
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares from stock
options, convertible preferred stock, convertible notes and warrants are
excluded from the computation as their effect is antidilutive.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1994 and 1995
financial statements to conform with the fiscal 1996 presentation.
F-21
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. FINANCIAL INSTRUMENTS
AVAILABLE-FOR-SALE SECURITIES
The following is a summary of the amortized cost of available-for-sale
securities, which approximates fair value:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
------------ -----------
<S> <C> <C>
U.S. Treasury securities........................................... $ 486,676 $ --
Repurchase agreements.............................................. 132,000 480,000
U.S. corporate securities.......................................... 1,161,026 90,000
------------ -----------
Total.............................................................. $ 1,779,702 $ 570,000
------------ -----------
------------ -----------
Above amounts are included in the following:
Cash and cash equivalents........................................ $ 1,293,026 $ 570,000
Short-term investments........................................... 486,676 --
------------ -----------
Total.............................................................. $ 1,779,702 $ 570,000
------------ -----------
------------ -----------
Cash and cash equivalents:
Available-for-sale securities.................................... $ 1,293,026 $ 570,000
Cash and bank accounts........................................... 153,196 (131,141)
------------ -----------
Total cash and cash equivalents.................................... $ 1,446,222 $ 438,859
------------ -----------
------------ -----------
</TABLE>
As of December 31, 1996, the average duration of the portfolio is less than one
year and no individual contractual maturity exceeds one year. No material gains
or losses have been realized on the sale of available-for-sale securities.
EQUIPMENT FINANCING OBLIGATIONS
In August 1993, the Company entered into a $1,000,000 equipment lease line
of credit. In October 1994, the Company entered into a $2,000,000 equipment loan
agreement. The equipment lease line of credit and the equipment loan were
terminated in May 1996.
Included in property and equipment are assets with a cost of approximately
$1,666,000 and $1,851,000 at December 31, 1995 and 1996, respectively, acquired
pursuant to equipment financing obligations. These obligations have interest
rates ranging from 14% to 18%. The carrying value of the obligations
approximates fair value based on a discounted cash flow analysis using the
Company's incremental borrowing rate for similar obligations. Accumulated
amortization of assets acquired pursuant to these obligations was approximately
$634,000 and $1,065,000 at December 31, 1995 and 1996, respectively. Assets
acquired under these arrangements secure the related obligations.
F-22
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. FINANCIAL INSTRUMENTS (CONTINUED)
At December 31, 1996, the Company's aggregate future minimum payments under
such obligations, including 10% to 20% buyout options at maturity are as
follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
- --------------------------------------------------------------------------------
<S> <C>
1997............................................................................ $ 609,210
1998............................................................................ 450,714
1999............................................................................ 312,829
2000............................................................................ 11,372
2001............................................................................ 5,555
------------
Total minimum payments.......................................................... 1,389,680
Less amount representing interest............................................... (229,534)
------------
Present value of minimum payments............................................... 1,160,146
Less current portion............................................................ (474,272)
------------
$ 685,874
------------
------------
</TABLE>
NOTES RECEIVABLE FROM OFFICERS
In November 1994, the Company loaned $650,000 to an officer of the Company.
The related note bears interest at 7.45% per annum and is secured by real
property. At December 31, 1996, subsequent to the officer's separation from the
Company, the remaining principal balance of the note of $162,500 and $12,106 of
related accrued interest was paid in January 1997.
In September 1995, the Company loaned $150,000 to an officer of the Company.
The related note bears interest at the lesser of 28.2% of the capital gain upon
the sale of the secured property or the Fannie Mae Rate, compounded annually and
so may be zero. As of December 31, 1996, no interest has been accrued on the
loan. The balance is due no later than the first anniversary of the officer's
termination from the Company.
CONVERTIBLE NOTES PAYABLE
In October and December, the Company entered into a bridge financing
agreement with its current investor group whereby the Company issued convertible
demand notes in the aggregate amount of $1,500,000. The intent of the parties
was that this financing was to bridge the Company to either a permanent equity
round of financing or a significant merger transaction with another company. In
lieu of a stated interest rate, the agreement provides that these notes are
convertible at the option of the holder at the time of the next equity
transaction at a price that reflects a discount from the indicated market price
at that time. The time frame for the next equity financing is uncertain and, as
such, the note conversion date is indeterminable. Incremental interest expense
inherent in the notes' discounted conversion feature, which is currently
deferred on the balance sheet, will be charged to operations when the notes
become convertible at the discounted rate. In connection with the merger
transaction discussed in Note 9, the investor group agreed to modify the bridge
financing agreement to eliminate their right to a discount on conversion in
connection with the proposed transaction.
F-23
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
------------ -------------
<S> <C> <C>
Laboratory equipment............................................. $ 1,401,228 $ 1,870,155
Office equipment, furniture and fixtures......................... 335,319 509,710
Leasehold improvements........................................... 66,538 85,504
------------ -------------
1,803,085 2,465,369
Less accumulated depreciation and amortization................... (652,428) (1,148,992)
------------ -------------
Property and equipment, net...................................... $ 1,150,657 $ 1,316,377
------------ -------------
------------ -------------
</TABLE>
5. FACILITY LEASE AND OTHER COMMITMENTS
In April 1995, the Company extended through September 1998 its facility
operating lease which originally expired in June 1995. At December 31, 1996,
future noncancelable minimum payments under the operating lease are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- -------------------------------------------------------------------------------
<S> <C>
1997......................................................................... $ 214,800
1998......................................................................... 161,100
----------
Total minimum payments required................................................ $ 375,900
----------
----------
</TABLE>
The Company has the option to extend the lease for two years and to expand
the facilities leased for a 12-month term ending on September 30, 1999.
Rent expense was approximately $126,000, $135,000, $191,000 and $539,000 for
the years ended December 31, 1994, 1995 and 1996 and for the period from
inception (October 9, 1992) to December 31, 1996, respectively.
The Company sponsors research programs and blood sample collection services
at universities and other research institutions from time to time. The amounts
incurred on the contracted research programs for the years ended December 31,
1995 and 1996, and for the period from inception (October 3, 1992) to December
31, 1996 were approximately $60,000, $1,069,000 and $1,129,000, respectively
(none in 1994). At December 31, 1996, the Company has committed to fund
approximately $887,000 in 1997.
6. RESEARCH COLLABORATION AND LICENSE AGREEMENT
During fiscal 1995, the Company commenced efforts under a research
collaboration and license agreement with Agene Research Institute ("Agene"), in
which Agene agreed to fund certain research and development efforts in the area
of aging in an amount of $1 million over a two-year period through April 1997.
Revenue recognized under the agreement was $375,000 and $500,000 for the years
ended December 31, 1995 and 1996, respectively (none in 1994). Costs incurred
under this agreement of approximately $170,000 and $298,000 for the years ended
December 31, 1995 and 1996, respectively (none in 1994) are included in research
and development expenses. On December 27, 1996, the agreement and associated
research was terminated by mutual agreement between the two parties.
F-24
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED AND COMMON STOCK
REDEEMABLE PREFERRED STOCK
On April 3, 1996, the Company's stockholders' approved a 5.2-for-one split
of Series B preferred stock. On May 30, 1996, the Company's board of directors
approved a one-for-10 reverse stock split of the outstanding shares of the
Company's common and preferred stock. The share and per share amounts included
in these financial statements are presented on a post-split basis and have been
adjusted to reflect these stock splits.
Series A, B, C and D preferred stockholders are entitled to noncumulative
dividends at an annual rate of $0.70, $0.18, $0.07 and $0.09 per share,
respectively. Dividends will be paid only when declared by the board of
directors out of legally available funds. No dividends have been declared as of
December 31, 1996.
At any time after October 31, 2001 for Series A, B, C and D preferred stock,
upon receipt of the consent of holders of at least 50% of the outstanding shares
of the series of preferred stock, the Company is required to redeem all shares
of the series of preferred stock at $10.00, $2.50, $1.00 and $1.34 per share for
Series A, B, C and D, respectively, plus all declared but unpaid dividends. If
the Company has insufficient funds to redeem all such shares, redemption using
all funds legally available shall be done pro rata among such series of
preferred stockholders based on the number of such shares held at that date.
Series D preferred stockholders are entitled to receive, upon liquidation, a
distribution of $1.34 per share (subject to adjustment for a recapitalization)
plus all declared but unpaid dividends. After payment of the full liquidation
preference of the Series D stockholders, the Series C preferred stockholders are
entitled to receive, upon liquidation, a distribution of $1.00 per share
(subject to adjustment for a recapitalization) plus all declared but unpaid
dividends.
After payment of the full liquidation preference of the Series C and D
stockholders, the Series A and B preferred stockholders are entitled to receive,
upon liquidation, a distribution of $10.00 and $2.50 per share, respectively
(subject to adjustment for a recapitalization) plus all declared but unpaid
dividends. Thereafter, the remaining assets and funds, if any, shall be
distributed among the Series A, B, C and D preferred and common stockholders,
pro rata on an as-converted basis. If, upon liquidation, the assets and funds
distributed among the Series A and B preferred stockholders are insufficient to
permit the entitled payment, the entire assets and funds of the Company legally
available for distribution shall be distributed among these stockholders in
proportion to the relative liquidation rights of each such series.
Each share of Series A, B, C and D preferred stock is, at the option of the
holder, convertible into shares of common stock on a one-for-one basis, subject
to certain adjustments for dilution, if any, resulting from future stock
issuances. Upon the approval of the holders of at least 66 2/3% of the
outstanding shares of each series of preferred stock, the preferred shares will
automatically convert into common stock. Additionally, the preferred shares
automatically convert into common stock concurrent with the closing of an
underwritten public offering of common stock under the Securities Act of 1933 in
which the Company receives at least $10,000,000 in gross proceeds and the price
per share is at least $4.00 (subject to adjustment for a recapitalization or
certain other stock adjustments).
The Series A, B, C and D preferred stockholders have voting rights equal to
the common shares they would own upon conversion.
F-25
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
COMMON STOCK
The Company has issued 174,056 common shares to the founders, advisors and
employees of the Company, of which certain shares are subject to repurchase
rights which generally expire ratably over four years from the date of issuance.
At December 31, 1996, there were 4,812 shares subject to repurchase.
Included in the common shares outstanding at December 31, 1996 are 84,000
shares of founders common stock. Under a co-sale agreement, which was amended in
April 1996, if any founder proposes to sell or transfer any shares of founders
common stock, holders of Series A, B, C and D redeemable convertible preferred
stock shall have the right to participate as a seller in such sale on the same
terms and conditions offered to the founder.
At December 31, 1996, the Company has reserved a total of 12,083,555 shares
of common stock: 195,500 for issuance under the 1993 Stock Option Plan,
3,787,592 for issuance under the 1996 Stock Option Plan, 319,350, 3,254,796 and
4,526,317 for issuance upon conversion of the Series A, B and C preferred stock
and warrants, respectively.
STOCK OPTION PLANS
The 1993 Stock Option Plan was adopted in July 1993, with subsequent
amendments in November 1993 and December 1994, and provides for the issuance of
options for up to 208,000 shares of common stock to employees, consultants and
directors.
During 1996, the Company's board of directors approved the adoption of the
1996 Stock Option Plan with terms and conditions the same as those of the 1993
Stock Option Plan (collectively, the "Plans"). The 1996 Stock Option Plan
provides for the issuance of options for up to 3,792,000 shares of common stock
to employees, consultants and directors.
Stock options granted under the Plans may be either incentive stock options
or nonqualified stock options. Incentive stock options may be granted to
employees with exercise prices of no less than the fair value and nonqualified
options may be granted to employees, directors or consultants at exercise prices
of no less than 85% of the fair value of the common stock on the grant date, as
determined by the board of directors. If, at the time the Company grants an
option, the optionee directly or by attribution owns stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
the option price shall be at least 110% of the fair value and shall not be
exercisable more than five years after the date of grant. The options expire no
more than 10 years after the date of grant or earlier if employment or
relationship as director or consultant is terminated. The board of directors
shall determine the times during the term when the options may be exercised and
the number of shares for which an option may be granted. Options may be granted
with different vesting terms from time to time but will provide for vesting of
at least 20% of the total number of shares subject to the option per year. The
options may include provisions to exercise the option prior to full vesting. Any
unvested shares so purchased shall be subject to repurchase by the Company at
the original exercise price of the option. Such repurchase rights shall lapse at
a minimum rate of 20% per year over five years from the date the option was
granted.
On August 9, 1996, the Company granted options under both the 1993 and 1996
plans to purchase 1,406,739 shares of the Company's common stock to founders,
advisors and employees. These founders, advisors and employees held options
granted prior to the issuance of the Company's Series C preferred stock. The new
options vest over the remaining vesting period of the original options.
Generally, options vest over a four-year period.
F-26
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
A summary of 1993 Stock Option Plan activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
-------------------------------------------------------
WEIGHTED AGGREGATE
NUMBER OF EXERCISE AVERAGE PURCHASE
SHARES PRICE EXERCISE PRICE PRICE
----------- ------------- --------------- ----------
<S> <C> <C> <C> <C>
Options granted................................ 14,642 $0.50-$1.00 $ $ 10,071
Options canceled............................... (2,200) 0.50- 1.00 (1,200)
----------- ----------
Balance at December 31, 1993..................... 12,442 0.50- 1.00 8,871
Options exercised.............................. (1,000) 0.50- 1.00 (875)
Options granted................................ 116,369 1.00- 1.30 149,735
Options canceled............................... (150) 0.50 (75)
----------- ----------
Balance at December 31, 1994..................... 127,661 0.50- 1.30 1.23 157,656
Options exercised.............................. (10,954) 0.50- 1.30 1.20 (13,171)
Options granted................................ 75,050 1.30 1.30 97,565
Options canceled............................... (70,605) 0.50- 1.30 1.30 (91,718)
----------- ----------
Balance at December 31, 1995..................... 121,152 0.50- 1.30 1.24 150,332
Options exercised.............................. (546) 0.15- 1.30 0.29 (160)
Options granted................................ 19,150 0.15- 1.30 0.68 12,993
Options canceled............................... (57,069) 0.15- 1.30 1.07 (61,237)
----------- ----------
Balance at December 31, 1996..................... 82,687 $0.50-$1.30 $ 1.23 $ 101,928
----------- ----------
----------- ----------
</TABLE>
A summary of 1996 Stock Option Plan activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
------------------------------------------------------------
WEIGHTED AGGREGATE
NUMBER OF AVERAGE PURCHASE
SHARES EXERCISE PRICE EXERCISE PRICE PRICE
---------- --------------- ------------------- ----------
<S> <C> <C> <C> <C>
Options granted........................... 2,726,495 $ 0.15 $ 0.15 $ 408,974
Options exercised......................... (4,408) 0.15 0.15 (661)
Options canceled.......................... (13,605) 0.15 0.15 (2,041)
---------- ----------
Balance at December 31, 1996................ 2,708,482 $ 0.15 $ 0.15 $ 406,272
---------- ----------
---------- ----------
</TABLE>
At December 31, 1996, outstanding options for 1,343,517 shares were
exercisable at a weighted average price of $0.18. Shares of common stock
available for future grants under the 1993 and 1996 Stock Option Plans are
112,813 and 1,079,110, respectively. The weighted average remaining contractual
life of options outstanding at December 31, 1996 is 9.58 years.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, computed as if the Company had accounted for its employee stock
options granted or otherwise modified subsequent to December 31, 1994 under the
fair-value-based accounting method of that Statement. The value for these
F-27
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. REDEEMABLE PREFERRED AND COMMON STOCK (CONTINUED)
options was estimated at the date of grant using the minimum-value method with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Expected dividend yield..................................................... 0.00% 0.00%
Risk-free interest rate..................................................... 6.15% 6.29%
Expected life............................................................... 5.36 years 3.96 years
</TABLE>
The weighted average fair value of options granted in 1995 and 1996 was
$0.35 and $0.03 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The pro forma
effect of applying SFAS 123 was not material to the Company's reported net loss
or loss per share in 1995 or 1996. Because Statement 123 is applicable only to
options granted subsequent to December 31, 1994, its pro forma effect will not
be fully reflected until 1999.
WARRANTS
In August 1993, in connection with a lease line, the Company issued a
warrant that entitles the holder to purchase 17,850 shares of Series A preferred
stock at an exercise price of $2.80 per share on or before August 31, 2003. In
October 1994, in connection with the equipment loan agreement, the Company
issued a warrant that entitles the holder to purchase 46,800 shares of Series B
preferred stock at an exercise price of $2.50 per share on or before October 28,
2004. The warrants are subject to acceleration upon the occurrence of certain
events. Both warrants were outstanding at December 31, 1996. The Company has
reserved 17,850 shares of Series A preferred stock and 46,800 shares of Series B
preferred stock for issuance under the stock warrants.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes are as
follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................................ $ 600,000 $ 1,500,000
Research credits........................................................ 400,000 600,000
Capitalized research and development costs.............................. 2,900,000 4,700,000
------------- -------------
3,900,000 6,800,000
Valuation allowance....................................................... (3,900,000) (6,800,000)
------------- -------------
$ -- $ --
------------- -------------
------------- -------------
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets at December 31,
1995 and 1996 has been established to reflect these uncertainties. The change in
the valuation allowance was a net increase of $1,200,000, $2,200,000 and
$2,900,000 for the years ended 1994, 1995 and 1996, respectively.
F-28
<PAGE>
MERCATOR GENETICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $3,800,000. The net operating loss carryforwards
will expire at various dates through 2011, if not utilized. Utilization of the
net operating losses may be subject to a substantial annual limitation due to
the "change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the expiration of
net operating losses before utilization.
9. SUBSEQUENT EVENTS
On February 14, 1997, the Company entered into an agreement and plan of
reorganization with Progenitor, Inc. ("Progenitor") whereby Progenitor may
purchase the Company through July 31, 1997. The acquisition will occur
simultaneously with the completion of Progenitor's initial public offering
("IPO"). If the IPO is not completed, Progenitor is under no obligation to
purchase Mercator. To support Mercator's research prior to the effective date,
Mercator will receive up to $6.6 million in a convertible bridge promissory note
from Progenitor. The bridge note will bear interest at a fixed rate of 10% per
annum and is payable on January 15, 1999 subject to earlier repayment on a
change of control of the Company. The bridge note is convertible into Mercator's
Series D preferred stock at the option of Progenitor under certain circumstances
at a price of $1.34 per share. In order to provide funding to Progenitor for the
bridge financing, Interneuron Pharmaceuticals, Inc. has agreed to provide
Progenitor a line of credit of up to an aggregate maximum amount of $6.6
million.
If the acquisition becomes effective as contemplated, the principal amount
of Mercator's convertible notes payable as of December 31, 1996 of $1,500,000
will convert into Mercator Series D preferred stock at a price of $1.34 per
share, and Mercator's preferred and common stockholders together with Mercator's
outstanding options and warrant holders will receive approximately $22 million
of Progenitor common stock or options or warrants to purchase Progenitor common
stock (valued at a price per share equal to the price paid by the public in
Progenitor's IPO). Alternatively, Progenitor has the option to consummate the
acquisition through the payment of the purchase price in cash, or prior to the
IPO date, in unregistered shares of Progenitor's capital stock or in shares of
another public company on terms to be agreed upon between the parties. The
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>
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.
F-29
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 21
Dividend Policy........................................................... 21
Capitalization............................................................ 22
Dilution.................................................................. 23
Unaudited Pro Forma Financial Statements.................................. 25
Progenitor Selected Historical Financial Data............................. 31
Mercator Selected Historical Financial Data............................... 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 33
Business.................................................................. 38
Management................................................................ 63
Certain Transactions...................................................... 79
Principal Stockholders.................................................... 86
Description of Capital Stock.............................................. 89
Shares Eligible for Future Sale........................................... 94
Underwriting.............................................................. 96
Legal Matters............................................................. 98
Experts................................................................... 98
Additional Information.................................................... 98
Index to Financial Statements............................................. F-1
</TABLE>
---------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,750,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
, 1997
------------------------
LEHMAN BROTHERS
GENESIS MERCHANT GROUP
SECURITIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates except
for the SEC registration fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 13,933
NASD Filing Fee................................................... 4,583
Nasdaq National Market Listing Fee................................ 44,038
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Transfer agent and registrar fees................................. *
Miscellaneous..................................................... *
---------
Total......................................................... $ 950,000
---------
---------
</TABLE>
- ------------------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 ("Section 145") of the Delaware General Corporation Law ("DGCL")
provides a detailed statutory framework covering indemnification of officers and
directors against liabilities and expenses arising out of legal proceedings
brought against them by reason of their being or having been directors or
officers. Section 145 generally provides that a director or officer of a
corporation (i) shall be indemnified by the corporation for all expenses of such
legal proceedings when he is successful on the merits, (ii) may be indemnified
by the corporation for the expenses, judgments, fines and amounts paid in
settlement of such proceedings (other than a derivative suit), even if he is not
successful on the merits, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, and (iii) may be
indemnified by the corporation for the expenses of a derivative suit (a suit by
a stockholder alleging a breach by a director or officer of a duty owed to the
corporation), even if he is not successful on the merits, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. No indemnification may be made under clause (iii)
above, however, if the director or officer is adjudged liable for negligence or
misconduct in the performance of his duties to the corporation, unless a
corporation determines that, despite such adjudication, but in view of all the
circumstances, he is entitled to indemnification. The indemnification described
in clauses (ii) and (iii) above may be made only upon a determination that
indemnification is proper because the applicable standard of conduct has been
met. Such a determination may be made by a majority of a quorum of disinterested
directors, independent legal counsel, the stockholders or a court of competent
jurisdiction. The Certificate of Incorporation and Bylaws of the Registrant
provides that the Registrant shall indemnify to the fullest extent permitted by
Section 145, as it now exists or as amended, all persons whom it may indemnify
pursuant thereto.
Section 102(b)(7) of the DGCL permits a corporation to provide in its
Certificate of Incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper personal
benefit. The
II-1
<PAGE>
Certificate of Incorporation and Bylaws of the Registrant provides for the
elimination of personal liability of a director for breach of fiduciary duty, as
permitted by Section 102(b)(7) of the DGCL.
Section 7 of the Form of Underwriting Agreement, filed as Exhibit 1.1
hereto, contains certain provisions relating to indemnification.
Prior to the closing of the Offering, the Company intends to obtain
liability insurance insuring the Company's officers and directors against
liabilities that they may incur in such capacities.
The Registrant has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in its charter
documents. These agreements, among other things, provide for the indemnification
of the Registrant's directors and executive officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of the Registrant, arising out of such person's services as a director or
executive officer of the Registrant, any subsidiary of the Registrant or any
other company or enterprise to which such person provides services at the
request of the Registrant to the fullest extent permitted by applicable law. The
Registrant believes that these provisions and agreements will assist it in
attracting and retaining qualified persons to serve as directors and executive
officers.
The Investors' Agreements provide for cross-indemnification of stockholders
of the Company whose shares with registration rights are included in a
registration under the Securities Act, and of the Company, its officers and
directors for certain liabilities arising in connection with such registration.
See also the undertakings set out in response to Item 17 herein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1993, the Registrant has issued and sold the following
unregistered securities:
(1) In 1993, the Registrant (a) sold 82,907 shares of Common Stock to Dr.
Given for $0.02 per share pursuant to the terms of his employment
agreement, (b) issued 11,400 shares of Common Stock to The Ohio
University Foundation without additional consideration pursuant to
certain antidilution rights contained in a stock purchase agreement with
the Registrant and (c) issued a certificate for 14,854 shares of Common
Stock to Dr. Cooper in exchange for certificates for 89,121 shares of
Common Stock pursuant to a repurchase of Common Stock in connection with
the termination of Dr. Cooper's employment agreement with the Registrant.
(2) In 1994, the Registrant (a) issued 178,750 shares of Common Stock to Dr.
Thomas Wagner upon the conversion of the shares of Class B Common Stock
held by Dr. Wagner and (b) issued 40,353 shares of Common Stock to The
Ohio University Foundation without additional consideration pursuant to
certain antidilution rights contained in a stock purchase agreement with
the Registrant.
(3) Between December 1994 and July 1995, the Registrant issued and sold an
aggregate of 349,000 shares of Series B Preferred Stock to certain
persons and entities for $4.48 per share. In connection with such
transaction, the Registrant issued warrants to purchase 22,627 shares of
Series B Preferred Stock to designees of Paramount Capital, Inc., the
placement agent for such transaction, and warrants to purchase 12,274
shares of Series B Preferred Stock to designees of D.H. Blair & Co.,
Inc., selected dealer for such transaction, pursuant to rights of such
entities under agreements with the Registrant.
(4) In December 1994, upon the initial closing of the issuance and sale of
Series B Preferred Stock described in paragraph (3) above, in exchange
for the cancellation of an aggregate of approximately $12.6 million of
debt owed by the Registrant to Interneuron, the Registrant issued and
sold 2,020,496 shares of Series A Preferred Stock to Interneuron for
$6.25 per share.
(5) In 1996, the Registrant issued (a) 58,333 shares of Common Stock to The
Ohio University Foundation pursuant to a Stock Purchase Agreement dated
as of February 26, 1996, for $6.00 per share, (b) issued and sold 27,250
shares of Common Stock for $0.20 per share to certain former
II-2
<PAGE>
employees pursuant to the exercise of stock options granted under the
1992 Stock Option Plan, (c) issued and sold 50 shares of Common Stock for
$2.00 per share to a former employee pursuant to the exercise of stock
options granted under the 1992 Stock Option Plan, (d) issued and sold
5,000 shares of Common Stock for $4.00 per share to a former employee
pursuant to the exercise of stock options granted under the 1992 Stock
Option Plan and (e) issued and sold 7,500 shares of Common Stock to a
former employee for $6.00 per share pursuant to the exercise of stock
options granted under the 1992 Stock Option Plan.
(6) In 1997, the Registrant issued and sold 1,125 shares of Common Stock for
$4.00 per share and 188 shares of Common Stock for $5.50 per share to an
employee pursuant to the exercise of stock options granted under the 1992
Stock Option Plan.
(7) Since January 1, 1993, the Registrant granted stock options to
employees, consultants, directors, officers and affiliates of the
Registrant as described below. From February 1 to June 1, 1993, the
Registrant granted stock options under the 1992 Stock Option Plan
covering an aggregate of 82,450 shares of Common Stock at an exercise
price of $0.20 per share. On June 21, 1993, the Registrant granted stock
options under the 1992 Stock Option Plan covering an aggregate of 14,250
shares of Common Stock at an exercise price of $2.00 per share. From June
2, 1993 to December 31, 1994, the Registrant granted stock options under
the 1992 Stock Option Plan covering an aggregate of 84,375 shares of
Common Stock at an exercise price of $4.00 per share. From March 1, 1995
to February 21, 1996, the Registrant granted stock options under the 1992
Stock Option Plan covering an aggregate of 235,000 shares of Common Stock
at an exercise price of $6.00 per share. On May 13, 1996, the Registrant
granted stock options under the 1996 Stock Incentive Plan covering an
aggregate of 275,000 shares of Common Stock at an exercise price of $9.00
per share. On August 20, 1996, the Registrant granted stock options under
the 1996 Stock Incentive Plan covering an aggregate of 110,000 shares of
Common Stock at an exercise price of $9.00 per share. On September 10,
1996, the Registrant granted stock options under the 1992 Stock Option
Plan covering an aggregate of 1,750 shares of Common Stock at an exercise
price of $9.00 per share. On December 30, 1996, the Registrant granted
stock options under the 1992 Stock Option Plan covering an aggregate of
12,025 shares of Common Stock at an exercise price of $5.50 per share.
Also on December 30, 1996, the Registrant cancelled all outstanding stock
options granted from March 1, 1995 to September 10, 1996, and regranted
the same number of options under the same plans under which such options
had been previously granted, at an exercise price of $5.50 per share.
The sales and issuances of Common Stock in the transactions described in
paragraphs (1), (2) and (5) above other than pursuant to the exercise of stock
options were deemed to be exempt from registration under the Securities Act
pursuant to Section 4(2) thereof.
The issuance and sale of the Series B Preferred Stock in the transactions
described in paragraph (3) were deemed to be exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act and/or Regulation
D promulgated thereunder.
The issuance of the warrants in the transactions described in paragraph (3)
was deemed to be exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
The issuance and sale of the Series A Preferred Stock in the transaction
described in paragraph (4) were deemed to be exempt from registration under the
Securities Act pursuant to Section 4(2) thereof.
The issuances and sales of Common Stock pursuant to the exercise of stock
options described in paragraph (5) were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder, or were
deemed to be exempt pursuant to Section 4(2) thereof.
With respect to the grant of stock options described in paragraph (6),
exemption from registration under the Securities Act was unnecessary in that
none of such transactions involved a "sale" of securities as such term is used
in Section 2(3) of the Securities Act.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<C> <S>
+1.1 Form of Underwriting Agreement.
**2.1 Amended and Restated Agreement and Plan of Reorganization, dated as of February
14, 1997 (filed as Exhibit 2.1 to the Registration Statement on Form S-4 filed
by the Company and incorporated herein by reference).
**3.1 Form of Restated Certificate of Incorporation of the Company.
**3.2 Amended and Restated Bylaws of the Company.
**4.1 Specimen Stock Certificate of the Company.
**4.2 Reference is made to Exhibits 3.1 and 3.2.
**4.3 Warrant Agreement for Series A Preferred Stock issued by Mercator Genetics, Inc.
to Phoenix Leasing Incorporated, dated August 31, 1993.
**4.4 Warrant Agreement for Series B Preferred Stock issued by Mercator Genetics, Inc.
to Phoenix Leasing Incorporated, dated October 28, 1994.
**5.1 Opinion of Morrison & Foerster LLP.
**10.1 Form of Indemnification Agreement entered into between the Company and its
directors and executive officers.
**10.2 The Company's 1992 Stock Option Plan.
**10.3 Form of Incentive Stock Option Agreement under the 1992 Stock Option Plan.
**10.4 Form of Non-Qualified Stock Option Agreement under the 1992 Stock Option Plan.
**10.5 The Company's 1996 Stock Incentive Plan, as amended and restated as of March 7,
1997, and form of Stock Option Agreement.
**10.6 Form of Investors' Rights Agreement, entered into among the Company, Interneuron
Pharmaceuticals, Inc., Transcell Technologies, Inc., and the holders of the
Company's Preferred Stock, Series B.
*/**10.7 License Agreement, dated as of January 28, 1992, by and between Scimark Corp.,
The Castle Group Ltd. and Ohio University, as amended October 15, 1993.
*/**10.8 Sponsored Research Agreement, dated January 31, 1992, by and between Scimark
Corp. and Ohio University, as amended October 15, 1993, February 16, 1994,
November 16, 1994 and November 22, 1995.
*/**10.9 License Agreement, dated as of April 1, 1993, by and between the Company and Ohio
University.
**10.11 License Agreement, dated as of June 8, 1994, by and between the Company and
Associated Universities, Inc.
*/**10.12 Standard License Agreement, dated as of September 1, 1994, by and between the
Company and the Wisconsin Alumni Research Foundation, as amended June 2, 1995.
*/**10.13 License and Collaboration Agreement, dated as of March 31, 1995, by and between
the Company and Chiron Corporation, as amended April 10, 1996.
*/**10.14 Sponsored Research and License Agreement, dated as of May 1, 1995, by and between
the Company and Novo Nordisk A/S, as amended January 17, 1996 and March 17,
1996.
*/**10.15 License Agreement, dated as of July 17, 1995, by and between the Company and
Vanderbilt University.
*/**10.16 License Agreement, dated as of May 30, 1996, by and between the Company and AMRAD
Developments PTY Ltd.
**10.17 Lease Agreement, dated as of November 1994, by and between the Company and Thomas
R. Eggers.
**10.18 Lease, Service and Affiliation Agreement, entered into as of February 1995, by
and between the Company and The Ohio State University.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
**10.19 Employment Agreement, dated January 3, 1993, by and between the Company and
Douglass B. Given.
**10.20 Form of Intercompany Services Agreement, dated as of , 1997, by and
between the Company and Interneuron Pharmaceuticals, Inc.
**10.21 Form of Tax Allocation Agreement, dated as of , 1997, by and between
the Company and Interneuron Pharmaceuticals, Inc.
**10.22 The Company's 1996 Employee Stock Purchase Plan.
*/**10.23 License Agreement, dated as of December 31, 1996, by and between the Company and
Amgen Inc.
*/**10.24 Stock Purchase Agreement, dated as of December 31, 1996, by and between the
Company and Amgen Inc.
*/**10.25 License Agreement, dated as of January 8, 1997, by and between the Company and
Associated Universities, Inc., operator of Brookhaven National Laboratory.
*/**10.26 Amended and Restated Sponsored Research and License Agreement, dated as of
February 21, 1997, by and between the Company and Novo Nordisk A/S.
**10.27 The Company's 1997 Stock Option Plan.
*/**10.28 License Agreement, dated as of February 1, 1997, by and between Mercator
Genetics, Inc. and the Board of Trustees of The Leland Stanford Junior
University.
**10.29 Lease Agreement, dated July 29, 1993, by and between Mercator Genetics, Inc. and
WVP Income Plus, III, as amended August 11, 1993, February 7, 1994, October 10,
1994 and April 27, 1995.
**10.30 Form of Indemnification Agreement entered into between Mercator Genetics, Inc.
and its directors and executive officers.
**10.31 Employment Agreement, dated as of February 14, 1997, by and between the Company
and Elliott Sigal.
**10.32 Loan Agreement, dated as of February 14, 1997, by and between Mercator Genetics,
Inc. and the Company (filed as Exhibit 10.25 to the Registration Statement on
S-4 filed by the Company and incorporated herein by reference).
*/**10.33 Scientific Collaboration Agreement, dated February 21, 1997, by and between
Mercator Genetics, Inc. and Affymetrix, Inc.
*/**10.34 Scientific Collaboration Agreement, dated March 3, 1997, by and between Mercator
Genetics, Inc. and Affymetrix, Inc.
*/**10.35 Progenitor--Pangea Collaboration Agreement, dated as of March 13, 1997, by and
between the Company and Pangea Systems, Inc.
10.36 Employment Agreement, dated as of May 1997, by and between the Company and
Douglass B. Given.
*10.37 Exclusive License Agreement and Option, dated as of April 1, 1997, by and between
The National Jewish Medical and Research Center and the Company.
*10.38 Sponsored Research Agreement, dated May 1, 1997, by and between the Ontario
Cancer Institute/Princess Margaret Hospital and the Company.
*10.39 Sponsored Research Agreement, dated April 15, 1997, by and between the University
of Cambridge and the Company.
*10.40 Sponsored Research Agreement, dated May 1, 1997, by and between the Board of
Regents of the University of Nebraska (doing business as the University of
Nebraska Medical Center) and the Company.
*10.41 Sponsored Research Agreement, dated May 1, 1997, by and between Ohio University
and the Company.
**21.1 List of subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
23.2 Consent of Ernst & Young LLP, independent auditors.
**23.3 Consent of Pennie & Edmonds LLP.
**23.4 Consent of Morrison & Foerster LLP (included in Exhibit 5.1).
**23.5 Consent of Robert R. Momsen.
**24.1 Power of Attorney of the Company (see II-7).
**27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Documents for which confidential treatment has been requested.
** Exhibit previously filed.
+ To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES.
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates for the Securities in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Certificate of
Incorporation and Bylaws of the Registrant, the DGCL, the Underwriting
Agreement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer or
controlling person in connection with the Securities being registered hereunder,
the Registrant will, unless in the opinion of their respective counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be in the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the undersigned
Registrant has duly caused this Amendment to the Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Columbus, State of Ohio, on May 9, 1997.
PROGENITOR, INC.
By: /s/ MARK N. K. BAGNALL
-----------------------------------
Mark N. K. Bagnall
VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------------- -----------------
<C> <S> <C>
/s/ DOUGLASS B. GIVEN* President, Chief Executive Officer and
------------------------------------------- Director (Principal Executive May 9, 1997
Douglass B. Given, M.D., Ph.D. Officer)
/s/ MARK N. K. BAGNALL Vice President, Finance and Chief
------------------------------------------- Financial Officer (Principal May 9, 1997
Mark N. K. Bagnall Financial and Accounting Officer)
/s/ ROBERT P. AXLINE*
------------------------------------------- Director May 9, 1997
Robert P. Axline
/s/ GLENN L. COOPER*
------------------------------------------- Director May 9, 1997
Glenn L. Cooper M.D.
/s/ ALEXANDER M. HAIG, JR.*
------------------------------------------- Director May 9, 1997
Alexander M. Haig, Jr.
/s/ MORRIS LASTER*
------------------------------------------- Director May 9, 1997
Morris Laster, M.D.
/s/ JERRY P. PEPPERS*
------------------------------------------- Director May 9, 1997
Jerry P. Peppers
/s/ DAVID B. SHARROCK*
------------------------------------------- Director May 9, 1997
David B. Sharrock
* By /s/ MARK N. K. BAGNALL
----------------------
Mark N. K. Bagnall
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT PAGE
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
+1.1 Form of Underwriting Agreement................................................................
**2.1 Amended and Restated Agreement and Plan of Reorganization, dated as of February 14, 1997
(filed as Exhibit 2.1 to the Registration Statement on Form S-4 filed by the Company and
incorporated herein by reference)...........................................................
**3.1 Form of Restated Certificate of Incorporation of the Company..................................
**3.2 Amended and Restated Bylaws of the Company....................................................
**4.1 Specimen Stock Certificate of the Company.....................................................
**4.2 Reference is made to Exhibits 3.1 and 3.2.....................................................
**4.3 Warrant Agreement for Series A Preferred Stock issued by Mercator Genetics, Inc. to Phoenix
Leasing Incorporated, dated August 31, 1993.................................................
**4.4 Warrant Agreement for Series B Preferred Stock issued by Mercator Genetics, Inc. to Phoenix
Leasing Incorporated, dated October 28, 1994................................................
**5.1 Opinion of Morrison & Foerster LLP............................................................
**10.1 Form of Indemnification Agreement entered into between the Company and its directors and
executive officers..........................................................................
**10.2 The Company's 1992 Stock Option Plan..........................................................
**10.3 Form of Incentive Stock Option Agreement under the 1992 Stock Option Plan.....................
**10.4 Form of Non-Qualified Stock Option Agreement under the 1992 Stock Option
Plan........................................................................................
**10.5 The Company's 1996 Stock Incentive Plan, as amended and restated as of March 7, 1997, and form
of Stock Option Agreement...................................................................
**10.6 Form of Investors' Rights Agreement, entered into among the Company, Interneuron
Pharmaceuticals, Inc., Transcell Technologies, Inc., and the holders of the Company's
Preferred Stock, Series B...................................................................
*/**10.7 License Agreement, dated as of January 28, 1992, by and between Scimark Corp., The Castle
Group Ltd. and Ohio University, as amended October 15, 1993.................................
*/**10.8 Sponsored Research Agreement, dated January 31, 1992, by and between Scimark Corp. and Ohio
University, as amended October 15, 1993, February 16, 1994, November 16, 1994 and November
22, 1995....................................................................................
*/**10.9 License Agreement, dated as of April 1, 1993, by and between the Company and Ohio
University..................................................................................
**10.11 License Agreement, dated as of June 8, 1994, by and between the Company and Associated
Universities, Inc...........................................................................
*/**10.12 Standard License Agreement, dated as of September 1, 1994, by and between the Company and the
Wisconsin Alumni Research Foundation, as amended June 2, 1995...............................
*/**10.13 License and Collaboration Agreement, dated as of March 31, 1995, by and between the Company
and Chiron Corporation, as amended April 10, 1996...........................................
*/**10.14 Sponsored Research and License Agreement, dated as of May 1, 1995, by and between the Company
and Novo Nordisk A/S, as amended January 17, 1996 and March 17, 1996........................
*/**10.15 License Agreement, dated as of July 17, 1995, by and between the Company and Vanderbilt
University..................................................................................
*/**10.16 License Agreement, dated as of May 30, 1996, by and between the Company and AMRAD Developments
PTY Ltd.....................................................................................
**10.17 Lease Agreement, dated as of November 1994, by and between the Company and Thomas R. Eggers...
**10.18 Lease, Service and Affiliation Agreement, entered into as of February 1995, by and between the
Company and The Ohio State University.......................................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT PAGE
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
**10.19 Employment Agreement, dated January 3, 1993, by and between the Company and Douglass B.
Given.......................................................................................
**10.20 Form of Intercompany Services Agreement, dated as of , 1997, by and between the
Company and Interneuron Pharmaceuticals, Inc................................................
**10.21 Form of Tax Allocation Agreement, dated as of , 1997, by and between the Company
and Interneuron Pharmaceuticals, Inc........................................................
**10.22 The Company's 1996 Employee Stock Purchase Plan...............................................
*/**10.23 License Agreement, dated as of December 31, 1996, by and between the Company and Amgen Inc....
*/**10.24 Stock Purchase Agreement, dated as of December 31, 1996, by and between the Company and Amgen
Inc.........................................................................................
*/**10.25 License Agreement, dated as of January 8, 1997, by and between the Company and Associated
Universities, Inc., operator of Brookhaven National Laboratory..............................
*/**10.26 Amended and Restated Sponsored Research and License Agreement, dated as of February 21, 1997,
by and between the Company and Novo Nordisk A/S.............................................
**10.27 The Company's 1997 Stock Option Plan..........................................................
*/**10.28 License Agreement, dated as of February 1, 1997, by and between Mercator Genetics, Inc. and
the Board of Trustees of The Leland Stanford Junior University..............................
**10.29 Lease Agreement, dated July 29, 1993, by and between Mercator Genetics, Inc. and WVP Income
Plus, III, as amended August 11, 1993, February 7, 1994, October 10, 1994 and April 27,
1995........................................................................................
**10.30 Form of Indemnification Agreement entered into between Mercator Genetics, Inc. and its
directors and executive officers............................................................
**10.31 Employment Agreement, dated as of February 14, 1997, by and between the Company and Elliott
Sigal.......................................................................................
**10.32 Loan Agreement, dated as of February 14, 1997, by and between Mercator Genetics, Inc. and the
Company (filed as Exhibit 10.25 to the Registration Statement on S-4 filed by the Company
and incorporated herein by reference).......................................................
*/**10.33 Scientific Collaboration Agreement, dated February 21, 1997, by and between Mercator Genetics,
Inc. and Affymetrix, Inc....................................................................
*/**10.34 Scientific Collaboration Agreement, dated March 3, 1997, by and between Mercator Genetics,
Inc. and Affymetrix, Inc....................................................................
*/**10.35 Progenitor--Pangea Collaboration Agreement, dated as of March 13, 1997, by and between the
Company and Pangea Sytems Inc...............................................................
10.36 Employment Agreement, dated as of May 1997, by and between the Company and Douglass B.
Given.......................................................................................
*10.37 Exclusive License Agreement and Option, dated as of April 1, 1997, by and between The National
Jewish Medical and Research Center and the Company..........................................
*10.38 Sponsored Research Agreement, dated May 1, 1997, by and between the Ontario Cancer
Institute/Princess Margaret Hospital and the Company........................................
*10.39 Sponsored Research Agreement, dated April 15, 1997, by and between the University of Cambridge
and the Company.............................................................................
*10.40 Sponsored Research Agreement, dated May 1, 1997, by and between the Board of Regents of the
University of Nebraska (doing business as the University of Nebraska Medical Center) and the
Company.....................................................................................
*10.41 Sponsored Research Agreement, dated May 1, 1997, by and between Ohio University and the
Company.....................................................................................
**21.1 List of subsidiaries of the Company...........................................................
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants..................................
23.2 Consent of Ernst & Young LLP., independent auditors...........................................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT PAGE
- ----------- ---------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
**23.3 Consent of Pennie & Edmonds LLP...............................................................
**23.4 Consent of Morrison & Foerster LLP (included in Exhibit 5.1)..................................
**23.5 Consent of Robert R. Momsen...................................................................
**24.1 Power of Attorney of the Company (see II-7)...................................................
**27.1 Financial Data Schedule.......................................................................
</TABLE>
- ------------------------
* Documents for which confidential treatment has been requested.
** Exhibit previously filed.
+ To be filed by amendment.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement"), dated as of May 1997
(the "Effective Date"), is entered into by and between Progenitor, Inc., a
Delaware corporation (the "Company"), and Douglass B. Given, M.D., Ph.D.
("Given").
BACKGROUND
The Company has employed and desires to continue to employ Given as
President and Chief Executive Officer of the Company reporting to the Board
of Directors of the Company, and Given desires to be employed and to continue
to be employed by the Company as President and Chief Executive Officer.
Company and Given are entering into this Employment Agreement to set out
the terms and conditions of the Company's employment of Given in this
capacity.
All of the terms of the Agreement will be effective as of the Effective
Date with the exception of certain terms which will become effective upon the
closing of an Initial Public Offering of the Company's stock which is now in
the registration process with the SEC (the "IPO") at any time during 1997.
Those benefits that are contingent on the closing of the IPO, as described in
this Agreement, are Given's higher base salary, the grant to Given of
additional stock options to purchase the common stock of the Company, and
certain benefits associated with relocating Given to California.
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises and covenants contained in this Employment Agreement ("Agreement")
and other good and valuable consideration the receipt of which is hereby
acknowledged, the parties agree as follows:
1. EMPLOYMENT; DUTIES
(a) Company hereby engages and employs Given, and Given hereby accepts
engagement and employment, as President and Chief Executive Officer of Company
reporting directly to the Board of Directors of the Company, to direct,
supervise and have responsibility for the daily operations of the Company,
including, but not limited to: (i) directing and supervising the business and
research and development efforts of the Company; (ii) managing the other
executives and personnel of the Company; (iii) evaluating, negotiating,
structuring and implementing business transactions with the Company's licensees,
customers and suppliers; and (iv) performing such other services as are
appropriate to Given's position and as the Board of Directors of the Company
(the "Board") may from time to time determine.
<PAGE>
(b) Given will perform his duties from the Company's executive offices
which will be located in California; it being understood that the performance
of his duties may require significant domestic and international travel.
(c) Given will devote substantially all of his business time and
efforts to the proper discharge of his duties and responsibilities under this
Agreement.
2. TERM OF AGREEMENT
Given's employment under this Agreement will commence as of the
Effective Date and will continue until terminated pursuant to Section 7
(Termination); provided, however, that Company will not be obligated to
provide those benefits to Given pursuant to Section 3(a)(iv) (Home Mortgage
Interest Differential), Section 3(a)(v) (Home Loan), Section 3(a)(vi)
(Relocation Expenses), and Section 3(a)(vii) (Ohio Mortgage Interest
Assistance) and those other benefits as expressly provided in this Agreement
until the closing of the IPO.
3. COMPENSATION AND BENEFITS
(a) As compensation for the performance of his duties under this
Agreement, Given will be compensated as follows:
(i) BASE SALARY. Company will pay Given a base salary ("Base
Salary") at the rate of Two Hundred Seventy-Five Thousand Dollars ($275,000)
per year; provided, however, that contingent on the closing of the IPO,
Company will pay Given a Base Salary of Three Hundred Thousand Dollars
($300,000) per year. The applicable Base Salary will be payable in accordance
with the usual payroll period of Company. Given's Base Salary will be
subject to an annual review in the sole discretion of the Board or its
Compensation Committee, provided that the Base Salary may not be adjusted
downward;
(ii) ANNUAL BONUS. Company will pay Given an annual bonus of up to
40% of his Base Salary upon the achievement of certain reasonable and readily
ascertainable revenue, expense, or cashflow goals to be mutually agreed upon
from time to time by the Board or its Compensation Committee and Given;
(iii) OPTIONS. Given currently holds 80,000 shares of Company
Founder's Stock and 211,000 options to acquire the common stock of Company.
Conditioned on the closing of the IPO, Given will be granted an additional
310,000 options to purchase shares of common stock of Company ("Options"),
with an exercise price determined in accordance with the Company's stock
option plan, but not more than the price per share at which the Company's
stock is underwritten for sale in the IPO.
<PAGE>
Given will vest in the Options on a quarterly basis over a
three-year period, commencing as of the date of grant, which will be no later
than the closing of the IPO. If Given's employment is terminated, Given will
vest in the Options pursuant to the terms of Section 7(b) of this Agreement.
To the maximum extent permitted by law, the Options will be
incentive stock options.
(iv) HOME MORTGAGE INTEREST DIFFERENTIAL. The Company will pay
Given the sum of Four Thousand Dollars ($4,000) per month on the first day of
each calendar month for a period of three (3) years to be used by Given to
make payments on any mortgage loan he may obtain in connection with a new
home he may purchase in California ("New Home") commencing when the New Home
is acquired.
(v) HOME LOAN. The Company will loan to Given for purposes of
purchasing the New Home a sum of up to Two Hundred Thousand Dollars
($200,000). This New Home Loan will bear simple interest at seven percent
(7%) per year, with interest to accrue and not compound during the initial
three (3) years of the loan, and with no payments of principal or interest to
be due during these initial three years. After the initial three (3) years
of the New Home Loan, interest only payments will be due and payable on the
15th day of each calendar month, with the interest accrued as of the third
anniversary of the Loan to be amortized and paid in 36 equal monthly
installments over the subsequent three (3) year period together with the
interest then currently accruing. The New Home Loan will be secured by a
customary form second deed of trust on the New Home, and will be subordinate
to any seller financing or bank or financial institution first deed of trust
on the New Home.
In addition, the New Home Loan will be repayable as follows:
(A) Installments of twenty-five percent (25%) of the original
principal balance of the Loan, plus accrued interest on this amount, will be
forgiven by the Company upon the closing of each single transaction which
provides the Company with committed funds of at least $2,000,000 in the form
of either equity, convertible debt or gross income to the Company;
(B) Within thirty days after the sale of any securities of
the Company then held by Given which were acquired pursuant to options
granted to him by the Company, an amount equal to twenty-five percent (25%)
of the net proceeds (netting out in the account the sums necessary to
exercise the options) received by Given from the sale of these securities;
(C) Upon the sale of the New Home; and
<PAGE>
(D) In full upon the earlier of the fifth anniversary of the
making of the New Home Loan or one (1) year after the termination of Given's
employment by the Company.
If any portion of the Loan is forgiven pursuant to Section 3(a)(v)(A),
at the time of the forgiveness, the Company will also pay to Given an amount to
take into account the gross up for federal and state income taxes on the
forgiven amounts.
(vi) RELOCATION EXPENSES. Company will reimburse Given for his
reasonable moving costs and house-hunting expenses in California, which will be
limited to the following:
(A) 7.5% of sales price of Given's home in Ohio;
(B) 3.5% of purchase price of Given's New Home;
(C) Reasonable moving expenses to move Given's household goods
and two (2) cars;
(D) A reasonable number of house-hunting and school-hunting
trips, not to exceed a total of four (4) round-trips, for
Given and his spouse, with one of these round-trips to
include Given and his family;
(E) Reasonable cost of final trip to move Given's family;
(F) Temporary housing in the San Francisco Bay Area for Given's
family for a period not to exceed six (6) months; and
(G) Storage of Given's household goods for a period not to
exceed six (6) months.
(vii) OHIO MORTGAGE INTEREST ASSISTANCE. Company will pay the
monthly mortgage payment on Given's home in Ohio from the date Given acquires
the New Home until the earlier of (a) the one year anniversary from the date
Given acquires the New Home, or (b) the sale of the home in Ohio; provided
that after three bids have been placed on the house, Given must accept the
next cash offer on reasonable terms which exceeds the highest bid previously
rejected. If the home is not sold after the end of the one-year period, the
Company will arrange for the home to be sold to a professional relocation
company at its then fair market value with the proceeds to be paid to Given
and his mortgage lender.
With respect to any payments received by Given pursuant to Section 3(a)(vi)
and (vii) for which Given is not allowed a corresponding deduction or offset
to income on his personal income tax return, the Company will pay to Given in
the same calendar year as the payments are made an additional amount to take
into account the gross up for federal and state income taxes on the amount of
the benefit paid to Given.
<PAGE>
The Company will withhold all applicable federal, state and local taxes,
social security and workers' compensation contributions and such other
amounts as may be required by law or agreed upon by the parties with respect
to the compensation payable to Given pursuant to this Section 3(a).
(b) The Company will reimburse Given for all reasonable expenses
incurred by Given in furtherance of the business and affairs of the Company,
including reasonable travel and entertainment, against receipt by the Company
of appropriate vouchers or other proof of Given's expenditures and otherwise
in accordance with the Company's Expense Reimbursement Policy as may from
time to time be adopted by the Board.
(c) Given will be entitled to paid vacation of not less than four (4)
weeks per year.
(d) Company will make available to Given and his dependents, medical,
disability, life insurance and other health benefits as Company makes
available to its senior officers and directors. Company will provide Given
with term life insurance coverage not less than $1,000,000 in addition to the
group term life insurance plan available to all Company employees, both of
which will be payable to the beneficiary of Given's choice. Company will
also provide Given with executive disability insurance coverage providing for
not less than 60% of Given's Base Salary tax-free for life, and Given will
have the opportunity to purchase additional disability insurance coverage at
the same premium rate as is paid by the Company providing for 20% of his
Base Salary (or such lesser percentage as he may choose) tax-free for life.
4. REPRESENTATIONS AND WARRANTIES BY GIVEN AND CORPORATION
Given hereby represents and warrants to Company as follows:
(a) Neither the execution and delivery of this Agreement nor the
performance by Given of his duties and other obligations hereunder violate or
will violate any statute, law, determination or award, or conflict with or
constitute a default under (whether immediately, upon the giving of notice or
lapse of time or both) any prior employment agreement, contract, or other
instrument to which Given is a party or by which he is bound.
(b) Given has the full right, power and legal capacity to enter and
deliver this Agreement and to perform his duties and other obligations under
it. This Agreement constitutes the legal, valid and binding obligation of
Given enforceable against him in accordance with its terms. No approvals or
consents of any persons or
<PAGE>
entities are required for Given to execute and deliver this Agreement or
perform his duties and other obligations hereunder.
(c) Given understands that some or all of the stock issuable upon
exercise of the Options received by Given pursuant to Section 3(a) may not be
registered under the Securities Act of 1933 (the "1933 Act"), and
acknowledges that he will be obligated to agree, as a condition to the
issuance of the stock, that he will acquire such stock for his own account
for investment and not with a view to, or for resale in connection with a
distribution thereof, and will bear the economic risk of his investment in
such stock for an indefinite period of time.
Company hereby represents and warrants to Given as follows:
(a) Company was duly organized and is validly existing and in good
standing under the laws of the State of Delaware, with all requisite
corporate power and authority to own its properties and conduct its business
in the manner presently contemplated.
(b) Company has full power and authority to enter into this Agreement
and to incur and perform its obligations under this Agreement.
(c) The execution, delivery and performance by Company of this
Agreement does not conflict with or result in a breach or violation of or
constitute a default under (whether immediately, upon the giving of notice or
lapse of time or both) the certificate of incorporation or bylaws of Company,
or any agreement or instrument to which Company is a party or by which
Company or any of its properties may be bound or affected.
<PAGE>
5. NON-COMPETITION
(a) Given understands and recognizes that his services to Company are
special and unique and agrees that, during the term of this Agreement and,
unless such termination is by Given pursuant to Section 7(a)(v), for a period
of nine (9) months from the date of termination of his employment under this
Agreement, he will not in any manner, directly or indirectly, on behalf of
himself or any person, firm, partnership, joint venture, corporation or other
business entity ("Person"), enter into or engage in any business, either as
an individual for his own account, or as a partner, joint venturer,
executive, agent, consultant, salesperson, officer, director or shareholder
of a Person, with the companies listed in Exhibit A, which are directly
competitive with Company.
(b) During the term of this Agreement and, unless such termination is
by Given pursuant to Section 7(a)(v), for a period of nine (9) months from
the date of termination of his employment under this Agreement, Given will
not, directly or indirectly, without the prior written consent of Company,
initiate contact with any person who is then an employee of Company or any of
its affiliates to solicit that person for employment by another Person.
(c) In the event that Given breaches any provisions of this section or
there is a threatened breach, then, in addition to any other rights which
Company may have, Company will be entitled, without the posting of a bond or
other security, to injunctive relief to enforce the restrictions contained in
this section. In the event that an actual proceeding is brought in equity to
enforce the provisions of this section, Given will not urge as a defense that
there is an adequate remedy at law nor will Company be prevented from seeking
any other remedies which may be available.
6. CONFIDENTIAL INFORMATION
(a) Given agrees that during the course of his employment or at any time
after termination, he will not disclose or make accessible to any other person,
the Company's confidential products, services and technology, both current and
under development, promotion and marketing programs, lists, trade secrets and
other confidential and proprietary business information of Company or any of its
clients; provided that this confidential material will not include information
which lawfully becomes publicly available or which Given is required to deliver
by Court order, where Given has provided the Company with at least 15 days prior
notice of the Court order requiring the disclosure to allow the Company to seek
appropriate protective orders in the proceedings. Given agrees: (i) not to use
any such
<PAGE>
information for himself or others; and (ii) not to take any such material or
reproductions of the material from Company's facilities at any time during
his employment by Company, except as required in Given's duties to Company.
Given agrees immediately to return all the material and reproductions of the
material in his possession to Company upon request and in any event upon
termination of his employment.
(b) Except with prior written authorization by the Company, or as Given
in the good faith exercise of his duties as the President and CEO of the
Company deems in the best interests of the Company, Given agrees not to
disclose or publish any of the confidential, technical or business
information or material of the Company, its clients or any other party to
whom the Company owes an obligation of confidence, at any time during or
after his employment with the Company.
(c) Given hereby assigns to the Company all right, title and interest
he may have or acquire in all inventions (including patent rights) developed
by Given as a part of his duties under the terms of this Agreement
("Inventions") and agrees that all Inventions will be the sole property of
Company and its assigns, and the Company and its assigns will be the sole
owner of all patents, copyrights and other rights in connection with the
Inventions. Given further agrees to assist the Company in every proper way,
at the Company's expense, to obtain and from time to time enforce patents,
copyrights or other rights on the Inventions in any and all countries.
7. TERMINATION
(a) Given's employment under this Agreement will begin as of the
Effective Date of this Agreement and will continue until terminated upon the
first to occur of the following events:
(i) The death of Given;
(ii) Termination by the Board upon thirty (30) days prior written
notice because of any physical or mental incapacity which has or
will prevent Given from properly performing his duties under this
Agreement for more than ninety (90) days in any one (1) year
period;
(iii) Termination by the Board for just cause without prior
notice. Only the following actions or omissions by Given will
constitute "just cause":
(A) Willful or intentional material breach of any provision of
the Agreement which Given fails to cure or fails to begin
<PAGE>
good faith efforts to cure within fifteen (15) days after
written notice from the Board of the breach;
(B) Commission by Given of an act of fraud or theft against
Company; or
(C) Conviction of Given of any felony act other than one
involving the operation of a motor vehicle;
(iv) Termination by the Board for any reason, without just cause as
defined in Section 7(a)(iii), upon thirty (30) days prior written
notice;
(v) Termination by Given for just cause without prior notice. Only
the following actions or omissions by the Company will constitute
"just cause":
(A) Willful or intentional material breach by the Company of any
provision of this Agreement which the Company fails to cure
or fails to begin good faith efforts to cure within fifteen
(15) days after notice from Given of the breach; or
(B) Any action by the Company to intentionally harm Given;
(vi) Termination by Given for any reason, without just cause as
defined in Section 7(a)(v), upon thirty (30) days prior written
notice; or
(vii) Termination by either Given or the Company within one (1)
year after a Change in Control. A "Change in Control" is deemed
to have occurred if any "person" (as the term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act")), becomes, after the date of this Agreement the
"beneficial owner" (as defined in Rule 13(d)-3 under the Exchange
Act), directly or indirectly, of securities of Company
representing fifty percent (50%) or more of the combined voting
power of Company's then outstanding securities.
(b) Upon termination, Given will be entitled to the following:
(i) Upon termination by the Board without just cause pursuant to
Section 7(a)(iv) or by Given for just cause pursuant to Section
7(a)(v) or upon termination resulting from Given's death
<PAGE>
pursuant to Section 7(a)(i) or from Given's disability pursuant
to Section 7(a)(ii), Given (or his estate in the event of a
termination pursuant to Section 7(a)(i)) will be entitled to the
following:
(A) all vested compensation then due and owing;
(B) as of the date of the termination, the Company will pay
either in a lump sum or in equal monthly payments over a
period of twelve (12) months, at the option of the Company,
the total sum of the Base Salary for a period of twelve (12)
months and a bonus equal to a percentage of the annual Base
Salary, which percentage is equal to the average of the
actual annual bonus percentage for the two (2) years
immediately prior to the date of the termination ("Average
Annual Bonus");
(C) Company will continue to pay for his, or his heirs', COBRA
premiums and the premium for his executive disability
insurance coverage, if applicable, for a period of eighteen
(18) months commencing as of the date of termination; and
(D) any options to acquire the common stock of Company in which
Given has not yet fully vested as of the date of termination
will be deemed to vest on the same date they would have
vested as if he had continued to be employed by the Company,
provided that they would have vested within two (2) years
after the date of termination; provided that to the extent
required by the plan pursuant to which the options were
granted, the options will be deemed to have vested
immediately upon termination to the extent required to
prevent them from lapsing.
(ii) Upon termination by the Board for just cause pursuant to Section
7(a)(iii), Given will be entitled to the following:
(A) all vested compensation then due and owing;
(B) as of the date of the termination, Company will pay either
in a lump sum or in equal monthly payments over a period of
three (3) months, at the option of the Company, the total
sum of the Base Salary for a period of three (3) months and
25% of the Average Annual Bonus;
<PAGE>
(C) Company will continue to pay for his COBRA premiums and the
premium for his executive disability insurance coverage for
a period of nine (9) months commencing as of the date of
termination; and
(D) any options to acquire the common stock of Company in which
Given has not yet fully vested as of the date of termination
will be deemed to vest on the same date they would have
vested as if he had continued to be employed by the Company,
provided that they would have vested within one (1) year
after the date of termination; provided that to the extent
required by the plan pursuant to which the options were
granted, the options will be deemed to have vested
immediately upon termination to the extent required to
prevent them from lapsing.
(iii) Upon termination by Given for any reason, without just
cause, pursuant to Section 7(a)(vi), Given will be entitled to
all vested compensation then due and owing together with all
options then vested.
(iv) Upon termination resulting from a Change in Control pursuant to
Section 7(a)(vii), Given will be entitled to:
(A) all vested compensation then due and owing;
(B) as of the date of the termination, the Company will pay a
lump sum equal to the Base Salary and the maximum bonus of
40% of the Base Salary for a period of twelve (12) months;
and
(C) any options to acquire the common stock of Company in which
Given has not yet fully vested as of the date of termination
will be deemed to have accelerated and become fully vested.
(c) After the Company has fulfilled its obligations under Section 7(b),
all obligations of the Company under this Agreement will cease.
8. NOTICES
All notices and any other communications permitted or required under this
Agreement must be in writing and will be effective (i) immediately upon delivery
in
<PAGE>
person, or (i) 24 hours after deposit with a commercial courier or delivery
service for overnight delivery, or (iii) three (3) days after deposit with the
United States Postal Service, certified mail, return receipt requested, postage
prepaid. All notices must be properly addressed and delivered to the parties at
the addresses set forth below, or at such other addresses as either party may
subsequently designate by written notice given in the manner provided in this
Section:
Company: Progenitor, Inc.
1507 Chambers Road
Columbus, OH 43212-1566
Given: Douglass B. Given
4224 Conklin Court
New Albany, OH 43054
9. SEVERABILITY OF PROVISIONS
If any provision of this Agreement is declared by a court of competent
jurisdiction to be invalid, illegal or incapable of being enforced in whole or
in part, such provision will be interpreted so as to remain enforceable to the
maximum extent permissible, consistent with applicable law, and the remaining
conditions and provisions or portions thereof will nevertheless remain in full
force and effect and enforceable to the extent they are valid, legal and
enforceable, and no provision will be deemed dependent upon any other covenant
or provision unless otherwise expressed in this Agreement.
<PAGE>
10. ENTIRE AGREEMENT; MODIFICATION
This Agreement contains the entire agreement of the parties relating to the
subject matter hereof, and supersedes any other similar employment agreement,
and the parties agree that they have made no agreements, representations or
warranties relating to the subject matter of this Agreement which are not set
forth in this Agreement. This Agreement may be modified only by a written
instrument signed by the party against whom the modification is to be enforced.
11. BINDING EFFECT
The rights, benefits, duties and obligations under this Agreement will
inure to, and be binding upon, the Company, its successors and assigns, and upon
Given and his heirs, executors and legal representatives upon Given's death.
This Agreement constitutes a personal service agreement, and the performance of
Given's obligations under this Agreement may not be transferred or assigned by
Given.
12. NON-WAIVER
The failure of either party to insist upon the strict performance of any of
the terms, conditions and provisions of this Agreement will not be construed as
a waiver or relinquishment of future compliance with those provisions, and those
terms, conditions and provisions will remain in full force and effect. No
waiver of any term or condition of this Agreement on the part of either party
will be effective for any purpose whatsoever unless the waiver is in writing and
signed by the waiving party.
13. GOVERNING LAW
This Agreement will be governed by, and construed and interpreted in
accordance with, the laws of the State of California without regard to
principles of conflict of laws.
<PAGE>
14. HEADINGS
The headings of sections are inserted for convenience and will not affect
any interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first written above.
PROGENITOR, INC.,
a Delaware Corporation
By: /s/ Glenn Cooper
-------------------------------------------
Its: Chairman of Board of Directors and Director
-------------------------------------------
/s/ Douglass B. Given
-----------------------------------
DOUGLASS B. GIVEN, M.D., Ph.D.
<PAGE>
THE INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
EXCLUSIVE LICENSE AGREEMENT AND OPTION
THIS AGREEMENT ("Agreement"), effective as of April 1, 1997 ("Effective
Date"), is entered into by and between THE NATIONAL JEWISH MEDICAL AND RESEARCH
CENTER ("National Jewish"), a non-profit educational and research institution
organized under the laws of Colorado and having principal offices at 1400
Jackson Street, Denver, Colorado 80206, and PROGENITOR, INC., a Delaware
corporation having principal offices at 1507 Chambers Road, Columbus, Ohio
43212-1566 ("Progenitor").
WHEREAS, Progenitor desires to obtain certain rights and license under
intellectual property held or otherwise controlled by National Jewish covering
the EBHX-11 cell line to screen for erythroid and other hematopoietic
factors [***]; and
WHEREAS, National Jewish is willing to grant such certain rights.
NOW, THEREFORE, in consideration of the mutual covenants and promises
herein contained, National Jewish and Progenitor agree as follows:
1.- DEFINITIONS
1.1. "EBHX-11 Cell Line" shall mean the immortalized Erythroid Body HOX Cell
Line Number 11 (including any progeny, derivatives, or modifications
thereto), a proprietary cell line developed by Dr. Gordon Keller, an
employee of National Jewish, and certain colleagues, which is a subject
of [***], and is the subject of the Materials Transfer Agreement signed
by Progenitor on January 25th, 1996.
1.2. "Field of Use" shall mean the use of the EBHX-11 Cell line as an assay
to screen for erythroid or other hematopoietic factors [***].
1.3. "Product" shall mean any compound, formulation or composition whose
utility is identified or confirmed by Progenitor using the EBHX-11 Cell
Line within the Field of Use.
1.4. "Sublicensee" shall mean any third party licensed by Progenitor to use,
manufacture, or sell any Product.
1.5. "Collaborator" shall mean any third party that enters into an agreement
with Progenitor to develop, manufacture, use, or sell any Product.
1.6. "Combination Products" shall mean a combination of a Product with at
least one other active ingredient, such active ingredient being one that
is either proprietary to Progenitor or licensed by Progenitor from a
third party.
1
<PAGE>
1.7. "Affiliate" or "Affiliates" shall mean any company or business entity:
(i) in which Progenitor owns or controls at least fifty (50) percent of
the outstanding stock, or any entity over which Progenitor, directly or
indirectly, exercises effective control, or (ii) any individual or
company which owns, directly or indirectly, fifty (50) percent or more
of the outstanding stock of Progenitor, or otherwise exercises, directly
or indirectly, effective control of Progenitor.
2.- GRANT OF RIGHTS
2.1. Subject to the terms and conditions of this Agreement, National Jewish
hereby grants to Progenitor a right and license to use the EBHX-11 Cell
Line within the Field of Use. This right and license shall be exclusive
for one year commencing on the Effective Date and non-exclusive
thereafter.
2.2. The right and license granted to Progenitor shall not include the right
to sublicense the EBHX-11 Cell Line except as part of an agreement with
a Sublicensee or Collaborator and only for the field of use of this
license granted to Progenitor. Terms of this Agreement, or their
substantive equivalents, shall be incorporated into any such agreement
between Progenitor or its Affiliates and any Sublicensees or
Collaborators, as deemed necessary by National Jewish to protect its
rights to the EBHX-11 Cell Line.
2.3. The term of this right and license shall commence upon the Effective
Date and shall end on the third anniversary of the Effective Date.
National Jewish hereby grants Progenitor an option to extend the term of
this right and license on a year-by-year basis for no more than two
additional years by providing written notice thereof to National Jewish
no later than three (3) months prior to the third and fourth anniversary
dates of this Agreement and by paying the Extended Annual Maintenance
Fees specified in Section 3.2 of this Agreement.
3.- CONSIDERATION
3.1. ANNUAL FEES. In partial consideration for the right and license granted
to Progenitor in Section 2, Progenitor shall pay to National Jewish a
fee equal to [***], said fee to be paid in three equal payments of
[***] each. The first such payment shall be made within ten (10) days
after the Effective Date. The second such payment shall be made on the
first anniversary of the Effective Date. The third and final such
payment shall be made on the second anniversary of the Effective Date.
Notwithstanding the above, in the event that Progenitor terminates this
Agreement pursuant to Section 6.2 prior to the second anniversary of the
Effective Date, the payment due date for any unpaid fees under this
Section 3.1 shall be the effective date of termination and Progenitor
shall pay to National Jewish any such unpaid fees on the effective date
of such termination.
3.2. EXTENSION FEES. In the event that Progenitor chooses to exercise the
option granted by National Jewish pursuant to Section 2.3 and thereby
extend the term of this Agreement, Progenitor shall pay to National
Jewish an extension fee equal to [***] for each one year extension.
Such payment shall be due and payable, and Progenitor shall pay such
2
<PAGE>
fee, on or before the anniversary of the Effective Date which
corresponds to the first day of the year of the one year extension.
3.3. ADDITIONAL FEES. Progenitor shall pay National Jewish Additional Fees
for each and every agreement made between Progenitor or its Affiliates
and Sublicensees or Collaborators that includes the purpose of further
research and/or development of any and all Products or Combination
Products. The amount of the Additional Fees shall be the greater of
[***] or [***] of the value of any Cash Considerations received by
Progenitor or its Affiliates from said Sublicensees or Collaborators.
For the purposes of this Agreement, "Cash Considerations" shall include
any initial or upfront fee, but will not include the value of any
milestone fees or equity or royalty payments on sales of any Product
or Combination Product. Payment of Additional Fees shall be delivered
to National Jewish by Progenitor no later than 30 days after the
effective date of any agreements with Sublicensees or Collaborators.
3.4. PAYMENTS AND RECORDS. Progenitor shall make available to National
Jewish, on a confidential basis, copies of any agreements between
Progenitor or its Affiliates and any Sublicensees or Collaborators.
Copies provided may be redacted to protect confidential information, but
must contain information necessary and sufficient for the purpose of
validating Additional Fees owed to National Jewish. Upon National
Jewish's request and at National Jewish's sole expense, Progenitor and
its Affiliates shall permit an independent Certified Public Accountant
selected by National Jewish (except one to whom Progenitor has
reasonable objections) to have access during ordinary business hours to
such of Progenitor's and its Affiliates' records as may be necessary to
determine, in respect of any year ending not more than three (3) years
prior to the date of such request, the correctness of any payment made
by Progenitor to National Jewish under this Agreement. Progenitor shall
remain responsible for all payments due hereunder by any Affiliate. If
a discrepancy in payments favoring Progenitor or its Affiliates is
discovered, Progenitor shall remit the past due amount to National
Jewish. If a discrepancy is discovered which is greater than five (5)
percent of the amount paid National Jewish, Progenitor shall pay for the
cost of the audit.
3.5. INTEREST ON PAST DUE AMOUNTS. Progenitor shall pay National Jewish
interest on all payments and royalties past due, at an annual rate equal
to the lesser of ten (10) percent, or the highest rate permitted under
applicable law, compounded on each anniversary of the payment due date.
Any such payments made by Progenitor under this Section 3.5 shall not be
construed to cure any breach of this Agreement.
3.6. TAXES WITHHELD. Any income or other tax that Progenitor or its
Affiliates are required to withhold on behalf of National Jewish with
respect to the payments made to National Jewish under this Agreement
shall be deducted from said payments prior to remittance to National
Jewish; provided, however, that in regard to any tax so deducted,
Progenitor or its Affiliates shall give or cause to be given to National
Jewish such assistance as may reasonably be necessary to enable National
Jewish to claim exemption therefrom or credit
3
<PAGE>
therefor, and in each case shall furnish National Jewish proper evidence
of the taxes paid on its behalf.
4.- INTELLECTUAL PROPERTY RIGHTS
4.1. OWNERSHIP. Rights to inventions and discoveries, whether or not
patentable or copyrightable, relating to Products or Combination
Products identified through the use of the EBHX-11 Cell Line within the
Field of Use under the terms of Section 2 of this Agreement which are
conceived and reduced to practice by employees of Progenitor shall be
owned by Progenitor.
4.2. GRANT OF RIGHTS TO NATIONAL JEWISH. In the event that an employee or
paid contractor of Progenitor or its Affiliates conceives or reduces to
practice any invention or discovery which is a significant improvement
to the EBHX-11 cell line or a use thereof, such invention or discovery
shall be considered outside the scope of this agreement and Progenitor
shall immediately provide notice to National Jewish of any such
discovery or invention. Such discoveries or inventions shall be
considered the joint property of Progenitor and National Jewish, and
Progenitor and National Jewish jointly agree to negotiate an agreement
relating to the protection and commercialization of such discoveries or
inventions.
4.3. Nothing in the foregoing sections 4.1 and 4.2 shall be interpreted in
any way to supersede the provisions related to the ownership of
intellectual property contained in the Sponsored Research Agreement
between Progenitor and National Jewish dated September 18, 1996.
4.4. Notwithstanding any other provision of this Agreement, National Jewish
hereby reserves, during the period of exclusivity of this Agreement, the
perpetual, royalty-free right to conduct research and other academic,
non-commercial activities with respect to the use of EBHX-11 Cell Line
licensed to Progenitor hereunder. It is the intent of the parties that
National Jewish shall be entitled to use the cell line to the fullest
extent, including the right of National Jewish to contract with third
parties to obtain funding for further research and development, provided
that such parties are not granted any rights or licenses or options to
the EBHX-11 Cell Line which are inconsistent with the right and license
granted to Progenitor under this Agreement.
4.5. GOVERNMENT RIGHTS. This Agreement is subject to all of the terms and
conditions of Public Law 96-517, as amended, and Progenitor agrees to to
take all action necessary on its part to enable National Jewish to
satisfy its obligation thereunder related to the EBHX-11 Cell Line.
5.- REPRESENTATIONS AND WARRANTIES
5.1. REPRESENTATIONS AND WARRANTIES BY NATIONAL JEWISH. National Jewish
represents and warrants that: (i) to the best of its knowledge, National
Jewish is the owner of the entire right, title and interest in and to
the EBHX-11 Cell Line, (ii) to the best of its knowledge,
4
<PAGE>
National Jewish is the owner of the entire right, title and interest in
and to any and all intellectual property, including without limitation
patent applications and patents, covering the EBHX-11 Cell Line, (iii)
National Jewish has the full power, right and authority to grant the
right and license granted to Progenitor hereunder, (iv) National Jewish
has the full power, right, and authority to enter into this Agreement
and to carry out its obligations hereunder, (v) National Jewish has not
granted and will not grant any right or license to any third party that
is inconsistent with the right and license granted to Progenitor herein.
5.2. REPRESENTATION AND WARRANTY BY PROGENITOR. Progenitor represents and
warrants that Progenitor has the full power, right, and authority to
enter into this Agreement and to carry out its obligations hereunder.
5.3. LIMITATION OF WARRANTY. EXCEPT FOR THE EXPRESS WARRANTEES SET FORTH IN
SECTIONS 5.1 AND 5.2, NATIONAL JEWISH AND PROGENITOR GRANT NO
WARRANTEES, EXPRESS OR IMPLIED, EITHER IN FACT OF BY OPERATION OF LAW,
BY STATUTE OR OTHERWISE, AND NATIONAL JEWISH AND PROGENITOR EACH
SPECIFICALLY DISCLAIM ANY IMPLIED WARRANTY OF QUALITY, WARRANTY OF
MERCHANTABILITY, WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR
WARRANTY OF NONINFRINGEMENT.
6.- TERM AND TERMINATION
6.1. TERM. Unless terminated in accordance with the provisions of this
Section 6, the term of this Agreement shall commence on the Effective
Date and continue in full force and effect for an initial period of
three years and thereafter, subject to Progenitor's exercise of the
option granted by National Jewish under Section 2.3 and payment of
applicable extension fees pursuant to Section 3.2, on a year to year
basis until the fifth anniversary of the Effective Date.
6.2. TERMINATION BY PROGENITOR. Progenitor may terminate this Agreement at
any time for any reason, such termination to be effective sixty (60)
days after the date of receipt by National Jewish of Progenitor's
written notice of termination. Such termination, however, shall not
relieve Progenitor of any obligations under Section 3 of this Agreement
if this Agreement is terminated prior to the third anniversary of the
Effective Date; provided, however, that Progenitor shall have no
obligations under Section 3.2 as a result of termination pursuant to
this Section 6.2.
6.3. TERMINATION FOR BREACH OR DEFAULT. In the event that either party to
this Agreement shall be in breach or default of an obligation under this
agreement and shall fail to remedy such breach or default within sixty
(60) days after receipt of written notice thereof by the other party,
where such notice will contain a full description of the event or
occurrence constituting a breach of the Agreement, the nonbreaching
party to this Agreement shall be entitled to terminate this Agreement
upon written notice to the party in breach or default at any time after
such sixty (60) day period. Either party may immediately terminate this
agreement for fraud, willful misconduct or illegal conduct of the other
party upon written
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notice of same to the other party. Termination by National Jewish for
breach or default shall not relieve Progenitor of its obligations under
Section 3 of this Agreement if this Agreement is terminated prior to the
third anniversary of the Effective Date; provided, however, that
Progenitor shall have no obligations under Section 3.2 as a result of
termination pursuant to this Section 6.3.
6.4. TERMINATION UPON BANKRUPTCY. If, during the term of this Agreement,
Progenitor shall become bankrupt or insolvent or if the business of
Progenitor shall be placed in the hands of a receiver or trustee,
whether by voluntary act of Progenitor or otherwise, or if Progenitor
shall cease to exist as an active business, this Agreement shall, to the
extent permitted by law, immediately terminate.
6.5. CONSEQUENCES OF TERMINATION. Termination of this Agreement shall not
affect the rights and obligations of the parties which have accrued
prior to the effective date of termination. In particular, termination
of this Agreement shall not relieve Progenitor of the obligations under
Section 3 of this Agreement if this Agreement is terminated prior to the
third anniversary of the Effective Date; provided, however, that
Progenitor shall have no obligations under Section 3.2 as a result of
termination pursuant to this Section 6.5.
6.6. SURVIVAL. The following sections of this Agreement shall survive
termination of this Agreement for any reason: Sections 3.1, 3.3, 3.4,
3.5, 3.6, 4, 5.3, 6.5, 6.6, 7, and 8.
7.- MISCELLANEOUS
7.1. NOTICES. It shall be a sufficient giving of any notice, request,
report, statement disclosure, or other communication hereunder, if the
party giving the same shall deposit a copy thereof in the United States
Post Office in certified mail, postage prepaid, addressed to the other
party at its address hereinafter set forth or at any other address as
the other party shall have theretofore in writing designated:
NATIONAL JEWISH:
Judith Baskett
Director of Research Administration and Technology Transfer
National Jewish Medical and Research Center
Room F204
1400 Jackson Street
Denver, Colorado 80206
PROGENITOR:
Steve Williams
Progenitor, Inc.
1507 Chambers Road
Columbus, Ohio 43212-1566
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The date of giving any such notice, request, report, statement,
disclosure, or other communications, and the date of making any payment
hereunder required (provided such payment is received), shall be the
U.S. postmark of such envelope, if marked, or the actual date of receipt
if delivered otherwise.
7.2. INDEMNITY. Progenitor agrees to indemnify, hold harmless and defend
National Jewish, its trustees, officers, employees and agents against
any and all claims, suits, losses, damages, costs, fees and expenses,
including attorney fees, resulting from or arising out of the exercise
of this license. Progenitor shall not be responsible for the negligence
or intentional wrongdoing of National Jewish. However, National Jewish
does warrant that it has complied with the duty of disclosure to the
U.S. Patent and Trademark Office.
7.3. STATUS OF PARTIES. Neither party hereto is an agent of the other party
for any purpose whatsoever.
7.4. USE OF NAMES. Neither party will, without the prior written consent of
the other party, use in advertising, publicity or otherwise, any trade
name, trademark, trade device, service mark, symbol, or any
abbreviation, contraction or simulation thereof owned by the other
party, use the name of any employee or agent of the other party in any
publication, publicity, advertising or otherwise, or represent, either
directly or indirectly, that any product or service of the other party
is a product or service of the representing party, or that it is made in
accordance with or utilizes information or documents of the other party.
However, each party may acknowledge the existence of this Agreement and
the parties hereto, publicly or privately, as necessary for carrying out
its business or as required by law. Progenitor shall allow National
Jewish to review all relevant portions of any documents filed with the
U.S. Securities and Exchange Commission that contain references to
National Jewish Medical and Research Center or this Agreement, such
review to be conducted in a timely manner so as not to unreasonably
delay such filings.
7.5. ENTIRE AGREEMENT. This Agreement, including any schedules or other
attachments which are incorporated herein by reference, contain the
entire agreement between the parties as to its subject matter. This
Agreement merges all prior discussions between the parties and neither
party chall be bound by conditions, definitions, warranties,
understandings or representations concerning such subject matter except
as provided in this Agreement or as may be specified later in writing
and signed by the properly authorized representatives of the parties.
This Agreement can be modified or amended only by written agreement duly
signed by persons authorized to such agreements on behalf of the
parties.
7.6. WAIVER. The failure of a party in any instance to insist upon the
strict performance of the terms of this Agreement shall not be construed
to be a waiver or relinquishment of any of the terms of this Agreement,
either at the time of the party's failure to insist upon strict
performance or at any time in the future, and such term or terms shall
continue in full force and effect.
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7.7. TITLES. All titles and article headings contained in this Agreement are
inserted only as a matter of convenienece and reference. They do not
define, limit, extend, or describe the scope of this Agreement or the
intent of any of its provisions.
7.8. CONFIDENTIALITY. All information concerning the subject matter of this
Agreement disclosed to one party by the other orally or in written form
shall be maintained in confidence by the other party and shall not be
disclosed to any other person, firm or agency, governmental or private,
or used for purposes other than those set forth in this Agreement,
without the prior written consent of the other party, except to the
extent such information:
(i) is known at the time of its receipt by the receiving party as
documented by written records dated prior to such disclosure; or
(ii) is in the public domain other than through the fault of the
receiving party; or
(iii) is subsequently disclosed to the receiving party by a third party
who may lawfully do so and who is not under an obligation of
confidentiality to the supplying party; or
(iv) is disclosed to the Securities and Exchange Commission in filings
by Progenitor therewith or to other governmental agencies to facilitate
the issuance of marketing approvals for Products; or
(v) is disclosed by Progenitor to potential Sublicensees or
Collaborators within the terms of this Agreement, which Sublicensees or
Collaborators shall first agree to be bound by the confidentiality
obligations contained in this Agreement; or
(vi) is required to be disclosed in a judicial or administrative
proceeding after legal remedies for maintaining the subject matter in
confidence have been exhausted.
7.9. FINANCIAL TERMS. Neither party shall disclose the financial terms of
this Agreement to any third party (other than the employees of either
party) without the prior written consent of the other party, unless such
disclosure is otherwise required by law or applicable regulation.
7.10. PUBLICATIONS. Progenitor agrees to supply National Jewish with copies
of all written documents or presentation materials at least thirty (30)
days prior to any publication or oral presentation of those materials,
in order to allow the National Jewish to review those materials and take
any actions necessary to protect intellectual property related to the
EBHX-11 Cell Line or to ensure compliance with Section 7.8 of this
Agreement.
7.11. FORCE MAJEURE. No failure or omission by the parties hereto in the
performance of any obligation of this Agreementshall be deemed a breach
of this Agreement or create any liability if the same shall arise from
any cause or causes beyond the control of the parties, including, but
not limited to, the following: act of God, acts or omissions of any
government; any rules, regulations or orders issued by any governmental
authority or by
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any officer, department, agency or instrumentality thereof; fire; storm;
flood; earthquake; accident; war; rebellion; insurrection; riot;
invasion; strike; and lockouts; and provided that such failure or
omission resulting from one of the above causes is cured as soon as is
practicable after the occurrence of one or more of the above-mentioned
causes.
7.12. GOVERNING LAW. This Agreement shall be construed as having been entered
into in the State of Colorado and shall be interepreted in accordance
with and its performance governed by the laws of the State of Colorado.
7.13. ASSIGNABILITY. This Agreement shall be binding upon and inure to the
benefit of respective successors and assigns of the parties hereto,
however, a party may only assign its rights hereunder with the prior
written consent of the other party, such consent not to be unreasonably
withheld or delayed. In order to obtain the other party's written
consent, the assigning party shall advise the other party in writing as
to the entity to which it wishes to assign this Agreement. The other
party shall respond to the assigning party's request within ten (10)
days of receipt of the assigning party's notice. If the other party
shall refuse to provide its consent, it shall provide its reasons in
writing. Failure by the other party to respond within said ten (10) day
period shall be deemed consent to the assigning party's request.
Notwithstanding the foregoing, Progenitor shall have the right to Assign
this Agreement without the prior written consent of National Jewish in
connection with the sale of all or substantially all of its assets,
provided that Progenitor is not in breach and that the assignee agrees
in writing to the terms of this Agreement.
7.14. SEVERANCE. Each clause of this Agreement is a distinct and severable
clause and if any clause is deemed illegal, void, or unenforceable, the
validity, legality, or enforceability of any other clause or portion of
this Agreement will not be affected thereby.
8.- DISPUTE RESOLUTION
8.1. DISPUTE RESOLUTION. If one of the parties hereto declares that a
dispute between the parties has arisen related to this Agreement, such
dispute shall, in the first instance, be the subject of good faith
negotiations between the parties to resolve such dispute. Meetings to
resolve disputes shall be held in the jurisdiction of the party that did
not first allege the existence of a dispute, unless another location is
slected that is mutually acceptable to the parties. Should the
negotiations not lead to a settlement of the dispute within thirty (30)
days of the date of the meeting, the parties shall refer the dispute to
a mutually acceptable mediation service to resolve the dispute. The
mediation shall be attended by individuals from within each party who
have decision making authority with respect to the matter in question.
If the mediation does not lead to a settlement of the dispute within
forty-five (45) days of the date of the meeting, then the parties shall
submit the issue to arbitration before a panel of arbitrators under the
rules of the American Arbitration Association. Unless the parties
otherwise agree, arbitration will be held in the jurisdiction of the
party that did not first allege the existence of the dispute. The panel
of arbitrators shall consist of three parties: one selected by each
party, as well as a disinterested third party that the two arbitrators
shall name. The third arbitrator shall be a person who has had
experience
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<PAGE>
in the business of biotechnology or pharmaceutical licensing. If a
qualified person in this field cannot be found and agreed upon, the two
arbitrators shall use their own discretion and select a third arbitrator
with qualifications as they deem appropriate. The three arbitrators
shall be given full power to hear and finally determine and dispose of
all disputes between the parties that may arise from or that are related
to this Agreement. The parties agree that, any provision of applicable
law notwithstanding, they will not request, and the arbitrators shall
have no authority to award, punitive or exemplary damages against any
party. The arbitrators shall make their ruling in writing no later than
thirty (30) days after the hearing. The decision of two of the three
arbitrators shall be binding on the parties. No party has the right to
appeal the ruling, to any court or otherwise. Judgment upon the
decision rendered may be entered in any courthaving jurisdiction or
application may be made to such court of a judicial acceptance of the
award and an order of enforcement, as the case may be. All fees and
expenses payable with respect to the mediation and arbitration
proceedings shall be shared by both parties during the course of the
mediation and arbitration proceedings, but, in the case of the
arbitration, shall be reimbursed in favor of the prevailing party after
the arbitration ruling is rendered.
IN WITNESS THEREOF, the parties hereto have executed this Agreement as of the
day and year first written above.
National Jewish Medical and Research Center
By: /s/ Judith Baskett
Judith Baskett
Director of Research Administration and Technology Transfer
Date: 3/26/97
Progenitor, Inc
By: /s/ Stephen J. Williams
V.P. - Corporate Development
Date: March 31, 1997
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Exhibit 10.38
THE INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
SPONSORED RESEARCH AGREEMENT
This Agreement is made and entered into this First Day of May, 1997 by and
between the Ontario Cancer Institute / Princess Margaret Hospital,
610 University Avenue, Toronto, Canada M5G 2M9 (hereinafter referred to as
"Institution") and Progenitor, Inc. 1507 Chambers Road, Columbus, Ohio 4322-1566
(hereinafter referred to as "Sponsor").
WHEREAS, the research program contemplated by this Agreement is of mutual
interest and benefit to Institution and to the Sponsor, and will further the
research objectives of the Institution in a manner consistent with its status as
a non-profit, tax-exempt research institution,
NOW, THERFORE the parties agree as follows:
1. STATEMENT OF WORK. Institution agrees to use its best efforts to perform
the Research Plan outlined in the proposal dated February 3, 1997 and in
general conformance with the Proposal Budget and Research Plan which are
incorporated into this Agreement by reference and attached hereto as
Exhibit 1.
2. PRINCIPLE INVESTIGATOR. The research will be supervised by Norman Iscove,
M.D., Ph.D. If for any reason Dr. Iscove is unable to continue to serve as
principle investigator, and a successor acceptable to both Institute and
Sponsor is not available, this Agreement shall be terminated as mutually
agreed.
3. PERIOD OF PERFORMANCE. The research shall be conducted during the period
May 1, 1997 to April 30, 1999
4. CONSIDERATION. In consideration for the research to be conducted by the
Principle Investigator and Institution during the first year of this
Agreement, Sponsor will pay to Institution a total of [***]. Payment
shall be made to Institution in four installments. The first installment
shall equal [***] and shall be paid within thirty (30) days of the date of
execution of this Agreement. Seven additional installments in the amount
[***] each shall be paid on August 1, 1997, November 1, 1997, February 1,
1998, May 1, 1998, August 1, 1998, November 1, 1998 and February 1, 1999.
Sponsor and Institution shall mutually agree upon and determine in writing
any extensions to this Agreement and any associated research budget, no
later than 60 days before the end of the term of this Agreement. All
payments by Sponsor in consideration for research to be conducted by
Principle Investigator and Center during extensions of this Agreement
shall be made in equal quarterly payments on a quarterly basis beginning
on the start date of each year and shall be in accordance with the research
budget corresponding to each year as agreed between the Institution and
Sponsor. Any equipment purchased pursuant to this Agreement shall be and
shall remain the property of the Institution.
5. TERMINATION. Notwithstanding any other terms and conditions hereunder,
this Agreement may be terminated by either party by written notification to
the other party at
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least one-hundred eighty (180) days prior to the desired effective date of
the termination. In the event of early termination by Sponsor for any
reason except a material breach of this Agreement by Institution and
principle Investigator, the Institution shall be entitled to payment of all
expenditures or encumbrances that cannot be canceled and which were
incurred prior to the termination date. Further, upon early termination of
this Agreement, Institution shall return to Sponsor all data and
information obtained by Institution under this Agreement prior to the date
of termination shall be returned to Sponsor. In addition, any materials
provided to Institution by Sponsor under this Agreement shall be destroyed
or returned to Sponsor, at Sponsor's option.
6. PUBLICATIONS. Institution will be free to publish results under this
Agreement. A copy of each publication will be provided to the Sponsor
forty-five (45) days prior to submission for publication to allow adequate
time for the parties to identify and protect patentable subject matter.
Notwithstanding the above, publication will be delayed until patent
applications have been filed in the United States, provided the delay does
not exceed sixty (60) days from the date the publication is submitted to
the Sponsor.
7. REPORTS. The Institution will provide Sponsor with annual written reports
within forty-five (45) days after May 1 in each calendar year or after the
date of termination. Reports will include review of progress on the
Research Plan and a summary of activities during the preceding 12 months as
well as revisions to the Research Plan and the projected budget for the
next year. Institution and Principle Investigator will meet periodically
with Sponsor to review the Research Plan and discuss the research progress.
If the location of the meetings is outside of the Toronto, Canada area,
Sponsor will pay travel expenses of Principle Investigator.
8. INTELLECTUAL PROPERTY. Title to any invention conceived or first reduced
to practice in the performance of the Research Plan solely by any person(s)
employed or otherwise appointed by Institution, or at any time by any
person(s) at Institution whose salary and benefits are paid though
financial support provided by Sponsor, shall remain with Institution.
Title to any invention conceived or first reduced to practice jointly by
Institution and by any employee(s) of Sponsor in the performance of the
Research Plan shall be jointly owned by Institution and Sponsor. Sponsor
shall have, and Institution hereby grants to Sponsor, a right of first
refusal to acquire an exclusive license to Institution's rights in any
invention conceived or first reduced to practice either (I) in the
performance of the Research Plan by any person(s) employed or otherwise
appointed by Institution, or (II) at any time by any person(s) whose salary
and benefits are paid through financial support provided by Sponsor. The
terms and condition of such license shall be negotiated in good faith
between the parties and shall be consistent with the terms of license and
consideration which are incorporated into this Agreement by reference and
attached hereto as Exhibit 2. Sponsor may exercise such right of first
refusal at any time during a period of ninety (90) days after the date of
Sponsor's receipt of Institution's written notice describing an invention
in detail. After such ninety (90) day period, the right of first refusal
granted to Sponsor shall expire and Institution may grant rights to a third
party under Institution's rights in any such invention without obligation
to Sponsor.
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9. USE OF NAMES. Neither party will use the name of the other in any
advertising or other form of publicity without the prior written permission
of the other.
10. CONFIDENTIAL INFORMATION. During the term of this Agreement both parties
will exchange certain proprietary Confidential Information in connection
therewith, either written or orally ("Information"). Both Sponsor and
Institution agree to keep such Information strictly confidential; will not
use such Information to reverse engineer or design around proprietary
projects or products; and will not disclose Information to others without
the express written permission of the other party; provided, however, they
will not be prevented from using or disclosing information which:
a) is now, or which hereafter, through no act or failure of the other
party, becomes generally known or available;
b) is known by the other party at the time of receiving such Information
c) is hereafter furnished to the other party by a third party who did not
acquire such Information directly or indirectly form the other party;
or
d) is independently developed by the other party without knowledge of
Information, and the recipient party can demonstrate or prove truth
thereof.
11. NOTICES. Any notice required to be given or which shall be given under
this Agreement shall be in writing delivered by first class mail addressed
to the parties as follows:
Progenitor, Inc.
Vice President, Corporate Development
1507 Chambers Road
Columbus, Ohio 43212-1566
Research Administrator
Research Department
Ontario Cancer Institute / Princess Margaret Hospital
610 University Avenue
Toronto, Canada M5G 2M9
In the event notices, statements and payments required under this Agreement
are sent by certified or registered mail by one party to the other party at
its above address, they shall be deemed to have been given or made as of
the date so mailed, otherwise as of the date received.
12. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and the successors to substantially the entire
business and assets hereto, provided the successor entity agrees in writing
to abide by all the terms of this Agreement.
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13. GOVERNING LAW. The validity and interpretation of the Agreement and the
legal relation of the parties to it shall be governed by the laws of the
Province of Ontario and Canada.
14. FORCE MAJEURE. Institution shall not be responsible to the Sponsor for
failure to perform any of the obligations imposed by the Agreement,
provided such failure shall be occasioned by fire, flood, explosion,
lightning, windstorm, earthquake, subsidence of soil, failure or
destruction, in whole or in part, of machinery or equipment failure or
supply of materials, discontinuity in supply of power, governmental
interference, civil commotion, riot, war, labor disturbance, transportation
difficulties, labor shortage or any cause beyond the reasonable control of
Institution
15. ENTIRE AGREEMENT. Unless otherwise specified, this Agreement embodies the
entire understanding between Institution and Sponsor for this project, and
any prior or contemporaneous representations, either written or oral are
hereby superseded. No amendment or changes to this Agreement, including
without limitation, change in the statement of work, total estimated cost,
and period of performance, shall be effective unless made in writing and
signed by authorized representative of the parties.
For Institution For Progenitor, Inc.
By: /s/ Dr. Richard G. Miller By: /s/ Stephen J. Williams
------------------------- ---------------------------------
Title: V.P. Research Title: V.P. Corporate Development
---------------------- ------------------------------
Date: April 15, 1997 Date: 4/11/97
---------------------- ------------------------------
/s/ Norman Iscove
----------------------
Senior Staff Scientist
15 April 1997
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EXHIBIT 1 BUDGET AND RESEARCH PLAN
ONTARIO CANCER CENTER
DR. NORMAN ISCOVE
Budget (May 1, 1997 through April 30, 1999) Year 1 Year 2
- ------------------------------------------- ------ ------
Salary and Benefits for 1 Research Technician [***] Can [***] Can
Research Supplies [***] Can [***] Can
Services and Overhead [***] Can [***] Can
TOTAL [***] CAN [***] CAN
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BACKGROUND
Developmental decision making in the hemopoietic system is the main focus of
interest in my laboratory. We consider that such decisions are ultimately
initiated by changes in the expression of critical regulatory genes, and that
research aimed at identification of genes that are expressed differentially at
specific decision points will provide the keys to understanding the mechanisms
of differentiative progression.
The quest for such information is complicated by the heterogeneous composition
of hemopoietic tissues, where differentiative decisions take place within rare
precursor cells that are structurally indistinguishable and greatly outnumbered
amongst their maturing progeny. Nevertheless, it is possible to detect
hemopoietic precursor cells in functional assays, and to distinguish precursors
that differ in their differentiative and growth potentials on the basis of the
composition of the clones that they can generate. Such assays define a
hierarchy of hemopoietic precursors extending from multipotential stem cells
through pluripotential and oligopotential intermediates to cells committed
uniquely to forming one out of a dozen alternative blood and tissue cell types.
Methods of cell separation can purify precursor cells from more differentiated
progeny, and can separate to near homogeneity the earliest long term
reconstituting stem ('LTR') cells from their more advanced progeny. However,
cell purification has not been particularly effective in separating the various
pluripotential and committed intermediates from one another even though they
differ in their commitment states [1,2]. Molecular analysis in this system has
therefore been limited to the study of precursor populations of mixed
composition, or of cell lines which may also frequently comprise a mixture of
cells in varying stages of the maturation process. The problem of heterogeneity
is perhaps the most significant factor limiting the resolution that can be
applied to the search for genes that govern commitment processes.
Acute myeloid leukemia, while characterized by a failure of normal maturation,
and by a variety of specific mutatations differing patient to patient, also
appears to be arranged in a precursor hierarchy. The bulk of leukemic blasts in
a patient are proliferatively inert and survive no more than days in vivo.
Leukemic cells capable of colony formation in culture generally comprise no more
than a few percent of the blast population and have been shown to differ in
physical and surface markers from the bulk of inert blasts. Further, the
persistence and eventual dominance of leukemic clones in vivo implies the
existence of self-renewing leukemic stem cells that must maintain the disease in
a manner analogous to the maintenance of normal hemopoiesis by normal stem
cells. The leukemic cells that are measured by clonal growth in culture yield
inert blasts after 2-3 weeks of culture which do not grow further. The limited
growth suggests that such methods may not detect the stem cells that can
maintain the disease in vivo, but rather an intermediate population having more
limited proliferative capacity.
Current work in my laboratory is focussed on detection, quantitation and
separation of rare cells in patient AML samples with the capacity to proliferate
for months in vitro, maintaining clonal leukemic cell populations that retain
the same proliferative hierarchycharacteristic of the original AML population.
The system offers, in analogy to normal hemopoiesis, an opportunity for
exploring the gene expressional basis of the transitions from leukemic stem to
proliferative
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intermediate to inert leukemic and cell, provided again that the problem of
population heterogeneity can be solved.
GLOBAL RT-PCR APPLIED TO SINGLE CELLS
We recently introduced a novel strategy for comprehensive analysis of gene
expression in rare precursor cell populations. The first element of the
approach is an RT-PCR procedure for unbiased amplification of all polyadenylated
mRNAs in samples as small as a single cell. The method generates short cDNA
strands using an oligo(dT) primer. These are tailed with poly(dA) and
subsequently amplified with a single oligo(dT)-containing primer. The method is
robust, reproducibly applicable to single cells, and preserves the 3' terminal
300-600 bases of all transcripts together with their original abundance
relationships in the amplified product. It has been applied to the analysis of
single hemopoietic precursor cells drawn from nascent 4-8 cell colonies. A
second essential element in the approach is the parallel tracking of the
biological potential of the siblings of each cell processed for cDNA, as
illustrated in Figure 1. Each sibling is cultured individually in conditions
supporting growth anddifferentiation in all myeloid lineages. These tactics
yield cDNA samples each originating from a homogeneous, known cellular source,
essentially bypassing the need for extensive prior purification of different
kinds of precursors. The procedures are detailed in references 3-5.
FIGURE 1. DETERMINATION OF THE BIOLOGICAL POTENTIAL OF A PROCESSED CELL BY
FOLLOWING THE FATES OF ITS SIBLING CELLS.
The resulting cDNA samples can be reamplified as required, without apparent
change in abundance relationships, and thus represent a permanent resource. The
primers contain restriction sites allowing easy cloning into plasmid libraries
where desired. Large numbers of individual cDNA samples are conveniently
analyzed by slot blotting and hybridization with probes of interest.
We have not yet measured complexity of the cDNA samples directly. Indirect
evidence suggests, however, that they include a substantial proportion of all
message species originally present in these cells. First, a large variety of
expected messages are detectable in the samples by simple Southern blotting, and
we know that mRNAs synthetically added to an abundance of only 0.25% are readily
detected after global amplification. A second indication comes from screening
of the set for transcripts for specific cytokine receptors. Many of these are
known to be expressed at very low abundance levels in cell lines. Although most
were undetected by simple hybridization of our blots, they were all clearly
detectable, in precursor cells known to express them, when we did secondary PCR
analysis of our generally amplified cDNAs using specific primers targetted to 3'
UTR sequences. The results argue that the generally amplified cDNAs are complex
enough to be representative even of transcripts present originally at only a few
copies per cell.
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cDNA ARCHIVES REPRESENTATIVE OF MURINE AND HUMAN HEMOPOIETIC PRECURSOR
HIERARCHIES
I. cDNAS FROM MURINE HEMOPOIETIC CELLS:
A. cDNA prepared from populations of FACS purified precursor cells
This work represents a collaboration with Dr. Chung Li at the University of
Queensland. The goal is to identify transcripts that are expressed uniquely in
LTR cells, or transcripts that are upregulated only as cells differentiate
beyond the LTR cell stage. Globally amplified cDNA has been prepared from two
distinct sorted populations. A c-kit+/Ly6A+/Rho123-population contains LTR
cells at a frequency between 1 in 50 and 1 in 5. A second c-kit+/Ly6A-/Rho123+
fraction consists of colony-forming cells of various kinds at a frequency of
6/10, but is entirely devoid of LTR activity.
B. cDNA from single precursor cells
We have accumulated over 140 such samples from mouse bone marrow cells
representing 18 distinct positions in the hemopoietic differentiation hierarchy
(Figure 2), including multipotential cells individually able to differentiate at
least into erythroid, megakaryocytic, monocytic, neutrophil and mast cell
lineages. Details of the sample set follow. Unless otherwise noted, each cDNA
sample was derived from a single progenitor cell whose siblings had uniform and
identical fates in reporter cultures. The number of independent samples of each
type that clearly hybridized an L32 housekeeping probe is indicated in
parentheses.
FIGURE 2. OVERVIEW OF THE MURINE SAMPLES IN THE FORM OF A BRANCHING HIERARCHY,
INDICATING THE NUMBERS OF INDEPENDENT cDNA SAMPLES ARCHIVED FROM EACH STAGE
1. 'multipotential' E/Meg/Neut/Mac +/- mast (15)
To prepare these, the Ly6A+Rho123dull fraction of normal marrow (enriched in
long-term reconstituting stem cells) was cultured in IL- 1/IL-6/IL-11/SCF for 4
days to generate colony starts containing 4 - 8 cells. In our experience, 1 of
about 60 - 80 such starts would have the capacity for permanent reconstitution
of hemo-and lymphopoiesis in irradiated W mutant recipients. Sibling reporters
were cultured in the same cytokines plus IL-3 and erythropoietin. For thorough
assessment of myeioid lineage potential, the derived colonies were further
replated in methyl cellulose in the same cytokines, as well as in liquid
cultures with IL-3 and ConA for detection of mast cells. In 11 of the starts,
all siblings had all of erythroid/megakaryocytic/neutrophil/macrophage
potentials. In 4 additional starts, all sibs displayed all of these potentials
as well as yielding mast cell outgrowth. At the time, we were not yet able (as
we are now) to assess B lymphoid potential in the sibling cells.
Some of the following samples were derived from the same experimental framework
as described above. Others were obtained earlier in the course of the work
published in Current Biology 5:909 (enclosed). The colony starts from the
earlier experiments were obtained from unseparated marrow cells enriched first
for primitive cells by overnight culture with IL-1 and IL-3 in the presence of a
blocking concentration of unlabelled thymidine, followed by initiation
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of colony starts in methyl cellulose containing IL-1, IL-3, SCF and
erythropoietin. The differentiative potentials of the sampled precursor cells
are indicated.
2. E/Meg/Mast (2)
3. E/Meg/Mac (9)
4. E/Meg (21)
5. Neut/Mac (6)
6. Neut/?Mast (2)
7. E only (BFU) (2)
8. Mac only (22)
9. Neut only (7)
10. Meg only (7)
11. E only (CFU-E) (2)
CFU-E stage samples were each prepared from about 50 cells drawn from large,
growing colonies judged by in situ morphology to be likely erythroid but not yet
hemoglobinized. On stained slides the cells had the features of
proerythroblasts. The colonies from which they were drawn became visibly
hemoglobinized within the succeeding 2 - 3 days and contained only erythroid
cells.
12. maturing cells: erythroid, neutrophil, macrophage, megakaryocyte, mast, B,
T (CD4), T(CD8)
These were prepared from samples of about 50 cells from homogeneous colonies or
cultures, in some cases from cells growing in differing sets of stimuli. There
are 3 - 6 independently prepared cDNA samples for each category and condition
set.
II. cDNAS FROM HUMAN HEMOPOIETIC CELLS:
We havo also accumulated a set of similar cDNA samples from normal human marrow.
An overview of the set is show in Figure 3.
FIGURE 3. OVERVIEW OF THE HUMAN SAMPLES ARRANGED AS A HIERARCHY, INDICATING THE
NUMBERS OF INDEPENDENT cDNA SAMPLES OBTAINED FROM EACH STAGE THAT CLEARLY
HYBRIDIZE AN ACTIN PROBE.
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Each precursor cDNA sample was derived from a single cell with sibling reporters
indicating lineage and position in the hierarchy. In most instances, cultures
containing IL-1, IL-3, IL-6, GM-CSF, G-CSF, SCF and erythropoietin were
initiated with normal CD34 positive marrow cells, and siblings were tracked in
similar conditions. We could not readily identify megakaryocytes in our
conditions on morphological grounds despite some effort with MGDF and therefore
do not know which of our sampled precursors may also have had megakaryocytic
potential.
Precursors:
1. E/Neut/Mac (2)
2. Neut/Mac (10)
3. E only (BFU) (9)
4. E only (CFU-E) (18)
5. Mac only (14)
6. Neut only (7)
7. Eosinophil only (7)
8. maturing cells: erythroid, neutrophil, macrophage, megakaryocyte,
eosinophil
These were each prepared from samples of about 50 cells from homogeneous
colonies. There are 3 - 7 independently prepared cDNA samples from each type.
MAPPING OF EXPRESSION OF KNOWN GENES WITHIN THE PRECURSOR HIERARCHY
The use of Southern blot hybridization to map gene expression in the murine
hemopoietic hierarchy is detailed in reference 5, representative of a larger
number of published studies using these blots. The approach has yielded RNA-
level expression maps for a variety of genes in primary cells and PROVIDES THE
FIRST SUCCESSFUL RESOLUTION OF EXPRESSION BETWEEN PRECURSOR CELLS IN DIFFERING
STATES OF COMMITMENT.
More recently, we have used the archive to map expression of a large panel of
cytokine receptor transcripts (in preparation). Most of these were not
detectable by simple Southern blotting. We therefore chose PCR primer pairs to
target sequences within the 3' terminal 300 bases of the transcripts, regions
that should be contained within our generally amplified samples. The
transcripts proved detectable by PCR and showed expression patterns consistent
with previous information. THE RESULT SHOWED THAT THE GLOBAL PCR APPROACH
YIELDS AN AMPLIFICATION PRODUCT THAT IS REPRESENTATIVE OF EVEN VERY LOW
ABUNDANCE TRANSCRIPTS PRESENT IN THE ORIGINALLY PROCESSED CELLS.
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SUBTRACTIVE ANALYSIS
The groundwork outlined above has provided us with unprecedented access to cDNA
samples from specific, defined stages of hemopoietic stem cell differentiation.
Precursor cells are expected to contain 1000's of distinct transcripts. Most of
these are likely to be expressed in common among hemopoietic cells and to carry
out functions required generally by cells. On the other hand, some transcripts
involved in steering cell fate should be expressed differentially among cells
with differing biologcal potentials. Subtractive hybridization would be ideally
suited to the identification of these rarer transcripts, and those with
significant regulatory roles should be significantly enriched in suitably
subtracted materials. As already noted, cDNA amplified by our procedure likely
provides a nearly complete representation of transcripts present in at least a
few copies in the originally processed cells.
Our initial subtractive approach and results are described in reference 5. The
work compared cDNAs obtained from a single E/Meg precursor and a single Neut/Mac
precursor. Driver and tracer were double-stranded cDNA. 5 rounds of
subtraction were performed at a driver:tracer ratio of 20:1. After each round,
the subtracted product was specifically reamplified using a primer specific to
the tracer ends. The final difference products were cut in the primer ends with
EcoRI and cloned into BlueScript libraries. Complexity was not directly
measured.
From the E/Meg minus Neut/Mac library, 50 random clones were drawn of which
17 hybridized to tracer and not driver. Of these, 17/17 were unique. THE
RESULT SUGGESTED THAT THE DIFFERENCE LIBRARY WAS LIKELY TO CONTAIN AT LEAST
HUNDREDS OF DISTINCT DIFFERENCE CLONES. A smaller number of difference clones
were similarly identified in the Neut/Mac minus E/Meg library.
25 difference clones were each tested for hybridization to the broader set of
hierarchy samples. Their differing expression between the individual samples
used in the subtraction was confirmed. However, in all but 1 instance, they did
not represent consistent differences between other examples of Neut/Mac and
E/Meg precursors. As discussed in greater detail in reference 5, the experiment
taught us that subtractions would have to be performed between pools of single
cell-derived samples to yield a significant proportion of expression differences
that consistently track with precursor type.
7 of the 25 difference clones were of some interest on the basis of their
expression patterns. One of these, HPK1, has been worked up in depth and is
described in reference 6. None were matched by known entities in the
GenBank/EMBL data bases, A RESULT THAT PREDICTS THAT DIFFERENTIALLY EXPRESSED
TRANSCRIPTS IN THIS SYSTEM WILL ONLY INFREQUENTLY IDENTIFY TRANSCRIPTS WITH
ALREADY IDENTIFIED FUNCTION.
In more recent work, we subtracted cDNA pooled from 10 tetra and pentapotential
samples (A.1. above) with cDNA pooled from 23 bipotential precursors (14 E/Meg,
7 Neut/Mac, 2 Neut/?Mast). The subtraction method involved a new protocol
developed by us. Driver cDNA was rendered single-stranded by digestion of the
primer(FokI site) ends away with FokI followed by digestion to completion with
ExoIII and photo-biotinylation. Tracer was intact double-stranded cDNA prepared
with primer ends containing a NotI site. A single round of subtraction was done
at a driver:tracer ratio of 20000:1 (driver 1 ug/ml, 65o, 1.5M NaCl, 10% PEG,
2hr) to
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theoretical completion of the pseudo-first order reaction, followed by removal
of driver and driver- tracer hybrids using avidin and phenol extraction. The
NotI primer- amplified subtraction products were digested with NotI and cloned
into BlueScript libraries. Complexity was high, based on hybridization to a
variety of probes, but remains to be measured directly.
From each library, 300 clones were randomly picked and tested for hybridization
to labelled driver and tracer. About 100 Multi-derived clones from the Multi -
Bi subtraction hybridized the Multi pool but not the Bi pool. About 40 of the
Bi-derived clones hybridized the Bi pool but not the Multi pool. THESE NUMBERS
DEMONSTRATE THE EFFECTIVENESS OF THE SUBTRACTIVE PROCEDURE, WHICH APPEARS TO
HAVE SIGNIFICANT PRACTICAL ADVANTAGES OVER THE ALTERNATIVE APPROACH OF
DIFFERENTIAL DISPLAY.
11 randomly chosen subtractive Multi clones have been screened by hybridization
to a matrix of 100+ single-progenitor and end-cell global cDNAs. A very
interesting and unanticipated finding is emerging from this work. All of the 11
hybridized as expected to individual samples from multipotential precursors, and
sporadically or not at all to bipotential or uniquely committed progenitors.
However, they generally also hybridized strongly to terminally maturing
macrophages and each also to a variable pattern of maturing cells in other
lineages. Examples are illustrated in Figure 4. Tentatively, we are
considering that in multipotential cells, loci which are destined eventually for
high level expression in mature blood cells may be in the process of being made
physically available for transcription, but may not yet have come under the
control of specific repressor factors. Because such transcripts are down-
regulated by the time cells reach bipotential commitment, they appear in our
subtraction, and indeed dominate numerically. Clearly, future subtractions will
have to include cDNA from maturing cells in the driver pool. Removal of
transcripts typical of terminally mature cells would be expected to increase the
proportion of subtractants that are novel.
The subtracted materials are cDNA and PCR-based, so the depth to which they can
be mined is limited only by the complexity of the amplified product. Cloned
libraries of the corresponding complexity can be repeatedly generated from these
materials.
FIGURE 4 [GRAPH]
SELECTION OF DIFFERENCE CLONES FOR INTENSIVE ANALYSIS
RESULTS TO NOW HAVE ESTABLISHED THAT THESE METHODS CAN YIELD 3' DIFFERENCE TAGS
IN VERY LARGE NUMBERS THAT ARE REPRESENTATIVE OF NOVEL TRANSCRIPTS, and
resources have therefore to be prioritized. Our work has proceeded along the
following lines, illustrated schematically in Figure 5, and by the example of
HPK1 described in reference 6.
FIGURE 5. STEPWISE SELECTION OF EXPRESSION CLONES FOR FURTHER EXAMINATION.
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<PAGE>
(1) Subtraction clones are tested individually for hybridization to tracer and
driver, and only those hybridizing mainly to tracer are taken to step (2).
(2) 3' tags are sequenced, and only those likely to represent novel transcripts
are taken to the next step.
(3) Clones are hybridized to slot blots of globally amplified cDNA
representative of a variety of tissues and cell lineages, in addition to our
hemopoietic hierarchy samples. Only those with interesting patterns of
specificity are taken further.
(4) Clones are hybridized to Northern blots prepared from a panel of cell
lines. Those identifying distinct and probably tractable transcripts proceed to
the next stage.
(5) Available full length cDNA libraries are screened with probes prepared from
pools of clones identified in previous steps. Library clones containing long
inserts proceed to the next step.
(6) Library clones are sequenced. Those containing coding region motifs
suggestive of possible function are selected for further analysis.
(7) The most attractive candidates, by a number of criteria, are tested for
functional role by expression, deletion or interaction screening strategies.
SUMMARY OF SYSTEM FEATURES
1. Almost every stage in the hemopoietic hierarchy is represented by cDNA from
homogeneously pure cells of known developmental potential. This sample set is
unique to our laboratory. The resolution it provides can not be obtained by the
use of sorted cell populations or cell lines, both of which always consist of
mixtures of cells in differing commitment states.
2. Each cDNA sample is indefinitely renewable by PCR and can be repeatedly
cloned into libraries.
3. The amplified products appear to be representative of a very large
proportion of all transcripts present at each stage, including mRNA species
originally present at only a few copies per cell.
4. Our subtraction protocols yield difference clones efficiently and in high
numbers, and a large proportion of these represent novel transcripts without
previously defined functions. The difference products, like the starting
materials, are indefinitely renewable by PCR and repeatedly clonable into
libraries.
SPECIFIC RESEARCH OBJECTIVES
1. GENERATION OF REQUIRED FULL LENGTH cDNA LIBRARIES
Successful and efficient identification of novel regulators will depend on
easy access to near full length cDNAs containing most of the coding sequence of
the corresponding transcripts.
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<PAGE>
The CapFinder technology recently introduced by CloneTech appears to offer major
advances in the art of cDNA library construction. In particular, a very high
proportion of generated cDNAs encompass the entire transcript, the primary
product is PCR-generated and therefore renewable and repeatedly clonable into
libraries, and Southern blots of the amplification product effectively yield
"virtual Northerns" that indicate the true size of the native transcripts. The
method requires an input of at least several thousand cells.
Libraries will be generated from representative hemopoietic cell lines,
marrow fractions highly enriched for LTR or progenitor cells, ES cells and
possiblly from mouse embryos.
2. IDENTIFICATION OF LARGE NUMBERS OF 3' TAG CLONES EXPRESSED IN LTR CELLS OR
IN MULTILINEAGE PRECURSORS AND DOWNREGULATED SUBSEQUENTLY
The likelihood of identifying significant novel regulators will be
proportional to the numbers of differentially expressed 3' tags that can be
processed through the 7 step strategy outlined above. From any particular
subtraction, we would like to clone and sequence as many differentially
hybridizing tags as are contained in the amplified difference product. To do
so, it will be necessary to estimate complexity of the difference product, and
to use the information to screen the required numbers of tags.
Based on our initial observations, identification of transcripts expressed
only in multipotential cells will require subtraction of sequences expressed in
terminally maturing cells as well as those expressed in committing progenitor
cells.
3. IDENTIFICATION OF LARGE NUMBER OF 3' TAG CLONES UPREGULATED AT SPECIFIC
DECISION POINTS DOWNSTREAM OF LTR AND MULTILINEAGE CELLS AND THEN DOWNREGULATED
WITH FURTHER MATURATION
Transcripts with this pattern of expression will be obtained from
subtractions performed with generally amplified stage-specific cDNA as tracer,
and a driver comprised of amplified cDNA pooled from both LTR/multilineage cells
and from terminally maturing cells.
4. TRANSCRIPTS EXPRESSED DIFFERENTIALLY IN THE PROLIFERATIVE HIERARCHY OF HUMAN
ACUTE MYELOID LEUKEMIA
This work seeks to identify genes whose expression is correlated with the
permanent capacity to self-renew characteristic of the rare AML stem cells, or
with the loss of capacity for further proliferation that characterizes the
transition from growth-competent to inert leukemic blast cells. Of particular
interest will be transcripts that correlate with these attributes in various
patient samples independently of the specific mutations characteristic of
individual patient disease. Genes with these characteristics will be of obvious
interest from diagnostic, prognostic, therapeutic and fundamental points of
view.
The experiments will combine cell sorting for enrichment of functional cell
types with a single cell cDNA approach that incorporates analysis of sibling
potentials. We have in place the tools for growth of single isolated primary
AML cells and testing of the growth potential of individual siblings.
5. IDENTIFICATION OF NOVEL REGULATORS
Full length clones from the above work that survive through step 5) of the
heuristic illustrated in Figure 5 will be sequenced and scanned for motifs
suggestive of roles as cytokines,
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<PAGE>
cell surface receptors, signalling proteins or transcriptional regulators. The
nature of the suggested function will dictate further experiments at the protein
level. Basic approaches at the genetics level will consist of scans of the
effects of constitutive overexpression and of deletion of function, and a search
for potential interactions by 2-hybrid analysis.
COLLABORATIVE FRAMEWORK
Progenitor is envisioned as an essential partner for the sequencing steps
[ (2) and (6) in Figure 5 ] and for eventual collaborative expansion of the work
into step (7).
Throughput will depend on manpower engaged in the subtraction and cloning
work. The effort could be accelerated from the outset by salary and materials
support for 1 f.t.e. technologist to launch the generation of full length cDNA
libraries as well as assist with blot screening, subtraction and cloning.
15
<PAGE>
REFERENCES
1. Trevisan M, Iscove NN: Phenotypic analysis of murine long term hemopoietic
reconstituting cells quantitated competitively in vivo and comparison with more
advanced colony-forming progeny. J. Exp. Med. 181:93-103, 1995
2. Trevisan M, Yan X-Q, Iscove NN: Cycle initiation and colony formation in
culture by murine marrow cells with long-term reconstituting potential in vivo.
Blood 88:4149-4158, 1996
3. Brady G, Barbara M, Iscove NN: Representative in vitro cDNA amplification
from individual hemopoietic cells and colonies. Methods Molec. Cell. Biol.
2:17-25, 1990
4. Brady G, Iscove NN: Construction of cDNA libraries from single cells. IN
Methods in Enzymology, San Diego, Academic Press, EDS Wassarman PM, DePamphilis
ML: p 611-623, 1993
5. Brady G, Billia F, Knox J, Hoang T, Kirsch IR, Voura EB, Hawley RG, Cumming
R, Buchwald M, Siminovitch K, Miyamoto N, Boehmelt G, Iscove NN: Analysis of
gene expression in a complex differentiation hierarchy by global amplification
of cDNA from single cells. Current Biology 5:909-922,1995
6. Kiefer F, Tibbles LA, Anafi M, Janssen A, Zanke BW, Lassam N, Pawson T,
Woodgett JR, Iscove NN: HPK1, a hematopoietic protein kinase activating the
SAPK/JNK pathway. EMBO J 15:7013-7025, 1996
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EXHIBIT 2 TERM SHEET
LICENSE TERMS:
Grant: Worldwide, exclusive right and
license, with the right to grant
sub-licenses, under any and all
intellectual property conceived
and/or reduced to practice to make,
use, offer to sell, sell and import
inventions made under inventions
relating to products and uses of
gene sequences (full or partial),
protein sequences (full or
partial), antibodies, expression
systems, DNA, RNA and anti-sense.
Field: All fields without restriction
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patent claims
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and defense responsibility of
Progenitor. Patents to be filed in
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prosecuted to obtain broad
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Progenitor will provide Institution
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achieve objective milestones
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Termination: By Institution: For breach by
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Institution or upon 30-day notice
Grant-back: Patent applications and data revert
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For a period of one (1) year after
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17
<PAGE>
FINANCIAL TERMS:
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Consideration: Joint Intellectual Property:
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[***] of any fees, royalties or
other cash consideration actually
received by Progenitor, excluding
research and development support
and equity investments.
Institutional Intellectual
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<PAGE>
THE INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
SPONSORED RESEARCH AGREEMENT
This Agreement is made and entered into this 15th day of April, 1997 by and
between the University of Cambridge, Cambridge, CB2 ITT, England (hereinafter
referred to as "Institution") and Progenitor, Inc. 1507 Chambers Road, Columbus,
Ohio 4322-1566 (hereinafter referred to as "Sponsor").
WHEREAS, the research program contemplated by this Agreement is of mutual
interest and benefit to Institution and to the Sponsor, and will further the
research objectives of the Institution in a manner consistent with its status as
a non-profit, tax-exempt research institution,
NOW, THERFORE the parties agree as follows:
1. STATEMENT OF WORK. Institution agrees to use its best efforts to perform
the Research Plan outlined in the proposal dated March 18, 1997 and in
general conformance with the projected Budget and Research Plan sections
all of which are incorporated into this Agreement by reference and attached
hereto as Exhibit 1.
2. PRINCIPLE INVESTIGATOR. The research will be supervised by Professor Azim
Surani. If for any reason Professor Surani is unable to continue to serve
as principle investigator, and a successor acceptable to both Institute and
Sponsor is not available, this Agreement shall be terminated as mutually
agreed.
3. PERIOD OF PERFORMANCE. The research shall be conducted during the period
April 15, 1997 to April 14, 1999.
4. CONSIDERATION. In consideration for the research to be conducted by the
Principle Investigator and Institution during the first year of this
Agreement, Sponsor will pay to Institution a total of [***]. Payment
shall be made to Institution in four installments. The first installment
shall equal [***] Pounds Sterling and shall be paid upon execution of this
Agreement. The second, third and fourth installments shall each equal
[***] Pounds Sterling and shall be paid on October 15, 1997, April 15, 1998
and October 15, 1998. Sponsor and Institution shall determine in writing
the research budget for any additional term of this Agreement, no later
than 60 days before the end of the second year. Any equipment purchased
pursuant to this Agreement shall be and shall remain the property of the
Institution.
5. TERMINATION. Notwithstanding any other terms and conditions hereunder,
this Agreement may be terminated by either party by written notification to
the other party at least one-hundred eighty (180) days prior to the desired
effective date of the termination. In the event of early termination by
Sponsor for any reason except for a material breach of this Agreement by
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obligation to pay the salary and benefits of one post-doctoral fellow (to
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for Year 1 and Year 2, as specified in Exhibit 1.
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for the parties to identify and protect patentable subject matter.
Notwithstanding the above, publication will be delayed until patent
applications have been filed in
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<PAGE>
the United States, provided the delay does not exceed sixty (60) days from
the date the publication is submitted to the Sponsor.
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If the location of the meetings is outside of the Cambridge, England area,
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8. INTELLECTUAL PROPERTY. Title to any invention conceived or first reduced
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thereof.
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<PAGE>
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The Old Schools
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14. FORCE MAJEURE. Institution shall not be responsible to the Sponsor for
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provided such failure shall be occasioned by fire, flood, explosion,
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15. ENTIRE AGREEMENT. Unless otherwise specified, this Agreement embodies the
entire understanding between Institution and Sponsor for this project, and
any prior or contemporaneous representations, either written or oral are
hereby superseded. No amendment or changes to this Agreement, including
without limitation, change in the statement of work, total estimated cost,
and period of performance, shall be effective unless made in writing and
signed by authorized representative of the parties.
For Cambridge University For Progenitor, Inc.
By: /s/ Elizabeth Ansell By: /s/ Stephen J. Williams
--------------------- -------------------------
Title: Head, Research Grants and Title: Vice President
Contracts Section ----------------------
--------------------------
Date: 15 April 1997 Date: April 3, 1997
--------------------------- -----------------------
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EXHIBIT 1
BUDGET AND RESEARCH PLAN - DR. AZIM SURANI
GOALS
To evaluate the expression pattern of novel stage-specific genes by IN SITU
hybridization of embryonic tissues.
Histological sections of embryos (d14-18) will be performed first, followed
by embryonic whole mounts or adult tissues where warranted
To analyze the potential role of novel genes IN VITRO using embryonic stem
cells together with interactions between novel genes and other known genes.
To use comprehensive embryological and genetic approaches to analyze
functions of novel genes in the context of whole animals including gene
targeting ("knock-out" technology). The animals we produce with the gain of
function and null phenotypes for functional analyses of the most interesting
genes will be a valuable asset for future academic and applied research.
BUDGET (FOR TWO YEARS, IN BRITISH POUNDS)
1. Progenitor Postdoctoral Research Fellow [***]
2. Progenitor Research Assistant [***]
3. Consumables [***]
4. Equipment [***]
5. Indirect costs (University overhead @ 40% on [***]
salaries)
Total [***]
<PAGE>
EXHIBIT 2 TERM SHEET
LICENSE TERMS:
Grant: Worldwide, exclusive right and license, with the right
to grant sub-licenses, under any and all intellectual
property conceived and/or reduced to practice to make,
use, offer to sell, sell and import inventions made
under inventions relating to products and uses of gene
sequences (full or partial), protein sequences (full or
partial), antibodies, expression systems, DNA, RNA and
anti-sense.
Field: All fields without restriction
Term: Expires on last to expire of valid patent claims
Intellectual Property: Filing, prosecution, enforcement, and defense
responsibility of Progenitor. Patents to be filed in
major market countries and prosecuted to obtain broad
protection consistent with sound, prudent patent
practice. Progenitor will provide Institution with
copies of filings and correspondence relating to, and
will consult with Institution on, prosecution
activities.
Diligence: Commercially reasonable efforts to achieve objective
milestones leading to commercialization
Termination: By Institution: For breach by Progenitor
By Progenitor: For breach by Institution or upon 30-day notice
Grant-back: Patent applications and data revert to Institution upon
termination of the license agreement by Progenitor
For a period of one (1) year after the date of
reversion of rights to Institution, Progenitor
<PAGE>
shall have a right of first refusal on third-party
grant-backs of joint intellectual property to
Institution
FINANCIAL TERMS:
Intellectual property
costs and expenses: Borne by Progenitor
Consideration: Joint Intellectual Property: Progenitor to pay to
Institution [***] of any fees, royalties or other cash
consideration actually received by Progenitor,
excluding research and development support and equity
investments.
Institutional Intellectual Property: Progenitor to pay
to Institution [***] of any fees, royalties or other
cash consideration actually received by Progenitor,
excluding research and development support and equity
investments.
<PAGE>
THE INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
SPONSORED RESEARCH AGREEMENT
This Agreement is made and entered into this first day of May, 1997 by and
between the Board of Regents of the University of Nebraska doing business as the
University of Nebraska Medical Center, 600 S. 42nd Street, Omaha, Nebraska,
68198 (hereinafter referred to as "Institution") and Progenitor, Inc. 1507
Chambers Road, Columbus, Ohio 4322-1566 (hereinafter referred to as "Sponsor").
WHEREAS, the research program contemplated by this Agreement is of mutual
interest and benefit to Institution and to the Sponsor, and will further the
research objectives of the Institution in a manner consistent with its status as
a non-profit, tax-exempt research institution,
NOW, THERFORE the parties agree as follows:
1. STATEMENT OF WORK. Institution agrees to use its best efforts to perform
the Research Plan outlined in the proposal dated March 21, 1997 and in
general conformance with the Proposal Budget and Research Plan which are
incorporated into this Agreement by reference and attached hereto as
Exhibit 1.
2. PRINCIPLE INVESTIGATOR. The research will be supervised by James, B.
Turpen, Ph.D. If for any reason Dr. Turpen is unable to continue to serve
as principle investigator, and a successor acceptable to both Institute and
Sponsor is not available, this Agreement shall be terminated as mutually
agreed.
3. PERIOD OF PERFORMANCE. The research shall be conducted during the period
May 1, 1997 to April 30, 1998
4. CONSIDERATION. In consideration for the research to be conducted by the
Principle Investigator and Institution during the first year of this
Agreement, Sponsor will pay to Institution a total of [***]. Payment
shall be made to Institution in four installments. The first installment
shall equal [***] and shall be paid within thirty (30) days of the date of
execution of this Agreement. The second, third and fourth installments
shall each equal [***] and shall be paid on August 1, 1997, November 1,
1997 and February 1, 1998. Sponsor and Institution shall mutually agree
upon and determine in writing any extensions to this Agreement and any
associated research budget, no later than 60 days before the end of the
term of this Agreement. All payments by Sponsor in consideration for
research to be conducted by Principle Investigator and Center during
extensions of this Agreement shall be made in equal quarterly payments
on a quarterly basis beginning on the start date of each year and shall
be in accordance with the research budget corresponding to each year as
agreed between the Institution and Sponsor. Any equipment purchased
pursuant to this Agreement shall be and shall remain the property of
the Institution.
5. TERMINATION. Notwithstanding any other terms and conditions hereunder,
this Agreement may be terminated by either party by written notification to
the other party at least one-hundred eighty (180) days prior to the desired
effective date of the termination. In the event of early termination by
Sponsor for any reason except a material breach of this Agreement by
Institution and principle Investigator, the Institution shall be entitled
to payment of all expenditures or encumbrances that cannot be canceled and
which were incurred prior to the termination date. Further, upon early
termination of this Agreement, Institution shall return to Sponsor all data
and information obtained by Institution under this Agreement prior to the
date of termination shall be returned to Sponsor. In addition, any
materials provided to Institution by Sponsor under this Agreement shall be
destroyed or returned to Sponsor, at Sponsor's option.
6. PUBLICATIONS. Institution will be free to publish results under this
Agreement. A copy of
1
<PAGE>
each publication will be provided to the Sponsor forty-five (45) days prior
to submission for publication to allow adequate time for the parties to
identify and protect patentable subject matter. Notwithstanding the above,
publication will be delayed until patent applications have been filed in
the United States, provided the delay does not exceed sixty (60) days from
the date the publication is submitted to the Sponsor.
7. REPORTS. The Institution will provide Sponsor with annual written reports
within forty-five (45) days after (DATE) in each calendar year or after the
date of termination. Reports will include review of progress on the
Research Plan and a summary of activities during the preceding 12 months as
well as revisions to the Research Plan and the projected budget for the
next year. Institution and Principle Investigator will meet periodically
with Sponsor to review the Research Plan and discuss the research progress.
If the location of the meetings is outside of the Omaha, Nebraska area,
Sponsor will pay travel expenses of Institution and Principle Investigator.
8. INTELLECTUAL PROPERTY. Title to any invention conceived or first reduced
to practice in the performance of the Research Plan solely by any person(s)
employed or otherwise appointed by Institution, or at any time by any
person(s) at Institution whose salary and benefits are paid though
financial support provided by Sponsor, shall remain with Institution.
Title to any invention conceived or first reduced to practice jointly by
Institution and by any employee(s) of Sponsor in the performance of the
Research Plan shall be jointly owned by Institution and Sponsor. Sponsor
shall have, and Institution hereby grants to Sponsor, a right of first
refusal to acquire an exclusive license to Institution's rights in any
invention conceived or first reduced to practice either (I) in the
performance of the Research Plan by any person(s) employed or otherwise
appointed by Institution, or (II) at any time by any person(s) whose salary
and benefits are paid through financial support provided by Sponsor. The
terms and condition of such license shall be negotiated in good faith
between the parties and shall be consistent with the terms of license and
consideration which are incorporated into this Agreement by reference and
attached hereto as Exhibit 2. Sponsor may exercise such right of first
refusal at any time during a period of ninety (90) days after the date of
Sponsor's receipt of Institution's written notice describing an invention
in detail. After such ninety (90) day period, the right of first refusal
granted to Sponsor shall expire and Institution may grant rights to a third
party under Institution's rights in any such invention without obligation
to Sponsor.
9. USE OF NAMES. Neither party will use the name of the other in any
advertising or other form of publicity without the prior written permission
of the other.
10. CONFIDENTIAL INFORMATION. During the term of this Agreement both parties
will exchange certain proprietary Confidential Information in connection
therewith, either written or orally ("Information"). Both Sponsor and
Institution agree to keep such Information strictly confidential; will not
use such Information to reverse engineer or design around proprietary
projects or products; and will not disclose Information to others without
the express written permission of the other party; provided, however, they
will not be prevented from using or disclosing information which:
a) is now, or which hereafter, through no act or failure of the other
party, becomes generally known or available;
b) is known by the other party at the time of receiving such Information
c) is hereafter furnished to the other party by a third party who did not
acquire such Information directly or indirectly form the other party; or
d) is independently developed by the other party without knowledge of
Information, and the recipient party can demonstrate or prove truth
thereof.
11. NOTICES. Any notice required to be given or which shall be given under
this Agreement shall be in writing delivered by first class mail addressed
to the parties as follows:
2
<PAGE>
Progenitor, Inc.
Vice President, Corporate Development
1507 Chambers Road
Columbus, Ohio 43212-1566
Office of the Vice Chancellor for Academic Affairs
University of Nebraska Medical Center
3021 Eppley Science Hall
Omaha, NE 68198-6810
In the event notices, statements and payments required under this Agreement
are sent by certified or registered mail by one party to the other party at
its above address, they shall be deemed to have been given or made as of
the date so mailed, otherwise as of the date received.
12. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and the successors to substantially the entire
business and assets hereto, provided the successor entity agrees in writing
to abide by all the terms of this Agreement.
13. GOVERNING LAW. The validity and interpretation of the Agreement and the
legal relation of the parties to it shall be governed by the laws of the
State of Nebraska and the United States.
14. FORCE MAJEURE. Institution shall not be responsible to the Sponsor for
failure to perform any of the obligations imposed by the Agreement,
provided such failure shall be occasioned by fire, flood, explosion,
lightning, windstorm, earthquake, subsidence of soil, failure or
destruction, in whole or in part, of machinery or equipment failure or
supply of materials, discontinuity in supply of power, governmental
interference, civil commotion, riot, war, labor disturbance, transportation
difficulties, labor shortage or any cause beyond the reasonable control of
Institution
15. ENTIRE AGREEMENT. Unless otherwise specified, this Agreement embodies the
entire understanding between Institution and Sponsor for this project, and
any prior or contemporaneous representations, either written or oral are
hereby superseded. No amendment or changes to this Agreement, including
without limitation, change in the statement of work, total estimated cost,
and period of performance, shall be effective unless made in writing and
signed by authorized representative of the parties.
For Institution For Progenitor, Inc.
By: /s/ David A. Crouse, Ph.D. By: /s/ Stephen J. Williams
-----------------------------
Title: Int. V. Chancellor for
Academic Affairs, UNMC Title: V.P. Corporate Development
---------------------------
Date: 4/16/97 Date: 4/14/97
--------------
3
<PAGE>
EXHIBIT 1 - BUDGET AND RESEARCH PLAN
USING XENOPUS TO IDENTIFY NOVEL GENES IMPORTANT IN EARLY
HEMATOPOIETIC DEVELOPMENT
BUDGET PROPOSAL
PERSONNEL SALARY BENEFITS TOTAL
--------- ------ -------- -----
James Turpen, Ph.D. (.25 FTE)
Principal Investigator [***] [***] [***]
TBA (1.00 FTE) [***] [***] [***]
Research Technologist II
Equipment
Pipette Grinder [***]
Micromanipulators and stands (2) [***] [***]
Supplies [***]
Total Direct Costs [***]
Indirect Costs (15% of salaries) [***]
----------
Total Costs [***]
4
<PAGE>
PROPOSAL FOR USING XENOPUS TO IDENTIFY NOVEL GENES
IMPORTANT IN EARLY HEMATOPOIETIC DEVELOPMENT
Early hematopoietic development in Xenopus involves the induction of
ventral mesoderm and the subsequent proliferation and differentiation of
progenitor populations to yield the blood cell lineages. Although the growth
requirements for definitive (fetal/adult) progenitors is regulated by
hematopoietic cytokines, conditions that yield abundant primitive (embryonic)
colonies have not been adequately defined.
Bone morphogenetic protein-4 (BMP-4) has been shown to be necessary for
ventral mesoderm induction in Xenopus and injection of BMP-4 RNA into fertilized
eggs ventralizes the embryos. Overexpression of BMP-4 partially induces the
erythroid program in isolated animal cap explant assays and this induction is
enhanced in explants treated with mesoderm inducing factors such as activin or
FGF. Expression of a dominant negative BMP-4 receptor (-BMP-4R) inhibits the
erythroid program in explant assays and results in tadpoles lacking primitive
blood cells. These data suggest that activin and FGF induce mesodermal
differentiation and that BMP-4 stimulates hematopoietic development by
patterning ventral mesoderm.
We have used these insights to develop a rapid, reproducible and sensitive
functional assay for identifying genes that play a role in early hematopoietic
development in the Xenopus system. Furthermore, it has been shown that a
several mammalian gene products (e.g. stem cell factor, bFGF, activin, TGF-6)
function in this system. We propose to collaborate with Progenitor to use this
system as a high throughput functional assay for genes important in early
hematopoietic development.
GOALS
To collaborate with Progenitor to develop the Xenopus system as a high
through-put functional screen for genes from stage-specific cDNA expression
libraries. The libraries and screens will focus on genes important to mesoderm
and early hematopoietic development.
APPROACH
Progenitor will prepare, or have prepared, these stage-specific cDNA
libraries in the pcDNA3 expression vector. My laboratory will test interesting
cDNA clones from these libraries in three functional Xenopus assays (e.g.
developmental phenotype, animal cap cell morphology, animal cap gene
expression). The assays will include testing the gene by itself, testing the
gene in conjunction with BMP-4 and testing the gene in conjunction with activin
or FGF. Any gene that induces a significant increase in erythroid development
in these screens will be selected for further functional characterization and
development by mutual agreement.
BUDGET (direct costs only):
[***] (~2FTEs). 2 years
Progenitor contributes the resources for generation of stage-specific
libraries and all necessary sequencing (~4 FTEs)
5
<PAGE>
EXHIBIT 2 TERM SHEET
LICENSE TERMS:
Grant: Worldwide, exclusive right and
license, with the right to grant
sub-licenses, under any and all
intellectual property conceived
and/or reduced to practice to make,
use, offer to sell, sell and import
inventions made under inventions
relating to products and uses of gene
sequences (full or partial), protein
sequences (full or partial),
antibodies, expression systems, DNA,
RNA and anti-sense.
Field: All fields without restriction
Term: Expires on last to expire of valid
patent claims
Intellectual Property: Filing, prosecution, enforcement, and
defense responsibility of Progenitor.
Patents to be filed in major market
countries and prosecuted to obtain
broad protection consistent with
sound, prudent patent practice.
Progenitor will provide Institution
with copies of filings and
correspondence relating to, and will
consult with Institution on,
prosecution activities.
Diligence: Commercially reasonable efforts to
achieve objective milestones leading
to commercialization
Termination: By Institution: For breach by
Progenitor
By Progenitor: For breach by
Institution or upon 30-day notice
Grant-back: Patent applications and data revert
to Institution upon termination of
the license agreement by Progenitor
For a period of one (1) year after
the date of reversion of rights to
Institution, Progenitor shall have a
right of first refusal on third-party
grant-backs of joint intellectual
property to Institution
FINANCIAL TERMS:
Intellectual property costs and expenses: Borne by Progenitor
Consideration: Joint Intellectual Property:
Progenitor to pay to Institution
[***] of any fees, royalties or
other cash consideration actually
received by Progenitor, excluding
research and development support and
equity investments.
Institutional Intellectual Property:
Progenitor to pay to Institution
[***] of any fees, royalties or other
cash consideration actually received
by Progenitor, excluding research and
development support and equity
investments.
6
<PAGE>
THE INFORMATION MARKED BY * AND [ ] HAS BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIAL TREATMENT. THE OMITTED PORTIONS HAVE BEEN SEPARATELY FILED
WITH THE COMMISSION.
SPONSORED RESEARCH AGREEMENT
This Agreement made and entered into this 1st day of May 1997 by and between
Ohio University, having office at 105 Research and Technology Center, Athens,
Ohio 45701, (hereinafter referred to as "Institution") and Progenitor, Inc.,
having offices at 1507 Chambers Road, Columbus, Ohio 43212-1566 (hereinafter
referred to as "Sponsor").
WHEREAS, the research program contemplated by this Agreement is of mutual
interest and benefit to Institution and to the Sponsor, and will further the
research objectives of the Institution in a manner consistent with its status as
a non-profit tax-exempt research institution,
NOW, THEREFORE the parties are as follows:
1. STATEMENT OF WORK. Institution agrees to use its best efforts to perform
the Research Plan outlined in the proposal dated 1 May 1997 and in general
conformance with the Proposal Budget and Research Plan which are
incorporated into this Agreement by reference and attached hereto as
Exhibit 1.
2. PRINCIPLE INVESTIGATOR. The research will be supervised by Dr. Thomas
Wagner. If for any reason Dr. Wagner is unable to continue to serve as
principle investigator, and a successor acceptable to both Institute and
Sponsor is not available, this Agreement shall be terminated as mutually
agreed.
3. PERIOD OF PERFORMANCE. The research shall be conducted during the period 1
May 1997 to 30 April 1999.
4. CONSIDERATION. In consideration for the research to be conducted by the
Principle Investigator and Institution during the first year of this
Agreement, Sponsor will pay to Institution a total of [***]. Payment
shall be made to Institution in four installments. The first installment
shall equal [***] and shall be paid upon execution of this Agreement.
The second, third and fourth installments shall each equal [***] and
shall be paid on 1 August 1997, 1 November 1997 and 1 February 1998. In
consideration for the research to be conducted by the Principle
Investigator and Institution during the second and final year of this
Agreement, Sponsor will pay to Institution a total of [***]. Payment
shall be made to Institution in four installments. The first installment
shall equal [***] and shall be paid upon 1 May 1998. The second, third
and fourth installments shall each equal [***] and shall be paid on 1
August 1998, 1 November 1998 and 1 February 1999.
5. TERMINATION. Sponsor may terminate this Agreement upon material breach by
Institution or Principal Investigator of their obligations under this
Agreement, provided that the Institution and/or the Principal Investigator
has not cured the material breach within thirty (30) days after receipt of
written notice from Sponsor specifying such breach. In the event that
Institution or Principal Investigator has not cured such breach within such
thirty (30) day period, Sponsor, at Sponsor's sole discretion, may
terminate
1
<PAGE>
this Agreement upon a second written notice to Institution and Principal
Investigator, such termination to be effective upon receipt of such second
written notice by Institution and Principal Investigator. Notwithstanding
any other terms and conditions hereunder, this Agreement may be terminated
by either party by written notification to the other party at least one-
hundred eighty (180) days prior to the desired effective date of the
termination. In the event of early termination by Sponsor for any reason
except for a material breach of this Agreement by Institution and Principal
Investigator, the Institution shall be entitled to payment of all
expenditures or encumbrances that cannot be canceled and which were incurred
prior to the termination date. Further, upon termination of this Agreement,
any materials provided to Institution by Sponsor under this Agreement shall
be destroyed or returned to Sponsor, at Sponsor's option.
6. PUBLICATIONS. Institution will be free to publish results under this
Agreement. A copy of each publication will be provided to the Sponsor
forty-five (45) days prior to submission for publication to allow adequate
time for the parties to identify and protect patentable subject matter.
Notwithstanding the above, publication will be delayed until patent
applications have been filed in the United States, provided the delay does
not exceed sixty (60) days from the date the publication is submitted to
the Sponsor.
7. REPORTS. The Institution will provide Sponsor with detailed annual written
reports within forty-five (45) days after 1 May in each calendar year or
after the date of termination. Reports will include a detailed review of
progress on the Research Plan and a detailed accounting of activities
during the preceding 12 months as they affect the achievement of project
milestones, as well as proposed revisions to the Research Plan and the
projected budget for next year. Institution and Sponsor acknowledge and
agree that such reports may not be sufficient to permit Sponsor to receive
full advantage of the work conducted under the Research Plan. Therefore,
Institution and Principle Investigator will meet periodically with Sponsor
to review the Research Plan and discuss the research progress. Such review
and discussion will be in sufficient detail to permit Sponsor to be
informed of research results and research progress as they affect the
achievement of project milestones. Failure of Institution and Principal
Investigator to provide such sufficient detail will be deemed a material
breach of this Agreement by Institution and Principal Investigator. If the
location of the meetings is outside of the Athens, Ohio area, Sponsor will
pay travel expenses actually incurred by Institution and Principle
Investigator. Nothing in this clause shall be construed as requiring
Institution or Principal Investigator to disclose to Sponsor, either in the
written reports or the reviews and discussions, any intellectual property
developed outside of the scope of work of this Agreement and owned either
exclusively by Institution or jointly by Institution and any other
sponsor(s) of research, or provided to Institution by any other provider(s)
of proprietary research materials or information.
2
<PAGE>
8. INTELLECTUAL PROPERTY. Title to any invention conceived or first reduced
to practice in the performance of the Research Plan solely by any person(s)
employed or otherwise appointed by Institution, or at any time by any
person(s) at Institution whose salary and benefits are paid through
financial support provided by Sponsor, shall remain with Institution.
Title to any invention conceived or first reduced to practice jointly by
Institution and by any employee(s) of Sponsor in the performance of the
Research Plan shall be jointly owned by Institution and Sponsor. Sponsor
shall have, and Institution hereby grants to Sponsor, a right of first
refusal to acquire an exclusive license to Institution's rights in any
invention conceived or first reduced to practice either (i) in the
performance of the Research Plan by any person(s) employed or otherwise
appointed by Institute, or (ii) at any time by any person(s) whose salary
and benefits are paid through financial support provided by Sponsor. The
terms and condition of such license shall be negotiated in good faith
between the parties and shall be consistent with the terms of license and
consideration which are incorporated into this Agreement by reference and
attached hereto as Exhibit 2. Sponsor may exercise such right of first
refusal at any time during a period of ninety (90) days after the date of
Sponsor's receipt of Institution's written notice describing an invention
in detail. After such ninety (90) day period, the right of first refusal
granted to Sponsor shall expire and Institution may grant rights to a third
party under Institution's rights in any such invention without obligation
to Sponsor.
9. USE OF NAMES. Neither party will use the name of the other in any
advertising or other form of publicity without the prior written permission
of the other.
10. CONFIDENTIAL INFORMATION. During the term of this Agreement both parties
will exchange certain proprietary Confidential Information in connection
therewith, either written or orally ("Information"). Both Sponsor and
Institution agree to keep such Information strictly confidential; will not
use such Information to reverse engineer or design around proprietary
projects or products; and will not disclose Information to others without
the express written permission of the other party; provided, however, they
will not be prevented from using or disclosing information which:
a) is now, or which hereafter, through no act or failure of the other
party, becomes generally known or available;
b) is known by the other party at the time of receiving such Information;
c) is hereafter furnished to the other party by a third party who did not
acquire such Information directly or indirectly from the other party;
or
d) is independently developed by the other party without knowledge of
Information, and the recipient party can demonstrate or prove truth
thereof.
11. NOTICES. Any notice to be given or which shall be given under this
Agreement shall be in writing delivered by first class mail addressed to
the parties as follows:
3
<PAGE>
Sponsor: Progenitor, Inc.
Vice President, Corporate Development
1507 Chambers Road
Columbus, Ohio 43212-1566
Institution: Ohio University
Office of Research and Sponsored Programs
105 Research and Technology Center
Athens, Ohio 45701
12. In the event notices, statements and payments required under this Agreement
are sent by certified or registered mail by one party to the other party at
its above address, they shall be deemed to have been given or made as of
the date so mailed, otherwise as of the date received.
13. ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and the successors to substantially the entire
business and assets hereto, provided the successor entity agrees in writing
to abide by all the terms of this Agreement.
14. GOVERNING LAW. The validity and interpretation of the Agreement and the
legal relation of the parties to it shall be governed by the laws of the
State of Ohio and the United States.
15. FORCE MAJEURE. Institution shall not be responsible to the Sponsor for
failure to perform any of the obligations imposed by the Agreement,
provided such failure shall be occasioned by fire, flood, explosion,
lightning, windstorm, earthquake, subsidence of soil, failure or
destruction, in whole or in part, of machinery or equipment, failure or
supply of materials, discontinuity in supply of power, governmental
interference, civil commotion, riot, war, labor disturbance, transportation
difficulties, labor shortage or any cause beyond the reasonable control of
Institution.
16. ENTIRE AGREEMENT. Unless otherwise specified, this Agreement embodies the
entire understanding between Institution and Sponsor for this project, any
prior or contemporaneous representations, either written or oral are hereby
superseded. No amendment or changes to this Agreement, including without
limitation, change in the statement of work, total estimated cost, and
period of performance, shall be effective unless made in writing and signed
by authorized representative of the parties.
4
<PAGE>
For Institution For Progenitor, Inc.
By: /s/Carol J. Blum By: /s/ Stephen J. Williams
------------------------------ ------------------------------
Title: Associate Vice President for Title: V.P. Corporate Finance
---------------------------- ----------------------------
Research
----------------------------
Date: 04/21/97 Date: 04/21/97
----------------------------- ----------------------------
5
<PAGE>
EXHIBIT 1 - RESEARCH PLAN AND PROPOSAL BUDGET
WORK PLAN FOR CONTRACT WITH PROGENITOR, INC.
TO
ASSAY GENOMIC CODING SEQUENCES FOR GENE FUNCTION
A PROPOSAL BY THE OHIO UNIVERSITY EDISON INSTITUTE
The combination of the NIH Human Genome Project and the efforts of many
biotechnology companies focusing in the area of molecular genomics have already
sequenced many of the human genes and soon will have identified the sequence of
each human gene. Unfortunately, this information is of little useful scientific
value without some knowledge of the biological function of each of these known
sequences. The real challenge of genomics research will be this identification
of gene function, not, the more trivial, gene sequencing.
Identification of gene function requires the use of either a whole animal
or a multipotent or totipotent embryonic cellular assay system. Because of the
Edison Institute's foundation of, and long history in, the use of transgenic
models it is unusually well positioned to utilize these unique whole animal
systems to develop rapid assays for gene function to screen genomic sequences of
unknown function with a reasonably high throughput efficiency. Assays in two
different animal model systems are proposed.
HIGH LEVEL CONSTITUTIVE EXPRESSION OF GENOMIC CODING SEQUENCES OF UNKNOWN
FUNCTION DURING EMBRYONIC DEVELOPMENT
The scientific goal of studying gene function is to identify genes coding
for key factors important in initiating or directing critical biological
processes which, in turn, may involve many other gene products. This is true
since the products of these genes may function as important triggers for a
medically important cascade. An example is Erythropoietin which triggers the
rebuilding of the red blood cell population of cancer patients following
chemotherapy. Therefore, it is important to bias studies of gene function and
the use of gene function assays towards such dominant regulating factors.
It is the belief of the molecular and developmental biologists at the
Edison Institute, in consultation with other experts in this field, and based
upon observation of non-viable transgenic embryos over expressing such genes
(e.g., Del I) that the constitutive over expression of dominant regulatory
factors specifically alters and disrupts the normal development of the cellular
lineages which respond to these factors. Therefore we propose inserting genomic
coding sequences of unknown function into expression cassettes driven by strong
constitutive promoters and injecting these genetic constructs into the
fertilized eggs to generate transgenic embryos. These embryos will then be
assayed by microscopic observation at time periods during early development to
identify specific aberrations or defects in development. When developmental
defects or abnormalities are observed in a reasonable percentage of the embryos
over expressing any particular gene, a more detailed histological examination of
these abnormalities at the
1
<PAGE>
cellular level will be undertaken to determine the exact nature of the defect or
abnormality. Identification of such specific defects or abnormalities in
specific cellular lineages during embryonic development will strongly suggest
specific dominant gene function.
We propose performing this assay in two different animal model systems:
the zebra fish and the mouse. In the zebra fish, eggs will be injected by
methods well established by experts in transgenic fish biology at the Edison
Institute. Lineage commitment and substantial development of all organ systems
within the zebra fish embryo is complete within 24 hours following fertilization
and, since the zebra fish embryo is a very clear, transparent, embryo which can
be microscopically observed during its development in saline solution, the
initial assay can be completed within a 24- to 72 hour period.
While the mouse system is more complex because development takes place
within the uterine environment of the mother, this assay can also be performed
quite rapidly. Fertilized mouse eggs will be injected with the genetic
constructions and transplanted into recipient female mice. These recipients
will be sacrificed at timed intervals during the first 12 days of gestation,
before which most development has already occurred, and observed
microscopically.
Both the mouse embryo microsurgeon and the fish embryo microsurgeon can
inject approximately 200 to 400 eggs per day. This number should provide a
large enough sample to show any dominant effect. This proposal would allow for
up to 6 gene constructs to be assayed per month in either system.
PERSONNEL REQUIREMENTS FOR THE PROPOSED GENE FUNCTION ASSAYS
(see attached budget)
- - Zebra Fish Laboratory:
- Fish embryo microsurgeon/ technician (embryo production and culture
egg microinjection, microscopic embryo assay)
- Consulting zebra fish embryologist (see following page)
- - Mouse Embryo Laboratory:
- Mouse embryo microsurgeon/ embryologist (egg microinjection, histology
and overall management)
- Mouse embryology/ histology technician (microscopic embryo assay,
histological assays)
- Mouse technician (breeding and care of embryo donor and recipient
mice)
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- - Genetic Construction Laboratory
- Molecular Biologist (Xiao Chen - design and direct the construction of
over expression genetic materials)
- Molecular Biology technician (construction of over expression genetic
materials)
CONSULTING ZEBRA FISH EMBRYOLOGIST (LINDA S. ROSS)
Linda S. Ross, Ph.D., Associate Professor, Department of Biological
Sciences, Ohio University, has agreed to participate in this project as a
consultant on zebra fish development, particularly in cases where neural
development is affected by over expression of a transgene. She will devote the
equivalent of 8% effort to the project and her involvement will be as follows:
1. TRAINING EDISON CENTER WORKERS - She will train members of the Edison
Institute staff in the use of morphological criteria to make initial screens of
transgenic embryos. She will also provide training in standard histology and
immunochemical techniques and their application to zebra fish embryos. Dr. Ross
assumes that Progenitor will want to begin making transgenic animals as soon as
possible once the contract goes into effect, therefore she would like to conduct
this training in April or May 1997 so that workers are prepared when genetic
material is received in July (assuming a July 1 start date).
2. INITIAL SCREEN - The Edison Institute will perform the initial screen for
gross morphological abnormalities, according to the criteria they learn from
training provided by Dr. Ross (described above). Embryos will be screened with
vital dyes and a staging series to document changes in the normal patterns of
development of the major systems of the body. Embryos will be observed with
Nomarski optics at the follow stages: shield stage of the gastrula (6 hrs.
postfertilization (pf.)), 2-4 somite stage (10-12 hrs. pf.), early pharyngula
(24 hrs. pf.), late pharyngula (48 hrs. pf.) and late hatchling (72 hrs. pf.).
If embryos are judged to have abnormal developmental patterns, sample embryos at
each age as well as control embryos will be fixed and prepared for routine
histology and immunocytochemistry and reserved for my further analysis. Dr.
Ross will train workers at the Edison Institute in the application of these
methods, and they will prepare the embryos for her analysis.
3. DETAILED SCREEN - Once Edison Institute workers have isolated embryos with
altered developmental patterns, Dr. Ross will further analyze each group of
transgenic animals for a more precise spatial and temporal description of
abnormalities. To make this analysis, she will use comparisons of the
transgenic embryos with the control embryos and material from her own research.
These detailed analyses will be made in Dr. Ross' laboratory in Irvine Hall
on the Ohio University campus. To document the alterations she will make
digital images of control and transgenic animals. These images can be sent by
e-mail to scientists at the
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Edison Institute or Progenitor to help them make decisions regarding direction
of future analysis efforts.
If interesting or promising patterns are found, Dr. Ross plans to use more
sophisticated anatomical or immunochemical methods to explore the basis of
observed abnormalities. For example, if segmentation of the neural tube seems
to be altered, cell injection and time lapse techniques can be used to document
the divisions of individual cells and the dispersion of the progeny of the
injected cell; the patterns observed in transgenic animals can be compared with
patterns of similar cells in control animals.
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Proposal Budget
Progenitor - Embryonic Development
Period of Performance: July 1, 1997 through June 30, 1999
Principal Investigator: Dr. Thomas Wagner
Edison Biotechnology Institute
Ohio University
<TABLE>
<CAPTION>
Year 1 Year 2 Summary
<S> <C> <C> <C>
I. Personnel
Salaries [***] [***] [***]
Benefits [***] [***] [***]
--------- --------- ----------
Total [***] [***] [***]
II. Operations
Lab Supplies [***] [***] [***]
Animal Care Costs (LARS) [***] [***] [***]
Photocopy, Postage, Phone, misc. [***] [***] [***]
Publication/Page Charges [***] [***] [***]
Computer Software [***] [***] [***]
Lab Equipment (under $500) [***] [***] [***]
Subcontracts [***] [***] [***]
Tuition [***] [***] [***]
--------- --------- ---------
Total [***] [***] [***]
III. Travel
Domestic [***] [***] [***]
Foreign [***] [***] [***]
--------- --------- ---------
Total [***] [***] [***]
IV. Capital Equipment [***] [***] [***]
V. Total Direct Costs [***] [***] [***]
VI. Indirect Costs (45% x MTDC) [***] [***] [***]
--------- --------- ---------
VII. Total Project Costs [***] [***] [***]
</TABLE>
<PAGE>
EXHIBIT 2 - TERM SHEET
LICENSE TERMS:
Grant: Worldwide, exclusive right and license, with
the right to grant sublicenses, under any and
all intellectual property conceived and/or
reduced to practice to make, use, offer to
sell, sell and import inventions made
relating to products and uses of gene
sequences (full or partial), protein
sequences (full or partial), antibodies,
expression systems, DNA, RNA and antisense.
Field: All fields without restriction.
Term: Expires on last to expire of valid patent
claims.
Intellectual Property: Filing, prosecution, enforcement, and defense
responsibility of Progenitor. Patent
applications to be filed in major market
countries and prosecuted to obtain broad
protection consistent with sound, prudent
patent practice. Progenitor will provide
Institution with copies of filings and
correspondence relating to, and will consult
with Institution on, prosecution activities
Diligence: Commercially reasonable efforts to achieve
objective milestones leading to
commercialization..
Termination: By Institution: For breach by Progenitor
By Progenitor: For breach by Institution of
upon 60-day notice.
Grant-back: Patent applications and data revert to
Institution upon termination of the license
agreement by Progenitor.
For a period of 1 year after the effective
date of reversion of rights to Institution,
Progenitor shall have a right of first
refusal on third-party
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grant-backs of joint intellectual property to
Institution.
FINANCIAL TERMS:
Intellectual property costs and Borne by Progenitor
expenses:
Consideration: Joint Intellectual Property: Progenitor to
pay to Institution [***] of any fees,
royalties or other cash consideration actually
received by Progenitor, excluding research and
development support and equity investments.
Institutional Intellectual Property:
Progenitor to pay to Institution [***] of any
fees, royalties or other cash consideration
actually received by Progenitor, excluding
research and development support and equity
investments.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report, which includes an explanatory paragraph regarding the Company's
ability to continue as a going concern, dated March 10, 1997 on our audits of
the financial statements of Progenitor, Inc. (a Development Stage Company). We
also consent to the reference to our firm under the caption "Experts."
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
May 8, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Mercator
Selected Historical Financial Data" and "Experts" and to the use of our report
dated February 14, 1997, with respect to the financial statements of Mercator
Genetics, Inc. (a development stage company) included in Amendment No. 4 to the
Registration Statement (Form S-1 No. 333-05369) and related Prospectus of
Progenitor, Inc. for the registration of 3,162,500 shares of its common stock.
/s/ ERNST & YOUNG LLP
Palo Alto, California
May 7, 1997
