SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Confidential, for Use of the
[X] Preliminary Proxy Statement Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Under Rule 14a-12
----------------
MICROCIDE PHARMACEUTICALS, INC.
(Name of Registrant as Specified in its Charter)
----------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: common
stock
(2) Aggregate number of securities to which transaction applies: 5,550,000
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): $4.87*
(4) Proposed maximum aggregate value of transaction: $27,028,500
(5) Total fee paid: $5,408
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
* The average of the high and low prices of the registrant's common stock
reported in the consolidated reporting system as of August 10, 2001.
MICROCIDE PHARMACEUTICALS, INC.
850 Maude Avenue
Mountain View, California 94043
, 2001
Dear Stockholders:
I am pleased to inform you that the Board of Directors of Microcide
Pharmaceuticals, Inc. has approved (1) a merger agreement that provides for the
merger of a wholly-owned subsidiary of Microcide with The Althexis Company,
Inc. and (2) financing arrangements that provide for the issuance of shares of
preferred stock of Microcide to new investors. If the merger is completed, each
outstanding share of Althexis' stock will be exchanged for Microcide common
stock. The merger and the financing are contingent upon each other, and neither
will be completed unless both are approved by holders of a majority of the
outstanding common stock of Microcide.
We have scheduled a special meeting of stockholders of Microcide to be held
on , 2001 at a.m. at Microcide's offices located at 850 Maude Avenue,
Mountain View, California 94043. At the special meeting, you will be asked to
approve the issuance of shares of common stock pursuant to the merger
agreement, the issuance of shares of preferred stock pursuant to the financing
arrangements and an amendment to Microcide's Restated Certificate of
Incorporation changing the name of Microcide to "Essential Therapeutics, Inc."
The Notice of Special Meeting of Stockholders and the proxy statement attached
further describe the business to be conducted at the special meeting. You
should carefully consider the risk factors beginning on page 11 of the proxy
statement before voting your shares.
Your vote is important. Please take the time to vote on the proposals by
completing and mailing the enclosed proxy card, even if you plan to attend the
special meeting. Thank you for your interest and participation in the affairs
of Microcide Pharmaceuticals.
Sincerely,
James E. Rurka
President and Chief Executive
Officer
REFERENCES TO ADDITIONAL INFORMATION
This proxy statement incorporates important business and financial
information about Microcide Pharmaceuticals, Inc. from documents that are not
included in or delivered with this proxy statement. This information is
available to you without charge upon your written or oral request. You can
obtain the documents incorporated by reference in this proxy statement by
requesting them in writing or by telephone from Microcide at 850 Maude Avenue,
Mountain View, California 94043, Attention: Investor Relations, Telephone:
(650) 428-3535.
See also "Where You Can Find More Information." If you would like to request
documents, please do so by , 2001 in order to receive them before the
special meeting.
MICROCIDE PHARMACEUTICALS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on , 2001
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Microcide
Pharmaceuticals, Inc., a Delaware corporation, will be held on , , 2001,
at a.m., local time, at Microcide's offices located at 850 Maude Avenue,
Mountain View, California 94043 for the following purposes:
1. To approve the issuance of shares of common stock pursuant to the
Agreement and Plan of Merger, dated as of July 27, 2001, among
Microcide, California MP Acquisition, Inc., a wholly-owned subsidiary of
Microcide, and The Althexis Company, Inc. Pursuant to the merger
agreement, among other things:
. California MP Acquisition will merge with and into Althexis in
accordance with the General Corporation Law of the State of Delaware;
. Microcide will issue of up to 5.55 million shares of common stock in
exchange for all the outstanding securities of Althexis; and
. Microcide will appoint Mark Skaletsky, the current Chairman of the
Board and Chief Executive Officer of Althexis, the President, Chief
Executive Officer and Chairman of the Board of Microcide upon
completion of the merger.
2. To approve the issuance of shares of preferred stock pursuant to the
Subscription Agreements, each dated as of July 27, 2001, between
Microcide and each purchaser of preferred stock. Pursuant to the
subscription agreements, among other things:
. Microcide will issue up to 60,000 shares of Series B convertible
redeemable preferred stock, convertible into 20.0 million shares of
common stock; and
. Microcide will appoint three nominees of the purchasers to
Microcide's Board of Directors.
3. To approve an amendment to Microcide's Restated Certificate of
Incorporation to change the name of Microcide to "Essential
Therapeutics, Inc."
4. To transact any other business that may properly come before the special
meeting or any adjournment or postponement.
Microcide's Board of Directors unanimously recommends that stockholders vote
"FOR" the approval of the issuance of shares of common stock pursuant to the
merger agreement, "FOR" the approval of the issuance of shares of preferred
stock pursuant to the subscription agreements and "FOR" the approval of the
amendment to Microcide's Restated Certificate of Incorporation to change the
name of Microcide.
The merger and the financing are contingent upon each other. Microcide
cannot complete these transactions unless a quorum is present at the special
meeting in person or by proxy, and a majority of the total votes cast at the
special meeting by holders of Microcide's common stock outstanding as of the
record date is voted in favor of the approval of the issuance of shares of
common stock pursuant to the merger agreement and the issuance of shares of
preferred stock pursuant to the subscription agreements. Microcide cannot
complete the proposed name change unless a quorum is present at the special
meeting in person or by proxy, and a majority of Microcide's common stock
outstanding as of the record date is voted in favor of the approval of the
amendment to Microcide's Restated Certificate of Incorporation. As a result, if
you do not vote by proxy or in person at the special meeting it will have the
effect of a vote against the approval of the proposed name change.
Only stockholders of record at the close of business on , 2001 are
entitled to notice of and to vote at the special meeting. This proxy statement
is first being mailed to stockholders on or about , 2001.
All stockholders are cordially invited to attend the special meeting in
person. However, to assure your representation at the special meeting, you are
urged to sign and return the enclosed proxy as promptly as possible in the
postage-prepaid envelope enclosed for that purpose. Any stockholder attending
the special meeting may vote in person even if the stockholder has returned a
proxy.
For more information about the proposed transactions, please review the
accompanying proxy statement, including the appendices.
By order of the Board of Directors
Alan C. Mendelson
Secretary
Mountain View, California
, 2001
IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ENVELOPE PROVIDED.
This proxy is solicited on behalf of the Board of Directors.
TABLE OF CONTENTS
Page
----
Forward-Looking Statements May Prove Inaccurate........................... iii
Questions and Answers..................................................... iv
Summary................................................................... 1
The Companies........................................................... 1
The Special Meeting..................................................... 1
Reasons for the Merger.................................................. 1
Reasons for the Financing............................................... 2
Reasons for the Amendment to Microcide's Restated Certificate of
Incorporation.......................................................... 2
Recommendations to Stockholders......................................... 2
Quorum, Vote Required................................................... 2
The Merger.............................................................. 2
The Financing........................................................... 2
Management Following the Merger and the Financing....................... 3
Ownership Upon Completion of Merger and Financing....................... 3
Conditions to Merger.................................................... 3
Conditions to Financing................................................. 3
No Solicitation......................................................... 3
Termination of Merger Agreement......................................... 4
Termination of Subscription Agreements.................................. 4
Option Agreements and Termination Fee................................... 4
Opinion of Financial Advisor............................................ 4
Accounting Treatment.................................................... 4
Amendment of Restated Certificate of Incorporation...................... 4
Selected Historical and Pro Forma Financial Data........................ 5
Microcide Selected Historical Financial Data............................ 6
Althexis Selected Historical Financial Data............................. 7
Pro Forma Condensed Consolidated Financial Statements................... 8
Comparative Per Share Data.............................................. 10
Risk Factors.............................................................. 11
Risks Related to the Merger............................................. 11
Risks Related to the Financing.......................................... 11
Risks Related to Microcide.............................................. 12
Risks Related to Althexis............................................... 20
The Companies............................................................. 21
Microcide Pharmaceuticals, Inc.......................................... 21
The Althexis Company, Inc............................................... 21
The Combined Company.................................................... 24
The Special Meeting....................................................... 25
General................................................................. 25
Solicitation, Voting and Revocability of Proxies........................ 26
Recommendations of Microcide's Board of Directors....................... 27
The Merger................................................................ 28
Background of the Merger................................................ 28
Reasons for the Merger.................................................. 33
Opinion of Financial Advisor............................................ 35
Structure of the Merger................................................. 39
Merger Consideration.................................................... 39
Conversion of Securities................................................ 39
Interests of Certain Persons in the Merger.............................. 40
i
TABLE OF CONTENTS--(Continued)
Page
----
Accounting Treatment................................................ 41
Material United States Federal Income Tax Consequences.............. 41
Regulatory Approvals................................................ 41
Appraisal Rights.................................................... 41
Federal Securities Matters.......................................... 41
The Merger Agreement................................................... 42
Conditions to the Completion of the Merger.......................... 42
No Solicitation of Alternate Transactions........................... 43
Bridge Financing.................................................... 44
Registration Rights................................................. 44
Termination......................................................... 45
Expenses and Termination Fees....................................... 45
Conduct of Business Pending the Merger.............................. 46
Amendment and Waiver................................................ 47
Representations and Warranties...................................... 48
Other Agreements Related to the Merger................................. 49
Stockholder Support Agreements...................................... 49
Severance Agreements................................................ 49
Stock Option Agreements............................................. 50
Stockholders Agreements............................................. 51
The Financing.......................................................... 52
Reasons for the Financing........................................... 52
Structure of the Financing.......................................... 52
The Subscription Agreements......................................... 53
Certificate of Designations......................................... 57
Voting Agreement.................................................... 60
Interests of Certain Persons in the Financing....................... 60
Althexis Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 73
Unaudited Pro Forma Condensed Consolidated Financial Statements........ 75
Amendment to Microcide's Restated Certificate of Incorporation......... 82
Beneficial Security Ownership of Management and Certain Beneficial
Owners................................................................ 83
Other Matters.......................................................... 84
Deadline for Receipt of Stockholder Proposals.......................... 84
Where You Can Find More Information.................................... 85
APPENDIX A Agreement and Plan of Merger, dated as of July 27, 2001, by
and among Microcide Pharmaceuticals, Inc., California MP
Acquisition, Inc. and The Althexis Company, Inc.
APPENDIX B Fairness Opinion of JPMorgan H&Q
APPENDIX C Form of Subscription Agreement
APPENDIX D Form of Certificate of Designations
ii
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This proxy statement and the documents that are incorporated by reference
contain forward-looking statements that are subject to risks and uncertainties.
You should not place undue reliance on these statements, which only speak as of
the date hereof. Forward-looking statements include the information concerning
possible or assumed future results of operations of Microcide and Althexis,
including any forecasts, projections and descriptions of anticipated synergies
related to the merger. You should note that many factors could affect the
actual financial results of Microcide and Althexis, and could cause actual
results to differ materially from those in the forward-looking statements.
These factors include the following:
. the merger and the financing not being completed;
. costs or difficulties related to the integration of the technologies or
businesses of the companies being greater than expected;
. demands placed on management by the increase in the combined company's
size;
. unanticipated increases occurring in financing and other costs;
. general economic or business conditions being less favorable than
expected;
. legislative or regulatory changes adversely affecting the businesses in
which the companies are engaged; and
. other opportunities being presented to and pursued by the companies.
iii
QUESTIONS AND ANSWERS
Q: Why are Microcide and Althexis proposing to merge?
A: Microcide and Althexis are proposing to merge because we believe that the
combination will create a stronger, more competitive company with greater
growth potential than either Microcide or Althexis would have on its own.
We believe that the combination of Microcide's drug discovery platforms and
product development opportunities with Althexis' proprietary target
validation system and structure-based drug design skills will accelerate
the combined company's multiple drug development programs in infectious
disease.
Q: What will happen to my common stock in the merger?
A: Each share of Microcide common stock will be unaffected by the merger and
remain outstanding.
Q: Why is Microcide proposing to issue shares of its Series B convertible
redeemable preferred stock in the financing?
A: Microcide is issuing preferred stock in order to finance the working
capital requirements of the combined company.
Q: Why is Microcide proposing to amend its certificate of incorporation?
A: The Board of Directors of Microcide has determined to change the name of
Microcide to "Essential Therapeutics, Inc." Microcide is proposing to amend
its certificate of incorporation in order to complete the name change.
Q: How does the Board of Directors of Microcide recommend I vote my shares?
A: The Microcide Board recommends that you vote "FOR" each of the proposals
described in this proxy statement.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
proxy statement, please fill out and sign your proxy card and mail your
signed proxy card in the enclosed return envelope as soon as possible so
that your shares may be represented at the special meeting.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you provide instructions on how
to vote. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares. Without instructions, your
shares will not be voted.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. You can change your vote at any time before your proxy is voted at the
special meeting. You can do this in one of three ways. First, you can send
a written notice stating that you would like to revoke your proxy. Second,
you can complete and submit a new proxy. If you choose either of these two
methods, you must submit your notice of revocation to Microcide at the
address set forth at the end of this section or submit your new proxy in
the same way you submitted your prior proxy. Third, you can attend the
special meeting and vote in person.
Q: When do you expect the merger and the financing to be completed?
A: We are working towards completing the merger and the financing as soon as
possible. We expect to complete the transactions by September 30, 2001.
iv
Who can help answer my questions?
If you have any questions about the merger, the financing or the amendment
to Microcide's certificate of incorporation, or if you need additional copies
of this proxy statement or the enclosed proxy, you should contact Microcide
Pharmaceuticals, Inc., 850 Maude Avenue, Mountain View, California 94043,
Attention: Investor Relations, Telephone: (650) 428-3535, Facsimile: (650) 428-
3545, email: feubanks@microcide.com.
v
SUMMARY
This summary highlights selected information from this proxy statement and
may not contain all of the information that is important to you. To understand
the merger, the financing, the amendment to Microcide's Restated Certificate of
Incorporation and related matters, you should carefully read this entire proxy
statement and the documents to which we have referred you. See "Where You Can
Find More Information."
The Companies
Microcide Pharmaceuticals, Inc.
850 Maude Avenue
Mountain View, California 94043
Telephone: (650) 428-1550
Microcide is a biopharmaceutical company committed to the discovery,
development and commercialization of novel antimicrobials for the improved
treatment of serious bacterial, fungal and viral infections. Novel
antimicrobials are newly discovered drugs that define a new chemical class,
with characteristics that allow them to function in a different way from the
current classes of antimicrobials. Antibacterials, antifungals and antivirals
are all antimicrobials. Microcide's three discovery research platforms address
the growing problems of antibiotic resistance and the need for improved
antifungal and antiviral therapeutics. Microcide's Cephalosporin Antibiotics
and Efflux Pump Inhibition platforms focus on developing novel antibiotics and
antibiotic potentiators, or efflux inhibitors, to directly address existing
bacterial and fungal resistance problems. Efflux is the mechanism by which
bacteria and fungi eject or "pump out" antibiotics. Microcide's VALID Microbial
Genomics platform utilizes proprietary bacterial, fungal and viral genetics and
genomics tools to discover entirely new classes of antimicrobial agents. Please
see "The Companies--Microcide Pharmaceuticals, Inc."
The Althexis Company, Inc.
1365 Main Street
Waltham, Massachusetts 02451
Telephone: (781) 647-5554
Althexis is a biopharmaceutical company committed to the discovery,
development and commercialization of new medicines to treat human diseases.
Althexis' discovery approach is centered on the use of structure-based drug
design, or SBDD, a powerful method of drug discovery that exploits atomic-level
information about potential disease targets. Althexis is developing a
proprietary target validation system called ACTT. Althexis combines SBDD and
related technologies with expertise in more traditional discovery tools, such
as high-throughput screening and medicinal chemistry. Even though SBDD is
generally applicable to any disease category, the first therapeutic target
studied by Althexis is an essential bacterial enzyme, the structure of which is
strongly conserved across a broad spectrum of pathogens. Drugs targeted against
this enzyme will address the growing resistance of bacteria to current
therapies, a worldwide healthcare threat. Althexis is collaborating in this
effort with PLIVA Pharmaceuticals, Inc., the inventor of azithromycin, which is
sold in the United States by Pfizer under the name Zithromax. Please see "The
Companies--The Althexis Company, Inc."
The Special Meeting
The special meeting will be held on , 2001, at a.m., local time, at
Microcide's offices located at 850 Maude Avenue, Mountain View, California
94043. Please see "The Special Meeting."
Reasons for the Merger
The Board of Directors of Microcide has identified various benefits that are
likely to result from the merger. The Microcide Board believes the merger will:
. combine the companies' technologies to accelerate Microcide's drug
discovery and development programs in infectious disease;
. supplement Microcide's management team; and
. enhance long-term stockholder value.
Please see "The Merger--Reasons for the Merger."
1
Reasons for the Financing
The Microcide Board has determined that the financing is necessary to
finance the working capital requirements of the combined company. Please see
"The Financing--Reasons for the Financing."
Reasons for the Amendment to Microcide's Restated Certificate of Incorporation
The Microcide Board has determined that Microcide change its name to
"Essential Therapeutics, Inc.," which will be effected by the amendment to
Microcide's Restated Certificate of Incorporation. Please see "Amendment to
Microcide's Restated Certificate of Incorporation."
Recommendations to Stockholders
The Microcide Board believes that each of the merger, the financing and the
amendment to Microcide's Restated Certificate of Incorporation are in the best
interests of Microcide and its stockholders and recommends that stockholders
vote "FOR" the proposals:
. to approve the issuance of shares of common stock pursuant to the merger
agreement;
. to approve the issuance of shares of preferred stock pursuant to the
subscription agreements; and
. to approve an amendment to Microcide's Restated Certificate of
Incorporation to change Microcide's name to "Essential Therapeutics,
Inc."
Please see "The Special Meeting--Recommendation of Microcide's Board of
Directors."
Quorum, Vote Required
The presence in person or by proxy of at least a majority of the outstanding
shares of Microcide's common stock entitled to vote at the special meeting is
required to establish a quorum at the special meeting. The affirmative vote of
a majority of the votes cast at the Microcide special meeting is required for
the approval of the issuance of shares of common stock pursuant to the merger
agreement and the issuance of shares of preferred stock pursuant to the
subscription agreements. The merger and the financing are contingent upon each
other, and neither will be completed unless both are approved by Microcide's
stockholders. The affirmative vote of a majority of the outstanding shares of
Microcide's common stock is required for the approval of the amendment to
Microcide's Restated Certificate of Incorporation. Please see "The Special
Meeting--Solicitation, Voting and Revocability of Proxies."
The Merger
The merger agreement is included as Appendix A to this proxy statement. We
encourage you to read the merger agreement because it is the principal document
governing the merger.
In connection with the merger, a wholly-owned subsidiary of Microcide will
merge with and into Althexis, with Althexis surviving the merger and continuing
as a wholly-owned subsidiary of Microcide. Each issued and outstanding share of
Althexis stock will be converted into an estimated 1.15 shares of Microcide
common stock and Microcide will assume Althexis' outstanding options and
warrants. Each outstanding share of Microcide common stock will remain
outstanding and be unaffected by the merger. In connection with the merger,
Microcide will change its name to Essential Therapeutics, Inc. Please see "The
Merger--Structure of the Merger" and "--Conversion of Securities."
The Financing
At the time of the merger, Microcide will sell up to $60.0 million of its
convertible redeemable preferred stock to a group of purchasers in a private
placement. The preferred stock is convertible into shares of Microcide's common
stock at a fixed exchange ratio of $3.00 per share, subject to adjustment for
stock dividends, stock splits and similar events. The resale of the underlying
common stock will be registered on a registration statement on Form S-3 and
subject to lockup provisions for up to nine months after closing. Please see
"The Financing--Structure of the Financing."
2
We will be required to record a deemed dividend on our financial statements
in the amount of $23.8 million in connection with the financing. Please see
"The Financing--Structure of the Financing."
Management Following the Merger and the Financing
Upon completion of the merger and the financing, the Microcide Board will
have eight members, consisting of:
. John Walker and Jim Rurka, the current Chairman of the Board and the
current Chief Executive Officer and director, respectively, of Microcide;
. Mark Skaletsky, the current Chairman of the Board and Chief Executive
Officer of Althexis;
. David Schnell, Charles Newhall and Kate Bingham, the nominees of the
purchasers of preferred stock; and
. two additional persons that have not been identified as of the date of
this proxy statement.
Upon the completion of the merger, Mr. Skaletsky will be appointed the
President, Chief Executive Officer and Chairman of the Board of Microcide.
Ownership Upon Completion of Merger and Financing
Based upon the number of outstanding shares of Microcide common stock and
Althexis stock as of the record date:
. giving effect to the merger but not the financing: the stockholders of
Microcide immediately prior to the merger will own approximately 68.9% of
the outstanding shares of Microcide; and the former stockholders of
Althexis will own approximately 31.1% of the outstanding shares of
Microcide; and
. giving effect to both the merger and the financing: the stockholders of
Microcide immediately prior to the merger will own approximately 31.4% of
the outstanding shares of Microcide; the former stockholders of Althexis
will own approximately 14.2% of the outstanding shares of Microcide; and
the purchasers of preferred stock, assuming conversion of their shares
into common stock, will own approximately 54.4% of the outstanding shares
of Microcide.
Conditions to Merger
The completion of the merger depends upon the satisfaction of a number of
conditions, including the following:
. approval of the issuance of shares of common stock pursuant to the merger
agreement by the stockholders of Microcide;
. approval of the merger agreement by the stockholders of Althexis;
. absence of a material adverse change with respect to Microcide and
Althexis; and
. completion of the financing.
Please see "The Merger Agreement--Conditions to Completion of the Merger."
Conditions to Financing
The completion of the financing depends upon the satisfaction of a number of
conditions, including the following:
. approval of the issuance of shares of preferred stock pursuant to the
subscription agreements by the stockholders of Microcide;
. the aggregate purchase price for the preferred stock purchased by all
purchasers will be at least $55.0 million; and
. completion of the merger.
Please see "The Financing--The Subscription Agreements--Conditions to
Completion of the Financing."
No Solicitation
Microcide and Althexis have agreed that they will not initiate any
discussions regarding a business combination with another party. Please see
"The Merger Agreement--No Solicitation of Alternate Transactions."
3
Termination of Merger Agreement
Microcide and Althexis can agree to terminate the merger agreement without
completing the merger, and either Microcide or Althexis can terminate the
merger agreement if any of the following occurs:
. the merger is not completed by December 31, 2001;
. the approval of the stockholders of Microcide is not obtained; or
. the other party breaches any representation, warranty, covenant or
agreement, except for breaches that are not reasonably likely to have a
material adverse effect, and the breach continues for at least 14 days
after written notice.
Please see "The Merger Agreement--Termination."
Termination of Subscription Agreements
Microcide and the purchasers of preferred stock can agree to terminate the
subscription agreements without completing the financing, and either Microcide
or the purchasers can terminate the subscription agreements if any of the
following occurs:
. the financing is not completed by November 30, 2001; or
. the other party materially breaches any of its representations or
warranties or obligations under the merger agreement.
Please see "The Financing--The Subscription Agreements--Termination."
Option Agreements and Termination Fee
Microcide and Althexis have entered into reciprocal option agreements
pursuant to which Microcide has granted to Althexis, and Althexis has granted
to Microcide, an option to acquire up to 19.9% of the common stock of Microcide
or Althexis, respectively, under specified circumstances. The merger agreement
requires Microcide or Althexis to pay a termination fee of $1.0 million plus
reimbursement of expenses if the merger agreement is terminated under specified
circumstances. The total profit that either company may realize under the
option agreements and through the payment of termination fees will not exceed
$2.5 million. Please see "The Merger Agreement--Expenses and Termination Fees"
and "Other Agreements Related to the Merger--Stock Option Agreements."
Opinion of Financial Advisor
In deciding to approve the merger agreement, the Microcide Board considered
an opinion from JPMorgan H&Q, a division of J.P. Morgan Securities, Inc., its
financial advisor, as to the fairness, from a financial point of view, to
Microcide of the exchange ratio contained in the merger agreement. This opinion
is included as Appendix B to this proxy statement, and we encourage you to read
it. Please see "The Merger--Opinion of Financial Advisor."
Accounting Treatment
The merger will be accounted for as a "purchase" transaction for accounting
and financial reporting purposes, in accordance with generally accepted
accounting principles. Accordingly, a determination of the fair value of
Althexis' assets and liabilities will be made in order to allocate the purchase
price to the assets acquired and the liabilities assumed. In connection with
the merger, Microcide anticipates that it will take a one-time charge
consisting of a write-off of the value of purchased in-process research and
development estimated to be approximately $13.9 million. The purchase price
allocation, including the one-time charge for write-off of the value of
purchased in-process research and development, is subject to revision when
additional information concerning asset and liability valuation is obtained.
Please see "The Merger--Accounting Treatment" and "Unaudited Pro Forma
Condensed Consolidated Financial Statements."
Amendment of Restated Certificate of Incorporation
The Microcide Board has approved an amendment to the Restated Certificate of
Incorporation of Microcide to change the name of Microcide to "Essential
Therapeutics, Inc." Please see "Amendment to Microcide's Restated Certificate
of Incorporation."
4
Selected Historical and Pro Forma Financial Data
Set forth on the following pages are (1) selected historical financial data
of Microcide, (2) selected historical financial data of Althexis and (3)
selected unaudited pro forma combined financial data of Microcide after giving
effect to the merger and the financing. The selected historical financial data
should be read in conjunction with the selected historical audited and
unaudited financial statements of Microcide and Althexis and the related notes
included elsewhere or incorporated by reference in this proxy statement. The
selected unaudited pro forma combined financial data of Microcide is derived
from, and should be read in conjunction with, the unaudited pro forma combined
financial statements and the related notes included elsewhere in this proxy
statement. See "Unaudited Pro Forma Combined Financial Statements."
5
Microcide Selected Historical Financial Data
Set forth below are selected historical financial data of Microcide. We have
prepared this information using the consolidated financial statements of
Microcide as of and for the five years ended December 31, 2000 and as of and
for the six-month periods ended June 30, 2001 and 2000. The financial
statements as of and for the five fiscal years ended December 31, 2000 have
been audited by Ernst & Young LLP, independent auditors. The financial
statements as of and for the six-month periods ended June 30, 2001 and 2000
have not been audited.
Six Months
Year Ended December 31, Ended June 30,
---------------------------------------------- ----------------
1996 1997 1998 1999 2000 2000 2001
------- ------- -------- -------- -------- ------- -------
(In thousands, except per share data)
Historical Statement of
Operations Data:
Total revenues.......... $11,273 $14,894 $ 11,181 $ 9,448 $ 5,864 $ 2,754 $ 4,515
Operating expenses:
Research and
development.......... 10,717 17,877 18,806 17,288 16,082 8,169 8,477
General and
administrative....... 2,889 4,091 3,971 3,956 4,353 1,925 2,463
------- ------- -------- -------- -------- ------- -------
Total operating
expenses........... 13,606 21,968 22,777 21,244 20,435 10,094 10,940
------- ------- -------- -------- -------- ------- -------
Operating loss.......... (2,333) (7,074) (11,596) (11,796) (14,571) (7,340) (6,425)
Interest income, net.... 1,663 2,472 1,838 1,050 859 469 337
------- ------- -------- -------- -------- ------- -------
Loss before cumulative
effect of change in
accounting principle... (670) (4,602) (9,758) (10,746) (13,712) (6,871) (6,088)
Cumulative effect of
change in accounting
principle.............. -- -- -- -- (233) (233) --
------- ------- -------- -------- -------- ------- -------
Net loss................ $ (670) $(4,602) $ (9,758) $(10,746) $(13,945) $(7,104) $(6,088)
======= ======= ======== ======== ======== ======= =======
Basic and diluted net
loss per share......... $ (0.10) $ (0.43) $ (0.89) $ (0.97) $ (1.23) $ (0.63) $ (0.53)
Shares used in computing
basic and diluted net
loss per share......... 7,034 10,817 10,962 11,085 11,320 11,261 11,486
December 31, June 30,
---------------------------------------------- ----------------
1996 1997 1998 1999 2000 2000 2001
------- ------- -------- -------- -------- ------- -------
Historical Balance Sheet
Data:
Cash, cash equivalents
and short-term
investments............ $47,508 $40,387 $ 33,192 $ 24,868 $ 12,589 $19,123 $11,326
Working capital......... 42,542 37,235 30,269 21,447 9,214 15,457 4,325
Total assets............ 56,826 51,782 44,490 33,831 27,198 27,826 17,796
Long-term obligations... 952 450 3,039 2,164 603 1,353 456
Total stockholders'
equity................. 50,574 46,896 37,938 27,803 15,324 21,736 9,491
6
Althexis Selected Historical Financial Data
Set forth below are selected historical financial data of Althexis. We have
prepared this information using the consolidated financial statements of
Althexis as of and for the years ended December 31, 1999 and 2000, and the
period October 1, 1998 (date of inception) through December 31, 1998 and as of
and for the six-month periods ended June 30, 2001 and 2000. The financial
statements as of and for the periods ended December 31, 1999 and 2000, and the
period October 1, 1998 (date of inception) through December 31, 1998 have been
audited by Ernst & Young LLP, independent auditors. The financial statements as
of and for the six-month periods ended June 30, 2001 and 2000 are unaudited.
When you read this selected historical financial data, it is important that
you also read the historical financial statements and related notes, as well as
"Althexis Management's Discussion and Analysis of Financial Condition and
Results of Operations," included elsewhere in this proxy statement.
Six Months
Year Ended Ended June
December 31, 30,
------------- -------------
October 1, 1998
(date of inception)
through
December 31, 1998 1999 2000 2000 2001
------------------- ------ ------ ------ ------
(In thousands, except per share data)
Historical Statement of
Operations Data:
Total revenues............... $ -- $3,717 $4,825 $3,208 $1,983
Operating expenses:
Research and development... -- 2,162 3,182 1,149 1,926
General and
administrative............ 300 816 1,248 657 662
------ ------ ------ ------ ------
Total operating
expenses................ 300 2,978 4,430 1,806 2,588
------ ------ ------ ------ ------
Operating income (loss)...... (300) 739 395 1,402 (605)
Interest income, net......... -- 46 53 18 (17)
------ ------ ------ ------ ------
Income (loss) before
provision for income taxes.. (300) 785 448 1,420 (622)
Income tax expense........... -- 175 45 143 --
------ ------ ------ ------ ------
Net income (loss)............ $ (300) $ 610 $ 403 $1,277 $ (622)
====== ====== ====== ====== ======
Net income (loss) per share--
basic....................... $(0.08) $ 0.17 $ 0.11 $ 0.35 $(0.17)
Net income (loss) per share--
diluted .................... $(0.08) $ 0.17 $ 0.10 $ 0.31 $(0.17)
Shares used to compute net
income (loss)
Per share--basic........... 3,600 3,600 3,600 3,600 3,648
--diluted.............. 3,600 3,675 4,122 4,099 3,648
December 31, June 30,
--------------------------------- -------------
1998 1999 2000 2000 2001
------------------- ------ ------ ------ ------
Historical Balance Sheet
Data:
Cash, cash equivalents and
short-term investments...... $ 7 $1,548 $1,534 $3,569 $1,823
Working capital (deficit).... (46) 2,313 1,773 2,822 909
Total assets................. 76 4,264 4,208 5,199 3,482
Long-term obligations........ -- 1,165 586 722 404
Total stockholders' equity
(deficit)................... (28) 1,982 2,385 3,259 1,823
7
Pro Forma Condensed Combined Financial Statements
The following pro forma condensed combined financial statements reflect the
merger of California MP Acquisition, a wholly owned subsidiary of Microcide,
with and into Althexis in accordance with the provisions of the merger
agreement. The unaudited pro forma condensed combined financial information
gives effect to the merger assuming that each share of Althexis common stock
and Althexis preferred stock is exchanged for 1.15 shares of Microcide common
stock and each option to purchase Althexis capital stock is exchanged for an
option to purchase 1.15 shares of Microcide common stock. The merger will be
accounted for as a purchase with the assets and liabilities of Althexis
recorded at their estimated fair values. The unaudited pro forma condensed
combined statement of operations for the year ended December 31, 2000 and the
six months ended June 30, 2001 combine the historical statements of operations
of Microcide and Althexis as if the merger had occurred on January 1, 2000. The
unaudited pro forma condensed combined balance sheet data as of June 30, 2001
gives effect to the merger and the $60.0 million equity financing expected to
close concurrently with the closing of the merger as if each occurred on June
30, 2001 and gives effect to the preliminary allocation of the purchase price
to the Althexis assets acquired, including in-process research and development,
and liabilities assumed based upon a preliminary valuation performed by an
independent third party which has not yet been finalized. This data should be
read in conjunction with the selected historical financial information, the
unaudited pro forma condensed combined financial statements and the separate
historical financial statements of Microcide and Althexis included elsewhere or
incorporated by reference in this proxy statement. The unaudited pro forma
condensed combined financial information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have been achieved had the merger been completed on January
1, 2000, and such information should not be construed as representative of
future operating results or financial position. Please see "Unaudited Pro Forma
Condensed Combined Financial Statements" for information regarding the pro
forma adjustments.
Year Ended December 31, 2000
----------------------------------------------
Historical
------------------------
Microcide Pro Forma Pro Forma
Pharmaceuticals Althexis Adjustments Combined
--------------- -------- ----------- ---------
(In thousands, except per share data)
Statement of Operations Data:
Total revenues................. $ 5,864 $4,825 $ -- $ 10,689
Operating expenses:
Research and development..... 16,082 3,182 -- 19,264
General and administrative... 4,353 1,248 894 6,495
-------- ------ ----- --------
Total operating expenses... 20,435 4,430 894 25,759
-------- ------ ----- --------
Operating income (loss)........ (14,571) 395 (894) (15,070)
Interest and other income,
net........................... 859 53 -- 912
Income tax expense............. -- 45 (45) --
-------- ------ ----- --------
Income (loss) before cumulative
effect of change in accounting
principle..................... (13,712) 403 (849) (14,158)
Cumulative effect of change in
accounting principle.......... (233) -- -- (233)
-------- ------ ----- --------
Net income (loss).............. $(13,945) $ 403 $(849) $(14,391)
======== ====== ===== ========
Basic net income (loss) per
share......................... $ (1.23) $ 0.11 $ (0.86)
Diluted net income (loss) per
share......................... $ (1.23) $ 0.10 $ (0.86)
Shares used in computing basic
net income (loss) per share... 11,320 3,600 16,738
Shares used in computing
diluted net income (loss)
per share..................... 11,320 4,122 16,738
8
Six months ended June 30, 2001
----------------------------------------------
Historical
------------------------
Microcide Pro Forma Pro Forma
Pharmaceuticals Althexis Adjustments Combined
--------------- -------- ----------- ---------
(In thousands, except per share data)
Statement of Operations Data:
Total revenues................. $ 4,515 $1,983 $ -- $ 6,498
Operating expenses:
Research and development..... 8,477 1,926 -- 10,403
General and administrative... 2,463 662 447 3,572
------- ------ ----- -------
Total operating expenses... 10,940 2,588 447 13,975
------- ------ ----- -------
Operating loss................. (6,425) (605) (447) (7,477)
Interest and other income,
net........................... 337 (17) -- 320
------- ------ ----- -------
Net loss....................... $(6,088) $ (622) $(447) $(7,157)
======= ====== ===== =======
Basic and diluted net loss per
share......................... $ (0.53) $(0.17) -- $ (0.43)
Shares used in computing basic
and diluted net loss
per share..................... 11,486 3,648 -- 16,786
As of June 30, 2001
-------------------------------------------------------------------
Financing
Historical Pro Forma Microcide Historical Pro Forma Pro Forma
Microcide Adjustments As Adjusted Althexis Adjustments Combined
---------- ----------- ----------- ---------- ----------- ---------
Balance Sheet Data:
Cash, cash equivalents
and short-term
investments............ $11,326 $60,000 $71,326 $1,823 $ -- $73,149
Working capital......... 4,325 60,000 64,325 909 (1,435) 63,799
Total assets............ 17,796 60,000 77,796 3,482 4,962 86,240
Long-term obligations... 456 -- 456 404 -- 860
Convertible redeemable
preferred stock........ -- 60,000 60,000 -- -- 60,000
Total stockholders'
equity................. 9,491 -- 9,491 1,823 3,527 14,841
9
Comparative Per Share Data
The following table sets forth certain historical per share data of
Microcide and Althexis and combined per share data on a pro forma basis. You
should read the information set forth below along with the selected historical
financial data and the pro forma combined financial information included
elsewhere in this proxy statement. The pro forma combined financial data are
not necessarily indicative of the operating results that would have been
achieved had the merger been consummated as of the beginning of the periods
presented and you should not construe it as representative of future
operations.
Year Ended
December 31, Six Months Ended
2000 June 30, 2001
------------ ----------------
Microcide--Historical
Basic and diluted net loss per share.......... $(1.23) $(0.53)
Book value per common share(1)................ 1.34 0.82
Year Ended
December 31, Six Months Ended
2000 June 30, 2001
------------ ----------------
Althexis--Historical
Basic net income (loss) per share............. $ 0.11 $(0.17)
Diluted net income (loss) per share........... 0.10 (0.17)
Book value per common share(1)................ 0.27 0.10
Year Ended
December 31, Six Months Ended
2000 June 30, 2001
------------ ----------------
Pro Forma Combined--Microcide
Basic and diluted net loss per share.......... $(0.86) $(0.43)
Book value per common share(2)................ 1.25 0.88
Year Ended
December 31, Six Months Ended
2000 June 30, 2001
------------ ----------------
Equivalent Pro Forma Combined--Per Microcide
Share
Basic and diluted net loss per share.......... $(0.98) $(0.49)
Book value per common share(3)................ 1.43 1.01
- --------
1. The historical book value per common share is computed by dividing
stockholders' equity attributable to common stock (total stockholders'
equity, less aggregate liquidation preferences of preferred stock) by the
number of shares of common stock outstanding at the end of the period.
2. The pro forma consolidated book value per common share is computed by
dividing pro forma stockholders' equity by the pro forma shares of common
stock outstanding at the end of the period.
3. Represents the pro forma consolidated amounts multiplied by the exchange
ratio applicable to the Microcide stock.
10
RISK FACTORS
Risks Related to the Merger
Althexis stockholders will receive a fixed exchange ratio of an estimated
1.15 shares of Microcide common stock per Althexis share even if there are
changes in the market value of Microcide common stock before the completion
of the merger.
There will be no adjustment to the exchange ratio if the market price of
Microcide common stock fluctuates. Accordingly, the specific value of the
consideration paid by Microcide to the former stockholders of Althexis in
connection with the merger will depend on the market price of Microcide common
stock at the effective time of the merger. The share price of Microcide common
stock is subject to price fluctuations in the market for publicly traded
securities and has experienced significant volatility. In addition, the stock
market in recent years has experienced significant price and volume
fluctuations that have affected the market prices of biotechnology companies
and have often been unrelated to or disproportionately impacted by the
operating performance of these companies. In the event that the market price
of Microcide common stock increases or decreases, the market value of the
consideration paid to the former stockholders of Althexis would
correspondingly increase or decrease. You are advised to obtain recent market
quotations for Microcide common stock. We cannot assure you as to the market
price of Microcide common stock at any time before the merger or as to the
market price of Microcide common stock at any time after the merger.
We may not be able to integrate our operations with the operations of
Althexis effectively and efficiently.
Integrating the operations and management of Microcide and Althexis will be
a complex process, and we cannot assure you that this integration will be
completed rapidly or will achieve all of the anticipated synergies and other
benefits we expect from the merger. Moreover, the integration of Microcide and
Althexis will require significant management attention, which may temporarily
distract management from its usual focus on the daily operations of the
combined company. Management's inability to integrate successfully the
operations of Microcide and Althexis, or any significant delay in achieving
this integration, could cause our business to suffer after the merger.
We may not be able to realize the expected benefits of the merger.
Achieving the benefits we expect from the merger will depend in large part
on integrating our businesses, technology, operations and personnel in a
timely and efficient manner to minimize the impact on the operations of the
combined company. Among the challenges involved in this integration is the
need to integrate the research operations of Microcide, which are conducted in
Mountain View, California, with those of Althexis, which are conducted in
Waltham, Massachusetts. We intend to continue to operate both facilities
following completion of the merger. The integration of the activities of these
two facilities following completion of the merger will require significant
management resources, and we may not be able to complete this integration
efficiently. In addition, we plan to relocate our corporate headquarters from
Mountain View, California to Waltham, Massachusetts. We must also persuade our
personnel that our business cultures are compatible. We cannot assure you that
we will realize any of the anticipated benefits of the merger, and failure to
do so could adversely affect the business of the combined company after the
merger.
Risks Related to the Financing
The financing will result in substantial dilution to Microcide's existing
stockholders.
Pursuant to the terms of the subscription agreements, Microcide will issue
an aggregate of up to 60,000 shares of preferred stock for an aggregate
purchase price equal to $60.0 million. The preferred stock to be issued in
connection with the financing will be convertible into an aggregate of 20.0
million shares of common stock, resulting in a common equivalent per share
price to the purchasers of $3.00, which is a discount of $1.19, or 28%, to the
$4.19 closing price of the common stock on the Nasdaq National Market on July
27,
11
2001, the day prior to the public announcement of the merger and the financing.
As a result, the holders of the common stock will experience immediate and
significant dilution of their investment.
The financing will constitute a change of control of Microcide.
Pursuant to the terms of the subscription agreements, Microcide will issue
shares of preferred stock convertible into an aggregate of 20.0 million shares
of common stock. There were approximately 11.5 million shares of common stock
outstanding as of the date of this proxy statement, and Microcide estimates
that it will issue an aggregate of approximately 5.2 million shares of common
stock to the former stockholders of Althexis on the closing date. As a result,
upon completion of the merger and the financing the holders of the preferred
stock will control approximately 54.4% of the voting power of Microcide on a
fully diluted basis. As a result, the holders of a majority of the preferred
stock will be in a position to influence materially, if not control, the
outcome of all matters requiring stockholder approval, subject to limitations
contained in the Voting Agreements, including the election of directors. See
"The Financing--Voting Agreements. "
The financing will result in a change in a majority of Microcide's Board of
Directors.
Upon completion of the merger and the financing, the Microcide Board is
expected to consist of eight persons, only two of whom are currently directors
of Microcide. Under the terms of the subscription and the preferred stock
agreements, the holders of a majority of the preferred stock will be entitled
to elect three members of the Microcide Board. As a result, the holders of a
majority of the preferred stock will be in a position to influence materially,
if not control, matters requiring approval of the Microcide Board, including
the selection of officers of Microcide.
We will be required to record a deemed dividend of approximately $23.8 million
upon the completion of the merger and the financing, which will materially
adversely affect our net loss attributable to common stockholders.
The financing contemplates the issuance by Microcide of preferred stock at a
discount to the quoted market price of the common stock at the commitment date
of the financing arrangement. Microcide will be required to record an amount
equal to approximately $23.8 million as a deemed dividend on the date of
issuance of the preferred stock. The amount of the deemed dividend is
calculated by multiplying the 20.0 million shares of common stock into which
the preferred stock is convertible by $1.19, which is the difference between
the $4.19 per share closing price of the common stock on the Nasdaq National
Market on July 27, 2001 less the $3.00 per share equivalent purchase price for
the preferred stock. On July 19, 2001, the Microcide Board approved the merger
and the financing, and on July 27, 2001, Microcide and the purchasers of
preferred stock entered into the subscription agreements. The deemed dividend
will be a non-cash charge appearing on the financial statements of Microcide
for the quarter and the year in which the financing is completed and will have
a significant adverse effect on Microcide's net loss attributable to common
stockholders.
Risks Related to Microcide
If our research and development efforts do not result in potential drug
candidates and/or we cannot advance potential products through clinical
trials, we may fail to develop pharmaceutical products.
Our first potential pharmaceutical product, a compound in the cephalosporin
class of antibacterials, commenced Phase I Clinical Trials under the direction
of our partner, The R.W. Johnson Pharmaceutical Research Institute, or RWJPRI,
an affiliate of Johnson & Johnson, in November 1999. The cephalosporin class of
antibacterial drugs is the largest class of antibiotics in terms of global
sales. The purpose of these Phase I studies is to assess the compound's safety,
tolerability and pharmacokinetics. Safety and tolerability are measures of the
body's ability to assimilate the compound at various dose levels without
adverse reactions or side effects. Pharmacokinetics includes measures of
absorption, distribution, metabolism and excretion of the compound in the body.
Based upon the observation of irritation at the injection site in some subjects
in these trials, Microcide announced in May 2001 that RWJPRI had decided to
focus current efforts on the advancement of RWJ-442831, a Microcide-developed
prodrug form of the cephalosporin compound RWJ-54428, into
12
pre-clinical toxicology studies which, if successful, would allow the compound
to advance into Phase I clinical trials. A prodrug is a modified form of a drug
which is readily converted to the active drug in the body. Preliminary studies
of RWJ-442831 in animals, conducted by Microcide, demonstrated reduced venous
irritation at the injection site compared to RWJ-54428. The Phase I clinical
trials for this cephalosporin compound may not be completed. There are two
other Microcide cephalosporin compounds in the Johnson & Johnson collaboration:
another parenteral compound that is in pre-clinical development and a
cephalosporin intended for oral administration, in the research stage. Our
other potential products are in the pre-clinical or research stage. Our
potential products will require significant additional research and development
efforts before we can sell them. These efforts include extensive pre-clinical
and clinical testing prior to submission to the Food and Drug Administration,
or FDA, or other regulatory authority. Pre-clinical and clinical testing will
likely take several years. After submission, these potential products will be
subject to lengthy regulatory review. We cannot predict with accuracy the time
required to commercialize new pharmaceutical products.
The development of new pharmaceutical products is highly uncertain and
subject to a number of significant risks. We do not expect any of our potential
products to be commercially available for a number of years, if at all.
Pharmaceuticals that appear to be promising at early stages of development may
not reach the market for a number of reasons including the following:
. we or our collaborators may not successfully complete our research and
development efforts;
. any pharmaceuticals we or our collaborators develop may be found to be
ineffective or to cause harmful side effects during pre-clinical testing
or clinical trials;
. we may fail to obtain required regulatory approvals for any products we
develop;
. we may be unable to manufacture enough of any potential products at an
acceptable cost and with appropriate quality;
. our products may not be competitive with other existing or future
products; and
. proprietary rights of third parties may prevent us from commercializing
our products.
If we are unable to maintain our current corporate collaborations or enter
into new collaborations, development of our potential products could be
delayed.
Our strategy for enhancing our research and development capability and
funding, in part, our capital requirements involves entering into collaboration
agreements with major pharmaceutical companies. We have entered into
collaboration agreements with Johnson & Johnson, Daiichi Pharmaceutical Co.,
Ltd., Pfizer Inc.'s animal health group and Schering-Plough Animal Health
Corporation. Under these agreements, our collaborative partners are responsible
for:
. selecting which compounds discovered in the collaboration will proceed
into subsequent development, if any;
. conducting pre-clinical testing, clinical trials and obtaining required
approvals for potential products; and
. manufacturing and commercializing any approved products.
We cannot control the timing of these actions or the amount of resources
devoted to these activities by our partners. In addition, these agreements are
subject to cancellation or the election not to extend by our partners. As a
result, our receipt of revenue (whether in the form of continued research
funding, product development milestones, or royalties on sales) depends upon
the decisions made and the actions taken by our partners. Our collaborative
partners may view compounds that we may discover as competitive with its
products or potential products, and therefore may elect not to proceed with the
development of our potential product. Our partners are free to pursue their own
existing or alternative technologies to develop products in preference to our
potential products. We cannot be certain that our interests will continue to
coincide with those of our partners, or that disagreements concerning our
rights, technology, or other proprietary interests will not arise with our
partners.
13
Substantially all of our revenues to date have resulted from our
collaborations. We intend to continue to rely on our collaborations to fund a
substantial portion of our research and development activities over the next
several years. If our existing partners do not extend our collaborations or if
we are unable to enter into new collaborations, the development and
commercialization of our potential products may be delayed. In addition, we
may be forced to seek alternative sources of financing for product development
and commercialization activities.
If we cannot obtain substantial additional funding, we may not be able to
proceed with our drug discovery and development programs.
The development of our potential pharmaceutical products will require
substantially more money than we currently have. We intend to seek to raise
additional funding from sources including other collaborative partners and
through public or private financings involving the sale of equity or debt
securities. We cannot be certain that any financings will be available when
needed, or if available will be on acceptable terms. Funding from
collaborative partners could limit our ability to control the research,
development and commercialization of potential products, and could limit our
revenues and profits from these products, if any. Our collaborative agreements
may also require us to give up rights to products or technologies that we
would otherwise seek to develop or commercialize ourselves. Any additional
equity financing will result in dilution to our current stockholders. If we
fail to secure sufficient additional funding, we will have to delay or
terminate some or all of our drug discovery and development programs.
We have incurred substantial losses in the past, expect to continue to incur
losses for the next several years and may never achieve profitability.
We have incurred substantial net losses in every year since our inception
in December 1992. We had net losses of $4.6 million in 1997, $9.8 million in
1998, $10.7 million in 1999, and $13.9 million in 2000. We had an accumulated
deficit of $59.3 million through June 30, 2001. We expect to continue to incur
operating losses over the next several years.
Substantially all of our revenues to date have resulted from license fees,
research support and milestone payments under our collaborative agreements. We
will not receive revenues or royalties from drug sales until we or our
collaborative partners successfully complete clinical trials with regard to a
drug candidate, obtain regulatory approval for the drug candidate, and
successfully commercialize the drug. We do not expect to receive revenues or
royalties from sales of drugs for a number of years, if at all. If we fail to
achieve sufficient revenues to become profitable or sustain profitability, we
may be unable to continue operations.
Our approach to drug discovery is unproven and we may not succeed in
identifying any candidates with clinical benefits.
We are developing a gene function based technology platform and other
proprietary technology to attempt to identify and commercialize novel
antibiotics, antifungals and antiviral agents. To date these technologies have
identified a small number of compounds that have demonstrated potential
clinical benefits. We cannot be certain that these or any other technology we
may develop will allow us to identify drug candidates that may have clinical
benefits. The failure to identify and develop new drug candidates will have a
material adverse effect on our business.
If we fail to satisfy safety and efficacy requirements or meet regulatory
requirements in our clinical trials, we will not be able to commercialize our
drug candidates.
Either we or our collaborators must show through pre-clinical studies and
clinical trials that each of our pharmaceutical products is safe and effective
in humans for each indication before obtaining regulatory clearance from the
FDA for the commercial sale of that pharmaceutical. If we fail to adequately
show the
14
safety and effectiveness of a pharmaceutical, regulatory approval could be
delayed or denied. The results from pre-clinical studies and early clinical
trials are often different than the results that are obtained in large-scale
testing. We cannot be certain that we will show sufficient safety and
effectiveness in our clinical trials that would allow us to obtain the needed
regulatory approval. A number of companies in the pharmaceutical industry,
including biotechnology companies, have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials.
Any drug is likely to produce some level of toxicity or undesirable side
effects in animals and in humans when administered at sufficiently high doses
and/or for a long period of time. Unacceptable toxicities or side effects may
occur in the course of toxicity studies or clinical trials. We have observed
local irritation at the injection site in some subjects receiving our potential
cephalosporin product in Phase I clinical trials conducted by our collaborator,
RWJPRI. In addressing this problem, Microcide announced in May 2001 that RWJPRI
had decided to focus current efforts on the advancement of RWJ-442831, a
Microcide-developed prodrug form of the cephalosporin compound RWJ-54428, into
pre-clinical toxicology studies which, if successful, would allow the compound
to advance into Phase I clinical trials. A prodrug is a modified form of a drug
which is readily converted to the active drug in the body. Preliminary studies
of RWJ-442831 in animals, conducted by Microcide, demonstrated reduced venous
irritation at the injection site compared to RWJ-54428. If we observe further
unacceptable toxicities or other side effects, we, our collaborators or
regulatory authorities may interrupt, limit, delay or halt the development of
the drug. In addition, unacceptable toxicities or side effects could prevent
approval by the FDA or foreign regulatory authorities for any or all
indications.
We must obtain regulatory approval before marketing or selling our future
drug products. In the United States, we must obtain FDA approval for each drug
that we intend to commercialize. The FDA approval process is lengthy and
expensive, and approval is never certain. Products distributed abroad are also
subject to foreign government regulation. The process of obtaining FDA and
other required regulatory approvals can vary a great deal based upon the type,
complexity and novelty of the products involved. Delays or rejections may be
encountered based upon additional government regulation from future legislation
or administrative action or changes in FDA policy during the period of clinical
trials and FDA regulatory review. Similar delays also may be encountered in
foreign countries.
None of our drug candidates has received regulatory approval. If we fail to
obtain this approval, we will be unable to commercially manufacture and sell
our drug products. Even if we obtain regulatory approval, we may be required to
continue clinical studies even after we have started selling a pharmaceutical.
In addition, identification of certain side effects after a drug is on the
market or the occurrence of manufacturing problems could cause subsequent
withdrawal of approval, reformulation of the drug, additional pre-clinical
testing or clinical trials and changes in labeling of the product. This could
delay or prevent us from generating revenues from the sale of that drug or
cause our revenues to decline.
If we obtain regulatory approval, we will also be subject to ongoing
existing and future FDA regulations and guidelines and continued regulatory
review. In particular, we, our collaborators, or any third party that we use to
manufacture the drug will be required to adhere to regulations setting forth
current good manufacturing practices. The regulations require that we
manufacture our products and maintain our records in a particular way with
respect to manufacturing, testing and quality control activities. Furthermore,
we, our collaborators, or our third-party manufacturers must pass a pre-
approval inspection of manufacturing facilities by the FDA before obtaining
marketing approval.
Failure to comply with the FDA or other relevant regulatory requirements may
subject us to administrative or legally imposed restrictions. These include:
warning letters, civil penalties, injunctions, product seizure or detention,
product recalls, total or partial suspension of production and FDA refusal to
approve pending New Drug Applications, or NDAs, or supplements to approved
NDAs.
15
If we are unable to protect our intellectual property, we may lose the
competitive advantage inherent in our proprietary technologies.
Our success depends in part on our ability to establish, protect and
enforce our proprietary rights relating to our lead compounds, gene
discoveries, screening technology and certain other proprietary technology. We
have filed approximately 80 patent applications in the United States, in
addition to applications filed in other countries, in order to protect lead
compounds, gene discoveries and screening technology, and 24 United States
patents have been issued to date on these applications. We cannot be certain
that patents will be granted with respect to any of our patent applications
currently pending in the United States or in other countries, or with respect
to applications filed in the future. For example, although in 2000 a patent
was granted in the U.S. covering our cephalosporin compounds now in
development, prosecution has not yet begun on more recently filed patent
applications related to prodrugs of our earlier inventions, as well as on our
new compounds having potential for oral administration. A prodrug is a
modified form of a drug, typically having additional beneficial properties,
such as improved solubility or absorption characteristics, which is readily
converted to the active drug in the body. In our Bacterial Essential Genes
Program, while three U.S. patents have been granted covering 35 bacterial
essential genes, 70 targets are still in various stages of prosecution. Our
failure to obtain patents pursuant to our current or future applications could
have a material adverse effect on our business. Furthermore, we cannot be
certain that any patents issued to us will not be infringed, challenged,
invalidated or circumvented by others, or that the rights granted thereunder
will provide competitive advantages to us. In particular, it is difficult to
enforce patents covering methods of use of screening and other similar
technologies. Litigation to establish the validity of patents, to defend
against copatent infringement claims and to assert infringement claims against
others can be expensive and time-consuming, even if the outcome is favorable
to us. If the outcome of patent prosecution or litigation is not favorable to
us, our business could be materially adversely affected.
Our commercial success also depends on our ability to operate without
infringing patents and proprietary rights of third parties. There can be no
assurance that our products will not infringe on the patents or proprietary
rights of others. For example, many companies are active in the field of
genomics, and some have filed patents on essential genes in bacteria. A patent
may issue in the future that encumbers our ability to practice the
technologies we have discovered. We may be required to obtain licenses to
patents or other proprietary rights of others. These licenses may not be
available on terms acceptable to us, if at all. The failure to obtain these
licenses could delay or prevent our collaborative partners' activities,
including the development, manufacture or sale of drugs requiring these
licenses.
In addition to patent protection, we rely on trade secrets, proprietary
know-how and technological advances which we seek to protect, in part, by
confidentiality agreements with our collaborative partners, employees, and
consultants. We cannot assure you that these agreements will not be breached,
that we would have adequate remedies for any breach, or that our trade
secrets, proprietary know-how and technological advances will not otherwise
become known or be independently discovered by others.
If other companies develop better products than ours or market similar
products sooner, our products may be rendered obsolete or noncompetitive.
We operate in a field in which new developments are occurring at an
increasing pace. Competition from biotechnology and pharmaceutical companies,
joint ventures, academic and other research institutions and others is intense
and is expected to increase. Many of our competitors have substantially
greater financial, technical and personnel resources than we have. Although we
believe that we have identified new and distinct approaches to drug discovery,
there are other companies with drug discovery programs, at least some of the
objectives of which are the same as or similar to ours. For example, there are
other companies that have recently described cephalosporins in early stages of
development that are designed for treatment of resistant Gram-positive
infections in hospitals, the same objective as our lead cephalosporin
compound. Similarly, several other companies are seeking to capitalize on the
expanding body of knowledge of efflux pumps in microorganisms.
16
Competing technologies may be developed that would render our technologies
obsolete or non-competitive. We are aware of many pharmaceutical and
biotechnology companies that are engaged in efforts to treat each of the
infectious diseases for which we are seeking to develop therapeutic products.
There can be no assurance that our competitors will not develop competing drugs
that are more effective than those developed by us and our collaborative
partners or obtain regulatory approvals of their drugs more rapidly than us and
our collaborative partners, thereby rendering our and our collaborative
partners' drugs obsolete or noncompetitive. Moreover, there can be no assurance
that our competitors will not obtain patent protection or other intellectual
property rights that would limit our and our collaborative partners' ability to
use our technology or commercialize our or their drugs.
Our potential products may not be acceptable in the market or eligible for
third party reimbursement, resulting in a negative impact on our future
financial results.
Any products successfully developed by us or our collaborative partners may
not achieve market acceptance. The antibiotic products that we are attempting
to develop will compete with a number of well-established traditional
antibiotic drugs manufactured and marketed by major pharmaceutical companies.
The degree of market acceptance of any of our future products will depend on a
number of factors, including:
. the establishment and demonstration in the medical community of the
clinical efficacy and safety of our future products;
. the potential advantage of our future products over existing treatment
methods; and
. reimbursement policies of government and third-party payors.
Physicians, patients or the medical community in general may not accept or
utilize any products that may be developed by us or our collaborative partners.
Our ability to receive revenues and income with respect to drugs, if any,
developed through the use of our technology will depend, in part, upon the
extent to which reimbursement for the cost of these drugs will be available
from third-party payors, such as government health administration authorities,
private health care insurers, health maintenance organizations, pharmacy
benefits management companies and other organizations. Third-party payors are
increasingly challenging the prices charged for pharmaceutical products. If
third-party reimbursement was not available or sufficient to allow profitable
price levels to be maintained for drugs developed by us or our collaborative
partners, our business could be adversely affected.
We have no manufacturing, marketing or sales experience, and if we are unable
to enter into manufacturing agreements or maintain collaborations with
marketing partners or if we are unable to develop our own manufacturing, sales
and marketing capability, we may not be successful in commercializing our
products.
We do not have any experience in the manufacture of commercial quantities of
drugs, and our current facilities and staff are inadequate for the commercial
production or distribution of drugs. We intend to rely on our collaborative
partners for the manufacturing, marketing and sales of any products that result
from our collaborations. The current third-party manufacturer of our potential
cephalosporin product has in the past encountered difficulties with the
manufacture of related compounds in sufficient quantities for clinical trial
purposes. Manufacturers often encounter difficulties in scaling up to
manufacture commercial quantities of pharmaceutical products. We cannot be
certain that our current or any other manufacturer will not encounter similar
delays in the scale-up to manufacture this or any other compound in commercial
quantities in the future.
We will be required to contract with third parties for the manufacture of
our products or to acquire or build production facilities before we can
manufacture any products. There can be no assurance that we will be able to
enter into contractual manufacturing arrangements with third parties on
acceptable terms, if at all, or acquire or build production facilities
ourselves.
17
To date we have no experience with sales, marketing or distribution. In
order to market any of our products, we will be required to develop marketing
and sales capabilities, either on our own or in conjunction with others. We
cannot be certain that we will be able to develop any of these capabilities.
Health care reform measures or cost control initiatives may negatively impact
pharmaceutical pricing.
The levels of revenue and profitability of pharmaceutical companies may be
affected by continuing governmental efforts to contain or reduce the costs of
health care through various means. For example, in certain foreign markets
pricing or profitability of prescription pharmaceuticals is already subject to
governmental control. In the United States, there have been, and we expect that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. Cost control initiatives could decrease the price
that we or our collaborative partners receive for any products that we or they
may develop in the future that would adversely affect our business. Further, to
the extent that these proposals or initiatives have a material adverse effect
on our collaborative partners or potential collaborative partners, our ability
to commercialize our potential products may be materially adversely affected.
If our products harm people, we may experience product liability claims that
may not be covered by insurance.
We face an inherent business risk of exposure to potential product liability
claims in the event that drugs, if any, developed through the use of our
technology are alleged to have caused adverse effects on patients. This risk
exists for products being tested in human clinical trials, as well as products
that receive regulatory approval for commercial sale. We will, if appropriate,
seek to obtain product liability insurance with respect to drugs developed by
us and our collaborative partners. However, we may not be able to obtain this
insurance. Even if insurance is obtainable, it may not be available at a
reasonable cost or in a sufficient amount to protect us against liability.
If we cannot attract and retain management and scientific staff, we may not be
able to proceed with our drug discovery and development programs.
We are highly dependent on management and scientific staff, including James
E. Rurka, our President and Chief Executive Officer, George H. Miller, Ph.D.,
our Senior Vice President--Research and Development, Donald D. Huffman, our
Vice President--Finance and Corporate Development and Chief Financial Officer
and on our other officers. Considering the time necessary to recruit
replacements, if we lose the services of any of the named individuals or other
senior management and key scientific staff, we may incur delays in our product
development and commercialization efforts or experience difficulties in raising
additional funds. We may also lose a significant amount of revenues without the
senior staff necessary to maintain existing corporate collaborations or to
enter into new collaborations. We do not carry key-man life insurance on any of
our executives. We believe that our future success will depend, in part, on our
ability to attract and retain highly talented managerial and scientific
personnel and consultants. We face intense competition for personnel from,
among others, biotechnology and pharmaceutical companies, as well as academic
and other research institutions. We cannot be certain that we will be able to
attract and retain the personnel we require on acceptable terms.
Our operations involve hazardous materials, which could subject us to
significant liability.
As with many biotechnology and pharmaceutical companies, our activities
involve the use of radioactive compounds and hazardous materials. As a
consequence, we are subject to numerous environmental and safety laws and
regulations. Any violation of, and the cost of compliance with, these
regulations could materially adversely affect our operations. We are subject to
periodic inspections for possible violations of any environmental or safety law
or regulation.
18
Anti-takeover provisions in our charter and bylaws and Delaware law, together
with our stockholder rights plan, could make the acquisition of our company
by another company more difficult.
Certain provisions of our Restated Certificate of Incorporation and Bylaws
may have the effect of making it more difficult for a third party to acquire,
or discouraging a third party from attempting to acquire, control of our
company. These provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock. These provisions
allow us to issue preferred stock without a vote or further action by our
stockholders, provide for staggered elections of our Board of Directors and
specify procedures for director nominations by stockholders and submission of
other proposals for consideration at stockholder meetings. None of these
provisions provide for cumulative voting in the election of directors. Certain
provisions of Delaware law applicable to us could also delay or make more
difficult a merger, tender offer or proxy contest involving us, including
Section 203 of the Delaware General Corporation Law, or DGCL, which prohibits
a Delaware corporation from engaging in any business combination with any
stockholder owning 15% or more of our outstanding voting stock for a period of
three years from the date such person became a 15% stockholder unless certain
conditions are met.
We adopted a stockholder rights plan, dated as of February 2, 1999,
pursuant to which our Board of Directors declared a dividend of one right for
each share of the common stock outstanding, which right entitles the holder to
purchase for $30.00 a fraction of a share of our Series A preferred stock with
economic terms similar to that of one share of the common stock. In the event
that an acquiror obtains 20% or more of our outstanding common stock, each
right, other than rights owned by the acquiror or its affiliates, will
thereafter entitle the holder thereof to purchase, for the exercise price, a
number of shares of the common stock having a then current market value equal
to twice the exercise price. If, after an acquiring person obtains 20% or more
of our outstanding common stock, we merge into another entity, an acquiring
entity merges into our company, or we sell more than 50% of our assets or
earning power, then each right, other than rights owned by the acquiring
person or its affiliates, will entitle the holder thereof to purchase for the
exercise price, a number of shares of common stock of the person engaging in
the transaction having a then current market value equal to twice the exercise
price.
The possible issuance of preferred stock, the procedures required for
director nominations and stockholder proposals, Delaware law and the
provisions of our stockholder rights plan could have the effect of delaying,
deferring or preventing a change in control of Microcide, including without
limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of our common stock. These provisions could
also limit the price that investors might be willing to pay in the future for
shares of our common stock.
Market conditions and changes in operating results may continue to cause
volatility in the market price of our stock, making future equity financings
more difficult.
The market price of the common stock, like that of the securities of many
other biopharmaceutical companies, has been and is likely to continue to be
highly volatile. The stock market has experienced significant price and volume
fluctuations that are often unrelated to the operating performance of
particular companies. Factors contributing to this volatility include:
. results of pre-clinical studies and clinical trials by us or our
competitors;
. announcements of new collaborations;
. announcements of our technological innovations or new therapeutic
products or that of our competitors;
. developments in our patent or other proprietary rights or that of our
competitors, including litigation;
. governmental regulation; and
. healthcare legislation.
19
Fluctuations in our operating results and market conditions for
biotechnology stocks in general could have a significant impact on the
volatility of the market price for the common stock and on the future price of
the common stock.
We expect to retain all future earnings and have no intention to pay
dividends.
We have never paid any cash dividends on Microcide common stock. We
currently intend to retain all future earnings, if any, for use in our business
and do not expect to pay any dividends in the foreseeable future.
Risks Related to Althexis
Althexis faces most of the same risks and uncertainties that Microcide faces.
As similarly situated companies in the same industry, Althexis is subject to
most of the same risks and uncertainties facing Microcide, including those that
relate to the development of new pharmaceutical products. Additionally,
Althexis' stockholders and Microcide's stockholders should be particularly
aware that:
. Althexis has a limited operating history and, accordingly, there is
limited information on which to evaluate Althexis' business prospects;
. Althexis has derived substantially all of its revenue from one source,
its collaborative research agreement with Pliva Pharmaceuticals, Inc.,
and, accordingly, has very limited revenue sources to finance its
operations;
. Althexis may be unable to maintain its current collaborations with its
partners or enter into new collaborations, which would delay the
development of Althexis' potential products;
. Althexis has initiated new drug discovery programs aimed at obtaining a
broad-spectrum antibiotic and antiviral agent that will require
additional funding, and Althexis cannot be certain that funding will be
available when needed;
. Althexis' target validation process known as ACTT, which stands for
Althexis Calorimetric Target Triage, is unproven and in need of
commercial validation;
. Althexis relies on a combination of patent, trademark and trade secret
laws, employee and third-party nondisclosure agreements and other
industry-standard methods for protecting ownership of its intellectual
property, and there could be material failures in this protection or
questions may arise as to the validity of Althexis' intellectual property
rights;
. competitors may provide more attractive product offerings within
Althexis' area of operations, which could result in decreased demand for
Althexis' products; and
. Althexis depends on its key personnel and qualified future hires and will
be unable to carry on its business if it cannot attract and retain
sufficiently qualified employees.
20
THE COMPANIES
Microcide Pharmaceuticals, Inc.
Microcide, incorporated in 1992, is a biopharmaceutical company committed to
the discovery, development and commercialization of novel antimicrobials for
the improved treatment of serious bacterial, fungal and viral infections. Novel
antimicrobials are newly discovered drugs that define a new chemical class,
with characteristics that allow them to function in a different way from the
current classes of antimicrobials. Antibacterials, antifungals and antivirals
are all antimicrobials. Microcide's three discovery research platforms address
the growing problems of antibiotic resistance and the need for improved
antifungal and antiviral therapeutics. Microcide's Cephalosporin Antibiotics
and Efflux Pump Inhibition platforms focus on developing novel antibiotics and
antibiotic potentiators, or efflux inhibitors, to directly address existing
bacterial and fungal resistance problems. Efflux is the mechanism by which
bacteria and fungi eject or "pump out" antibiotics. Microcide's VALID Microbial
Genomics platform utilizes proprietary bacterial, fungal and viral genetics and
genomics tools to discover entirely new classes of antimicrobial agents.
Microcide believes that the antibiotics market provides an attractive
opportunity for its research and development activities for the following
reasons:
. the antibiotics market is the third largest biopharmaceutical market with
worldwide sales of systemic antibiotics totaling $24.7 billion in 1999,
including $8.5 billion in the United States;
. there are significant unmet clinical needs, caused by growing bacterial
resistance problems, that require new antibacterial therapies; and
. the pre-clinical and clinical development process for antibiotics
generally follows an efficient and well-defined path to market.
Microcide's executive offices are located at 850 Maude Avenue, Mountain
View, California 94043, and Microcide's telephone number is (650) 428-1550.
The Althexis Company, Inc.
Overview
Althexis, incorporated in 1998, is a biopharmaceutical company committed to
the discovery, development and commercialization of new medicines to treat
human diseases. Althexis' discovery approach is centered on the use of
structure-based drug design, or SBDD, a powerful method of drug discovery that
exploits atomic-level information about potential disease targets. Althexis
combines SBDD and related technologies with expertise in more traditional
discovery tools, such as high-throughput screening and medicinal chemistry.
Even though SBDD is generally applicable to any disease category, the first
therapeutic target studied by Althexis is an essential bacterial enzyme, the
structure of which is strongly conserved across a broad spectrum of pathogens.
Drugs targeted against this enzyme will address the growing resistance of
bacteria to current therapies, a worldwide healthcare threat. Althexis is
collaborating in this effort with PLIVA Pharmaceuticals, Inc., the inventor of
azithromycin, which is sold in the United States by Pfizer under the name
Zithromax.
Althexis is developing a proprietary target validation system known as ACTT,
which stands for Althexis Calorimetric Target Triage. ACTT uses a highly
sensitive calorimetric methodology to assess the functional activity of
proteins that serve as drug targets. ACTT enables Althexis to select targets
from among the thousands of potential targets now available to the
pharmaceutical industry as a result of genomics research. The fundamental
importance of ACTT is highlighted by the fact that as many as 80% of the
proteins identified in the recently determined human genome may be proteins of
unknown function, otherwise inaccessible for drug development. Althexis
believes that the combination of ACTT with its SBDD capabilities provides
Althexis with a comprehensive and integrated platform for drug discovery.
21
Althexis' executive offices are located at 1365 Main Street, Waltham,
Massachusetts 02451 and Althexis' telephone number is (718) 647-5554.
Strategy
Althexis has chosen to focus its initial research and development efforts in
the area of anti-infectives, and more specifically on the discovery and
development of novel antibiotics. Althexis believes that its technological
approach may lead to the discovery of novel compounds showing significant
competitive advantages, including greater potency, better efficacy against
resistant strains and a reduced side-effect profile, over existing drugs.
Many of the major pharmaceutical companies worldwide have established anti-
infective programs, offering Althexis significant opportunities for corporate
partnering to achieve sales and distribution of Althexis' future products.
Additionally, the hospital-based market for antimicrobials is significant, and
the concentrated nature of this segment may permit Althexis to market or co-
market its future products directly at a relatively early stage.
In addition to the general ongoing need for better therapeutics, two growing
trends appear to create the need for improved antimicrobial agents. First,
there has been an increase in the number of patients with impaired immune
systems resulting from the aging of the population, the growing use of
chemotherapy and organ transplantation and the prevalence of chronic viral
conditions, including HIV. These immuno-compromised patients are particularly
susceptible to serious infection. Second, there has been a rise in recent years
in the rate of microbial resistance to existing antimicrobial drugs. This
problem is particularly acute in the hospital setting, where an estimated 50%
of all hospital-acquired infections are caused by pathogens resistant to one or
more established drug regimens. As a result, there is strong demand for
therapeutic agents that are more potent and more effective against resistant
strains, and that cause fewer side effects than existing drugs.
Major research efforts worldwide over the past ten years have focused on
determining the genetic sequence of a number of clinically important human
pathogens, including bacteria and fungi. Essential genes in pathogens are those
that produce proteins that are required for growth and survival, and inhibition
of these genes/proteins forms the basis of antimicrobial therapy. To date,
existing antibiotics have been limited to a set of 20-25 known essential gene
targets. Genomic efforts may expand this pool of essential genes to as many as
400-500, creating drug discovery opportunities targeting newly identified
essential genes. Althexis' ACTT target validation technology is designed to
select and validate these potential targets before initiating a discovery
program.
SBDD and its associated technologies are applicable to antimicrobial drug
discovery for a number of important reasons. To begin with, a large number of
the researched and validated therapeutic targets to date are enzymes, which as
a general sub-class of proteins is amenable to SBDD and to new small molecule
drug therapies. While existing antimicrobial agents are often toxic to humans,
rationally designed small molecule drugs are tailored to substantially reduce
these undesirable properties. In addition, SBDD allows Althexis to focus on
target enzymes that are unique to microbial pathogens and not found in humans,
thus further reducing the possibility of toxic side effects.
Competition
The biotechnology and pharmaceutical industries are intensely competitive.
Many companies, including large, multinational pharmaceutical and biotechnology
companies, are actively engaged in activities similar to those of Althexis.
Many of these companies may have greater financial and other resources,
including larger research and development staffs and more extensive marketing
and manufacturing organizations, than Althexis or its collaborative partners.
Academic institutions, governmental agencies and other research organizations
also conduct research in areas in which Althexis is working. Competing
technologies may be developed that would render Althexis' technologies obsolete
or non-competitive. Althexis is aware of many pharmaceutical and
22
biotechnology companies that are engaged in efforts to treat each of the
infectious diseases for which Althexis is seeking to develop therapeutic
products.
Althexis also expects to encounter significant competition with respect to
the drugs that it and its collaborative partners plan to develop in the future.
Companies that complete clinical trials, obtain required regulatory agency
approvals and commence commercial sale of their drugs before their competitors
may achieve a significant competitive advantage. In order to compete
successfully, Althexis' goal is to obtain patent protection for its potential
products and to make them available selectively to pharmaceutical companies
through collaborative and licensing arrangements. Althexis does not know
whether its competitors will develop competing drugs that are more effective
than those developed by Althexis and its collaborative partners or obtain
regulatory approvals of their drugs more rapidly than Althexis and its
collaborative partners, thereby rendering Althexis' and its collaborative
partners' drugs obsolete or non-competitive. Moreover, Althexis does not know
whether its competitors will obtain patent protection or other intellectual
property rights that would limit Althexis' or its collaborative partners'
ability to use Althexis' technology or commercialize its or their future
products.
Intellectual Property
Protection of Althexis' proprietary compounds and technology is essential to
Althexis' business. Althexis' policy is to seek, when appropriate, protection
for its lead compounds, gene discoveries, screening technologies and other
proprietary technology by filing patent applications in the United States and
other countries. As of August 8, 2001, Althexis has six United States
provisional patent applications and one United States non-provisional patent
application pending. As of August 8, 2001, no patents have been granted to
Althexis in the United States or other foreign countries or unions.
Patent law as it relates to inventions in the biotechnology field is still
evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Moreover, Althexis cannot be certain
that it was the first to invent the subject matter covered by its patent
applications or that it was the first to file patent applications for any
inventions for the following reasons:
. patent applications in the United States are maintained in secrecy until
patents issue;
. patent applications in other countries generally are not published until
more than eighteen months after they are filed;
. publication of technological developments in scientific or patent
literature often lags behind the date of these developments; and
. searches of prior art may not reveal all relevant prior inventions.
Althexis' commercial success will depend, in part, on not infringing patents
or proprietary rights of others. In some cases, litigation or other proceedings
may be necessary to defend against or assert claims of infringement, to enforce
patents that may be issued to Althexis, to protect trade secrets, know-how or
other intellectual property rights owned by Althexis, or to determine the scope
and validity of the proprietary rights of third parties. Any potential
litigation could result in substantial costs and be a distraction to
management, which could have a material adverse impact on Althexis. Althexis
cannot make any assurances that it will be issued any patents, or that any
patents that are issued to Althexis in the future will ultimately be held valid
or that efforts to defend any of its patents, trade secrets, know-how or other
intellectual property rights will be successful. An adverse outcome in any
patent litigation or proceeding could subject Althexis to significant
liabilities, require Althexis to cease using the subject technology or require
Althexis to license the subject technology from a third party, all of which
could have a material adverse effect on Althexis' business.
Althexis also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect,
23
in part, by confidentiality agreements with its commercial partners,
collaborators, employees and consultants. Althexis also has invention or patent
assignment agreements with its employees. Althexis cannot make any assurances
that relevant inventions will not be developed by a person not bound by an
invention assignment agreement.
As is commonplace in the biotechnology industry, Althexis employs
individuals who were previously employed at other biotechnology or
pharmaceutical companies, including competitors or potential competitors of
Althexis. To the extent that Althexis' employees are involved in research areas
at Althexis that are similar to those areas in which they were involved at
their former employer, Althexis may be subject to claims that these employees
and/or Althexis have inadvertently or otherwise used or disclosed the alleged
trade secrets or other proprietary information of the former employers.
Litigation may be necessary to defend against these types of claims, which
could result in substantial costs and be a distraction to management, and which
may have a material adverse effect on Althexis, even if Althexis were
successful in defending any claims.
Employees
As of July 31, 2001, Althexis had 26 full-time, regular employees, of whom
12 hold Ph.D. degrees and four hold other advanced degrees. Of Althexis' 26
employees, 20 are engaged in scientific activities and six are engaged in
general, managerial and administrative functions. None of Althexis' employees
are represented by a collective bargaining agreement, nor has Althexis
experienced any work stoppage. Althexis considers its relations with its
employees to be good.
Facilities
Althexis has one facility consisting of approximately 14,000 square feet of
leased laboratory and office space located at 1365 Main Street, Waltham,
Massachusetts 02451, under lease agreement expiring in 2002. Althexis believes
that this facility is sufficient to accommodate the anticipated research and
administrative needs of Althexis through 2002. Thereafter, Althexis believes
that it will be able to secure adequate additional facilities for its continued
operations.
Legal Proceedings
Althexis is not a party to any material legal proceedings.
The Combined Company
Microcide and Althexis believe that the merger will create a leading
research and development organization focused on the discovery and development
of pharmaceutical products. The research and development synergies created
through the combination of Microcide and Althexis should increase the
opportunities for developing clinical candidates. For example, the companies
believe that the combination of Microcide's discovery platform, including its
VALID Microbial Genomics technologies, with Althexis' proprietary target
validation system, or ACTT, will accelerate both target validation efforts and
new compound discovery. In addition, Althexis' structure-based drug design, or
SBDD, will guide multiple lead optimization efforts to discover better drug
candidates.
The financing will provide Microcide with the resources to pursue its
planned research and development goals. Microcide believes that it can maximize
the value of its drug discoveries by advancing them into later stages of
development, including clinical development. Microcide plans to acquire the
additional resources necessary to move product candidates from the discovery
stage through clinical development to regulatory approval. Microcide may
collaborate with other companies to commercialize its future products or, in
selected situations, market future products directly. In addition, Microcide
will consider in-licensing later stage development compounds that reflect the
combined company's development focus.
The combined company's executive offices will be located at 1365 Main
Street, Waltham, Massachusetts 02451, and the combined company's telephone
number will be (718) 647-5554.
24
THE SPECIAL MEETING
General
This proxy statement is being furnished to stockholders of Microcide as part
of the solicitation of proxies by the Microcide Board for use at a special
meeting of stockholders to be held on , 2001 at a.m., local time, at
Microcide's offices located at 850 Maude Avenue, Mountain View, California
94043, or any adjournment or postponement. This proxy statement and the
enclosed form of proxy are first being mailed to stockholders of Microcide on
or about , 2001.
The purpose of the special meeting is:
. to approve the issuance of shares of common stock pursuant to the
Agreement and Plan of Merger, dated as of July 27, 2001, by and among
Microcide, California MP Acquisition, Inc., a wholly-owned subsidiary of
Microcide, and The Althexis Company, Inc.;
. to approve the issuance of shares of preferred stock pursuant to the
Subscription Agreements, each dated as of July 27, 2001, by and between
Microcide and each purchaser of preferred stock;
. to approve an amendment to Microcide's Restated Certificate of
Incorporation to change the name of Microcide to "Essential Therapeutics,
Inc."; and
. to transact any other business that may properly come before the special
meeting or any adjournment or postponement.
Each copy of this proxy statement mailed to holders of Microcide common
stock is accompanied by a form of proxy for use at the special meeting.
Pursuant to the merger agreement, among other things,
. California MP Acquisition will merge with and into Althexis in accordance
with the General Corporation Law of the State of Delaware;
. Microcide will issue up to 5.55 million shares of common stock in
exchange for all the outstanding securities of Althexis; and
. Microcide will appoint Mark Skaletsky, the current Chairman of the Board
and Chief Executive Officer of Althexis, the President, Chief Executive
Officer and Chairman of the Board of Microcide upon completion of the
merger.
Pursuant to the subscription agreements, among other things,
. Microcide will issue up to 60,000 shares of its Series B convertible
redeemable preferred stock, initially convertible into 20.0 million
shares of common stock; and
. Microcide will appoint three nominees of the purchasers to the Microcide
Board.
The merger and the financing are contingent transactions. The completion of
the merger is a condition to the completion of the financing, and the
completion of the financing is a condition to the completion of the merger.
Based upon the number of outstanding shares of Microcide common stock and
Althexis stock as of the record date:
. giving effect to the merger but not the financing: the stockholders of
Microcide immediately prior to the merger will own approximately 68.9% of
the outstanding shares of Microcide; and the former stockholders of
Althexis will own approximately 31.1% of the outstanding shares of
Microcide; and
. giving effect to both the merger and the financing: the stockholders of
Microcide immediately prior to the merger will own approximately 31.4% of
the outstanding shares of Microcide; the former stockholders of Althexis
will own approximately 14.2% of the outstanding shares of Microcide; and
the
25
purchasers of preferred stock, assuming conversion of those shares into
common stock, will own approximately 54.4% of the outstanding shares of
Microcide.
The merger and the financing are subject to a number of conditions,
including the receipt of required stockholder approvals. See "The Merger
Agreement--Conditions to the Completion of the Merger."
Solicitation, Voting and Revocability of Proxies
The close of business on , 2001 has been fixed by the Microcide Board
as the record date for determination of the stockholders of Microcide entitled
to notice of, and to vote at, the special meeting. Stockholders of record as of
the record date are entitled to notice of, and to vote at, the special meeting.
Accordingly, only holders of record of shares of Microcide common stock at the
close of business on the record date will be entitled to notice of, and to vote
at, the special meeting. Each holder of Microcide common stock on the record
date is entitled to one vote per share held on all matters properly presented
at the special meeting. As of the close of business on the record date, there
were shares of Microcide common stock outstanding and entitled to vote,
held by approximately holders of record.
The presence in person or by proxy at the special meeting of the holders of
at least a majority of the votes entitled to be cast at the special meeting is
necessary to constitute a quorum for the transaction of business. Approval of
the issuance of shares of Microcide common stock pursuant to the merger
agreement and the subscription agreements requires the approval of a majority
of votes cast on each matter. Approval of the amendment to Microcide's Restated
Certificate of Incorporation requires the approval of holders of at least a
majority of the outstanding Microcide common stock.
If an executed proxy card is returned and the stockholder has explicitly
abstained from voting on any matter, the shares represented by the proxy will
be considered present at the special meeting for purposes of determining a
quorum and will count as votes cast on the matter but will not count as votes
cast in favor of any proposal and, therefore, will have the same effect as a
vote against the matter. Broker non-votes will be counted for purposes of
determining whether a quorum exists at the special meeting, but will not be
considered to have been voted on any matter and, with respect to the proposal
to amend Microcide's Restated Certificate of Incorporation, will have the
effect of a vote against the matter.
If the enclosed proxy card is properly executed and returned to Microcide in
time to be voted at the special meeting, the shares represented by the proxy
will be voted in accordance with the instructions marked on the proxy card.
Executed but unmarked proxies will be voted for approval and adoption of each
of the proposals. The Microcide Board does not know of any matters other than
those described in the Notice of Special Meeting of Stockholders that are to
come before the special meeting. If any other business is properly brought
before the special meeting, including, among other things, a motion to adjourn
or postpone the special meeting to another time and/or place for the purpose of
soliciting additional proxies in favor of the proposal to approve and adopt
each of the proposals or to permit dissemination of information regarding
material developments relating to the proposals or otherwise germane to the
special meeting, one or more of the persons named in the proxy card will vote
the shares represented by the proxy upon those matters as determined in their
discretion.
If the special meeting is adjourned for any reason, the approval of any of
the proposals may be considered and voted upon by stockholders at the
subsequent reconvened meeting, if any.
The presence of a stockholder at the special meeting will not automatically
revoke that stockholder's proxy. Any proxy given pursuant to this solicitation
may be revoked by the person giving it by providing written notice of such
revocation to Microcide at any time before it is voted, by delivery of a duly
executed, later-dated proxy or by attending the special meeting and voting in
person. All written notices of revocation and other communications with respect
to revocation of proxies should be addressed to Microcide Pharmaceuticals,
Inc., 850 Maude Avenue, Mountain View, California 94043, Attention: Investor
Relations.
26
The cost of soliciting proxies for the special meeting will be borne by
Microcide. In addition to use of the mail, proxies may be solicited personally
or by telephone, telegraph, facsimile or other means of communication by
directors, officers and employees of Microcide, who will not be specifically
compensated for these activities, but who may be reimbursed for reasonable
expenses in connection with the solicitation. Microcide will also request
persons, firms and companies holding shares in their names or in the names of
their nominees, which are beneficially owned by others, to send proxy materials
to and obtain proxies from beneficial owners. Microcide will reimburse these
persons for their reasonable expenses incurred in connection therewith.
Microcide has retained to assist in the solicitation of proxies by
Microcide for a customary fee, plus reasonable expenses.
Recommendations of Microcide's Board of Directors
The Microcide Board has unanimously approved (i) the merger agreement, (ii)
the subscription agreements and (iii) the amendment to Microcide's Restated
Certificate of Incorporation. The Microcide Board believes that these
transactions are in the best interests of the stockholders of Microcide and
recommends that stockholders of Microcide vote "FOR" approval of the issuance
of shares of common stock pursuant to the merger agreement, "FOR" approval of
the issuance of shares of preferred stock pursuant to the subscription
agreements and "FOR" approval of the amendment of Microcide's Restated
Certificate of Incorporation. In making that determination, the Microcide Board
took into account, among other things, the opinion of JPMorgan H&Q, financial
advisor to Microcide, as to the fairness, from a financial point of view, to
Microcide of the exchange ratio contained in the merger agreement. Please see
"The Merger--Reasons For the Merger."
27
THE MERGER
The following discussion summarizes the material terms of the merger and the
merger agreement. You should read carefully the merger agreement, which is
attached as Appendix A to this proxy statement.
Background of the Merger
On the basis of informal discussions between James Rurka, the President,
Chief Executive Officer and a director of Microcide, and the President and CEO
of a publicly traded biotechnology company referred to herein as Company A on
May 13, 2000, members of management of Microcide and Company A met at Company A
on June 2, 2000 to discuss the possibility of collaborating in some manner,
including a possible merger, to strengthen the discovery and development
efforts of both Microcide and Company A.
On July 11, 2000, the Microcide Board held a regular meeting, at which,
among other matters, it discussed various financing strategies and
alternatives, as well as forward-integration possibilities and strategic
alternatives. The Board appointed a sub-committee, consisting of John Walker,
David Schnell, M.D. and Mr. Rurka, to work with management in this regard.
On July 21, 2000, and on the basis of several previous informal contacts and
discussions occurring over a period of approximately two years, the Chief
Executive Officer of a publicly traded biotechnology company referred to herein
as Company B suggested to Mr. Rurka a meeting be held among senior research and
financial executives of Microcide and Company B to explore the possibility of a
strategic transaction between the companies, as a means of more effectively
competing in the field of antimicrobial drug discovery and development.
During July and August 2000, Microcide's senior management met separately
with management and senior scientific representatives of both Company A and
Company B on several occasions to further explore these possibilities.
At the invitation of Microcide, on August 3, 2000 representatives from
JPMorgan H&Q presented an overview of financial and strategic transactions in
the biotechnology industry to Microcide's senior management.
On September 13, 2000, the Microcide Board held a regular meeting, at which,
among other matters, it discussed Microcide's long-term budget as well as
future financial requirements and strategic alternatives. Also present at the
meeting were representatives of JPMorgan H&Q. At the meeting, the Board
determined to undertake a detailed review of strategic alternatives in the
biotechnology industry. After representatives of JPMorgan H&Q had presented a
report on financial strategic options, the Board authorized management to
engage JPMorgan H&Q to assist Microcide in reviewing the expressed interest of
Company A and Company B in a merger transaction, as well as managing a formal
process of determining the possible interest of other biotechnology companies
in a strategic transaction in which Microcide would be acquired or enter into
another form of business combination, including a joint venture. On September
18, 2000, Microcide entered into an engagement letter with JPMorgan H&Q to
assist Microcide in assessing various strategic alternatives.
JPMorgan H&Q identified a list of more than fifteen biotechnology companies
that it believed might be interested in a business combination transaction with
Microcide. Working with Microcide's management and the Board, JPMorgan H&Q
narrowed this list to eight biotechnology companies, including Company A and
Company B, that had (1) businesses which aligned with Microcide's programs, (2)
the desired level of financial strength and (3) the potential through a
business combination transaction to provide increased value to Microcide's
stockholders.
Commencing in mid-September and continuing through the first week of
December 2000, members of Microcide's management and representatives of
JPMorgan H&Q held various discussions and negotiations with representatives of
these eight biotechnology companies concerning a possible business combination
with
28
Microcide. On November 25, 2000, JPMorgan H&Q sent letters to each of these
companies asking for a written indication of interest in a strategic
transaction with Microcide. This process did not result in any formal proposal
for a merger or other form of business combination from any of the companies
contacted, including Company A and Company B. Several companies indicated,
however, that they might have further interest at a later time.
On November 29, 2000, as part of Microcide's then-ongoing efforts to
identify companies with complementary technologies to help advance its VALID
microbial genomics discovery platform, representatives from the scientific
staffs of Microcide and Althexis discussed possible collaboration opportunities
based on Microcide's VALID technology and Althexis' ACTT technology. On January
25, 2001, Microcide's scientific management held a follow-up teleconference
with representatives of Althexis to discuss ways in which the companies might
collaborate. Microcide's scientists were particularly interested in exploring
the utility of ACTT as a high-throughput screening technology.
On February 2, 2001, Microcide received a letter from Althexis proposing
that the companies explore ways to combine scientific resources for a more
efficient utilization of discovery capabilities. On March 9, 2001, Microcide
replied to Althexis, acknowledging the desirability of collaboration, but
stating that any collaboration would need to be a cash-neutral relationship due
to Microcide's limited financial resources. Microcide proposed that each party
contribute technology and manpower to a joint research work plan, and then
share the downstream revenues that the collaboration may generate.
In early March 2001, a senior representative of a San Francisco Bay Area
investment fund contacted Mr. Walker regarding the possibility of a
collaboration between Microcide and a private biotechnology company in which
they had an investment referred to herein as Company C. On March 19, 2001,
management and senior scientific representatives from Company C met with
Microcide's management and senior scientific staff to discuss a possible
collaboration around Microcide's VALID microbial genomics discovery platform.
At the meeting, the companies determined that their technologies and business
plans were complementary and agreed to continue discussions at a later date.
On March 22, 2001, Mr. Rurka announced his intention to step down as Chief
Executive Officer of Microcide upon the appointment of a successor.
On March 26, 2001, Mark Skaletsky joined Althexis as Chairman and Chief
Executive Officer and resigned from the Microcide Board effective that day.
On April 3, 2001, the Chief Executive Officer of Company C contacted Mr.
Walker as a continuation of the March 19 meeting to discuss Company C's
interest in a strategic transaction rather than a collaboration.
On April 3, 2001, Mark Skaletsky met with representatives of Prospect
Venture Partners, or Prospect, to discuss Prospect's interest in an investment
in Althexis. Mr. Skaletsky had become acquainted with Prospect Venture Partners
through Dr. Schnell, a Managing Partner of Prospect who also served on
Microcide's Board. Althexis presented its technology and overall company
strategy of drug development, which places an initial emphasis on antibiotics.
On various dates between April 8 and April 23, 2001, Prospect Venture Partners
conducted due diligence on Althexis for the purpose of making an investment
decision.
On April 19, 2001, management representatives from Company C met with
management representatives of Microcide, Microcide's legal counsel and JPMorgan
H&Q . During the meeting, Company C informed Microcide that it would be
interested in further discussions with Microcide regarding a possible merger
transaction.
The Microcide Board met on May 1, 2001. At the meeting, management reported
on the status of discussions with Company C, as well as discussions with
investment bankers, and potential investors regarding the amount of funding
that could be raised and the financial and strategic implications of various
possible
29
financing scenarios. Dr. Schnell reported to the Board that Prospect Venture
Partners was engaged in discussions with Althexis with respect to a possible
investment by Prospect in Althexis, and that he would, if desired by the
Microcide Board, explore the possibility of a financing in connection with a
merger of Microcide and Althexis. The Microcide Board authorized Dr. Schnell to
explore such a possible merger and concurrent financing with Althexis.
On May 3, 2001, Mark Skaletsky met with Dr. Schnell to discuss several
options. One option was for Prospect to make an investment in Althexis. Another
option involved the possible merger of Microcide and Althexis.
Later on May 3, 2001, Mr. Skaletsky telephoned Mr. Rurka to indicate that,
in his meeting with Dr. Schnell, the possibility of a merger between Microcide
and Althexis was discussed, and that Microcide and Althexis should plan to meet
soon in order to explore the opportunity more fully.
On May 7, 2001, George Miller, Ph.D., Senior Vice President of Research and
Development, and Jerry Buysse, Ph.D., Vice President, Discovery Biology, Assay
Development and Screening, of Microcide met with the senior scientific staff of
a public biotechnology company referred to herein as Company D that had
expressed a preliminary interest during the strategic transaction meetings held
in the Fall of 2000. Although Company D had declined to submit a formal
indication of interest in December 2000, Company D's Chief Executive Officer
expressed an interest in a transaction at some future time. The purpose of the
meeting was to review the current status of Microcide's scientific programs and
to determine the companies' interest in further merger discussions. On May 9,
2001, Drs. Miller and Buysse met with the senior scientific staff of Company A
for the same purpose.
On May 10 and 11, 2001, members of Microcide's management and senior
scientific staff met with management and senior scientific representatives from
Company C at the offices of Company C to conduct scientific and financial due
diligence in connection with a possible merger transaction.
On May 16, 2001, Mr. Walker, Dr. Schnell, Mr. Rurka, Dr. Miller, Donald
Huffman, Microcide's Vice President and Chief Financial Officer, Dr. Buysse,
Michael Dudley, PharmD, Microcide's Vice President, Pharmacology &
Microbiology, and Scott Hecker, Ph.D., Microcide's Vice President, Medicinal
Chemistry & Natural Products, met with Mr. Skaletsky, Manuel Navia, Ph.D.,
Althexis' Executive Vice President, and Patrick Connelly, Ph.D., Althexis' Vice
President and Chief Scientific Officer, to discuss the programs of both
companies and conduct scientific, financial and intellectual property due
diligence. After the meeting, Dr. Schnell proposed, and Mr. Walker agreed, that
Dr. Schnell would recuse himself from meetings of the Microcide Board at which
deliberations on a possible business combination transaction with Althexis were
to be discussed. On the following day, Drs. Miller, Buysse, Dudley, Hecker,
Navia and Connelly met to continue scientific and intellectual property due
diligence.
On May 19 and 20, 2001, Mr. Skaletsky and Dr. Schnell had further
discussions regarding possible financing alternatives in the event of a merger
transaction between Microcide and Althexis.
On May 24, 2001, representatives of the boards and management of Microcide
and Company C met to discuss various aspects and implications of a merger
between the companies. Company C indicated that it was still interested in
exploring a merger transaction with Microcide, but the parties were unable to
reach an appropriate valuation for Company C. The companies concluded that some
form of collaboration may still be of interest to them, but that a merger
transaction was not tenable due to valuation issues.
On May 31, 2001, Messrs. Walker and Skaletsky met to begin a formal exchange
of views regarding a possible business combination transaction between
Microcide and Althexis. After considering the transaction further, Messrs.
Walker and Skaletsky discussed a merger of a wholly-owned subsidiary of
Microcide with and into Althexis pursuant to which (1) Althexis would become a
wholly-owned subsidiary of Microcide and (2) Microcide would issue an aggregate
of $22.2 million of its common stock to the former equityholders of
30
Althexis. This valuation of Althexis represented a 20% premium to the last
round of private financing completed by Althexis in December 1999. Messrs.
Walker and Skaletsky contemplated that the combined company would require
financing in an amount equal to at least $30.0 million. They also agreed that
the merger and financing would be contingent upon each other. On June 4, 2001,
Messrs. Walker and Skaletsky further discussed the possibility of merger of the
two companies and agreed to negotiate a preliminary non-binding term sheet for
a transaction that could be presented to the boards of both companies.
On June 4, 2001, Microcide scheduled a special meeting of its Board for the
following day to discuss, among other things, the status of possible merger
discussions with Althexis. As previously agreed, Dr. Schnell recused himself
from the meeting. Subsequently, Dr. Schnell submitted his resignation from the
Microcide Board effective June 5, 2001.
At the June 5, 2001 meeting of the Microcide Board, management reported on
the complementary aspects of Althexis' technologies, especially in light of its
potential contribution to Microcide's current goals of accelerating lead
optimization efforts in two unpartnered programs involving compounds to which
Microcide retains full development rights. At the meeting, Mr. Walker also
reported that Microcide and Company C were unable to establish an appropriate
valuation for C in connection with merger discussions. Upon review, the Board
agreed with management's assessment of the valuation issue surrounding a
transaction with Company C and decided to discontinue discussions with Company
C. Based on information furnished to Microcide by JPMorgan H&Q on June 4, 2001,
management updated the Board on conditions in the financial markets and the
estimated amount and price of funding that could be raised by Microcide.
Also at the meeting, Mr. Walker outlined the preliminary terms regarding a
merger transaction between Microcide and Althexis that he had previously
discussed with Mr. Skaletsky on May 31, 2001 and June 4, 2001. Mr. Walker also
reported that, during these discussions, he had asked Mr. Skaletsky to consider
assuming the role of Chief Executive Officer of the combined entity upon
completion of the merger. The Board discussed these terms and instructed Mr.
Walker to continue the negotiation of a non-binding term sheet for a merger
transaction with Althexis that could also serve as a basis for discussions with
potential sources of financing. The Microcide Board also authorized the
engagement of JPMorgan H&Q as its financial advisor in connection with a
possible merger transaction, including a transaction involving Althexis.
In reaching the decision to continue to negotiate with Althexis, the Board
assessed the financial resources of Microcide in terms of its ability to fund
Microcide's development programs and to continue operations at an optimal level
in both the short and long term. The Board also considered the likelihood of
raising additional funds on acceptable terms and the probability of completing
a merger with Althexis in the near term. The Board considered that Mr.
Skaletsky had the appropriate qualifications to be Chief Executive Officer of
the combined company and that the proposed transaction, including the raising
of additional capital, had a high probability of being completed. The Board
also considered the importance of access to highly complementary technology at
an opportune point in the advancement of Microcide's internal programs and a
broader pipeline of potential products.
Later on June 5, 2001, Mr. Walker informed Mr. Skaletsky of the Microcide
Board's decision. Messrs. Walker and Skaletsky agreed that Mr. Skaletsky would
discuss the transaction with Prospect Venture Partners and other potential
investors.
From June 5 through June 11, 2001 Mr. Skaletsky contacted a number of
potential investors to determine interest in participating in a financing based
upon the merger of Microcide and Althexis. On June 11, 2001, Prospect Venture
Partners forwarded a preliminary proposal for funding the combined company
through the purchase of $40.0 million of convertible preferred stock. On June
11 and 12, 2001, Mr. Skaletsky and Paul Mellett, Chief Financial Officer of
Althexis, and Messrs. Walker, Rurka and Huffman of Microcide, together with the
companies' respective legal counsel, met to further negotiate the terms of a
merger, review the terms of the financing proposal received from Prospect and
conduct further due diligence. Upon the completion of this meeting, Mr.
Skaletsky informed Dr. Schnell that a number of the terms of the proposed
financing were unacceptable and asked Prospect to consider submitting a revised
proposal.
31
On June 12, 2001, Microcide received a written proposal from Company C
outlining a collaboration between the companies. Members of Microcide's Board
and management reviewed the proposal and found the terms unacceptable, as it
required a sale of part of Microcide's assets in exchange for common stock in a
private company.
On June 13, 2001, representatives of Microcide and Althexis further
negotiated the material provisions for a merger of the companies, contingent
upon mutually agreeable financing. On June 15, 2001, Microcide and Althexis
received a revised proposal from a group of investors led by Prospect for up to
$40.0 million of convertible preferred stock. Representatives of Microcide and
Althexis reviewed the revised proposal and again concluded that a number of the
terms were unacceptable. From June 15 through mid-July 2001, Mr. Skaletsky
contacted various potential investors regarding interest in the proposed
transaction.
On June 21, 2001, the Microcide Board held a special telephonic meeting. At
the meeting, Mr. Walker updated the Board on the status of discussions with
Althexis and Prospect. The Board confirmed management's assessment that the
terms of Company C's June 12 proposal were unacceptable.
On June 26, 2001, the Chief Executive Officer of a publicly traded
biotechnology company referred to herein as Company E, in attendance with Mr.
Rurka at an industry conference, expressed his interest in discussing the
possibility of merger of the two companies. Later in the day on June 26 and
again on June 28, 2001, Mr. Rurka met with the Chief Executive Officer of
Company E to further discuss Company E's interest in acquiring Microcide.
Between June 28, 2001 and July 19, 2001, Microcide and Althexis negotiated
the terms of definitive agreements for the merger.
On July 2, 2001, Althexis held a special meeting of its board of directors.
At this meeting, Mr. Skaletsky updated the board on the status of the
negotiations with Microcide. Management of Althexis reviewed for the board the
material terms of the proposed transaction, as well as those points as to which
agreement had not been reached. The board instructed Mr. Skaletsky to continue
the negotiations and report back to the board. Thereafter, the parties and
their respective outside advisors continued to negotiate the terms of the
transaction and the definitive documentation for it. Between July 2, 2001 and
July 27, 2001, the management of Althexis and its legal advisors held a number
of teleconference calls to review and discuss the terms and conditions of the
merger agreement.
On July 6, 2001, Messrs. Walker, Rurka and Huffman discussed by telephone
with the Chief Executive Officer of Company E his plan for a merger and the
process by which the transaction could be undertaken. Mr. Walker disclosed to
Company E that another company had a strong interest in completing a strategic
transaction with Microcide. It was agreed that the management and senior
scientific staff of both companies would meet as soon as possible to conduct
due diligence.
On July 9, 2001, Microcide signed a formal engagement letter with JPMorgan
H&Q to act as its financial advisor in a merger transaction, including the
proposed merger transaction with Althexis.
On July 10, 2001, management and senior scientific staff of Microcide and
Company E met at Microcide's offices to conduct due diligence. The Chief
Executive Officer of Company E stated that he believed that completion of a
financing concurrent with, or soon after, a merger would be a prerequisite for
a merger transaction to be undertaken. Further, he stated that Company E could
come to a decision regarding its interest in pursuing merger discussions
promptly and that, if favorable, could provide a definitive expression of its
interest.
On July 13, 2001, in a telephone conversation with Mr. Rurka, the Chief
Executive Officer of Company E reiterated Company E's interest in exploring a
merger transaction and suggested that Microcide management
32
join him and his financial advisor to discuss the various aspects of financing
a merged company. Mr. Rurka informed the Chief Executive Officer of Company E
that the uncertainty inherent in the financing contingency in a merger
transaction would diminish the attractiveness of any proposal.
Also on July 13, 2001, Drs. Miller, Buysse, Dudley and Hecker of Microcide
met in Althexis' offices with Drs. Navia and Connelly of Althexis to further
discuss the programs of both companies and conduct scientific due diligence.
On the same day, Microcide received a revised termsheet from Prospect for a
proposed preferred stock financing of a combination of Microcide and Althexis
for up to $60.0 million.
Also on July 13, 2001, the Microcide Board held a special meeting. At the
meeting, Messrs. Walker and Rurka updated the Board on the status of
negotiations with Althexis and Prospect, the terms of the revised financing
proposal received earlier in the day and the status of negotiations with
Company E. In addition, JPMorgan H&Q reviewed with the Board various financial
and other information relating to the possible merger transactions. The Board
considered that Company E's interest in pursuing merger discussions was based
on a potential future financing. The Board concluded that it was uncertain as
to whether a formal offer would be made, and, if made, would have a requisite
probability of completion. The Board authorized management to continue to
pursue the transaction with Althexis and the group of investors led by
Prospect.
On July 19, 2001, the Microcide Board held a special telephonic meeting. At
the meeting, Microcide's outside legal counsel updated the Microcide Board on
the legal status of negotiations with Althexis and Prospect. JPMorgan H&Q
delivered its oral opinion that, based upon and subject to the matters set
forth in its written opinion, the exchange ratio for the merger was fair, from
a financial point of view, to Microcide. This opinion was confirmed by delivery
of a written opinion dated July 19, 2001. Thereafter, the Microcide Board, by
unanimous vote, (1) approved and adopted the terms of (a) the merger agreement
and the transactions contemplated thereby and (b) the subscription agreements
and the transactions contemplated thereby and (2) authorized the execution of
the merger agreement, the subscription agreements and related agreements.
On July 27, 2001, by written consent in lieu of a meeting, after having had
the opportunity to discuss with Althexis' management and advisors the material
terms of the merger and its related transactions, the Althexis board voted
unanimously to approve the merger and its related transactions and the various
definitive documents to be entered into by Althexis in connection with the
merger. Also, on July 27, 2001, Microcide and Althexis executed and delivered
the merger agreement, and Microcide and the purchasers of preferred stock
executed and delivered the subscription agreements.
On July 30, 2001, Microcide and Althexis publicly announced the signing of
the merger agreement and the subscription agreements.
Reasons for the Merger
The Microcide Board believes that the terms of the merger agreement and the
transactions contemplated thereby are in the best interests of Microcide and
its stockholders. Accordingly, the Microcide Board has unanimously approved the
merger agreement and recommends approval of the issuance of shares of common
stock pursuant to the merger agreement by the stockholders of Microcide.
Complementary Nature of Businesses. The Microcide Board considered the
strategic fit between the technologies of Microcide and Althexis, including an
analysis of the core competencies, intellectual property rights and focus
areas. The Microcide Board evaluated the potential for the combined company to
implement Microcide's forward integration strategy and accelerate the existing
drug development programs of each company. The Microcide Board believes that
the combination of Microcide's discovery platforms, including its VALID
Microbial Genomics technologies, with Althexis' proprietary target validation
system, or ACTT, will accelerate Microcide's discovery programs and that the
application of Althexis' structure-based drug design, or
33
SBDD, capabilities to lead optimization will accelerate Microcide's drug
development programs in infectious disease.
Management. The Microcide Board considered the impact of appointing Mark
Skaletsky as the Chairman of the Board, President and Chief Executive Officer
of Microcide upon completion of the merger. The Microcide Board reviewed Mr.
Skaletsky's qualifications and experience, including his prior service as a
member of the Microcide Board. The Microcide Board believes that the addition
of Mr. Skaletsky to Microcide's senior management team will create a strong
management structure for the combined company.
Additional Capital. The Microcide Board considered the opportunity to raise
a sufficient amount of capital under acceptable terms that would be adequate to
fund existing programs, including the funds necessary to accelerate the
advancement of Microcide-owned potential products.
As of June 30, 2001 Projected Post-Merger
---------------------- ----------------------
Cash......................... $11 million APPROX. $70 million
Clinical Programs............ 1 1
Pre-Clinical Lead
Optimization Programs
(internal).................. 3 3
Pre-Clinical Lead
Optimization Programs
(partnered)................. 3 4
Earlier Stage Discovery
Programs.................... 4 6
Drug Discovery Platforms..... Cephalosporins Cephalosporins
Efflux Pump Inhibition Efflux Pump Inhibition
VALID VALID
ACTT
SBDD
The Microcide Board determined that having significant financial resources was
an advantage in terms of being able to fund the development of potential
products into advanced clinical trials, thereby creating the opportunity for
enhancing value for Microcide's stockholders.
Financial Considerations. The Microcide Board evaluated the financial terms
of the merger agreement and their effect on holders of Microcide common stock.
The Microcide Board considered the financial performance and condition,
businesses and prospects of Microcide and Althexis on a stand-alone and
combined basis, including information with respect to the respective earnings
history and performance of each of the companies, as well as the results of
Microcide's due diligence review of Althexis. The Microcide Board took into
account the recent and historical stock prices of Microcide, the potential for
an increase or decrease in the market price of Microcide's common stock in the
future and the potential for improved trading liquidity of the combined
company. The Microcide Board also took into account the detailed financial
analysis and pro forma and other information with respect to the merger
prepared by its financial advisor. The Microcide Board believes that the merger
will create a stronger, more competitive company with greater growth potential
than Microcide would have on its own.
Terms of the Merger Agreement and Related Agreements. The Microcide Board
took into consideration the terms of the merger agreement and the related
agreements, including the form and amount of consideration and the
representations, warranties, covenants and conditions contained in those
agreements. The Microcide Board also considered the possibility of strategic
alternatives to the merger. The Microcide Board determined that the merger was
the most effective transaction available to Microcide for purposes of enhancing
long-term value for Microcide's stockholders.
Advice of Financial Advisor and Fairness Opinion. The Microcide Board
considered the advice of its financial advisor, JPMorgan H&Q, and the July 19,
2001 oral opinion, subsequently confirmed in writing, of JPMorgan H&Q that the
exchange ratio was fair, from a financial point of view, to Microcide. The
written opinion of JPMorgan H&Q and the underlying analysis are summarized
below, and a complete copy of the written opinion dated August 1, 2001 setting
forth the procedures followed, the matters considered, the scope of
34
the review undertaken and the assumptions made by JPMorgan H&Q is included as
Appendix B to this proxy statement. Please see "--Opinion of Financial
Advisor." The opinion does not constitute a recommendation as to how any holder
of Microcide common stock should vote with respect to the merger.
Industry Consolidation. The Microcide Board considered the trend towards
consolidation in the biotechnology industry. The Microcide Board believes that
larger companies may have significant competitive advantages over smaller
companies and that, as a result, many smaller companies will be required to
consider strategic alternatives. The Microcide Board considered the reduction
of strategic risk inherent in an expanded portfolio of technology and potential
products, and determined that it is in the best interests of Microcide and its
stockholders for Microcide to be part of a larger organization with greater
market potential, enabling Microcide to offer its future products as part of a
broader range of products for treating a variety of infectious diseases.
Analysis of Other Merger Opportunities. The Microcide Board conducted a
formal review of other opportunities to enter into strategic transactions
during the past year. This review was conducted in the context of current
industry, market and economic conditions. The Microcide Board believes that a
more attractive opportunity will not be available based on previous merger
discussions with other biotechnology companies.
The foregoing discussion of the information and factors considered by the
Microcide Board is not intended to be exhaustive but includes all material
factors considered by the Microcide Board. In reaching its determination to
approve the merger agreement and the transactions contemplated thereby, the
Microcide Board did not assign any relative or specific weights to the
foregoing factors, and individual directors may have given differing weights to
different factors.
Opinion of Financial Advisor
Pursuant to an engagement letter dated June 26, 2001, Microcide retained
JPMorgan H&Q as its financial advisor in connection with the proposed merger.
At the meeting of the Microcide Board on July 19, 2001, JPMorgan H&Q
rendered its oral opinion to the Microcide Board that, as of such date, the
exchange ratio in the proposed merger was fair from a financial point of view
to Microcide's common stockholders. JPMorgan H&Q subsequently confirmed its
oral opinion in writing. No limitations were imposed by the Microcide Board
upon JPMorgan H&Q with respect to the investigations made or procedures
followed by it in rendering its opinion.
The full text of the written opinion of JPMorgan H&Q, which sets forth the
assumptions made, matters considered and limits on the review undertaken, is
attached as Appendix B to this proxy statement and is incorporated herein by
reference. Microcide's stockholders are urged to read the opinion in its
entirety. JPMorgan H&Q's written opinion is addressed to the Board of Directors
of Microcide, is directed only to exchange ratio and does not constitute a
recommendation to any stockholder of Microcide as to how such stockholder
should vote with respect to the merger. The summary of the opinion of JPMorgan
H&Q set forth in this proxy statement is qualified in its entirety by reference
to the full text of the opinion.
In arriving at its opinion, JPMorgan H&Q, among other things:
. reviewed a draft of the merger agreement dated July 27, 2001;
. reviewed certain publicly available business and financial information
concerning Althexis and Microcide and the industry in which they operate;
. compared the proposed financial terms of the merger with the publicly
available financial terms of certain transactions involving companies it
deemed relevant and the consideration received for those companies;
. compared the financial and operating performance of Althexis and
Microcide with publicly available information concerning certain other
companies it deemed relevant and reviewed the current and historical
market price of the common stock of Microcide and certain publicly traded
securities of those other companies;
35
. reviewed certain internal financial analyses and forecasts prepared by
the managements of Althexis and Microcide relating to their respective
businesses;
. held discussions with members of management of Althexis and Microcide
with respect to certain aspects of the merger, and the past and current
business operations of Althexis and Microcide, the financial condition
and future prospects and operations of Althexis and Microcide, the
effects of the merger on the financial condition and future prospects of
Althexis and other matters it believed necessary or appropriate to its
inquiry; and
. performed other financial studies and analyses and considered other
information as it deemed appropriate for the purposes of the opinion.
JPMorgan H&Q relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or
that was furnished to it by Microcide and Althexis or otherwise reviewed by
JPMorgan H&Q, and JPMorgan H&Q has not assumed any responsibility or liability
therefor. JPMorgan H&Q has not conducted any valuation or appraisal of any
assets or liabilities, nor have any valuations or appraisals been provided to
JPMorgan H&Q. In relying on financial analyses and forecasts provided to
JPMorgan H&Q, JPMorgan H&Q has assumed that they have been reasonably prepared
based on assumptions reflecting the best currently available estimates and
judgments by management as to the expected future results of operations and
financial condition of Althexis and Microcide to which the analyses or
forecasts relate. JPMorgan H&Q has also assumed that the merger will qualify as
a tax-free reorganization for United States federal tax purposes, and that the
merger and other transactions contemplated by the merger agreement will be
consummated as described in the merger agreement.
The projections furnished to JPMorgan H&Q for Microcide and Althexis were
prepared by the respective managements of Microcide and Althexis. Microcide and
Althexis do not publicly disclose internal management projections of the type
provided to JPMorgan H&Q in connection with JPMorgan H&Q's analysis of the
merger, and these projections were not prepared with a view toward public
disclosure. These projections were based on numerous variables and assumptions
that are inherently uncertain and may be beyond the control of management,
including, without limitation, factors related to general economic and
competitive conditions and prevailing interest rates. Accordingly, actual
results could vary significantly from those set forth in these projections.
JPMorgan H&Q's opinion is based on economic, market and other conditions as
in effect on, and the information made available to JPMorgan H&Q as of, the
date of the opinion. Subsequent developments may affect its opinion, and
JPMorgan H&Q does not have any obligation to update, revise, or reaffirm its
opinion. JPMorgan H&Q expressed no opinion as to the underlying decision by
Microcide to engage in the merger.
In accordance with customary investment banking practice, JPMorgan H&Q
employed generally accepted valuation methods in reaching its opinion. The
following is a summary of the material financial analyses utilized by JPMorgan
H&Q in connection with providing its opinion.
Public Trading Multiples. With respect to Althexis, using publicly available
information, JPMorgan H&Q compared selected financial data of Althexis with
similar data for selected publicly traded companies engaged in businesses which
JPMorgan H&Q judged to be comparable to Althexis. The companies selected by
JPMorgan H&Q as comparable to Althexis were Ariad Pharmaceuticals, Inc.; Cubist
Pharmaceuticals, Inc.; 3-Dimensional Pharmaceuticals, Inc.; Intrabiotics
Pharmaceuticals, Inc.; Versicor, Inc.; and Vertex Pharmaceuticals Incorporated.
For each comparable company, JPMorgan H&Q used estimates of calendar year 2001
and 2002 revenues published in publicly available equity analyst research
reports to derive a multiples range based on enterprise value to calendar year
2001 and 2002 revenues. The equity value of a company is equal to its
enterprise value less net debt. The enterprise value of a company is equal to
its market value, plus net debt. To derive the high-end of the enterprise
multiples range, JPMorgan H&Q selected the mean calendar year 2001 and 2002
revenue multiple of the comparable companies and discounted the multiple by
40%. To derive the low-end of the enterprise multiples range, JPMorgan H&Q
applied the low revenue multiple of the comparable companies.
36
- --------
/1/Financial statistics related to this transaction are not publicly available.
JPMorgan H&Q then applied these multiples to calculate the implied equity
value of Althexis using Althexis' calendar year 2001 and 2002 revenue
estimates. JPMorgan H&Q assumed that Althexis had net cash of approximately
$1.2 million. The results of this analysis were as follows:
Equity
Multiple Value (in
Range millions)
---------- -----------
Low High Low High
---- ----- ----- -----
CY 2001 Revenue..................................... 3.0x 13.0x $19.2 $79.2
CY 2002 Revenue..................................... 2.2x 11.2x $ 8.5 $38.3
With respect to Microcide, using publicly available information, JPMorgan
H&Q compared selected financial data of Microcide with similar data for
selected publicly traded companies engaged in businesses which JPMorgan H&Q
judged to be comparable to Microcide. The companies selected by JPMorgan H&Q
as comparable to Microcide were Cubist Pharmaceuticals, Inc.; Diversa
Corporation; Gilead Sciences, Inc.; Intrabiotics Pharmaceuticals, Inc.; Isis
Pharmaceuticals, Inc.; Ribozyme Pharmaceuticals, Inc.; Trimeris, Inc.;
Versicor, Inc.; Virologic, Inc.; Viropharma Incorporated; and Vertex
Pharmaceuticals Incorporated. For each comparable company, JPMorgan H&Q used
estimates of calendar year 2001 and 2002 revenues published in publicly
available equity analyst research reports to derive a multiples range based on
enterprise value to calendar year 2001 and 2002 revenues. To derive the high-
end of the enterprise multiples range, JPMorgan H&Q selected the mean calendar
year 2001 and 2002 revenue multiple of the comparable companies and discounted
the multiple by 40%. To derive the low-end of the enterprise multiples range,
JPMorgan H&Q applied the lowest revenue multiple of the comparable companies.
JPMorgan H&Q then applied these multiples to calculate the implied equity
value of Microcide using Microcide's calendar year 2001 and 2002 revenue
estimates. JPMorgan H&Q assumed that Microcide had net cash of approximately
$12.6 million. The results of this analysis were as follows:
Multiple Equity Value
Range (in millions)
---------- --------------
Low High Low High
---- ----- ------ -------
CY 2001 Revenue.................................. 2.1x 13.7x $ 40.3 $ 191.8
CY 2002 Revenue.................................. 0.9x 9.5x $ 19.9 $ 94.1
Selected Transaction Analysis. Using publicly available information,
JPMorgan H&Q examined selected merger and acquisition transactions in the
biotechnology and pharmaceutical industries. Specifically, JPMorgan H&Q
reviewed the following transactions: Company 1's acquisition of Company 2/1/;
Sequenom, Inc.'s acquisition of Gemini Genomics PLC; Merck & Co., Inc.'s
acquisition of Rosetta Inpharmatics, Inc.; Vertex Pharmaceuticals
Incorporated's acquisition of Aurora Biosciences Corporation; Lion Bioscience
AG's acquisition of Trega Biosciences, Inc.; Incyte Genomics, Inc.'s
acquisition of Proteome Sciences PLC; Amgen Inc.'s acquisition of Kinetix
Pharmaceuticals Inc.; Cubist Pharmaceuticals, Inc.'s acquisition of TerraGen
Discovery Inc.; Maxim Pharmaceuticals, Inc.'s acquisition of Cytovia, Inc.;
SignalGene Inc.'s acquisition of Nanodesign Inc.; E. I. duPont de Nemours and
Company's acquisition of Combichem, Inc.; Merck & Co., Inc.'s acquisition of
Sibia Neurosciences, Inc.; and Pharmacia & Upjohn, Inc.'s acquisition of SUGEN,
Inc. This group of transactions is referred to collectively as the "Combined
Group." JPMorgan H&Q then created a sub-group of the Combined Group consisting
of Company 1's acquisition of Company 2; Cubist Pharmaceuticals, Inc.'s
acquisition of TerraGen Discovery Inc.; E. I. duPont de Nemours and Company's
acquisition of Combichem, Inc.; and Merck & Co., Inc.'s acquisition of Sibia
Neurosciences, Inc. which JPMorgan H&Q considered the closest comparable
transactions to the merger. This sub-group of transactions is referred to as
the "Sub-Group." JPMorgan H&Q calculated the implied enterprise multiples in
each transaction based on the enterprise value of the transaction to the target
company's last twelve months of revenue, estimated one-year forward revenue and
estimated two-year forward revenue.
37
To derive an equity value range, JPMorgan H&Q selected the lowest multiple
of the Combined Group to derive the low-end of the multiple range and the mean
multiple of the Sub-Group to derive the high-end of the multiple range.
JPMorgan H&Q then applied Althexis' last twelve months of revenue, estimated
one-year forward revenue and estimated two-year forward revenue to the
transaction multiples. In each calculation, JPMorgan H&Q assumed that Althexis
had net cash of approximately $1.2 million. The results of the analysis were as
follows:
Multiple Equity Value
Range (in millions)
---------- --------------
Low High Low High
---- ----- ------ -------
LTM Revenues.................................... 2.8x 11.8x $ 14.6 $ 58.0
1-Year Forward Revenue.......................... 2.4x 10.6x $ 15.3 $ 65.0
2-Year Forward Revenue.......................... 4.7x 11.9x $ 16.8 $ 40.6
Premiums Paid Analysis. Using publicly available information, JPMorgan H&Q
reviewed the Sub-Group's stock performance. JPMorgan H&Q noted that the premium
to the closing stock price of the acquired companies one day prior to
announcement of the transactions averaged 39.8%, the premium to the average
closing stock price of the acquired companies for the twenty trading days prior
to announcement of the transactions averaged 55.2%, and the premium to the
average closing stock price of the acquired companies for the five hundred
eighty five trading days prior to announcement of the transactions averaged
51.5%.
JPMorgan H&Q then calculated the implied equity value of Althexis by
applying Althexis' post-money valuation of $18.6 million as of December 1999 to
the premiums paid for the acquired companies in the Sub-Group. Applying the
$18.6 million valuation to the one-day, twenty-day and five hundred eighty-
five-day premiums paid yielded a range of equity values for Althexis equal to
$26.0 million, $28.9 million and $26.5 million, respectively.
The summary set forth above does not purport to be a complete description of
the analyses or data presented by JPMorgan H&Q. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. JPMorgan H&Q believes that the summary set
forth above and their analyses must be considered as a whole and that selecting
portions thereof, without considering all of its analyses, could create an
incomplete view of the processes underlying its analyses and opinion. JPMorgan
H&Q based its analyses on assumptions that it deemed reasonable, including
assumptions concerning general business and economic conditions and industry-
specific factors. The other principal assumptions upon which JPMorgan H&Q based
its analyses are set forth above under the description of each analysis.
JPMorgan H&Q's analyses are not necessarily indicative of actual values or
actual future results that might be achieved, which values may be higher or
lower than those indicated. Moreover, JPMorgan H&Q's analyses are not and do
not purport to be appraisals or otherwise reflective of the prices at which
businesses actually could be bought or sold.
As a part of its investment banking business, JPMorgan H&Q and its
affiliates are continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, investments for passive
and control purposes, negotiated underwritings, secondary distributions of
listed and unlisted securities, private placements, and valuations for estate,
corporate and other purposes. JPMorgan H&Q was selected to advise Microcide
with respect to the merger on the basis of that experience and its familiarity
with Microcide.
For services rendered in connection with the merger, Microcide has agreed to
pay JPMorgan H&Q a fee equal to $750,000. Of this amount, Microcide paid
$250,000 in December 2000. In addition, $250,000 became due and payable upon
delivery of the opinion and $250,000 will become due and payable upon
completion of the merger. Microcide has agreed to reimburse JPMorgan H&Q for
its expenses incurred in connection with its services, including the fees and
disbursements of counsel, and will indemnify JPMorgan H&Q against certain
liabilities, including liabilities arising under federal securities laws.
JPMorgan H&Q and its affiliates maintain banking and other business
relationships with Microcide and its affiliates, for which it receives
customary fees. In the ordinary course of their businesses, JPMorgan H&Q and
its
38
affiliates may actively trade the debt and equity securities of Microcide for
their own accounts or for the accounts of customers and, accordingly, they may
at any time hold long or short positions in those securities.
Structure of the Merger
Upon the terms and subject to the conditions contained in the merger
agreement, and in accordance with Delaware law, following approval by
Microcide's stockholders and the satisfaction or waiver of the other conditions
to the merger, the merger will be effected by the merger of a newly-formed
subsidiary of Microcide, California MP Acquisition, Inc., with and into
Althexis, with Althexis surviving the merger and becoming a wholly-owned
subsidiary of Microcide.
The completion of the merger will take place within three business days of
the date on which the last of the conditions is satisfied or waived, or at such
other time and date as Microcide and Althexis mutually agree. On the closing
date, Microcide and Althexis will cause a certificate of merger to be filed
with the Secretary of State of the State of Delaware, at which time and date,
or at a later time or date specified in the certificate of merger, the merger
will become effective.
Merger Consideration
At the effective time of the merger, each share of Althexis common stock and
preferred stock, other than shares as to which appraisal rights have been
properly exercised, will be converted into and represent the right to receive
an estimated 1.15 fully paid and nonassessable shares of Microcide common
stock. Althexis stockholders will receive cash for any fractional shares of
Microcide common stock that they would otherwise receive in the merger. If, at
any time during the period between the date of the merger agreement and the
date of completion of the merger, the number of shares of Althexis common stock
or Microcide common stock issued and outstanding is adjusted as a result of a
stock split, reverse split, stock combination, stock dividend, reorganization,
reclassification, recapitalization or other like change, the exchange ratio
will be appropriately adjusted. At the effective time of the merger, all shares
of Althexis stock will automatically be canceled and will cease to exist, and
each holder of a certificate representing any shares of Althexis stock will
cease to have any rights as a stockholder except the right to receive Microcide
common stock and cash in lieu of fractional shares.
Conversion of Securities
Althexis Stock. The conversion of the Althexis stock into the right to
receive Microcide common stock will occur automatically at the effective time
of the merger. As reasonably as practicable after the effective time, Microcide
will cause its transfer agent to provide instructions to the former
stockholders of Althexis for surrendering their Althexis stock certificates.
Each holder of a certificate representing Althexis stock will be asked to
surrender and deliver the certificate to the transfer agent together with a
properly completed and executed transmittal letter. Promptly after surrender
and delivery, the holder will receive a certificate representing the number of
whole shares of Microcide common stock into which the holder's shares of
Althexis stock have been converted, together with a check for any cash in lieu
of any fractional share of Microcide common stock. Until so surrendered and
exchanged, each certificate formerly representing an outstanding share of
Althexis stock will be treated for all purposes to evidence only the right to
receive Microcide common stock and any cash payable in lieu of fractional
shares. No dividends or distributions declared or made after the effective time
of the merger with respect to shares of Microcide common stock will be paid to
the holder of any unsurrendered Althexis stock certificate, and no cash payment
in lieu of fractional shares will be paid, until the Althexis certificate has
been surrendered. Upon surrender, any dividends and distributions and any cash
payment in lieu of fractional shares will be paid without interest.
If any Althexis certificates have been lost, stolen or destroyed, the
transfer agent may require the claiming holder to make an affidavit of that
fact and deliver a bond as the transfer agent may reasonably require, and the
39
transfer agent may then issue the Microcide common stock and pay any cash
payable in lieu of fractional shares to which the holder of the lost, stolen or
destroyed certificates is entitled.
Althexis Options. Pursuant to the merger agreement, at the effective time of
the merger, the outstanding options to purchase Althexis common stock not
previously exercised will become exercisable for shares of Microcide common
stock in accordance with their existing terms. Each option to acquire shares of
Althexis common stock will be converted into an option to acquire Microcide
common stock on the same terms and conditions applicable to the Althexis stock
option, except that:
. the number of shares of Microcide common stock subject to each stock
option will be equal to the number of shares of Althexis common stock
subject to the option prior to the merger multiplied by the exchange
ratio, with the result being rounded down to the nearest whole number of
shares of Microcide common stock; and
. the per share exercise price of the option will be the per share exercise
price for the option prior to the merger divided by the exchange ratio,
with the result being rounded up to the nearest whole cent.
To the extent that the shares of Microcide common stock issuable upon
conversion of the stock options qualify for registration on Form S-8, Microcide
will use reasonable efforts to file, within 30 days of the effective time of
the merger, a registration statement on Form S-8 under the Securities Act with
respect to those shares. Althexis has agreed not to issue any additional stock
options prior to the effective time of the merger.
Althexis Warrants. Pursuant to the merger agreement, at the effective time
of the merger, outstanding warrants to purchase Althexis common stock or
preferred stock not previously expired or exercised will become exercisable for
shares of Microcide common stock in accordance with their existing terms,
except that:
. the number of shares of Microcide common stock subject to each warrant
will be equal to the number of shares of Althexis stock subject to the
warrant prior to the merger multiplied by the exchange ratio, with the
result being rounded down to the nearest whole number of shares of
Microcide common stock; and
. the per share exercise price of the warrant will be the per share
exercise price for the warrant prior to the merger divided by the
exchange ratio, with the result being rounded up to the nearest whole
cent.
Althexis has agreed not to issue any additional warrants prior to the effective
time of the merger.
Interests of Certain Persons in the Merger
Mark Skaletsky, the Chairman and Chief Executive Officer of Althexis, served
as a director of Microcide from April 1998 through March 2001. Mr. Skaletsky
resigned from the Microcide Board, effective as of March 26, 2001. As of the
date of this proxy statement, Mr. Skaletsky owns an aggregate of 439,987 shares
of Althexis common stock, which will be converted at the effective time of the
merger into the right to receive approximately 503,750 shares of common stock
of Microcide pursuant to the provisions of the merger agreement. Mr.
Skaletsky's Althexis shares are, and his Microcide shares will be, subject to a
right of repurchase that lapses over time.
The merger agreement provides that Mr. Skaletsky will become the President,
Chief Executive Officer and Chairman of the Board of Microcide upon the
completion of the merger. In connection with the execution of the merger
agreement, Mr. Skaletsky entered into a severance agreement with Microcide that
will become effective upon the completion of the merger. The severance
agreement provides that Mr. Skaletsky will be entitled to continue to receive
his base salary for a period of 12 months in the event that, within 12 months
after a change of control of Microcide, either Mr. Skaletsky resigns his
employment for "good reason" or Microcide terminates his employment for any
reason other than "cause." For additional information, please see "Other
Agreements Related to the Merger--Severance Agreements."
40
Accounting Treatment
The merger will be accounted for as a "purchase" transaction for accounting
and financial reporting purposes, in accordance with generally accepted
accounting principles. Accordingly, a determination of the fair value of
Althexis' assets and liabilities will be made in order to allocate the purchase
price to the assets acquired and the liabilities assumed. In connection with
the merger, Microcide anticipates that it will take a one-time charge
consisting of a write-off of the value of purchased in-process research and
development estimated to be approximately $13.9 million. The purchase price
allocation, including the one-time charge for write-off of the value of
purchased in-process research and development, is subject to revision when
additional information concerning asset and liability valuation is obtained.
Material United States Federal Income Tax Consequences
The following summary of material United States federal income tax
consequences of the merger is based upon current provisions of the Internal
Revenue Code of 1986, as amended, currently applicable United States Treasury
regulations and judicial and administrative rulings and decisions as of the
date hereof. The following summary is not binding on the Internal Revenue
Service, and no rulings have been or will be sought from the Internal Revenue
Service regarding any matters relating to the merger. In addition, legislative,
judicial or administrative changes may be forthcoming that could alter or
modify the statements set forth herein, possibly on a retroactive basis.
The merger will constitute a reorganization within the meaning of Section
368(a) of the Code for United States federal income tax purposes, and
Microcide, California MP Acquisition and Althexis will each be a party to the
reorganization within the meaning of Section 368(b) of the Code. No gain or
loss will be recognized by Microcide, California MP Acquisition and Althexis as
a result of the merger.
Regulatory Approvals
Neither Microcide nor Althexis is aware of any governmental filings or
consents that are required in connection with the merger. If any filings or
consents are required, they may delay or prevent the closing of the merger or
have other adverse consequences to Microcide and/or Althexis.
Appraisal Rights
Under the DGCL, you are not entitled to appraisal rights in connection with
the merger because Microcide's common stock is listed on a national securities
exchange.
Federal Securities Matters
The shares of Microcide common stock to be issued in connection with the
merger will not have been registered under the Securities Act of 1933, as
amended, or applicable state securities laws, and therefore, may not be resold
unless subsequently registered or an exemption from registration is then
available. See "The Merger Agreement--Registration Rights."
41
THE MERGER AGREEMENT
The following summary of the merger agreement, which describes all of the
material terms and provisions of the merger agreement, is qualified in its
entirety by reference to the other information contained elsewhere in this
proxy statement, including the appendices hereto and the documents incorporated
herein by reference. A copy of the merger agreement, excluding the exhibits and
schedules thereto, is set forth in Appendix A to this proxy statement and is
incorporated herein by reference, and reference is made thereto for a complete
description of the terms of the merger. We encourage you to read the merger
agreement and each of the other appendices hereto carefully.
Conditions to the Completion of the Merger
The obligations of Microcide and Althexis to complete the merger are subject
to the satisfaction or waiver of various conditions, including the following:
. all material consents, approvals and waivers from governmental
authorities and other parties necessary to permit the merger and the
operation of the business after the merger will have been obtained;
. no statute, rule, regulation, executive order, decree, ruling, injunction
or other order will have been enacted, entered, promulgated or enforced
by any court or governmental authority of competent jurisdiction which
prohibits, restrains, enjoins or restricts the completion of the merger;
. there will have been no material adverse change with respect to the
business, operations, assets, liabilities, condition or result of
operations of the other party, or the right or ability of the other party
to consummate any of the transactions contemplated by the merger
agreement;
. Microcide's stockholders must have approved the issuance of shares of
common stock pursuant to the merger agreement;
. Microcide will have entered into severance agreements with specified
members of Althexis' management, and each severance agreement will be in
full force and effect at the effective time of the merger;
. Microcide will have entered into stockholders agreements with specified
stockholders of Althexis, and the stockholders agreements will be in full
force and effect at the effective time of the merger;
. Microcide and Althexis will have entered into option agreements, and the
option agreements shall not have been terminated prior to the effective
time; and
. Microcide will have entered into definitive agreements with regard to the
financing, and the financing agreements shall be in full force and
effect. The completion of the financing shall occur simultaneously with
the completion of the merger.
The obligation of each of Microcide and California MP Acquisition to effect
the merger is subject to the satisfaction or waiver of the following additional
conditions:
. the representations and warranties of Althexis contained in the merger
agreement will be true and correct in all material respects as though
made on and as of the effective date of the merger, except for
representations and warranties which expressly refer to a particular
date, which shall be true and correct as of the applicable date;
. Microcide will have received from Althexis or stockholders of Althexis
questionnaires and other documentation evidencing that, in connection
with the transactions contemplated by the merger agreement, there are no
more than 35 purchasers of securities from Microcide, within the meaning
of Rule 506 under the Securities Act;
. no new elections with respect to taxes or changes in current elections
with respect to taxes, affecting Althexis will have been made after the
date of the merger agreement without the prior written consent of
Microcide;
42
. Althexis and Mark Skaletsky will have entered into an amended and
restated executive stock purchase agreement, and the amended and restated
executive stock purchase agreement shall be in full force and effect at
the effective time of the merger;
. stockholders beneficially owning in the aggregate shares of common stock
representing not less than 51% of the issued and outstanding shares of
Althexis common stock and not less than 51% of the issued and outstanding
shares of Althexis preferred stock, in each case entitled to vote with
respect to the merger, shall have duly executed and delivered a
stockholder consent; and
. Althexis will have executed and delivered to Microcide a statement in a
form reasonably acceptable to Microcide for purposes of satisfying
Microcide's obligations under Treasury Regulation Section 1.445-2(c)(3).
The obligation of Althexis to effect the merger is subject to the
satisfaction or waiver of the following additional conditions:
. the representations and warranties of Microcide and California MP
Acquisition contained in the merger agreement will be true and correct in
all material respects as though made on and as of the effective date of
the merger, except for representations and warranties which expressly
refer to a particular date, which shall be true and correct as of the
applicable date; and
. the shares of Microcide common stock into which the shares of Althexis
common stock will be converted in the merger will have been authorized
for listing, subject to official notice of issuance, on the Nasdaq
National Market.
No Solicitation of Alternate Transactions
The merger agreement provides that neither Microcide nor Althexis will,
directly or indirectly, through any representative or otherwise:
. solicit inquiries or proposals to enter into or continue any discussions,
negotiations or agreements relating to a "proposed acquisition
transaction"; or
. provide any assistance or any information to any person in connection
with any inquiry, proposal or transaction;
provided, however, that Microcide or Althexis may furnish information to, or
enter into discussions or negotiations with, any person in connection with an
unsolicited bona fide written proposed acquisition transaction if (i) the
applicable board of directors determines that such proposed acquisition
transaction is reasonably likely to result in a "superior parent transaction"
or "superior company transaction," as applicable; (ii) prior to furnishing
information or entering into discussions or negotiations, the applicable board
of directors receives from the third party an executed confidentiality
agreement with terms no more favorable than those contained in the
confidentiality agreement executed by and between Microcide and Althexis; and
(iii) prior to recommending the proposed acquisition transaction, Microcide or
Althexis, as the case may be, provides the other party at least five business
days' prior notice of its intention to make such a recommendation, during which
time Microcide or Althexis, as the case may be, may make a counterproposal,
which the other party will consider in good faith.
The merger agreement provides that the term "proposed acquisition
transaction" means any transaction with respect to any of the following:
. the sale or exchange of capital stock of Microcide or Althexis;
. the merger of Microcide or Althexis with, or the direct or indirect
disposition of a significant amount of its assets or its business to, any
person other than Microcide or Althexis, as applicable; or
. the licensing of proprietary rights to any person, except in the ordinary
course of business and consistent with past practice, by Althexis or
Microcide.
43
The merger agreement provides that the terms "superior parent transaction" and
"superior company transaction" mean any bona fide written proposal with respect
to a transaction involving all or substantially all of the outstanding capital
stock of Microcide or Althexis, respectively, that the applicable board of
directors determines in good faith (i) contains terms that are more favorable
and provide greater value to that company's stockholders than the merger
agreement and the merger taken as a whole and (ii) is reasonably capable of
being completed on substantially the terms proposed, including consideration as
to whether the proposal is fully financed.
In the event that the merger has not been consummated on or prior to
November 30, 2001, each of Microcide and Althexis may arrange for alternate
financing through the issuance and sale of equity or debt securities; provided,
however, that the negotiation and/or completion of any alternate financing
shall not affect the rights and obligations of any party under the merger
agreement. In the event that any alternate financing is completed prior to
December 31, 2001, the purchaser of any such securities will, as a condition to
the completion of the alternate financing, execute an irrevocable written
consent approving the merger and the transactions contemplated by the merger
agreement.
Bridge Financing
The merger agreement provides that, in the event that the merger has not
been completed by September 30, 2001, Althexis may from time to time request in
writing that Microcide make working capital advances to Althexis in an amount
up to $1.5 million. All working capital advances made by Microcide to Althexis
will bear interest at a rate equal to 10% per year, and the principal and the
accrued interest will become due and payable by Althexis immediately upon the
termination of the merger agreement for any reason.
Registration Rights
The merger agreement provides that, on or before the 30th day following the
effective date of the merger, Microcide will file with the Commission a
registration statement on Form S-3 covering the public resale by the former
Althexis stockholders of shares of Microcide common stock acquired in
connection with the merger. Microcide will use its reasonable efforts to cause
the registration statement to be declared effective within 90 days after the
effective date of the merger and to remain effective until the third
anniversary of the effective date of the merger, or such earlier time that all
shares covered by the registration statement have been sold.
Additionally, if at any time during the effective period, Microcide proposes
to file a registration statement relating to an offering in which Microcide
proposes to sell shares of common stock for its own account, excluding
registration statements in connection with mergers, acquisitions, exchange
offers or subscription offers, or any executive, employee benefit or
compensation plans, Microcide will provide at least 20 days' written notice to
all of the stockholders who acquired the shares of Microcide common stock in
connection with the merger and, upon written request from any of those
stockholders, Microcide will use its reasonable efforts to cause the shares of
common stock for which registration has been requested to be included in the
registration, with customary exceptions.
Microcide will pay its expenses associated with the registrations effected
pursuant to the merger agreement, including all registration and filing fees,
exchange listing fees and fees and expenses of Microcide's counsel and
accountants, but excluding any brokerage fees, selling commissions or
underwriting discounts incurred by the selling stockholders in connection with
sales under the registration statement and the fees and expenses of any counsel
retained by the selling stockholders. In addition, Microcide will provide
customary securities law indemnification to any party that participates in any
registration effected under the merger agreement.
44
Termination
The merger agreement may be terminated at any time before the closing by
written agreement of Microcide and Althexis. The merger agreement may also be
terminated by Microcide or Althexis at any time before the closing under the
following conditions:
. if the merger shall not have been consummated on or before December 31,
2001, provided that the terminating party's failure to perform any of its
material covenants or obligations under the merger agreement did not
result in the failure of the merger to occur on or before that date;
. if any required approval of the stockholders of Microcide for the merger
agreement, the merger or the financing shall not have been obtained at a
duly held meeting or at any adjournment thereof; or
. if, as of the date of the special meeting, Althexis has not provided to
Microcide the required written consents from Althexis' stockholders.
In addition, the merger agreement may be terminated by Microcide at any time
before the closing under the following conditions:
. if there is a breach of any representation or warranty on the part of
Althexis or any covenant or agreement to be complied with or performed by
Althexis, except for breaches that have not had and are not reasonably
likely to have a material adverse effect, and the breach persists for 14
days or more after written notice is given, so long as the breach is not
caused by the action or inaction of Microcide or California MP
Acquisition; or
. to accept a superior parent transaction, but only prior to obtaining
approval of the issuance of shares of common stock pursuant to the merger
agreement by Microcide's stockholders.
In addition, the merger agreement may be terminated by Althexis at any time
before the closing under the following conditions:
. if there is a breach of any representation or warranty on the part of
Microcide or California MP Acquisition or any covenant or agreement to be
complied with or performed by Microcide or California MP Acquisition,
except for breaches that have not had and are not reasonably likely to
have a material adverse effect, and the breach persists for 14 days or
more after written notice is given, so long as the breach is not caused
by the action or inaction of Althexis;
. to accept a superior company transaction, but only prior to obtaining
approval of the merger by the Althexis stockholders; or
. if Microcide materially breaches its obligations in connection with the
bridge financing, and the breach persists for two business days or more
after written notice is given, so long as the breach is not caused by the
action or inaction of Althexis or any of Althexis' stockholders.
Expenses and Termination Fees
If Althexis terminates the merger agreement to accept a superior company
transaction or if Microcide terminates the merger because Althexis has not
provided Microcide the required written consents from Althexis' stockholders as
of the date of the special meeting, then Althexis must pay to Microcide all of
Microcide's out-of-pocket expenses and fees incurred in connection with the
merger agreement and the transactions contemplated therein, including fees and
expenses payable to Microcide's financial advisor and its counsel for arranging
or providing financial advice with respect to the merger and all reasonable
fees and expenses of counsel, accountants, experts and consultants. In
addition, if Althexis terminates the merger agreement to accept a superior
company transaction, then Althexis must also pay concurrent with the
termination, in addition to the expenses payable, a fee of $1.0 million to
Microcide.
45
If either Microcide or Althexis terminates the merger agreement because the
required approval of Microcide's stockholders has not been obtained, or if
Microcide terminates the merger agreement to accept a superior parent
transaction, then Microcide must pay to Althexis all of Althexis' out-of-pocket
expenses and fees incurred in connection with the merger agreement and the
transactions contemplated therein, including all reasonable fees and expenses
of counsel, accountants, experts and consultants. In addition, if Microcide
terminates the merger agreement to accept a superior parent transaction, then
Microcide must also pay concurrent with the termination, in addition to the
expenses payable, a fee of $1.0 million to Althexis.
Except as otherwise set forth above, whether or not the merger is
consummated, all costs and expenses incurred in connection with the merger
agreement and the transactions contemplated by the agreement will be paid by
the party incurring the fees or expenses.
Conduct of Business Pending the Merger
Conduct of Althexis' Business. Before the effective time of the merger,
except as contemplated by the merger agreement or unless Microcide otherwise
agrees in writing, Althexis will operate its business solely in the ordinary
course of business and in accordance with past practice and will not in any
event take any action inconsistent with the merger agreement, any of the
ancillary agreements to the merger agreement or the completion of the merger,
and will not, among other things do any of the following:
. incur any indebtedness for borrowed money, other than pursuant to
revolving credit lines or equipment lines in existence on the date of the
merger agreement, or assume, guarantee, endorse, other than endorsements
for deposit or collection in the ordinary course of business, or
otherwise become responsible for obligations of any other person in
excess of $25,000;
. issue, except pursuant to the exercise of Althexis' options and warrants
outstanding on the date of the merger agreement and disclosed therein, or
commit to issue any shares of its capital stock or any other securities
or any securities convertible into shares of its capital stock or any
other securities, including, without limitation, any options to acquire
capital stock;
. declare, pay or incur any obligation to pay any dividend on its capital
stock or declare, make or incur any obligation to make any distribution
or redemption or pay any liquidation preference with respect to its
capital stock, except with respect to redemption of shares of Althexis'
common stock from employees at cost in connection with the termination of
an employee's employment or association, as the case may be, with
Althexis;
. make any change to the certificate of incorporation or bylaws of
Althexis;
. mortgage, pledge or otherwise encumber any assets of Althexis or sell,
transfer, license or otherwise dispose of any of the assets except for
(i) the sale of inventory to customers in the ordinary course of business
and consistent with past practice, (ii) assets with an aggregate book
value of $25,000 or less, (iii) the grant of licenses in the ordinary
course of business and consistent with past practice, and (iv) actions
pursuant to contracts disclosed in the merger agreement;
. cancel, release or assign any indebtedness owed to it or any claims or
rights held by it, except pursuant to contracts disclosed in the merger
agreement;
. make any investment or commitment of a capital nature either by purchase
of stock or securities, contributions to capital, property transfer or
otherwise, or by the purchase of any property or assets of any other
person in excess of $25,000 in the aggregate;
. terminate any material contract or make any change in any material
contract to which Althexis is a party;
46
. (i) enter into or modify any employment contract, (ii) pay any
compensation to or for any employee, officer or director other than in
the ordinary course of business and pursuant to existing employment
arrangements, (iii) pay or agree to pay any bonus, incentive
compensation, service award, severance, "stay bonus" or other like
benefit or (iv) enter into or modify any other employee plan;
. take any action that will result in (i) the acceleration or vesting of
any rights of any person to benefits under any employee plan or (ii) any
obligation of Althexis to make any payment to any present or former
employee following termination of employment or upon consummation of the
transactions contemplated by the merger agreement;
. enter into or modify any contract or other arrangement with any "related
party";
. make any change in any method of accounting or accounting practice;
. fail to comply with all regulations applicable to the assets and the
business of Althexis consistent with past practices, except for any
failures that, individually or in the aggregate, are not reasonably
likely to have a material adverse effect;
. fail to use its commercial best efforts to (i) maintain the business,
(ii) retain the employees so that they will remain available to Althexis
after the effective time of the merger, (iii) maintain existing
relationships with material collaborators, suppliers and customers and
others having business dealings with Althexis and (iv) otherwise to
preserve the goodwill of the business so that they will be preserved on
and after the consummation of the merger; or
. make or change any election in respect of taxes, adopt or change any
material accounting method in respect of taxes, enter into any tax
allocation agreement, tax sharing agreement, tax indemnity agreement or
closing agreement, settle or compromise any claim, notice, audit report
or assessment in respect of taxes, or consent to any extension or waiver
of the limitation period applicable to any claim or assessment in respect
of taxes.
Conduct of Microcide's Business. Before the effective time of the merger,
except as contemplated by the merger agreement or unless Althexis otherwise
agrees in writing, Microcide has agreed that it will not take any action
inconsistent with the merger agreement, any of the ancillary agreements to the
merger agreement or the completion of the merger, and will not, among other
things do any of the following:
. (i) enter into or modify any employment contract; (ii) pay any
compensation to or for any employee, officer or director other than in
the ordinary course of business and pursuant to existing employment
arrangements; (iii) pay or agree to pay any bonus, incentive
compensation, service award, severance, "stay bonus" or other like
benefit; or (iv) enter into or modify any other employee benefit plan; or
. take any action that will result in (i) the acceleration or vesting of
any rights of any person to benefits under any employee plan or (ii) any
obligation of parent to make any payment to any present or former
employee following termination of employment or upon consummation of the
transactions contemplated by the merger agreement.
Amendment and Waiver
The merger agreement may be amended, modified or supplemented, and any
provision of the merger agreement may be waived, only in writing by the parties
to be bound by the amendment, modification, supplement or waiver.
47
Representations and Warranties
The merger agreement contains customary representations and warranties
relating to, among other things:
. corporate organization and similar corporate matters of Microcide,
California MP Acquisition and Althexis;
. the capital structure of Microcide and Althexis;
. the authorization, execution, delivery, performance and enforceability
of, and required consents, approvals, orders and authorizations of
governmental authorities relating to, the merger agreement and related
matters of Microcide and Althexis;
. documents filed by Microcide with the Commission, the accuracy of the
information contained in those documents and the absence of undisclosed
liabilities of Microcide;
. the absence of specified material changes or events concerning Microcide
and Althexis;
. compliance with applicable laws by Althexis and Microcide;
. intellectual property of Microcide and Althexis;
. management of Althexis;
. assets and contracts of Althexis and absence of defaults;
. environmental and insurance matters of Althexis;
. financial statements and corporate records of Althexis;
. outstanding and pending material litigation of Microcide and Althexis;
. matters relating to the Employee Retirement Income Security Act and other
labor matters of Microcide and Althexis;
. transactions with related parties of Althexis;
. tax matters of Microcide and Althexis; and
. receipt of fairness opinion by Microcide from its financial advisor.
48
OTHER AGREEMENTS RELATED TO THE MERGER
Stockholder Support Agreements
As an inducement and condition to the willingness of Microcide to enter into
the merger agreement, each of Mark Skaletsky, Paul Mellett, Manuel Navia,
Patrick Connelly, Mass Ventures LLC and Michael Dailey, the owners in the
aggregate of approximately 93% of the outstanding common stock of Althexis,
together with the owners of an aggregate of approximately 67% of Althexis'
preferred stock, entered into a stockholder support agreement with Microcide.
Pursuant to the stockholder support agreements, each stockholder agreed, at
any meeting of the stockholders of Althexis called to vote upon, and in any
action by written consent of the stockholders in lieu of a meeting to approve,
the merger, the merger agreement or the other transactions contemplated by the
merger agreement, to vote all of his Althexis shares in favor of:
. approval of the merger, adoption of the merger agreement and the approval
of the terms thereof and each of the other transactions contemplated by
the merger agreement, and
. any other matters necessary to the consummation of the transactions
contemplated by the merger agreement.
In addition, each stockholder agreed, at any meeting of the stockholders of
Althexis called to vote upon, and in any action by written consent of the
stockholders in lieu of a meeting to approve, any "proposed acquisition
transaction" other than the merger, to vote all of his Althexis shares against:
. the approval and adoption of any proposed acquisition transaction, other
than the merger, and
. actions which would frustrate the purposes or impede, prevent or delay
completion of the transactions contemplated by the merger agreement.
Also, each holder of preferred stock of Althexis entering into a stockholder
support agreement agreed to vote all of his shares in favor of any proposal
wherein the holders of Althexis' preferred stock agree not to treat the
transactions contemplated by the merger agreement as a liquidation entitling
the holders of Althexis' preferred stock to a liquidation preference. Under the
stockholder support agreements, each stockholder appointed Mark Skaletsky and
Paul Mellett as his attorney-in-fact and proxy to vote the shares of the
stockholder.
Additionally, in the stockholder support agreements, each stockholder
agreed, subject to specified limited exceptions, not to (i) sell, assign,
transfer, pledge or otherwise dispose of, or enter into any contract, option or
other arrangement or understanding with respect to the direct or indirect sale,
assignment, transfer, pledge or other disposition of his shares or (ii) deposit
any of his shares into a voting trust or enter into a voting agreement or
arrangement with respect to his shares.
Pursuant to the terms of the stockholder support agreements, each
stockholder agreed to, and to use his reasonable efforts to cause his
affiliates' agents and representatives to, (i) cease any discussions or
negotiations with any parties other than California MP Acquisition, Microcide
or their affiliates and representatives with respect to any proposed
acquisition transaction, and (ii) not, directly or indirectly, encourage,
solicit, initiate, enter into or conduct discussions or negotiations with or
provide any non-public information to any person or group concerning any
proposed acquisition transaction other than the merger.
The stockholder support agreements terminate upon the earlier to occur of
the effective time of the merger and termination of the merger agreement
pursuant to its terms.
Severance Agreements
In connection with the execution of the merger agreement, each of Mark
Skaletsky, Paul Mellett, Manuel Navia and Patrick Connelly entered into
severance agreements with Microcide. The severance agreements will become
effective upon the completion of the merger.
49
The severance agreements provide that each applicable employee shall be
entitled to continue to receive his base salary for a period of 12 months in
the event that, within 12 months after a change of control of Microcide, either
the employee resigns his employment for "good reason" or Microcide terminates
his employment for any reason other than "cause."
Under the severance agreements, "good reason" means that the applicable
employee:
. has been demoted or has incurred a material reduction in his authority or
responsibility as an employee of Microcide;
. has incurred a reduction in his total compensation as an employee of
Microcide, other than pursuant to a company-wide reduction of total
compensation for employees of Microcide generally; or
. has been notified that his principal place of work as an employee of
Microcide will be relocated by a distance of 50 miles or more.
Under the severance agreements, "cause" means:
. a willful act by the employee which constitutes misconduct or fraud and
which is injurious to Microcide; or
. a conviction of, or a plea of "guilty" or "no contest" to, a felony.
Stock Option Agreements
As an inducement and condition to the willingness of the parties to enter
into the merger agreement, Microcide and Althexis have entered reciprocal stock
option agreements pursuant to which Microcide has granted Althexis an option to
purchase up to 19.9% of the outstanding common stock of Microcide, and Althexis
has granted Microcide an option to purchase up to 19.9% of the outstanding
stock of Althexis, each at a per share price equal to the lesser of the fair
market value of the applicable common stock on the date of the press release
announcing the merger agreement, or the fair market value of the applicable
common stock on the date of the exercise of the stock option. The option
agreements provide for the adjustment of the total number of shares of common
stock covered by the option in the event of any change in the outstanding
shares of common stock by reason of stock dividends, split-ups, or the like.
Fair market value of the common stock on a particular day will be determined
by:
. the closing price for the common stock as quoted on the stock exchange or
national market system on which the common stock is listed;
. the mean between the high bid and low asked prices for the common stock;
or
. in the absence of an established market for the common stock, the value
for the common stock determined in good faith by the board of directors
of the issuer.
The stock option granted to either party will become exercisable in the
event that the other party terminates the merger agreement in order to accept a
superior company transaction or a superior parent transaction, as the case may
be. The right to exercise the option shall terminate upon the earliest to occur
of the following:
. the effective time of the merger agreement;
. the one-year anniversary of the termination of the merger agreement in
connection with a superior company transaction or superior parent
transaction; or
. the termination of the merger agreement for any other reason.
The stock option agreements provide that the holder's gains in connection
with the exercise of the option shall not exceed $2.5 million.
50
Stockholders Agreements
In connection with the completion of the merger, each of Mark Skaletsky,
Paul Mellett, Manuel Navia, Patrick Connelly, Mass Ventures LLC and Michael
Dailey, the owners of an aggregate of approximately 93% of the outstanding
common stock of Althexis, will enter into a stockholders agreement with
Microcide restricting the transfer of the Microcide common stock to be received
by him or it in connection with the merger. Each Althexis stockholder entering
into a stockholders agreement will agree that it will not, without the prior
written consent of Microcide, sell or otherwise transfer any of the shares of
Microcide common stock acquired in connection with the merger for a period of
one year after the effective date of the merger. In addition, Messrs.
Skaletsky, Mellett, Navia and Connelly will be restricted from transferring
more than 40% of the shares of Microcide common stock acquired in connection
with the merger for a period of two years after the effective date of the
merger. Transfers in connection with bona fide gifts or as distributions to
limited partners, shareholders or other affiliates of the stockholder, so long
as the transferee agrees in writing to be bound by the provisions of the
applicable stockholders agreement, will be exempted from the provisions of the
stockholders agreements.
51
THE FINANCING
The following summary of the subscription agreements and the certificate of
designations, which describes all of the material terms and provisions of the
subscription agreements and the certificate of designations, is qualified in
its entirety by reference to the other information contained elsewhere in this
proxy statement including the appendices and the documents incorporated by
reference. Copies of the form of subscription agreement and the certificate of
designations, excluding the exhibits and schedules, are set forth in Appendix C
and Appendix D, respectively, to this proxy statement and are incorporated
herein by reference, and reference is made thereto for a complete description
of the terms of the financing. We encourage you to read the form of
subscription agreement and certificate of designations and each of the other
appendices hereto carefully.
Reasons for the Financing
The Microcide Board believes that the terms of the subscription agreements
and the transactions contemplated thereby are in the best interests of
Microcide and its stockholders. Accordingly, the Microcide Board has
unanimously approved the subscription agreements and recommends approval of the
issuance of shares of preferred stock pursuant to the subscription agreements
by the stockholders of Microcide.
The Microcide Board considered the potential for the combined company to
implement its forward integration strategy. This includes:
. accelerating the existing drug development programs of each company;
. retaining existing and future drug development programs through later
stages of clinical development; and
. actively seeking to in-license potential drug development compounds from
third parties.
The Microcide Board believes that this strategy will enhance long-term value
for Microcide stockholders. The Microcide Board considered the revenue
expectations and expenditure level inherent in Microcide's current business
plan and the fact that Microcide would need to raise additional capital in the
near term in order to execute that plan. Further, the Microcide Board
considered that $60.0 million of additional capital would provide sufficient
funds for an estimated three years of operations of the combined company.
Please see "The Merger--Reasons for the Merger--Additional Capital."
We intend to use the net proceeds from the financing to fund our drug
discovery and development programs, including the financing of pre-clinical
testing and clinical trials, the payment of license fees, funding the costs of
obtaining patent protection and other payments to licensors, the potential
acquisition of additional drug candidates and the development of a commercial
infrastructure. We may also use a portion of the proceeds from the financing
for working capital and other general corporate purposes. As of the date of
this proxy statement, we have not finalized the amount of proceeds expected to
be used specifically for each of the purposes specified above.
Structure of the Financing
Upon the terms and subject to the conditions contained in the subscription
agreements, Microcide will issue and sell to the purchasers, and the purchasers
will purchase from Microcide, an aggregate of up to 60,000 shares of preferred
stock at a per share purchase price equal to $1,000. The preferred stock will
be convertible into an aggregate of up to 20.0 million shares of common stock,
subject to adjustment for stock dividends, stock splits and similar events.
The holders of the preferred stock will be entitled to elect three members
of the Microcide Board. The initial nominees of the purchasers are David
Schnell, Charles Newhall and Kate Bingham.
52
The financing contemplates the issuance by Microcide of preferred stock at a
discount to the quoted market price of the common stock at the commitment date
of the financing arrangement. Microcide will be required to record an amount
equal to approximately $23.8 million as a deemed dividend on the date of
issuance of the preferred stock. The amount of the deemed dividend is
calculated by multiplying the 20.0 million shares of common stock into which
the preferred stock is convertible by $1.19, which is the difference between
the $4.19 per share closing price of the common stock on the Nasdaq National
Market on July 27, 2001 less the $3.00 per share equivalent purchase price for
the preferred stock. On July 19, 2001, the Microcide Board approved the merger
and the financing, and on July 27, 2001, Microcide and the purchasers of
preferred stock entered into the subscription agreements. The deemed dividend
will be a non-cash charge appearing on the financial statements of Microcide
for the quarter and the year in which the financing is completed and will have
a significant adverse effect on Microcide's net loss for those periods.
The Subscription Agreements
The subscription agreements provide that, subject to the satisfaction of
specified conditions, each purchaser will purchase shares of Microcide's Series
B convertible redeemable preferred stock, par value $0.001. Each share of
preferred stock will have a stated amount or value of $1,000.
Representations and Warranties. The subscription agreements contain various
customary representations and warranties of Microcide and the purchasers.
Microcide's representations include representations as to the following:
. corporate status and good standing;
. the existence of subsidiaries;
. power and authority to enter into the subscription agreements;
. the enforceability of the terms of the subscription agreements;
. capitalization;
. the availability of reports and financial statements;
. the absence of (i) changes in Microcide's business, (ii) violations of
law, (iii) undisclosed liabilities, (iv) litigation, (v) tax obligations,
(vi) brokerage commissions and fees, (vii) breaches of material
contracts, (viii) orders, injunctions or decrees, (ix) transactions with
affiliates and (x) termination and other payments;
. the condition of properties;
. compliance with environmental, health and safety, and other applicable
laws;
. proper filing of regulatory documents;
. title and rights to properties, assets, leaseholds and intellectual
property; and
. the existence of, and the failure to trigger rights under, the
stockholder rights plan.
Each purchaser's representations include representations as to the
following:
. authority to consummate the transactions contemplated by the applicable
subscription agreement;
. the validity and enforceability of the applicable subscription agreement;
. due organization;
. status as an accredited investor and not as a broker or dealer;
. compliance with private placement investor requirements and its intent to
acquire the preferred stock solely for its own accounts for investment
purposes;
53
. the provision of an investor questionnaire;
. reoffers and resales;
. compliance with applicable laws in foreign jurisdictions; and
. the absence of any qualification or conflict of any provision of the
charter documents or any violation or contravention of any applicable
law, rule, regulation or decree.
Covenants. Pursuant to the terms of the subscription agreements, Microcide
and the purchasers have agreed to a number of covenants. Among other things,
Microcide has agreed:
. to provide its transfer agent instructions to issue certificates upon
conversion of the preferred stock and appointing the transfer agent the
conversion agent for the preferred stock;
. to file with the Commission a Form D as required to claim the exemption
provided by Rule 506 of Regulation D;
. to file with the Nasdaq Stock Market an application or other document
required by Nasdaq for the listing of the shares of common stock issuable
upon conversion of the preferred stock and to maintain the listing of the
common stock on Nasdaq or a registered national securities exchange;
. to comply with restrictions on the use of the proceeds from the sale of
preferred stock;
. to take necessary action to qualify or obtain an exemption for the offer
and sale of securities under applicable state securities laws;
. to comply with specified provisions of the preferred stock as if it were
outstanding;
. to reserve a sufficient number of shares of common stock to provide for
the conversion of the preferred stock;
. to ensure that all shares of common stock issued upon conversion of the
preferred stock will be fully paid and non-assessable;
. to secure registration or approval with any governmental authority under
any federal or state law before shares of common stock may be validly
issued upon conversion;
. to comply with specified limitations on indebtedness;
. to pay and discharge material obligations and liabilities in the ordinary
course consistent with Microcide's practices prior to the financing;
. to comply with laws;
. to comply with specified limitations on issuance of securities;
. not to become an investment company required to be registered under the
Investment Company Act of 1940, as amended;
. to comply with specified provisions granting the purchasers' rights of
first refusal;
. not to enter into any transactions with affiliates except on terms no
less favorable than terms that could be obtained by Microcide from a
third party;
. to make available to the purchasers information required pursuant to Rule
144A(d)(4) under the Securities Act;
. not to solicit a proposal or participate in any negotiations relating to
a possible financing; and
. not to shorten the length of any lock-up agreement between Microcide and
each of Mark Skaletsky, Paul Mellett, Manuel Navia, Patrick Connelly,
Michael Dailey and Paul Mass.
54
Among other things, the purchasers have agreed:
. to comply with restrictions on transfer of shares of the preferred stock
and the underlying shares of common stock;
. that certificates for the shares of preferred stock and the underlying
shares of common stock will bear restrictive legends; and
. to comply with specified standstill obligations.
Conditions to Completion of the Financing. The obligations of Microcide to
complete the financing are subject to a number of conditions, including the
following:
. the representations and warranties of the purchasers contained in the
subscription agreements are accurate in all material respects;
. the purchasers have performed in all material respects the obligations,
and complied with each of the covenants, agreements and conditions,
required to be performed or complied with by them on or prior to the
closing;
. no action, suit, proceeding or investigation that seeks to restrain or
prohibit the financing before any court, administrative agency or other
governmental authority shall be pending or threatened;
. receipt by Microcide of a lock-up agreement executed by each purchaser;
. the aggregate purchase price for the preferred stock purchased by all
purchasers will be not less than $55.0 million;
. all the conditions precedent to the merger shall have been satisfied or
waived; and
. receipt by Microcide of a voting agreement executed by each purchaser.
The obligations of the purchasers to complete the financing are subject to a
number of conditions, including the following:
. the transfer agent shall have received instructions from Microcide to
issue the preferred stock;
. the aggregate purchase price for the preferred stock will be not less
than $55.0 million;
. no legal action, suit or proceeding shall be pending or threatened that
seeks to restrain or prohibit the financing and that could have a
material adverse effect on the business, properties, operations,
condition, results of operations or prospects of Microcide or Althexis;
. the representations and warranties of Microcide contained in the
subscription agreements and each other agreement or instrument executed
and delivered by Microcide in connection with the financing shall have
been true and correct on the date of the subscription agreements and
shall be true and correct on the closing date as if made on the closing
date, and on or before the closing date Microcide shall have performed
all covenants and agreements of Microcide contained therein and required
to be performed by Microcide on or before the closing date;
. no event that under the provisions of the preferred stock would give the
purchasers the right to require Microcide to repurchase the preferred
stock will have occurred and be continuing;
. Microcide shall have completed the merger pursuant to the merger
agreement;
. as of the effective time of the merger, Mark Skaletsky shall have been
elected to the Board of Directors of Microcide and appointed Chief
Executive Officer of Microcide;
. Microcide shall have taken all necessary corporate action, if any, to
amend Microcide's Restated Certificate of Incorporation to reflect the
transactions contemplated by the financing;
. Microcide shall have received lock-up agreements executed by Mark
Skaletsky, Patrick Connelly, Paul Mellett, Manuel Navia, Michael Dailey
and Paul Mass;
55
. the subscription agreements and the transactions contemplated thereby
shall have been approved by the stockholders of Microcide by the required
vote;
. Microcide shall have received a waiver from any officer or director who
would be entitled to have the vesting schedule of any outstanding options
accelerate as a result of the merger or the transactions contemplated by
the merger and/or the financing;
. the authorized size of the Microcide Board shall be eight persons;
. Microcide will have taken all corporate action such that immediately
following the closing, the directors of Microcide shall include David
Schnell, Charles Newhall, Kate Bingham, Mark Skaletsky, John Walker and
James Rurka;
. the purchasers will have received satisfactory confirmation of the filing
with the Secretary of State of the State of Delaware of the certificate
of designations;
. the shares of common stock into which the preferred stock may be
converted shall have been duly authorized and reserved;
. Microcide will have filed a Notification Form for Listing of Additional
Shares with respect to the shares of common stock into which the
preferred stock may be converted with Nasdaq;
. Microcide will have delivered to the purchasers a certificate certifying
the Restated Certificate of Incorporation and Bylaws of Microcide as in
effect on the closing date and all resolutions of the Microcide Board
relating to the subscription agreements and the financing;
. the purchasers shall have received legal opinions in form, scope and
substance reasonably satisfactory to the purchasers; and
. trading in securities on the New York Stock Exchange, the American Stock
Exchange, or Nasdaq shall not have been suspended or materially limited
and a general moratorium on commercial banking activities in the State of
New York shall not have been declared by either federal or state
authorities.
Termination. Each purchaser may terminate the applicable subscription
agreement at any time before the closing under the following conditions:
. Microcide fails to perform any of its obligations under the subscription
agreement;
. any condition to the completion of the financing is not satisfied; or
. the closing does not occur on or before November 30, 2001.
Microcide may terminate each subscription agreement at any time before the
closing under the following conditions:
. the applicable purchaser fails to perform any of its obligations under
the subscription agreement; or
. the closing does not occur on or before November 30, 2001.
Registration Rights. As soon as is reasonably practicable after the
completion of the financing, but in no event later than 30 days after the
completion of the financing, Microcide will file a registration statement with
the Commission with respect to the resale of all of the shares of common stock
issuable upon conversion of the preferred stock. One-half of the shares to be
issued from the conversion of the preferred stock are subject to a contractual
lock-up restricting the resale thereof prior to the nine-month anniversary of
the completion of the financing.
Right of First Refusal. So long as the purchasers continue to hold shares of
preferred stock, they will have a right of first refusal to purchase their pro
rata share of all equity securities that Microcide may propose to sell and
issue. This right of first refusal terminates with respect to any purchaser in
the event that the
56
purchaser does not participate in any applicable transaction. For purposes of
this right of first refusal, the term "equity securities" means:
. any primary issuance of common stock registered for sale with the
Commission other than shares registered with the Commission pursuant to a
Form S-4 or Form S-8; or
. any primary issuance of common stock issued in a transaction exempt from
the registration requirements of the Securities Act and subsequently
registered for resale pursuant to a registration statement on Form S-1 or
Form S-3, other than securities issuances in connection with specified
strategic alliances, collaborations, joint ventures, partnerships or
similar arrangements.
Microcide will require that the managing underwriter or underwriters of any
public offering by Microcide offer to sell to each purchaser its pro rata share
of the registered common stock to be offered to the public, at the same price
and on the same terms as the public, provided that the initial filing of the
registration statement to register securities with the Commission occurs at
least 12 months after the date of the subscription agreements. If Microcide
files a registration statement with regard to a public offering within 12
months after the date of the subscription agreements, Microcide will offer to
sell to each purchaser its pro rata share of common stock in a private
placement consummated contemporaneously with the public offering.
Restrictions on Transfer. Each purchaser has agreed that it will not,
directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of
any shares of preferred stock or the shares of common stock issued or issuable
upon conversion of shares of preferred stock unless registered under the
Securities Act, pursuant to an exemption from registration under the Securities
Act or in a transaction not requiring registration under the Securities Act.
Certificate of Designations
The certificate of designations sets forth the terms and conditions of the
preferred stock.
Terms of Conversion. Each share of preferred stock will be convertible into
the number of shares of common stock equal to the quotient of the issuance
price divided by the conversion price of $3.00 per share.
The conversion price will be subject to weighted average anti-dilution
adjustments to reduce dilution in the following events:
. the issuance of additional equity securities at a purchase price less
than the conversion price, or
. the repurchase of more than 10% of the common stock outstanding as of the
closing date at a purchase price less than the conversion price, unless
the repurchase is approved by the members of the Microcide Board elected
by the holders of the preferred stock.
There will not be an anti-dilution adjustment for the issuance or exercise of
employee or director options or in connection with equipment lease transactions
or other kinds of issuances that are customarily exempt from anti-dilution
adjustments. The conversion price will be subject to proportional adjustment
for stock splits, stock dividends, recapitalizations and similar events.
If Microcide does not have available for issuance upon conversion of the
preferred stock at least the number of common shares required to be issued,
then holders may elect by notice to Microcide that it make a payment in an
amount equal to the number of shares of common stock to which the holder is
entitled and that Microcide is unable to issue multiplied by an average market
price during the five consecutive days prior to the conversion. In addition,
Microcide will pay or reimburse the holders for fees, expenses and out-of-
pocket damages and liabilities arising from any failure to deliver the shares
of common stock upon conversion of the preferred stock, including margin
interest, the costs of purchasing securities to cover a sale and other damages.
Dividends. The holders of preferred stock will be entitled to receive
dividends only when, as and if declared by the Microcide Board. No dividends
will be paid or declared and set apart for payment on the
57
common stock unless an equivalent amount per share, based on the relative
stated values, has been paid or declared and set apart for payment on the
preferred stock.
Terms of Redemption. Upon the occurrence of the following events, the
holders of preferred stock will have the right to require Microcide to redeem
the preferred stock in cash at a price equal to 100% of the purchase price of
the preferred stock then outstanding, plus any declared and unpaid dividends:
. for any period of five consecutive trading days, there is no reported
sale price of the common stock on any of the Nasdaq Stock Market, the New
York Stock Exchange or the American Stock Exchange;
. the common stock ceases to be listed for trading on any of the Nasdaq
Stock Market, the New York Stock Exchange or the American Stock Exchange
for any period of five consecutive trading days;
. if the registration statement registering the resale of shares of common
stock issuable upon conversion of the preferred stock is not declared
effective within 90 days after the closing, or if the holders of
preferred stock are unable for 20 trading days during any period of 365
consecutive days occurring on or after the date the Commission declares
the registration statement effective to sell shares of common stock
issued or issuable upon conversion of the preferred stock pursuant to the
registration statement (i) by reason of the requirements of the
Securities Act, the Exchange Act or any of the rules or regulations under
either thereof or (ii) due to the registration statement containing any
untrue statement of material fact or omitting to state a material fact or
other failure of the registration statement or the prospectus contained
therein to comply with the rules and regulations of the Commission;
. the failure of Microcide to issue shares of common stock to the holders
of preferred stock within 5 trading days of the conversion thereof or to
transfer any certificate for shares of common stock issued to any holder
of preferred stock upon conversion of preferred stock as and when
required by the certificate of designations or the subscription
agreements;
. the failure by Microcide to comply with the limitations on indebtedness
and the issuance of securities set forth in the subscription agreements
or to comply, for a period of 45 days, in any material respect with any
of the other requirements contained in the subscription agreements or
other material term or provision of the preferred stock;
. any material representation or warranty of Microcide contained in the
definitive agreements between Microcide and the holders of preferred
stock shall be false or misleading in any material respect when made; and
. Microcide or any of its subsidiaries shall have received notice that it
is in breach or default with respect to any other indebtedness which has
an outstanding principal amount in excess of $1.0 million individually or
$2.0 million in the aggregate and the breach or default results in an
acceleration of such indebtedness or any other indebtedness of Microcide
not cured within five days of notice of the breach or default; provided,
however, that any breach or default for non-payment of any indebtedness
shall not be deemed a repurchase event if: (i) the breach or default is
being actively contested in good faith by Microcide with the unanimous
approval of the Microcide Board, (ii) the breach or default does not
result in the acceleration of any other indebtedness, and (iii) the
aggregate amount of non-payment does not exceed $1.0 million.
In addition, the holders of preferred stock will have the right to require
Microcide to redeem the preferred stock in cash at a price equal to 150% of the
purchase price of the preferred stock then outstanding, plus any declared and
unpaid dividends, in the event of a fundamental change to Microcide. For
purposes of the foregoing, the term "fundamental change" means:
. a change in control, meaning a consolidation or merger with another
entity after which the stockholders of Microcide do not collectively own
51% or more of the voting securities of the surviving corporation;
. a transaction in which all or substantially all of the common stock is
exchanged for, converted into or acquired for consideration which is not
a security listed on a national securities exchange or the Nasdaq Stock
Market;
58
. the acquisition by a person or entity of ownership of securities
representing 50% or more of the combined voting power of the outstanding
voting securities of Microcide;
. the sale of more than 50% of the assets of Microcide; or
. the liquidation, dissolution or other winding up of the affairs of
Microcide.
Mandatory Redemption. Any shares of preferred stock outstanding will be
redeemed on the five-year anniversary of the closing at a redemption price
equal to 100% of the stated value plus any declared and unpaid dividends;
provided that each holder of preferred stock shall have the right to delay this
mandatory redemption for a period of one year.
Optional Redemption. If at any time following the second anniversary of the
closing date (1) the closing bid price of the common stock exceeds $20.00 per
share for 40 consecutive trading days and (2) the registration statement
registering the resale of shares of common stock issuable upon the conversion
of the preferred stock shall have been effective during the entire 40-trading
day period, then Microcide will have the option to redeem any shares of
preferred stock then outstanding at a redemption price equal to 100% of the
stated value, plus any declared and unpaid dividends.
Voting Rights. Each holder of preferred stock will be entitled to the number
of votes equal to the number of shares of common stock into which the holder's
shares of preferred stock could be converted and will be entitled to notice of
any stockholders meeting in accordance with the Bylaws of Microcide. Except as
otherwise provided in the certificate of designations or as required by law,
the preferred stock shall vote together with the common stock at any annual or
special meeting of the stockholders and not as a separate class, and may act by
written consent in the same manner as the common stock.
The affirmative vote or written consent of holders of a majority of the
preferred stock, voting separately as a class, will be required for:
. any amendment, alteration, or repeal, whether by merger or consolidation
or otherwise, of Microcide's Restated Certificate of Incorporation or the
certificate of designations if the amendment, alteration or repeal
materially and adversely affects the powers, preferences or special
rights of the preferred stock; or
. the creation or issuance of any series of preferred stock having dividend
or liquidation rights senior to or of even parity with the preferred
stock.
Notwithstanding the foregoing, no amendment, alteration or repeal will:
. reduce any redemption price;
. change the percentage of holders of preferred stock necessary to approve
an amendment to Microcide's Restated Certificate of Incorporation or the
certificate of designations;
. change the method of calculating the conversion price in a manner adverse
to the holders of preferred stock or reduce the number of shares of
common stock issuable upon conversion of preferred stock, other than a
reduction which effects a combination of the outstanding shares of common
stock and results in an adjustment in the conversion price; or
. amend, modify or repeal the amendment provisions of the certificate of
designations;
in each case, unless the amendment, modification or repeal has been approved by
the affirmative vote or written consent of holders of a majority of the
preferred stock voting separately as a class.
For so long as any shares of preferred stock remain outstanding: (1) the
holders of a majority of the preferred stock, voting as a separate class, shall
be entitled to elect three members of the Microcide Board at each meeting or
pursuant to each consent of Microcide's stockholders for the election of
directors, and to remove them from office and to fill any vacancy caused by
their resignation, death or removal; and (2) the
59
holders of common stock and the holders of preferred stock, voting together as
a single class on an as-converted basis, shall be entitled to elect the
remaining members of the Microcide Board at each meeting or pursuant to each
consent of Microcide's stockholders for the election of directors, and to
remove them from office and to fill any vacancy caused by their resignation,
death or removal.
Liquidation Rights. Upon the liquidation, dissolution or other winding up of
the affairs of Microcide while any shares of preferred stock are outstanding,
the holders of preferred stock will have the right to require Microcide to
redeem the preferred stock in cash at a price equal to 150% of the purchase
price of the preferred stock then outstanding, plus any declared and unpaid
dividends.
In the event of a liquidation, dissolution or winding up of Microcide,
whether voluntary or involuntary, the holders of preferred stock will be
entitled to receive an amount per share of preferred stock equal to the stated
value plus any declared and unpaid dividends before any payment shall be made
or any assets distributed to the holders of common stock. After the liquidation
preferences of the preferred stock are fully met, the holders of preferred
stock shall not be entitled to any further participation in any distribution of
assets by Microcide.
Voting Agreement
As a condition to the completion of the financing, each purchaser has agreed
to enter into a voting agreement with Microcide in connection with the election
of directors of Microcide, other than directors elected by the holders of
preferred stock voting as a separate class. Under the voting agreements, each
purchaser will irrevocably appoint the Chairman of the Board of Microcide as
his, her or its attorney-in-fact to vote all of the shares owned by the
purchaser:
. "FOR" any person nominated by the Microcide Board;
. not "FOR" any person that has not been nominated by the Microcide Board;
and
. "FOR" any proposal made by the Microcide Board to remove any person as
a director of Microcide.
Each voting agreement terminates on the earlier of (1) the date on which the
purchaser no longer holds any shares of preferred stock or (2) the tenth
anniversary of the completion of the financing. The voting agreement will also
provide that one of the persons nominated by the Microcide Board will be
acceptable to the holders of preferred stock.
Interests of Certain Persons in the Financing
David Schnell, M.D., a Managing Partner of Prospect Venture Partners, was a
founder of Microcide and served as a director of Microcide from December 1992
through June 2001. On June 5, 2001, Dr. Schnell resigned from the Microcide
Board. Prospect Venture Partners L.P. and Prospect Venture Partners II L.P.,
affiliates of Prospect Venture Partners, are participating in the financing.
Pursuant to the provisions of subscription agreements with Microcide, Prospect
Venture Partners L.P. and Prospect Venture Partners II L.P. will purchase an
aggregate of 20,000 shares of preferred stock from Microcide for an aggregate
purchase price equal to $20.0 million. The shares of preferred stock purchased
by affiliates of Prospect Venture Partners will be convertible into
approximately 6.7 million shares of common stock of Microcide.
As of the date of this proxy statement, Dr. Schnell holds options to
purchase an aggregate of 16,000 shares of Microcide common stock at a average
weighted exercise price equal to $7.55. Microcide granted these options to Dr.
Schnell in connection with his service on the Microcide Board. The options
terminate on September 5, 2001, the three-month anniversary of Dr. Schnell's
resignation from the Microcide Board.
Microcide and Dr. Schnell have entered into an indemnification agreement
pursuant to which, subject to specified limitations, Microcide has agreed to
indemnify Dr. Schnell against any and all expenses, damages, judgments, fines
and amounts paid in settlement that Dr. Schnell incurs in connection with any
action or proceeding to which Dr. Schnell is a party by reason of the fact that
Dr. Schnell was a director of Microcide and/or, either in his various
capacities with Prospect Venture Partners or otherwise, proposed, arranged,
negotiated and/or participated in the financing.
60
INDEX TO FINANCIAL STATEMENTS OF THE ALTHEXIS COMPANY, INC.
Page
-----
Report of Independent Auditors........................................... 62
Balance Sheets as of December 31, 2000 and 1999 and June 30, 2001
(unaudited)............................................................. 63
Statements of Operations for the years ended December 31, 2000 and 1999,
the period October 1, 1998 (date of inception) to December 31, 1998 and
for the six-month periods ended June 30, 2001 and 2000 (unaudited)...... 64
Statements of Stockholders' Equity for the years ended December 31, 2000
and 1999, the period October 1, 1998 (date of inception) to December 31,
1998 and for the six-month period ended June 30, 2001 (unaudited)....... 65
Statements of Cash Flows for the years ended December 31, 2000 and 1999,
the period October 1, 1998 (date of inception) to December 31, 1998 and
for the six-month periods ended June 30, 2001 and 2000 (unaudited)...... 66
Notes to Financial Statements............................................ 67-73
61
Report of Independent Auditors
Board of Directors and Stockholders
The Althexis Company, Inc.
We have audited the accompanying balance sheets of The Althexis Company,
Inc. (the Company) as of December 31, 2000 and 1999, and the related statements
of operations, stockholders' equity, and cash flows for the years then ended
and for the period October 1, 1998 (date of inception) to December 31, 1998.
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 auditing standards generally
accepted in the United States. 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 The Althexis Company, Inc.
as of December 31, 2000 and 1999, and the results of its operations and its
cash flows for the years then ended and for the period October 1, 1998 (date of
inception) to December 31, 1998, in conformity with accounting principles
generally accepted in the United States.
Ernst & Young LLP
March 16, 2001
61-1
THE ALTHEXIS COMPANY, INC.
BALANCE SHEETS
December 31,
--------------------- June 30,
1999 2000 2001
---------- ---------- -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents.................. $1,548,218 $1,534,336 $1,822,520
Accounts receivable:
Collaborative partner.................... 1,250,000 1,250,000 --
Other.................................... 86,568 62,118 111,859
---------- ---------- ----------
1,336,568 1,312,118 111,859
Prepaid expenses........................... 545,245 163,063 229,761
---------- ---------- ----------
Total current assets......................... 3,430,031 3,009,517 2,164,140
Equipment, net............................... 783,494 1,145,896 1,265,323
Security deposits............................ 50,700 52,806 52,807
---------- ---------- ----------
Total assets................................. $4,264,225 $4,208,219 $3,482,270
========== ========== ==========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses...... $ 110,111 $ 48,364 $ 381,718
Deferred license fee revenue............... 666,667 666,667 333,333
Note payable............................... 130,375 244,643 256,597
Capital lease obligations.................. 64,971 86,932 93,396
Deferred tax liability..................... 145,000 190,000 190,000
---------- ---------- ----------
Total current liabilities.................... 1,117,124 1,236,606 1,255,044
Capital lease obligations, less current
portion..................................... 149,747 59,308 392,913
Notes payable, less current portion.......... 348,823 526,942 10,935
Deferred license fee revenue................. 666,666 -- --
Stockholders' equity:
Preferred Stock, $0.01 par value; 5,000,000
shares authorized and designated as:
Series A Convertible, 359,885 shares
authorized, issued and outstanding
(liquidation value of $1,399,991)....... 1,399,901 1,399,953 1,399,953
Common Stock, $0.01 par value; 10,000,000
shares authorized; 3,600,000 shares issued
and outstanding at December 31, 1999 and
2000, 4,179,065 at June 30, 2001.......... 36,000 36,000 41,791
Additional paid-in capital................... 235,424 235,424 520,145
Notes receivable from officers............... -- -- (230,426)
Retained earnings............................ 310,540 713,986 91,915
---------- ---------- ----------
Total stockholders' equity................... 1,981,865 2,385,363 1,823,378
---------- ---------- ----------
Total liabilities and stockholders' equity... $4,264,225 $4,208,219 $3,482,270
========== ========== ==========
See accompanying notes.
62
THE ALTHEXIS COMPANY, INC.
STATEMENTS OF OPERATIONS
October 1, 1998 Years ended December Six months ended June
(date of inception) 31, 30,
to December 31, --------------------- ---------------------
1998 1999 2000 2000 2001
------------------- ---------- ---------- ---------- ----------
(unaudited)
Revenues:
Collaborative
research............. $ -- $3,050,000 $4,050,000 $2,875,073 $1,650,000
License fees.......... -- 666,667 666,667 333,336 333,336
Grant revenue......... -- -- 108,097 -- --
--------- ---------- ---------- ---------- ----------
-- 3,716,667 4,824,764 3,208,409 1,983,336
Operating expenses:
Research and
development.......... -- 2,161,945 3,181,839 1,149,045 1,926,380
General and
administrative....... 299,703 815,292 1,247,960 657,308 661,879
--------- ---------- ---------- ---------- ----------
299,703 2,977,237 4,429,799 1,806,353 2,588,259
--------- ---------- ---------- ---------- ----------
Operating income
(loss)................. (299,703) 739,430 394,965 1,402,056 (604,923)
Interest income
(expense), net......... -- 45,813 53,481 18,148 (17,148)
--------- ---------- ---------- ---------- ----------
Income (loss) before
provision for income
taxes.................. (299,703) 785,243 448,446 1,420,204 (622,071)
Income tax expense...... -- 175,000 45,000 143,000 --
--------- ---------- ---------- ---------- ----------
Net income (loss)....... $(299,703) $ 610,243 $ 403,446 $1,277,204 $ (622,071)
========= ========== ========== ========== ==========
Net income (loss) per
share--Basic........... $ (0.08) $ 0.17 $ 0.11 $ 0.35 $ (0.17)
Net income (loss) per
share--Diluted......... $ (0.08) $ 0.17 $ 0.10 $ 0.31 $ (0.17)
Shares used to compute
net loss per share--
Basic.................. 3,600,000 3,600,000 3,600,000 3,600,000 3,647,993
Shares used to compute
net loss per share--
Diluted................ 3,600,000 3,675,366 4,122,161 4,099,260 3,647,993
See accompanying notes.
63
THE ALTHEXIS COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Series A
Convertible Retained
Preferred Stock Common Stock Additional Notes Earnings Total
------------------ ----------------- Paid-in Receivable (Accumulated Stockholders'
Shares Amount Shares Amount Capital from Officers Deficit) Equity
------- ---------- --------- ------- ---------- ------------- ------------ -------------
Net loss................ $(299,703) $ (299,703)
Issuance of Common
Stock.................. 3,600,000 $36,000 $235,424 271,424
------- ---------- --------- ------- -------- --------- --------- ----------
Balance at December 31,
1998................... 3,600,000 36,000 235,424 (299,703) (28,279)
Issuance of Series A
Convertible Preferred
Stock................. 359,885 $1,399,901 1,399,901
Net income............. 610,243 610,243
------- ---------- --------- ------- -------- --------- --------- ----------
Balance at December 31,
1999................... 359,885 1,399,901 3,600,000 36,000 235,424 310,540 1,981,865
Issuance of Series A
Convertible Preferred
Stock................. 52 52
Net income............. 403,446 403,446
------- ---------- --------- ------- -------- --------- --------- ----------
Balance at December 31,
2000................... 359,885 1,399,953 3,600,000 36,000 235,424 713,986 2,385,363
Issuance of Common
Stock (unaudited)..... 579,065 5,791 284,721 290,512
Note receivable from
officers (unaudited).. $(230,426) (230,426)
Net loss (unaudited)... (622,071) (622,071)
------- ---------- --------- ------- -------- --------- --------- ----------
Balance at June 30, 2001
(unaudited)............ 359,885 $1,399,953 4,179,065 $41,791 $520,145 $(230,426) $ 91,915 $1,823,378
======= ========== ========= ======= ======== ========= ========= ==========
See accompanying notes.
64
THE ALTHEXIS COMPANY, INC.
STATEMENTS OF CASH FLOWS
October 1,
1998 (date of Year ended For the six months
inception) to December 31, ended June 30,
December 31, ---------------------- ----------------------
1998 1999 2000 2000 2001
------------- ---------- ---------- ---------- ----------
(unaudited)
Operating activities:
Net income (loss)....... $(299,703) $ 610,243 $ 403,446 $1,277,204 $ (622,071)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... -- 71,497 263,530 118,851 158,345
Deferred tax
provision............ -- 145,000 45,000 -- --
Changes in operating
assets and
liabilities:
Accounts
receivable......... (51,000) (1,285,568) 23,950 1,199,374 1,200,259
Prepaid expenses and
security deposits.. -- (578,472) 380,575 211,583 (66,699)
Deferred license fee
revenue............ -- 1,333,333 (666,667) (333,333) (333,333)
Organization costs.. (17,472) -- -- -- --
Note payable........ 61,305 -- -- -- --
Accounts payable and
accrued expenses... 42,637 67,474 (61,747) 88,886 333,354
--------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) operating
activities............. (264,233) 363,507 388,087 2,562,565 669,855
Investing activity:
Purchase of equipment... -- (603,806) (625,932) (444,080) (453,943)
--------- ---------- ---------- ---------- ----------
Net cash used in
investing activity..... -- (603,806) (625,932) (444,080) (453,943)
Financing activities:
Issuance of Series A
Convertible Preferred
Stock.................. -- 1,399,901 52 52 --
Issuance of common
stock.................. 271,424 -- -- -- 60,086
Proceeds from equipment
loan................... -- 479,198 453,283 -- 176,170
Payments on notes
payable................ -- -- (151,566) (70,279) (122,075)
Payments on capital
lease obligations...... -- (36,468) (77,806) (27,412) (41,909)
Payment on notes payable
to stockholders........ -- (61,305) -- -- --
--------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities............. 271,424 1,781,326 223,963 (97,639) 72,272
--------- ---------- ---------- ---------- ----------
Net increase (decrease)
in cash................ 7,191 1,541,027 (13,882) 2,020,846 288,184
Cash at beginning of
period................. -- 7,191 1,548,218 1,548,218 1,534,336
--------- ---------- ---------- ---------- ----------
Cash at end of period... $ 7,191 $1,548,218 $1,534,336 $3,569,064 $1,822,520
========= ========== ========== ========== ==========
Noncash investing and
financing activities:
Equipment acquired under
capital lease.......... $ -- $ 251,185 $ -- $ -- $ --
Notes received for
common stock........... -- -- -- -- $ 230,426
Cash paid for:
Interest.............. -- $ 21,967 $ 87,445 $ 42,481 $ 53,760
Income taxes.......... -- $ 92,574 $ 50,456 $ 50,456 $ 25,000
See accompanying notes.
65
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000 and June 30, 2001 (unaudited)
1. Basis of Presentation
The Company
The Althexis Company, Inc. (the "Company") was formed on October 1, 1998 as
a limited liability company and converted to a corporation on December 31,
1998. Althexis' mission, as a post-genomics drug discovery Company, is to
employ a highly integrated approach to the discovery, development and
commercialization of novel orally active, small molecule drugs to treat human
diseases. The Company's discovery approach is centered on the use of Structure
Based Drug Design (SBDD), a powerful method of drug selection and design.
Interim Financial Information
The financial information and related notes at June 30, 2001 and for the six
months ended June 30, 2000 and 2001 are unaudited, but, in the opinion of
management, have been prepared on the same basis as the annual financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of
the financial position at such date and the operating results and cash flows
for such periods. Results for the six months ended June 30, 2001 may not be
indicative of the results for the year ended December 31, 2001.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. Significant Accounting Policies
Equipment
Equipment is recorded at cost. Depreciation and amortization are calculated
using the straight-line method over the estimated useful lives of the
equipment, which varies from three to seven years.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash equivalents and accounts receivable.
The Company places its cash equivalents with high credit quality financial
institutions and, by policy, limits the credit exposure to any one financial
instrument; accounts receivable are primarily limited to amounts due from
collaborators.
Revenues
The Company recognizes revenue under collaborative agreements as certain
milestones are achieved or license fees and research support payments are
earned. Federal grant revenues are recognized when reimbursable expenditures
are incurred for the grant.
Revenue is deemed earned when all of the following have occurred: all
obligations of the Company relating to the revenue have been met and the
earning process is complete; the monies received or receivable are not
refundable, irrespective of research results; and there are neither future
obligations nor future milestones to be met by the Company with respect to such
revenue.
66
Initial license fees are deferred and amortized over the period which the
Company is obligated to participate on a continuing and substantial basis in
the research and development activities outlined in each contract. Research
support payments are recognized over the period qualified research activities
are undertaken. Milestone payments are recognized as revenue in the period in
which the parties agree that the milestone has been achieved.
Stock Compensation Arrangements
The Company applies the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123). These provisions require the Company to disclose pro forma net income
(loss) amounts as if compensation expense related to grants of stock options
were recognized based on their fair value.
As permitted under SFAS 123, the Company accounts for its stock compensation
arrangements under the provisions of APB Opinion No. 25, Accounting for Stock
Issues to Employees (APB 25). Because the exercise price of options granted
during 2000 and 1999 equals the fair value of the underlying stock at date of
grant and the number of options is fixed, no compensation expense is required
under APB 25.
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between financial reporting and income tax bases of assets and liabilities, as
well as net operating loss carryforwards, and are measured using the enacted
tax rates and laws that will be in effect when the differences reverse.
Deferred tax assets are reduced by a valuation allowance to reflect the
uncertainty associated with their ultimate realization.
Segment Information
The Company is engaged in the development and commercialization of novel
antibiotic drugs. The Company manages its business and operations as one
segment. There are no revenues to date for any potential products and the
Company's assets are not identifiable to any one potential product.
3. Earnings Per Share
Basic net income (loss) per share represents net income divided by the
weighted average shares of common stock outstanding during the period. Diluted
net income (loss) per share includes the effect of all dilutive, potentially
issuable common shares using the treasury stock method. The difference between
basic and diluted shares used in the computation of net income (loss) per share
is as follows:
Six Months Ended
June 30,
-------------------
1998 1999 2000 2000 2001
--------- --------- --------- --------- ---------
(unaudited)
Weighted average number of
common shares outstanding
used in computing basic net
income (loss) per share..... 3,600,000 3,600,000 3,600,000 3,600,000 3,647,993
Effect of dilutive
securities:
Convertible Preferred
Stock..................... -- 7,888 359,885 359,885 359,885
Warrants................... -- 157 3,961 3,375 6,567
Options.................... -- 67,321 158,315 136,000 226,500
Restricted stock........... -- -- -- -- 254,567
--------- --------- --------- --------- ---------
Weighted average number of
common shares used in
diluted net income (loss)
per share................... 3,600,000 3,675,366 4,122,161 4,099,260 4,495,512
========= ========= ========= ========= =========
67
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and June 30, 2001 (unaudited)
4. Equipment
Equipment consists of the following:
December 31,
--------------------
1999 2000
-------- ----------
Laboratory equipment................................... $692,220 $1,257,369
Office and computer equipment.......................... 162,771 223,554
-------- ----------
854,991 1,480,923
Less accumulated depreciation.......................... (71,497) (335,027)
-------- ----------
$783,494 $1,145,896
======== ==========
5. Lease Commitments
The Company leases its facility under an operating lease that expires at the
end of 2002. The Company also leases certain of its equipment under a
noncancelable capital lease that requires the Company obtain a letter of credit
to secure the lease obligation. Future minimum lease payments under
noncancelable leases as of December 31, 2000 are as follows:
Capital Operating
-------- ---------
2001................................................... $102,432 $218,400
2002................................................... 62,316 218,400
-------- --------
Total minimum lease payments............................. 164,748 $436,800
========
Less amounts representing interest....................... (18,508)
--------
146,240
Less amounts currently due............................... (86,932)
--------
$ 59,308
========
Under the facility lease, the Company is required to pay to the lessor real
estate taxes and all related utility expenses. Rent expense amounted to
$223,314, $130,298 and $0 in 2000, 1999 and 1998, respectively.
At June 30, 2001, the Company is committed to purchase $176,000 of
laboratory equipment under a capital lease facility.
6. Notes Payable
In November 1999, the Company entered into a master loan agreement for the
purpose of financing the purchase of equipment. In December 1999, an initial
loan of $479,198 was obtained through the issuance of a note payable monthly
with interest at 12.4% through May 2003. In October 2000, a second note payable
was issued for the purchase of equipment totaling $453,283. That note is
payable monthly with interest at 12.2% through March 2004. Both notes are
secured by the related equipment. Annual maturities of the notes are as
follows: $244,643 in 2001, $276,524 in 2002, $211,633 in 2003 and $38,785 in
2004.
7. Collaboration Agreement
On December 24, 1998, the Company entered into a Collaboration Agreement
(the Agreement) with Pliva dd. (Pliva) to combine Pliva's scientific, drug
development and financial resources with the Company's
68
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and June 30, 2001 (unaudited)
unique expertise and experience in SBDD in order to discover, select, develop
and commercialize novel antibiotic drugs worldwide. The Company agreed to
undertake certain research (the Research Plan) and license the resulting
technology to Pliva. Pliva agreed to license certain of its technology to the
Company and received the right to commercialize any resulting products. Under
the Agreement the Company may receive up to $14.4 million in license fees,
research support and milestone payments over the three year term of the
Research Plan. The Research Plan may be extended by mutual consent of both
parties.
In January 1999, the Company received a $2,000,000 initial license fee that
is being recognized over the Research Plan term as license fees revenue in the
accompanying statement of operations. In January 1999, the Company began
receiving $7.5 million of research support payments ratably over the term of
the Research Plan. In 1999 and 2000 the Company also earned $550,000 and
$1,550,000, respectively, in milestone payments that have been reflected as
collaborative research revenue in the accompanying statement of operations.
8. Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
December 31,
-----------------
1999 2000
-------- --------
Rent....................................................... $223,316 $ --
Software license fees...................................... 168,326 63,683
Research expenses.......................................... 54,880 25,000
Professional fees.......................................... 75,194 --
Insurance.................................................. 8,807 13,766
Taxes...................................................... -- 47,437
Other...................................................... 14,722 13,177
-------- --------
$545,245 $163,063
======== ========
9. Income Taxes
From inception through December 31, 1998, the Company was taxed under the
Partnership provisions of the Internal Revenue Code. As such, the partners of
the Company were required to report their respective shares of the Company's
taxable loss through that date on their respective income tax returns.
Accordingly, no provision for federal or state income taxes has been made in
the 1998 financial statements.
Federal and state income tax expense consisted of the following:
1999 2000
-------- -------
Current:
Federal................................................... $ 30,000 $ --
-------- -------
30,000 --
Deferred:
Federal................................................... 104,000 --
State..................................................... 41,000 45,000
-------- -------
145,000 45,000
-------- -------
$175,000 $45,000
======== =======
69
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and June 30, 2001 (unaudited)
Income tax expense differed from the statutory income tax provision as
follows:
1999 2000
-------- --------
Statutory provision..................................... $266,983 $152,472
Nondeductible expenses.................................. 6,282 4,800
Research tax credits.................................... (98,265) (112,272)
-------- --------
Income tax expense...................................... $175,000 $ 45,000
======== ========
The significant components of the Company's deferred tax assets and
liabilities are as follows:
December 31,
--------------------
1999 2000
--------- ---------
Deferred tax assets:
Tax credits......................................... $ 64,341 $ 271,996
Organization costs.................................. -- 12,907
--------- ---------
Total deferred tax assets........................... 64,431 284,903
Less valuation allowance.............................. (24,118) (79,399)
--------- ---------
Net deferred tax assets............................... 40,223 205,504
Deferred tax liabilities:
Accrual to cash adjustment.......................... (150,087) (303,564)
Accelerated depreciation............................ (35,136) (91,940)
--------- ---------
Total deferred tax liabilities...................... (185,223) (395,504)
--------- ---------
Net deferred tax liability............................ $(145,000) $(190,000)
========= =========
Deferred tax accounting requires a valuation allowance to reduce the
deferred tax assets reported if, based on the weight of the evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. After consideration of all the evidence, both positive and
negative, management has determined that a $79,399 valuation allowance at
December 31, 2000 is necessary to reduce the deferred tax asset related to
state tax credits to the amount that will more likely than not be realized. The
change in the valuation allowance for the current year is $55,281. At December
31, 2000, the Company has available tax credits of $271,996 which expire in the
year 2020.
10. Stockholders' Equity
Preferred Stock
Each share of Series A Convertible Preferred Stock is convertible, at the
stockholders' option, into Common Stock at the rate then in effect (one to one
at December 31, 2000 and December 31, 1999) at any time after the consolidation
or merger of the Company with any other company or the sale of substantially
all of the assets of the Company. The shares will automatically convert upon
the closing of a public offering of the Company's Common Stock under the
Securities Act of 1933. The holders of Series A Convertible Preferred Stock are
entitled to receive, when and if declared by the Board of Directors, dividends
in the same amount per share as would be payable on the number of shares of
Common Stock into which the Preferred Stock is then convertible, payable in
preference and priority to any payment of any cash dividend on Common Stock.
The Series A Convertible Preferred shares are entitled to that number of votes
on any matter submitted to the stockholders of the Company equal to the number
of shares of Common Stock into which they are convertible.
70
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and June 30, 2001 (unaudited)
Upon the liquidation of the Company, the holder of each share of Series A
Convertible Preferred Stock is entitled, before any distribution or payment is
made to the holders of Common Stock, to be paid $3.89 per share plus any
declared and unpaid dividends thereon.
Restricted Stock
In April 2001, the Company sold 576,065 restricted shares of Common Stock to
certain officers for $.50 per share. In connection with the sale, the Company
agreed to provide to the officers recourse loans totaling $230,427 and bearing
interest at 6% per annum. The Company issued the Common Stock subject to a
repurchase option that lapses generally over four years. The loan and related
interest, secured by a pledge of the shares issued, will also be forgiven
generally over four years so long as the officers remain employed by the
Company.
Shares Reserved for Future Issuance
At December 31, 2000, the Company has reserved the following shares of
common stock for future issuance:
Stock option plan................................................. 400,000
Conversion of preferred stock..................................... 359,885
Warrants.......................................................... 6,567
-------
766,452
=======
11. Stock Option Plan
The Company's 1999 Stock Option Plan (the Plan) provides the opportunity for
employees, consultants and advisors to be granted options to purchase, or
receive awards of up to 400,000 shares of the Company's common stock. Options
granted under the Plan may be "Incentive Stock Options" or "Nonqualified
Options" under the applicable provisions of the Internal Revenue Code.
Incentive Stock Options are granted only to employees of the Company. Incentive
Stock Options granted to employees who own more than 10% of the total combined
voting power of all classes of stock will be granted at 110% of the fair market
value of the Company's common stock on the date of the grant. Nonqualified
Options may be granted to officers, employees, consultants, advisors and
directors of the Company. Nonqualified Options may be granted at amounts not
less than 50% of the fair market value of the Company's common stock on the
date of the grant, as determined by the Board of Directors.
During 2000 and 1999, the Company granted 90,500 and 136,000 options,
respectively, to employees and consultants to purchase shares of the Company's
common stock at an exercise price of $.50 per share. These options vest ratably
over four years. At December 31, 2000, 24,000 options have vested. No options
were vested as of December 31, 1999. The weighted-average fair value of the
options granted during 2000 and 1999 was $.13 per share. The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model. The following weighted-average assumptions were used to
determine the fair value for 2000 and 1999: a risk-free interest rate of 6% for
1999 and 5.83% for 2000, an expected dividend yield of 0%, a volatility factor
of 0.7 for 1999 and 0.82 for 2000, and a weighted-average expected life of the
options of five years.
The difference between the pro forma net income (loss) as if the Company had
used the fair value method of SFAS 123 to account for the stock options issued
under the equity incentive plan and the net loss reported in
71
THE ALTHEXIS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 2000 and June 30, 2001 (unaudited)
the accompanying statement of operations is immaterial. The effects of applying
SFAS 123 are not likely to be representative of the effects on pro forma net
income (loss) for future years.
12. Employee Savings Plan
In 2000, the Company established an employee savings plan, The Althexis
Company, Inc. 401(k) Plan. The plan is available to all full-time salaried and
nonunion hourly employees. The plan is funded with contributions by
participants and the Company. The Company did not make any contributions in
2000.
13. Related-Party Transactions
Mass Ventures LLC (Mass) is one of the co-founders of the Company. Assuming
conversion of all outstanding shares of convertible preferred stock, Mass has a
21.9% ownership interest in the Company at December 31, 2000. During 2000 and
1999, the Company paid Mass $124,369 and $194,293, respectively, for legal,
accounting and consulting services.
Dailey Capital Management LP (Dailey Capital) President, Michael E. Dailey,
is one of the co-founders of the Company. Assuming conversion of all
outstanding shares of convertible preferred stock, Mr. Dailey has a 17.9%
ownership interest in the Company at December 31, 2000. During 2000, the
Company paid Dailey Capital $303,659 for consulting services.
14. Subsequent Event
On July 27, 2001, the Company entered into a merger agreement with
Microcide, Inc., a publicly traded biotechnology company. Pending stockholder
approval, all outstanding shares of the Company's common and preferred stock
will be exchanged for shares of Microcide common stock.
72
ALTHEXIS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Althexis is a privately held biotechnology company that commenced operations
in October 1998. Since inception, Althexis has focused it resources on the
research and development of novel anti-infective therapeutics. Althexis has not
generated any revenue from product sales and has been dependent primarily upon
funding from its three-year collaboration agreement with Pliva Pharmaceuticals,
Inc., its private sale of both preferred and common stock, and equipment
financing provided by third parties. The Pliva collaboration has provided
Althexis substantially all of its revenue to date and has consisted of
collaborative research revenue, milestone payments and license fees. Althexis
expects its research and development expenses to increase as it expands its
existing early stage anti-infective programs. Additionally, Althexis also
expects its general and administrative costs to increase in connection with the
growth of the business overall. As a result, Althexis expects to incur
operating losses in the foreseeable future. Althexis' ability to sustain and
expand operations is dependent upon its ability to enter into additional
collaboration agreements with corporate partners, obtain additional capital
through the sale of its securities and obtain additional financing from third
parties. There can be no assurance that Althexis can achieve these objectives.
Adequate additional funds may not be available when needed or on terms
acceptable to Althexis.
Results of Operations
Comparison of Six Months Ended June 30, 2001 and 2000
Revenue. Total revenues were $2.0 million and $3.2 million for the six month
periods ended June 30, 2001 and 2000, respectively. Substantially all revenues
result from Althexis' collaboration agreement with Pliva Pharmaceuticals and
consist of milestone payments, collaborative research payments and the
amortization of revenue previously deferred in connection with an up-front
license fee received by Althexis. The reduction in revenue in 2001 as compared
to 2000 is due to a reduction in milestone payments between the periods.
Research and Development Expenses. Research and development expenses
increased by $777,000, or 68%, to $1.9 million for the six-month period ended
June 30, 2001, compared to $1.1 million for the comparable period in the prior
year. This increase was primarily due to the hiring of additional scientific
staff in 2001 as well as the related laboratory supplies and other costs that
increase proportionately with staffing levels. Althexis expects research and
development expenses to increase significantly over the next several years as
it expands its scientific programs.
General and Administrative Expenses. General and administrative expenses
were $662,000 and $657,000 for the six month periods ended June 30, 2001 and
2000, respectively. This increase was the result of increased staffing and
related expenses incurred in managing the business. Althexis expects general
and administrative expenses to increase in connection with the planned growth
of the business.
Interest Income (Expense) Net. Net interest expense was $17,000 for the six
months ended June 30, 2001 as compared to the net interest income of $18,000
for the six months ended June 30, 2000. The change was due to a lower average
cash balance available for investment in 2001 and increased interest expense in
2001, in connection with the $453,000 increase in equipment financing in
October 2000.
Comparison of Years Ended December 31, 2000 and 1999
Revenue. Total revenues were $4.8 million and $3.7 million for the years
ended December 31, 2000 and 1999, respectively. Substantially all of the
revenues were earned in connection with the Pliva collaboration agreement and
consist of collaborative research revenue, milestone payments and the release
of deferred
73
revenue related to an up-front license fee. The increase in revenues in 2001
was due to a $1.0 million increase in milestone fees earned over the prior
year.
Research and Development Expenses. Research and development expenses were
$3.2 million and $2.2 million for the years ended December 31, 2000 and 1999,
respectively, representing an increase of 45% or $1.0 million. The increase in
costs is primarily related to the increase in scientific staff, as well as
related laboratory supply costs. Althexis expects its research and development
expenses to increase significantly over the next several years.
General and Administrative Expenses. General and administrative costs were
$1.2 million and $816,000 for the years ended December 31, 2000 and 1999,
respectively. The increase in costs in 2000 is primarily attributable to
increased staffing and related expenses necessary to manage the expansion of
Althexis' operations. Althexis expects that general and administrative expenses
will continue to increase over the next several years as Althexis' operations
continue to expand.
Interest Income (Expense,) Net. Interest income, net increased to $53,000
for the year ended December 31, 2000 as compared to $46,000 for the year ended
December 31, 1999. The increase in 2000 is due to higher average cash balances
available for investment partially offset by increased interest costs related
to an additional $453,000 in equipment financing incurred in October 2000.
Comparison of Year Ended December 31, 1999 and the Period October 1, 1998 (Date
of Inception) Through December 31, 1998
Revenue. Total revenues were $3.7 million for the year ended December 31,
1999, all earned in connection with the Pliva collaboration. These revenues
consisted of collaborative research revenue, milestone payments and the release
of deferred revenue associated with an up-front license fee. There were no
revenues earned in 1998.
Research and Development Expenses. Research and development expenses were
$2.2 million for the year ended December 31, 1999, and consist of scientific
staffing costs and related expenses as Althexis began the process of hiring its
research and development personnel and initiated work on its scientific
programs. There were no research and development expenses incurred in 1998 as
Althexis' activities in 1998 were focused on general and administrative areas
in connection with the start-up.
General and Administrative Expenses. General and administrative expenses
were $816,000 for the year ended December 31, 1999 and $300,000 for the period
ended December 31, 1998. The increase was due to the full year of operations as
well as additional staff hired and related costs incurred in 1999 to manage the
growth of the business.
Interest Income (Expense,) Net. Interest income, net increased to $46,000 in
1999 over a minor amount in 1998 due to higher average cash balances on hand to
invest as well as the full year of operations, offset by the interest cost
related to Althexis' $479,000 equipment loan and $251,000 in capital lease
obligations incurred in 1999.
Liquidity and Capital Resources
Althexis has financed its operations from inception through June 30, 2001
primarily through a total of $10.75 million in license fees, collaborative
research revenue and milestone payments received in connection with its Pliva
collaboration agreement, $1.4 million from the private sale of preferred stock,
$271,000 from the private sale of common stock and $1.2 million through
equipment financing. Cash and equivalents totaled $1.8 million at June 30,
2001. Althexis believes its existing cash and equivalents will be sufficient to
fund its operating expenses, debt obligations and capital requirements through
2001. Althexis' ability to sustain and expand its operations is dependent upon
its ability to enter into additional collaboration agreements with corporate
partners, obtain additional capital through the sale of its securities and
obtain additional financing from third parties. There can be no assurance that
Althexis can achieve these objectives. Adequate additional funds may not be
available when needed or on terms acceptable to Althexis.
74
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following pro forma condensed combined financial statements reflect the
accounting for the merger of California MP Acquisition, a wholly owned
subsidiary of Microcide, with and into Althexis in accordance with generally
accepted accounting principles. California MP Acquisition is a wholly-owned
subsidiary of Microcide. The merger agreement provides that:
. each outstanding share of preferred and common stock of Althexis will be
exchanged for an estimated 1.15 shares of Microcide common stock;
. each option and warrant to purchase Althexis common stock or Althexis
preferred stock will be assumed by Microcide and become an option or
warrant, as applicable, to purchase a number of shares of Microcide
common stock equal to the number of shares of Althexis stock that the
option or warrant was exercisable for immediately prior to the completion
of the merger multiplied by an estimated 1.15 exchange ratio.
The unaudited pro forma condensed consolidated financial statements are based
upon and should be read in conjunction with the historical financial statements
of Microcide included in its report on Form 10-K for the year ended December
31, 2000 and report on Form 10-Q for the quarter ended June 30, 2001, both of
which are incorporated by reference herein, and the historical financial
statements of Althexis, which are included elsewhere in this proxy statement.
The unaudited pro forma condensed combined balance sheet as of June 30,
2001, gives effect to the merger of California MP Acquisition with and into
Althexis and related transactions as if they occurred on June 30, 2001. The
unaudited pro forma condensed combined balance sheet gives effect to the
exchange of shares described above and in Note 1 and the $60.0 million equity
financing expected to close concurrently with the merger.
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 2000 and the six months ended June 30, 2001 give effect
to the merger of California MP Acquisition with and into Althexis and related
transactions as if they had occurred on January 1, 2000. The unaudited pro
forma condensed combined statement of operations does not (a) purport to
represent what the results of operations actually would have been if the merger
of California MP Acquisition with and into Althexis and the other transactions
described below had occurred as of the date indicated or what those results
will be for any future periods or (b) give effect to certain nonrecurring
charges expected to result from the transaction (among other charges, such non-
recurring charges include a charge of $13.9 million relating to acquired in-
process research and development and a deemed dividend charge amounting to
approximately $23.8 million, which would have the effect of increasing net loss
attributable to common stockholders).
The merger of California MP Acquisition with and into Althexis will be
accounted for using the purchase method of accounting, with the total
acquisition cost allocated to the tangible and intangible assets and
liabilities acquired based upon their estimated fair values. The preliminary
purchase price allocation is based on an independent third-party valuation
which has not yet been finalized and is therefore subject to change. Upon
completion of the merger, the amount of purchase price allocated to tangible
assets acquired, in-process research and development and liabilities assumed
could differ from the amounts and allocation discussed in the Notes to the
Unaudited Pro Forma Condensed Combined Financial Statements. Microcide and
Althexis are not aware of any significant unrecorded obligations or
contingencies that are not included in the accompanying purchase price
allocation. However, the final allocation of the purchase price will be made
based upon valuations and other studies that have not been completed.
In addition, Microcide and Althexis expect to incur approximately $1.435
million in costs directly attributable to the merger and the financing. The
$1.435 million of transaction costs expected to be incurred have been included
in the determination of the preliminary purchase price.
We expect to incur certain expenses as a result of combining the companies;
however, the unaudited pro forma earnings per share data does not reflect any
of these anticipated expenses.
75
MICROCIDE PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of June 30, 2001
(in thousands)
Microcide Financing References Microcide Althexis Pro Forma References Pro Forma
Historical Adjustments (Note) Adjusted Historical Adjustments (Note) Combined
---------- ----------- ---------- --------- ---------- ----------- ---------- ---------
ASSETS
------
Current assets:
Cash and cash
equivalents........... $ 8,342 $ 60,000 (I) $ 68,342 $1,673 $ 70,015
Investments--short
term.................. 2,984 2,984 150 3,134
Receivables, prepaid
expenses and other
assets................ 848 848 341 1,189
-------- -------- -------- ------ --------
Total current
assets.............. 12,174 60,000 72,174 2,164 $ -- 74,338
Property and equipment,
net.................... 4,755 4,755 1,265 6,020
Other assets:
Deposits and other
assets................ 867 867 53 920
Goodwill and other
intangibles........... -- -- -- 4,962 (B) 4,962
-------- -------- -------- ------ ------- --------
Total assets......... $ 17,796 $ 60,000 $ 77,796 $3,482 $ 4,962 $ 86,240
======== ======== ======== ====== ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
Current liabilities:
Accounts payable....... $ 512 $ 512 $ 382 $ 894
Accrued compensation... 1,038 1,038 1,038
Other accrued
liabilities........... 1,236 1,236 190 $ 1,435 (C) 2,861
Current portion of
notes payable......... 1,025 1,025 257 1,282
Current portion of
debt obligations...... -- -- -- 93 -- 93
Deferred revenue....... 4,038 4,038 333 4,371
-------- -------- -------- ------ ------- --------
Total current
liabilities......... 7,849 7,849 1,255 1,435 10,539
Long-term portion of
notes payable.......... 103 103 393 496
Long-term portion of
debt obligations....... -- -- -- 11 -- 11
Accrued rent............ 353 353 353
Redeemable preferred
stock.................. $ 60,000 (I) 60,000 60,000
Stockholders equity:
Preferred stock........ -- -- 1,400 (1,400) (A) --
Common stock........... 68,897 68,897 42 (42) (A) 91,954
23,057 (D)
Additional paid-in
capital............... -- 23,800 (G) 23,800 520 (520) (A) 23,800
Notes receivable from
officers.............. -- -- (231) -- (231)
Deferred stock
compensation.......... (130) (130) (3,576) (F) (3,706)
Accumulated deficit.... (59,276) (23,800) (G) (83,076) 92 (92) (A) (96,976)
(13,900) (E)
-------- -------- -------- ------ ------- --------
Total stockholders'
equity.............. 9,491 -- 9,491 1,823 3,527 14,841
-------- -------- -------- ------ ------- --------
Total liabilities and
stockholders'
equity.............. $ 17,796 $ 60,000 $ 77,796 $3,482 $ 4,962 $ 86,240
======== ======== ======== ====== ======= ========
76
MICROCIDE PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2001
(In thousands, except per share data)
Microcide Althexis Pro Forma References Pro Forma
Historical Historical Adjustments (Note) Combined
---------- ---------- ----------- ---------- ---------
Total revenues.......... $ 4,515 $1,983 $ 6,498
Operating expenses:
Research and
development.......... 8,477 1,926 10,403
Selling, general and
administrative....... 2,463 662 $ 447 (F) 3,572
------- ------ ----- -------
Total operating
expenses........... 10,940 2,588 447 13,975
Operating loss.......... (6,425) (605) (447) (7,477)
Other income (expense):
Interest income, net.. 337 (17) 320
------- ------ ----- -------
Net income.......... $(6,088) $ (622) $(447) $(7,157)
======= ====== ===== =======
Net loss per share--
basic and diluted...... (0.53) (0.17) -- $ (0.43)
Shares used in computing
basic and diluted net
loss per share......... 11,486 3,648 -- 16,786
77
MICROCIDE PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2000
(In thousands, except per share data)
Microcide Althexis Pro Forma References
Historical Historical Adjustments (Notes) Pro Forma
---------- ---------- ----------- ---------- ---------
Total revenues.......... $ 5,864 $4,825 $ 10,689
Operating expenses:
Research and
development.......... 16,082 3,182 19,264
Selling, general and
administrative 4,353 1,248 $ 894 (F) 6,495
-------- ------ ----- --------
Total operating
expenses........... 20,435 4,430 894 25,759
-------- ------ ----- --------
Operating income
(loss)................. (14,571) 395 (894) (15,070)
Other income (expense):
Other income.......... 1,110 -- -- 1,110
Interest income, net.. (251) 53 -- (198)
-------- ------ ----- --------
859 53 -- 912
-------- ------ ----- --------
Income (loss) before
income taxes........... (13,712) 448 (894) (14,158)
Income tax expense...... -- 45 (45) (H) --
-------- ------ ----- --------
Income (loss) before
cumulative effect of
change in accounting
principle.............. (13,712) 403 (849) (14,158)
Cumulative effect of
change in accounting
principle.............. (233) -- -- (233)
-------- ------ ----- --------
Net income (loss)... $(13,945) $ 403 $(849) $(14,391)
======== ====== ===== ========
Net income (loss) per
share:
--basic............... $ (1.23) $ 0.11 $ -- $ (0.86)
--diluted............. (1.23) 0.10 -- (0.86)
Shares used to compute
net income (loss) per
share:
--basic............... 11,320 3,600 -- 16,738
--diluted............. 11,320 4,122 -- 16,738
78
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
Pursuant to the merger agreement, California MP Acquisition, a wholly-owned
subsidiary of Microcide, will merge with and into Althexis. In connection with
the merger, Microcide will issue an estimated 1.15 shares of common stock in
exchange for each share of Althexis common and preferred stock outstanding. At
the date of the merger agreement, Althexis had 4,181,065 shares of common stock
and 359,885 shares of Series A convertible preferred stock issued and
outstanding. In addition, as the date of the merger agreement, Althexis had
outstanding warrants to purchase 6,567 shares which will be exchanged for
warrants to purchase an estimated 7,518 shares of Microcide common stock.
Pursuant to the terms of the merger agreement, Microcide will assume all
outstanding options and the stock option plan of Althexis. As at the date of
the merger agreement, there were 300,000 options outstanding which will be
assumed and exercisable for an estimated 343,476 shares of Microcide common
stock.
Microcide's total cost to acquire Althexis is estimated to be $20.9 million,
which has been estimated using the closing market price of Microcide's common
stock as of July 27, 2001, including approximately $1.435 million of merger
related costs.
The cost to acquire Althexis has been allocated to the assets acquired and
liabilities assumed according to their respective fair values, with the excess
purchase price being allocated to goodwill. The allocation of the aggregate
purchase price is based on management's estimate. A formal valuation analysis
for purposes of allocating the fair value of purchased assets and liabilities
has not been completed. As such, adjustments to asset values and liabilities in
the final allocation may differ significantly from these estimates, which could
impact future earnings.
The estimated purchase cost of Althexis is as follows (in thousands):
Value of Microcide common stock issued.................. $23,057
Less: Intrinsic value of unvested options............... (963)
Fair value of shares issued to officers subject to
repurchase .......................................... (2,613)
------
Deferred compensation................................... (3,576)
Estimated transaction costs and expenses................ 1,435
-------
$20,916
=======
The purchase price allocation is as follows (in thousands):
Amount
-------
Net tangible assets of Althexis................................... $ 2,054
Intangible assets acquired:
In-process research and development............................. 13,900
Goodwill........................................................ 4,962
-------
Total purchase price allocation............................... $20,916
=======
The fair value assigned to purchased in-process research and development was
estimated by discounting, to present value, the cash flows expected to result
from each Althexis in-process research and development project once it has
reached commercial feasibility. In estimating future cash flows, a charge was
applied to the cash flows, reflecting other tangible and intangible assets
required for the successful development of the product resulting from each
purchased in-process research and development project. The discount rates used
reflect the stage of completion each project has achieved up to the merger
date.
79
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS--(Continued)
Below is a brief description of the in-process research and development
projects, including an estimation of when management believes Microcide may
realize revenues from the sale of these products in the respective application.
ACTT (Althexis Calorimetric Target Triage). ACTT is a proprietary technology
used to assess the functional activity of proteins that serve as potential drug
targets. The technology allows for an accelerated and more efficient assessment
and characterization of novel genomic targets, resulting in a more timely
approach to discovery of new drugs. Pending completion of improvements to
increase throughput and scale, Althexis hopes to provide services to assist
other biotech firms in drug discovery, on a commercial basis, beginning in late
2002. The future cost of this program is estimated to be approximately $1.0
million. A discount rate of 35% was utilized in discounting these estimated
cash flows.
Pliva Project. Althexis' current collaboration with PLIVA d.d. has resulted
in the selection of a new broad spectrum antibacterial agent. An IND submission
is anticipated for early 2002, with product launch expected in 2006-2007,
although there can be no assurance that a product will be launched or that the
launch will occur within this time period. While PLIVA has certain marketing
rights to this product, and is undertaking development in its market territory,
Althexis retains development and marketing rights in the Far East. Althexis
anticipates it will partner with a new firm for the development and marketing
rights in that region.
The future cost of this program is estimated to be approximately $12
million, a majority of which is anticipated to be reimbursed by the licensing
partner. A discount rate of 45% was utilized in discounting these estimated
cash flows.
Narrow Spectrum Antibiotic Project. Althexis has identified a narrow
spectrum antibacterial agent that has demonstrated some antimicrobial efficacy
in small animal tests. An IND submission is anticipated sometime in 2002, with
product launch expected in 2006-2007, although there can be no assurance that a
product will be launched or that the launch will occur within this time period.
Once the project reaches late clinical stage, it is anticipated a development
and marketing partnership will be arranged.
The future cost of this program is estimated to be approximately $33
million, a majority of which is anticipated to be reimbursed by the licensing
partner. A discount rate of 50% was utilized in discounting these estimated
cash flows.
Broad Spectrum Antibiotic Project. A broad spectrum antibiotic targeting an
enzyme involved in bacterial protein synthesis is in the compound testing
phase. An IND submission is anticipated in 2003, with product launch expected
in 2007, although there can be no assurance that a product will be launched or
that the launch will occur within this time period. Once the project reaches
late clinical stage, it is anticipated a development and marketing partnership
will be arranged.
The future cost of this program is estimated to be approximately $33
million, a majority of which is anticipated to be reimbursed by the licensing
partner. A discount rate of 55% was utilized in discounting these estimated
cash flows.
Goodwill represents the excess of the purchase price of an investment in an
acquired business over the fair value of the underlying net identifiable
assets. In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" or SFAS, No. 142,
which directed that goodwill and indefinite lived intangible assets will no
longer be amortized but reviewed at least annually for impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives. The amortization provisions of SFAS
No. 142 apply to goodwill and intangible assets acquired after June 30, 2001.
Accordingly, the goodwill acquired pursuant to the merger has not been
amortized.
80
DESCRIPTION OF PRO FORMA ADJUSTMENTS RECORDED
IN PRO FORMA FINANCIAL INFORMATION
(A) To eliminate Althexis' historical equity accounts.
(B) To reflect the goodwill and intangible assets originating from the
transaction.
(C) To reflect the estimated direct transaction costs recorded as part of the
purchase price.
(D) To reflect the issuance of Microcide common stock.
(E) To reflect the estimated purchased in-process research and development
charge.
(F) To reflect the deferred compensation charges associated with the intrinsic
value of unvested options exchanged in the merger and shares held by
employees subject to a lapsing right of repurchase and the amortization
thereof.
(G) To reflect the deemed dividend relating to the beneficial conversion
feature of the convertible redeemable preferred stock.
(H) To reflect tax benefit of combined losses.
(I) Reflects the receipt of $60.0 million of gross proceeds from the issuance
of convertible redeemable preferred stock.
81
AMENDMENT TO MICROCIDE'S RESTATED CERTIFICATE OF INCORPORATION
Pursuant to the provisions of the merger agreement, Microcide will change
its name to "Essential Therapeutics, Inc." in connection with the completion of
the merger. The Microcide Board believes that the new name more accurately
describes the business strategy and operations of the combined company.
Pursuant to Microcide's Restated Certificate of Incorporation and Delaware law,
Microcide's Restated Certificate of Incorporation cannot be amended without the
approval of Microcide's stockholders. This amendment to Microcide's Restated
Certificate of Incorporation will only become effective if the merger agreement
and the amendment to Microcide's Restated Certificate of Incorporation are
approved.
If the amendment to Microcide's Restated Certificate of Incorporation is
approved by Microcide's stockholders, Article I will be amended to read as
follows:
"The name of the Corporation is Essential Therapeutics, Inc."
82
BENEFICIAL SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information known to Microcide with respect
to beneficial ownership of its common stock as of July 31, 2001 by the
following persons:
. each stockholder known by Microcide to be the beneficial owner of more
than 5% of the common stock;
. each current director;
. Microcide's Chief Executive Officer and each of the other executive
officers of Microcide whose total salary and bonus for fiscal year 2000
exceeded $100,000; and
. all executive officers and directors as a group.
Percent
Five Percent Stockholders, Directors and Executive Beneficially
Officers Number Owned(1)
- -------------------------------------------------- ------- ------------
BVF Partners L.P. ....................................... 975,007 8.5%
333 West Wacker Drive, Suite 1600
Chicago, IL 60606
Liberty Wanger Asset Management, L.P. ................... 823,000 7.1%
70 West Madison Street, Suite 3300
Chicago, IL 60602
Keith A. Bostian, Ph.D.(2)............................... 193,433 1.7%
Donald D. Huffman(3)..................................... 30,000 *
Daniel L. Kisner, M.D.(4)................................ 22,667 *
George H. Miller, Ph.D.(5)............................... 129,432 1.0%
Hugh Y. Rienhoff, Jr., M.D.(6)........................... 17,035 *
James E. Rurka(7)........................................ 435,282 3.6%
John P. Walker(8)........................................ 63,833 *
All directors and executive officers as a group (7
persons)(9)............................................. 890,682 7.7%
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities, subject to community property laws, where
applicable. Applicable percentage ownership is based on 11,519,313 shares
of Common Stock outstanding as of July 31, 2001. Except as otherwise
indicated, each individual named has a business address of c/o Microcide
Pharmaceuticals, Inc., 850 Maude Avenue, Mountain View, California 94043.
(2) Includes 145,433 shares held by Dr. Bostian, 16,000 shares held by Arthur
Weil as Trustee for Dr. Bostian's children with respect to which Dr.
Bostian disclaims beneficial ownership, 2,000 shares held by Dr. Bostian
as Custodian for Dr. Bostian's children, and 30,000 shares issuable to Dr.
Bostian pursuant to options exercisable within 60 days of July 31, 2001.
Of the latter, Dr. Bostian disclaims beneficial ownership of 12,794
shares, the beneficial ownership of which has been transferred to his
former spouse.
(3) Includes 30,000 shares issuable to Mr. Huffman pursuant to options
exercisable within 60 days of July 31, 2001.
(4) Includes 22,667 shares issuable to Dr. Kisner pursuant to options
exercisable within 60 days of July 31, 2001.
(5) Includes 16,307 shares held by Dr. Miller and 113,125 shares issuable to
Dr. Miller pursuant to options exercisable within 60 days of July 31,
2001.
(6) Includes 35 shares held by Dr. Rienhoff and 17,000 shares issuable to Dr.
Rienhoff pursuant to options exercisable within 60 days of July 31, 2001.
(7) Includes 187,365 shares held by Mr. Rurka and 247,917 shares issuable to
Mr. Rurka pursuant to options exercisable within 60 days of July 31, 2001.
83
(8) Includes 15,000 shares held by the Walker Living Trust of which Mr. Walker
is a Trustee and 48,833 shares issuable to Mr. Walker pursuant to options
exercisable within 60 days of July 31, 2001.
(9) Includes 509,542 shares issuable pursuant to options exercisable within 60
days of July 31, 2001.
OTHER MATTERS
As of the date of this proxy statement, the Microcide Board knows of no
matters that will be presented for consideration at the special meeting other
than as described in this proxy statement. If any other matters shall properly
come before the special meeting or any adjournment or postponement and be voted
upon, the enclosed proxies will be deemed to confer discretionary authority on
the individuals named as proxies to vote the shares represented by the proxies
as to any other matters. The persons named as proxies intend to vote or not to
vote in accordance with the recommendation of the management of Microcide.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Proposals of stockholders of Microcide that are intended to be presented by
any stockholders at Microcide's 2002 Annual Meeting of Stockholders must be
received by Microcide no later than January 23, 2002 in order that they may be
considered for inclusion in the proxy statement and form of proxy relating to
that meeting, and in any event, must be received by Microcide no later than
April 8, 2002 to be eligible for stockholder action in that meeting.
84
WHERE YOU CAN FIND MORE INFORMATION
Microcide files annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy any reports,
statements or other information we file in the Commission's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please
call the Commission at (800) SEC-0330 for further information on the public
reference rooms. Our Commission filings are also available to the public from
commercial document retrieval services and at the web site maintained by the
Commission at www.sec.gov.
The Commission allows us to incorporate by reference information into this
proxy statement which means that we can disclose important information to you
by referring you to another document filed separately with the Commission. The
information incorporated by reference is deemed to be a part of this proxy
statement, except for any information superseded by information in this proxy
statement. This proxy statement incorporates by reference the following
documents that we have previously filed with the Commission.
. Annual Report on Form 10-K/A for the year ended December 31, 2001;
. Quarterly Report on Form 10-Q for the quarter ended March 31, 2001;
. Quarterly Report on Form 10-Q for the quarter ended June 30, 2001;
. Current Report on Form 8-K dated March 23, 2001; and
. Current Report on Form 8-K dated July 27, 2001.
We are also incorporating by reference additional documents that we may file
with the Commission between the date of this proxy statement and the date of
the special meeting.
If you are a stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them without charge,
excluding all exhibits unless we have specifically incorporated by reference an
exhibit in this proxy statement. Stockholders may obtain documents incorporated
by reference in this proxy statement by requesting them in writing or by
telephone from Microcide at 850 Maude Avenue, Mountain View, California 94043,
Telephone: (650) 428-3535. If you would like to request documents from us,
please do so by , 2001 to receive them before the special meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement. We have not authorized anyone to provide you
with information that is different from what is contained in this proxy
statement. This proxy statement is dated , 2001. You should not assume
that the information contained in this proxy statement is accurate as of any
date other than , 2001, and the mailing of this proxy statement to
stockholders shall not create any implication to the contrary.
85
APPENDIX A
================================================================================
AGREEMENT AND PLAN OF MERGER
by and among
MICROCIDE PHARMACEUTICALS, INC.,
CALIFORNIA MP ACQUISITION, INC.
and
THE ALTHEXIS COMPANY, INC.
Dated as of July 27, 2001
================================================================================
TABLE OF EXHIBITS
Exhibit A Form of Stockholder Support Agreement
Exhibit B Severance Agreement
Exhibit C Form of Option Agreement
Exhibit D First Amended and Restated Executive Stock Purchase Agreement
Exhibit E Form of Stockholders Agreement
Exhibit F Form of Note
AGREEMENT AND PLAN OF MERGER
----------------------------
This AGREEMENT AND PLAN OF MERGER is dated as of July 27, 2001 (the
"Agreement"), by and among Microcide Pharmaceuticals, Inc., a Delaware
- ----------
corporation ("Parent"), California MP Acquisition, Inc., a Delaware corporation
------
("Sub"), and The Althexis Company, Inc., a Delaware corporation (the "Company").
--- -------
RECITALS:
--------
A. The Boards of Directors of Parent, Sub and the Company have determined
that it is advisable and in the best interests of their respective stockholders
for Parent, Sub and the Company to enter into a business combination upon the
terms and subject to the conditions set forth herein.
B. In furtherance of such combination, the Boards of Directors of Parent,
Sub and the Company have each approved the merger of Sub with and into the
Company (the "Merger"), upon the terms and subject to the conditions set forth
------
herein, in accordance with the applicable provisions of the Delaware General
Corporation Law (the "DGCL").
----
C. Parent, Sub and the Company intend, by approving resolutions
authorizing this Agreement, to adopt this Agreement as a plan of reorganization
within the meaning of Section 368 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations promulgated thereunder.
----
D. In connection with the execution of this Agreement, (i) stockholders of
the Company owning shares of Company Stock (as defined below) representing not
less than 51% of the outstanding common stock of the Company shall have executed
and delivered to Parent a stockholder support agreement, in the form attached
hereto as Exhibit A, (ii) certain employees of the Company shall have entered
---------
into severance agreements with Parent in the form attached hereto as Exhibit B,
---------
(iii) the Company and Parent shall have entered into an option agreement in the
form attached hereto as Exhibit C pursuant to which the Company shall grant
---------
Parent an option to purchase shares of Company Common Stock (as defined below)
under certain circumstances, (iv) the Company and Parent shall have entered into
an option agreement in the form attached hereto as Exhibit C pursuant to which
---------
Parent shall grant the Company an option to purchase shares of Parent Common
Stock (as defined below) under certain circumstances and (v) Parent shall have
entered into definitive agreements in form and substance reasonably acceptable
to Parent and the Company with regard to the Financing (as defined below).
E. Pursuant to the Merger, each outstanding share of Company Stock shall
be converted solely into the right to receive Parent Common Stock, upon the
terms and subject to the conditions set forth herein.
F. Concurrently with the closing of the transactions contemplated by this
Agreement, Parent shall issue and sell shares of Parent Preferred Stock (as
defined below) in a private placement for a minimum aggregate purchase price
equal to $55.0 million ($55,000,000).
1
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Parent, Sub and the Company hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings:
"Actions" has the meaning set forth in Section 3.16.
"Affiliate" of a Person means any other Person which, directly or
indirectly, controls, is controlled by, or is under common control with, such
Person. The term "control" (including, with correlative meaning, the terms
"controlled by" and "under common control with"), as used with respect to any
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, whether
through the ownership of voting securities, by contract or otherwise.
"Agreement" has the meaning set forth in the preamble.
"Ancillary Agreements" means the Severance Agreements, the First
Amended and Restated Executive Stock Purchase Agreement, the Stockholders
Agreement, the Stockholder Support Agreements, the Option Agreements and all
other agreements required hereunder to consummate the Merger.
"Arbitrable Claim" has the meaning set forth in Section 9.15.
"Assets" means the right, title and interest of the Company in its
properties, assets and rights of any kind, whether tangible or intangible, real
or personal, including without limitation the right, title and interest in the
following:
(a) all Contracts and Contract Rights;
(b) all Fixtures and Equipment;
(c) all Inventory;
(d) all Books and Records;
(e) all Proprietary Rights;
(f) all Permits;
(g) all return and other rights under or pursuant to all warranties,
representations and guarantees made by suppliers and other third parties in
connection with the Assets or services furnished to such Person;
2
(h) all cash, accounts receivable, deposits and prepaid expenses; and
(i) all goodwill.
"Average Parent Common Stock Price" means $4.00 per share (based on
the average of the closing prices of Parent Common Stock on the Nasdaq National
Market as reported in the Wall Street Journal for the twenty (20) Trading Days
ending on June 11, 2001).
"Balance Sheet" means the balance sheet of the Company as of the
Balance Sheet Date.
"Balance Sheet Date" means May 31, 2001.
"Benefit Arrangement" means, with respect to any Person, any
employment, consulting, severance or other similar contract, arrangement or
policy (written or oral) and each plan, arrangement, program, agreement or
commitment (written or oral) providing for insurance coverage (including,
without limitation, any self-insured arrangements), workers' compensation,
disability benefits, supplemental unemployment benefits, vacation benefits,
retirement benefits, life, health or accident benefits (including, without
limitation, any "voluntary employees' beneficiary association" as defined in
Section 501(c)(9) of the Code providing for the same or other benefits) or for
deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation rights, stock purchases or other forms of incentive compensation or
post-retirement insurance, compensation or benefits which (a) is not a Welfare
Plan, Pension Plan or Multiemployer Plan, (b) is entered into, maintained,
contributed to or required to be contributed to, as the case may be, by such
Person or any ERISA Affiliate or under which such Person or any ERISA Affiliate
may incur any liability, and (c) covers any employee or former employee of such
Person or any ERISA Affiliate (with respect to their relationship with such any
entity).
"Books and Records" means (a) all product, business and marketing
plans, sales and promotional literature and artwork relating to the Assets or
the Business, (b) all books, records, lists, ledgers, financial data, files,
reports, product and design manuals, plans, drawings, technical manuals and
operating records of every kind relating to the Assets or the Business
(including records and lists of customers, distributors, suppliers and
personnel) and (c) all telephone and fax numbers used in the Business, in each
case whether maintained as hard copy or stored in computer memory and whether
owned by the Company or its Affiliates.
"Business" means the discovery, development and commercialization of
new medicines to treat human diseases by the Company and all other business and
operations of the Company.
"Certificate of Merger" has the meaning set forth in Section 2.2.
"Certificates" means certificates which immediately prior to the
Effective Time represented outstanding shares of Company Stock.
"Closing" has the meaning set forth in Section 2.1(b).
"Closing Date" means the date of the Closing.
3
"Code" has the meaning set forth in the recitals.
"Company" has the meaning set forth in the preamble.
"Company Closing Certificate" has the meaning set forth in Section
7.1.
"Company Common Stock" means the common stock, par value $0.01 per
share of the Company.
"Company Disclosure Schedules" has the meaning set forth in Article
3.
"Company Material Adverse Effect" or "Company Material Adverse Change"
means a Material Adverse Effect with respect to the Company; provided, however,
that this definition shall exclude (i) the effect of changes in national
economic conditions or industry conditions generally or (ii) the effect of a
decrease in (a) the amount of cash on hand held by the Company or (b) revenues
generated by the Company, in the case of each of (a) and (b) in excess of any
decrease reflected in the written financial information prepared by the Company
and provided to Parent prior to the date hereof.
"Company Options" means options to purchase shares of Company Stock
issued by the Company (including, but not limited to, options issued to
employees of the Company); provided, however, "Company Options" shall not
include the option to purchase shares of Company Stock granted to Parent by the
Company under the Option Agreement.
"Company Preferred Stock" means the preferred stock, par value $0.01
per share, of the Company.
"Company Proprietary Right" shall mean any Proprietary Right that is
(i) owned by, (ii) licensed to or (iii) was developed or created by or for the
Company.
"Company Registered Proprietary Rights" means all Registered
Proprietary Rights owned by, filed in the name of, assigned to or applied for
by, the Company.
"Company Stock" means the Company Common Stock and the Company
Preferred Stock.
"Company Stock Plans" means the Company's 1999 Stock Option Plan.
"Company Warrants" means warrants to purchase shares of Company Stock.
"Confidentiality Agreement" has the meaning set forth in Section 5.15.
"Consents" means any and all Permits and any and all consents,
approvals or waivers from third parties that are required for the consummation
of the transactions contemplated by this Agreement.
"Contract Rights" means all rights and obligations under the
Contracts.
4
"Contracts" means, with respect to any Person, all agreements,
contracts, leases (whether for real or personal property), purchase orders,
undertakings, covenants not to compete, employment agreements, confidentiality
agreements, licenses, instruments, obligations and commitments to which such
Person is a party or by which such Person or any of such Person's assets
(including, in the case of the Company, the Assets) are bound or affected,
whether written or oral.
"Court Order" means any judgment, decision, consent decree,
injunction, ruling or order of any foreign, federal, state or local court or
governmental agency, department or authority that is binding on any Person or
its property under applicable law.
"Default" means (a) a breach of or default under any Contract, (b) the
occurrence of an event that with the passage of time or the giving of notice or
both would constitute a breach of or default under any Contract or (c) the
occurrence of an event that with or without the passage of time or the giving of
notice or both would give rise to a right of termination, renegotiation or
acceleration under any Contract.
"DGCL" has the meaning set forth in the recitals.
"Effective Period" has the meaning set forth in Section 2.13(a).
"Effective Time" has the meaning set forth in Section 2.2.
"Employee Plans" means, with respect to any Person, all Benefit
Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans of such
Person.
"Employees" means, with respect to any Person, all officers and
directors of such Person and all other Persons employed by such Person on a full
or part-time basis together with all Persons retained as "independent
contractors" as of the relevant date.
"Encumbrance" means any claim, lien, pledge, option, charge, easement,
tax assessment, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes any agreement to give any of the
foregoing in the future, and any contingent sale or other title retention
agreement or lease in the nature thereof.
"Environmental Claims" means all notices of violation, liens, claims,
demands, suits, or causes of action for any damage, including, without
limitation, personal injury, property damage (including, without limitation, any
depreciation or diminution of property values), lost use of property or
consequential damages, arising directly or indirectly out of Environmental
Conditions or Environmental Laws. By way of example only (and not by way of
limitation), Environmental Claims include (i) violations of or obligations under
any contract related to Environmental Laws or Environmental Conditions between
the Company and any other person, (ii) actual or threatened damages to natural
resources, (iii) claims for nuisance or its statutory equivalent, (iv) claims
for the recovery of response costs, or administrative or judicial orders
directing the performance of investigations, responses or remedial actions under
any Environmental Laws, (v) requirements to implement "corrective action"
pursuant to any order or
5
permit issued pursuant to the Resource Conservation and Recovery Act, as
amended, or similar provisions of applicable state law, (vi) claims related to
Environmental Laws or Environmental Conditions for restitution, contribution, or
indemnity, (vii) fines, penalties or liens of any kind against property related
to Environmental Laws or Environmental Conditions, (viii) claims related to
Environmental Laws or Environmental Conditions for injunctive relief or other
orders or notices of violation from federal, state or local agencies or courts,
and (ix) with regard to any present or former employees, claims relating to
exposure to or injury from Environmental Conditions.
"Environmental Conditions" means the state of the environment,
including natural resources (e.g., flora and fauna), soil, surface water, ground
water, any present or potential drinking water supply, subsurface strata or
ambient air, relating to or arising out of the use, handling, storage,
treatment, recycling, generation, transportation, release, spilling, leaking,
pumping, pouring, emptying, discharging, injecting, escaping, leaching,
disposal, dumping or threatened release of Hazardous Substances by the Company
or any of its predecessors or successors in interest, or by its respective
agents, representatives, employees or independent contractors when acting in
such capacity on behalf of the Company. With respect to Environmental Claims by
third parties, Environmental Conditions also include the exposure of persons to
Hazardous Substances at the work place or the exposure of persons or property to
Hazardous Substances migrating from or otherwise emanating from or located on
property owned or occupied by the Company.
"Environmental Laws" means all applicable federal, state, district and
local laws, all rules or regulations promulgated thereunder, and all orders,
consent orders, judgments, notices, permits or demand letters issued,
promulgated or entered pursuant thereto, relating to pollution or protection of
the environment (including, without limitation, ambient air, surface water,
ground water, land surface, or subsurface strata), including, without
limitation, (i) laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, chemicals, industrial materials, wastes or
other substances into the environment and (ii) laws relating to the
identification, generation, manufacture, processing, distribution, use,
treatment, storage, disposal, recovery, transport or other handling of
pollutants, contaminants, chemicals, industrial materials, wastes or other
substances. Environmental Laws shall include, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended ("CERCLA"), the Toxic Substances Control Act, as amended, the Hazardous
------
Materials Transportation Act, as amended, the Resource Conservation and Recovery
Act, as amended ("RCRA"), the Clean Water Act, as amended, the Safe Drinking
----
Water Act, as amended, the Clean Air Act, as amended, the Occupational Safety
and Health Act, as amended, and all analogous laws promulgated or issued by any
state or other Governmental Authority.
"Environmental Reports" means any and all written analyses, summaries
or explanations, in the possession or control of the Company, prepared for the
purpose of analyzing or assessing (a) any Environmental Conditions in, on or
about the properties of the Company or (b) the Company's compliance with
Environmental Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
6
"ERISA Affiliate" means, with respect to any Person, any entity which
is (or at any relevant time was) a member of a "controlled group of
corporations" with, under "common control" with, or a member of an "affiliated
service group" with, or otherwise required to be aggregated with, such Person as
set forth in Section 414(b), (c), (m) or (o) of the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Ratio" means the result of dividing (i) the Merger Shares by
(ii) the Number of Company Securities issued and outstanding immediately prior
to the Effective Time.
"Facilities" means all plants, offices, manufacturing facilities,
stores, warehouses, administration buildings and all real property and related
facilities leased by the Company, all as identified or listed on Schedule
--------
3.8(c).
- ------
"Financing" means the sale and issuance of convertible preferred stock
of the Parent to certain investors for an aggregate purchase price of at least
$55.0 million ($55,000,000) on terms mutually agreeable with the investors,
Parent and the Company, the closing of which shall occur concurrently with the
Closing of the Merger.
"Financial Statements" means (a) the balance sheets of the Company (or
its predecessor, as the case may be) as of May 31, 2001 and the related
statements of income, changes in stockholders' equity and cash flows, of the
Company for the five-month period ended May 31, 2001.
"First Amended and Restated Executive Stock Purchase Agreement" means
the First Amended and Restated Executive Stock Purchase Agreement to be entered
into as of the Effective Time by and among Parent, Mark B. Skaletsky and the
Company, in the form attached hereto as Exhibit D.
---------
"Fixtures and Equipment" means all of the furniture, fixtures,
furnishings, machinery, computer hardware, and other tangible personal property
owned by the Company, wherever located.
"Funded Debt Adjustment" means (i) the Funded Debt of the Company as
of the Effective Time as set forth in the Funded Debt Notice minus (ii)
$965,000, provided that if the Funded Debt of the Company as of the Effective
Time is less than $965,000 then the Funded Debt Adjustment shall be zero.
"Funded Debt Notice" has the meaning set forth in Section 2.11.
"Funded Debt of the Company" means, without duplication, (a) all
obligations of the Company for borrowed money including, without limitation, all
obligations for accrued and unpaid interest thereon and any pre-payment premiums
or penalties (and associated expenses) with respect thereto, (b) any
reimbursement obligations of the Company in respect of any letters of credit,
(c) any capitalized lease obligations of the Company (as determined in
accordance with GAAP), and (d) all guarantees issued by the Company in respect
of any obligations of any other Person (other than the Company) of the type
described in clauses (a) through (c) above, all of which shall constitute
obligations of the Company at Closing, but shall not include any
7
indebtedness incurred by the Company pursuant to the bridge financing
contemplated by Section 5.18.
"GAAP" means generally accepted accounting principles as applied in
the United States.
"Hazardous Substances" means all pollutants, contaminants, chemicals,
wastes, and any other carcinogenic, ignitable, corrosive, reactive, toxic or
otherwise hazardous substances or materials (whether solids, liquids or gases)
subject to regulation, control or remediation under Environmental Laws. By way
of example only, the term Hazardous Substances includes petroleum, urea
formaldehyde, flammable, explosive and radioactive materials, PCBs, pesticides,
herbicides, asbestos, sludge, slag, acids, metals, solvents and waste waters.
"Holder Inclusion Notice" has the meaning set forth in Section
2.13(a).
"HSR Act" means the Hart Scott Rodino Antitrust Improvements Act of
1976, as amended.
"Incidental Shares" has the meaning set forth in Section 2.13(a).
"Inventory" means all merchandise owned and intended for resale.
"JAMS" has the meaning set forth in Section 9.15.
"knowledge" when used to qualify a representation or warranty in this
Agreement, means that where a representation or warranty is made to a Person's
knowledge, or with a similar qualification, such Person will be deemed to have
knowledge of any matter with respect to which any executive officer or director
of such Person has actual knowledge or would have knowledge after conducting a
reasonable investigation.
"Liability" means any direct or indirect liability, indebtedness,
obligation, commitment, expense, claim, deficiency, guaranty or endorsement of
or by any Person of any type, whether accrued, absolute, contingent, matured,
unmatured, liquidated, unliquidated, known or unknown.
"License" means any Contract that grants a Person the right to use any
Proprietary Right, including, without limitation, any covenants not to sue with
respect to any Proprietary Right.
"Lease" means a real property lease or a personal property lease, as
applicable.
"Leased Property" has the meaning set forth in Section 3.8(c).
"Material Adverse Effect" or "Material Adverse Change" or a similar
phrase means, with respect to any Person, (a) any material adverse effect on or
change with respect to (i) the business, operations, assets (taken as a whole),
liabilities (taken as a whole), condition (financial or otherwise) or results of
operations, of such Person and its subsidiaries, taken as a
8
whole, or (ii) the right or ability of such Person to consummate any of the
transactions contemplated hereby or (b) any event or condition which, with the
passage of time, the giving or receipt of notice or the occurrence or
nonoccurrence of any other circumstance, action or event, would reasonably be
expected to constitute a "Material Adverse Effect" on or "Material Adverse
Change" with respect to such Person.
"Merger" has the meaning set forth in the preamble.
"Merger Common Shares" has the meaning set forth in Section 2.13(a).
"Merger Consideration" means $22.2 million ($22,200,000) less the
Funded Debt Adjustment.
"Merger Shares" means that number of shares of Parent Common Stock
equal to the quotient of the Merger Consideration divided by the Average Parent
Common Stock Price.
"Multiemployer Plan" means, with respect to any Person, any
"multiemployer plan," as defined in Section 4001(a)(3) or 3(37) of ERISA, which
(a) such Person or any ERISA Affiliate maintains, administers, contributes to or
is required to contribute to, or, after September 25, 1980, maintained,
administered, contributed to or was required to contribute to, or under which
such Person or any ERISA Affiliate may incur any liability and (b) covers any
employee or former employee of such Person or any ERISA Affiliate (with respect
to their relationship with any such entity).
"Note" has the meaning set forth in Section 5.18.
"Number of Company Securities" means the sum of (i) the number of
shares of Company Common Stock, (ii) the number of shares of Company Preferred
Stock, (iii) the number of Company Options, (iv) the number of Company Warrants,
(v) any other securities convertible into or otherwise exercisable or
exchangeable for Company Common Stock, Company Preferred Stock, Company Options
or Company Warrants (assuming, in the case of clauses (ii), (iii), (iv) and (v),
the conversion, exercise or exchange of such securities for Company Common
Stock) and (vi) all other capital stock of any class or series of the Company
and all rights to acquire any such capital stock; provided, however, "Number of
Company Securities" shall not include any shares subject to the option to
purchase shares of Company Stock granted to Parent by the Company under the
Option Agreement.
"Option Agreement" means an Option Agreement in the form attached
hereto as Exhibit C, dated the date hereof, and executed and delivered between
---------
Parent and the Company.
"Parent" has the meaning set forth in the preamble.
"Parent Common Stock" means the common stock, par value $0.001 per
share, of Parent.
"Parent Closing Certificate" has the meaning set forth in Section 6.1.
"Parent Disclosure Schedules" has the meaning set forth in Article 4.
9
"Parent Material Adverse Effect" means a Material Adverse Effect with
respect to Parent; provided, however, that a Parent Material Adverse Effect
shall not include any adverse effect following the date of this Agreement which
is solely attributable to (i) the announcement of the transactions contemplated
by this Agreement or the Financing (other than the termination by the R.W.
Johnson Pharmaceutical Research Institute of its Research and License Agreement
with Parent pursuant to the terms thereof) or (ii) changes in national economic
conditions or industry conditions generally.
"Parent Options" means options to purchase shares of Parent Common
Stock issued by the Parent (including, but not limited to, options issued to
employees of the Company).
"Parent Preferred Stock" means the preferred stock, par value $0.001
per share, of Parent.
"Parent Proprietary Right" shall mean any Proprietary Right that is
(i) owned by, (ii) licensed to or (iii) was developed or created by or for
Parent.
"Parent SEC Documents" has the meaning set forth in Section 4.5.
"Pension Plan" means, with respect to any Person, any "employee
pension benefit plan" as defined in Section 3(2) of ERISA (other than a
Multiemployer Plan) which (a) such Person or any ERISA Affiliate maintains,
administers, contributes to or is required to contribute to, or, within the five
(5) years prior to the Closing Date, maintained, administered, contributed to or
was required to contribute to, or under which such Person or any ERISA Affiliate
may incur any liability (including, without limitation, any contingent
liability) and (b) covers any employee or former employee of such Person or any
ERISA Affiliate (with respect to their relationship with any such entity).
"Permitted Encumbrances" means (a) statutory liens of landlords, liens
of carriers, warehousepersons, mechanics and materialpersons incurred in the
ordinary course of business for sums (i) not yet due and payable, or (ii) being
contested in good faith, if, in either such case, an adequate reserve, shall
have been made therefor in such Person's financial statements, (b) liens
incurred or deposits made in connection with workers' compensation, unemployment
insurance and other similar types of social security programs or to secure the
performance of tenders, statutory obligations, surety and appeal bonds, bids,
leases, government contracts, performance and return of money bonds and similar
obligations, in each case in the ordinary course of business, consistent with
past practice, (c) easements, rights-of-way, restrictions and other similar
charges or encumbrances, in each case, which do not interfere with the ordinary
conduct of business of the Company and do not materially detract from the value
of the property upon which such encumbrance exists, (d) liens securing taxes,
assessments and governmental charges not yet delinquent, (e) such imperfections
of title, easements, encumbrances or restrictions which do not materially impair
the current use by the Company of the Assets subject thereto or the Company's
ability to sell or transfer such Assets without discharging any obligation, (f)
purchase money security interests incurred in the ordinary course of business
and consistent with past practice, and (g) liens related to leased furniture and
equipment.
10
"Permits" means all licenses, permits, franchises, approvals,
authorizations, consents or orders of, or filings with, any governmental
authority, whether foreign, federal, state or local, necessary or desirable for
the past, present or anticipated conduct or operation of the Business or
ownership of the Assets.
"Person" means any person or entity, whether an individual, trustee,
corporation, limited liability company, general partnership, limited
partnership, trust, unincorporated organization, business association, firm,
joint venture, governmental agency or authority or any similar entity.
"Piggyback Notice" has the meaning set forth in Section 2.13(a).
"Proposed Acquisition Transaction" has the meaning set forth in
Section 5.6.
"Proprietary Rights" means all (a) U.S. and foreign patents, patent
applications, patent disclosures and improvements thereto, including petty
patents and utility models and applications therefor, (b) U.S. and foreign
trademarks, service marks, trade dress, logos, trade names and corporate names
and the goodwill associated therewith and registrations and applications for
registration thereof, (c) U.S. and foreign copyrights and registrations and
applications for registration thereof, (d) U.S. and foreign mask work rights and
registrations and applications for registration thereof, (e) Trade Secrets, (f)
URL registrations, (g) other proprietary rights, (h) copies and tangible
embodiments thereof (in whatever form or medium) and (i) licenses granting any
rights with respect to any of the foregoing.
"Qualified Holders" has the meaning set forth in Section 2.13(a).
"Registered Proprietary Rights" shall mean all United States,
international and foreign: (i) issued patents and patent applications (including
provisional applications), (ii) registered trademarks and servicemarks,
applications to register trademarks and servicemarks, intent-to-use
applications, other registrations or applications to trademarks or servicemarks,
(iii) registered copyrights and applications for copyright registration, (iv)
any mask work registrations and applications to register mask works, and (v) any
other Proprietary Right that is the subject of an application, certificate,
filing, registration or other document issued by, filed with, or recorded by,
any state, government or other public legal authority.
"Registering Stockholders" has the meaning set forth in Section
2.13(a).
"Regulations" means any laws, statutes, ordinances, regulations,
rules, notice requirements, court decisions, agency guidelines, and orders of
any foreign, federal, state or local government and any other governmental
department or agency, including without limitation energy, motor vehicle safety,
public utility, zoning, building and health codes, Environmental Laws,
occupational safety and health and laws respecting employment practices,
employee documentation, terms and conditions of employment and wages and hours.
"Related Party" means (i) any of the Company's officers, directors and
stockholders, and any officers, directors, partners, associates or relatives of
such officers, directors and stockholders, (ii) any Person in which the Company
or any stockholder of the
11
Company or any Affiliate, associate or relative of any such Person has any
direct or indirect interest, and (iii) any direct or indirect trustee or
beneficiary of any stockholder of the Company.
"Representative" of any Person means any officer, director, principal,
attorney, accountant, agent, employee or other representative of such Person.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Severance Agreements" means the Severance Agreements to be entered
into by and between Parent and each of Mark B. Skaletsky, Paul Mellett, Manuel
Navia and Patrick Connelly, contemporaneously with the execution of this
Agreement to become effective at the Effective Time, in the form attached hereto
as Exhibit B.
---------
"Stockholder" means each holder of an equity security of the Company
at the Effective Time.
"Stockholders Agreement" means the Stockholders Agreement to be
entered into as of the Effective Time by and among Parent, Manuel Navia, Patrick
Connelly, Mass Ventures LLC, Michael Dailey, Mark B. Skaletsky and Paul Mellett,
in the form attached hereto as Exhibit E.
---------
"Stockholder Registration Statement" has the meaning set forth in
Section 2.13(a).
"Stockholder Support Agreement" means a Stockholder Support Agreement
in the form attached hereto as Exhibit A.
---------
"Sub" has the meaning set forth in the preamble.
"Surviving Corporation" has the meaning set forth in Section 2.1(a).
"Suspension Period" has the meaning set forth in Section 2.13(b).
"Takeover Statute" means a "fair price," "moratorium," "control share
acquisition" or other similar antitakeover statute or regulation enacted under
state or federal laws in the United States.
"Tax Return" means any report, return, document, declaration or other
information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) including information returns, and any
documents with respect to or accompanying requests for the extension of time in
which to file any such report, return, document, declaration or other
information.
"Taxes" means any and all taxes, charges, fees, levies or other
assessments, including income, gross receipts, estimated, excise, value-added,
real or personal property, sales, withholding, social security, retirement,
unemployment, disability occupation, worker's
12
compensation, use, service, license, utility, net worth, payroll, ad volarem,
franchise and transfer and recording, imposed by the Internal Revenue Service or
any taxing authority or jurisdiction (whether domestic or foreign, including any
federal, state, county, local or foreign government or any subdivision or taxing
agency thereof (including a U.S. possession)), whether computed on a separate,
consolidated, unitary, combined or any other basis and whether disputed or not;
and such term shall include any interest whether paid or received, fines,
penalties or additional amounts attributable to, or imposed upon, or with
respect to, any such taxes, charges, fees, levies or other assessments.
"Trade Secrets" means all trade secrets and confidential business
information (including ideas, formulas, compositions, inventions (whether
patentable or unpatentable and whether or not reduced to practice), know-how,
research and development information, software, drawings, specifications,
designs, plans, proposals, technical data, copyrightable works, financial,
marketing and business data, pricing and cost information, business and
marketing plans marketing mailing and e-mail lists, and customer and supplier
mailing and e-mail lists and information).
"Trading Day" means any day on which the Nasdaq National Market is
open and available for at least five (5) hours for the trading of securities.
"Transfer Agent" has the meaning set forth in Section 2.10.
"Welfare Plan" means, with respect to any Person, any "employee
welfare benefit plan" as defined in Section 3(1) of ERISA, which (a) such Person
or any ERISA Affiliate maintains, administers, contributes to or is required to
contribute to, or under which such Person or any ERISA Affiliate may incur any
liability and (b) covers any employee or former employee of such Person or any
ERISA Affiliate (with respect to their relationship with any such entity).
1.2 Interpretation Provisions.
-------------------------
(a) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement, and article, section, schedule and
exhibit references are to this Agreement unless otherwise specified. The meaning
of defined terms shall be equally applicable to the singular and plural forms of
the defined terms. The terms "include" and "including" are not limiting and mean
"including without limitation."
(b) References to agreements and other documents shall be deemed to
include all subsequent amendments and other modifications thereto.
(c) References to statutes shall include all regulations promulgated
thereunder and references to statutes or regulations shall be construed as
including all statutory and regulatory provisions consolidating, amending or
replacing the statute or regulation.
(d) The captions and headings of this Agreement are for convenience
of reference only and shall not affect the construction of this Agreement.
13
(e) The parties participated jointly in the negotiation and drafting
of this Agreement and the language used in this Agreement shall be deemed to be
the language chosen by the parties to express their mutual intent. If an
ambiguity or question of intent or interpretation arises, then this Agreement
will accordingly be construed as drafted jointly by the parties to this
Agreement, and no presumption or burden of proof will arise favoring or
disfavoring any party to this Agreement by virtue of the authorship of any of
the provisions of this Agreement.
(f) The schedules and exhibits to this Agreement are a material part
hereof and shall be treated as if fully incorporated into the body of the
Agreement.
ARTICLE 2
THE MERGER
2.1 The Merger.
----------
(a) Effective Time. At the Effective Time (as defined in Section 2.2
--------------
hereof), and upon the terms and subject to the conditions of this Agreement and
the DGCL, Sub shall be merged with and into the Company, the separate corporate
existence of Sub shall cease, and the Company shall continue as the surviving
corporation. The Company, as the surviving corporation after the Merger, is
hereinafter sometimes referred to as the "Surviving Corporation."
---------------------
(b) Closing. Unless this Agreement shall have been terminated
-------
pursuant to Section 9.1, and subject to the satisfaction (or to the extent
permitted, the waiver) of the conditions set forth in Articles 6 and 7, the
closing of the transactions contemplated by this Agreement (the "Closing") shall
-------
take place (i) at the offices of Latham & Watkins located at 135 Commonwealth
Drive, Menlo Park, California 94025, as promptly as practicable (and in any
event within three (3) business days) after satisfaction (or to the extent
permitted, the waiver) of the conditions set forth in Articles 6 and 7 or (ii)
at such other time, date or place as Parent and the Company may mutually agree.
2.2 Effective Time. As promptly as practicable after the satisfaction (or
--------------
to the extent permitted, the waiver) of the conditions set forth in Articles 6
and 7, and provided that this Agreement has not been terminated pursuant to
Section 9.1, the parties hereto shall cause the Merger to be consummated by
executing and filing a certificate of merger as contemplated by the DGCL (the
"Certificate of Merger"), with the Secretary of State of Delaware as provided in
---------------------
Section 251 of the DGCL. The Merger shall be effective at the time indicated in
such Certificate of Merger (the "Effective Time").
--------------
2.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in this Agreement, the Certificate of Merger and the
applicable provisions of the DGCL.
2.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) Certificate of Incorporation. At the Effective Time, the
----------------------------
Certificate of Incorporation of Sub as in effect immediately prior to the
Effective Time shall be the Certificate
14
of Incorporation of the Surviving Corporation, until duly amended in accordance
with applicable law.
(b) Bylaws. At the Effective Time, the Bylaws of Sub, as in effect
------
immediately prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation until thereafter duly amended in accordance with applicable law, the
Certificate of Incorporation of the Surviving Corporation and such Bylaws.
2.5 Directors and Officers. The directors of Sub immediately prior to the
----------------------
Effective Time shall be the initial directors of the Surviving Corporation, each
to hold office in accordance with the Certificate of Incorporation and Bylaws of
the Surviving Corporation, and the officers of the Company immediately prior to
the Effective Time shall be the initial officers of the Surviving Corporation,
in each case until their respective successors are duly elected or appointed and
qualified in the manner provided in the Certificate of Incorporation and Bylaws
of the Surviving Corporation and in accordance with applicable law.
2.6 Conversion of Securities. At the Effective Time, by virtue of the
------------------------
Merger and without any further action on the part of Parent, Sub or the Company:
(a) Company Stock. Subject to Sections 2.6(h) and 2.7, each share of
-------------
Company Stock issued and outstanding immediately prior to the Effective Time
shall be converted into the right to receive, and become exchangeable for, such
number of shares of validly issued, fully paid and nonassessable Parent Common
Stock as equals the Exchange Ratio.
(b) Shares of Parent Common Stock Issuable. The number of shares of
--------------------------------------
Parent Common Stock to be issued in connection with the Merger in exchange for
the acquisition by Parent of all outstanding shares of Company Stock, all
outstanding Company Options and Company Warrants and all other capital stock of
any class or series, and all rights to acquire any such capital stock, shall not
under any circumstances exceed the number of Merger Shares.
(c) Sub Stock. Each share of common stock, par value $0.001 per
---------
share, of Sub issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of the holder
thereof, automatically be converted into and thereafter represent one (1)
validly issued, fully paid and nonassessable common share, par value $0.001 per
share, of the Surviving Corporation, so that thereafter Parent will be the sole
and exclusive owner of the capital stock of the Surviving Corporation.
(d) Cancellation. Each share of Company Stock held in the treasury
------------
of the Company immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, automatically
cease to be outstanding, be canceled and retired without payment of any
consideration therefor and cease to exist.
(e) Company Warrants. Each unexpired and unexercised Company Warrant
----------------
issued and outstanding immediately prior to the Effective Time shall be assumed
by Parent. Each Company Warrant so assumed by Parent shall continue to have, and
be subject to, the same terms and conditions as were applicable to such Company
Warrant immediately prior to the Effective Time, provided that (i) such Company
Warrant shall be exercisable for that number of whole shares of Parent Common
Stock equal to the product of the number of shares of Company
15
Stock that were issuable upon exercise of such Company Warrant immediately prior
to the Effective Time multiplied by the Exchange Ratio (rounded down to the
nearest whole number of shares of Parent Common Stock) and (ii) the per share
exercise price for the Parent Common Stock issuable upon exercise of such
assumed Company Warrant shall be equal to the quotient determined by dividing
the exercise price per share of Company Stock at which such Company Warrant was
exercisable immediately prior to the Effective Time by the Exchange Ratio
(rounded up to the nearest whole cent).
(f) Company Options and Company Stock Plans. All unexpired and unexercised
---------------------------------------
Company Options then outstanding, whether vested or unvested, together with each
Company Stock Plan, shall be assumed by Parent in accordance with the provisions
described below.
(i) At the Effective Time, each unexpired and unexercised Company
Option then outstanding, whether vested or unvested, shall be, in connection
with the Merger, assumed by Parent, together with each Company Stock Plan. Each
Company Option so assumed by Parent under this Agreement shall continue to have,
and be subject to, the same terms and conditions as were applicable to such
Company Option immediately prior to the Effective Time (including, but not
limited to, any repurchase rights or vesting provisions), provided that (x) such
Company Option shall be exercisable for that number of whole shares of Parent
Common Stock equal to the product of the number of shares of Company Stock that
were issuable upon exercise of such Company Option immediately prior to the
Effective Time multiplied by the Exchange Ratio (rounded down to the nearest
whole number of shares of Parent Common Stock) and (y) the per share exercise
price for the Parent Common Stock issuable upon exercise of such assumed Company
Option shall be equal to the quotient determined by dividing the exercise price
per share of Company Stock at which such Company Option was exercisable
immediately prior to the Effective Time by the Exchange Ratio (rounded up to the
nearest whole cent).
(ii) It is the intention of the parties that the Company Options
assumed by Parent shall qualify following the Effective Time as "incentive stock
options" (as defined in Section 422 of the Code) to the same extent the Company
Options qualified as incentive stock options immediately prior to the Effective
Time and the provisions of this Section 2.6(f) shall be applied consistent with
this intent. Following the Effective Time, Parent shall use its commercially
reasonable best efforts not to take any actions that would jeopardize the
treatment as incentive stock options of any such Company Options that qualified
as incentive stock options immediately prior to the Effective Time.
(iii) Promptly following the Effective Time, Parent will issue to
each holder of an unexpired and unexercised Company Option an instrument
evidencing the foregoing assumption of such Company Option by Parent.
(iv) Parent will reserve sufficient shares of Parent Common Stock
for issuance pursuant to this Section 2.6(f).
(v) Parent shall use reasonable efforts to file with the SEC on or
before the 30th day following the Closing Date a registration statement on Form
S-8 covering the shares of Parent Common Stock issuable with respect to assumed
Company Options to the extent the
16
shares of Parent Common Stock issuable upon exercise of such Company Options
qualify for registration on Form S-8.
(g) Adjustment to Exchange Ratio. The Exchange Ratio shall be
----------------------------
equitably adjusted to reflect fully the effect of any stock split, reverse
split, stock combination, stock dividend, reorganization, reclassification,
recapitalization or other like change with respect to Parent Common Stock or
Company Stock after the date hereof and prior to the Effective Date.
(h) Fractional Shares. No certificates or scrip representing
-----------------
fractional shares of Parent Common Stock shall be issued in connection with the
Merger, but in lieu thereof each Stockholder who would otherwise be entitled to
receive a fraction of a share of Parent Common Stock shall receive from Parent
an amount of cash equal to the product of (i) the fraction of a share of Parent
Common Stock to which such Stockholder would otherwise be entitled multiplied by
(ii) the Average Parent Common Stock Price.
2.7 Dissenting Shares.
-----------------
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Common Stock held by a holder who has demanded and
perfected appraisal rights for such shares in accordance with the DGCL and who,
as of the Effective Time, has not effectively withdrawn or lost such appraisal
or dissenters' rights ("Dissenting Shares") shall not be converted into or
-----------------
represent a right to a portion of the Merger Shares pursuant to Section 2.6, but
the holder thereof shall only be entitled to such rights as are granted by the
Company pursuant to the DGCL.
(b) Notwithstanding the provisions of Section 2.7(a) above, if any
holder of shares of Company Stock who demands appraisal of such shares under the
DGCL shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the later of (i) the Effective
Time or (ii) the occurrence of such event, such holder's shares shall
automatically be exchanged for and represent only the right to receive the
portion of the Merger Shares as provided in Section 2.6, without interest
thereon, upon surrender to the Company of the certificate representing such
shares.
(c) The Company shall give Parent (i) prompt notice of its receipt of
any written demands for appraisal of any shares of Company Stock, withdrawals of
such demands, and any other instruments relating to the Merger served pursuant
to the DGCL and received by the Company and (ii) the opportunity to participate
in all negotiations and proceedings with respect to demands for appraisal under
the DGCL. The Company shall not, except with the prior written consent of Parent
(which consent shall not be unreasonably withheld or delayed) or as may be
required under applicable law, voluntarily make any payment with respect to any
demands for appraisal of Company Stock or offer to settle or settle any such
demands.
2.8 No Further Ownership Rights in Shares of Company Stock. The Parent
------------------------------------------------------
Common Stock delivered upon the surrender for exchange of Company Stock in
accordance with the terms hereof shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Company Stock, and there
shall be no further registration of transfers of shares of Company Stock which
were outstanding immediately prior to the Effective Time on the records
17
of the Surviving Corporation. If, after the Effective Time, the Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Agreement.
2.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
--------------------------------------
shall have been lost, stolen or destroyed, Parent shall issue in exchange for
such lost, stolen or destroyed Certificates, upon the making of an affidavit of
that fact by the holder thereof, such Parent Common Stock as may be required
pursuant to Section 2.6; provided, however, that Parent may, in its sole
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificates to deliver a bond in such
sum as it may reasonably direct or a personal indemnification undertaking as
indemnity against any claim that may be made against Parent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
2.10 Surrender of Certificates.
-------------------------
(a) Exchange of Certificates. As soon as reasonably practicable
------------------------
after the Effective Time, Parent shall cause the transfer agent for the Parent
Common Stock (the "Transfer Agent") to mail to each holder of record of a
--------------
Certificate or Certificates whose shares were converted into the right to
receive Parent Common Stock pursuant to Section 2.6 and who did not surrender
such Certificates in connection with the Closing: (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and title
to the Certificates shall pass, only upon delivery of the Certificates to the
Transfer Agent and shall be in such form and have such other provisions as
Parent and the Company may reasonably specify) and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for certificates
representing Parent Common Stock, in each case in customary form for a
stock-for-stock merger transaction. Upon surrender of a Certificate to the
Transfer Agent, together with such letter of transmittal, duly executed, and any
other documents reasonably required by the Transfer Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor a certificate
representing the number of Merger Shares which such holder has the right to
receive pursuant to the provisions of Section 2.6, and the Certificate so
surrendered shall forthwith be cancelled. In the event of a transfer of
ownership of Company Stock which is not registered in the transfer records of
the Company, a certificate representing the proper number of shares of Parent
Common Stock may be issued to a transferee if the Certificate representing such
Company Stock is presented to the Transfer Agent or Parent to evidence and
effect such transfer and that any applicable stock transfer or other taxes have
been paid. Until surrendered as contemplated by this Section 2.10(a), each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the certificate representing the
appropriate number of shares of Parent Common Stock to be delivered upon the
Closing Date in exchange therefor and cash in lieu of any fractional shares of
Parent Common Stock as contemplated by Section 2.6(h).
(b) Distributions With Respect to Unexchanged Shares of Company
-----------------------------------------------------------
Stock. No dividends or other distributions with respect to Parent Common Stock
- -----
declared or made after the Effective Time and with a record date after the
Effective Time will be paid to the holder of any unsurrendered Certificate with
respect to the Parent Common Stock represented thereby until the holder of
record of such Certificate shall surrender such Certificate. Subject to
applicable law, promptly following surrender of any such Certificate, there
shall be paid to the record
18
holder of the certificates representing the Parent Common Stock issued in
exchange therefor, without interest, at the time of such surrender, the amount
of dividends or other distributions with a record date after the Effective Time,
if any, theretofore payable with respect to such Parent Common Stock.
2.11 Certain Actions to be Taken With Respect to the Funded Debt of the
------------------------------------------------------------------
Company. On or before the date that is three (3) business days prior to the
- -------
date scheduled for the Closing, the Company will provide Parent with a written
certificate executed by its Chief Financial Officer (the "Funded Debt Notice"),
------------------
which certificate shall set forth all Funded Debt of the Company as of the
Effective Time. Upon request, the Company will provide reasonable documentary
support for its calculations and, with regard to any Funded Debt required to be
repaid in connection with the Merger, obtain pay-off letters from the lenders
and vendors involved.
2.12 Taking of Necessary Action; Further Action. Each of Parent, Sub and
------------------------------------------
the Company will take all such reasonable lawful action as may be necessary or
appropriate in order to effect the Merger in accordance with this Agreement as
promptly as practicable. If, at any time after the Effective Time, any such
further action is necessary or desirable to carry out the purposes of this
Agreement and to vest Parent with full right, title and possession to all the
property, rights, privileges, power and franchises of the Company, the officers
and directors of Sub, Parent and the Company immediately prior to the Effective
Time are fully authorized in the name of their respective corporations or
otherwise to take, and will take, all such lawful and necessary action.
2.13 Registration Rights.
-------------------
(a) Registration of Shares. Parent shall use reasonable efforts to
----------------------
file with the SEC, on or before the 30th day following the Closing Date, a
registration statement on Form S-3, or on Form S-1 if Parent does not qualify
for Form S-3 (the "Stockholder Registration Statement"), covering the resale to
----------------------------------
the public by the Stockholders (the "Registering Stockholders") who hold or may
------------------------
hold shares of Parent Common Stock issued in connection with the Merger (the
"Merger Common Shares"). Parent shall use its reasonable efforts to cause the
- ---------------------
Stockholder Registration Statement to be declared effective by the SEC within
ninety (90) days after the Effective Time, and to remain effective until the
third anniversary of the Closing Date or such earlier time as all of the Merger
Common Shares covered by the Stockholder Registration Statement have been sold
pursuant thereto (the "Effective Period"). Thereafter Parent shall be entitled
----------------
to withdraw the Stockholder Registration Statement and the Stockholders shall
have no further right to offer or sell any of the Merger Common Shares pursuant
to the Stockholder Registration Statement (or any prospectus relating thereto).
The Merger Common Shares subject to the Stockholder Registration Statement shall
not be underwritten unless Parent shall otherwise consent in its sole
discretion.
From and after the date hereof and prior to the expiration of the
Effective Period, whenever Parent proposes to file a registration statement
relating to an offering in which Parent proposes to sell shares of Parent Common
Stock for its own account (other than registration statements on Form S-4 or
Form S-8 or any successor form for securities to be offered in a transaction of
the type contemplated by Rule 145 under the Securities Act or to employees or
consultants of Parent pursuant to any employee benefit plan), it will, prior to
such filing, give at least twenty (20) days' written notice to all Registering
Stockholders of its intention to do so
19
(subject to the limitations set forth below) (the "Piggyback Notice") and, upon
----------------
the written request of one or more Registering Stockholders given within ten
(10) days after the Parent Piggyback Notice is given (which request shall state
the intended method of disposition of such Merger Common Shares) (the
"Holder Inclusion Notice"), Parent shall use its reasonable best efforts to
-----------------------
cause all Merger Common Shares that Parent has been requested by such
Registering Stockholder or Registering Stockholders to register to be registered
under the Securities Act to the extent necessary to permit their sale or other
disposition in accordance with the intended methods of distribution specified in
the Holder Inclusion Notice, provided that (i) Parent shall have the right to
postpone or withdraw any registration effected pursuant to this paragraph
without obligation to any Registering Stockholder and (ii) the number of Merger
Common Shares proposed to be sold by any such Registering Stockholder is at
least twenty-five percent (25%) of the total number of Merger Common Shares then
held by such Registering Stockholder. In connection with any offering under this
paragraph involving an underwriting, Parent shall not be required to include any
Merger Common Shares in such underwriting unless the holders thereof accept the
terms of the underwriting as agreed upon between Parent and the underwriter(s)
of such offering.
If in the opinion of the managing underwriter(s) of such offering the
registration of all, or part of, the shares of Parent Common Stock (the
"Incidental Shares") that the Registering Stockholders have requested to be
-----------------
included pursuant to the immediately preceding paragraph and/or that other
holders of shares of Parent Common Stock or other securities of Parent entitled
to include shares of Parent Common Stock in such registration have requested to
be included (collectively, the "Qualified Holders") would materially and
-----------------
adversely affect the success of such public offering or the price that would be
received for any shares of Parent Common Stock offered in the offering, then,
notwithstanding anything in this Section 2.13 to the contrary, Parent shall only
be required to include in such registration (to the extent of the number of
shares of Parent Common Stock that Parent is so advised can be sold in such
offering) (i) first, the number of shares of Parent Common Stock proposed to be
included in such registration for the account of Parent and/or any stockholders
of Parent that have exercised demand registration rights in accordance with the
priorities, if any, then existing among Parent and/or such stockholders of
Parent with demand registration rights and (ii) second, the shares of Parent
Common Stock requested to be included in such registration by all other
stockholders of Parent (including, without limitation, the Registering
Stockholders) pro rata among such other stockholders (including, without
limitation, the Registering Stockholders) on the basis of the number of shares
of Parent Common Stock that each of them requested to be included in such
registration.
Notwithstanding anything in this Section 2.13 to the contrary, Parent
shall not be required to provide any advance notice to Registering Stockholders
in connection with any offering under this Section 2.13 involving an
underwriting if Parent has been informed in writing that in the opinion of the
managing underwriter or underwriterss the inclusion of any Incidental Shares in
such offering would materially and adversely affect the success of the offering
or the price that would be received for any shares of Parent Common Stock
offered in the offering. In such event, Parent will provide written notice to
all Registering Stockholders containing a copy of such managing underwriter's or
underwriters' opinion, which notice need not be given prior to the filing of the
applicable registration statement.
20
(b) Limitations on Registration Rights. Notwithstanding anything in this
----------------------------------
Section 2.13 to the contrary, if the Company shall furnish to the Registering
Stockholders a certificate signed by the President or Chief Executive Officer of
Parent stating that the Board of Directors of Parent has made the good faith
determination that (i) continued use by the Registering Stockholders of the
Stockholder Registration Statement filed by Parent for purposes of effecting
offers or sales of Merger Common Shares pursuant thereto would require, under
the Securities Act and the rules and regulations promulgated thereunder,
premature disclosure in Stockholder Registration Statement (or the prospectus
relating thereto) of material, nonpublic information concerning Parent, its
business or prospects or any proposed material transaction involving Parent,
(ii) such premature disclosure would be materially adverse to Parent, its
business or prospects or any such proposed material transaction or would make
the successful consummation by Parent of any such material transaction
significantly less likely and (iii) it is therefore essential to suspend the use
by the Registering Stockholders of such Stockholder Registration Statement (and
the prospectus relating thereto) for purposes of effecting offers or sales of
Merger Common Shares pursuant thereto, then the right of the Registering
Stockholders to use such Stockholder Registration Statement (and the prospectus
relating thereto) for purposes of effecting offers or sales of Merger Common
Shares pursuant thereto shall be suspended for a period (the
"Suspension Period") of not more than 90 days in any twelve (12) month period
-----------------
after delivery by the Company of the certificate referred to above in this
Section 2.13(b). During the Suspension Period, none of the Registering
Stockholders shall offer or sell any Merger Common Shares pursuant to or in
reliance upon such Stockholder Registration Statement (or the prospectus
relating thereto). Parent agrees that, as promptly as practicable after the
consummation, abandonment or public disclosure of the event or transaction that
caused Parent to suspend the use of the Registration Statement (and the
prospectus relating thereto) pursuant to this Section 2.13(b), Parent will
provide the Registering Stockholders with revised prospectuses, if required, and
will notify the Registering Stockholders of their ability to effect offers or
sales of Merger Common Shares pursuant to or in reliance upon such Stockholder
Registration Statement.
Parent agrees that no other holder of Parent Stock seeking to resell
shares of Parent Common Stock pursuant to a shelf registration statement on Form
S-3 will be permitted to sell shares of Parent Common Stock pursuant to such
shelf registration statement during a Suspension Period. Parent shall not be
required to disclose to the Registering Stockholders the reasons for requiring a
suspension of sales hereunder, and the Registering Stockholders shall not
disclose to any third party the existence of any such suspension.
(c) Registration Procedures. In connection with the filing by Parent of
-----------------------
the Stockholder Registration Statement, Parent shall furnish to each Registering
Stockholder a copy of the prospectus, including a preliminary prospectus, in
conformity with the requirements of the Securities Act. Subject to Section
2.13(b), Parent shall prepare and file with the SEC such amendments and
supplements to the Stockholder Registration Statement and the prospectus used in
connection with such Stockholder Registration Statement as may be reasonably
necessary to keep such Stockholder Registration Statement effective and to
comply with the provisions of the Securities Act with respect to the disposition
of all Merger Common Shares pursuant to such Stockholder Registration Statement
until the earlier of (i) such time as all such Merger Common
21
Shares have been disposed of or (ii) the third anniversary of the Closing Date.
Parent shall furnish to each Registering Stockholder a copy of any amendment or
supplement to such Stockholder Registration Statement or prospectus prior to
filing the same with the SEC, and shall not file any such amendment or
supplement to which any such requesting Registering Stockholder shall reasonably
have objected to in writing prior to the filing thereof on the grounds that such
amendment or supplement contains a material inaccuracy with respect to the
description of such Registering Stockholder.
If Parent has delivered preliminary or final prospectuses to the
Registering Stockholders and after having done so the prospectus is amended or
supplemented to comply with the requirements of the Securities Act as described
in the immediately preceding paragraph, Parent shall promptly notify the
Registering Stockholders and, if requested by Parent, the Registering
Stockholders shall immediately cease making offers or sales of shares under the
Stockholder Registration Statement and return all prospectuses to Parent. Parent
shall promptly provide the Registering Stockholders with revised prospectuses
and, following receipt of the revised prospectuses, the Registering Stockholders
shall be free to resume making offers and sales under the Stockholder
Registration Statement.
Parent shall furnish to each requesting Registering Stockholder such
number of conformed copies of the Stockholder Registration Statement and of each
such amendment and supplement thereto (in each case including all exhibits
thereto), such number of copies of the prospectus included in such Stockholder
Registration Statement (including each preliminary prospectus) and such number
of documents, if any, incorporated by reference in such Stockholder Registration
Statement or prospectus, as such requesting Registering Stockholder may
reasonably request.
Parent shall use its reasonable best efforts to register or qualify the
Merger Common Shares covered by the Stockholder Registration Statement under the
securities or "blue sky" laws of such states as the Registering Stockholders
shall reasonably request; provided, however, that Parent shall not be required
to qualify as a foreign corporation or execute a general consent to service of
process in any jurisdiction.
Parent shall pay the expenses incurred by it in complying with its
obligations under this Section 2.13, including all registration and filing fees,
exchange listing fees and fees and expenses of Parent's counsel and accountants,
but excluding (i) any brokerage fees, selling commissions or underwriting
discounts incurred by the Registering Stockholders in connection with sales
under the Stockholder Registration Statement and (ii) the fees and expenses of
any counsel retained by Registering Stockholders.
(d) Requirements of Company Stockholders. Parent shall not be required to
------------------------------------
include any Merger Common Shares in the Stockholder Registration Statement
unless the Registering Stockholder owning such shares (i) furnishes to Parent in
writing such information regarding such Registering Stockholder and the proposed
sale of Merger Common Shares by such Registering Stockholder as Parent may
reasonably request in writing in connection with the Stockholder Registration
Statement or as shall be required in connection therewith by the SEC
22
or any state securities law authorities and (ii) upon the written request of
Parent, confirms in writing its indemnification obligations under Section
2.13(e)(ii).
(e) Indemnification. In the event that any Merger Common Shares of
---------------
the Registering Stockholders are included in a registration statement pursuant
to this Agreement:
(i) To the fullest extent permitted by law, Parent will indemnify and
hold harmless each Registering Stockholder, any underwriter (as defined in the
Securities Act), and each officer, director, fiduciary, employee, member,
general partner and limited partner (and affiliates thereof) of such Registering
Stockholder or such underwriter, each broker or other person acting on behalf of
such Registering Stockholder and each person, if any, who controls such
Registering Stockholder or such underwriter within the meaning of the Securities
Act, against any losses, claims, damages or liabilities, joint or several, to
which they may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
Parent of the Securities Act or state securities or blue sky laws applicable to
Parent and leading to action or inaction required of Parent in connection with
such registration or qualification under such Securities Act or state securities
or blue sky laws; and will reimburse on demand such Registering Stockholder,
such underwriter, such broker or other person acting on behalf of such
Registering Stockholder or such officer, director, fiduciary, employee, member,
general partner, limited partner, affiliate or controlling person for any legal
or other expenses reasonably incurred by any of them in connection with
investigating or defending any such loss, claim, damage, liability or action,
subject to the provisions of this Section 2.13(c); provided, however, that (x)
the indemnity agreement contained in this Section 2.13(c) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of Parent (which consent
shall not be unreasonably withheld or delayed), nor shall Parent be liable in
any such case for any such loss, damage, liability or action to the extent that
it arises out of or is based upon an untrue statement or alleged untrue
statement or omission made in connection with such registration statement,
preliminary prospectus, final prospectus, or amendments or supplements thereto,
in reliance upon and in conformity with written information furnished expressly
for use in connection with such registration by the Registering Stockholders,
any underwriter for them or controlling person with respect to them and (y) the
foregoing indemnity shall not inure to the benefit of any Registering
Stockholder, underwriter, broker or other person acting on behalf of such
Registering Stockholder or such officer, director, fiduciary, employee, member,
general partner, limited partner, affiliate or controlling person from whom the
Person asserting any loss, claim, damage, liability or action purchased Merger
Common Shares during a Suspension Period or if copies of a revised prospectus
were timely delivered to such Registering Stockholder pursuant to Section
2.13(b) and a copy of revised prospectus was not sent or given by or on behalf
of such Registering Stockholder to such Person, if required by law to have been
delivered, and such revised prospectus would have cured the defect giving rise
to such loss, claim, damage, liability or expense.
23
(ii) To the fullest extent permitted by law, each Registering Stockholder
will indemnify and hold harmless Parent, each of its directors, each of its
officers who have signed such registration statement, each person, if any, who
controls Parent within the meaning of the Securities Act, any underwriter for
Parent (within the meaning of the Securities Act), and all other Registering
Stockholders against any losses, claims, damages or liabilities to which Parent
or any such director, officer, controlling person, underwriter or other
Registering Stockholders may become subject to, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
each case to the extent that such untrue statement or alleged untrue statement
or omission or alleged omission was made in such registration statement,
preliminary prospectus, final prospectus, or amendments or supplements thereto,
in reliance upon and in conformity with written information furnished by such
Registering Stockholder expressly for use in connection with such registration;
and such Registering Stockholder will reimburse any legal or other expenses
reasonably incurred by Parent or any such director, officer, controlling person,
underwriter or other Registering Stockholder in connection with investigating or
defending any such loss, claim, damage, liability or action, subject to the
provisions of Section 2A.5(c); provided, however, that the maximum amount of
liability of each Registering Stockholder hereunder shall be limited to the
proceeds (net of underwriting discounts and commissions, if any) actually
received by such Registering Stockholder from the sale of Merger Common Shares
covered by such registration statement, and provided further that the indemnity
agreement contained in this Section 2.13(e)(i) shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of those Registering Stockholder(s)
against which the request for indemnity is being made (which consent shall not
be unreasonably withheld or delayed).
Promptly after receipt by an indemnified party under this Section 2.13(e)
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under this
Section 2.13(e), notify the indemnifying party in writing of the commencement
thereof and the indemnifying party shall have the right to participate in and,
to the extent the indemnifying party desires, jointly with any other
indemnifying party similarly noticed, to assume at its expense the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
that, if any indemnified party shall have reasonably concluded that there may be
one or more legal defenses available to such indemnified party that are
different from or additional to those available to the indemnifying party, or
that such claim or litigation involves or could have an effect upon matters
beyond the scope of the indemnity agreement provided in this Section 2.13(e),
the indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party, and such indemnifying party shall
reimburse such indemnified party and any person controlling such indemnified
party for the fees and expenses of counsel retained by the indemnified party
that are reasonably related to the matters covered by the indemnity agreement
provided in this Section 2.13(e). Subject to the foregoing, an indemnified party
shall have the right to employ separate
24
counsel in any such action and to participate in the defense thereof but the
fees and expenses of such counsel shall not be at the expense of the
indemnifying party. The failure to notify an indemnifying party promptly of the
commencement of any such action, if materially prejudicial to his ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 2.13(e), but the omission so to notify
the indemnifying party will not relieve him of any liability that the
indemnifying party may have to any indemnified party otherwise other than under
this Section 2.13.
In order to provide for just and equitable contribution to joint liability
under the Securities Act in any case in which either (i) any Registering
Stockholder exercising rights under this Agreement, or any controlling person of
any such holder, makes a claim for indemnification pursuant to this Section 2.13
but it is judicially determined that such indemnification may not be enforced in
such case notwithstanding the fact that this Section 2.13 provides for
indemnification in such case or (ii) contribution under the Securities Act may
be required on the part of any such Registering Stockholder or any such
controlling person in circumstances for which indemnification is provided under
this Section 2.13, then, in each such case, the Company and such Registering
Stockholder will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportions so that such holder is responsible for the portion represented
by the percentage that the public offering price of its Merger Common Shares
offered by the Stockholder Registration Statement bears to the public offering
price of all securities offered by such Stockholder Registration Statement, and
the Company is responsible for the remaining portion; provided, however, that,
in any such case, (i) no such holder will be required to contribute any amount
in excess of the net proceeds to it of all Merger Common Shares sold by it
pursuant to such Stockholder Registration Statement, and (ii) no person or
entity guilty of fraudulent misrepresentation, within the meaning of Section
11(f) of the Securities Act, shall be entitled to contribution from any person
or entity who is not guilty of such fraudulent misrepresentation.
Notwithstanding anything in this Section 2.13 to the contrary, if, in
connection with an underwritten public offering, Parent, the Registering
Stockholders and the underwriters enter into an underwriting or purchase
agreement relating to such offering that contains provisions covering
indemnification among the parties, then the indemnification provision of this
Section 2.13(e) shall be deemed inoperative for purposes of such offering.
(f) Rule 144. Parent shall use its reasonable best efforts to comply
--------
with the requirements of Rule 144(c) under the Securities Act, as such Rule may
be amended from time to time (or any similar rule or regulation hereafter
adopted by the SEC), regarding the availability of current public information to
the extent required to enable each Registering Stockholder to sell Merger Common
Shares without registration under the Securities Act pursuant to the resale
provisions of Rule 144 (or any similar rule or regulation). Upon the written
request of a Registering Stockholder, Parent will deliver to such Registering
Stockholder a written statement as to whether it has complied with such
requirements and, upon a Registering Stockholder's compliance with the
applicable provisions of Rule 144, will take such action as may reasonably be
required (including, without limitation, causing legal counsel to issue an
appropriate opinion) to cause its transfer agent to effectuate any transfer of
Merger Common
25
Shares properly requested by such Registering Stockholder, in accordance with
the terms and conditions of Rule 144.
(g) Transferees. The Stockholder Registration Statement and the
-----------
prospectus that is a part thereof shall provide appropriate disclosure
indicating that the term "selling stockholders" as used therein shall include
donees, transferees, pledges and other successors in interest of the Registering
Stockholders. Parent hereby covenants to file any amendment to the Stockholder
Registration Statement, or supplement the prospectus that is a part thereof, to
enable any Registering Stockholder's donees, transferees, pledges or other
successors in interest to sell any Merger Common Shares pursuant to the
Stockholder Registration Statement. All rights of any Registering Stockholder
under this Section 2.13(g) shall run to the benefit of any donees, transferees,
pledges or other successors in interest of such Registering Stockholder.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement of Parent and Sub to enter into this Agreement, the
Company hereby makes, as of the date hereof and as of the Closing Date, the
following representations and warranties to Parent and Sub which representations
and warranties are, as of the date hereof, and will be, as of the Closing Date,
true and correct, except as otherwise set forth in written disclosure schedules
(the "Company Disclosure Schedules") delivered to Parent prior to the date
----------------------------
hereof, a copy of which is attached hereto. The Company Disclosure Schedules
are numbered to correspond to the various sections of this Article 3 setting
forth certain exceptions to the representations and warranties contained in this
Article 3 and certain other information called for by this Agreement.
Notwithstanding any other provision of this Agreement or the Company Disclosure
Schedules, each exception set forth in the Company Disclosure Schedules will be
deemed to qualify each representation and warranty set forth in this Agreement
(i) that is specifically identified (by cross-reference or otherwise) in the
Company Disclosure Schedules as being qualified by exception or (ii) with
respect to which the relevance of such exception is reasonably apparent on the
face of the disclosure of such exception set forth in the Company Disclosure
Schedules.
3.1 Organization. The Company is a corporation duly organized, validly
------------
existing and in standing under the laws of the State of Delaware, with all
requisite corporate power and authority to conduct its Business as it is
presently being conducted and to own or lease, as applicable, the Assets owned
or leased by it. The Company is duly qualified to conduct business as a foreign
corporation and is in good standing in each jurisdiction in which such
qualification is necessary under applicable law as a result of the conduct of
its Business or the ownership of its properties. Each jurisdiction in which the
Company is qualified to do business as a foreign corporation is set forth in
Schedule 3.1.
- ------------
3.2 Capitalization.
--------------
(a) Stock. As of the date of this Agreement, the authorized capitalization
-----
of the Company consists of (i) 10,000,000 shares of Company Common Stock of
which 4,181,065 shares are issued and outstanding and (ii) 5,000,000 shares of
Company Preferred Stock. Of the authorized shares of Company Preferred Stock,
400,000 shares have been designated as Series A
26
Preferred Stock, 359,885 of which are issued and outstanding. No additional
shares of capital stock of the Company will be issued after the date hereof
except for shares of Company Stock issuable upon the exercise of Company Options
and Company Warrants outstanding on the date hereof. The Company has no other
capital stock authorized, issued or outstanding. Schedule 3.2(a) sets forth the
name of each holder of shares of Company Stock, as well as the number of shares
of Company Stock held by each such holder.
(b) Warrants. As of the date of this Agreement, no shares of Company
--------
Common Stock and 6,567 shares of Company Preferred Stock are reserved for
issuance upon the exercise of outstanding Company Warrants. Schedule 3.2(b) sets
---------------
forth the name of each holder of Company Warrants, as well as the number of
Company Warrants held by each such holder, the number of shares of Company Stock
for which each such Company Warrant is exercisable, the date upon which each
such Company Warrant becomes exercisable and the price per share of Company
Stock for which each such Company Warrant is exercisable (without taking into
account whether or not such Company Warrant is in fact exercisable on the date
hereof). True and correct copies of the forms of warrant agreements governing
all Company Warrants have been previously provided or made available to Parent.
(c) Options. As of the date of this Agreement, 400,000 shares of Company
-------
Common Stock are reserved for issuance upon the exercise of outstanding Company
Options. Schedule 3.2(c) sets forth the name of each holder of Company Options,
---------------
as well as the number of the Company Options held by each such holder, the
number of shares of Company Common Stock for which each such Company Option is
exercisable, the date upon which each such Company Option becomes exercisable
and the price per share of Company Common Stock for which each such Company
Option is exercisable (without taking into account whether or not such Company
Option is in fact exercisable on the date hereof). A true and correct copy of
the plan document governing all Company Options, which contains the forms of
option agreement used in all cases, has been previously provided or made
available to Parent.
(d) No Other Capital Stock, Options, Warrants. Except for the Company
-----------------------------------------
Warrants and Company Options referred to above, there are no outstanding
options, warrants, convertible securities or rights of any kind to purchase or
otherwise acquire any shares of capital stock or other securities of the
Company. Except for up to 6,567 shares of Company Preferred Stock reserved for
issuance upon exercise of Company Warrants up to 400,000 shares of Company
Common Stock reserved for issuance upon exercise of outstanding Company Options
and up to 359,885 shares of Company Common Stock reserved for issuance upon the
Conversion of Company Preferred Stock, no shares of capital stock of the Company
are reserved for issuance.
(e) Valid Issuances. All outstanding shares of Company Stock are, and any
---------------
shares of Company Stock issued upon exercise of any Company Warrant or Company
Option will be, validly issued, fully paid and non-assessable and not subject to
any preemptive or similar rights created by statute, the Company's Certificate
of Incorporation or Bylaws, or any Contract. The outstanding shares of Company
Stock, Company Warrants and Company Options have been, and the shares of Company
Stock issuable upon the exercise of outstanding Company Warrants and Company
Options will be, issued in compliance with all federal and state corporate and
securities laws.
27
3.3 Stockholders' Agreements, etc. Except as set forth on Schedule 3.3,
-----------------------------
there are no stockholder agreements, voting trusts, proxies or other agreements
or understandings with respect to or concerning the purchase, sale or voting of
the capital stock of the Company.
3.4 Authorization. The Company has all necessary corporate power and
-------------
authority to enter into this Agreement and the Ancillary Agreements to which the
Company is a party and has taken all corporate action necessary to consummate
the transactions contemplated hereby and thereby and to perform its obligations
hereunder and thereunder. This Agreement has been duly executed and delivered by
the Company, and this Agreement is, and upon execution and delivery thereof each
Ancillary Agreement to which the Company is a party will be, a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms, except that enforceability may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting the rights of creditors or (b) general principles of equity
(regardless of whether enforceability is considered in a proceeding at law or in
equity).
3.5 Officers and Directors. Schedule 3.5 contains a true, correct and
----------------------
complete list of all the officers and directors of the Company.
3.6 Bank Accounts. Schedule 3.6 contains a list of all of the Company's
-------------
bank accounts, safe deposit boxes and persons authorized to draw thereon or have
access thereto.
3.7 Subsidiaries. The Company does not own or hold any equity interest of
------------
any kind in any other Person.
3.8 Real Property.
-------------
(a) General. The Company leases all real property necessary for the
-------
conduct of the Business as presently conducted.
(b) Owned Real Property. Schedule 3.8(b) hereto sets forth all
------------------- ---------------
Facilities owned by the Company or to be acquired by it prior to the Effective
Time. With respect to each parcel of owned real property, except as set forth on
Schedule 3.8(b), (i) the Company has good and marketable fee simple title to
such parcel of real property, free and clear of any and all Encumbrances other
than Permitted Encumbrances, (ii) there are no Leases, subleases, licenses,
options, rights, concessions or other agreements, written or oral, granting to
any party or parties the right of use or occupancy of any portion of such parcel
of real property, except for those which constitute a Permitted Encumbrance,
(iii) there are no outstanding options or rights of first refusal in favor of
any other party to purchase any such parcel of real property or any portion
thereof or interest therein, (iv) there are no parties (other than the Company)
who are in possession of or who are using any such parcel of real property,
except in connection with a Permitted Encumbrance, and (v) there is no (A)
pending or threatened condemnation proceeding relating to such parcel of real
property, (B) pending or threatened Action relating to such parcel of real
property, or (C) other matter adversely affecting the current or currently
proposed use, occupancy or value of, such parcel of real property.
(c) Leased Real Property. Schedule 3.8(c) sets forth all Leases pursuant
--------------------
to which Facilities are leased by the Company (as lessee), true and correct
copies of which have
28
been delivered or made available to Parent. Such Leases constitute all Leases,
subleases or other occupancy agreements pursuant to which the Company occupies
or uses Facilities. Except as set forth on Schedule 3.8(c), the Company has good
---------------
and valid leasehold title to, and enjoys peaceful and undisturbed possession of,
all leased property described in such Leases (the "Leased Property"), free and
clear of any and all Encumbrances other than any Permitted Encumbrances which
would not permit the termination of the Lease therefor by the lessor. With
respect to each such parcel of Leased Property (i) there are no pending or
threatened condemnation proceedings relating to, or any pending or threatened
Actions relating to, the Company's leasehold interests in such Leased Property
or any portion thereof, (ii) neither the Company nor any third party has entered
into any sublease, license, option, right, concession or other agreement or
arrangement, written or oral, granting to any person the right to use or occupy
such Leased Property or any portion thereof or interest therein, except in
connection with a Permitted Encumbrance, and (iii) the Company has not received
notice of any pending or threatened special assessment relating to such Leased
Property or otherwise has any knowledge of any pending or threatened special
assessment relating thereto.
With respect to each Lease listed on Schedule 3.8(c), (i) there has been
---------------
no default under any such Lease by the Company or by any other party, (ii) the
execution, delivery and performance of this Agreement and the Ancillary
Agreements and the consummation of the transactions contemplated hereby and
thereby will not cause a default under any such Lease, (iii) such Lease is a
valid and binding obligation of the lessor, is in full force and effect with
respect to and is enforceable against the lessor in accordance with its terms,
except as the enforceability thereof may be limited by (1) applicable
bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or
similar laws in effect which affect the enforcement of creditors' rights
generally or (2) general principles of equity, whether considered in a
proceeding at law or in equity, (iv) no action has been taken by the Company,
and no event has occurred which, with notice or lapse of time or both, would
permit termination, modification or acceleration by a party thereto other than
the Company without the consent of the Company under any such Lease, (v) no
party has repudiated to the Company any term thereof or threatened to the
Company to terminate, cancel or not renew any such Lease and (vi) the Company
has not assigned, transferred, conveyed, mortgaged or encumbered any interest
therein or in any leased property subject thereto (or any portion thereof).
3.9 Personal Property.
-----------------
(a) General. The Company owns or leases all personal property Assets
-------
necessary for the conduct of the Business as presently conducted, and the
personal property Assets (taken as a whole) are in such operating condition and
repair (subject to normal wear and tear) as is necessary for the conduct of the
Business as presently conducted.
(b) Owned Personal Property. Except as set forth on Schedule 3.9(b),
----------------------- ---------------
the Company has good and marketable title to all such personal property owned by
it, free and clear of any and all Encumbrances other than Permitted
Encumbrances. With respect to each such item of personal property (i) there are
no Leases, subleases, licenses, options, rights, concessions or other
agreements, written or oral, granting to any party or parties the right of use
of any portion
29
of such item of personal property, (ii) there are no outstanding options or
rights of first refusal in favor of any other party to purchase any such item of
personal property or any portion thereof or interest therein and (iii) there are
no parties (other than the Company) who are in possession of or who are using
any such item of personal property.
(c) Leased Personal Property. The Company has good and valid
------------------------
leasehold title to all of such Fixtures and Equipment, vehicles and other
tangible personal property Assets leased by it from third parties, free and
clear of any and all Encumbrances other than Permitted Encumbrances which would
not permit the termination of the lease therefor by the lessor. Schedule 3.9(c)
---------------
sets forth all Leases for personal property involving annual payments of more
than $25,000.
With respect to each Lease listed on Schedule 3.9(c), (i) there has been
---------------
no default under such Lease by the Company or by any other party, (ii) the
execution, delivery and performance of this Agreement and the Ancillary
Agreements and the consummation of the transactions contemplated hereby and
thereby will not cause (with or without notice and with or without the passage
of time) a default under any such Lease, (iii) such Lease is a valid and binding
obligation of the applicable lessor, is in full force and effect and is
enforceable by the Company in accordance with its terms, except as the
enforceability thereof may be limited by (1) applicable bankruptcy, insolvency,
moratorium, reorganization, fraudulent conveyance or similar laws in effect
which affect the enforcement of creditors' rights generally or (2) general
principles of equity, whether considered in a proceeding at law or in equity,
(iv) no action has been taken by the Company and no event has occurred which,
with notice or lapse of time or both, would permit termination, modification or
acceleration by a party thereto other than by the Company without the consent of
the Company under any such Lease, (v) no party has repudiated any term thereof
or threatened to terminate, cancel or not renew any such Lease, and (vi) the
Company has not assigned, transferred, conveyed, mortgaged or encumbered any
interest therein or in any leased property subject thereto (or any portion
thereof).
3.10 Environmental Matters.
----------------------
(a) Compliance. The Company is in compliance with all Environmental
----------
Laws, including, without limitation, all Permits required thereunder to conduct
the Business as currently being conducted or proposed to be conducted. All such
Permits are listed on Schedule 3.10(a). The Company has not received any notice
----------------
to the effect that, or otherwise has knowledge that, (i) it is not in compliance
with, or is in violation of, any such Environmental Laws or Permits required
thereunder or (ii) any currently existing circumstances are reasonably likely to
result in a failure of the Company to comply with, or a violation by the Company
of, any such Environmental Laws or Permits required thereunder. The Company at
all times during its existence has been in compliance with all Environmental
Laws.
(b) Environmental Claims. There are no existing or potential
--------------------
Environmental Claims against the Company. The Company has not received any
written notification or otherwise has any knowledge, of any allegation of any
actual, or potential responsibility for, or any inquiry or investigation
regarding, any disposal, release or threatened release at any location of any
Hazardous Substance generated or transported by the Company.
(c) Hazardous Substances. No underground tank or other
--------------------
underground storage receptacle for Hazardous Substances is currently located on
the Facilities, and there have
30
been no releases of any Hazardous Substances from any such underground tank or
related piping and there have been no releases (i.e., any past or present
releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, disposing, or dumping) of Hazardous Substances in
quantities exceeding the reportable quantities as defined under federal or state
law on, upon or into the Facilities other than those authorized by Environmental
Laws including, without limitation, the Permits required thereunder. In
addition, there have been no such releases by predecessors of the Company and no
releases in quantities exceeding the reportable quantities as defined under
federal or state law on, upon, or into any real property in the immediate
vicinity of any of the real properties of the Company other than those
authorized by Environmental Laws which, through soil or ground water
contamination, may have come to be located on the properties of the Company.
(d) Environmental Indemnities. Except as set forth on Schedule
------------------------- --------
3.10(d), the Company is not a party, whether as a direct signatory or as
- -------
successor, assign or third-party beneficiary, or otherwise bound, to any Lease
or other Contract (excluding insurance policies disclosed on the Schedules)
under which the Company is obligated by or entitled to the benefits of, directly
or indirectly, any representation, warranty, indemnification, covenant,
restriction or other undertaking concerning Environmental Conditions.
(e) No Releases. The Company has not released any other person
-----------
from any claim under any Environmental Law or waived any rights concerning any
Environmental Condition.
(f) Environmental Reports. Complete and accurate copies of the
---------------------
Environmental Reports, as well as all other written environmental reports,
audits or assessments which have been conducted, either by the Company or any
person engaged by the Company for such purpose, at any facility owned or
formerly owned by the Company have been made available to Parent and a list of
all such reports, audits and assessments is set forth on Schedule 3.10(f).
----------------
3.11 Contracts.
---------
(a) Disclosure. Schedule 3.11 sets forth a complete and accurate
---------- -------------
list of all of the Contracts of the following categories:
(i) Contracts not made in the ordinary course of business;
(ii) License agreements, collaboration agreements, research
agreements, development agreements or royalty agreements (excluding licenses
that are commonly available on standard commercial terms, such as software
"shrink-wrap" licenses);
(iii) Confidentiality and non-disclosure agreements (whether the
Company is the beneficiary or the obligated party thereunder);
(iv) Contracts or commitments involving future expenditures or
Liabilities, actual or potential, in excess of $25,000 after the date hereof or
otherwise material to the Business or the Assets;
31
(v) Contracts or commitments relating to commission
arrangements with others that are material to the Business;
(vi) Employment contracts, consulting contracts, severance
agreements, "stay-bonus" agreements and similar arrangements, including
Contracts (A) to employ or terminate executive officers or other personnel and
other contracts with present or former officers or directors of the Company or
(B) that will result in the payment by, or the creation of any Liability of the
Company, the stockholders of the Company or Parent to pay any severance,
termination, "golden parachute," or other similar payments to any present or
former personnel following termination of employment or otherwise as a result of
the consummation of the transactions contemplated by this Agreement;
(vii) Indemnification agreements;
(viii) Promissory notes, loans, agreements, indentures,
evidences of indebtedness, letters of credit, guarantees, or other instruments
relating to an obligation to pay money, whether the Company shall be the
borrower, lender or guarantor thereunder (excluding credit provided by the
Company in the ordinary course of business to purchasers of its products and
obligations to pay vendors in the ordinary course of business and consistent
with past practice); (ix) Contracts containing covenants limiting the freedom of
the Company, or any officer, director, Employee or Affiliate of the Company, to
engage in any line of business or compete with any Person that relates directly
or indirectly to the Business;
(x) Any Contract with the federal, state or local
government or any agency or department thereof;
(xi) Any Contract or other arrangement with a Related
Party;
(xii) Leases of real or personal property involving annual
payments of more than $25,000; and
(xiii) Any other Contract under which the consequences of a
default or termination would reasonably be expected to have, individually or in
the aggregate, a Company Material Adverse Effect.
Complete and accurate copies of all of the Contracts listed on Schedule
--------
3.11, including all amendments and supplements thereto, have been made available
- ----
to Parent. The Company has included as part of Schedule 3.11 a brief summary of
-------------
the material terms of each oral Contract.
(b) Absence of Defaults. Except as set forth on Schedule 3.11(b),
-------------------
(i) all of the Contracts are valid, binding and enforceable in accordance with
their terms with no existing or threatened Default or dispute; (ii) the Company
has fulfilled, or taken all action necessary to enable it to fulfill when due,
all of its obligations under each of such Contracts; and (iii) all parties to
such Contracts have complied with the provisions thereof, no party is in Default
thereunder and no notice of any claim of Default has been given to the Company.
32
(c) Product Warranty. The Company has not committed any act, and
----------------
there has been no omission, which may result in, and there has been no
occurrence which may give rise to, product liability or Liability for breach of
warranty (whether covered by insurance or not) on the part of the Company, with
respect to products designed, manufactured, assembled, sold, repaired,
maintained, delivered or installed or services rendered prior to or on the
Closing Date which could reasonably be expected to result in Liability to the
Company exceeding $25,000 in the aggregate.
3.12 No Conflict or Violation; Consents. Except as set forth on
----------------------------------
Schedule 3.12, none of the execution, delivery or performance of this Agreement
- -------------
or any Ancillary Agreement, the consummation of the transactions contemplated
hereby or thereby, nor compliance by the Company with any of the provisions
hereof or thereof, will (a) violate or conflict with any provision of the
Certificate of Incorporation or Bylaws of the Company, (b) violate, conflict
with, or result in a breach of or constitute a default (with or without notice
or the passage of time) under, or result in the termination of, or accelerate
the performance required by, or result in a right to terminate, accelerate,
modify or cancel under, or require a notice under, or result in the creation of
any Encumbrance upon any of the Assets under, any Contract, lease, sublease,
license, sublicense, franchise, permit, indenture, agreement or mortgage for
borrowed money, instrument of indebtedness, security interest or other
arrangement to which the Company is a party or by which the Company is bound or
to which any of the Assets are subject, (c) violate any applicable Regulation or
Court Order applicable to the Company or (d) impose any Encumbrance on any
Assets or the Business. Except as set forth on Schedule 3.12, no notices to,
-------------
declaration, filing or registration with, approvals or Consents of, or
assignments by, any Persons (including any federal, state or local governmental
or administrative authorities) are necessary to be made or obtained by the
Company in connection with the execution, delivery or performance of this
Agreement or any Ancillary Agreement to which it is a party or the consummation
of the transactions contemplated hereby or thereby.
3.13 Permits. Schedule 3.13 sets forth a complete list of all material
------- -------------
Permits, all of which are as of the date hereof, and will be as of the Closing
Date, in full force and effect. The Company has, and at all times has had, all
Permits required under any applicable Regulation in its operation of the
Business or in its ownership of the Assets, and owns or possesses such Permits
free and clear of all Encumbrances. The Company is not in default, nor has the
Company received any notice of any claim of default, with respect to any such
Permit. Except as otherwise governed by law, all such Permits are renewable by
their terms or in the ordinary course of business without the need to comply
with any special qualification procedures or to pay any amounts other than
routine filing fees and, except as set forth on Schedule 3.13, will not be
-------------
adversely affected by the completion of the transactions contemplated by this
Agreement or the Ancillary Agreements.
3.14 Financial Statements; Books and Records.
---------------------------------------
(a) General. The financial statements of the Company, including
-------
without limitation the Financial Statements, are complete, are in accordance
with the Company's Books and Records and fairly present in the financial
condition, results of operations and cash flows of the Company as of the dates
and for the periods indicated thereby, in accordance with GAAP consistently
applied throughout the periods covered thereby.
33
(b) Internal Controls. The Company maintains a system of internal
-----------------
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed with management's authorizations, (ii) transactions
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's authorization and (iv)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(c) Books and Records. The Books and Records, in reasonable detail,
-----------------
accurately and fairly reflect the activities of the Company and the Business and
have been provided to Parent for its inspection.
(d) All Accounts Recorded. The Company has not engaged in any
---------------------
transaction, maintained any bank account or used any corporate funds except for
transactions, bank accounts or funds which have been and are reflected in the
Books and Records.
(e) Corporate Records. The stock records and minute books of the
-----------------
Company that have been made available to Parent fully reflect all minutes of
meetings, resolutions and other material actions and proceedings of its
stockholders, trustees and board of directors and all committees thereof, all
issuances, transfers and redemptions of capital stock and contain true, correct
and complete copies of their respective Certificate of Incorporation and Bylaws
of the Company and all amendments thereto through the date hereof.
3.15 Absence of Certain Changes or Events. Except as set forth on Schedule
------------------------------------ --------
3.15, since the Balance Sheet Date there has not been any:
- ----
(a) Company Material Adverse Change;
(b) failure to operate the Business in the ordinary course so as to
use all commercially reasonable efforts to preserve the Business intact and to
preserve the continued services of the Company's employees and the goodwill of
strategic partners, suppliers, customers and others having business relations
with the Company or its Representatives;
(c) resignation or termination of any officer, director or manager,
or any increase in the rate of compensation payable or to become payable to any
officer, director or manager or Representative of the Company (other than
general, regularly-scheduled reviews), including the making of any loan to, or
the payment, grant or accrual of any bonus, incentive compensation, service
award or other similar benefit to, any such Person;
(d) any payment, loan or advance of any amount to or in respect of,
or the sale, transfer or lease of any properties or the Assets to, or entering
into of any Contract with, any Related Party except regular compensation to
Employees;
(e) sale, assignment, license, transfer or Encumbrance of any of the
Assets, tangible or intangible, singly or in the aggregate, other than sales of
products and services in the ordinary course of business and consistent with
past practice;
34
(f) new Contracts, or extensions, modifications, terminations or renewals
thereof, except for Contracts entered into, modified or terminated in the
ordinary course of business and consistent with past practice;
(g) actual or threatened termination of any customer account or group of
accounts or actual or threatened reduction in purchases or royalties payable by
any such customer or occurrence of any event that is likely to result in any
such termination or reduction;
(h) disposition or lapsing of any Proprietary Rights of the Company, in
whole or in part, or any disclosure of any trade secret, process or know-how to
any Person not an Employee;
(i) change in accounting methods or practices by the Company;
(j) revaluation by the Company of any of the Assets, including writing
off or establishing reserves with respect to inventory, notes or accounts
receivable (other than for which adequate reserves have been previously
established;
(k) damage, destruction or loss (whether or not covered by insurance)
adversely affecting the Assets, the Business or the prospects of the Company;
(l) declaration, setting aside or payment of any dividend or distribution
in respect of any capital stock of the Company or any redemption, purchase
or other acquisition of any equity securities of the Company;
(m) issuance or reservation for issuance by the Company of, or commitment
of it to issue or reserve for issuance, any shares of capital stock or other
equity securities or obligations or securities convertible into or exchangeable
for shares of capital stock or other equity securities;
(n) increase, decrease or reclassification of the capital stock of the
Company;
(o) amendment of the Certificate of Incorporation or Bylaws of the
Company;
(p) capital expenditure or execution of any lease or any incurring of
liability therefor by the Company, involving payments or obligations in excess
of $25,000 in the aggregate;
(q) failure to pay any material obligation of the Company when due;
(r) cancellation of any indebtedness or waiver of any rights of
substantial va lue to the Company, except in the ordinary course of business and
consistent with past practice;
(s) indebtedness incurred by the Company for borrowed money or any
commitment to borrow money entered into by the Company, or any loans made or
agreed to be made by the Company;
35
(t) liability incurred by the Company except in the ordinary course
of business and consistent with past practice, or any increase or change in any
assumptions underlying or methods of calculating any bad debt, contingency or
other reserves;
(u) payment, discharge or satisfaction of any Liabilities of the
Company other than the payment, discharge or satisfaction in the ordinary course
of business and consistent with past practice of Liabilities reflected or
reserved against in the Financial Statements or incurred in the ordinary course
of business and consistent with past practice since the Balance Sheet Date;
(v) acquisition of any equity interest in any other Person; or
(w) agreement by the Company directly or indirectly to do any of the
foregoing.
3.16 Liabilities. Except as set forth in Schedule 3.16, the Company has
----------- -------------
no Liabilities or obligations (absolute, accrued, contingent or otherwise)
except (i) Liabilities which are reflected and properly reserved against in the
Financial Statements, (ii) Liabilities incurred in the ordinary course of
business and consistent with past practice since the Balance Sheet Date, (iii)
Tax Liabilities and (iv) Liabilities arising under the Contracts (other than
obligations which are required to be reflected on a balance sheet prepared in
accordance with GAAP) set forth on Schedule 3.11. None of the Liabilities
-------------
described in this Section 3.16 relates to any breach of Contract, breach of
warranty, tort, infringement or violation of law or arose out of any action,
order writ, injunction, judgment or decree outstanding or claim, suit,
litigation, proceeding, investigation or dispute (collectively, "Actions").
-------
3.17 Litigation. Except as set forth on Schedule 3.17, there is no Action,
---------- -------------
pending or threatened or anticipated (i) against, relating to or affecting the
Company, any of the Assets or any of the Company's officers and directors as
such, (ii) which seeks to enjoin or obtain damages in respect of the
transactions contemplated hereby or by the Ancillary Agreements or (iii) with
respect to which there is a reasonable likelihood of a determination which would
prevent the Company from consummating the transactions contemplated hereby. None
of the Actions, if adversely determined against the Company, its respective
directors or officers, or any other Person could reasonably be expected to
result in a loss to the Company, individually or in the aggregate, in excess of
$25,000. There is no basis for any Action, which if adversely determined against
the Company, its directors or officers or any other Person could reasonably be
expected to result in a loss to the Company, individually or in the aggregate,
in excess of $25,000. There are currently no outstanding judgments, decrees or
orders of any court or any governmental or administrative agency against or
affecting the Company, the Business or any of the Assets. Schedule 3.17 contains
-------------
a complete and accurate description of all Actions to which the Company has been
a party or which relate to any of the Assets or the Company's officers or
directors as such, or any such Actions which were settled prior to the
institution of formal proceedings, other than Actions brought by the Company for
collection of monies owed in the ordinary course of business.
3.18 Labor Matters.
-------------
36
(a) General. The Company is not a party to any labor agreement with
-------
respect to its Employees with any labor organization, group or association and
has not experienced any attempt by organized labor or its representatives to
make the Company conform to demands of organized labor relating to its Employees
or to enter into a binding agreement with organized labor that would cover the
Employees of the Company. There is no unfair labor practice charge or complaint
against the Company pending before the National Labor Relations Board or any
other governmental agency arising out of the Company's activities, and the
Company has no knowledge of any facts or information which would give rise
thereto; there is no labor strike or labor disturbance pending or threatened
against the Company nor is any grievance currently being asserted against it;
and the Company has not experienced a work stoppage or other labor difficulty.
There are no controversies pending or threatened between the Company and its
Employees, and the Company is not aware of any facts which could reasonably
result in any such controversy.
(b) Compliance. The Company is in compliance in all material
----------
respects with all applicable Regulations respecting employment practices, terms
and conditions of employment, wages and hours, equal employment opportunity, and
the payment of social security and similar taxes and is not engaged in any
unfair labor practice. The Company is not liable for any claims for past due
wages or any penalties for failure to comply with any of the foregoing.
(c) Severance Obligations. Except as set forth on Schedule 3.18(c),
--------------------- ---------------
the Company has not entered into any severance, "stay-bonus" or similar
arrangement in respect of any present or former Employee that will result in any
obligation (absolute or contingent) of Parent or the Company to make any payment
to any present or former Employee following termination of employment or upon
consummation of the transactions contemplated by this Agreement (whether or not
employment is continued for any specified period after the Effective Time).
Except as set forth on Schedule 3.18(c), neither the execution and delivery of
----------------
this Agreement or any Ancillary Agreement nor the consummation of the
transactions contemplated hereby or thereby will result in the acceleration or
vesting of any other rights of any Person to benefits under any Employee Plans.
(d) Highly Compensated Employees. Attached hereto as Schedule
---------------------------- --------
3.18(d) is a list of the names of all present Employees with total
- -------
compensation expected to exceed $75,000 in 2001 and their current compensation
payable by the Company. Notwithstanding any provision of this Agreement or any
Schedule to the contrary, the Company represents that from and after the
Effective Time no benefit or other compensation is payable to any Person
identified on Schedule 3.18(d) upon the voluntary resignation of such Person
----------------
from employment with Parent or the Company as a result of the occurrence of
the Effective Time.
3.19 Employee Benefit Plans.
----------------------
(a) Employee Plans. Except as set forth on Schedule 3.19, there are
-------------- -------------
no, and since the formation of the Company, there have been no, Employee Plans
which cover or have covered employees of the Company or under which the Company
has contributed or has any obligation to contribute or with respect to which the
Company has any liability. With respect to each Employee Plan, the Company has
delivered or made available to Parent a true, complete
37
and correct copy of (i) such Employee Plan (or, if not written, a written
summary of its material terms) and the most recent summary plan description, if
any, related to such Employee Plan, (ii) each trust agreement or other funding
arrangement relating to such Employee Plan, (iii) the most recent annual report
(Form 5500) filed with the IRS with respect to such Employee Plan (and, if the
most recent annual report is a Form 5500R, the most recent Form 5500C filed with
respect to such Employee Plan), (iv) the most recent actuarial report or
financial statement relating to such Employee Plan and (v) the most recent
determination letter, if any, issued by the IRS with respect to such Employee
Plan and any pending request for such a determination letter. Neither the
Company, nor any other person or entity, has any express or implied commitment,
whether legally enforceable or not, to modify, change or terminate any Employee
Plan, other than with respect to a modification, change or termination required
by ERISA or the Code.
(b) Compliance. Each Employee Plan has been administered in
----------
accordance with its terms and all applicable laws, including ERISA and the Code,
and contributions required to be made under the terms of any of such Employee
Plans as of the date of this Agreement have been timely made or, if not yet due,
have been properly reflected on the most recent consolidated balance sheet filed
or incorporated by reference in the Company's financial statements prior to the
date of this Agreement. With respect to such Employee Plans, no event has
occurred and there exists no condition or set of circumstances in connection
with which the Company could be subject to any liability (other than for routine
benefit liabilities) under the terms of, or with respect to, such Employee
Plans, ERISA, the Code or any other applicable Law.
(c) Qualification. The Company on behalf of itself and each ERISA
-------------
Affiliate hereby represents that: (i) each Employee Plan which is intended to
qualify under Section 401(a), Section 401(k), Section 401(m) or Section
4975(e)(6) of the Code has received a favorable determination letter from the
IRS as to its qualified status, and each trust established in connection with
any such Employee Plan which is intended to be exempt from federal income
taxation under Section 501(a) of the Code, and no fact or event has occurred
that could adversely affect the qualified status of any such Employee Plan or
the exempt status of any such trust and (ii) each Employee Plan can be amended,
terminated or otherwise discontinued after the Effective Time in accordance with
its terms, without liability (other than (A) liability for ordinary
administrative expenses typically incurred in a termination event or (B) if the
Employee Plan is a Pension Plan subject to Part 2 of Title I of ERISA, liability
for the accrued benefits as of the date of such termination (if and to the
extent required by ERISA) to the extent that either there are sufficient assets
set aside in a trust or insurance contract to satisfy such liability or such
liability is reflected on the most recent balance sheet included in the
Financial Statements prior to the date of this Agreement). No suit,
administrative proceeding, action or other litigation has been brought, or is
threatened, against or with respect to any such Employee Plan, including any
audit or inquiry by the IRS or United States Department of Labor (other than
routine benefits claims).
(d) Multiemployer Plans. No Employee Plan is a Multiemployer Plan
-------------------
or other Pension Plan subject to Title IV of ERISA and neither the Company nor
any ERISA Affiliate has sponsored or contributed to or been required to
contribute to a multiemployer pension plan or other pension plan subject to
Title IV of ERISA. No material liability under Title IV of ERISA has been
incurred by the Company or any ERISA Affiliate that has not been satisfied in
full, and no condition exists that presents a material risk to the Company or
any ERISA Affiliate of
38
incurring or being subject (whether primarily, jointly or secondarily) to a
liability thereunder. None of the assets of the Company or any ERISA Affiliate
is, or may reasonably be expected to become, the subject of any lien arising
under ERISA or Section 412(n) of the Code.
(e) Funding Deficiency. With respect to each Pension Plan set
------------------
forth on Schedule 3.19 that is subject to Title IV or Part 3 of Title I of ERISA
-------------
or Section 412 of the Code, (i) no reportable event (within the meaning of
Section 4043 of ERISA, other than an event that is not required to be reported
before or within 30 days of such event) has occurred or is expected to occur,
(ii) there was not an accumulated funding deficiency (within the meaning of
Section 302 of ERISA or Section 412 of the Code), whether or not waived, as of
the most recently ended plan year of such Pension Plan; and (iii) there is no
"unfunded benefit liability" (within the meaning of Section 4001(a)(18) of
ERISA).
(f) Retiree Welfare Benefits. Except as required by Law, no
------------------------
Employee Plan provides any of the following retiree or post-employment benefits
to any person: medical, disability or life insurance benefits. The Company is in
compliance with (i) the requirements of the applicable health care continuation
and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA") and the regulations (including proposed regulations)
-----
thereunder and (ii) the applicable requirements of the Health Insurance
Portability and Accountability Act of 1996, as amended, and the regulations
(including proposed regulations) thereunder.
(g) Deductibility of Payments. There is no contract, agreement,
-------------------------
plan or arrangement covering any Employee or former Employee of the Company
(with respect to such Employee's relationship with the Company) that,
individually or collectively, requires the payment by the Company of any amount
(i) that is not deductible under Section 162(a)(1) or 404 of the Code or (ii)
that is an "excess parachute payment" pursuant to Section 280G of the Code.
(h) Fiduciary Duties and Prohibited Transactions. The Company has
--------------------------------------------
not engaged in, or has any liability in respect of, any transaction in violation
of Sections 404 or 406 of ERISA or any "prohibited transaction," as defined in
Section 4975(c)(1) of the Code, for which no exemption exists under Section 408
of ERISA or Section 4975(c)(2) or (d) of the Code, or has otherwise violated the
provisions of Part 4 of Title I, Subtitle B of ERISA so as to create any
liability of the Company. The Company has not participated in a violation of
Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any Welfare Plan
or Pension Plan, and the Company has not been assessed any civil penalty under
Section 502(l) of ERISA.
(i) No Adoption. Neither the Company nor any ERISA Affiliate has
-----------
announced to Employees, former Employees, consultants or directors an intention
to create, or otherwise created, a legally binding commitment to adopt, change
or terminate any Employee Plan which is intended to cover employees or former
employees of the Company (with respect to their relationship with the Company).
(j) Unpaid Contributions. Neither the Company nor any ERISA
--------------------
Affiliate has any liability for unpaid contributions under Section 515 of ERISA.
39
3.20 Transactions with Related Parties. Except for employment agreements
---------------------------------
and other compensation arrangements disclosed on Schedule 3.20, no Related Party
-------------
has (a) borrowed or loaned money or other property to the Company which has not
been repaid or returned, (b) any contractual relationship or other claims,
express or implied, of any kind whatsoever against the Company or (c) any
interest in any property used by the Company.
3.21 Compliance with Law. The Company and its predecessors have conducted
-------------------
the Business in compliance in all material respects with all applicable
Regulations and Court Orders. The Company has not received any notice to the
effect that, or has otherwise been advised that, the Company or any predecessor
is not in compliance with any such Regulations or Court Orders, and the Company
has no reason to anticipate that any existing circumstances are likely to result
in any violation of any of the foregoing.
3.22 Intellectual Property.
---------------------
(a) Schedule 3.22(a) lists all Company Registered Proprietary Rights
----------------
(including all trademarks and service marks that the Company have used with the
intent of creating or benefiting from any common law rights relating to such
marks) and lists any proceedings or actions pending as of the date hereof before
any court or tribunal (including the PTO or equivalent authority anywhere in the
world) related to any of the Company Registered Proprietary Rights.
(b) The Company has all requisite right, title and interest in or
valid and enforceable rights under Contracts or Licenses to use all Company
Proprietary Rights necessary to the conduct of the Business as presently
conducted. Except as set forth on Schedule 3.22(b), each item of Company
----------------
Proprietary Rights, including all Company Registered Proprietary Rights listed
on Schedule 3.22(b), is owned exclusively by the Company (excluding Proprietary
----------------
Rights licensed to the Company under any License) and is free and clear of any
Encumbrances. Except as set forth on Schedule 3.22(b), the Company (i) owns
----------------
exclusively all trademarks, service marks and trade names used by the Company in
connection with the operation or conduct of the Business, including the sale of
any products or technology or the provision of any services by the Company,
provided, however, that the Company may use trademarks, service marks and trade
names of third parties which are licensed to the Company or are in the public
domain, and (ii) owns exclusively, and have good title to, all copyrighted works
that are Company's products or other works of authorship that the Company
otherwise purport to own; provided, however, that such works may incorporate
copyrighted works or works of authorship, trademarks or trade names of third
parties which are licensed to the Company or are in the public domain.
(c) To the extent that any Company Proprietary Rights have been
developed or created by any Person other than the Company, except as set forth
in Schedule 3.22(c), the Company has a written agreement with such Person with
----------------
respect thereto and the Company has either (i) obtained ownership of, and is the
exclusive owner of, all such Proprietary Rights by operation of law or by valid
assignment of any such rights or (ii) has obtained a License under or to such
Proprietary Rights.
(d) Except pursuant to agreements described in Schedule 3.22(d), the
-----------------
Company has not transferred ownership of or granted any License of or other
right to use or
40
authorized the retention of any rights to use, any Proprietary Rights that are
or were Company Proprietary Rights, to any other Person.
(e) The Company Proprietary Rights constitute all the Proprietary
Rights necessary or desirable to conduct the Business as it currently is
conducted or as reasonably contemplated to be conducted, including, without
limitation, the design, development, distribution, marketing, manufacture, use,
import, license, and sale of the products, technology and services of the
Company (including products, technology, or services currently under
development). Each of the Company Proprietary Rights owned or used by the
Company immediately prior to the Closing hereunder will be owned or available
for use by the Company on identical terms and conditions immediately subsequent
to the Closing hereunder. The Company has taken all necessary and desirable
action to maintain and protect each item of the Company Proprietary Rights that
it owns or uses.
(f) Schedule 3.22(f) lists all Contracts and Licenses (including all
----------------
inbound Licenses) to which the Company is a party with respect to any
Proprietary Rights. Except as set forth in Schedule 3.22(f), no Person other
----------------
than the Company has ownership rights to improvements made by the Company in
Proprietary Rights that have been licensed to the Company.
(g) Schedule 3.22(g) lists all Contracts, Licenses and agreements
----------------
between the Company and any other Person wherein or whereby the Company has
agreed to, or assumed, any obligation or duty to warrant, indemnify, reimburse,
hold harmless, guaranty or otherwise assume or incur any obligation or Liability
or provide a right of rescission with respect to the infringement or
misappropriation by the Company or such other Person of the Proprietary Rights
of any Person other than the Company.
(h) Except as set forth in Schedule 3.22(h), the operation of the
Business as currently conducted or as presently proposed to be conducted,
including the Company's design, development, use, import, manufacture and sale
of the products, technology or services (including products, technology or
services currently under development) of the Company do not infringe or
misappropriate the Proprietary Rights of any Person, violate the rights of any
Person (including rights to privacy or publicity), or constitute unfair
competition or an unfair trade practice under any applicable Law, and the
Company has not received notice from any Person claiming that such operation or
any act, product, technology or service (including products, technology or
services currently under development) of the Company infringes or
misappropriates the Proprietary Rights of any Person or constitutes unfair
competition or trade practices under any applicable Law.
(i) Except as set forth in Schedule 3.22(i), each item of Company
----------------
Registered Proprietary Rights is valid and subsisting, and all necessary
registration, maintenance, renewal fees, annuity fees and taxes due through the
date of this Agreement in connection with such Registered Proprietary Rights
have been paid and all necessary documents and certificates in connection with
such Company Registered Proprietary Rights have been filed with the relevant
patent, copyright, trademark or other authorities in the United States or
foreign jurisdictions, as the case may be, for the purposes of maintaining such
Registered Proprietary Rights. Schedule 3.22(i) lists all actions that must be
----------------
taken by the Company within 180 days from the
41
date hereof, including the payment of any registration, maintenance, renewal
fees, annuity fees and taxes or the filing of any documents, applications or
certificates for the purposes of maintaining, perfecting or preserving or
renewing any Company Registered Proprietary Rights. Except as set forth in
Schedule 3.22(i), the Company has not registered the copyright with the U.S.
- ----------------
Copyright Office for the latest version of each product or technology of the
Company that constitutes or includes a copyrightable work. In each case in which
the Company has acquired ownership of any Proprietary Rights from any Person,
the Company has obtained a valid and enforceable assignment sufficient to
irrevocably transfer all rights in such Proprietary Rights (including the right
to seek damages with respect to such Proprietary Rights) to the Company, to the
maximum extent required to protect the Company's ownership interests in and to
such Proprietary Rights in accordance with applicable Laws, the Company has
recorded each such assignment of Registered Proprietary Rights with the relevant
Governmental or Regulatory Authority, including the PTO, the U.S. Copyright
Office, or their respective equivalents in any relevant foreign jurisdiction, as
the case may be.
(j) Except as set forth in Schedule 3.22(j), there are no Contracts
----------------
or Licenses between the Company and any other Person with respect to Company
Proprietary Rights under which there is any claim (or facts that may reasonably
lead to a claim) known to the Company regarding the scope of such Contract or
License, or performance under such Contract or License, including with respect
to any payments to be made or received by the Company thereunder.
(k) No Person is infringing or misappropriating any Company
Proprietary Rights.
(l) The Company has taken all commercially reasonable steps to
protect its rights in confidential information and trade secrets of the Company
or provided by any other Person to the Company subject to a duty of
confidentiality. Without limiting the generality of the foregoing, the Company
has, and enforces, a policy requiring each Employee, consultant and independent
contractor to execute proprietary information, confidentiality and invention and
copyright assignment agreements, and all current and former employees,
consultants and independent contractors of the Company have executed such
agreements, as applicable. Except as set forth in Schedule 3.22(l), forms of all
----------------
such agreements have been provided to Parent or made available to Parent for
review.
(m) No Company Proprietary Rights or product, technology or service
of the Company is subject to any Order or Action or Proceeding that restricts,
or that is reasonably expected to restrict in any manner, the use, transfer or
licensing of any Company Proprietary Rights by the Company or that may affect
the validity, use or enforceability of such Company Proprietary Rights.
(n) Neither this Agreement nor any transactions contemplated by this
Agreement will result in Parent granting any rights or licenses with respect to
the Proprietary Rights of Parent to any Person pursuant to any Contract to which
the Company is a party or by which any of its Assets are bound.
(o) The Company has taken all necessary and appropriate steps to
protect and preserve ownership of Company Proprietary Rights. The Company has
secured valid written
42
assignments from all consultants and employees who contributed to the creation
or development of the Company Proprietary Rights. In the event that any
consultant is concurrently employed by the Company and a third party, the
Company has taken additional steps to ensure that any Company Proprietary Rights
developed by such a consultant does not belong to the third party or conflict
with the third party's employment agreement such steps include, but are not
limited to, ensuring that all research and development work performed by such a
consultant are performed only on the Company's facilities and only using the
Company's resources, except as set forth in Schedule 3.22(q).
----------------
3.23 Tax Matters.
-----------
(a) Filing of Tax Returns. The Company has timely filed with the
---------------------
appropriate taxing authorities all Tax Returns required to be filed through the
date hereof. The Tax Returns filed are complete and accurate. Except as set
forth on Schedule 3.23(a), the Company is not presently the beneficiary of, and
----------------
has no pending request for, any extension of time within which to file any Tax
Return. The Company has delivered to Parent complete and accurate copies of the
federal and state income Tax Returns of the Company for the years 1998, 1999 and
2000, and has delivered or made available to Parent complete and accurate copies
of all other Tax Returns of the Company for those years.
(b) Payment of Taxes. All Taxes due from the Company in respect of
----------------
periods (or portions thereof) ending before the Closing Date have been timely
paid, or an adequate reserve (in conformity with GAAP) has been established
therefor, as set forth in the Financial Statements, and the Company has no
Liability for Taxes in excess of the amounts so paid or the reserves so
established. Except as set forth on Schedule 3.23, all Taxes that the Company is
-------------
required by law to withhold or collect have been duly withheld or collected and
have been timely paid over to the appropriate governmental authorities to the
extent due and payable.
(c) Audits, Investigations or Claims. No deficiencies for Taxes of
--------------------------------
the Company have been claimed, proposed or assessed by any taxing or other
governmental authority. Except as set forth on Schedule 3.23, there are no
-------------
pending or threatened audits, assessments or other Actions for or relating to
any Liability in respect of Taxes of the Company, and there are no matters under
discussion with any governmental authorities with respect to Taxes that are
likely to result in an additional Liability for Taxes. Except as set forth on
Schedule 3.23, the Company has not been notified that any taxing authority
- -------------
intends to audit any of the Company's Tax Returns. Except as set forth on
Schedule 3.23, no extension of a statute of limitations relating to Taxes is in
- -------------
effect with respect to the Company.
(d) Lien. Except for Permitted Encumbrances, there are no
----
Encumbrances for Taxes on any of the Assets.
(e) Tax Elections. The Company has not (i) consented at any time
-------------
under Section 341(f)(1) of the Code to have the provisions of Section 341(f)(2)
of the Code apply to any disposition of any Assets; (ii) agreed, or is required,
to make any adjustment under Section 481(a) of the Code by reason of a change in
accounting method or otherwise other than as a result of the Merger; (iii) made
an election, or is required, to treat any Asset as owned by another Person
pursuant to the provisions of Section 168(f) of the Code or as tax-exempt bond
financed
43
property or tax-exempt use property within the meaning of Section 168 of the
Code; (iv) acquired and does not own any assets that directly or indirectly
secure any debt the interest on which is tax exempt under Section 103(a) of the
Code; or (v) made any of the foregoing elections or is required to apply any of
the foregoing rules under any comparable state or local Tax provision. Since its
formation, the Company has never been an S Corporation within the meaning of the
Code.
(f) Prior Affiliated Groups. The Company is not and has never been a
-----------------------
member of an affiliated group of corporations within the meaning of Section 1504
of the Code or any group that has filed a combined consolidated or unitary state
or local return.
(g) Tax Sharing Agreements. There are no Tax-sharing agreements or
----------------------
similar arrangements (including indemnity arrangements) with respect to or
involving the Company, the Assets or the Business and, after the Closing Date,
none of the Company, the Assets or the Business shall be bound by any such Tax-
sharing agreements or similar arrangements or have any Liability thereunder for
amounts due in respect of periods prior to the Closing Date.
(h) Partnerships. The Company has no interest in nor is it subject
------------
to any joint venture, partnership, limited liability company or other
arrangement or contract which is treated as a partnership for federal income tax
purposes.
(i) USRPHC. The Company is not and has not been a United State real
------
property holding corporation within the meaning of Section 897(c)(2) of the Code
during the applicable period specified in section 897(c)(1)(A)(ii) of the Code.
(j) Other Entity Liability. The Company does not have any Liability
----------------------
for the Taxes of any Person (other than Taxes of the Company without regard to
the activities of any predecessor) under Treasury Regulation Section 1.1502-6
(or any similar provision of state, local, or foreign law), as a transferee or
successor, by contract or otherwise.
3.24 Insurance. Schedule 3.24 contains a complete and accurate list of
--------- -------------
all policies or binders of insurance (showing as to each policy or binder the
carrier, policy number, coverage limits, expiration dates, annual premiums, a
general description of the type of coverage provided and any pending claims
thereunder) of which the Company is the owner, insured or beneficiary. All of
such policies are sufficient for (i) compliance with all Regulations and all of
the Contracts, (ii) covering all reasonably foreseeable damage to and
liabilities or contingencies relating to the Company's conduct of the Business
and (iii) providing replacement cost insurance coverage for all of the Assets,
Fixtures and Equipment and all leasehold improvements. The Company is not in
default under any of such policies or binders, and has not failed to give any
notice or to present any material claim under any such policy or binder in a due
and timely fashion. There are no facts known to the Company upon which an
insurer might be justified in reducing or denying coverage or increasing
premiums on existing policies or binders. There are no outstanding unpaid claims
under any such policies or binders. Such policies and binders are in full force
and effect on the date hereof and shall be kept in full force and effect by the
Company through the Closing Date.
44
3.25 Accounts Receivable. Except as contemplated by Schedule 3.25, the
------------------- -------------
accounts and notes receivable reflected in the Balance Sheet, and all accounts
or notes receivable arising since the Balance Sheet Date, represent bona fide
claims against debtors for sales, services performed or other charges arising on
or before the date of recording thereof, and all the goods delivered and
services performed which gave rise to said accounts were delivered or performed
in accordance with the applicable orders, Contracts or customer requirements.
3.26 Purchase Commitments and Outstanding Bids. As of the date of this
-----------------------------------------
Agreement, the aggregate of all Contracts for the purchase of Inventory by the
Company, other than in the ordinary course of business, does not exceed $25,000.
No outstanding purchase or outstanding lease commitment of the Company presently
is in excess of the normal, ordinary and usual requirements of the Business or
was made at any price in excess of the now current market price or contains
terms and conditions more onerous than those usual and customary in the
Company's business. There are outstanding no pending obligations to lease real
property in addition to those identified on Schedule 3.8(c).
---------------
3.27 Suppliers. Schedule 3.27 sets forth a complete and accurate list of
--------- -------------
the names and addresses of the ten (10) suppliers with the greatest dollar
volume of sales to the Company during the last fiscal year and during the last
fiscal quarter, showing the approximate total purchases in dollars by the
Company from each such supplier during such fiscal year. Since the Balance Sheet
Date, there has been no adverse change in the business relationship of the
Company with any supplier named on Schedule 3.27. The Company has not received
-------------
any written communication from any supplier named on Schedule 3.27 of any
-------------
intention to return, terminate or materially reduce purchases from or supplies
to the Company.
3.28 Brokers; Transaction Costs. Except as set forth on Schedule 3.28,
-------------------------- -------------
the Company has not entered into and will not enter into any contract,
agreement, arrangement or understanding with any Person which will result in the
obligation of Parent, the Company or any other Person to pay any finder's fee,
brokerage commission, or similar payment in connection with the transactions
contemplated hereby.
3.29 No Other Agreements to Sell the Company or the Assets. The Company
-----------------------------------------------------
has no legal obligation, absolute or contingent, to any other Person to sell the
Assets (other than Inventory in the ordinary course of business) or to sell any
capital stock of the Company or to effect any merger, consolidation or other
reorganization of the Company or to enter into any agreement with respect
thereto, except pursuant to this Agreement.
3.30 Foreign Corrupt Practices Act. Neither the Company nor any
-----------------------------
predecessor, agent, employee or other Person associated with or acting on behalf
of the Company or any predecessor has, directly or indirectly, used any
corporate funds for unlawful contributions, gifts, entertainment or other
unlawful expenses relating to political activity, made any unlawful payment to
foreign or domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds, violated any provision of
the Foreign Corrupt Practices Act of 1977, as amended, or made any bribe,
rebate, payoff, influence payment, kickback or other similar unlawful payment.
45
3.31 Financial Information. The Company has provided to Parent prior to
---------------------
the date hereof certain written financial information prepared by the Company
with respect to the Business which information was prepared for internal use
only. The Company makes no representation or warranty regarding the accuracy of
such financial information or as to whether the estimates contained therein will
be achieved, except that the Company represents and warrants that such financial
information was prepared in good faith and is based on assumptions believed by
it to be reasonable as of the date of this Agreement.
3.32 Approvals. Schedule 3.32 contains a list of all material approvals
--------- -------------
or consents relating to the Business which are required to be given to or
obtained by the Company from any Person in connection with the consummation of
the transactions contemplated by this Agreement and the Ancillary Agreements.
3.33 Takeover Statutes. No Takeover Statute applicable to the Company is
-----------------
applicable to the Merger or the transactions contemplated hereby.
3.34 Material Misstatements Or Omissions. No representations or
-----------------------------------
warranties by the Company in this Agreement or any Ancillary Agreement to which
it is a party or in any document, written information, exhibit, statement,
certificate or schedule heretofore or hereinafter furnished by the Company or
any of its Representatives to Parent or Sub pursuant hereto, or in connection
with the transactions contemplated by this Agreement or by such Ancillary
Agreements contains or will contain any untrue statement of a material fact, or
omits or will omit to state any material fact necessary to make the statements
or facts contained therein not misleading.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF Parent AND SUB
As an inducement of the Company to enter into this Agreement, Parent and
Sub hereby make, as of the date hereof and as of the Closing Date, the following
representations and warranties to the Company, which representations and
warranties are, as of the date hereof, and will be, as of the Closing Date, true
and correct, except as otherwise set forth in written disclosure schedules (the
"Parent Disclosure Schedules") delivered to the Company prior to the date
---------------------------
hereof, a copy of which is attached hereto. The Parent Disclosure Schedules are
numbered to correspond to the various sections of this Article 4 setting forth
certain exceptions to the representations and warranties contained in this
Article 4 and certain other information called for by this Agreement.
Notwithstanding any other provision of this Agreement or the Parent Disclosure
Schedules, each exception set forth in the Parent Disclosure Schedules will be
deemed to qualify each representation and warranty set forth in this Agreement
(i) that is specifically identified (by cross-reference or otherwise) in the
Parent Disclosure Schedules as being qualified by such exception or (ii) with
respect to which the relevance of such exception is reasonably apparent on the
face of the disclosure of such exception set forth in the Parent Disclosure
Schedules.
4.1 Organization. Parent is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware, with all
requisite corporate power and authority to conduct its business as it is
presently being conducted and to own or lease, as applicable, the
46
assets owned or leased by it. Parent is duly qualified to conduct business as a
foreign corporation and is in good standing in each jurisdiction in which such
qualification is necessary under applicable law as a result of the conduct of
its business or the ownership of its properties. Sub is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Sub has not engaged in any business (other than in connection with
this Agreement and the transactions contemplated hereby) since the date of its
incorporation.
4.2 Capitalization.
--------------
(a) Stock. As of the date of this Agreement, the authorized
-----
capitalization of Parent consists of (i) 50,000,000 shares of Parent Common
Stock of which 11,519,313 shares are issued and outstanding and (ii) 5,000,000
shares of Parent Preferred Stock, none of which are issued and outstanding.
Parent has no other capital stock authorized, issued or outstanding except as
set forth on Schedule 4.2(a).
(b) Options. As of the date of this Agreement, 1,965,297 shares of
-------
Parent Common Stock are reserved for issuance upon the exercise of outstanding
Parent Options.
(c) No Other Capital Stock, Options, Warrants. Except for Parent
-----------------------------------------
Options referred to above, there are no outstanding options, warrants,
convertible securities or rights of any kind to purchase or otherwise acquire
any shares of capital stock or other securities of the Company. Except for (i)
up to 470,000 shares of Parent Common Stock reserved for issuance pursuant to
Parent's 1996 Amended Employee Stock Purchase Plan, (ii) up to 150,000 shares of
Parent Common Stock reserved for issuance upon exercise of Parent Options
granted under Parent's 1996 Directors' Stock Option Plan, (iii) up to 2,830,000
shares of Parent Common Stock reserved for issuance upon exercise of Parent
Options granted under Parent's 1993 Amended Incentive Stock Plan and (iv) and up
to 550,000 shares of Parent Common Stock reserved for issuance pursuant to the
exercise of Parent Options granted under Parent's 2001 Incentive Stock Plan, no
shares of capital stock of Parent are reserved for issuance.
(d) Valid Issuances. All outstanding shares of Parent Common Stock
---------------
are, and any shares of Parent Common Stock issued upon exercise of any Parent
Option will be, validly issued, fully paid and non-assessable and not subject to
any preemptive or similar rights created by statute, Parent's Certificate of
Incorporation or Bylaws, or any Contract. The outstanding shares of Parent
Common Stock Parent Options have been, and the shares of Parent Common Stock
issuable upon the exercise of outstanding Parent Options will be, issued in
compliance with all federal and state corporate and securities laws.
(e) The Merger Shares to be issued pursuant to the terms of this
Agreement have been duly authorized and, when issued in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable.
(f) The authorized capital stock of Sub consists of 1,000 shares of
common stock, par value $0.001 per share, of which 100 shares are issued and
outstanding. All of such outstanding shares are owned by Parent and are validly
issued, fully paid and non-assessable.
4.3 Authorization. Each of Parent and Sub has all necessary corporate
-------------
power and authority to enter into this Agreement and the Ancillary Agreements to
which it is a party and
47
has taken all action necessary to consummate the transactions contemplated
hereby and thereby and to perform its respective obligations hereunder and
thereunder. This Agreement has been duly executed and delivered by each of
Parent and Sub, and this Agreement is, and upon execution and delivery thereof
each of the Ancillary Agreements to which Parent or Sub is a party will be, a
valid and binding obligation of Parent or Sub, as applicable, enforceable
against Parent or Sub, as applicable, in accordance with its terms, except that
enforceability may be limited by (a) bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights of
creditors or (b) general principles of equity (regardless of whether
enforceability is considered in a proceeding at law or in equity).
4.4 No Conflict or Violation; Consents. Except as set forth on Schedule
---------------------------------- --------
4.4, none of the execution, delivery or performance of this Agreement or any
- ---
Ancillary Agreement, the consummation of the transactions contemplated hereby or
thereby, the consummation of the Financing, nor compliance by Parent or Sub with
any of the provisions hereof or thereof, will (a) violate or conflict with any
provision of the Certificate of Incorporation or Bylaws of Parent or Sub, (b)
violate, conflict with, or result in a breach of or constitute a default (with
or without notice of passage of time) under, or result in the termination of, or
accelerate the performance required by, or result in a right to terminate,
accelerate, modify or cancel under, or require a notice under, or result in the
creation of any Encumbrance upon any of its assets under, any contract, lease,
sublease, license, sublicense, franchise, permit, indenture, agreement or
mortgage for borrowed money, instrument of indebtedness, security interest or
other arrangement to which Parent or Sub is a party or by which Parent or Sub is
bound or to which any of their respective assets are subject, (c) violate any
Regulation or Court Order applicable to Parent or Sub or (d) impose any
Encumbrance on any assets of Parent or Sub or their respective businesses.
Except for filings pursuant to applicable state securities or blue sky laws and
Regulation D of the Securities Act or as set forth on Schedule 4.4, no notices
------------
to, declaration, filing or registration with, approvals or Consents of, or
assignments by, any Persons (including any federal, state or local governmental
or administrative authorities) are necessary to be made or obtained by Parent or
Sub in connection with the execution, delivery or performance of this Agreement
or any Ancillary Agreement to which Parent and/or Sub is a party or the
consummation of (i) the transactions contemplated hereby or thereby and (ii) the
Financing.
4.5 SEC Documents; Financial Statements. Parent has timely filed all
------------------------------------
reports required to be filed with the SEC pursuant to the Exchange Act or the
Securities Act, and has previously provided or made available to the Company
true and correct copies of all reports filed by Parent with the SEC since
December 31, 2000 (the "Parent SEC Documents"). As of their respective dates,
--------------------
the Parent SEC Documents complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
the rules and regulations of the SEC thereunder applicable to such SEC Documents
or such other forms, reports or other documents, and none of the Parent SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of Parent, including the notes thereto,
included in the Parent SEC Documents have been prepared in accordance with GAAP
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto or, in the case of the unaudited statements, as
permitted by Form 10-Q of the SEC) and fairly present (subject, in the case of
the unaudited statements, to normal, recurring audit adjustments,
48
which were not individually or in the aggregate material) in all material
respects the consolidated financial position of Parent and its subsidiaries as
at the dates thereof and the results of its operations and cash flows for the
periods then ended.
4.6 Absence of Certain Changes or Events. Except as otherwise set forth
------------------------------------
in the Parent SEC Documents filed prior to the date hereof or on Schedule 4.6,
since December 31, 2000, there has not been any Parent Material Adverse Effect.
4.7 Litigation. Except as described in the Parent SEC Documents filed
----------
prior to the date hereof, there is no Action pending against Parent, or as to
which Parent has received written notice, individually or in the aggregate, (i)
that is reasonably likely to have a Parent Material Adverse Effect or (ii) with
respect to which there is a reasonable likelihood of a determination which would
prevent Parent from consummating the transactions contemplated hereby or the
Financing.
4.8 Compliance with Laws. Parent has conducted its business in compliance
--------------------
in all material respects with all applicable Regulations and Court Orders.
Parent has not received any notice to the effect that, or has otherwise been
advised that, Parent is not in compliance with any such Regulations or Court
Orders, and Parent has no reason to anticipate that any existing circumstances
are likely to result in any violation of any of the foregoing that would have,
individually or in the aggregate, a Parent Material Adverse Effect.
4.9 Tax Matters. Neither Parent nor any of its Affiliates has taken or
-----------
agreed to take any action that, to Parent's knowledge, would prevent the Merger
from constituting a transaction qualifying as a reorganization under Section
368(a) of the Code.
4.10 Opinion of Financial Advisor. The financial advisor of Parent, J.P.
----------------------------
Morgan H&Q, has delivered to Parent an opinion dated the date of this Agreement,
a copy of which opinion has been delivered to the Company, as to the fairness,
from a financial point of view, of the Exchange Ratio.
4.11 Takeover Statutes. No Takeover Statute applicable to Parent is
-----------------
applicable to the Merger or the transactions contemplated hereby.
4.12 Intellectual Property Rights. The Parent Proprietary Rights
----------------------------
constitute all the Proprietary Rights necessary or desirable to conduct the
business of Parent as it is currently conducted or as reasonably contemplated to
be conducted. The operation of the Parent's business as currently conducted or
as presently proposed to be conducted, including Parent's design, development,
use, import, manufacture and sale of the products, technology or services
(including products, technology or services currently under development) of
Parent do not, to Parent's knowledge, infringe or misappropriate the Proprietary
Rights of any Person, violate the rights of any Person (including rights to
privacy or publicity), or constitute unfair competition or an unfair trade
practice under any applicable Law, and Parent has not received notice from any
Person claiming that such operation or any act, product, technology or service
(including products, technology or services currently under development) of
Parent infringes or misappropriates the Proprietary Rights of any Person or
constitutes unfair competition or trade practices under any applicable Law.
49
4.13 ERISA Compliance. Parent and each of the Employee Plans established
----------------
or maintained by Parent or its ERISA Affiliates are in compliance in all
material respects with ERISA. Except as would not reasonably be expected to
result in a Parent Material Adverse Effect, no "reportable event" (as defined
under ERISA) has occurred or is reasonably expected to occur with respect to any
Employee Plan established or maintained by Parent or its ERISA Affiliates.
Except as would not reasonably be expected to result in a Parent Material
Adverse Effect, no Employee Plan established or maintained by Parent or its
ERISA Affiliates, if such Employee Plan were terminated, would have any "amount
of unfunded benefit liabilities" (as defined under ERISA). Except as would not
reasonably be expected to result in a Parent Material Adverse Effect, neither
Parent nor any of its ERISA Affiliates has incurred or reasonably expects to
incur any liability under (i) Title IV of ERISA with respect to termination of,
or withdrawal from, any Employee Plan established or maintained by Parent or any
of its ERISA Affiliates that is intended to be qualified under Section 401(a) of
the Code is so qualified and nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification, except where the
failure to so qualify would not reasonably be expected to result in a Parent
Material Adverse Effect.
4.14 Labor Matters. Except as set forth on Schedule 4.14, Parent has not
------------- -------------
entered into any severance, "stay-bonus" or similar arrangement in respect of
any present or former Employee that will result in any obligation (absolute or
contingent) of Parent to make any payment to any present or former Employee
following termination of employment or upon consummation of (i) the transactions
contemplated by this Agreement (whether or not employment is continued for any
specified period after the Effective Time) and (ii) the Financing. Except as set
forth on Schedule 4.14, neither the execution and delivery of this Agreement or
-------------
any Ancillary Agreement, nor the consummation of the transactions contemplated
hereby or thereby, or the consummation of the Financing, will result in the
acceleration or vesting of any other rights of any Person to benefits under any
Employee Plans.
4.15 Liabilities. Except as set forth in Schedule 4.15, Parent has no
----------- -------------
Liabilities or obligations (absolute, accrued, contingent or otherwise) except
(i) Liabilities which are reflected and properly reserved against in the
financial statements contained in the Parent SEC Documents filed prior to the
date hereof, (ii) Liabilities incurred in the ordinary course of business and
consistent with past practice since March 31, 2001 and (iii) Liabilities arising
under Contracts (other than obligations which are required to be reflected on a
balance sheet prepared in accordance with GAAP) of Parent. None of the
Liabilities described in this Section 4.15 relates to any breach of Contract,
breach of warranty, tort, infringement or violation of law or arose out of any
Action.
4.16 No Other Agreements to Sell Parent or Parent's Assets. Parent has no
-----------------------------------------------------
legal obligation, absolute or contingent, to any other Person to sell a material
portion of its assets (other than Inventory in the ordinary course of business)
or to sell any capital stock of Parent or to effect any merger, consolidation or
other reorganization of Parent or to enter into any agreement with respect
thereto, except pursuant to this Agreement.
ARTICLE 5
ACTIONS BY THE COMPANY AND PARENT
The Company, Parent and Sub, each as indicated below, covenant as follows:
50
5.1 Conduct of Business. From the date hereof through the Closing Date,
-------------------
the Company shall, except as otherwise expressly contemplated by this Agreement,
or as consented to by Parent in writing, operate the Business solely in the
ordinary course of business and in accordance with past practice and will not,
in any event, take any action inconsistent with this Agreement, the Ancillary
Agreements or the consummation of the Closing. Without limiting the generality
of the foregoing, the Company shall not, except as specifically contemplated by
this Agreement or as consented to by Parent in writing:
(a) incur any indebtedness for borrowed money (other than pursuant to
revolving credit lines or equipment lines in existence on the date hereof), or
assume, guarantee, endorse (other than endorsements for deposit or collection in
the ordinary course of business), or otherwise become responsible for
obligations of any other Person in excess of $25,000;
(b) issue (except pursuant to the exercise of Company Options and
Company Warrants outstanding on the date of this Agreement and disclosed in
Schedule 3.2) or commit to issue any shares of its capital stock or any other
- ------------
securities or any securities convertible into shares of its capital stock or any
other securities, including, without limitation, any options to acquire capital
stock;
(c) declare, pay or incur any obligation to pay any dividend on its
capital stock or declare, make or incur any obligation to make any distribution
or redemption or pay any liquidation preference with respect to its capital
stock (except with respect to redemption of shares of Company Common Stock from
Employees at cost in connection with the termination of an Employee's employment
or association, as the case may be, with the Company);
(d) make any change to the Company's Certificate of Incorporation or
Bylaws;
(e) mortgage, pledge or otherwise encumber any Assets or sell,
transfer, license or otherwise dispose of any Assets except for (i) the sale of
inventory to customers in the ordinary course of business and consistent with
past practice, (ii) Assets with an aggregate book value of $25,000 or less,
(iii) the grant of licenses in the ordinary course of business and consistent
with past practice, and (iv) pursuant to Contracts listed on Schedule 3.11;
-------------
(f) cancel, release or assign any indebtedness owed to it or any
claims or rights held by it, except pursuant to Contracts listed on Schedule
3.11;
(g) make any investment or commitment of a capital nature either by
purchase of stock or securities, contributions to capital, property transfer or
otherwise, or by the purchase of any property or assets of any other Person in
excess of $25,000 in the aggregate;
(h) terminate any material Contract or make any change in any
material Contract;
(i) enter into or modify any employment Contract, (ii) pay any
compensation to or for any Employee, officer or director other than in the
ordinary course of business and pursuant to existing employment arrangements,
(iii) pay or agree to pay any bonus, incentive
51
compensation, service award, severance, "stay bonus" or other like benefit or
(iv) enter into or modify any other Employee Plan;
(j) take any action that will result in (i) the acceleration or
vesting of any rights of any Person to benefits under any Employee Plan or (ii)
any obligation (absolute or contingent) of the Company to make any payment to
any present or former Employee following termination of employment or upon
consummation of the transactions contemplated by this Agreement (whether or not
employment is continued for any specified period after the Effective Time);
(k) enter into or modify any Contract or other arrangement with a
Related Party;
(l) make any change in any method of accounting or accounting
practice;
(m) fail to comply with all Regulations applicable to the Assets and
the Business consistent with past practices, except for any such failures that,
individually or in the aggregate, are not reasonably likely to have a Company
Material Adverse Effect;
(n) fail to use its commercial best efforts to (i) maintain the
Business, (ii) retain the Employees so that such Employees will remain available
to the Surviving Corporation on and after the Closing Date, (iii) maintain
existing relationships with material collaborators, suppliers and customers and
others having business dealings with Parent and (iv) otherwise to preserve the
goodwill of the Business so that such relationships and goodwill will be
preserved on and after the Closing Date;
(o) make or change any election in respect of Taxes, adopt or change
any material accounting method in respect of Taxes, enter into any tax
allocation agreement, tax sharing agreement, tax indemnity agreement or closing
agreement, settle or compromise any claim, notice, audit report or assessment in
respect of Taxes, or consent to any extension or waiver of the limitation period
applicable to any claim or assessment in respect of Taxes; or
(p) directly or indirectly take, agree to take or otherwise permit to
occur any of the actions described in Sections 5.1(a) through 5.1(o).
5.2 Conduct of Parent's Business. From the date hereof through the
----------------------------
Closing Date, Parent shall not, except as otherwise expressly contemplated by
this Agreement, or as consented to by the Company in writing, take any action
inconsistent with this Agreement, the Ancillary Agreements or the consummation
of the Closing. Without limiting the generality of the foregoing, Parent shall
not, except as specifically contemplated by this Agreement or as consented to by
the Company in writing:
(a) enter into or modify any employment Contract, (ii) pay any
compensation to or for any employee, officer or director other than in the
ordinary course of business and pursuant to existing employment arrangements,
(iii) pay or agree to pay any bonus, incentive compensation, service award,
severance, "stay bonus" or other like benefit or (iv) enter into or modify any
other employee benefit plan;
52
(b) take any action that will result in (i) the acceleration or
vesting of any rights of any Person to benefits under any Employee Plan or (ii)
any obligation (absolute or contingent) of Parent to make any payment to any
present or former Employee following termination of employment or upon
consummation of the transactions contemplated by this Agreement (whether or not
employment is continued for any specified period after the Effective Time); or
(c) directly or indirectly take, agree to take or otherwise permit to
occur any of the actions described in Sections 5.2(a) or 5.2(b).
5.3 Approval of Stockholders of the Company.
---------------------------------------
(a) As soon as reasonably practicable after the date hereof, the
Company shall take all action necessary to obtain from its stockholders
necessary approval in connection with this Agreement and the transactions
contemplated hereby (including the Merger). The Company agrees that it will
submit to its stockholders a written consent in lieu of a meeting of such
stockholders (the "Stockholder Consent") (a) approving the execution, delivery
-------------------
and performance by the Company of this Agreement and each of the Ancillary
Agreements to which it is a party, and the consummation of the transactions
contemplated hereby and thereby, (b) in the case of a holder of Company
Preferred Stock, agreeing not to treat the transactions contemplated by this
Agreement as a liquidation entitling such holder of Company Preferred Stock to a
liquidation preference, and (c) expressly waiving any dissenters' appraisal or
similar remedy available under the DGCL or other applicable law. The Company,
acting through its Board of Directors, shall (i) recommend approval and adoption
of this Agreement and the Merger by the Stockholders and (ii) obtain the
"approval of the stockholders" of the Company within the meaning of the DGCL to
this Agreement and the transactions contemplated hereby and to enable the
Closing to occur as promptly as practicable. The Board of Directors of the
Company shall not withdraw, amend or modify in a manner adverse to Parent its
recommendation referred to in clause (i) of the preceding sentence (or publicly
announce its intention to do so), except that such Board of Directors shall be
permitted to withdraw, amend or modify its recommendation (or publicly announce
its intention to do so) if (x) the Company has complied with Section 5.6, (y) a
Superior Company Transaction shall have been proposed by any Person other than
Parent and such proposal is pending at the time of such withdrawal, amendment or
modification and (z) the Company shall have notified Parent of such Superior
Company Transaction at least five days in advance of such withdrawal, amendment
or modification.
(b) "Superior Company Transaction" means any bona fide written
----------------------------
proposal with respect to a transaction involving all of the outstanding Company
Stock or all or substantially all of the Assets which the Board of Directors of
the Company determines, in its good faith judgment, (i) contains terms which are
more favorable and provide greater value to the Company's stockholders than this
Agreement and the Merger taken as a whole and (ii) is reasonably capable of
being completed on substantially the terms proposed (including consideration as
to whether such proposal is fully financed, if applicable).
(c) Concurrently with the execution and delivery of this Agreement,
the Company has delivered to Parent an executed Stockholder Support Agreement
from Stockholders beneficially owning in the aggregate shares of Company Common
Stock
53
representing not less than 51% of the issued and outstanding Company Common
Stock entitled to vote with respect to the Merger.
5.4 Approval of Parent Stockholders. As soon as reasonably practicable
-------------------------------
after the date hereof, Parent shall take all action necessary to obtain from its
stockholders necessary approval in connection with this Agreement and the
transactions contemplated hereby (including the Merger and the issuance of the
Merger Shares), including, without limitation, preparing, filing with the SEC
and mailing to its stockholders a proxy statement with respect thereto, and duly
calling, giving notice of, convening and holding a meeting or meetings of its
stockholders for such purpose. Parent, acting through its Board of Directors,
shall (i) recommend approval and adoption of this Agreement and the Merger by
the stockholders of Parent and (ii) use all commercially reasonable efforts to
obtain the "approval of the stockholders" of Parent within the meaning of the
DGCL to this Agreement and the transactions contemplated hereby and to enable
the Closing to occur as promptly as practicable. The Board of Directors of
Parent shall not withdraw, amend or modify in a manner adverse to the Company
its recommendation referred to in clause (i) of the preceding sentence (or
publicly announce its intention to do so), except that such Board of Directors
shall be permitted to withdraw, amend or modify its recommendation (or publicly
announce its intention to do so) if (x) Parent has complied with Section 5.6,
(y) a Superior Parent Transaction shall have been proposed by any Person other
than the Company and such proposal is pending at the time of such withdrawal,
amendment or modification and (z) Parent shall have notified the Company of such
Superior Parent Transaction at least five days in advance of such withdrawal,
amendment or modification.
(b) "Superior Parent Transaction" means any bona fide written
---------------------------
proposal with respect to a transaction involving a majority of the outstanding
Parent Common Stock or all or substantially all of the assets of Parent which
the Board of Directors of Parent determines, in its good faith judgment, (i)
contains terms which are more favorable and provide greater value to Parent's
stockholders than this Agreement and the Merger taken as a whole and (ii) is
reasonably capable of being completed on substantially the terms proposed
(including consideration as to whether such proposal is fully financed, if
applicable).
5.5 Access. From the date hereof through the Closing Date, each of the
------
Company and Parent shall, and shall cause its officers, Employees and
Representatives to, afford the Representatives of the other party upon
reasonable notice and at all reasonable times access to its business for the
purpose of inspecting the same, and to its officers, employees and
Representatives, properties, books and records, contracts and assets, and shall
furnish the other party and its Representatives, upon reasonable notice and in a
timely manner, all financial, operating and other data and information as the
other party, or its affiliates, through their respective Representatives, may
reasonably request.
5.6 Notification of Certain Matters. Each of the Company and Parent shall
-------------------------------
give prompt notice to the other party of (i) the occurrence, or failure to
occur, of any event which occurrence or failure would be likely to cause any
representation or warranty of the party giving such notice contained in this
Agreement to be untrue or inaccurate in any material respect and (ii) any
material failure of the party giving such notice to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder or under any Ancillary Agreement; provided, however, that such
disclosure shall not be deemed to cure any breach of a
54
representation, warranty, covenant or agreement or to satisfy any condition, and
provided further that no party shall have the right to terminate this Agreement
pursuant to Section 9.1 as a result of the other party's failure to promptly
-----------
give such notice so long as any such occurrence or failure required to be
contained in such notice, individually or in the aggregate, has not had and is
not reasonably likely to have a Material Adverse Effect with respect to the
other party. Each of the Company and Parent shall promptly notify the other
party of any Default, the threat or commencement of any Action, or any
development that occurs before the Closing that could reasonably be expected to
result in a Material Adverse Effect. In addition, the Company shall promptly
notify Parent in the event it determines to commence any Action or other legal
proceeding and shall keep Parent reasonably informed as to the status of any
such Action or proceeding.
5.7 No Mergers, Consolidations, Sale of Stock, etc. Neither the Company
----------------------------------------------
nor Parent will, directly or indirectly, through any Representative or
otherwise, (a) solicit any inquiries or proposals or enter into or continue any
discussions, negotiations or agreements relating to (i) the sale or exchange of
its capital stock, (ii) the merger of itself with, or the direct or indirect
disposition of a significant amount of its assets or its business to, any Person
other than Parent or the Company, as applicable, or (iii) the licensing of the
its Proprietary Rights to any Person, (except in the ordinary course of business
and consistent with past practice), or (b) provide any assistance or any
information to any Person in connection with any such inquiry, proposal or
transaction; provided, however, that nothing contained in this Agreement shall
prevent Parent or the Company from furnishing information to, or entering into
discussions or negotiations with, any Person in connection with an unsolicited
bona fide written Proposed Acquisition Transaction if and only to the extent
that (x) the Board of Directors of Parent or the Company, as the case may be,
determines that such Proposed Acquisition Transaction is reasonably likely to
result in a Superior Parent Transaction or Superior Company Transaction, as the
case may be, (y) prior to furnishing such information or entering into such
discussions or negotiations, the applicable Board of Directors receives from
such Person an executed confidentiality agreement with terms no more favorable
to such Person than those contained in the Confidentiality Agreement and (z)
prior to recommending a Superior Parent Transaction or Superior Company
Transaction, as the case may be, Parent or the Company provides the other party
at least five business days' prior notice of its intention to make such a
recommendation, during which time the Company or Parent, as the case may be, may
make, and in such case the other party shall consider in good faith, a
counterproposal to such Superior Parent Transaction or Superior Company
Transaction, as the case may be. Each of the Company and Parent represents that
it is not now engaged in discussions or negotiations with any party other than
the other party to this Agreement, with respect to any transaction of the kind
described in clauses (a) (i) through (a) (iii) of the preceding sentence (a
"Proposed Acquisition Transaction"). Each of the Company and Parent agrees not
--------------------------------
to release any third party from, or waive any provision of, any confidentiality
or standstill agreement to which any of them is a party. Each of the Company and
Parent shall (x) promptly notify the other party (orally and in writing) if any
offer is made, any discussions or negotiations are sought to be initiated, any
inquiry, proposal or contact is made or any information is requested with
respect to any Proposed Acquisition Transaction, (y) promptly notify the other
party of the terms of any proposal which it may receive in respect of any such
Proposed Acquisition Transaction, including, without limitation, the identity of
the prospective purchaser or soliciting party and (z) keep the other party
informed of the status of such offer and the offeror's efforts and activities
with respect thereto.
55
Notwithstanding the foregoing, in the event that the Closing has not
occurred on or prior to November 30, 2001, each of Parent and the Company may
arrange for alternate financing through the issuance and sale of equity or debt
securities; provided, however, that (a) the negotiation and/or completion of any
such alternate financing shall not affect the rights and obligations of any
party under this Agreement, including, without limitation, each party's
obligations under Section 5.11 and (b) in the event that any such alternate
financing is completed prior to December 31, 2001, the purchaser of any such
securities shall, as a condition to the completion of such financing, execute an
irrevocable written consent approving the transactions contemplated hereby and
the Financing, which consent shall be reasonably acceptable in form and
substance (i) to Parent, in the case of such an alternate financing by the
Company or (ii) the Company, in the case of such an alternate financing by
Parent.
5.8 Nasdaq National Market Listing of Merger Shares. Parent shall use
-----------------------------------------------
its commercially reasonable efforts to cause the Merger Shares to be authorized
for listing on the Nasdaq National Market, subject to official notice of
issuance.
5.9 Company's Auditors. The Company will use commercially reasonable
------------------
efforts to cause its management to facilitate on a timely basis (i) the
preparation of financial statements (including pro forma financial statements if
required) as required by Parent to comply with applicable SEC regulations and
(ii) the review of any Company or predecessor audit work papers, including, as
applicable, the review of selected interim financial statements and data.
5.10 Takeover Statutes; Stockholder Rights Plan. If any Takeover Statute
------------------------------------------
or stockholder rights plan is or may become applicable to the transactions
contemplated hereby or the Financing, the Boards of Directors of the Company and
Parent will grant such approvals and take such actions as are commercially
reasonably and necessary so that the transactions contemplated hereby and the
Financing may be consummated as promptly as practicable on the terms
contemplated hereby and by the Financing and otherwise act to eliminate the
effects of any Takeover Statute or stockholder rights plan on any of the
transactions contemplated hereby or by the Financing.
5.11 Further Assurances. Upon the terms and subject to the conditions
------------------
contained herein, the parties agree, in each case both before and after the
Closing, (i) to use all commercially reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary, proper
or advisable to consummate and make effective the transactions contemplated by
this Agreement and the Ancillary Agreements, (ii) to execute any documents,
instruments or conveyances of any kind which may be reasonably necessary or
advisable to carry out any of the transactions contemplated hereunder and
thereunder, and (iii) to cooperate with each other in connection with the
foregoing. Without limiting the foregoing, the parties agree to use their
respective reasonable commercial efforts (A) to obtain any necessary Consents
(including, without limitation, all filings required to be made under the HSR
Act with respect to this Agreement and the transactions contemplated hereby),
(B) to give all notices to, and make all registrations and filings with third
parties, including submissions of information requested by governmental
authorities, (C) to fulfill all other conditions to this Agreement and (D) to
cooperate in the preparation and distribution to the Stockholders of an
information statement as may be necessary to perfect an exemption from the
registration requirements of the Securities Act in connection with the issuance
of shares of Parent Common Stock to such Stockholders and
56
the other transactions contemplated by this Agreement. Notwithstanding the
foregoing, (y) no amendment or modification shall be made to any Contract to
obtain any required Consent without the prior written consent of Parent and (z)
no party hereto or any of their respective Affiliates shall be required to sell,
transfer, divest or otherwise dispose of any of its respective business, assets
or properties in connection with this Agreement or any of the transactions
contemplated hereby.
5.12 Directors. At Effective Time, (a) certain members of the Board of
---------
Directors of Parent shall resign from the Board of Directors of Parent and (b)
the Board of Directors of Parent shall appoint Mark B. Skaletsky to the Board of
Directors of Parent, to hold office in accordance with the Certificate of
Incorporation and Bylaws of Parent, and until his successor is duly elected or
appointed and qualified in the manner provided in the Certificate of
Incorporation and Bylaws of Parent and in accordance with applicable law. Mark
B. Skaletsky shall serve as the Chairman of the Board of Directors of Parent.
5.13 President and Chief Executive Officer. At the Effective Time, (a)
-------------------------------------
James E. Rurka shall resign from his position as Parent's President and Chief
Executive Officer and (b) the Board of Directors of Parent shall appoint Mark B.
Skaletsky as the President and Chief Executive Officer of Parent to serve at the
leisure of the Board of Directors of Parent.
5.14 Parent Name; Headquarters. In connection with the transactions
-------------------------
contemplated by this Agreement, Parent will (a) change its name to Essential
Therapeutics, Inc. and (b) relocate its corporate headquarters to Waltham,
Massachusetts.
5.15 Confidentiality Agreement. The parties acknowledge that Parent and
-------------------------
the Company have previously executed a Mutual Non-Disclosure Agreement, dated as
of May 14, 2001 (the "Confidentiality Agreement"), which shall continue in full
-------------------------
force and effect in accordance with its terms, except as may be expressly
modified herein.
5.16 Indemnification; Directors' and Officers' Insurance, etc.
--------------------------------------------------------
(a) Parent shall, to the fullest extent permitted by law, cause the
Surviving Corporation (from and after the Effective Time) to honor all the
Company's obligations (including, to the extent provided as of the date hereof,
reimbursement and/or advances for payment of reasonable attorneys' fees) to
indemnify, defend and hold harmless (including any obligations to advance funds
for expenses) the current and former directors and officers of the Company
against all losses, claims, damages or liabilities arising out of acts or
omissions by any such directors and officers occurring prior to the Effective
Time to the maximum extent that such obligations of the Company exist on the
date of this Agreement, whether pursuant to the Company's Certificate of
Incorporation, the Company's Bylaws, the DGCL, or otherwise, and such obligation
shall survive the Merger and shall continue in full force and effect in
accordance with the terms of the Company's Certificate of Incorporation, the
Company's Bylaws, the DGCL and individual indemnity agreements from the
Effective Time until the expiration of the applicable statute of limitations or
agreement, as the case may be, with respect to any claims against such directors
or officers arising out of such acts or omissions, provided, however, that the
Company shall have no such obligations with respect to any such losses, claims,
damages or liabilities arising out of or in connection with any such acts or
omissions (i) made by any such
57
current or former director or officer in bad faith, (ii) from which any such
current or former director or officer derived an improper personal benefit or
(iii) which constitutes a breach of any such current or former director's or
officer's fiduciary duties.
(b) Parent shall cause to be maintained in effect for a period of six
years from the Effective Time the current policies of directors' and officers'
liability insurance maintained by the Company (provided that Parent may
substitute therefor policies of at least the same coverage containing terms and
conditions which are not materially less advantageous) with respect to matters
or events occurring prior to the Effective Time.
(c) If the Surviving Corporation or any of its successors or assigns
(i) consolidates with or merges into another Person and the Surviving
Corporation shall not be the continuing or surviving corporation or entity of
such consolidation or merger and the continuing or surviving entity does not
assume the obligations of the Surviving Corporation set forth in this Section
5.16 or (ii) transfers all or substantially all of its properties and assets to
any Person, then proper provision shall be made so that the successors and
assigns of the Surviving Corporation assume, as a matter of law or otherwise,
the obligations set forth in this Section 5.16.
5.17 Tax Matters. Parent and the Company shall take no action following
-----------
the Merger that prevents the Merger from constituting a transaction qualifying
as a reorganization under Section 368(a) of the Code. Following the Merger,
Parent or one or more members of Parent's qualified group (as defined in
Treasury Regulation Section 1.368-1(d)(4)(ii)) will either continue the
Company's historic business or use a significant portion of the Company's
historic business assets in a business. Parent has no plan or intention to, and
in the one-year period following the Merger, Parent shall not, (a) liquidate the
Company, merge the Company into another Person or sell or otherwise dispose of
any of the stock of the Company, (b) cause or permit the Company to sell or
dispose of any of the Assets, except for dispositions made in the ordinary
course of business or (c) redeem or otherwise reacquire any of the Parent Common
Stock issued in the Merger. Notwithstanding the preceding sentence, Parent shall
not be precluded from (i) transferring all or part of the stock of the Company
to a corporation controlled by Parent within the meaning of Section 368(c) of
the Code or (ii) causing or permitting the Company to transfer all or part of
the Assets to a corporation controlled by the Company within the meaning of
Section 368(c) of the Code, provided that in the case of any transfer permitted
under this sentence Parent shall not cause or permit the transferee to make a
successive transfer of such stock or Assets other than to a corporation
controlled by such transferee within the meaning of Section 368(c) of the Code.
5.18 Bridge Financing. In the event that the Closing has not occurred on
----------------
or prior to September 30, 2001, the Company may from time to time request in
writing that Parent make working capital advances to the Company in an aggregate
amount not to exceed $1.5 million ($1,500,000). Within five business days after
receipt of such a request and subject to Parent's receipt from the Company of an
executed Note (as defined), Parent shall make the requested funds available to
the Company via wire transfer of immediately available funds. All working
capital advances made by Parent to the Company pursuant to this Section 5.18
shall be evidenced by a promissory note in the form attached hereto as Exhibit F
---------
(the "Note"). The Note shall become due, and the principal and accrued interest
----
thereon shall be payable by the Company, immediately upon the termination of
this Agreement for any reason. Notwithstanding any other
58
provision of this Agreement, the Company shall have no rights to terminate this
Agreement pursuant to Section 9.1(f) after such date as Parent has made any
working capital advances to the Company pursuant to this Section 5.18.
ARTICLE 6
CONDITIONS TO THE COMPANY'S OBLIGATIONS
The obligations of the Company to effect the Merger and complete the
related transactions contemplated by this Agreement are subject, in the
discretion of the Company, to the satisfaction or waiver, on or prior to the
Closing Date, of each of the following conditions:
6.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of Parent and Sub contained in this Agreement shall be true and
correct at and as of the Closing Date (except for representations and warranties
which expressly refer to a particular date, which shall be true and correct as
of such date) as if such representations and warranties were made at and as of
the Closing Date, except (i) for changes contemplated by this Agreement and (ii)
where the reason for or circumstances giving rise to the failure of one or more
representations and warranties to be true and correct, individually or in the
aggregate and without regard to any qualification as to materiality or Parent
Material Adverse Effect, has not had and is not reasonably likely to have a
Parent Material Adverse Effect. Parent and Sub shall have performed in all
material respects all agreements and covenants required hereby to be performed
by them prior to or at the Closing Date . There shall be delivered to the
Company a certificate of Parent signed by its Chief Executive Officer to the
foregoing effect ("Parent Closing Certificate").
--------------------------
6.2 Consents. All Consents, approvals and waivers from governmental
--------
authorities and other parties necessary to permit consummation of the Merger as
contemplated hereby and for the operation of the business of Parent after the
Closing (including all third party consents) shall have been obtained, except
for such non-governmental consents or approvals as would not, individually or in
the aggregate, have a Parent Material Adverse Effect. The Company shall be
satisfied that all approvals required under any Regulations to permit Parent and
Sub to carry out the transactions contemplated by this Agreement and the
Ancillary Agreements (including, without limitation, the expiration or
termination of the waiting period under the HSR Act) shall have been obtained,
except for such non-governmental consents or approvals as would not,
individually or in the aggregate, have a Parent Material Adverse Effect.
6.3 No Restraints or Court Orders. No temporary restraining order,
-----------------------------
preliminary or permanent injunction, or other order issued by any court or
competent jurisdiction, or other legal restraint or prohibition preventing the
consummation of the Merger, will be in effect, and no petition or request by any
governmental authority or agency for any such injunction or other order will be
pending. There shall not be any Regulation or Court Order that makes the
acquisition of the Company Stock contemplated hereby illegal or otherwise
prohibited or that otherwise may have a Parent Material Adverse Effect.
6.4 Closing Documents. Parent shall have delivered to the Company the
-----------------
documents and other items described in Section 8.2 and such other documents and
items as the Company may reasonably require.
59
6.5 Material Adverse Change. There shall not have been any Parent
-----------------------
Material Adverse Change.
6.6 Financing. The Company shall have entered into definitive agreements
---------
with regard to the Financing, and such agreements shall be in full force and
effect. The consummation of the Financing shall occur simultaneously with the
Closing.
6.7 Nasdaq Listing. The shares of Parent Common Stock into which shares
--------------
of Company Stock will be converted in the Merger will have been authorized for
listing, subject to official notice of issuance, on the Nasdaq National Market.
6.8 Severance Agreements. Parent shall have entered into a Severance
--------------------
Agreement with each of Mark B. Skaletsky, Paul Mellett, Manuel Navia, and
Patrick Connelly, and each such Severance Agreement shall be in full force and
effect.
6.9 Stockholders Agreement. Parent shall have entered into the
----------------------
Stockholders Agreement with each of Mark B. Skaletsky, Paul Mellett, Manuel
Navia, Patrick Connelly, Mass Ventures LLC and Michael Dailey, and such
Stockholders Agreement shall be in full force and effect.
6.10 Option Agreement. Parent shall have entered into an Option Agreement
----------------
with the Company pursuant to which Parent shall have granted the Company an
option to purchase shares of Parent Common Stock under certain circumstances,
and such Option Agreement shall not have been terminated prior to the Effective
Time.
6.11 Stockholder Approval. The stockholders of Parent shall have approved
--------------------
this Agreement and the transactions contemplated hereby (including the Merger)
and shall have taken all further actions related to the due authorization of the
Merger as may be required under the DGCL.
ARTICLE 7
CONDITIONS TO PARENT'S AND SUB'S OBLIGATIONS
The obligations of Parent and Sub to effect the Merger and complete the
related transactions contemplated by this Agreement are subject, in the
discretion of Parent, to the satisfaction or waiver, on or prior to the Closing
Date, of each of the following conditions:
7.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of the Company contained in this Agreement shall be true and correct
at and as of the Closing Date (except for representations and warranties which
expressly refer to a particular date, which shall be true and correct as of such
date) as if such representations and warranties were made at and as of the
Closing Date, except (i) for changes contemplated by this Agreement and (ii)
where the reason for or circumstances giving rise to the failure of one or more
representations and warranties to be true and correct, individually or in the
aggregate and without regard to any qualification as to materiality or Company
Material Adverse Effect, has not had and is not reasonably likely to have a
Company Material Adverse Effect. The Company shall have performed in all
material respects all agreements and covenants required hereby to be performed
by it prior to or at the Closing Date. There shall be delivered to Parent a
certificate of the
60
Company signed by its Chief Executive Officer to the foregoing effect (the
"Company Closing Certificate").
---------------------------
7.2 Consents. All Consents, approvals and waivers from governmental
--------
authorities and other parties necessary to permit consummation of the Merger as
contemplated hereby and for the operation of the Business after the Closing
(including all required third party consents under the Contracts) shall have
been obtained except for such non-governmental consents or approvals as would
not, individually or in the aggregate, have a Company Material Adverse Effect.
Parent shall be satisfied that all approvals required under any Regulations to
permit the Company and the Stockholders to carry out the transactions
contemplated by this Agreement and the Ancillary Agreements (including, without
limitation, the expiration or termination of the waiting period under the HSR
Act) shall have been obtained, except for such non-governmental consents or
approvals as would not, individually or in the aggregate, have a Company
Material Adverse Effect.
7.3 No Restraints or Court Orders. No temporary restraining order,
-----------------------------
preliminary or permanent injunction, or other order issued by any court of
competent jurisdiction, or other legal restraint or prohibition preventing the
consummation of the Merger, will be in effect, and no petition or request by any
governmental authority or agency for any such injunction or other order will be
pending. There shall not be any Regulation or Court Order that makes the
acquisition of the Company Stock contemplated hereby illegal or otherwise
prohibited or that otherwise may have a Company Material Adverse Effect.
7.4 Closing Documents. The Company shall have delivered to Parent the
-----------------
documents and other items described in Section 8.1 and such other documents and
items as Parent may reasonably require.
7.5 Exemption under Federal and State Securities Laws. Parent shall have
-------------------------------------------------
received questionnaires and other documentation reasonably requested by Parent
from the Company and/or the Stockholders evidencing that, in connection with the
transactions contemplated by this Agreement, there are no more than 35
purchasers of securities from Parent (within the meaning of Rule 506 under the
Securities Act).
7.6 Stockholder Approval. The stockholders of Parent shall have approved
--------------------
this Agreement and the transactions contemplated hereby (including the Merger)
and shall have taken all further actions related to the due authorization of the
Merger as may be required under the DGCL.
7.7 Tax Matters. No new elections with respect to Taxes, or changes in
-----------
current elections with respect to Taxes, affecting the Company shall have been
made after the date of this Agreement without the prior written consent of
Parent, which consent shall not be unreasonably withheld.
7.8 Severance Agreements. Each of Mark B. Skaletsky, Paul Mellett, Manuel
--------------------
Navia, and Patrick Connelly shall have entered into an Severance Agreement with
Parent, and each such Severance Agreement shall be in full force and effect.
61
7.9 Stockholders Agreement. Each of Mark B. Skaletsky, Paul Mellett,
----------------------
Manuel Navia, Patrick Connelly, Mass Ventures LLC and Michael Dailey shall have
entered into the Stockholders Agreement with Parent, and such Stockholders
Agreement shall be in full force and effect.
7.10 First Amended and Restated Executive Stock Purchase Agreement. Mark
-------------------------------------------------------------
B. Skaletsky and the Company shall have entered into the First Amended and
Restated Executive Stock Purchase Agreement, and such First Amended and Restated
Executive Stock Purchase Agreement shall be in full force and effect.
7.11 Execution of Stockholder Consents. Stockholders beneficially owning
---------------------------------
in the aggregate shares of Company Stock representing not less than 51% of the
issued and outstanding Company Common Stock and not less than 51% of the issued
and outstanding Company Preferred Stock, in each case entitled to vote with
respect to the Merger, shall have duly executed and delivered the Stockholder
Consent.
7.12 Material Adverse Change. There shall not have been any Company
-----------------------
Material Adverse Change.
7.13 Financing. Parent shall have entered into definitive agreements with
---------
regard to the Financing, and such agreements shall be in full force and effect.
The consummation of the Financing shall occur simultaneously with the Closing.
7.14 Option Agreement. Parent shall have entered into an Option Agreement
----------------
with the Company pursuant to which the Company shall have granted Parent an
option to purchase shares of Company Common Stock under certain circumstances,
and such Option Agreement shall not have been terminated prior to the Effective
Time.
7.15 FIRPTA Compliance. A statement in the form reasonably acceptable to
-----------------
Parent for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.445-2(c)(3) shall be executed and delivered.
ARTICLE 8
CLOSING
On the Closing Date:
8.1 Deliveries by the Company. The Company shall deliver (or cause to be
-------------------------
delivered) to Parent:
(a) the Ancillary Agreements, other than the Severance Agreements,
the Option Agreements and the Stockholder Support Agreements (all of which shall
be executed and delivered on the date hereof), duly executed by each party
thereto other than Parent and Sub;
(b) any Consents that the Company has obtained in order to satisfy
the conditions in Section 7.2;
(c) the Company Closing Certificate; and
62
(d) Certificates representing the shares of Company Stock to be
canceled in connection with the Merger that have been obtained by the Company on
or prior to the Closing Date.
8.2 Deliveries by Parent. Parent shall deliver to the Company:
--------------------
(a) the Ancillary Agreements, other than the Severance Agreements,
the Option Agreements and the Stockholder Support Agreements (all of which shall
be executed and delivered on the date hereof), duly executed by Parent and/or
Sub, as applicable;
(b) any Consents that Parent or Sub has obtained in order to satisfy
the conditions in Section 6.2;
(c) the Parent Closing Certificate; and
(d) certificates representing the Merger Shares to be issued to
those Stockholders that have delivered any Certificates and letter of
transmittal or affidavit, as provided in Section 2.10.
ARTICLE 9
MISCELLANEOUS
9.1 Termination. This Agreement may be terminated at any time prior to
-----------
Closing:
(a) by the written agreement of Parent and the Company;
(b) by Parent or the Company if the Closing shall not have occurred
on or before December 31, 2001, other than due to a breach of this Agreement by
the party seeking to terminate;
(c) by Parent if there is a breach of any representation or warranty
set forth in Article 3 or any covenant or agreement to be complied with or
performed by the Company pursuant to the terms of this Agreement, except for
breaches that, without regard to any qualifications as to materiality or Company
Material Adverse Effect contained in such representations, warranties, covenants
or agreements, have not had and are not reasonably likely to have a Company
Material Adverse Effect, and such breach persists for fourteen (14) days or more
after written notice is given, so long as any such breach is not caused by the
action or inaction of Parent or Sub;
(d) by the Company if there is a breach of any representation or
warranty set forth in Article 4 hereof or of any covenant or agreement to be
complied with or performed by Parent or Sub pursuant to the terms of this
Agreement, except for breaches that, without regard to any qualifications as to
materiality or Parent Material Adverse Effect contained in such representations,
warranties, covenants or agreements, have not had and are not reasonably likely
to have a Parent Material Adverse Effect, and such breach persists for fourteen
(14) days or more after written notice is given, so long as any such breach is
not caused by the action or inaction of the Company or any of the Stockholders;
63
(e) by Parent or the Company if any required approval of the
stockholders of Parent for this Agreement, the Merger or the Financing shall not
have been obtained at a duly held meeting of stockholders or at any adjournment
thereof;
(f) subject to the provisions of Section 5.18, by the Company (but
------------
only prior to approval by the Stockholders) to accept a Superior Company
Transaction in accordance with the provisions of Section 5.6, provided that such
termination under this Section 9.1(f) shall not be effective until the Company
has made payment of the fee and expenses required by Section 9.3;
(g) by Parent (but only prior to approval by the stockholders of
Parent) to accept a Superior Parent Transaction in accordance with the
provisions of Section 5.6, provided that such termination under this Section
9.1(g) shall not be effective until Parent has made payment of the fee and
expenses required by Section 9.3;
(h) by the Company if Parent materially breaches its obligations
pursuant to Section 5.18, and such breach persists for two (2) business days or
more after written notice is given, so long as any such breach is not caused by
the action or inaction of the Company or any of the Stockholders; or
(i) by Parent if, as of the date of the special meeting of
stockholders of Parent held in connection with the transactions contemplated by
this Agreement, the Company shall not have provided to Parent written consents
approving this Agreement and the Merger executed by Stockholders beneficially
owning in the aggregate shares of Company Common Stock representing not less
than 51% of the issued and outstanding Company Common Stock and not less than
51% of the issued and outstanding Company Preferred Stock, in each case to the
extent required to approve the Merger.
9.2 Effect of Termination. In the event of the termination of this
---------------------
Agreement pursuant to Section 9.1, this Agreement shall forthwith become void
and no party hereto shall have any liability to any other party except (i) as
set forth in Section 9.3, (ii) that no such termination shall relieve any party
from liability by reason of any willful breach by such party of its
representations, warranties, covenants or other agreements contained in this
Agreement; and (iii) the provisions of Sections 5.16, 9.3 through 9.19 of this
Agreement and the Confidentiality Agreement shall remain in full force and
effect and survive any termination of this Agreement.
9.3 Fees and Merger Expenses.
------------------------
(a) Parent Merger Expenses. If the Company terminates this Agreement
----------------------
pursuant to Section 9.1(f) or Parent terminates this Agreement pursuant to
Section 9.1(i), then the Company shall pay to Parent, within one business day
after request by Parent (accompanied by reasonably detailed documentation to the
extent reasonably requested by the Company) from time to time, all of Parent's
out-of-pocket expenses and fees actually incurred in connection with this
Agreement and the transactions contemplated herein (including, without
limitation, fees and expenses payable to all banks, investment banking firms and
other financial institutions and their respective agents and counsel for
arranging or providing financial advice with respect to the Merger and all
reasonable fees and expenses of counsel, accountants, experts and consultants).
64
(b) Company Merger Expenses. If Parent or the Company terminates
-----------------------
this Agreement pursuant to Section 9.1(e) or if Parent terminates this Agreement
pursuant to Section 9.1(g), then Parent shall pay to the Company, within one
business day after request by the Company (accompanied by reasonably detailed
documentation to the extent reasonably requested by Parent) from time to time,
all of the Company's out-of-pocket expenses and fees actually incurred in
connection with this Agreement and the transactions contemplated herein
(including, without limitation, fees and expenses payable to all banks,
investment banking firms and other financial institutions and their respective
agents and counsel for arranging or providing financial advice with respect to
the Merger and all reasonable fees and expenses of counsel, accountants, experts
and consultants).
(c) Termination Fee.
---------------
(i) If the Company terminates this Agreement pursuant to
Section 9.1(f), then the Company shall also pay concurrent with such termination
(in addition to any expenses payable pursuant to Section 9.3(a)) to Parent a fee
of $1.0 million ($1,000,000).
(ii) If Parent terminates this Agreement pursuant to Section
9.1(g), then Parent shall also pay concurrent with such termination (in addition
to any expenses payable pursuant to Section 9.3(b)) to the Company a fee of $1.0
million ($1,000,000).
9.4 Non-Survival of Representations, Warranties and Agreements. The
----------------------------------------------------------
representations, warranties and agreements in this Agreement shall terminate at
the Effective Time or upon the termination of this Agreement pursuant to Section
9.1, as the case may be, except that those covenants and agreements contained
herein that by their terms are to be performed after the Effective Time shall
survive the Effective Time.
9.5 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned (whether by operation of law or otherwise)
by the Company without the prior written consent of Parent, or by Parent or Sub
without the prior written consent of the Company.
9.6 Notices. Unless otherwise provided herein, any notice, request,
-------
instruction or other document to be given hereunder by any party to the other
shall be in writing and delivered in person or by courier, sent by facsimile
transmission, sent via overnight delivery service or mailed by registered or
certified mail (such notice to be effective upon receipt), as follows:
If prior to the Closing, to the Company:
The Althexis Company, Inc.
1365 Main Street
Waltham, Massachusetts 02451
Attention: Mark B. Skaletsky
Fax: (781) 647-5552
65
With a copy to:
Bingham Dana LLP
150 Federal Street
Boston, Massachusetts 02110
Attention: Julio E. Vega, Esq.
Fax: (617) 951-8736
If to Parent or Sub or, if after the Closing, to the Surviving Corporation:
Microcide Pharmaceuticals, Inc.
850 Maude Avenue
Mountain View, California 94043
Attention: James E. Rurka
Fax: (650) 428-3545
With a copy to:
Latham & Watkins
135 Commonwealth Drive
Menlo Park, California 94025
Attention: Alan C. Mendelson, Esq.
Fax: (650) 463-2600
or to such other place and with such other copies as any party may designate as
to itself by written notice to the others.
9.7 Choice of Law. This Agreement shall be construed, interpreted and the
-------------
rights of the parties determined in accordance with the laws of the State of
Delaware, as applied to contracts under seal made, and entirely to be performed,
within Delaware, and without reference to principles of conflicts or choice of
laws.
9.8 Representation By Counsel. Each party hereto represents and agrees
-------------------------
with each other that it has been represented by or had the opportunity to be
represented by, independent counsel of its own choosing, and that it has had the
full right and opportunity to consult with its respective attorney(s), that to
the extent, if any, that it desired, it availed itself of this right and
opportunity, that it or its authorized officers (as the case may be) have
carefully read and fully understand this Agreement in its entirety and have had
it fully explained to them by such party's respective counsel, that each is
fully aware of the contents thereof and its meaning, intent and legal effect,
and that it or its authorized officer (as the case may be) is competent to
execute this Agreement and has executed this Agreement free from coercion,
duress or undue influence.
9.9 Entire Agreement; Amendments and Waivers. This Agreement, together
----------------------------------------
with the Confidentiality Agreement and the Ancillary Agreements and all exhibits
and schedules hereto and thereto, constitutes the entire agreement among the
parties pertaining to the subject matter hereof and supersedes all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties; provided that the Confidentiality Agreement shall
remain in full force and effect through the Effective Time. No supplement,
modification or waiver of
66
this Agreement shall be binding unless executed in writing by the party to be
bound thereby. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided.
9.10 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.11 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Agreement or any other such instrument.
9.12 Expenses. Except as otherwise set forth herein, whether or not the
--------
transactions contemplated by this Agreement are consummated each party shall pay
its own respective legal, accounting, advisory and other fees, and other out-of-
pocket expenses incurred in connection with the transactions contemplated
herein, and will not look to any other party for any contribution toward such
expenses.
9.13 Publicity. Except as required by law or on advice of counsel, no
---------
party hereto shall issue any press release or make any public statement
regarding the transactions contemplated hereby without the prior approval of the
other parties, and the parties hereto shall issue a mutually acceptable press
release as soon as practicable after the date hereof and after the Closing Date.
Notwithstanding the foregoing, Parent shall be permitted to make any public
statement without obtaining the consent of any other party hereto if (i) the
disclosure is required by law or the requirements of the Nasdaq National Market
and (ii) Parent has first used its reasonable efforts to consult with (but not
to obtain the consent of) the other parties about the form and substance of such
disclosure.
9.14 Third Party Beneficiaries. This Agreement shall be binding upon and
-------------------------
inure solely to the benefit of each party hereto, and nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person any
right, benefit or remedy of any nature whatsoever under or by reason of this
Agreement, including, without limitation, by way of subrogation; provided,
however, that the Registering Stockholders shall be deemed to be third party
beneficiaries solely with respect to Section 2.13.
9.15 Dispute Resolution. Subject to the provisions of Section 9.19, the
------------------
parties hereby agree that, in order to obtain prompt and expeditious resolution
of any disputes under this Agreement, each claim, dispute or controversy of
whatever nature, arising out of, in connection with, or in relation to the
interpretation, performance or breach of this Agreement or the transactions
contemplated hereby, including without limitation any claim based on contract,
tort or statute, or the arbitrability of any claim hereunder (an "Arbitrable
----------
Claim"), shall be settled by final and binding arbitration conducted in the
- -----
State of Delaware. All such Arbitrable Claims shall be settled by three (3)
arbitrators in accordance with the Commercial Arbitration Rules then in effect
of the American Arbitration Association. Such arbitrators shall be provided
through the JAMS Endispute ("JAMS") by mutual agreement of the parties; provided
----
that, absent such
67
agreement, the arbitrators shall be appointed by JAMS. In either event, such
arbitrators may not have any preexisting, direct or indirect relationship with
any party to the dispute. Each party hereto expressly consents to, and waives
any future objection to, such forum and arbitration rules. Judgment upon any
award may be entered by any state or federal court having jurisdiction thereof.
Except as required by law (including, without limitation, the rules and
regulations of the SEC and the Nasdaq Stock Market if applicable), neither party
nor the arbitrators shall disclose the existence, content, or results of any
arbitration hereunder without the prior written consent of all parties. Except
as provided herein, the Federal Arbitration Act shall govern the interpretation,
enforcement and all proceeding pursuant to this section.
Adherence to this dispute resolution process shall not limit the right of
the parties hereto to obtain any provisional remedy, including without
limitation, injunctive or similar relief, from any court of competent
jurisdiction as may be necessary to protect their respective rights and
interests pending arbitration. Subject to the foregoing sentence and Section
9.19, this dispute resolution procedure is intended to be the exclusive method
of resolving any Arbitrable Claims arising out of or relating to this Agreement.
The arbitration procedures shall follow the substantive law of the State of
Delaware, including the provisions of statutory law dealing with arbitration, as
it may exist at the time of the demand for arbitration, insofar as said
provisions are not in conflict with this Agreement and specifically excepting
therefrom sections of any such statute dealing with discovery and sections
requiring notice of the hearing date by registered or certified mail. The
arbitrators shall determine the prevailing party and shall include in their
award that party's reasonable attorneys' fees and costs.
9.16 Waiver of Jury Trial. Consistent with the intention of Section 9.12,
--------------------
each signatory to this Agreement hereby waives its respective right to a jury
trial of any permitted claim or cause of action arising out of this agreement,
any of the transactions contemplated hereby, or any dealings between any of the
signatories hereto relating to the subject matter of this agreement or any of
the transactions contemplated hereby. The scope of this waiver is intended to be
all encompassing of any and all disputes that may be filed in any court and that
relate the subject matter of this agreement or any of the transactions
contemplated hereby, including, without limitation, contract claims, tort
claims, and all other common law and statutory claims. This waiver is
irrevocable, meaning that it may not be modified either orally or in writing,
and this waiver shall apply to any subsequent amendments, supplements or other
modifications to this agreement, any of the transactions contemplated hereby or
to any other document or agreement relating to the transactions contemplated
hereby.
9.17 Service of Process; Consent to Jurisdiction.
-------------------------------------------
(a) SERVICE OF PROCESS. EACH OF THE PARTIES HERETO IRREVOCABLY
------------------
CONSENTS TO THE SERVICE OF ANY PROCESS, PLEADING, NOTICES OR OTHER PAPERS BY THE
MAILING OF COPIES THEREOF BY REGISTERED, CERTIFIED OR FIRST CLASS MAIL, POSTAGE
PREPAID, TO SUCH PARTY AT SUCH PARTY'S ADDRESS SET FORTH HEREIN, OR BY ANY OTHER
METHOD PROVIDED OR PERMITTED UNDER DELAWARE LAW.
(b) CONSENT AND JURISDICTION. EACH PARTY HERETO IRREVOCABLY AND
------------------------
UNCONDITIONALLY (I) AGREES THAT ANY SUIT, ACTION OR
68
OTHER LEGAL PROCEEDING ARISING OUT OF THIS AGREEMENT MAY BE BROUGHT IN THE
UNITED STATES DISTRICT COURT IN THE STATE OF DELAWARE OR, IF SUCH COURT DOES NOT
HAVE JURISDICTION OR WILL NOT ACCEPT JURISDICTION, IN ANY COURT OF GENERAL
JURISDICTION IN THE STATE OF DELAWARE; (II) CONSENTS TO THE JURISDICTION OF ANY
SUCH COURT IN ANY SUCH SUIT, ACTION OR PROCEEDING; AND (III) WAIVES ANY
OBJECTION WHICH SUCH PARTY MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT,
ACTION OR PROCEEDING IN ANY SUCH COURT.
9.18 Attorney Fees. If any party to this Agreement brings an action to
-------------
enforce its rights under this Agreement in accordance with the provisions
hereof, the prevailing party shall be entitled to recover its actual out-of-
pocket costs and expenses, including without limitation reasonable attorneys'
fees reasonably incurred in connection with such action, including any appeal of
such action.
9.19 Specific Performance. Notwithstanding the provisions of Section 9.15,
--------------------
the parties hereto agree that irreparable damage would occur in the event that
any covenant or agreement set forth in this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to injunctive relief to
prevent breaches of any covenant or agreement set forth in this Agreement and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which they are entitled at law or in equity.
* * * * * *
69
IN WITNESS WHEREOF, each party hereto has executed this Agreement or caused
this Agreement to be duly executed on its behalf by its officer thereunto duly
authorized, as of the day and year first above written.
MICROCIDE PHARMACEUTICALS, INC.
By: /s/ James E. Rurka
--------------------------------------------
Name: James E. Rurka
Title: President and Chief Executive Officer
CALIFORNIA MP ACQUISITION, INC.
By: /s/ Donald D. Huffman
--------------------------------------------
Name: Donald D. Huffman
Title: President
THE ALTHEXIS COMPANY, INC.
By: /s/ Mark Skaletsky
--------------------------------------------
Name: Mark Skaletsky
Title: Chief Executive Officer
70
APPENDIX B
[LOGO OF J.P. MORGAN]
A Division of J.P. Morgan Securities Inc.
One Bush Street
San Francisco, CA 94104
Tel 415-371-3000
August 1, 2001
The Board of Directors
Microcide Pharmaceuticals, Inc.
850 Maude Avenue
Mountain View, CA 94043
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point of
view, to Microcide Pharmaceuticals, Inc. (the "Company") of the Exchange Ratio
(as defined below) in the proposed merger (the "Merger") of a wholly-owned
subsidiary of the Company with The Althexis Company, Inc. (the "Merger
Partner"). Pursuant to the Agreement and Plan of Merger, dated as of July 27,
2001 (the "Agreement"), among the Company, California MP Acquisition, Inc. and
the Merger Partner, the Merger Partner will become a wholly-owned subsidiary of
the Company, and each outstanding share of common stock, par value $0.01 per
share, of the Merger Partner (the "Merger Partner Common Stock") will be
converted into the right to receive 1.167 shares (the "Exchange Ratio") of the
Company's common stock, par value $0.001 per share (the "Company Common Stock").
Pursuant to the Agreement, at the Closing Date (as defined in the Agreement) the
Company has separately agreed to sell up to $60,000,000 of Series B Convertible
Redeemable Preferred Stock pursuant to the Subscription Agreement dated as of
July 27, 2001 among Microcide and the investors named therein.
In arriving at our opinion, we have (i) reviewed a draft dated July 27, 2001 of
the Agreement; (ii) reviewed certain publicly available business and financial
information concerning the Merger Partner and the Company and the industries in
which they operate; (iii) compared the proposed financial terms of the Merger
with the publicly available financial terms of certain transactions involving
companies we deemed relevant and the consideration received for such companies;
(iv) compared the financial and operating performance of the Merger Partner and
the Company with publicly available information concerning certain other
companies we deemed relevant and reviewed the current and historical market
price of the Company Common Stock and certain publicly traded securities of such
other companies; (v) reviewed certain internal financial analyses and forecasts
prepared by the managements of the Merger Partner and the Company relating to
their respective businesses and (vi) performed such other financial studies and
analyses and considered such other information as we deemed appropriate for the
purposes of this opinion.
-2-
In addition, we have held discussions with certain members of the management of
the Merger Partner and the Company with respect to certain aspects of the
Merger, and the past and current business operations of the Merger Partner and
the Company, the financial condition and future prospects and operations of the
Merger Partner and the Company, the effects of the Merger on the financial
condition and future prospects of the Company, and certain other matters we
believed necessary or appropriate to our inquiry.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Company and the Merger Partner or
otherwise reviewed by us, and we have not assumed any responsibility or
liability therefor. We have not conducted any valuation or appraisal of any
assets or liabilities, nor have any such valuations or appraisals been provided
to us. In relying on financial analyses and forecasts provided to us, we have
assumed that they have been reasonably prepared based on assumptions reflecting
the best currently available estimates and judgments by management as to the
expected future results of operations and financial condition of the Merger
Partner and the Company to which such analyses or forecasts relate. We have also
assumed that the Merger will qualify as a tax-free reorganization for United
States federal income tax purposes, and that the other transactions contemplated
by the Agreement will be consummated as described in the Agreement. We have
relied as to all legal matters relevant to rendering our opinion upon the advice
of counsel. We have also assumed that the definitive Agreement will not differ
in any material respects from the draft thereof furnished to us. We have further
assumed that all material governmental, regulatory or other consents and
approvals necessary for the consummation of the Merger will be obtained without
any adverse effect on the Merger Partner or the Company or on the contemplated
benefits of the Merger.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
Our opinion is limited to the fairness, from a financial point of view, to the
Company of the Exchange Ratio in the proposed Merger. We express no opinion as
to the fairness of the sale of the Series B Convertible Redeemable Preferred
Stock or the underlying decision by the Company to engage in the Merger or to
issue its Series B Convertible Redeemable Preferred Stock. We are expressing no
opinion herein as to the price at which the Company Common Stock will trade at
any future time.
We have acted as financial advisor to the Company with respect to the proposed
Merger and will receive a fee from the Company for our services. We will also
receive an additional fee if the proposed Merger is consummated. In the ordinary
course of our businesses, we and our affiliates may actively trade the debt and
equity securities of the Company for our own account or for the accounts of
customers and, accordingly, we may at any time hold long or short positions in
such securities.
-3-
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the Exchange Ratio in the proposed Merger is fair, from a financial
point of view, to the Company.
This letter is provided to the Board of Directors of the Company in connection
with and for the purposes of its evaluation of the Merger. This opinion does not
constitute a recommendation to any shareholder of the Company as to how such
shareholder should vote with respect to the Merger or any other matter. This
opinion may not be disclosed, referred to, or communicated (in whole or in part)
to any third party for any purpose whatsoever except with our prior written
approval. This opinion may be reproduced in full in any proxy or information
statement mailed to shareholders of the Company but may not otherwise be
disclosed publicly in any manner without our prior written approval.
Very truly yours,
J.P. MORGAN SECURITIES INC.
J.P. Morgan Securities Inc.
- ---------------------------
APPENDIX C
SUBSCRIPTION AGREEMENT
DATED AS OF JULY 27, 2001
BY AND BETWEEN
MICROCIDE PHARMACEUTICALS, INC.
AND
[INVESTOR]
SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK
MICROCIDE PHARMACEUTICALS, INC.
SUBSCRIPTION AGREEMENT
SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK
1. Definitions...................................................................... 1
2. Agreement To Subscribe; Purchase Price........................................... 8
(a) Subscription............................................................. 8
(b) Form of Payment.......................................................... 8
(c) Closing.................................................................. 8
3. Representations, Warranties, Covenants, etc. of the Buyer........................ 8
(a) Acquisition For Investment............................................... 8
(b) Accredited Investor...................................................... 9
(c) Reoffers And Resales..................................................... 9
(d) Company Reliance......................................................... 9
(e) Information Provided..................................................... 9
(f) Absence of Approvals..................................................... 9
(g) Subscription Agreement................................................... 9
(h) Buyer Status............................................................. 10
(i) Foreign Investors........................................................ 10
(j) Organization............................................................. 10
(k) Non-Contravention........................................................ 10
(l) Approvals, Filings, Etc.................................................. 10
(m) Trading in Company Common Stock.......................................... 10
4. Representations, Warranties, Covenants, Etc. Of The Company...................... 10
(a) Organization And Authority............................................... 10
(b) Qualifications........................................................... 11
(c) Capitalization........................................................... 11
(d) Concerning The Shares And The Common Stock............................... 12
(e) Corporate Authorization.................................................. 12
ii.
Table of Contents
(continued)
Page
(f) Non-Contravention........................................................ 13
(g) Approvals, Filings, Etc.................................................. 13
(h) Agreements............................................................... 13
(i) No Material Change....................................................... 14
(j) SEC Filings.............................................................. 15
(k) Absence Of Certain Proceedings........................................... 15
(l) Liabilities.............................................................. 15
(m) Title To Properties And Assets; Liens, Etc............................... 16
(n) Intellectual Property.................................................... 16
(o) Internal Accounting Controls............................................. 17
(p) Compliance With Laws..................................................... 17
(q) Tax Matters.............................................................. 17
(r) Investment Company....................................................... 18
(s) Absence Of Brokers, Finders, Etc......................................... 18
(t) No Solicitation.......................................................... 18
(u) Trading in Company Common Stock.......................................... 18
(v) Rights Plan.............................................................. 18
(w) Full Disclosure.......................................................... 18
5. Certain Covenants And Acknowledgments............................................ 19
(a) Transfer Restrictions.................................................... 19
(b) Restrictive Legends...................................................... 19
(c) Transfer Agent Instruction............................................... 21
(d) Form D................................................................... 21
(e) Nasdaq Listing; Reporting Status......................................... 21
(f) Use Of Proceeds.......................................................... 22
(g) State Securities Laws.................................................... 22
(h) Limitation On Certain Actions............................................ 22
(i) Best Efforts............................................................. 22
(j) Reservation Of Shares; Shares To Be Fully Paid; Listing Of
Common Stock........................................................... 22
(k) Additional Covenants..................................................... 23
iii.
Table of Contents
(continued)
Page
(l) USRPHC Status............................................................ 28
(m) No Negotiation........................................................... 28
(n) No Changes To Lock-Up Agreements With Former Holders Of
Common Stock Of Althexis............................................... 28
(o) Non-Transferability Of Preferred Shares.................................. 28
6. Conditions to the Company's Obligations to Sell and Issue........................ 29
7. Conditions To The Buyer's Obligations To Purchase................................ 29
8. Registration Rights.............................................................. 31
(a) Mandatory Registration................................................... 32
(b) Obligations of the Company............................................... 32
(c) Obligations Of The Buyer And Other Investors............................. 36
(d) Rule 144................................................................. 37
9. Indemnification And Contribution................................................. 37
(a) Indemnification.......................................................... 37
(b) Contribution............................................................. 39
(c) Other Rights............................................................. 39
10. Miscellaneous.................................................................... 39
(a) Governing Law............................................................ 39
(b) Headings................................................................. 39
(c) Severability............................................................. 39
(d) Notices.................................................................. 39
(e) Counterparts............................................................. 40
(f) Entire Agreement; Benefit................................................ 40
(g) Waiver................................................................... 40
(h) Amendment................................................................ 40
(i) Further Assurances....................................................... 41
(j) Assignment Of Certain Rights And Obligations............................. 41
(k) Expenses................................................................. 41
(l) Termination.............................................................. 41
(m) Survival................................................................. 42
(n) Public Statements, Press Releases, Etc................................... 42
iv.
Table of Contents
(continued)
Page
(o) Construction............................................................. 42
(p) Notices.................................................................. 42
v.
Table of Contents
(continued)
SCHEDULES
Schedule 4(c) Securities Subject to Certain Antidilution Adjustments
vi.
ANNEXES
Annex A Form of Certificate of Designations
Annex B Form of Transfer Agent Instruction
Annex C Form of "Lock-up" Agreement to Be Executed by the Buyer
Annex D-1 and D-2 Forms of "Lock-up" Agreement to Be Executed by Certain
Former Common Shareholders of The Althexis Company, Inc.
Annex E Form of Opinion of Bingham Dana to Be Delivered on Closing
Date
Annex F Form of Voting Agreement
Annex G [Reserved]
Annex H Notices
vii.
SUBSCRIPTION AGREEMENT
This Subscription Agreement, dated as of July 27, 2001 (this "Agreement"),
by and between Microcide Pharmaceuticals, Inc., a Delaware corporation (the
"Company"), with headquarters located at 850 Maude Avenue, Mountain View,
California 94043, and [Investor] (the "Buyer").
W I T N E S S E T H:
Whereas, the Company wishes to sell, and the Buyer wishes to purchase, upon
the terms and subject to the conditions of this Agreement, shares of Series B
Convertible Redeemable Preferred Stock of the Company which will be convertible
into shares of Common Stock (such capitalized term and all other capitalized
terms used in this Agreement having the respective meanings provided in Section
1);
Now Therefore, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Definitions.
(a) As used in this Agreement, the terms "Agreement," "Buyer" and
"Company" shall have the respective meanings assigned to such terms in the
introductory paragraph of this Agreement.
(b) All the agreements or instruments herein defined shall mean such
agreements or instruments as the same may from time to time be supplemented or
amended or the terms thereof waived or modified to the extent permitted by, and
in accordance with, the terms thereof and of this Agreement.
(c) The following terms shall have the following meanings (such meanings
to be equally applicable to both the singular and plural forms of the terms
defined):
"Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or under common control with the subject Person. For purposes of
the term "Affiliate," the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to direct or to cause the direction of the management and
policies of a Person, whether through the ownership of securities, by contract
or otherwise. Notwithstanding the foregoing, neither the Company nor the
Chairman of the Board of Directors of the Company shall be deemed to be
"Affiliates" of the Buyer or any of the Other Buyers, or vice versa, as a result
of the Voting Agreement or the Other Voting Agreements.
"Aggregate Purchase Price" means the total dollar amount purchased by the
Buyer and the Other Buyers on the Closing Date.
"Blackout Period" means up to 20 Trading Days in any period of 365 days
commencing on the day immediately after the date the Company notifies the
Investors that they are required, pursuant to Section 8(c)(iv), to suspend
offers and sales of Registrable Securities pursuant to the Registration
Statement as a result of an event or circumstance described in Section
8(b)(v)(A), during which period, by reason of Section 8(b)(v)(B), the Company is
not required to amend the Registration Statement or to supplement the
Prospectus.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
or executive order to remain closed.
"Certificate of Designations" means the Certificate of Designations of
Series B Convertible Redeemable Preferred Stock in the form of ANNEX A to this
Agreement, as the same is filed with the Secretary of State of the State of
Delaware.
"Claims" means any losses, claims, damages, liabilities or expenses,
including, without limitation, reasonable fees and expenses of legal counsel
(joint or several), incurred by a Person.
"Closing" means 12:00 noon, California time, on a date to be mutually
agreed upon by the parties, which shall be as soon as practicable but no later
than the third Business Day after the satisfaction or waiver of the last to
occur of the conditions set forth in Sections 6 and 7.
"Closing Date" means the date on which the Closing actually occurs.
"Code" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder and published interpretations thereof.
"Common Shares" means the Conversion Shares.
"Common Stock" means the Common Stock, par value $0.001 per share, of the
Company.
"Conversion Notice" means the Notice of Conversion of Series B Convertible
Redeemable Preferred Stock substantially in the form attached hereto as ANNEX H.
"Conversion Price" shall have the meaning to be provided or provided in the
Certificate of Designations.
"Conversion Shares" means the shares of Common Stock issued or issuable
upon conversion of the Preferred Shares.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the regulations thereunder and published interpretations thereof.
"Financing Transaction" shall mean any transaction involving the issuance,
sale or other disposition of (i) any capital stock of the Company, (ii) any
option, call, warrant or right (whether or not immediately exercisable) to
acquire any capital stock of the Company, or (iii) any security, instrument or
obligation that is or may become convertible into or exchangeable for
2
any capital stock of the Company, in each case where the purpose of which is to
raise capital for the Company.
"Generally Accepted Accounting Principles" for any Person means the United
States generally accepted accounting principles and practices applied by such
Person from time to time in the preparation of its audited financial statements.
"Holders" shall have the meaning to be provided or provided in the
Certificate of Designations.
"Holder Optional Repurchase Event" shall have the meaning provided in the
Certificate of Designations.
"Indebtedness" as used in reference to any Person means all indebtedness of
such Person for borrowed money, the deferred purchase price of property, goods
and services and obligations under leases which are required to be capitalized
in accordance with Generally Accepted Accounting Principles and shall include
all such indebtedness guaranteed in any manner by such Person or in effect
guaranteed by such Person through a contingent agreement to purchase and all
indebtedness for the payment or purchase of which such Person has contingently
agreed to advance or supply funds and all indebtedness secured by mortgage or
other lien upon property owned by such Person, although such Person has not
assumed or become liable for the payment of such indebtedness, and, for all
purposes hereof, such indebtedness shall be treated as though it has been
assumed by such Person to the extent of such guarantee (if limited in amount) or
the fair market value of property securing such debt, as the case may be.
Notwithstanding the foregoing, "Indebtedness" shall not include accounts payable
incurred by the Company in the ordinary course of business consistent with past
practice.
"Indemnified Party" means the Company, each of its directors, each of its
officers who signs the Registration Statement, each Person, if any, who controls
the Company within the meaning of the 1933 Act or the 1934 Act, any underwriter
and any other stockholder offering or selling securities pursuant to the
Registration Statement or any of its directors or officers or any Person who
controls such underwriter or stockholder within the meaning of the 1933 Act or
the 1934 Act.
"Indemnified Person" means the Buyer and each other Investor who
beneficially owns or holds Registrable Securities included in the Registration
Statement and each other Investor who offers or sells Registrable Securities
included in the Registration Statement in the manner permitted under this
Agreement, the directors, if any, of the Buyer or such Investor, the officers
(or persons performing similar functions), if any, of the Buyer and any such
Investor, each Person, if any, who controls the Buyer or any such Investor
within the meaning of the 1933 Act or the 1934 Act, any underwriter (as defined
in the 1933 Act) acting on behalf of an Investor who participates in the
offering of Registrable Securities of such Investor in accordance with the plan
of distribution contained in the Prospectus, the directors, if any, of such
underwriter and the officers, if any, of such underwriter, and each Person, if
any, who controls any such underwriter within the meaning of the 1933 Act or the
1934 Act.
3
"Inspector" means any attorney, accountant or other agent retained by an
Investor for the purposes provided in Section 8(b)(ix).
"Investor" or "Investors" means the Buyer and any permitted transferee or
assignee who agrees to become bound by the provisions of Sections 5(a), 5(b), 8,
9, and 10.
"Majority Holders" shall have the meaning to be provided or provided in the
Certificate of Designations.
"Margin Stock" shall have the meaning provided in Regulation G of the Board
of Governors of the Federal Reserve System (12 C.F.R. Part 207).
"Merger Agreement" shall mean that certain Agreement and Plan of and Merger
dated as of July 27, 2001 by and among the Company, California MP Acquisition,
Inc. and Althexis.
"Merger Shares" shall mean the shares of Common Stock issued or issuable
pursuant to the Merger Agreement.
"NASD" means the National Association of Securities Dealers, Inc.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq Stock Market" means The Nasdaq Stock Market, Inc.
"1934 Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.
"1933 Act" means the Securities Act of 1933, as amended, or any successor
statute.
"Non-Responsive Investor" means an Investor who does not provide the
Required Information to the Company at least one Business Day prior to the
filing of the Registration Statement.
"Other Buyers" means each of the several holders of the Preferred Stock of
the Company who have agreed to purchase the Preferred Stock pursuant to the
Other Subscription Agreements.
"Other Preferred Shares" means the shares of Preferred Stock to be
purchased by the Other Buyers pursuant to the Other Subscription Agreements.
"Other Subscription Agreements" means the several Subscription Agreements,
dated as of the date hereof, by and between the Company and the several buyers
named therein relating to the sale and purchase of shares of Preferred Stock.
"Other Voting Agreements" means the several Voting Agreements, dated as of
the Closing Date, by and among the Company and the Other Buyers.
"Permitted Indebtedness" means:
4
(i) Indebtedness not in excess of the aggregate principal amount
which is outstanding on the Closing Date and which would be reflected on a
balance sheet of the Company as of the Closing Date or in the notes thereto
prepared in accordance with Generally Accepted Accounting Principles;
(ii) Indebtedness of up to $5 million incurred after the Closing Date
consisting of (a) equipment lease obligations or other equipment financings for
equipment used in the business of the Company and its Subsidiaries which
obligations or financings are required to be capitalized in accordance with
Generally Accepted Accounting Principles; and (b) Indebtedness incurred in
connection with acquisition of furniture, fixtures and equipment used in the
business of the Company and its Subsidiaries, in each such case in an amount not
in excess of the purchase price thereof;
(iii) Indebtedness that is secured only by real property; and
(iv) Indebtedness of up to $5 million that is unsecured.
"Person" means any natural person, corporation, partnership, limited
liability company, trust, incorporated organization, unincorporated association,
or similar entity or any government, governmental agency or political
subdivision.
"Preferred Shares" means the shares of Preferred Stock to be purchased by
the Buyer pursuant to this Agreement, as set forth on the signature page of this
Agreement.
"Preferred Stock" shall mean the Series B Convertible Redeemable Preferred
Stock, par value $0.001, of the Company.
"Prospectus" means the prospectus forming part of a Registration Statement
at the time a Registration Statement is declared effective and any amendment or
supplement thereto, including any documents or information incorporated therein
by reference.
"Purchase Price" means the aggregate purchase price for the Preferred
Shares set forth on the signature page of this Agreement.
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Questionnaire" means the Prospective Purchaser Questionnaire completed by
the Buyer and furnished to the Company in connection with this Agreement.
"Record" shall mean all pertinent financial and other records, pertinent
corporate documents and properties of the Company and its Subsidiaries subject
to inspection for the purposes provided in Section 8(b)(ix).
"register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the 1933 Act and pursuant to Rule 415, and the declaration or
ordering of effectiveness of such Registration Statement by the SEC.
5
"Registrable Securities" means (i) the Common Shares, (ii) if the Common
Stock is changed, converted or exchanged by the Company or its successor, as the
case may be, into any other stock or other securities on or after the date the
Certificate of Designations is filed with the Secretary of State of the State of
Delaware, such other stock or other securities which are issued or issuable in
respect of or in lieu of the Common Shares and (iii) if any other securities are
issued to holders of the Common Stock (or such other shares or other securities
into which or for which the Common Stock is so changed, converted or exchanged
as described in the immediately preceding clause "(ii)") upon any
reclassification, share combination, share subdivision, share dividend, merger,
consolidation or similar transaction or event, such other securities which are
issued or issuable in respect of or in lieu of the Common Shares.
"Registration Period" means the period from the SEC Effective Date to the
earliest of
(i) the date that is five years after the Closing Date,
(ii) such date after which each Investor may sell all of its
Registrable Securities without registration under the 1933 Act pursuant to Rule
144, free of any limitation on the volume of such securities which may be sold
in any period or the manner of sale, and
(iii) the date on which the Investors no longer own or have any right
to acquire any Registrable Securities.
"Registration Statement" means a registration statement on Form S-3 of the
Company under the 1933 Act, including any amendment thereto, which names the
Investors as selling stockholders (including any documents or information
incorporated therein by reference, whether before or after the SEC Effective
Date).
"Regulation D" means Regulation D under the 1933 Act.
"Required Information" means, with respect to any Investor, all information
regarding such Investor, the Registrable Securities held by such Investor or
which such Investor has the right to acquire and the intended method of
disposition of the Registrable Securities held by such Investor or which such
Investor has the right to acquire as shall be required by the 1933 Act to effect
the registration of the resale by such Investor of such Registrable Securities.
"Rule 415" means Rule 415 under the 1933 Act or any successor rule
providing for offering securities on a delayed or continuous basis.
"Rule 144" means Rule 144 under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time provide a "safe harbor" exemption
from registration under the 1933 Act so as to permit a holder of securities to
sell such securities to the public without registration under the 1933 Act.
"Rule 144A" means Rule 144A under the 1933 Act or any successor rule
thereto.
"SEC" means the Securities and Exchange Commission.
6
"SEC Effective Date" means the date a Registration Statement is declared
effective by the SEC.
"SEC Filing Date" means the date a Registration Statement is first filed
with the SEC pursuant to Section 8.
"SEC Reports" means the (i) the 2000 10-K, (ii) the Company's Quarterly
Reports on Form 10-Q for the quarter ended March 31, 2001 and (iii) the
Company's definitive proxy statement for its 2001 Annual Meeting of
Stockholders, in each case as filed with the SEC and including the information
and documents (other than exhibits) incorporated therein by reference.
"Securities" means the Shares.
"Shares" means the Preferred Shares and the Common Shares.
"Subsidiary" means any corporation or other entity of which a majority of
the capital stock or other ownership interests having ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by the Company (including
The Althexis Company, Inc. ("Althexis")).
"Trading Day" shall have the meaning to be provided or provided in the
Certificate of Designations.
"Transaction Documents" means, individually or collectively, this
Agreement, the Voting Agreement, the Certificate of Designations, the Transfer
Agent Instruction and the other agreements, instruments and documents
contemplated hereby and thereby.
"Transfer Agent" means Mellon Investor Services LLC or any successor
thereof, serving as transfer agent and registrar for the Common Stock and
conversion agent for the Preferred Stock.
"Transfer Agent Instruction" means the Transfer Agent Instruction from the
Company to the Transfer Agent for the benefit of, among others, the Buyer and
the Other Buyers, in the form of ANNEX B to this Agreement.
"2000 10-K" means the Company's Annual Report on Form 10-K, as amended, for
the fiscal year ended December 31, 2000.
"Violation" means
(i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any post-effective amendment
thereof or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading,
(ii) any untrue statement or alleged untrue statement of a material
fact contained in the Prospectus (as amended or supplemented, if the Company
files any amendment thereof or supplement thereto with the SEC) or the omission
or alleged omission to state therein
7
any material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading,
(iii) any violation or alleged violation by the Company of the 1933
Act, the 1934 Act, any state securities law or any rule or regulation under the
1933 Act, the 1934 Act or any state securities law, or
(iv) any breach or alleged breach by any Person of any
representation, warranty, covenant, agreement or other term of any of the
Transaction Documents.
"Voting Agreement" means that certain Voting Agreement, dated as of the
Closing Date, by and among the Company and the Buyer.
2. Agreement To Subscribe; Purchase Price.
(a) Subscription. Upon the terms and subject to the conditions of this
Agreement, the Buyer hereby agrees to purchase from the Company, and the Company
hereby agrees to sell to the Buyer, on the Closing Date, the number of Preferred
Shares set forth on the signature page of this Agreement, having the terms and
conditions as set forth in the Certificate of Designations in the form of ANNEX
A to this Agreement, at the price per share and for the Purchase Price set forth
on the signature page of this Agreement. The Purchase Price shall be payable in
United States Dollars.
(b) Form of Payment. Payment by the Buyer of the Purchase Price to the
Company on the Closing Date shall be made by wire transfer of immediately
available funds to such accounts designated by the Company in writing three (3)
Business Days prior to the Closing Date.
(c) Closing. The issuance and sale of the Preferred Shares shall occur on
the Closing Date at the offices of Cooley Godward LLP, Five Palo Alto Square,
3000 El Camino Real, Palo Alto, California. At the Closing, upon the terms and
subject to the conditions of this Agreement, (i) the Company shall issue and
deliver to the Buyer the Preferred Shares, registered in the name of the Buyer
or its nominee, against payment by the Buyer to the Company of an amount equal
to the Purchase Price, and (ii) the Buyer shall pay to the Company an amount
equal to the Purchase Price against delivery by the Company to the Buyer of the
Preferred Shares.
3. Representations, Warranties, Covenants, etc. of the Buyer.
The Buyer represents and warrants to, and covenants and agrees with, the Company
as follows:
(a) Acquisition For Investment. The Buyer is purchasing the Preferred
Shares and will acquire the Common Shares for its own account for investment and
not with a view towards the public sale or distribution thereof within the
meaning of the 1933 Act; the Buyer will acquire any Common Shares for its own
account for investment and not with a view towards distribution thereof within
the meaning of the 1933 Act; provided, however, that notwithstanding the
foregoing, the Buyer may sell the Common Shares pursuant to an effective
Registration Statement or an exemption to the 1933 Act and any state securities
laws.
8
(b) Accredited Investor. The Buyer is an "accredited investor" as that
term is defined in Rule 501 of Regulation D by reason of Rule 501(a)(3) thereof.
(c) Reoffers And Resales. The Buyer will not, directly or indirectly,
offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to
buy, purchase or otherwise acquire or take a pledge of) any of the Securities
unless registered under the 1933 Act, pursuant to an exemption from registration
under the 1933 Act or in a transaction not requiring registration under the 1933
Act.
(d) Company Reliance. The Buyer understands that (i) the Preferred Shares
are being offered and sold to the Buyer and (ii) upon conversion of the
Preferred Shares, the Conversion Shares will be issued to the Buyer, in each
such case in reliance on one or more exemptions from the registration
requirements of the 1933 Act, including, without limitation, Regulation D, and
exemptions from state securities laws and that the Company is relying upon the
truth and accuracy of, and the Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Buyer set
forth herein and in the Questionnaire, a true and accurate copy of which has
been delivered by the Buyer to the Company, in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire or
receive an offer to acquire the Securities; and the information with respect to
the Buyer set forth in the Questionnaire is accurate and complete in all
material respects.
(e) Information Provided. The Buyer and its advisors, if any, have
requested, received and considered all information relating to the business,
properties, operations, condition (financial or other), results of operations
and prospects of the Company and the Subsidiaries and information relating to
the offer and sale of the Preferred Shares and the offer of the Conversion
Shares deemed relevant by them. The Buyer and its advisors, if any, have been
afforded the opportunity to ask questions of the Company concerning the terms of
the offering of the Securities and the business, properties, operations,
condition (financial or other), results of operations and prospects of the
Company and the Subsidiaries and have received satisfactory answers to any such
inquiries (assuming the accuracy and completeness of the SEC Reports and the
Company's responses to the Buyer's requests). Without limiting the generality of
the foregoing, the Buyer has had the opportunity to obtain and to review the SEC
Reports. In connection with its decision to purchase the Preferred Shares, the
Buyer has relied solely upon the SEC Reports, the representations, warranties,
covenants and agreements of the Company set forth in this Agreement and to be
contained in the other Transaction Documents, as well as any investigation of
the Company completed by the Buyer or its advisors, if any; and the Buyer
understands that its investment in the Securities involves a high degree of
risk.
(f) Absence of Approvals. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities.
(g) Subscription Agreement. The Buyer has all requisite power and
authority, corporate or otherwise, to execute, deliver and perform its
obligations under this Agreement and each of the Transaction Documents and the
other agreements executed or to be executed by the Buyer in connection herewith
and to consummate the transactions contemplated hereby and thereby. This
Agreement and each of the Transaction Documents has been duly and validly
9
authorized, duly executed and delivered on behalf of the Buyer and, assuming due
execution and delivery by the Company, is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, except as the enforceability
hereof may be limited by bankruptcy, insolvency, reorganization, moratorium, or
other similar laws now or hereafter in effect relating to or affecting
creditors' rights generally and general principles of equity, regardless of
whether enforcement is considered in a proceeding in equity or at law.
(h) Buyer Status. The Buyer is not a "broker" or "dealer" as those terms
are defined in the 1934 Act which is required to be registered with the SEC
pursuant to Section 15 of the 1934 Act.
(i) Foreign Investors. If the Buyer is not a United States person, Buyer
hereby represents that it is satisfied with the full observance of the laws of
Buyer's jurisdiction in connection with the offer and sale of the Preferred
Shares and the offer of the Conversion Shares. None of the transactions
contemplated by this Agreement or any of the Transaction Documents to which it
is a party will violate the laws of Buyer's jurisdiction.
(j) Organization. The Buyer is a [________] duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization.
(k) Non-Contravention. The execution and delivery of the Transaction
Documents by the Buyer and the consummation by the Buyer of the transactions
contemplated by the Transaction Documents do not and will not, with or without
the giving of notice or the lapse of time, or both, (i) result in any violation
of any provision of the charter documents of the Buyer or (ii) violate or
contravene any applicable law, rule or regulation or any applicable decree,
judgment or order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Buyer or any of its properties or assets which would have a material adverse
effect on the Buyer or the validity or enforceability of, or the ability of the
Buyer to perform its obligations under, the Transaction Documents.
(l) Approvals, Filings, Etc. No authorization, approval or consent of, or
filing with, any court, governmental body, regulatory agency, self-regulatory
organization, or stock exchange or market is required to be obtained or made by
the Buyer for (i) the execution, delivery and performance of the Transaction
Documents and (ii) the performance by the Buyer of its other obligations under
the Transaction Documents.
(m) Trading in Company Common Stock. The Buyer has not (and has not
permitted any of its officers, directors, employees, affiliates, agents or
representatives to): (i) effect, alone or with one or more Persons, a
transaction or series of transactions as a means of creating actual or apparent
active trading or raising or depressing the price of the Common Stock, or (ii)
take any action in violation of Section 9 of the 1934 Act.
4. Representations, Warranties, Covenants, Etc. Of The Company.
The Company represents and warrants to, and covenants and agrees with, the Buyer
that:
(a) Organization And Authority. (i) The Company and each Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the
10
jurisdiction of its incorporation, and (ii) each of the Company and the
Subsidiaries has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as described in the SEC
Reports and as currently conducted, and (iii) the Company has all requisite
corporate power and authority to execute, deliver and perform its obligations
under this Agreement and the other Transaction Documents being executed and
delivered by the Company in connection herewith, and to consummate the
transactions contemplated hereby and thereby. The Company has no Subsidiaries
other than (i) California MP Acquisition, Inc. and (ii) upon consummation of the
transactions contemplated by the Merger Agreement, Althexis.
(b) Qualifications. The Company and each Subsidiary is duly qualified to
do business as a foreign corporation and is in good standing in all
jurisdictions where such qualification is necessary and where failure so to
qualify could have a material adverse effect on the business, properties,
operations, condition (financial or other), results of operations or prospects
of the Company and the Subsidiaries, taken as a whole.
(c) Capitalization.
(i) The authorized capital stock of the Company consists of (A)
50,000,000 shares of Common Stock, of which 11,519,313 shares were outstanding
at the close of business on July 26, 2001 and (B) 5,000,000 shares of preferred
stock, par value $0.001, none of which is outstanding and of which (1) 100,000
shares are designated "Series A Participating Preferred Stock" and (2) [60,000]
shares will be designated as Preferred Stock and issued pursuant to this
Agreement and the Other Subscription Agreements. From July 27, 2001 to the
Closing Date, other than the issuance of the Merger Shares, there will be (x) no
material increase in the number of shares of Common Stock outstanding (except
for shares of Common Stock issued upon exercise of options and warrants
outstanding on the date hereof and disclosed in the SEC Reports) and (y) no
issuance of preferred stock of the Company or securities convertible into,
exchangeable for, or otherwise entitling the holder to acquire, shares of Common
Stock (except for securities issued pursuant to the Other Subscription
Agreements). The 2000 10-K discloses as of December 31, 2000 all outstanding
options or warrants for the purchase of, or other rights to purchase or
subscribe for, or securities convertible into, exchangeable for, or otherwise
entitling the holder to acquire, Common Stock or other capital stock of the
Company, or any contracts or commitments to issue or sell Common Stock or other
capital stock of the Company or any such options, warrants, rights or other
securities. From December 31, 2000 to the date hereof there has been, and to the
Closing Date, other than the issuance of the Merger Shares, there will be, no
material change in the amount or terms of any of the foregoing except for the
grant of options to purchase shares of Common Stock pursuant to the Company's
stock option plans in effect on the date of this Agreement, which grants are
disclosed in the SEC Reports.
(ii) The Company has duly reserved from its authorized and unissued
shares of Common Stock the full number of shares required for (A) all options,
warrants, convertible securities and other rights to acquire shares of Common
Stock which are outstanding and (B) all shares of Common Stock and options and
other rights to acquire shares of Common Stock which may be issued or granted
under the stock option and similar plans which have been adopted by the Company
or any Subsidiary. Immediately following the Closing Date, after giving effect
to any antidilution or similar adjustment arising by reason of issuance of the
Preferred Shares and the Other Preferred Shares and the other transactions
contemplated by this Agreement and the
11
Other Subscription Agreements, the total number of shares of Common Stock
reserved and required to be reserved from the authorized and unissued shares of
Common Stock for purposes of all such options, warrants, convertible securities,
other rights and stock option and similar plans (excluding the Preferred Stock)
will be 8,719,113 (assuming all Merger Shares are issued). Each outstanding
class or series of securities for which any such antidilution adjustment will
occur is identified on SCHEDULE 4(c) to this Agreement, together with the amount
of such antidilution adjustment for each such class or series. The outstanding
shares of capital stock of the Company have been duly authorized and validly
issued and are fully paid and nonassessable and all of such options, warrants
and other rights have been duly authorized by the Company. None of the holders
of such outstanding shares of capital stock is subject to personal liability
solely by reason of being such a holder. None of the outstanding shares of
capital stock or options, warrants and other rights to acquire Common Stock has
been issued in violation of the preemptive rights of any security holder of the
Company. The offers and sales of the outstanding shares of capital stock of the
Company and options, warrants and other rights to acquire Common Stock were at
all relevant times either registered under the 1933 Act and applicable state
securities laws or exempt from such requirements. No holder of any of the
Company's securities has any rights, "demand," "piggy-back" or otherwise, to
have such securities registered by reason of the intention to file, filing or
effectiveness of the Registration Statement.
(d) Concerning The Shares And The Common Stock. The Shares have been duly
authorized and the Preferred Shares, when issued and paid for in accordance with
this Agreement, and the Conversion Shares, when issued upon conversion of the
Preferred Shares, in each such case will be duly and validly issued, fully paid
and non-assessable and will not by itself subject the holder thereof to personal
liability by reason of being such holder. There are no preemptive or similar
rights of any stockholder of the Company or any other Person to acquire any of
the Securities. The Company has duly reserved 20,000,000 shares of Common Stock
for issuance upon conversion of the shares of Preferred Stock, and such shares
shall remain so reserved, and the Company shall from time to time reserve such
additional shares of Common Stock as shall be required to be reserved pursuant
to the Certificate of Designations, so long as the Preferred Stock may be
converted. The Common Stock is listed for trading on Nasdaq and (i) the Company
and the Common Stock meet the criteria for continued listing and trading on
Nasdaq; (ii) the Company has not been notified by the NASD or the Nasdaq Stock
Market of any failure or potential failure to meet the criteria for continued
listing and trading on Nasdaq and (iii) no suspension of trading in the Common
Stock is in effect. The Company knows of no reason that the Common Shares will
not be eligible for listing on Nasdaq.
(e) Corporate Authorization. This Agreement and the other Transaction
Documents have been duly and validly authorized by the Company, this Agreement
has been duly executed and delivered by the Company and, assuming due execution
and delivery by the Buyer, this Agreement is, and the Certificate of
Designations, when executed by the Company and filed with the Secretary of State
of the State of Delaware, will be, and the Transfer Agent Instruction, when
executed and delivered by the Company, will be, valid and binding obligations of
the Company enforceable in accordance with their respective terms, except as the
enforceability hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to or
affecting creditors' rights generally and general principles of equity,
regardless of whether enforcement is considered in a proceeding in equity or at
law.
12
(f) Non-Contravention. The execution and delivery of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated by the Transaction Documents do not and will not, with or without
the giving of notice or the lapse of time, or both, (i) result in any violation
of any provision of the certificate of incorporation or by-laws or similar
instruments of the Company or any Subsidiary, (ii) conflict with or result in a
breach by the Company or any Subsidiary of any of the terms or provisions of, or
constitute a default under, or result in the modification of, or result in the
creation or imposition of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company or any Subsidiary pursuant
to, any indenture, mortgage, deed of trust or other agreement or instrument to
which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary or any of their respective properties or assets are bound or
affected, in any such case which would have a material adverse effect on the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company and the Subsidiaries, taken as a whole,
or the validity or enforceability of, or the ability of the Company to perform
its obligations under, the Transaction Documents, (iii) violate or contravene
any applicable law, rule or regulation or any applicable decree, judgment or
order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or any Subsidiary or any of their respective properties or assets which
would have a material adverse effect on the business, properties, operations,
condition (financial or other), results of operations or prospects of the
Company and the Subsidiaries, taken as a whole, or the validity or
enforceability of, or the ability of the Company to perform its obligations
under, the Transaction Documents, or (iv) have any material adverse effect on
any permit, certification, registration, approval, consent, license or franchise
necessary for the Company or any Subsidiary to own or lease and operate any of
its properties and to conduct any of its business or the ability of the Company
or any Subsidiary to make use thereof.
(g) Approvals, Filings, Etc. No authorization, approval or consent of, or
filing with, any court, governmental body, regulatory agency, self-regulatory
organization, or stock exchange or market or the stockholders of the Company is
required to be obtained or made by the Company or any Subsidiary for (i) the
execution, delivery and performance of the Transaction Documents, (ii) the
issuance and sale of the Securities as contemplated by the Transaction
Documents, and (iii) the performance by the Company of its other obligations
under the Transaction Documents, other than (A) listing of the Common Shares on
Nasdaq, (B) registration of the resale of the Common Shares under the 1933 Act
as contemplated by Section 8, (C) as may be required under applicable state
securities or "blue sky" laws, and (D) filing of one or more Forms D with
respect to the Securities as required under Regulation D.
(h) Agreements.
(i) Except for agreements or other documents filed or incorporated
by reference as an exhibit to the SEC Reports and the Merger Agreement, there
are no agreements, understandings, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which the Company or any
Subsidiary is a party or to its knowledge by which it is bound which may involve
(A) obligations (contingent or otherwise) of, or payments to, the Company or any
Subsidiary in excess of $500,000 individually or $1,000,000 in the aggregate
(other than obligations of, or payments to, the Company or any Subsidiary
arising from purchase or sale agreements entered into in the ordinary course of
business), or (B) the transfer or license
13
of any patent, copyright, trade secret or other proprietary right to or from the
Company or any Subsidiary (other than licenses arising from the purchase of "off
the shelf" or other standard products), or (C) provisions restricting the
development, manufacture or distribution of the Company's or any Subsidiary's
products or services, or (D) indemnification by the Company or any Subsidiary
with respect to infringements of proprietary rights (other than indemnification
obligations arising from purchase or sale or license agreements entered into in
the ordinary course of business).
(ii) Neither the Company nor any Subsidiary has (A) declared or paid
any dividends, or authorized or made any distribution upon or with respect to
any class or series of its capital stock, (B) incurred or guaranteed any
indebtedness for money borrowed or any other liabilities (other than with
respect to dividend obligations, distributions, indebtedness and other
obligations incurred in the ordinary course of business) individually in excess
of $1,500,000 or in excess of $2,750,000 in the aggregate, (C) made any loans or
advances to any person, other than ordinary advances for travel expenses, or (D)
sold, exchanged or otherwise disposed of any of its assets or rights, other than
the sale of its inventory in the ordinary course of business.
(iii) For the purposes of subsections (i) and (ii) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(i) No Material Change. Except as set forth in the SEC Reports and the
Merger Agreement (and the transactions contemplated thereby), and except for the
transaction expressly contemplated hereby, since March 31, 2001:
(i) there has been no material adverse change or any development
involving a prospective material adverse change in or affecting the condition,
financial or otherwise, or in the earnings, assets, business affairs or business
prospects of the Company, whether or not arising in the ordinary course of
business;
(ii) there have been no transactions entered into by the Company
other than those in the ordinary course of business, which are material with
respect to the Company;
(iii) there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock;
(iv) there has been no damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting the properties,
business or prospects or financial condition of the Company;
(v) there has been no waiver by the Company of a valuable right or
of a material debt owed to it;
(vi) there have been no direct or indirect loans made by the Company
to any stockholder, employee, officer or director of the Company, other than
advances made in the ordinary course of business;
14
(vii) there has been no material change in any compensation
arrangement or agreement with any employee, officer, director or stockholder;
(viii) there has been no labor organization activity related to the
Company;
(ix) there has been no sale, assignment or transfer of any patents,
trademarks, copyrights, trade secrets or other intangible assets;
(x) there has been no change in any material agreement to which the
Company is a party or by which it is bound which materially and adversely
affects the business, assets, liabilities, financial condition, operations or
prospects of the Company;
(xi) there has been no other event or condition of any character
that, either individually or cumulatively, has materially and adversely affected
the business, assets, liabilities, financial condition, prospects or operations
of the Company; or
(xii) there has been no arrangement or commitment by the Company to
do any of the acts described in subsections (i) through (xi) above.
(j) SEC Filings. The Company has timely filed all reports required to be
filed under the 1934 Act and any other material reports or documents required to
be filed with the SEC. All of such reports and documents complied in all
material respects, with all applicable requirements of the 1933 Act and the 1934
Act. The Company meets the requirements for the use of Form S-3 for the
registration of the resale of the Registrable Securities by the Buyer and any
other Investor. The Company has not filed any reports with the SEC under the
1934 Act since May 18, 2001.
(k) Absence Of Certain Proceedings. Except as disclosed in the SEC
Reports, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board or body, or governmental agency pending, or to the
Company's knowledge threatened against or affecting the Company or any
Subsidiary wherein an unfavorable decision, ruling or finding could have a
material adverse effect on the business, properties, operations, condition
(financial or other), results of operations or prospects of the Company and the
Subsidiaries, taken as a whole, or the transactions contemplated by the
Transaction Documents or which could adversely affect the validity or
enforceability of, or the authority or ability of the Company to perform its
obligations under, the Transaction Documents; and to the best of the Company's
knowledge there is not pending or contemplated any, and there has been no,
investigation by the SEC involving the Company or any Subsidiary or any director
or officer thereof.
(l) Liabilities. Except as and to the extent disclosed or reserved against
in the financial statements of the Company and the notes thereto included in the
SEC Reports, neither the Company nor any Subsidiary has any liability, debt or
obligation, whether accrued, absolute, contingent or otherwise, and whether due
or to become due which, individually or in the aggregate, are material to the
Company and the Subsidiaries, taken as a whole. Subsequent to March 31, 2001,
neither the Company nor any Subsidiary has incurred any liabilities, debts or
obligations of any nature whatsoever which are, individually or in the
aggregate, material to the Company and the Subsidiaries, taken as a whole, other
than those incurred in the ordinary course
15
of its business, other than as disclosed in the SEC Reports and other than the
bridge financing referred to in Section 5.18 of the Merger Agreement.
(m) Title To Properties And Assets; Liens, Etc. The Company and each
Subsidiary has good and marketable title to their respective properties and
assets, including the properties and assets reflected in the most recent balance
sheet included in the SEC Reports, and good title to their respective leasehold
estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than (i) those resulting from taxes which have not yet become
delinquent, (ii) minor liens and encumbrances which do not materially detract
from the value of the property subject thereto or materially impair the
operations of the Company or any Subsidiary, and (iii) those that have otherwise
arisen in the ordinary course of business. All facilities, machinery, equipment,
fixtures, vehicles and other properties owned, leased or used by the Company or
any Subsidiary are in good operating condition and repair and are reasonably fit
and usable for the purposes for which they are being used. The Company and each
Subsidiary is in compliance with all material terms of each lease to which it is
a party or is otherwise bound.
(n) Intellectual Property.
(i) Except as disclosed in the SEC Reports, each of the Company and
each Subsidiary owns, or possesses adequate rights to use, all patents, patent
rights, inventions, trade secrets, know-how, proprietary techniques, including
processes and substances, trademarks, service marks, trade names and copyrights
described or referred to in the SEC Reports or owned or used by it or which are
necessary for the conduct of its business. Except for any documents filed or
incorporated by reference as exhibits to the SEC Reports, there are no
outstanding options, licenses or agreements of any kind relating to the
foregoing proprietary rights, nor is the Company or any Subsidiary bound by or a
party to any options, licenses or agreements of any kind with respect to the
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information and other proprietary rights and processes of any other
person or entity other than such licenses or agreements arising from the
purchase of "off the shelf" or standard products.
(ii) Except as disclosed in the SEC Reports, each of the Company and
each Subsidiary has no reason to believe, and is not aware of any claim, that
the conduct of its business will conflict with any patents, patent rights,
inventions, trade secrets, know-how, proprietary techniques, including processes
and substances, trademarks, service marks, trade names or copyrights of others.
(iii) Neither the Company nor any Subsidiary is aware that any of its
employee s is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere with
their duties to the Company or any Subsidiary or that would conflict with the
conduct of the Company's business. Each former and current employee, officer and
consultant of the Company and the Subsidiaries has executed a proprietary
information and inventions agreement in the form(s) as delivered to the Buyer.
No former and current employee, officer or consultant of the Company or any
Subsidiary has excluded works or inventions made prior to his or her employment
with the Company from his or her assignment of
16
inventions pursuant to such employee, officer or consultant's proprietary
information and inventions agreement.
(iv) The opinions delivered pursuant to Sections 7(t) and 7(u) cover
all of the patents and patent rights owned or used by the Company and the
Subsidiaries.
(o) Internal Accounting Controls. The Company maintains a system of
internal accounting controls meeting the requirements of Section 13(b)(2) of the
1934 Act in all material respects.
(p) Compliance With Laws. Neither the Company nor any Subsidiary is in
violation of or has any liability under any statute, law, rule, regulation,
ordinance, decision or order of any governmental agency or body or any court,
domestic or foreign, including, without limitation, those relating to the use,
operation, handling, transportation, disposal or release of hazardous or toxic
substances or wastes or relating to the protection or restoration of the
environment or human exposure to hazardous or toxic substances or wastes, except
in the case of violations or liabilities not relating to the use, operation,
handling, transportation, disposal or release of hazardous or toxic substances
or wastes or relating to the protection or restoration of the environment or
human exposure to hazardous or toxic substances or wastes where such violation
or liability would not individually or in the aggregate have a material adverse
effect on the business, properties, operations, condition (financial or other),
results of operations or prospects of the Company and the Subsidiaries, taken as
a whole; and neither the Company nor any Subsidiary is aware of any pending
investigation which could lead to such a claim. No Hazardous Materials (as
defined below) are used or have been used, stored, or disposed of by the Company
or any Subsidiary or, to the Company's knowledge, by any other person or entity
on any property owned, leased or used by the Company or any Subsidiary. For the
purposes of the preceding sentence, "Hazardous Materials" shall mean (1)
materials which are listed or otherwise defined as "hazardous" or "toxic" under
any applicable local, state, federal and/or foreign laws and regulations that
govern the existence and/or remedy of contamination on property, the protection
of the environment from contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building materials, or (2)
any petroleum products or nuclear materials.
(q) Tax Matters. The Company and each Subsidiary has filed all federal,
state and local income and franchise tax returns required to be filed. All taxes
shown to be due and payable on such returns, any assessments imposed, and to the
Company's knowledge all other taxes due and payable by the Company and each
Subsidiary on or before the Closing, have been paid or will be paid prior to the
time they become delinquent. The Company has not been advised (1) that any of
its returns, federal, state or other, have been or are being audited as of the
date hereof, or (2) of any deficiency in assessment or proposed judgment to its
or any Subsidiary's federal, state or other taxes. The Company has no knowledge
of any liability of any tax to be imposed upon its or any Subsidiary's
properties or assets as of the date of this Agreement that is not adequately
provided for. The Company is not and has not ever been a "United States Real
Property Holding Corporation" (a "USRPHC") as that term is defined in section
897(c)(2) of the Code and the Treasury Regulations thereunder (the "Treasury
Regulations").
17
(r) Investment Company. Neither the Company nor the Subsidiary is an
"investment company" within the meaning of such term under the Investment
Company Act of 1940, as amended, and the rules and regulations of the SEC
thereunder.
(s) Absence Of Brokers, Finders, Etc. No broker, finder, or similar Person
is entitled to any commission, fee, or other compensation by reason of the
transactions contemplated by this Agreement, and the Company shall pay, and
indemnify and hold harmless the Buyer from, any claim made against the Buyer by
any Person for any such commission, fee or other compensation.
(t) No Solicitation. No form of general solicitation or general
advertising was used by the Company or, to the best of its knowledge, any other
Person acting on behalf of the Company, in respect of the Securities or in
connection with the offer and sale of the Securities. Neither the Company nor,
to its knowledge, any Person acting on behalf of the Company has, either
directly or indirectly, sold or offered for sale to any Person any of the
Securities or, within the six (6) months prior to the date hereof, any other
similar security of the Company except as contemplated by this Agreement and the
Other Subscription Agreements, and neither the Company nor any Person authorized
to act on its behalf will sell or offer for sale any such security to, or
solicit any offers to buy any such security from, or otherwise approach or
negotiate in respect thereof with, any Person so as thereby to cause the
issuance or sale of any of the Securities to be in violation of Section 5 of the
1933 Act.
(u) Trading in Company Common Stock. The Company has not (and has not
permitted any of its officers, directors, employees, affiliates, agents or
representatives to): (i) effect, alone or with one or more Persons, a
transaction or series of transactions as a means of creating actual or apparent
active trading or raising or depressing the price of the Common Stock, or (ii)
take any action in violation of Section 9 of the 1934 Act.
(v) Rights Plan. No triggering or distribution of the rights pursuant to
that certain Preferred Shares Rights Agreement dated as of February 2, 1999,
between the Company and ChaseMellon Shareholder Services, L.L.C. that would
allow any holder thereof to exercise such rights shall occur as a result of the
transactions contemplated by the Transaction Documents or the Merger Agreement.
(w) Full Disclosure. The Company has provided the Buyer with all
information requested by the Buyer in connection with its decision to purchase
the Preferred Shares, including all information the Company believes is
reasonably necessary to make such investment decision. Neither this Agreement
(including each of the Company's representations and warranties contained in
Section 4 of this Agreement), the exhibits hereto, the Transaction Documents nor
any other document delivered by the Company to the Buyer or their attorneys or
agents in connection herewith or therewith or with the transactions contemplated
hereby or thereby, contain any untrue statement of a material fact nor, omit to
state a material fact necessary in order to make the statements contained herein
or therein not misleading. To the Company's knowledge, there are no facts which
(individually or in the aggregate) materially adversely affect the business,
assets, liabilities, financial condition, prospects or operations of the Company
or any Subsidiary that have not been set forth in this Agreement, the exhibits
hereto,
18
the Transaction Documents, in other documents delivered to the Buyer or its
attorneys or agents in connection herewith or in the Merger Agreement.
5. Certain Covenants And Acknowledgments.
(a) Transfer Restrictions. Subject to the further restrictions set forth
in Section 5(o) below, the Buyer acknowledges and agrees that (i) the Preferred
Shares have not been and are not being registered under the provisions of the
1933 Act or any state securities laws and, except as provided in Section 8, the
Common Shares have not been and are not being registered under the 1933 Act or
any state securities laws, that the Preferred Shares may not be transferred
without such registration unless the Buyer receives the prior written consent of
the Company and shall have delivered to the Company an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company, to the
effect that the Preferred Shares to be transferred may be transferred without
such registration or unless transferred in accordance with Rule 144A to a QIB,
and that the Common Shares may not be transferred without such registration
unless the Buyer shall have delivered to the Company an opinion of counsel,
reasonably satisfactory in form, scope and substance to the Company, to the
effect that the Common Shares to be transferred may be transferred without such
registration or unless transferred in accordance with Rule 144A to a QIB; (ii)
no sale, assignment or other transfer of the Preferred Shares or the Common
Shares or any interest therein may be made; (iii) the Common Shares are not
transferable in the absence of registration under the 1933 Act and applicable
state securities laws, or applicable exemptions therefrom; (iv) any sale of the
Common Shares under the Registration Statement shall be made only in compliance
with the terms of this Section 5(a) and Section 8 (including, without
limitation, Section 8(c)(5)); (v) any sale of the Common Shares or, with the
prior written consent of the Company, the Preferred Shares made in reliance on
Rule 144 may be made only in accordance with the terms of said Rule and further,
if the exemption provided by Rule 144 is not available, any resale of the Common
Shares or, with the prior written consent of the Company, the Preferred Shares
under circumstances in which the seller, or the Person through whom the sale is
made, may be deemed to be an underwriter, as that term is used in the 1933 Act,
may require compliance with some other exemption under the 1933 Act or the rules
and regulations of the SEC thereunder; and (vi) the Company is under no
obligation to register the Shares (other than registration of the resale of the
Common Shares in accordance with Section 8) under the 1933 Act or, except as
provided in Sections 5(d) and 8, to comply with the terms and conditions of any
exemption thereunder. Notwithstanding the foregoing but also subject to the
further restrictions set forth in Section 5(o), no prior written consent of the
Company, registration or opinion of counsel shall be necessary for a transfer by
the Buyer to (i) its partners or former partners in accordance with partnership
interests or to any Affiliate or (ii) any other investment fund the general
partner of which is the same as the Buyer's. Notwithstanding anything expressed
or implied in any of the Transaction Documents to the contrary, subject to
applicable securities laws, nothing shall prevent the Buyer from (A) "selling
short against the box" for purposes of hedging its investment in the Preferred
Shares or (B) employing all appropriate securities or instruments in connection
with hedging transactions carried out with the intention of protecting the value
of the existing investment in the Preferred Shares.
(b) Restrictive Legends.
19
(i) The Buyer acknowledges and agrees that the certificates for the
Preferred Shares shall bear restrictive legends in substantially the following
form (and a stop-transfer order may be placed against transfer of the Preferred
Shares):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"). THE ISSUANCE TO THE HOLDER OF THESE SECURITIES AND
THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THESE SECURITIES IS
NOT COVERED BY A REGISTRATION STATEMENT UNDER THE ACT. THESE SECURITIES
HAVE BEEN ACQUIRED, AND SUCH SHARES OF COMMON STOCK MUST BE ACQUIRED, FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS (A) THEIR
RESALE IS REGISTERED UNDER THE ACT, (B) THE COMPANY HAS RECEIVED AN OPINION
OF COUNSEL REASONABLY SATISFACTORY IN FORM, SCOPE AND SUBSTANCE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR (C) SOLD, TRANSFERRED OR
ASSIGNED TO A QIB PURSUANT TO RULE 144A.
EXCEPT FOR ANY TRANSFER BY THE HOLDER TO ANY INVESTMENT FUND THE GENERAL
PARTNER OF WHICH IS THE SAME AS THE HOLDER'S AND EXCEPT AS PROVIDED IN
SECTION 5(A) OF THE SUBSCRIPTION AGREEMENT DATED JULY 27, 2001, THESE
SECURITIES SHALL NOT BE SOLD, EXCHANGED OR OTHERWISE TRANSFERRED TO ANY
PERSON (INCLUDING PARTNERS, AFFILIATES OR ANY OTHER PERSON) WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMPANY.
THESE SECURITIES ARE SUBJECT TO THE TERMS AND CONDITIONS OF A VOTING
AGREEMENT THAT PLACES CERTAIN RESTRICTIONS ON THE VOTING OF THE SECURITIES.
ANY PERSON ACCEPTING ANY INTEREST IN SUCH SECURITIES SHALL BE DEEMED TO
AGREE TO AND BE BOUND BY ALL PROVISIONS OF SUCH AGREEMENT. A COPY OF SUCH
AGREEMENT WILL BE FURNISHED TO THE RECORD HOLDER OF THIS CERTIFICATE
WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE
OF BUSINESS.
(ii) The Buyer further acknowledges and agrees that until such time as
the Common Shares have been registered for resale under the 1933 Act as
contemplated by Section 8 or are eligible for resale under Rule 144(k) under the
1933 Act, the certificates for the Common Shares may bear a restrictive legend
in substantially the following form (and a stop-transfer order may be placed
against transfer of the certificates for the Common Shares):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE RESOLD, TRANSFERRED OR
ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE ACT, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY
IN
20
FORM, SCOPE AND SUBSTANCE TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED
UNDER THE ACT.
(iii) Once particular Common Shares are sold pursuant to an effective
Registration Statement or eligible for resale pursuant to Rule 144(k) under the
1933 Act, thereafter (A) upon request of the Buyer (together with certain
customary factual representations by the Buyer that the requirements of Rule
144(k) have been met in the case of a resale pursuant to Rule 144(k)) the
Company will substitute certificates without restrictive legend for certificates
for such particular Common Shares and remove any stop-transfer restriction
relating thereto promptly, but in no event later than three Trading Days after
surrender of such certificates by the Buyer and (B) the Company shall not place
any restrictive legend on certificates for Common Shares subsequently issued or
impose any stop-transfer restriction thereon.
(c) Transfer Agent Instruction. Prior to the closing on the Closing Date,
the Company will (i) execute and deliver to the Transfer Agent the Transfer
Agent Instruction in substantially the form of ANNEX B to this Agreement and
pursuant thereto irrevocably instruct the Transfer Agent to issue certificates
for the Common Shares from time to time upon conversion of the Preferred Shares
in such amounts as specified from time to time to the Transfer Agent in the
Conversion Notices surrendered in connection with such conversions, (ii) appoint
the Transfer Agent the conversion agent for the Preferred Stock. The
certificates for the Common Shares will bear the restrictive legend specified in
Section 5(b) of this Agreement prior to their resale pursuant to an effective
Registration Statement or Rule 144(k) under the 1933 Act. The Common Shares
shall be registered in the name of the Buyer or its nominee and in such
denominations to be specified by the Buyer in connection with each conversion of
Preferred Shares. The Company warrants that, except as otherwise expressly
permitted by the Transfer Agent Instruction, no instruction other than (x) such
instructions referred to in this Section 5(c), (y) stop transfer instructions to
give effect to Section 5(a) hereof prior to the resale of the Common Shares
pursuant to an effective Registration Statement or Rule 144(k) under the 1933
Act and (z) the instructions required by Section 8(b)(xii) hereof will be given
by the Company to the Transfer Agent and that the Common Shares shall otherwise
be freely transferable on the books and records of the Company as and to the
extent provided in this Agreement. Nothing in this Section 5(c) shall limit in
any way the Buyer's obligations and agreement to comply with the registration
requirements of the 1933 Act or an exemption there from upon resale of the
Shares. If the Buyer provides the Company with an opinion of counsel reasonably
satisfactory in form, scope and substance to the Company that registration of a
resale by the Buyer of any of the Shares in accordance with Section 5(a) of this
Agreement is not required under the 1933 Act, the Company shall permit the
transfer of such Shares and, in the case of the Common Shares, promptly, but in
no event later than three Business Days after receipt of such opinion, instruct
the Transfer Agent to issue upon transfer one or more share certificates in such
name and in such denominations as specified by the Buyer. Nothing in this
Section 5(c) shall limit the obligations of the Company under Section 8 of this
Agreement.
(d) Form D. The Company agrees to file with the SEC on a timely basis a
Form D with respect to the Securities as required to claim the exemption
provided by Rule 506 of Regulation D and to provide a copy thereof to the Buyer
promptly after such filing.
21
(e) Nasdaq Listing; Reporting Status. Prior to the Closing Date, the
Company shall file with the Nasdaq Stock Market an application or other document
required by Nasdaq for the listing of the Common Shares with Nasdaq and shall
provide evidence of such filing to the Buyer. The Company shall use its best
efforts to obtain the listing, subject to official notice of issuance, of the
Common Shares on Nasdaq prior to the Closing Date. So long as the Buyer
beneficially owns any Preferred Shares or Common Shares, the Company shall
maintain the listing of the Common Stock on Nasdaq or a registered national
securities exchange. During the Registration Period, the Company shall timely
file all reports required to be filed with the SEC pursuant to Section 13 or
15(d) of the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would permit such termination.
(f) Use Of Proceeds. The Company acknowledges and agrees that: (i) it does
not own or have any present intention of acquiring any Margin Stock; (ii) the
proceeds of sale of the Preferred Shares will be used for general working
capital purposes and in the operation of the Company's business; (iii) none of
such proceeds will be used, directly or indirectly (A) to make any loan to or
investment in any other Person or (B) for the purpose, whether immediate,
incidental or ultimate, of purchasing or carrying any Margin Stock or for the
purpose of maintaining, reducing or retiring any indebtedness which was
originally incurred to purchase or carry any stock that is currently a Margin
Stock or for any other purpose which might constitute the transactions
contemplated by this Agreement a "purpose credit" within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System; and (iv)
neither the Company nor any agent acting on its behalf has taken or will take
any action which might cause this Agreement or the transactions contemplated
hereby to violate Regulation T, Regulation U or any other regulation of the
Board of Governors of the Federal Reserve System or to violate the 1934 Act, in
each case as in effect now or as the same may hereafter be in effect.
(g) State Securities Laws. On or before the Closing Date, the Company
shall take such action as shall be necessary to qualify, or to obtain an
exemption for, the offer and sale of the Securities to the Buyer as contemplated
by the Transaction Documents under such of the securities laws of jurisdictions
in the United States as shall be applicable thereto. In connection with the
foregoing obligations of the Company in this Section 5(g), the Company shall not
be required (i) to qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 5(g), (ii) to subject
itself to general taxation in any such jurisdiction or (iii) to file a general
consent to service of process in any such jurisdiction. The Company shall
furnish to the Buyer copies of all filings, applications, orders and grants or
confirmations of exemptions relating to such securities laws on or prior to the
Closing Date.
(h) Limitation On Certain Actions. From the date of execution and delivery
of this Agreement by the parties hereto to the date of issuance of the Preferred
Shares, the Company (i) shall comply with Section 12 of the Certificate of
Designations as if the Preferred Shares were outstanding, (ii) shall not take
any action which, if the Preferred Shares were outstanding, would constitute a
Holder Optional Repurchase Event or, with the giving of notice or the passage of
time or both, would constitute a Holder Optional Repurchase Event and (iii)
shall not sell or otherwise issue any shares of capital stock or any other
securities (except for the Merger Shares and the granting of options in the
ordinary course of business consistent with past practice pursuant to the
Company's existing stock option, incentive or employee stock purchase plans).
22
(i) Best Efforts. Each of the parties shall use its best efforts timely to
satisfy each of the conditions to the other party's obligations to sell and
purchase the Preferred Shares set forth in Section 6 or 7, as the case may be,
of this Agreement on or before the Closing Date.
(j) Reservation Of Shares; Shares To Be Fully Paid; Listing Of Common
Stock.
(i) The Company shall reserve and keep available, free from
preemptive rights, out of its authorized but unissued shares of Common Stock or
shares of Common Stock held in treasury, solely for issuance upon conversion of
the Preferred Shares, sufficient shares to provide for the conversion of the
Preferred Shares from time to time as Preferred Shares are converted.
(ii) The Company shall take all action necessary to ensure that all
shares of Common Stock issued upon conversion of the Preferred Shares will be
fully paid and non-assessable by the Company and free from all taxes, liens and
charges with respect to the issue thereof.
(iii) The Company covenants that if any shares of Common Stock to be
provided for the purpose of conversion of the Preferred Shares require
registration with or approval of any governmental authority under any federal or
state law before such shares may be validly issued upon conversion, the Company
will in good faith and as expeditiously as possible endeavor to secure such
registration or approval, as the case may be.
(iv) The Company covenants that, so long as the Common Stock shall be
listed on the Nasdaq, the NYSE or any other national securities exchange, the
Company shall obtain and, so long as the Common Stock shall be so listed on such
market or exchange, maintain approval for listing thereon of all Common Stock
issuable upon conversion of the Preferred Shares.
(k) Additional Covenants. From and after the date hereof, for so long as
any Preferred Shares are outstanding, the Company shall comply with the
following unless in the case of clauses (i) through (ix) (but excluding clause
(x)) otherwise agreed in writing by the Holders of outstanding shares of
Preferred Stock which shares constitute 90% of the outstanding shares of
Preferred Stock:
(i) Limitation On Indebtedness. The Company will not itself, and
will not permit any Subsidiary to, create, assume, incur, in any manner become
liable in respect of, including, without limitation, by reason of any business
combination transaction, or suffer to exist (all of which are referred to herein
as "incurring"), any Indebtedness other than Permitted Indebtedness. This
Section 5(k)(i) shall terminate and be of no further force if the closing sale
price of the Common Stock exceeds $15.00 per share for any 60 consecutive
trading days following the date on which (A) none of the Conversion Shares are
subject to a contractual "lock-up" restricting the resale thereof, (B) the Buyer
is not on such date subject to any Blackout Period or any blackouts exist on
trading in the Company's Common Stock or similar restrictions on sale by reason
of its representative sitting on the Company's Board of Directors and (C) the
Registration Statement is effective.
23
(ii) Payment Of Obligations. The Company will pay and discharge, and
will cause each Subsidiary to pay and discharge, all their respective material
obligations and liabilities, including, without limitation, tax liabilities, in
the ordinary course consistent with the Company's practices prior to the date
hereof, except where the same may be contested in good faith by appropriate
proceedings.
(iii) Compliance With Laws. The Company will comply, and will cause
each Subsidiary to comply with all applicable laws, ordinances, rules,
regulations, decisions, orders and requirements of governmental authorities and
courts (including, without limitation, environmental laws) except (A) where
compliance therewith is contested in good faith by appropriate proceedings or
(B) where non-compliance therewith could not reasonably be expected to have a
material adverse effect on the business, condition (financial or otherwise),
operations, performance, properties or prospects of the Company and its
Subsidiaries taken as a whole.
(iv) Investment Company Act. The Company will not be or become an
open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended, or any successor provision.
(v) Limitations On Issuance Of Securities. The Company shall not (A)
issue any security that is convertible into or otherwise entitles the holder to
acquire Common Stock at a price that varies based on changes in the market price
of the Common Stock, (B) issue Common Stock under any arrangement for re-pricing
or adjusting the price after the issuance, or (C) issue any other preferred
stock that is senior to, or at parity with, the Preferred Stock; provided,
however, that this Section 5(k)(v) shall not prevent the Company from entering
into an "equity line" financing arrangement approved by the board of directors
of the Company. This Section 5(k)(v) shall terminate and be of no further force
if the closing sale price of the Common Stock exceeds $15.00 per share for any
60 consecutive trading days or such fewer number of consecutive trading days
during which the dollar value of the trading volume over such period is greater
than ten (10) times the Aggregate Purchase Price (provided, however, that such
fewer number of consecutive trading days shall not be less than 30) following
the date on which (A) none of the Conversion Shares are subject to a contractual
"lock-up" restricting the resale thereof, (B) the Buyer is not on such date
subject to any Blackout Period or any blackouts exist on trading in the
Company's Common Stock or similar restrictions on sale by reason of its
representative sitting on the Company's Board of Directors and (C) the
Registration Statement is effective.
(vi) Buyer's Rights of First Refusal.
(1) Subsequent Offerings. So long as the Buyer continues to
hold any Preferred Shares, the Buyer shall have a right of first refusal to
purchase its pro rata share of all Equity Securities, as defined below, that the
Company may, from time to time, propose to sell and issue after the date of this
Agreement. The Buyer's pro rata share is equal to the ratio of (A) the number of
shares of the Company's Common Stock (including all Conversion Shares) which the
Buyer is deemed to be a holder immediately prior to the issuance of such Equity
Securities to (B) the total number of shares of the Company's outstanding Common
Stock (including all
24
Conversion Shares and shares of Common Stock issued or issuable upon the
exercise of any outstanding warrants, options or convertible securities)
immediately prior to the issuance of the Equity Securities. The term "Equity
Securities" shall mean: (A) any primary issuance of Common Stock registered for
sale with the SEC other than shares registered with the SEC pursuant to a
Form S-4 or Form S-8, or (B) any primary issuance of Common Stock issued in a
transaction exempt from the registration requirements of the 1933 Act and
subsequently registered for resale (either before or after closing) pursuant to
Form S-1 or Form S-3 (or any successor form) (a "PIPE") other than securities
issuances in connection with a strategic alliance, collaboration, joint venture,
partnership or similar arrangement of the Company with another Person which
strategic alliance, collaboration, joint venture or partnership relates to the
Company's business as conducted immediately prior thereto and which Person is
engaged in a business similar or related to the business of the Company so long
the number of shares issued in such transaction does not exceed ten percent of
the outstanding capital stock of the Company (on a fully-diluted basis)
immediately prior to the issuance. The Company shall require that the managing
underwriter or underwriters of the Company's public offering (the "Offering")
offer to sell to the Buyer (or its designee) its pro rata share of the
registered Common Stock to be offered to the public, at the same price and on
the same terms as the public, provided that the initial filing of the
registration statement to register the Company's securities with the SEC (the
"Filing") occurs at least 12 months after the signing of this Agreement (the
"Grant Date"). If the Filing occurs within one year of the Grant Date, the
Company shall offer to sell to the Buyer (or its designees) its pro rata share
of Common Stock in a private placement consummated contemporaneously with the
Offering (the "Private Placement").
(2) Exercise of Rights. If the Company proposes to issue any
Equity Securities, it shall give the Buyer written notice of its intention,
describing the Equity Securities, the price and the terms and conditions upon
which the Company proposes to issue the same. The Buyer shall have fifteen (15)
days from the giving of such notice to agree to purchase its pro rata share of
the Equity Securities for the price and upon the terms and conditions specified
in the notice by giving written notice to the Company and stating therein the
quantity of Equity Securities to be purchased. Notwithstanding the foregoing,
the Company shall not be required to offer or sell such Equity Securities to the
Buyer if it would cause the Company to be in violation of applicable federal
securities laws by virtue of such offer or sale.
(3) Termination of Rights. The rights of first refusal
established by this Section 5(k)(vi) shall terminate and be of no further force
if the Buyer does not purchase its pro rata share of Equity Securities in any
subsequent offering.
(vii) Listing Eligibility Reporting. The Company shall notify the
Buyer from time to time within five days after the Company first learns that it
does not meet any of the applicable requirements for the continued listing of
the Common Stock on the principal securities market or exchange on which the
Common Stock is listed from time to time.
(viii) Transactions With Affiliates. The Company shall not enter into
any transactions with any Affiliates except on terms no less favorable than
terms that could be obtained by the Company from a third party, as determined in
good faith by the Board of Directors of the Company.
25
(ix) Rule 144A Information Requirement. Within the period prior to the
expiration of the holding period applicable to sales of the Preferred Shares
under Rule 144(k) under the 1933 Act (or any successor provision), the Company
shall, during any period in which it is not subject to Section 13 or 15(d) under
the 1934 Act, make available to the Buyer which continues to hold Restricted
Securities in connection with any sale thereof and any prospective purchaser of
Preferred Shares from the Buyer, the information required pursuant to Rule
144A(d)(4) under the 1933 Act upon the request of the Buyer and it will take
such further action as the Buyer may reasonably request, all to the extent
required from time to time to enable the Buyer to sell the Preferred Shares held
by it without registration under the 1933 Act within the limitation of the
exemption provided by Rule 144A, as Rule 144A may be amended from time to time.
Upon the request of the Buyer, the Company will deliver to the Buyer a written
statement as to whether it has complied with such requirements.
(x) Standstill Obligations.
(1) The Buyer hereby agrees with the Company and covenants that
until the first anniversary of the Closing Date (except with respect to clause
"f." which shall continue until the second anniversary of the Closing Date), so
long as it is the record or beneficial owner of any Preferred Shares (subject to
adjustments upon stock splits, dividends and recapitalizations), without the
prior written consent of the Company, it will not directly or indirectly:
a. make, or in any way participate in, alone or in concert
with others, any "solicitation" of "proxies" or "consents" (as such terms are
used in the proxy rules of the SEC promulgated pursuant to Section 14 of the
1934 Act) to vote for the election or removal of directors of the Company
(except to the extent otherwise permitted pursuant to Section 5(k)(x)(2) below);
b. otherwise seek to nominate, alone or in concert with
others, any person for election as a director of the Company who is not
nominated by the then incumbent directors (except to the extent otherwise
permitted pursuant to Section 5(k)(x)(2) below);
c. vote (whether at a meeting of stockholders, by written
consent without a meeting or otherwise), alone or in concert with others, any or
all of the Shares beneficially owned by the Buyer in favor of the election as a
director of the Company of any nominee that has not been nominated or
recommended for election as a director of the Company by the then incumbent
directors (except to the extent otherwise permitted pursuant to Section
5(k)(x)(2) below);
d. vote (whether at a meeting of stockholders, by written
consent without a meeting or otherwise), alone or in concert with others, any or
all of the Shares beneficially owned by the Buyer in favor of any proposal to
remove as a director of the Company of any director that has not been made,
sponsored and submitted by, or at the direction of, the then incumbent directors
(except to the extent otherwise permitted pursuant to Section 5(k)(x)(2) below);
26
e. grant to any Person any proxy or power of attorney that
would or could enable such Person to vote, alone or in concert with others, or
otherwise transfer or assign to any Person the power to vote (whether at a
meeting of stockholders, by written consent without a meeting or otherwise), any
or all of the Shares beneficially owned by the Buyer in a manner that would
violate the provisions of clauses "c." and/or "d." above or the foregoing
prohibition on the granting of proxies and powers of attorney;
f. acquire, offer or propose to acquire, solicit an offer to
sell or agree to acquire, directly or indirectly, alone or in concert with
others, by purchase or otherwise, any direct or indirect "beneficial ownership"
(such term, for purposes of this Agreement, shall have the meaning provided
therefor under the rules and regulations promulgated by the SEC under Section
13(d) of the 1934) in any voting securities or any direct or indirect beneficial
ownership in any rights, warrants or options to acquire, or in any securities
convertible into or exchangeable for, any voting securities of the Company
(other than as set forth in Section 5(k)(x)(3) and as contemplated by the
Transaction Documents); or
g. otherwise act, directly or indirectly, alone or in concert
with others to propose to the Company's stockholders any merger, business
combination, restructuring, recapitalization or other transaction that, in each
case, would involve or result in a change of control of the Company (it being
understood that nothing in this clause "g." shall prevent any Person who is
elected to the Board of Directors of the Company by the holders of the Preferred
Stock pursuant to Section 12(c)(1) of the Certificate of Designations, in such
Person's capacity as a member of the Board of Directors and consistent with his
or her fiduciary duties, from individually proposing, supporting or voting in
favor of such a transaction (whether or not such transaction was proposed by
such Person or another member of the Board of Directors)).
(2) Notwithstanding anything expressed or implied in this Section
5(k)(x) to the contrary, the provisions of this Section 5(k)(x) shall not apply
to, or restrict or otherwise limit in any way, (A) any right of any Person who
is elected to the Board of Directors of the Company by the holders of the
Preferred Stock pursuant to Section 12(c)(1) of the Certificate of Designations,
in such Person's capacity as a member of the Board of Directors, to participate
in the Board of Director's process to nominate directors for future elections in
accordance with the Company's Certificate of Incorporation or (B) any right that
the Buyer may have pursuant to Section 12(c)(1) of the Certificate of
Designations to: (i) "solicit" "proxies" or "consents" (as such terms are used
in the proxy rules of the SEC promulgated pursuant to Section 14 of the 1934
Act) to vote for the election or removal of any director who is elected to the
Board of Directors of the Company by the holders of the Preferred Stock pursuant
to Section 12(c)(1) of the Certificate of Designations, (ii) nominate any Person
for election as a director who will be elected to the Board of Directors of the
Company by the holders of the Preferred Stock pursuant to Section 12(c)(1) of
the Certificate of Designations, or (iii) vote for the election or removal of
any director who is elected to the Board of Directors of the Company by the
holders of the Preferred Stock pursuant to Section 12(c)(1) of the Certificate
of Designations.
(3) Notwithstanding anything expressed or implied in this Section
5(k)(x) to the contrary, subject to applicable securities laws, nothing shall
prevent the Buyer from (A) "selling short against the box" for purposes of
hedging its investment in the Preferred Shares or
27
(B) employing all appropriate securities or instruments in connection with
hedging transactions carried out with the intention of protecting the value of
the existing investment in the Preferred Shares.
(4) The Buyer hereby covenants and agrees that it shall not form,
become a member of, or otherwise participate in any "group" (as defined in the
1934 Act) with the Other Buyers and further agrees that it shall take reasonable
steps to ensure a sufficient number of shares are represented at stockholder
meetings of the Company for the sole purpose of establishing a valid quorum.
(5) The Buyer agrees that if the Buyer transfers any Shares in
accordance with Section 5(a) to any Person who is not an Affiliate of the Buyer,
then the transferee must agree to be bound by the provisions of this Section
5(k)(x).
(l) USRPHC Status. The Company will not become a USRPHC at any time while
the Buyer owns any Preferred Shares or Common Stock obtained upon conversion or
exercise of the foregoing ("Covered Equity Interest"). If at any time and from
time to time the Buyer desires to sell or dispose of any Covered Equity Interest
and upon demand by the Buyer, the Company agrees to deliver to the Buyer a
letter (the "Letter") which complies with sections 1.1445-2(c)(3) and 1.897-(h)
(or any similar or successor provisions thereto) addressed to the Buyer stating
that the Company is not and has not been a USRPHC at any time during the period
beginning on the later of (i) the day five years prior to the date of the Letter
and (ii) the date of this Agreement. The Letter shall be delivered the Buyer one
business day prior to the sale of the Covered Equity Interest and shall be dated
as of such date and signed by a corporate officer under penalties of perjury in
accordance with section 1.897-2(h) of the Treasury Regulations.
(m) No Negotiation. From the date of execution and delivery of this
Agreement by the parties hereto to the earlier to occur of (A) a termination of
this Agreement pursuant to Section 10(l) and (B) the date of issuance of the
Preferred Shares, the Company shall not (and shall not permit any of its
officers, directors, employees, affiliates, agents or representatives to)
directly or indirectly:
(i) solicit or encourage the initiation of any inquiry, proposal or
offer from any Person (other than the Buyer and the Other Buyers) relating to a
possible Financing Transaction; or
(ii) participate in any negotiations with, or provide any non-public
information to, any Person (other than the Buyer and the Other Buyers) relating
to or in connection with any possible Financing Transaction.
In the event that the Company receives any unsolicited inquiry, proposal or
offer from any Person (other than the Buyer or the Other Buyers) relating to a
possible Financing Transaction, the Company shall provide (i) immediate oral and
written notice to the Buyer of the receipt of any such inquiry, proposal or
offer and (ii) promptly to the Buyer copies of documentation relating to such
inquiry, proposal or offer.
(n) No Changes To Lock-Up Agreements With Former Holders Of Common Stock
Of Althexis. From and after the date hereof, the Company shall not shorten the
length of
28
any lock-up agreement it has with each of Mark Skaletsky, Patrick Connelly,
Michael Dailey, Paul Mass, Paul Mellett and Manuel Navia unless otherwise agreed
in writing by the Holders of 90% of outstanding shares of Preferred Stock.
(o) Non-Transferability Of Preferred Shares. The Buyer acknowledges and
agrees that the Preferred Shares may not be pledged or transferred unless the
Buyer receives the prior written consent of the Company. Notwithstanding the
foregoing, no prior written consent of the Company shall be necessary for a
transfer by the Buyer to any other investment fund the general partner of which
is the same as the Buyer's provided that such other investment fund agrees to
comply with the terms of the Voting Agreement and the legend requirements set
forth in Section 5(b) and, subject to applicable securities laws, nothing shall
prevent the Buyer from (i) "selling short against the box" for purposes of
hedging its investment in the Preferred Shares or (ii) employing all appropriate
securities or instruments in connection with hedging transactions carried out
with the intention of protecting the value of the existing investment in the
Preferred Shares.
6. CONDITIONS TO THE COMPANY'S OBLIGATIONS TO SELL AND ISSUE.
The Buyer understands that the Company's obligations to sell to the Buyer the
Preferred Shares on the Closing Date are conditioned upon satisfaction of the
following conditions precedent on or before the Closing Date (any or all of
which may be waived by the Company in its sole discretion):
(a) The Company shall have received a "lock-up" agreement in the form of
ANNEX C executed by the Buyer providing that, subject to certain conditions,
half of the Conversion Shares are subject to restrictions on transfer for a
period of 270 days following the Closing Date;
(b) On the Closing Date, no legal action, suit or proceeding shall be
pending or threatened which seeks to restrain or prohibit the transactions
contemplated by this Agreement;
(c) The representations and warranties of the Buyer contained in this
Agreement and in the Questionnaire shall have been true and correct on the date
of this Agreement and shall be true and correct on the Closing Date as if made
on and as of the Closing Date and on or before the Closing Date the Buyer shall
have performed all covenants and agreements of the Buyer required to be
performed by the Buyer on or before the Closing Date;
(d) The Aggregate Purchase Price for the Preferred Shares and the Other
Preferred Shares to be paid by the Buyer and the Other Buyers at the Closing
shall be not less than Fifty-Five Million dollars ($55,000,000.00);
(e) All of the conditions precedent to the merger of California MP
Acquisition, Inc. with and into Althexis (the "Merger") pursuant to the Merger
Agreement shall have been satisfied or waived (other than as a result of any
failure on the part of the Company to comply with or perform any covenant or
obligation set forth in the Merger Agreement); and
(f) The Company shall have received a Voting Agreement in the form of
ANNEX F executed by the Buyer.
29
7. CONDITIONS TO THE BUYER'S OBLIGATIONS TO PURCHASE.
The Company understands that the Buyer's obligations to purchase from the
Company the Preferred Shares on the Closing Date are conditioned upon
satisfaction of the following conditions precedent on or before the Closing Date
(any or all of which may be waived by the Buyer in its sole discretion):
(a) The Transfer Agent shall have acknowledged in writing its receipt and
acceptance of the Transfer Agent Instruction in substantially the form of ANNEX
B to this Agreement and the Buyer shall have received evidence of such receipt
and acknowledgment;
(b) The Aggregate Purchase Price for the Preferred Shares and the Other
Preferred Shares to be paid by the Buyer and the Other Buyers at the Closing
shall be not less than Fifty-Five Million dollars ($55,000,000.00).
(c) On the Closing Date, no legal action, suit or proceeding shall be
pending or threatened which (i) seeks to restrain or prohibit the transactions
contemplated by this Agreement, (ii) could have a material adverse effect on the
business, properties, operations, condition (financial or other), results of
operations or prospects of the Company or (iii) could have a material adverse
effect on the business, properties, operations, condition (financial or other),
results of operations or prospects of Althexis.
(d) The representations and warranties of the Company contained in this
Agreement and each other agreement or instrument executed and delivered by the
Company in connection with this Agreement shall have been true and correct on
the date of this Agreement and shall be true and correct on the Closing Date as
if made on the Closing Date; and on or before the Closing Date the Company shall
have performed all covenants and agreements of the Company contained herein or
therein and required to be performed by the Company on or before the Closing
Date;
(e) No event which, if the Preferred Shares were outstanding, would
constitute a Holder Optional Repurchase Event or, with the giving of notice or
the lapse of time, or both, would constitute a Holder Optional Repurchase Event
shall have occurred and be continuing;
(f) The Company shall have closed the Merger pursuant to the Merger
Agreement;
(g) Mark Skaletsky shall have been elected to the Board of Directors of
the Company as of the effective time of the Merger and appointed Chief Executive
Officer of the Company as of the effective time of the Merger;
(h) The Company shall have taken all necessary corporate action, if any,
to amend the Company's Certificate of Incorporation to (i) reflect the
transactions contemplated by the Transaction Documents (including the voting
provisions of the Certificate of Designations), (ii) set the authorized number
of members of the Board of Directors at eight (8) (including a provision that
shall prevent the Company from increasing the authorized size of the Board of
Directors unless it receives the prior written consent of the Majority Holders)
and (iii) provide for a procedure to nominate directors in future elections to
provide that the directors elected
30
pursuant to Section 12(c)(1) of the Certificate of Designations shall have the
right to consent to one of such future nominees;
(i) The Company shall have delivered to the Buyer a certificate, dated
the Closing Date, duly executed by its Chief Executive Officer or Chief
Financial Officer to the effect set forth in subparagraphs "(b)," "(c)," "(d),"
"(e)," "(f)," "(g)" and "(h)" of this Section 7;
(j) The Company shall have received "lock-up" agreements in the form of
ANNEX D-1 executed by Mark Skaletsky, Patrick Connelly, Paul Mellett and Manuel
Navia and in the form of ANNEX D-2 executed by Michael Dailey and Paul Mass
providing that, subject to certain conditions, all of the shares of Common Stock
held by such holders are subject to restrictions on transfer for a period of at
least of 365 days following the Closing Date;
(k) The Transaction Documents and the transactions contemplated thereby
shall have been approved by the stockholders of the Company by the required
vote;
(l) The Company shall have received a waiver from any officer or director
of the Company who would be entitled to have the vesting schedule of any
outstanding options accelerate as a result of the Merger or the transactions
contemplated by the Transaction Agreements, either alone or together, waiving
any right to such acceleration;
(m) The authorized size of the Board of Directors of the Company shall be
eight (8) persons;
(n) The Company shall have taken all necessary corporate action such that
immediately following the Closing, the directors of the Company shall include
David Schnell, Charles Newhall, Kate Bingham, Mark Skaletsky, John Walker and
James Rurka;
(o) The Buyer shall have received satisfactory confirmation of the filing
with the Secretary of State of the State of Delaware of the Certificate of
Designations;
(p) The Conversion Shares shall have been duly authorized and reserved;
(q) The Company shall have filed a Notification Form for Listing of
Additional Shares with respect to the Common Shares with Nasdaq;
(r) The Company shall have delivered to the Buyer a certificate, dated
the Closing Date, of the Secretary of the Company certifying (i) the Certificate
of Incorporation and bylaws of the Company as in effect on the Closing Date,
(ii) all resolutions of the Board of Directors (and committees thereof) of the
Company relating to this Agreement and the transactions contemplated hereby and
(iii) such other matters as reasonably requested by the Buyer;
(s) The Buyer shall have received on the Closing Date an opinion of
Bingham Dana LLP, counsel for the Company, dated the Closing Date, addressed to
the Buyer, in form, scope and substance reasonably satisfactory to the Buyer,
substantially in the form of ANNEX E to this Agreement;
31
(t) The Buyer shall have received on the Closing Date, an opinion of
intellectual property counsel for the Company reasonably satisfactory to the
Buyer, dated the Closing Date, addressed to the Buyer, in form, scope and
substance reasonably satisfactory to the Buyer;
(u) The Buyer shall have received on the Closing Date, an opinion of
intellectual property counsel for Althexis reasonably satisfactory to the Buyer,
dated the Closing Date, addressed to the Buyer, in form, scope and substance
reasonably satisfactory to the Buyer; and
(v) On the Closing Date, (i) trading in securities on the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. or Nasdaq shall not have been
suspended or materially limited and (ii) a general moratorium on commercial
banking activities in the State of New York shall not have been declared by
either federal or state authorities.
8. REGISTRATION RIGHTS.
(a) Mandatory Registration.
(i) The Company shall prepare promptly and, on or prior to the date
which is 30 days after the Closing Date, file with the SEC the Registration
Statement covering the Registrable Securities which covers the resale by the
Buyer or any of the Buyer's distributees of (A) a number of shares of Common
Stock equal to at least the number of Common Shares issuable to the Buyer upon
conversion of the Preferred Shares, determined at the Conversion Price which is
applicable on the day the Registration Statement is filed with the SEC as
Registrable Securities, and which Registration Statement shall state that, in
accordance with Rule 416 under the 1933 Act, such Registration Statement also
covers such indeterminate number of additional shares of Common Stock as may
become issuable upon conversion of the Preferred Shares to prevent dilution
resulting from stock splits, stock dividends or other dilutive events for which
anti-dilution protection is provided in the Certificate of Designations.
(ii) Prior to the SEC Effective Date for the Registration Statement,
the Company will not, without the prior written consent of the Majority Holders,
file or request the acceleration of any other registration statement filed with
the SEC, and during any time subsequent to the SEC Effective Date when the
Registration Statement for any reason is not available for use by any Investor
for the resale of any Registrable Securities, the Company shall not file any
other registration statement or any amendment thereto with the SEC under the
1933 Act or request the acceleration of the effectiveness of any other
registration statement previously filed with the SEC, other than (A) any
registration statement on Form S-8 and (B) any registration statement or
amendment which the Company is required to file or as to which the Company is
required to request acceleration pursuant to any obligation in effect on the
date of execution and delivery of this Agreement.
(b) Obligations of the Company. In connection with the registration of
the Registrable Securities, the Company shall:
(i) use its best efforts to cause the Registration Statement to
become effective as promptly as possible after the filing thereof and to keep
the Registration Statement effective pursuant to Rule 415 at all times during
the Registration Period. The Company shall submit to the SEC, within three
Business Days after the Company learns that no review of the Registration
32
Statement will be made by the staff of the SEC or that the staff of the SEC has
no further comments on the Registration Statement a request for acceleration of
effectiveness of the Registration Statement to a time and date not later than 48
hours after the submission of such request. The Company shall notify the
Investors of the effectiveness of the Registration Statement on the SEC
Effective Date. The Company represents and warrants and covenants to the
Investors that (A) the Registration Statement (including any amendments thereto
and prospectuses contained therein), at the time it is first filed with the SEC,
at the time it is ordered effective by the SEC and at all times during which it
is required to be effective hereunder (and each such amendment at the time it is
filed with the SEC and at all times during which it is available for use in
connection with the offer and sale of the Registrable Securities) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) the Prospectus (including any supplements thereto) at the
time the Registration Statement is declared effective by the SEC and at all
times that the Prospectus is required by this Agreement to be available for use
by any Investor and, in accordance with Section 8(c)(iv), any Investor is
entitled to sell Registrable Securities pursuant to the Prospectus (and each
such supplement at the time it is filed with the SEC and at all times during
which it is available for use in connection with the offer and sale of the
Registrable Securities), shall not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
(ii) subject to Section 8(b)(v), prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the
Registration Statement and the Prospectus as may be necessary to keep the
Registration Statement effective, and the Prospectus current, at all times
during the Registration Period, and, during the Registration Period, comply with
the provisions of the 1933 Act applicable to the Company in order to permit the
disposition by the Investors of all Registrable Securities covered by the
Registration Statement;
(iii) furnish to each Investor whose Registrable Securities are
included in the Registration Statement and its legal counsel (A) promptly after
the same is prepared and publicly distributed, filed with the SEC or received by
the Company, five copies of the Registration Statement and any amendment thereto
and the Prospectus and each amendment or supplement thereto, (B) one copy of
each letter written by or on behalf of the Company to the SEC or the staff of
the SEC and each item of correspondence from the SEC or the staff of the SEC
relating to the Registration Statement (other than any portion of any thereof
which contains information for which the Company has sought confidential
treatment), each of which the Company hereby determines to be confidential
information and which the Buyer hereby agrees to keep confidential as a
confidential Record in accordance with Section 8(b)(ix) and (C) such number of
copies of the Prospectus and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(iv) subject to Section 8(b)(v), use its best efforts (A) to
register and qualify the Registrable Securities covered by the Registration
Statement under the securities or blue sky laws of such jurisdictions as the
Investors who hold a majority in interest of the Registrable Securities
reasonably request, (B) to prepare and to file in those jurisdictions such
amendments (including post-effective amendments) and supplements to such
registrations and qualifications
33
as may be necessary to maintain the effectiveness thereof at all times during
the Registration Period and (C) to take all other actions reasonably necessary
or advisable to qualify the Registrable Securities for sale by the Investors in
such jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto (I) to qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 8(b)(iv), (II) to subject itself to general taxation in any such
jurisdiction or (III) to file a general consent to service of process in any
such jurisdiction;
(v) (A) as promptly as practicable after becoming aware of such
event or circumstance, notify each Investor of the occurrence of an event or
circumstance of which the Company has knowledge (x) as a result of which the
Prospectus, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading or (y) which requires the Company to amend or supplement
the Registration Statement due to the receipt from an Investor of new or
additional information about such Investor or its intended plan of distribution
of its Registrable Securities, and use its best efforts promptly to prepare a
supplement or amendment to the Registration Statement and Prospectus to correct
such untrue statement or omission or to add any new or additional information,
and deliver a number of copies of such supplement or amendment to each Investor
as such Investor may reasonably request; (B) notwithstanding Section 8(b)(v)(A)
above, if at any time the Company notifies the Investors as contemplated by
Section 8(b)(v)(A) the Company also notifies the Investors that the event giving
rise to such notice relates to a development involving the Company which
occurred subsequent to the later of (x) the SEC Effective Date and (y) the
latest date prior to such notice on which the Company has amended or
supplemented the Registration Statement, then the Company shall not be required
to use best efforts to make such amendment during a Blackout Period; provided,
however, that no Blackout Period may exceed 20 Trading Days (whether or not
consecutive) in any period of 365 consecutive days; and provided further,
however, that no Blackout Period may commence sooner than 90 days after the end
of an earlier Blackout Period;
(vi) as promptly as practicable after becoming aware of such
event, notify each Investor who holds Registrable Securities being offered or
sold pursuant to the Registration Statement of the issuance by the SEC of any
stop order or other suspension of effectiveness of the Registration Statement at
the earliest possible time;
(vii) permit the Investors who hold Registrable Securities being
included in the Registration Statement, at such Investors' sole cost and expense
(except as otherwise specifically provided in Section 10(k)) to review and have
a reasonable opportunity to comment on the Registration Statement and all
amendments and supplements thereto at least five (5) Business Days prior to
their filing with the SEC and shall not file any such document to which any
Investor reasonably objects;
(viii) make generally available to its security holders as soon as
practical, but not later than 90 days after the close of the period covered
thereby, an earnings statement (in form complying with the provisions of Rule
158 under the 1933 Act) covering a 12-month period beginning not later than the
first day of the Company's fiscal quarter next following the SEC Effective Date;
34
(ix) make available for inspection by any Investor and any
Inspector retained by such Investor, at such Investor's sole expense, all
Records as shall be reasonably necessary to enable such Investor to exercise its
due diligence responsibility, and cause the Company's and the Subsidiaries'
officers, directors and employees to supply all information which such Investor
or any Inspector may reasonably request for purposes of such due diligence;
provided, however, that such Investor shall hold in confidence and shall not
make any disclosure of any Record or other information which the Company
determines in good faith to be confidential, and of which determination such
Investor is so notified at the time such Investor receives such information,
unless (A) the disclosure of such Record is necessary to avoid or correct a
misstatement or omission in the Registration Statement, (B) the release of such
Record is ordered pursuant to a subpoena or other order from a court or
governmental body of competent jurisdiction or (C) the information in such
Record has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential information in such Records to any Inspector until
and unless such Inspector shall have entered into a confidentiality agreement
with the Company with respect thereto, substantially in the form of this Section
8(b)(ix), which agreement shall permit such Inspector to disclose Records to the
Investor who has retained such Inspector. Each Investor agrees that it shall,
upon learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at the Company's expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, the Records deemed confidential. The Company shall hold in confidence
and shall not make any disclosure of information concerning an Investor provided
to the Company pursuant to this Agreement unless (A) disclosure of such
information is necessary to comply with federal or state securities laws, (B)
disclosure of such information is necessary to avoid or correct a misstatement
or omission in the Registration Statement, (C) release of such information is
ordered pursuant to a subpoena or other order from a court or governmental body
of competent jurisdiction, or (D) such information has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company agrees that it shall, upon learning that disclosure
of such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to such Investor and allow such Investor, at such Investor's expense, to
undertake appropriate action to prevent disclosure of, or to obtain a protective
order for, such information;
(x) use its best efforts to cause all the Registrable Securities
covered by the Registration Statement as of the SEC Effective Date to be listed
on Nasdaq or such other principal securities market on which securities of the
same class or series issued by the Company are then listed or traded;
(xi) provide a transfer agent and registrar, which may be a single
entity, for the Registrable Securities at all times;
(xii) cooperate with the Investors who hold Registrable Securities
being offered pursuant to the Registration Statement to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legends)
representing Registrable Securities to be offered pursuant to the Registration
Statement and enable such certificates to be in such denominations or amounts as
the Investors
35
may reasonably request and registered in such names as the Investors may
request; and, not later than the SEC Effective Date and after the resale of the
Registrable Securities pursuant to an effective Registration Statement, the
Company shall deliver (A) to the Transfer Agent (with copies to the Investors
whose Registrable Securities are included in the Registration Statement) an
instruction to remove any legends on previously issued Registrable Securities
and thereafter to issue Registrable Securities without any legends and (B) shall
cause legal counsel selected by the Company to deliver to the Investors whose
Registrable Securities are included in the Registration Statement and, if
required by the Transfer Agent, to the Transfer Agent an opinion of counsel to
permit such legend removal;
(xiii) during the Registration Period, the Company shall not bid for
or purchase any Common Stock or any right to purchase Common Stock or attempt to
induce any Person to purchase any such security or right if such bid, purchase
or attempt would in any way limit the right of the Investors to sell Registrable
Securities by reason of the limitations set forth in Regulation M under the 1934
Act; and
(xiv) take all other reasonable actions necessary to expedite and
facilitate disposition by the Investors of the Registrable Securities pursuant
to the Registration Statement.
(c) Obligations Of The Buyer And Other Investors. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
(i) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company the Required Information and shall execute such documents
in connection with such registration as the Company may reasonably request. At
least ten (10) Business Days prior to the first anticipated filing date of the
Registration Statement, the Company shall notify each Investor of the Required
Information if any of such Investor's Registrable Securities are eligible for
inclusion in the Registration Statement. If at least one Business Day prior to
the SEC Filing Date the Company has not received the Required Information from
an Investor, then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor; provided,
however, that nothing herein shall relieve the Company of its obligation to
register the resale of such Investor's Registrable Securities promptly after
such Investor provides the Required Information to the Company.
(ii) Each Investor by such Investor's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Investor has notified the Company
of such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement.
(iii) Each Investor agrees that it will not effect any disposition
of the Registrable Securities except as contemplated in the Registration
Statement or as shall otherwise be in compliance with applicable securities laws
and that it will promptly notify the Company of any material changes in the
information set forth in the Registration Statement regarding such Investor or
its plan of distribution; each Investor agrees (A) to notify the Company in the
event that such Investor enters into any material agreement with a broker or a
dealer for the sale of the
36
Registrable Securities through a block trade, special offering, exchange
distribution or a purchase by a broker or dealer and (B) in connection with such
agreement, to provide to the Company in writing the information necessary to
prepare any supplemental prospectus pursuant to Rule 424(c) under the 1933 Act
which is required with respect to such transaction.
(iv) Each Investor acknowledges that there may occasionally be
times as specified in Section 8(b)(v) or 8(b)(vi) when the Company must suspend
the use of the Prospectus until such time as an amendment to the Registration
Statement has been filed by the Company and declared effective by the SEC, the
Company has prepared a supplement to the Prospectus or the Company has filed an
appropriate report with the SEC pursuant to the 1934 Act. Each Investor hereby
covenants that it will not sell any Registrable Securities pursuant to the
Prospectus during the period commencing at the time at which the Company gives
such Investor notice of the suspension of the use of the Prospectus in
accordance with Section 8(b)(v) or 8(b)(vi) and ending at the time the Company
gives such Investor notice that such Investor may thereafter effect sales
pursuant to the Prospectus, or until the Company delivers to such Investor an
amended or supplemented Prospectus;
(v) In connection with any sale of Registrable Securities which
is made by an Investor pursuant to the Registration Statement (A) if such sale
is made through a broker, such Investor shall instruct such broker to deliver
the Prospectus (including any amendments or supplements thereto) to the
purchaser (or the broker therefor) in connection with such sale, shall supply
copies of the Prospectus (including any amendments or supplements thereto) to
such broker, (B) if such sale is made in a transaction directly with a purchaser
and not through the facilities of any securities exchange or market, such
Investor shall deliver, or cause to be delivered, the Prospectus to such
purchaser; and (C) if such sale is made by any means other than those described
in the immediately preceding clauses (A) and (B), such Investor shall otherwise
use its reasonable best efforts to comply with the prospectus delivery
requirements of the 1933 Act applicable to such sale; and
(vi) Each Investor agrees to notify the Company promptly after the
event of the completion of the sale by such Investor of all Registrable
Securities to be sold by such Investor pursuant to the Registration Statement.
(d) Rule 144. With a view to making available to each Investor the
benefits of Rule 144, the Company agrees:
(i) so long as each Investor owns or has the right to acquire
Registrable Securities, promptly upon request, furnish to such Investor such
information as may be necessary, and otherwise reasonably to cooperate with such
Investor, to permit such Investor to sell its Registrable Securities pursuant to
Rule 144 without registration; and
(ii) if at any time the Company is not required to file such
reports with the SEC under Sections 13 or 15(d) of the 1934 Act, to use its best
efforts to, upon the request of an Investor, make publicly available other
information so long as is necessary to permit publication by brokers and dealers
of quotations for the Common Stock and sales of the Registrable Securities in
accordance with Rule 15c2-11 under the 1934 Act.
37
9. Indemnification And Contribution.
(a) Indemnification.
(i) To the extent not prohibited by applicable law, the Company will
indemnify and hold harmless each Indemnified Person against any Claims to which
any of them may become subject under the 1933 Act, the 1934 Act or otherwise,
insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any Violation or
any of the transactions contemplated by the Transaction Documents. Subject to
the restrictions set forth in Section 9(a)(iii) with respect to the number of
legal counsel, the Company shall reimburse each Indemnified Person, promptly as
such expenses are incurred and are due and payable, for any legal fees or other
expenses incurred by them in connection with investigating or defending any such
Claim. Notwithstanding anything to the contrary contained herein, an Indemnified
Person shall not be entitled to indemnification under this Section 9(a)(i) for:
(A) a Claim arising out of or based upon a Violation which occurs in reliance
upon and in conformity with information relating to an Indemnified Person
furnished in writing to the Company by such Indemnified Person or underwriter
for such Indemnified Person expressly for use in connection with the preparation
of the Registration Statement or any such amendment thereof or supplement
thereto if the Prospectus or such amendment or supplement thereto was timely
made available by the Company pursuant to Section 8(b)(iii); and (B) amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of the Company, which consent shall not be unreasonably
withheld. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Investors.
(ii) In connection with the Registration Statement, each Investor whose
Registrable Securities are included in the Registration Statement agrees to
indemnify and hold harmless, to the same extent and in the same manner set forth
in Section 9(a)(i), each Indemnified Party against any Claim to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim arises out of or is based upon any Violation, in each case to the
extent (and only to the extent) that such Violation occurs in reliance upon and
in conformity with written information furnished to the Company by such Investor
expressly for use in connection with the Registration Statement; and such
Investor will reimburse any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 9(a)(ii) shall not apply
to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Section 9(a)(ii) for only that amount of all Claims in the
aggregate as does not exceed the amount by which the proceeds to such Investor
as a result of the sale of Registrable Securities pursuant to the Registration
Statement exceeds the amount paid by such Investor for such Registrable
Securities. Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors.
(iii) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 9(a) of notice of the commencement of any action
(including any
38
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
Section 9(a), deliver to the indemnifying party a notice of the commencement
thereof and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel reasonably satisfactory to the Indemnified Person or the
Indemnified Party, as the case may be; provided, however, that an Indemnified
Person or Indemnified Party shall have the right to retain its own counsel with
the fees and expenses to be paid by the indemnifying party, if, in the opinion
of the indemnified party (upon advice of counsel), the representation by such
counsel of the Indemnified Person or Indemnified Party and the indemnifying
party would be inappropriate due to actual or potential differing interests
between such Indemnified Person or Indemnified Party and any other party
represented by such counsel in such proceeding; provided further, however, that
no indemnifying person shall be responsible for the fees and expenses of more
than one separate counsel for all Indemnified Persons or Indemnified Parties, as
the case may be, hereunder and one separate counsel in each jurisdiction in
which a Claim is pending or threatened. The failure to deliver notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 9(a), except to the
extent that the indemnifying party is materially prejudiced in its ability to
defend such action. The indemnification required by this Section 9(a) shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as such expense, loss, damage or liability is incurred
and is due and payable.
(b) Contribution. To the extent any indemnification by an indemnifying
party as set forth in Section 9(a) above is applicable by its terms but is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 9(a) to the fullest extent permitted by law. In determining the
amount of contribution to which the respective parties are entitled, there shall
be considered the relative fault of each party, the parties' relative knowledge
of and access to information concerning the matter with respect to which the
Claim was asserted, the opportunity to correct and prevent any statement or
omission and any other equitable considerations appropriate under the
circumstances; provided, however, that (i) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 9(a), (ii) no Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any other Person who was not guilty
of such fraudulent misrepresentation and (iii) the contribution by any Investor
in respect of all Claims in the aggregate shall be limited to the amount by
which the proceeds received by such seller from the sale of such Registrable
Securities exceeds the amount paid by such Investor for such Registrable
Securities.
(c) Other Rights. The indemnification and contribution provided in this
Section 9 shall be in addition to any other rights and remedies available at law
or in equity.
10. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California.
39
(b) Headings. The headings, captions and footers of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
(c) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction.
(d) Notices. Any notices required or permitted to be given under the terms
of this Agreement shall be in writing and shall be sent by mail, personal
delivery, by telephone line facsimile transmission or courier and shall be
effective five days after being placed in the mail, if mailed, or upon receipt,
if delivered personally, by telephone line facsimile transmission or by courier,
in each case addressed to a party at such party's address (or telephone line
facsimile transmission number) shown in the introductory paragraph or on the
signature page of this Agreement or such other address (or telephone line
facsimile transmission number) as a party shall have provided by notice to the
other party in accordance with this provision. In the case of any notice to the
Company, such notice shall be addressed to the Company at its address shown in
the introductory paragraph of this Agreement, Attention: Chief Financial Officer
(telephone line facsimile number (650) 428-3545), and a copy shall also be given
to: Latham & Watkins, 135 Commonwealth Drive, Menlo Park, California 94025,
Attn: Alan Mendelson (telephone line facsimile transmission number (650) 463-
2600), and in the case of any notice to the Buyer, a copy shall be given to:
Cooley Godward LLP, Five Palo Alto Square, 3000 El Camino Real, Palo Alto,
California 94306, Attn: Craig Dauchy (telephone line facsimile transmission
number (650) 849-7400). The Buyer hereby designates as its address for any
notice required or permitted to be given to the Buyer pursuant to the
Certificate of Designations the address shown on the signature page of this
Agreement, until the Buyer shall designate another address for such purpose.
(e) Counterparts. This Agreement may be executed in counterparts and by
the parties hereto on separate counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same instrument.
A telephone line facsimile transmission of this Agreement bearing a signature on
behalf of a party hereto shall be legal and binding on such party.
(f) Entire Agreement; Benefit. This Agreement, including the Annexes and
Schedules hereto, constitutes the entire agreement between the parties hereto
with respect to the subject matter hereof. There are no restrictions, promises,
warranties, or undertakings, other than those set forth or referred to herein
and therein. This Agreement, including the Annexes and Schedules hereto,
supersedes all prior agreements and understandings, whether written or oral,
between the parties hereto with respect to the subject matter hereof. This
Agreement and the terms and provisions hereof are for the sole benefit of only
the Company, the Buyer and their respective successors and permitted assigns.
(g) Waiver. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, or course of dealing between the parties, shall not operate as a waiver
thereof or an amendment hereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or
40
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or exercise of any other right or power.
(h) Amendment. No amendment, modification, waiver, discharge or
termination of any provision of this Agreement nor consent to any departure by
the Buyer or the Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the party to be charged with enforcement,
and then shall be effective only in the specific instance and for the purpose
for which given. No course of dealing between the parties hereto shall operate
as an amendment of this Agreement.
(i) Further Assurances. Each party to this Agreement will perform any and
all acts and execute any and all documents as may be necessary and proper under
the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.
(j) Assignment Of Certain Rights And Obligations. The rights of an
Investor under Sections 5, 8, 9, and 10 of this Agreement shall not be assigned
by such Investor to any transferee of all or any portion of such Investor's
Registrable Securities (or all or any portion of the Preferred Shares) without
the prior written consent of the Company. Upon any valid assignment, the Company
shall be obligated to such transferee to perform all of its covenants under
Sections 5, 8, 9, and 10 of this Agreement as if such transferee were the Buyer.
In connection with any valid transfer the Company shall, at its sole cost and
expense, promptly after such assignment take such actions as shall be reasonably
acceptable to the transferring Investor and such transferee to assure that the
Registration Statement relating to the Registrable Securities involved in such
transfer and the Prospectus are available for use by such transferee for sales
of the Registrable Securities in respect of which such rights and obligations
have been so assigned.
(k) Expenses. Each party shall pay all costs and expenses that it incurs
with respect to the negotiation, execution, delivery and performance of the
Agreement; provided, however, that the Company shall, at the Closing, reimburse
the reasonable fees of and expenses of Cooley Godward LLP, counsel to the Buyer
and the Other Buyers, for the Transaction Documents and the due diligence
relating to the transactions contemplated by the Transactions Documents.
(l) Termination.
(i) The Buyer shall have the right to terminate this Agreement by
giving notice to the Company at any time at or prior to the Closing Date if:
(1) the Company shall have failed, refused, or been unable at or
prior to the date of such termination of this Agreement to perform any of its
obligations hereunder;
(2) any other condition precedent set forth in Section 7 is not
fulfilled; or
(3) the Closing shall not have occurred on a Closing Date on or
before November 30, 2001, other than solely by reason of a breach of this
Agreement by the Buyer.
(ii) The Company shall have the right to terminate this Agreement by
giving notice to the Buyer at any time prior to the Closing Date if:
41
(1) the Buyer shall have failed, refused, or been unable at or
prior to the date of such termination of this Agreement to fulfill its payment
obligations in accordance with Section 2; or
(2) the Closing shall not have occurred on a Closing Date on or
before November 30, 2001, other than solely by reason of a breach of this
Agreement by the Company.
Any such termination shall be effective upon the giving of notice thereof by the
terminating party. Upon such termination, the terminating party shall have no
further obligation to the other party hereunder and the other party shall remain
liable for any breach of this Agreement or the other documents contemplated
hereby which occurred on or prior to the date of such termination.
Notwithstanding anything in the preceding sentence to the contrary, if this
Agreement is terminated for any reason other than pursuant to Section
10(l)(ii)(1), then the Company shall pay all reasonable costs and expenses, that
the Buyer and the Other Buyers incurred with respect to the negotiation,
execution, delivery and performance of the Transaction Documents.
(m) Survival. The respective representations, warranties, covenants and
agreements of the Company and the Buyer contained in this Agreement and the
other Transaction Documents shall survive the execution and delivery of this
Agreement and the other Transaction Documents and the closing hereunder and the
delivery of and payment for the Preferred Shares and shall remain in full force
and effect regardless of any investigation made by or on behalf of the Buyer or
any Person controlling or acting on behalf of the Buyer or by the Company or any
Person controlling or acting on behalf of the Company.
(n) Public Statements, Press Releases, Etc. The Company and the Buyer
shall have the right to approve before issuance any press releases or any other
public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of the Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law and regulations,
including the 1933 Act and the rules and regulations promulgated thereunder
(although the Buyer shall be consulted by the Company in connection with any
such press release or other public disclosure prior to its release and shall be
provided with a copy thereof).
(o) Construction. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules
of strict construction will be applied against any party.
(p) Notices. Attached hereto as ANNEX H are the notices required to be
delivered by the Company and/or the Buyer pursuant to the Certificate of
Designations.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
42
In Witness Whereof, the parties have caused this Agreement to be duly
executed by their respective officers or other representatives thereunto duly
authorized as of the date first set forth above.
Number of Preferred Shares:
------
Price Per Share: $1,000.00
Aggregate Purchase Price:
----------
Microcide Pharmaceuticals, Inc.
By:______________________________
Name:____________________________
Title:___________________________
[INVESTOR]
By:______________________________
Name:____________________________
Title:___________________________
Address:_________________________
_________________________________
_________________________________
Facsimile No.:___________________
SCHEDULES
Schedule 4(c) Securities Subject to Certain Antidilution Adjustments
APPENDIX D
CERTIFICATE OF DESIGNATIONS
OF
SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
Microcide Pharmaceuticals, Inc., a Delaware corporation (the
"Corporation"), in accordance with the provisions of Section 103 of the General
Corporation Law of the State of Delaware DOES HEREBY CERTIFY:
That pursuant to authority vested in the Board of Directors of the
Corporation (the "Board of Directors" or the "Board") by the Restated
Certificate of Incorporation, as amended, of the Corporation, the Board of
Directors, at a meeting held on July 19, 2001, adopted a resolution providing
for the creation of a series of the Corporation's Preferred Stock, par value
$0.001 per share, which series is designated "Series B Convertible Redeemable
Preferred Stock," which resolution is as follows:
Resolved, that pursuant to authority vested in the Board of Directors by
the Restated Certificate of Incorporation, as amended, the Board of Directors
does hereby provide for the creation of a series of the Preferred Stock, par
value of $0.001 per share (hereafter called the "Preferred Stock"), of the
Corporation, and to the extent that the voting powers and the designations,
preferences and relative, participating, optional or other special rights
thereof and the qualifications, limitations or restrictions of such rights have
not been set forth in the Restated Certificate of Incorporation, as amended, of
the Corporation, does hereby fix the same as follows:
SERIES B CONVERTIBLE REDEEMABLE PREFERRED STOCK
SECTION 1. CERTAIN DEFINED TERMS.
(a) All the agreements or instruments defined in this Certificate of
Designations shall mean such agreements or instruments as the same may from time
to time be supplemented or amended, or the terms thereof waived or modified, to
the extent permitted by, and in accordance with, the terms thereof and of this
Certificate of Designations.
(b) The following terms shall have the following meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
(c) "Affiliate" means, with respect to any Person, any other Person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by or under common control with the subject Person. For purposes of
the term "Affiliate," the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to direct or to cause the direction of the management and
policies of a Person, whether through the ownership of securities, by contract
or otherwise.
1
(d) "Auditors" means Ernst and Young LLP or another firm of
independent public accountants of recognized national standing selected by the
Corporation's Board of Directors to audit its annual financial statements.
(e) "Board of Directors" or "Board" means the Board of Directors of
the Corporation.
(f) "Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Corporation to have been duly adopted
by the Board of Directors, or duly authorized committee thereof (to the extent
permitted by applicable law), and to be in full force and effect on the date of
such certification, and delivered to the Holders.
(g) "Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in The City of New York are authorized or
required by law or executive order to remain closed.
(h) "Common Stock" includes the Common Stock, $0.001 par value, of
the Corporation as authorized on the date hereof, and any other securities into
which or for which the Common Stock may be converted or exchanged pursuant to a
plan of recapitalization, reorganization, merger, sale of assets or otherwise
and any stock (other than the Common Stock of the Corporation) and other
securities of the Corporation or any other Person which any Holder at any time
shall be entitled to receive, or shall have received, on the exercise of
conversion rights of the Series B Preferred Stock, in lieu of or in addition to
the Common Stock of the Corporation.
(i) "Common Stock Equivalent" means any warrant, option, subscription
or purchase right with respect to shares of Common Stock, any security
convertible into, exchangeable for, or otherwise entitling the holder thereof to
acquire, shares of Common Stock or any warrant, option, subscription or purchase
right with respect to any such convertible, exchangeable or other security.
(j) "Conversion Date" means the date on which a Conversion Notice is
given by a Holder, whether by mail, courier, personal service, telephone line
facsimile transmission or other means, as provided in Section 10(a); provided,
that if the Conversion Notice is given after 12:00 noon California time on any
date, the Conversion Date shall mean the date following the date on which the
Conversion Notice is given.
(k) "Conversion Notice" means a Notice of Conversion of Series B
Convertible Redeemable Preferred Stock substantially in the form attached to the
Subscription Agreement as Annex H.
(l) "Conversion Price" means $3.00 per share, subject to adjustment
as provided in Section 10(c).
(m) "Corporation Certificate" means a certificate of the Corporation
signed by an Officer.
2
(n) "Corporation Notice" means a Corporation Notice substantially in
the form attached to the Subscription Agreement as Annex H.
(o) "Corporation Redemption Date" means the Business Day on which
shares of Series B Preferred Stock are to be redeemed pursuant to Section 9(a),
determined in accordance with Section 9(a).
(p) "Corporation Redemption Event" means that (1) the Market Price of
the Common Stock shall be greater than $20.00 (subject to appropriate adjustment
in the event of an adjustment in the Conversion Price) on each Trading Day
during a period of 40 consecutive Trading Days and (2) the Registration
Statement shall have been effective during the entire 40-Trading Day period.
(q) "Corporation Redemption Price" means an amount in cash equal to
the sum of (1) the Stated Value PLUS (2) an amount equal to the declared and
unpaid dividends on the share of Series B Preferred Stock to be redeemed to the
applicable Corporation Redemption Date.
(r) "Current Market Price" shall mean the arithmetic average of the
daily Market Prices (calculated without duplicating any adjustments referred to
in the proviso of such defined term) per share of Common Stock for the ten
consecutive Trading Days immediately prior to the date in question; PROVIDED,
HOWEVER, that (1) if the "ex" date (as hereinafter defined) for any event (other
than the issuance or distribution requiring such computation) that requires an
adjustment to the Conversion Price pursuant to Section 10(c)(1), (2), (3), (4),
(5), (6), or (7), occurs during such ten consecutive Trading Days, then the
Market Price for each Trading Day prior to the "ex" date for such other event
shall be adjusted by multiplying such Market Price by the same fraction by which
the Conversion Price is so required to be adjusted as a result of such other
event, (2) if the "ex" date for any event (other than the issuance or
distribution requiring such computation) that requires an adjustment to the
Conversion Price pursuant to Section 10(c)(1), (2), (3), (4), (5), (6), or (7),
occurs on or after the "ex" date for the issuance or distribution requiring such
computation and prior to the day in question, the Market Price for each Trading
Day on and after the "ex" date for such other event shall be adjusted by
multiplying such Market Price by the reciprocal of the fraction by which the
Conversion Price is so required to be adjusted as a result of such other event,
and (3) if the "ex" date for the issuance or distribution requiring such
computation is prior to the day in question, after taking into account any
adjustment required pursuant to clause (1) or (2) of this proviso, the Market
Price for each Trading Day on or after such "ex" date shall be adjusted by
adding thereto the amount of any cash and the fair market value (as determined
by the Board of Directors in a manner consistent with any determination of such
value for purposes of Section 10(c)(4) or (6), whose determination shall be
conclusive and described in a Board Resolution) of the evidences of
indebtedness, shares of capital stock or assets being distributed applicable to
one share of Common Stock as of the close of business on the day before such
"ex" date. For purposes of any computation under Section 10(c)(6), the Current
Market Price of the Common Stock on any date shall be deemed to be the
arithmetic average of the daily Market Prices per share of Common Stock for such
day and the next two succeeding Trading Days; PROVIDED, HOWEVER, that if the
"ex" date for any event (other than the Tender Offer requiring such computation)
that requires an adjustment to the Conversion Price pursuant to Section
10(c)(1), (2), (3), (4), (5), (6),
3
or (7), occurs on or after the Expiration Time for the Tender Offer requiring
such computation, the Market Price for each Trading Day on and after the "ex"
date for such other event shall be adjusted by multiplying such Market Price by
the reciprocal of the fraction by which the Conversion Price is so required to
be adjusted as a result of such other event. For purposes of this paragraph, the
term "ex" date, (1) when used with respect to any issuance or distribution,
means the first date on which the Common Stock trades, regular way, on the
relevant exchange or in the relevant market from which the Market Price was
obtained without the right to receive such issuance or distribution, (2) when
used with respect to any subdivision or combination of shares of Common Stock,
means the first date on which the Common Stock trades, regular way, on such
exchange or in such market after the time at which such subdivision or
combination becomes effective, and (3) when used with respect to any Tender
Offer means the first date on which the Common Stock trades, regular way, on
such exchange or in such market after the Expiration Time of such Tender Offer.
Notwithstanding the foregoing, whenever successive adjustments to the Conversion
Price are called for pursuant to Section 10(c), such adjustments shall be made
to the Current Market Price as may be necessary or appropriate to effectuate the
intent of Section 10(c) and to avoid unjust or inequitable results as determined
in good faith by the Board of Directors.
(s) "Eligible Bank" means a corporation organized or existing under
the laws of the United States or any state, having combined capital and surplus
of at least $100 million and subject to supervision by United States federal or
state authority and which has a branch located in New York, New York.
(t) "Eligible Marketable Securities" of the Corporation as of any
date means marketable securities which would be reflected on a consolidated
balance sheet of the Corporation and its subsidiaries prepared as of such date
in accordance with Generally Accepted Accounting Principles and which have been
purchased pursuant to the Corporation's Investment Guidelines delivered to Buyer
on or prior to the date hereof.
(u) "Expiration Time" shall have the meaning provided in Section
10(c)(6).
(v) "Final Mandatory Redemption Date" means [insert date six years
after the Issuance Date].
(w) "Fundamental Change" means: (1) any consolidation or merger of
the Corporation or any Subsidiary with or into another entity (other than a
merger or consolidation of a wholly-owned Subsidiary into the Corporation or a
wholly-owned Subsidiary) where the stockholders of the Corporation immediately
prior to such transaction do not collectively own at least 51% of the
outstanding voting securities of the surviving corporation of such consolidation
or merger immediately following such transaction; or the sale of all or
substantially all of the assets of the Corporation in a single transaction or a
series of related transactions; or (2) the occurrence of any transaction or
event in connection with which all or substantially all the Common Stock shall
be exchanged for, converted into, acquired for or constitute the right to
receive consideration (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) which is not all or substantially all common
stock which is (or will, upon consummation of or immediately following such
transaction or event, will be) listed on a national securities exchange or
approved
4
for quotation on Nasdaq or any similar United States system of automated
dissemination of transaction reporting of securities prices; or (3) the
acquisition by a Person or entity or group of Persons or entities acting in
concert as a partnership, limited partnership, syndicate or group, as a result
of a tender or exchange offer, open market purchases, privately negotiated
purchases or otherwise, of beneficial ownership of securities of the Corporation
representing 50% or more of the combined voting power of the outstanding voting
securities of the Corporation ordinarily (and apart from rights accruing in
special circumstances) having the right to vote in the election of directors; or
(4) the disposal or sale of more than 50% of the assets of the Corporation; or
(5) the liquidation, dissolution or other winding up the affairs of the
Corporation; PROVIDED, HOWEVER, that in each case the Holders have not violated
any provision of Section 5(k)(x) of the Subscription Agreements.
(x) "Generally Accepted Accounting Principles" for any Person means
the United States generally accepted accounting principles and practices applied
by such Person from time to time in the preparation of its audited financial
statements.
(y) "Holder" means at any time with respect to any share of Series B
Preferred Stock the Person shown as the holder of record of such share of Series
B Preferred Stock on the records of the Corporation relating to the Series B
Preferred Stock which records are maintained in accordance with applicable law.
(z) "Holder Notice" means a Holder Notice substantially in the form
attached to the Subscription Agreement as Annex H.
(aa) "Holder Optional Repurchase Date" means the date which is five
(5) Business Days after a Holder who is entitled to repurchase rights under
Section 11(a) and 11(b) gives a Holder Notice.
(bb) "Holder Optional Repurchase Event" means any one of the following
events:
(1) For any period of five (5) consecutive Trading Days
following the Issuance Date there shall be no reported sale price of the Common
Stock on any of the Nasdaq, the NYSE or the AMEX;
(2) For any period of five (5) consecutive Trading Days
following the Issuance Date the Common Stock is not listed for trading on any of
the Nasdaq, the NYSE or the AMEX;
(3) Any Fundamental Change;
(4) The Corporation fails to have the Registration Statement
declared effective within 90 days of the Issuance Date;
(5) On or after the SEC Effective Date and prior to the end of
the Registration Period for any Holder, such Holder shall not be able for 20
Trading Days (whether or not consecutive), in any period of 365 consecutive days
to sell shares of Common Stock issuable or issued upon conversion of shares of
Series B Preferred Stock pursuant to the
5
Registration Statement (A) by reason of the requirements of the 1933 Act, the
1934 Act or any of the rules or regulations under either thereof or (B) due to
the Registration Statement or the Prospectus containing any untrue statement of
material fact or omitting to state a material fact required to be stated therein
or necessary to make the statements therein not misleading or any other failure
of the Registration Statement or the Prospectus to comply with the rules and
regulations of the SEC;
(6) The Corporation fails to issue or cause to be issued shares
of Common Stock to any Holder upon exercise by such Holder of the conversion
rights of such Holder within five (5) Trading Days after the due date therefor
(i.e. six (6) Trading Days following the Conversion Date) in accordance with the
terms of Section 10 or fails to transfer any certificate for shares of Common
Stock issued to any Holder upon conversion of Series B Preferred Stock or upon
exercise by such Holder of any purchase rights of such Holder as and when
required by this Certificate of Designations or the Subscription Agreements;
provided, that if such failure occurs due to the failure of the Transfer Agent
to comply with timely instructions from the Corporation, a Holder Optional
Repurchase Event shall not occur unless such failure continues for two (2)
additional Trading Days;
(7) The Corporation (A) fails to comply with Sections 5(k)(i),
(v) or (vi) of the Subscription Agreements, or (B) fails to comply for a period
of 45 days in any material respect with any of the other requirements set forth
in Section 5(k) of the Subscription Agreements or other material term or
provision of the Series B Preferred Stock;
(8) Any material representation or warranty of the Corporation
made herein or in any other Transaction Document shall be false or misleading in
any material respect when made;
(9) The Corporation or any Subsidiary shall (A) have received
notice that it is in default in any payment with respect to any indebtedness for
borrowed money which indebtedness has an outstanding principal amount in excess
of $1,000,000 individually or $2,000,000 in the aggregate for the Corporation
and the Subsidiaries, beyond the period of grace, if any, provided in the
instrument or agreement under which such indebtedness was created or (B) have
received notice that it is in default in the observance or performance of any
agreement, covenant or condition relating to any such indebtedness or contained
in any instrument or agreement evidencing, securing or relating thereto, or any
other event shall occur or condition exist, the effect of which default or other
event or condition is to cause, or to permit the holder or holders of such
indebtedness (or a trustee or agent on behalf of such holder or holders) to
cause, any such indebtedness to become due prior to its stated maturity and such
default or event shall continue beyond the period of grace, if any, provided in
the instrument or agreement under which such indebtedness was created (after
giving effect to any consent or waiver obtained and then in effect thereunder)
and, in each case, such breach or default results in the acceleration of such
indebtedness or any other indebtedness of the Corporation; PROVIDED, HOWEVER,
that the events and conditions described in the preceding clauses (A) and (B)
shall not constitute a Holder Optional Repurchase Event if the Corporation cures
such breach or default within five days of notice of such breach or default;
PROVIDED FURTHER THAT, any breach or default for non-payment of any indebtedness
shall not constitute a Holder Optional Repurchase Event if (i) the Corporation
(with the unanimous approval of the Board of Directors) is actively
6
contesting such default in good faith, (ii) prior to the expiration of such
five-day period no other indebtedness of the Corporation or any of its
Subsidiaries shall, in accordance with its terms, be declared to be due and
payable, or required to be prepaid other than by a regularly scheduled or
required payment prior to the stated maturity thereof, and (iii) the aggregate
amount of any non-payment does not exceed $1,000,000. The Corporation shall
provide notice to the Holders of any payment defaults that it intends to contest
in good faith within five (5) days of such obligation becoming due and payable.
(cc) "Holder Optional Repurchase Price" means an amount in cash
equal to the sum of (1) the Stated Value PLUS (2) an amount equal to any
declared and unpaid dividends on the share of Series B Preferred Stock to be
redeemed at the applicable Holder Optional Repurchase Date; PROVIDED, HOWEVER,
that if a Fundamental Change has occurred, then the Holder Optional Repurchase
Price means an amount in cash equal to the sum of (1) 150% of the Stated Value
PLUS (2) an amount equal to any declared and unpaid dividends on the share of
Series B Preferred Stock to be redeemed at the applicable Holder Optional
Repurchase Date.
(dd) "Initial Mandatory Redemption Date" means [insert date five
years after the Issuance Date].
(ee) "Issuance Date" means the first date of original issuance of
any shares of Series B Preferred Stock.
(ff) "Junior Dividend Stock" means, collectively, the Common
Stock and any other class or series of capital stock of the Corporation ranking,
as to dividends, junior to the Series B Preferred Stock.
(gg) "Junior Liquidation Stock" means, collectively, the Common
Stock and any other class or series of capital stock of the Corporation ranking
junior as to liquidation rights to the Series B Preferred Stock.
(hh) "LIBOR Rate" shall mean the arithmetic average of rates of
interest per annum (rounded upwards, if necessary to the next 1/16 of 1%) at
which Citibank, F.S.B. is offered deposits of United States Dollars in the
London interbank market on or about 11:00 a.m. London time two (2) Business Days
prior to the commencement of an interest period.
(ii) "Liquidation Preference" means, for each share of Series B
Preferred Stock, the sum of (1) the Stated Value PLUS (2) an amount equal to any
declared and unpaid dividends thereon to the date of final distribution to the
Holders in connection with the liquidation, dissolution or winding up of the
Corporation.
(jj) "Majority Holders" means at any time the Holders of
outstanding shares of Series B Preferred Stock which shares constitute 75% of
the outstanding shares of Series B Preferred Stock.
(kk) "Mandatory Redemption Notice" means a Mandatory Redemption
Notice substantially in the form attached to the Subscription Agreements as
Annex H.
7
(ll) "Mandatory Redemption Price" means an amount in cash equal
to the sum of (1) the Stated Value PLUS (2) an amount equal to any declared and
unpaid dividends on the share of Series B Preferred Stock to the Initial
Mandatory Redemption Date or the Final Mandatory Redemption Date, as applicable.
(mm) "Market Price" of any security on any date means the closing
price of such security on such date on the Nasdaq or such other securities
exchange or other market on which such security is listed for trading which
constitutes the principal securities market for such security, as reported by
Bloomberg, L.P.; PROVIDED, HOWEVER, that during any period the Market Price is
being determined, the Market Price shall be subject to equitable adjustments
from time to time on terms consistent with Section 10(c) and otherwise
reasonably acceptable to the Majority Holders for (1) stock splits, (2) stock
dividends, (3) combinations, (4) capital reorganizations, (5) issuance to all
holders of Common Stock of rights or warrants to purchase shares of Common
Stock, (6) distribution by the Corporation to all holders of Common Stock of
evidences of indebtedness of the Corporation or cash (other than regular
quarterly cash dividends), (7) Tender Offers by the Corporation or any
Subsidiary for, or other repurchases of shares of, Common Stock in one or more
transactions which, individually or in the aggregate, result in the purchase of
more than ten percent of the Common Stock outstanding, and (8) similar events
relating to the Common Stock, in each case which occur, or with respect to which
"ex-" trading of the Common Stock begins, during such period.
(nn) "Merger Shares" shall have the meaning set forth in the
Subscription Agreements.
(oo) "Nasdaq" means the Nasdaq National Market.
(pp) "Nasdaq Stock Market" means The Nasdaq Stock Market, Inc.
(qq) "1934 Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute thereto.
(rr) "1933 Act" means the Securities Act of 1933, as amended, or
any successor statute thereto.
(ss) "NYSE" means the New York Stock Exchange, Inc.
(tt) "Officer" means the Chairman of the Board, the Chief
Executive Officer, the President or the Chief Financial Officer of the
Corporation.
(uu) "Parity Dividend Stock" means any class or series of the
Corporation's capital stock ranking, as to dividends, on a parity with the
Series B Preferred Stock.
(vv) "Parity Liquidation Stock" means any class or series of the
Corporation's capital stock ranking on a parity as to liquidation rights with
the Series B Preferred Stock.
(ww) "Permitted Indebtedness" means:
8
(1) Indebtedness not in excess of the aggregate principal
amount which is outstanding on the Issuance Date and which would be reflected on
a balance sheet of the Corporation as of the Issuance Date or in the notes
thereto prepared in accordance with Generally Accepted Accounting Principles;
(2) Indebtedness of up to $5 million incurred after the
Issuance Date consisting of (A) equipment lease obligations or other equipment
financings for equipment used in the business of the Corporation and its
Subsidiaries which obligations or financings are required to be capitalized in
accordance with Generally Accepted Accounting Principles; and (B) Indebtedness
incurred in connection with acquisition of furniture, fixtures and equipment
used in the business of the Corporation and its Subsidiaries, in each such case
in an amount not in excess of the purchase price thereof;
(3) Indebtedness that is secured only by real property;
and
(4) Indebtedness of up to $5 million that is unsecured.
(xx) "Person" means any natural person, partnership,
corporation, limited liability company, trust, incorporated organization,
unincorporated association, joint stock company or association or similar entity
or any government, governmental agency or political subdivision.
(yy) "QIB" means a "qualified institutional buyer" as defined in
Rule 144A.
(zz) "Record Date" shall mean, with respect to any dividend,
distribution or other transaction or event in which the holders of Common Stock
have the right to receive any cash, securities or other property or in which the
Common Stock (or other applicable security) is exchanged for or converted into
any combination of cash, securities or other property, the date fixed for
determination of stockholders entitled to receive such cash, securities or other
property (whether such date is fixed by the Board of Directors or by statute,
contract or otherwise).
(aaa) "Redemption Notice" means a Redemption Notice substantially
in the form attached to the Subscription Agreement as Annex H.
(bbb) "Registrable Securities" means (1) the shares of Common
Stock issuable or issued upon conversion of shares of Series B Preferred Stock,
(2) if the Common Stock is changed, converted or exchanged by the Corporation or
its successor, as the case may be, into any other stock or other securities on
or after the date this Certificate of Designations is filed with the Secretary
of State of the State of Delaware, such other stock or other securities which
are issued or issuable in respect of or in lieu of the shares of Common Stock
issuable or issued upon conversion of shares of Series B Preferred Stock and (3)
if any other securities are issued to holders of the Common Stock (or such other
shares or other securities into which or for which the Common Stock is so
changed, converted or exchanged as described in the immediately preceding clause
(2)) upon any reclassification, share combination, share subdivision, share
dividend, merger, consolidation or similar transaction or event, such other
securities which are issued or issuable in respect of or in lieu of the shares
of Common Stock issuable or issued upon conversion of shares of Series B
Preferred Stock.
9
(ccc) "Registration Period" means the first to occur of the
following time frames: (1) the date which is five years after the SEC Effective
Date, (2) the date on which no Person who is entitled to the benefits of Section
8 of any Subscription Agreement and who is or was a Holder any longer owns or
has any right to acquire any Registrable Securities or (3) the date on which
each Person who is entitled to the benefits of Section 8 of any Subscription
Agreement and who is or was a Holder may sell, pursuant to Rule 144 under the
1933 Act (or any successor or replacement rule or regulation), all Registrable
Securities owned by such Person or which such Person has the right to acquire,
without the filing of any notice with the SEC and without restriction on the
manner of sale or amount of securities sold.
(ddd) "Registration Statement" means the Registration Statement
required to be filed by the Corporation with the SEC pursuant to Section 8 of
each Subscription Agreement.
(eee) "Rule 144A" means Rule 144A as promulgated under the 1933
Act.
(fff) "SEC" means the United States Securities and Exchange
Commission.
(ggg) "SEC Effective Date" means the date on which the
Registration Statement is first ordered effective by the SEC.
(hhh) "Securities" shall have the meaning provided in Section
10(c).
(iii) "Senior Dividend Stock" means any class or series of
capital stock of the Corporation ranking, as to dividends, senior to the Series
B Preferred Stock.
(jjj) "Senior Liquidation Stock" means any class or series of
capital stock of the Corporation ranking senior as to liquidation rights to the
Series B Preferred Stock.
(kkk) "Series B Preferred Stock" means the Series B Convertible
Redeemable Preferred Stock, $0.001 par value, of the Corporation.
(lll) "Stated Value" means $1,000 per share of Series B Preferred
Stock (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to the shares of Series B Preferred
Stock after the filing date hereof).
(mmm) "Subscription Agreements" means the several Subscription
Agreements, dated as of July 27, 2001, by and between the Corporation and the
several original Holders pursuant to which the shares of Series B Preferred
Stock were issued.
(nnn) "Subsidiary" means any corporation or other entity of which
a majority of the capital stock or other ownership interests having ordinary
voting power to elect a majority of the Corporation's board of directors or
other persons performing similar functions are at the time directly or
indirectly owned by the Corporation.
(ooo) "Tender Offer" means a tender offer or exchange offer.
(ppp) "Trading Day" means a day on whichever of (1) the national
securities exchange, (2) the Nasdaq or (3) such other securities market, in any
such case which at the time
10
constitutes the principal securities market for the Common Stock, is open for
general trading of securities.
(qqq) "Transaction Documents" means, individually or
collectively, the Subscription Agreements, this Certificate of Designations, the
Transfer Agent Instruction and each other instrument, statement or certificate
given in writing in connection herewith or therewith.
(rrr) "Transfer Agent" means Mellon Investor Services LLC, or its
duly appointed successor who shall be serving as transfer agent and registrar
for the Common Stock and who shall have been authorized by the Corporation to
act as conversion agent for the Series B Preferred Stock in accordance with the
Transfer Agent Instruction and the name, address and telephone number of which
shall have been given to the Holders by notice from the Corporation.
(sss) "Transfer Agent Instruction" means the Transfer Agent
Instruction, dated [________ __, 2001], from the Corporation to the Transfer
Agent for the benefit of the Holders.
SECTION 2. DESIGNATION AND AMOUNT.
The shares of such series shall be designated as "Series B Convertible
Redeemable Preferred Stock", and the number of shares constituting the Series B
Preferred Stock shall be 60,000, and shall not be subject to increase. The
Corporation shall not issue any shares of Series B Preferred Stock other than
pursuant to the Subscription Agreements, unless such issuance shall have been
approved by the Majority Holders. Any shares of Series B Preferred Stock which
are redeemed by the Corporation and retired and any shares of Series B Preferred
Stock which are converted into shares of Common Stock in accordance with Section
10 shall be restored to the status of authorized, unissued and undesignated
shares of the Corporation's class of Preferred Stock and shall not be subject to
issuance, and shall not thereafter be outstanding, as shares of Series B
Preferred Stock.
SECTION 3. SERIES B PREFERRED STOCK CAPITAL.
The amount to be represented in the capital account for the Series B
Preferred Stock at all times for each outstanding share of Series B Preferred
Stock shall be an amount equal to the sum of (a) the Stated Value PLUS (b) an
amount equal to any declared and unpaid dividends on such share of Series B
Preferred Stock to the date of determination.
SECTION 4. RANK.
The shares of Series B Preferred Stock shall rank senior to the Common
Stock and any shares of any other series of Preferred Stock or any shares of any
other class of preferred stock of the Corporation, now or hereafter issued, as
to payment of dividends and distribution of assets upon liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
except as otherwise approved by the Majority Holders in accordance with Section
12(b). Nothing in this Section 4 shall prohibit the Corporation from issuing
shares of capital stock if such issuance is made in compliance with Section
12(b) and the applicable provisions of the General Corporation Law of the State
of Delaware.
11
SECTION 5. DIVIDENDS.
The holders of shares of Series B Preferred Stock shall be entitled to
receive dividends only when, as, and if declared by the Board of Directors out
of funds legally available for such purpose. No dividends shall be paid or
declared and set apart for payment on the Common Stock unless an equivalent
amount per share (based on the relative stated values) shall have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series B Preferred Stock.
SECTION 6. LIQUIDATION PREFERENCE.
In the event of a liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, the Holders shall be entitled to
receive out of the assets of the Corporation, whether such assets constitute
stated capital or surplus of any nature, an amount per share of Series B
Preferred Stock equal to the Liquidation Preference, and no more, before any
payment shall be made or any assets distributed to the holders of Junior
Liquidation Stock; PROVIDED, HOWEVER, that such rights shall accrue to the
Holders only in the event that the Corporation's payments with respect to the
liquidation preference of the holders of Senior Liquidation Stock that has been
issued consistent with this Certificate of Designations are fully met. After the
liquidation preferences of such Senior Liquidation Stock are fully met, the
remaining assets of the Corporation available for distribution shall be
distributed ratably among the Holders and the holders of any Parity Liquidation
Stock that has been issued consistent with this Certificate of Designations in
proportion to the respective preferential amounts to which each is entitled up
to the full extent of such preferential amounts. After payment in full of the
Liquidation Preference of the shares of the Series B Preferred Stock and the
liquidation preference of such Parity Liquidation Stock that has been issued
consistent with this Certificate of Designations, the Holders shall not be
entitled to any further participation in any distribution of assets by the
Corporation.
SECTION 7. MANDATORY REDEMPTION.
(a) The Corporation shall give a Mandatory Redemption Notice to the
Holders not less than 30 nor more than 45 Business Days prior to the Initial
Mandatory Redemption Date; PROVIDED, HOWEVER, that each Holder, with respect to
its Series B Preferred Stock, shall have the right but not the obligation to
delay the Initial Mandatory Redemption Date by one year. Any Holder desiring to
extend the Initial Mandatory Redemption Date shall provide the Corporation
written notice no later than 60 days prior to the Initial Mandatory Redemption
Date. The Corporation shall give a Mandatory Redemption Notice to the Holders of
Series B Preferred Stock which has not been redeemed on the Initial Mandatory
Redemption Date not less than 30 nor more than 45 Business Days prior to the
Final Mandatory Redemption Date. On the Initial Mandatory Redemption Date, the
Series B Preferred Stock outstanding on the date the Mandatory Redemption Notice
is sent and held by Holders who have not requested a delay in the Initial
Mandatory Redemption Date shall be redeemed at the Mandatory Redemption Price.
Notwithstanding the foregoing, the number of shares of Series B Preferred Stock
to be redeemed from each Holder on the Initial Mandatory Redemption Date shall
be reduced (and there shall be a corresponding reduction in the total number of
shares redeemed) by the number of shares with respect to which such Holder has
given a Conversion
12
Notice (1) on or after the date the Mandatory Redemption Notice is given and (2)
prior to the Initial Mandatory Redemption Date. On the Final Mandatory
Redemption Date, all outstanding Series B Preferred Stock shall be redeemed at
the Mandatory Redemption Price. Any failure or defect in the giving of the
Mandatory Redemption Notice shall not affect the Corporation's obligation to
redeem the shares of Series B Preferred Stock pursuant to this Section 7.
(b) On the Initial Mandatory Redemption Date or the Final Mandatory
Redemption Date (or such later date as a particular Holder shall surrender to
the Corporation the certificate(s) for the shares of Series B Preferred Stock
redeemed), the Corporation shall pay to or upon the order of each Holder by wire
transfer of immediately available funds to such account as shall be specified
for such purpose by such Holder an amount equal to the Mandatory Redemption
Price of all of such Holder's shares of Series B Preferred Stock to be redeemed
on the Initial Mandatory Redemption Date or the Final Mandatory Redemption Date,
as applicable. A Holder of such shares of Series B Preferred Stock shall not be
entitled to payment of the Mandatory Redemption Price of such shares of Series B
Preferred Stock until such Holder shall have surrendered the certificate(s) for
such shares of Series B Preferred Stock to the Corporation or, in the case of
the loss, theft or destruction of any such certificate, given indemnity in
accordance with Section 14(b).
(c) The Corporation shall not be entitled to give the Mandatory
Redemption Notice with respect to, or to redeem, any shares of Series B
Preferred Stock with respect to which a Conversion Notice has been given
providing for a Conversion Date which is on or prior to the date on which the
Mandatory Redemption Notice is given or after the date on which the Mandatory
Redemption Notice is given but prior to the Initial Mandatory Redemption Date.
If a Mandatory Redemption Notice has been given, thereafter the proceedings for
such Mandatory Redemption shall not affect the rights of the Holders to convert
in accordance with Section 10 any shares of Series B Preferred Stock at any time
prior to the Initial Mandatory Redemption Date or the Final Mandatory Redemption
Date. If on the applicable Initial Mandatory Redemption Date or the Final
Mandatory Redemption Date the Corporation fails to pay the Mandatory Redemption
Price of any outstanding shares of Series B Preferred Stock to be redeemed in
full to such Holder or to deposit the same with an Eligible Bank in accordance
with Section 14(c), such Holder shall be entitled to convert in accordance with
Section 10 such shares of Series B Preferred Stock of such Holder so called for
redemption at any time after the Initial Mandatory Redemption Date or the Final
Mandatory Redemption Date and prior to the date on which the Corporation pays
the Mandatory Redemption Price in full to such Holder for all shares of Series B
Preferred Stock to be redeemed from such Holder (together with any amount due to
such Holder pursuant to Section 14(d)) or so deposits the same (together with
any amount due to such Holder pursuant to Section 14(d)) and gives notice to
such Holder of such deposit and in the case of any such conversion of any share
of Series B Preferred Stock, upon delivery to the converting Holder of the
shares of Common Stock issuable upon such conversion the Corporation shall have
no further liability in respect of the Mandatory Redemption Price of such share
of Series B Preferred Stock so converted other than payment of the amount
payable pursuant to Section 14(d) in respect of the period from the Initial
Mandatory Redemption Date or the Final Mandatory Redemption Date to the
Conversion Date for such conversion; PROVIDED, HOWEVER, that a Holder of such
shares of Series B Preferred Stock shall not be entitled to convert such shares
of Series B Preferred Stock if the Corporation's failure to pay the Mandatory
Redemption Price is due to such Holder's failure to have surrendered the
certificate(s) for such
13
shares of Series B Preferred Stock to the Corporation or, in the case of the
loss, theft or destruction of any such certificate, given indemnity in
accordance with Section 14(b).
SECTION 8. NO SINKING FUND.
The shares of Series B Preferred Stock shall not be entitled to the
benefits of any sinking fund for the redemption or repurchase of shares of
Series B Preferred Stock.
SECTION 9. REDEMPTION AT OPTION OF CORPORATION.
(a) Corporation Redemption.
(1) At any time after the second anniversary of the Issuance
Date, the Corporation shall have the right, if a Corporation Redemption Event
shall have occurred, on one occasion only with respect to such Corporation
Redemption Event to redeem on the applicable Corporation Redemption Date all or
any portion of the outstanding shares of Series B Preferred Stock so long as on
the date the Corporation gives the Redemption Notice and at all times thereafter
through such Corporation Redemption Date (A) the Corporation shall be in
compliance in all material respects with its obligations to the Holders
(including, without limitation, its obligations under the Transaction
Documents), (B) if such Redemption Notice is given before the end of the
Registration Period, the Registration Statement shall be effective and available
for use by the selling stockholders named therein and shall reasonably be
expected to remain effective and available for such use for the 30 days
following such Corporation Redemption Date, (C) no Holder Optional Repurchase
Event shall have occurred (i) with respect to which any Holder shall be entitled
to exercise redemption rights under Section 11 or (ii) with respect to which any
Holder shall have exercised such rights and the Corporation shall not have paid,
or deposited in accordance with Section 14(c), the Holder Optional Repurchase
Price and (D) the Corporation has sufficient funds legally available to pay the
Corporation Redemption Price of the shares of Series B Preferred Stock to be
redeemed. Any redemption of outstanding shares of Series B Preferred Stock
pursuant to this Section 9(a) shall be made at the applicable Corporation
Redemption Price. To exercise its right of redemption under this Section 9(a),
the Corporation shall give a Redemption Notice to the Holders within five (5)
Trading Days after such Corporation Redemption Event occurs and the Corporation
Redemption Date shall be set by the Corporation at not less than 30 nor more
than 35 Trading Days after the date of such Redemption Notice.
(2) On the Corporation Redemption Date (or such later date as
a particular Holder shall surrender to the Corporation the certificate(s) for
the shares of Series B Preferred Stock redeemed), the Corporation shall pay to
or upon the order of each Holder by wire transfer of immediately available funds
to such account as shall be specified for such purpose by such Holder an amount
equal to the Corporation Redemption Price of all of such Holder's shares of
Series B Preferred Stock to be redeemed on the Corporation Redemption Date. A
Holder of such shares of Series B Preferred Stock shall not be entitled to
payment of the Corporation Redemption Price of such shares of Series B Preferred
Stock until such Holder shall have surrendered the certificate(s) for such
shares of Series B Preferred Stock to the Corporation or, in the case of the
loss, theft or destruction of any such certificate, given indemnity in
accordance with Section 14(b).
14
(3) The Corporation shall not be entitled to give a Redemption
Notice with respect to, or to redeem, any shares of Series B Preferred Stock
with respect to which a Conversion Notice has been given providing for a
Conversion Date which is on or prior to the date on which a Redemption Notice is
given. If a Redemption Notice has been given, thereafter the proceedings for
such redemption shall not affect the rights of the Holders to convert in
accordance with Section 10 any shares of Series B Preferred Stock called for
redemption at any time prior to the Corporation Redemption Date for such shares.
If on the applicable Corporation Redemption Date the Corporation fails to pay
the Corporation Redemption Price of any outstanding shares of Series B Preferred
Stock to be redeemed in full to such Holder or to deposit the same with an
Eligible Bank in accordance with Section 14(c), such Holder shall be entitled to
convert in accordance with Section 10 the shares of Series B Preferred Stock of
such Holder so called for redemption at any time after such Corporation
Redemption Date and prior to the date on which the Corporation pays the
Corporation Redemption Price in full to such Holder for all shares of Series B
Preferred Stock to be redeemed from such Holder (together with any amount due to
such Holder pursuant to Section 14(d)) or so deposits the same (together with
any amount due to such Holder pursuant to Section 14(d)) and gives notice to
such Holder of such deposit and in the case of any such conversion of any share
of Series B Preferred Stock, upon delivery to the converting Holder of the
shares of Common Stock issuable upon such conversion the Corporation shall have
no further liability in respect of the Corporation Redemption Price of such
share of Series B Preferred Stock so converted, other than payment of the amount
payable pursuant to Section 14(d) in respect of the period from the applicable
Corporation Redemption Date to the Conversion Date for such conversion;
PROVIDED, HOWEVER, that a Holder of such shares of Series B Preferred Stock
shall not be entitled to convert such shares of Series B Preferred Stock if the
Corporation's failure to pay the Corporation Redemption Price is due to such
Holder's failure to have surrendered the certificate(s) for such shares of
Series B Preferred Stock to the Corporation or, in the case of the loss, theft
or destruction of any such certificate, given indemnity in accordance with
Section 14(b).
(b) No Other Redemption at the Option of the Corporation. Except as
otherwise specifically provided in Section 9(a), the Corporation shall not have
any right to redeem any shares of Series B Preferred Stock at the option of the
Corporation.
SECTION 10. CONVERSION.
(a) Right to Convert. Subject to and upon compliance with the
provisions of this Section 10, each Holder shall have the right, at such
Holder's option, at any time (except that if such Holder shall have exercised
redemption rights under Section 11 or the Corporation shall have exercised its
redemption rights under Section 9, such conversion right shall terminate with
respect to the shares of Series B Preferred Stock to be redeemed at the close of
business on the last Trading Day prior to the date the Corporation pays or
deposits in accordance with Section 14(c) the applicable Holder Optional
Repurchase Price or Corporation Redemption Price unless the Corporation shall
default in payment due upon redemption of any share of Series B Preferred Stock
(except in the case where the Corporation's failure to pay the applicable Holder
Optional Repurchase Price or Corporation Redemption Price is due to such
Holder's failure to have surrendered the certificate(s) for such shares of
Series B Preferred Stock to the Corporation or, in the case of the loss, theft
or destruction of any such certificate, given indemnity in accordance with
Section 14(b))) to convert the outstanding shares of Series B Preferred Stock
held by such
15
Holder, or from time to time any portion of such shares, plus an amount equal to
any declared and unpaid dividends on such share, into that number of fully paid
and non-assessable shares of Common Stock (as such shares shall then be
constituted) obtained by dividing (1) the sum of (A) the aggregate Stated Value
of all shares of Series B Preferred Stock being converted by such Holder on the
same Conversion Date PLUS (B) any declared and unpaid dividends on the shares of
Series B Preferred Stock being converted to the applicable Conversion Date BY
(2) the Conversion Price in effect on the applicable Conversion Date, by giving
a Conversion Notice in the manner provided in Section 10(b); PROVIDED, HOWEVER,
that, if at any time any share of Series B Preferred Stock is converted in whole
or in part pursuant to this Section 10(a), the Corporation does not have
available for issuance upon such conversion as authorized and unissued shares or
in its treasury at least the number of shares of Common Stock required to be
issued pursuant hereto, then, at the election of such Holder made by notice from
such Holder to the Corporation, such share of Series B Convertible Preferred
Stock, to the extent that sufficient shares of Common Stock are not then
available for issuance upon conversion, shall be converted into the right to
receive from the Corporation, in lieu of the shares of Common Stock into which
such share of Series B Convertible Preferred Stock would otherwise be converted
and which the Corporation is unable to issue, payment in an amount equal to the
product obtained by multiplying (1) the number of shares of Common Stock to
which the Holder is entitled which the Corporation is unable to issue TIMES (2)
the arithmetic average of the Market Price for the Common Stock during the five
consecutive Trading Days immediately prior to the applicable Conversion Date.
Any such payment shall, for all purposes of this Certificate of Designations, be
deemed to be satisfaction in full of the Corporation's obligation to issue upon
such conversion shares of Common Stock that are not then available for issuance
upon such conversion. A Holder is not entitled to any rights of a holder of
Common Stock until such Holder has converted one or more shares of Series B
Preferred Stock to Common Stock, and only to the extent any such shares of
Series B Preferred Stock are deemed to have been converted to Common Stock under
this Section 10. For purposes of Sections 10(d) and 10(e), whenever a provision
references the shares of Common Stock into which any share of Series B Preferred
Stock is convertible or the shares of Common Stock issuable upon conversion of
any share of Series B Preferred Stock or words of similar import, any
determination required by such provision shall be made as if a sufficient number
of shares of Common Stock were then available for issuance upon conversion in
full of all outstanding shares of Series B Preferred Stock.
(b) Exercise of Conversion Privilege; Issuance of Common Stock on
Conversion; no Adjustment for Interest or Dividends.
(1) To exercise the conversion privilege with respect to the
Series B Preferred Stock, a Holder shall give a Conversion Notice (or such other
notice which is acceptable to the Corporation) to the Corporation and the
Transfer Agent or to the office or agency designated by the Corporation for such
purpose by notice to the Holders. A Conversion Notice may be given by telephone
line facsimile transmission to the numbers set forth on the form of Conversion
Notice.
(2) As promptly as practicable, but in no event later than
three (3) Trading Days, after a Conversion Date, the Corporation shall issue and
shall deliver to the Holder giving a Conversion Notice or such Holder's designee
the number of full shares of Common Stock issuable upon such conversion of
shares of Series B Preferred Stock in
16
accordance with the provisions of this Section 10 and deliver a check or cash in
respect of any fractional interest in respect of a share of Common Stock arising
upon such conversion, as provided in Section 10(b)(7) and, if applicable, any
cash payment required pursuant to the proviso to the first sentence of Section
10(a) (which payment, if any, shall be paid no later than three (3) Trading Days
after the applicable Conversion Date). The Holder shall promptly surrender to
the Corporation such Holder's certificates for the shares of Series B Preferred
Stock to be converted.
(3) Each conversion of shares of Series B Preferred Stock
shall be deemed to have been effected on the applicable Conversion Date, and the
person in whose name any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become on such
Conversion Date the holder of record of the shares represented thereby;
PROVIDED, HOWEVER, that if a Conversion Date is a date on which the stock
transfer books of the Corporation shall be closed such conversion shall
constitute the person in whose name the certificates are to be issued as the
record holder thereof for all purposes on the next succeeding day on which such
stock transfer books are open, but such conversion shall be at the Conversion
Price in effect on the applicable Conversion Date.
(4) The Corporation shall notify a Holder of any claim by the
Corporation of manifest error in a Conversion Notice within two (2) Trading Days
after such Holder gives such Conversion Notice and no such claim of error shall
limit or delay performance of the Corporation's obligation to issue upon such
conversion the number of shares of Common Stock which are not in dispute. A
Conversion Notice shall be deemed for all purposes to be in proper form unless
the Corporation notifies the Holder who gives a Conversion Notice by telephone
line facsimile transmission within three (3) Trading Days after the Conversion
Date (which notice from the Corporation shall specify all defects in the
Conversion Notice) and any Conversion Notice containing any such defect shall
nonetheless be effective on the Conversion Date if such Holder promptly
undertakes to correct all such defects. The Corporation shall pay all expenses
related to such issuances (including any stamp taxes or issue taxes); provided
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of shares of
Common Stock or other securities or property on conversion of shares of Series B
Preferred Stock in a name other than that of such Holder, and the Corporation
shall not be required to issue or deliver any such shares or other securities or
property unless and until the person or persons requesting the issuance thereof
shall have paid to the Corporation the amount of any such tax or shall have
established to the satisfaction of the Corporation that such tax has been paid.
The converting Holder shall be responsible for the amount of any withholding tax
payable in connection with any conversion of shares of Series B Preferred Stock.
(5) If a Holder shall have given a Conversion Notice in
accordance with the terms of this Certificate of Designations, the Corporation's
obligation to issue and deliver the certificates for Common Stock shall be
absolute and unconditional, irrespective of any action or inaction by such
Holder to enforce the same, any waiver or consent with respect to any provision
hereof, the recovery of any judgment against any person or any action to enforce
the same, any failure or delay in the enforcement of any other obligation of the
Corporation to any Holder, or any setoff, counterclaim, recoupment, limitation
or termination, or any breach or alleged breach by any Holder or any other
person of any obligation to the Corporation or any
17
violation or alleged violation of law by any Holder or any other person, and
irrespective of any other circumstance which might otherwise limit such
obligation of the Corporation to such Holder in connection with such conversion;
PROVIDED, HOWEVER, that nothing herein shall limit or prejudice the right of the
Corporation to pursue any such claim in any other manner permitted by applicable
law. The occurrence of an event which requires an adjustment of the Conversion
Price as contemplated by Section 10(c) shall in no way restrict or delay the
right of any Holder to receive certificates for Common Stock upon conversion of
shares of Series B Preferred Stock and the Corporation shall use its best
efforts to implement such adjustment on terms reasonably acceptable to the
Majority Holders within two (2) Trading Days after such occurrence.
(6) If the Corporation fails to issue and deliver the shares
of Common Stock to a converting Holder in connection with a particular
conversion of shares of Series B Preferred Stock within three (3) Trading Days
after a Conversion Date, in addition to any other liabilities the Corporation
may have hereunder and under applicable law (x) the Corporation shall pay or
reimburse such Holder on demand for all out-of-pocket expenses, including,
without limitation, reasonable fees and expenses of legal counsel, incurred by
the Holder as a result of such failure, (y) if as a result of such failure such
Holder shall suffer any direct damages or liabilities from such failure
(including, without limitation, margin interest and the cost of purchasing
securities to cover a sale (whether by such Holder or such Holder's securities
broker) or borrowing of shares of Common Stock by such Holder for purposes of
settling any trade involving a sale of shares of Common Stock made by such
Holder during the period beginning on the Conversion Date and ending on the date
the Corporation delivers or causes to be delivered to such Holder such shares of
Common Stock), then the Corporation shall upon demand of such Holder pay to the
Holder an amount equal to the actual direct, out-of-pocket damages and
liabilities suffered by such Holder by reason thereof which such Holder
documents to the reasonable satisfaction of the Corporation, and (z) the Holder
may by written notice (which may be given by mail, courier, personal service or
telephone line facsimile transmission), given at any time prior to delivery to
such Holder of the shares of Common Stock issuable in connection with such
exercise of the Holder's conversion right, rescind such exercise and the
Conversion Notice relating thereto, in which case such Holder shall thereafter
be entitled to convert, in accordance with this Section 10 that portion of such
shares of Series B Preferred Stock as to which such exercise is so rescinded.
Notwithstanding the foregoing, the Corporation shall not be liable to such
Holder under clause (y) of the immediately preceding sentence to the extent the
failure of the Corporation to deliver or to cause to be delivered such shares of
Common Stock results from fire, flood, storm, earthquake, shipwreck, strike,
war, acts of terrorism, crash involving facilities of a common carrier, acts of
God, or any similar event outside the control of the Corporation (it being
understood that the action or failure to act of the Transfer Agent shall not be
deemed an event outside the control of the Corporation except to the extent
resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of
terrorism, crash involving facilities of a common carrier, acts of God, the
bankruptcy, liquidation or reorganization of the Transfer Agent under any
bankruptcy, insolvency or other similar law or any similar event outside the
control of the Transfer Agent). A converting Holder shall notify the Corporation
in writing (or by telephone conversation, confirmed in writing) as promptly as
practicable following the third Trading Day after the Conversion Date if such
Holder becomes aware that such shares of Common Stock so issuable have not been
received as provided herein, but any failure so to give such notice shall not
affect the Holder's rights under this Certificate of Designations or otherwise.
18
(7) No fractional shares of Common Stock shall be issued upon
conversion of any shares of Series B Preferred Stock but, in lieu of any
fraction of a share of Common Stock which would otherwise be issuable in respect
of such conversion, the Corporation shall pay lawful money of the United States
of America for such fractional share, based on a value of one share of Common
Stock being equal to the Market Price of the Common Stock on the applicable
Conversion Date.
(8) If a portion of the shares of Series B Preferred Stock
represented by a particular certificate are to be converted, upon surrender of
such certificate to the Corporation, the Corporation shall execute and deliver
to the Holders of such certificate without service charge, a new certificate or
certificates, in such denomination or denominations as requested by such Holder.
(c) Adjustment of Conversion Price. The Conversion Price shall be
adjusted from time to time by the Corporation as follows:
(1) In case the Corporation shall on or after the Issuance
Date pay a dividend or make a distribution to all holders of the outstanding
Common Stock in shares of Common Stock, the Conversion Price in effect at the
opening of business on the date following the date fixed for the determination
of stockholders entitled to receive such dividend or other distribution shall be
reduced by multiplying such Conversion Price by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at the close
of business on the Record Date fixed for such determination and the denominator
shall be the sum of such number of shares and the total number of shares
constituting such dividend or other distribution, such reduction to become
effective immediately after the opening of business on the day following such
Record Date. If any dividend or distribution of the type described in this
Section 10(c)(1) is declared but not so paid or made, the Conversion Price shall
again be adjusted to the Conversion Price which would then be in effect if such
dividend or distribution had not been declared.
(2) In case the Corporation shall on or after the Issuance
Date issue rights or warrants (other than any rights or warrants referred to in
Section 10(c)(4)) to all holders of its outstanding shares of Common Stock
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the Conversion Price in effect on the Record Date fixed for
the determination of stockholders entitled to receive such rights or warrants,
the Conversion Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect at the opening of
business on the date after such Record Date by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the applicable Record Date plus the number of shares which the
aggregate offering price of the total number of shares so offered pursuant to
such rights or warrants would purchase at such current Conversion Price, and the
denominator shall be the number of shares of Common Stock outstanding on the
close of business on such Record Date plus the total number of additional shares
of Common Stock so offered for subscription or purchase. Such adjustment shall
become effective immediately after the opening of business on the day following
the Record Date fixed for determination of stockholders entitled to receive such
rights or warrants. To the extent that shares of Common Stock are not delivered
pursuant to such rights or warrants, upon the expiration or termination of such
rights or warrants,
19
the Conversion Price shall be readjusted to the Conversion Price which would
then be in effect had the adjustments made upon the issuance of such rights or
warrants been made on the basis of delivery of only the number of shares of
Common Stock actually delivered. In the event that such rights or warrants are
not so issued, the Conversion Price shall again be adjusted to be the Conversion
Price which would then be in effect if such Record Date had not been fixed. In
determining whether any rights or warrants entitle the holder to subscribe for
or purchase shares of Common Stock at less than such current Conversion Price,
and in determining the aggregate offering price of such shares of Common Stock,
there shall be taken into account any consideration received for such rights or
warrants, and the value of such consideration, if other than cash, shall be
determined by the Board of Directors.
(3) In case the outstanding shares of Common Stock shall on or
after the Issuance Date be subdivided into a greater number of shares of Common
Stock, the Conversion Price in effect at the opening of business on the earlier
of the day following the day upon which such subdivision becomes effective and
the day on which "ex-" trading of the Common Stock begins with respect to such
subdivision shall be proportionately reduced, and conversely, in case
outstanding shares of Common Stock shall be combined into a smaller number of
shares of Common Stock, the Conversion Price in effect at the opening of
business on the earlier of the day following the day upon which such combination
becomes effective and the day on which "ex-" trading of the Common Stock with
respect to such combination begins shall be proportionately increased, such
reduction or increase, as the case may be, to become effective immediately after
the opening of business on the earlier of the day following the day upon which
such subdivision or combination becomes effective and the day on which "ex-"
trading of the Common Stock begins with respect to such subdivision or
combination.
(4) In case the Corporation shall on or after the Issuance
Date, by dividend or otherwise, distribute to all holders of its Common Stock
shares of any class of capital stock of the Corporation (other than any
dividends or distributions to which Section 10(c)(1) applies), evidences of its
indebtedness, cash or other assets (including securities, but excluding (i) any
rights or warrants referred to in Section 10(c)(2), (ii) dividends and
distributions paid exclusively in cash and (iii) any capital stock, evidences of
indebtedness, cash or assets distributed upon a merger or consolidation to which
Section 10(d) applies) (the foregoing hereinafter in this Section 10(c)(4)
called the "Securities")), then, in each such case, subject to the second
paragraph of this Section 10(c)(4), the Conversion Price shall be reduced so
that the same shall be equal to the price determined by multiplying the
Conversion Price in effect immediately prior to the close of business on the
Record Date with respect to such distribution by a fraction the numerator of
which shall be the Current Market Price on such date less the fair market value
(as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) on such date of the portion of
the Securities so distributed applicable to one share of Common Stock and the
denominator shall be such Current Market Price, such reduction to become
effective immediately prior to the opening of business on the day following such
Record Date; PROVIDED, HOWEVER, that in the event the then fair market value (as
so determined) of the portion of the Securities so distributed applicable to one
share of Common Stock is equal to or greater than the Current Market Price on
the Record Date, in lieu of the foregoing adjustment, adequate provision shall
be made so that the Holders shall have the right to receive upon conversion of
shares of Series B Preferred Stock the amount of Securities such Holder would
have received had such Holder converted such Holder's shares of
20
Series B Preferred Stock into shares of Common Stock immediately prior to such
Record Date. In the event that such dividend or distribution is not so paid or
made, the Conversion Price shall again be adjusted to be the Conversion Price
which would then be in effect if such dividend or distribution had not been
declared. If the Board of Directors determines the fair market value of any
distribution for purposes of this Section 10(c)(4) by reference to the actual or
when issued trading market for any Securities comprising all or part of such
distribution, it must in doing so consider the prices in such market over the
same period used in computing the Current Market Price to the extent possible.
Rights or warrants distributed by the Corporation to all holders of Common
Stock entitling the holders thereof to subscribe for or purchase shares of the
Corporation's capital stock (either initially or under certain circumstances),
which rights or warrants, until the occurrence of a specified event or events (a
"Trigger Event"): (i) are deemed to be transferred with such shares of Common
Stock; (ii) are not exercisable; and (iii) are also required to be issued in
respect of future issuances of Common Stock, shall not be deemed to have been
distributed for purposes of this Section 10(c) (and no adjustment to the
Conversion Price under this Section 10(c) will be required) until the occurrence
of the earliest Trigger Event; PROVIDED, HOWEVER, that the Holders have not
violated any provision of Section 5(k)(x) of the Subscription Agreements. If any
such rights or warrants, including any such existing rights or warrants
distributed prior to the Issuance Date, are subject to Trigger Events, upon the
satisfaction of each of which such rights or warrants shall become exercisable
to purchase different securities, evidences of indebtedness or other assets,
then the occurrence of each such Trigger Event shall be deemed to be such date
of issuance and record date with respect to new rights or warrants (and a
termination or expiration of the existing rights or warrants without exercise by
the holder thereof) (so that, by way of illustration and not limitation, the
dates of issuance of any such rights shall be deemed to be the dates on which
such rights become exercisable to purchase capital stock of the Corporation, and
not the date on which such rights may be issued, or may become evidenced by
separate certificates, if such rights are not then so exercisable). In addition,
in the event of any distribution of rights or warrants, or any Trigger Event
with respect thereto, that was counted for purposes of calculating a
distribution amount for which an adjustment to the Conversion Price under this
Section 10(c) was made (i) in the case of any such rights or warrants which
shall all have been redeemed or repurchased without exercise by any holders
thereof, the Conversion Price shall be readjusted upon such final redemption or
repurchase to give effect to such distribution or Trigger Event, as the case may
be, as though it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder or holders of Common Stock with respect to
such rights or warrants (assuming such holder had retained such rights or
warrants), made to all holders of Common Stock as of the date of such redemption
or repurchase, and (ii) in the case of such rights or warrants which shall have
expired or been terminated without exercise by any holders thereof, the
Conversion Price shall be readjusted as if such rights and warrants had not been
issued.
For purposes of this Section 10(c)(4) and Sections 10(c)(1) and (2), any
dividend or distribution to which this Section 10(c)(4) is applicable that also
includes shares of Common Stock, or rights or warrants to subscribe for or
purchase shares of Common Stock to which Section 10(c)(2) applies (or both),
shall be deemed instead to be (i) a dividend or distribution of the evidences of
indebtedness, assets, shares of capital stock, rights or warrants other than
such shares of Common Stock or rights or warrants to which Section 10(c)(2)
applies (and any
21
Conversion Price reduction required by this Section 10(c)(4) with respect to
such dividend or distribution shall then be made) immediately followed by (ii) a
dividend or distribution of such shares of Common Stock or such rights or
warrants (and any further Conversion Price reduction required by Sections
10(c)(1) and (2) with respect to such dividend or distribution shall then be
made), except (A) the Record Date of such dividend or distribution shall be
substituted as "the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution", "Record Date fixed for such
determination" and "Record Date" within the meaning of Section 10(c)(1) and as
"the date fixed for the determination of stockholders entitled to receive such
rights or warrants", "the Record Date fixed for the determination of the
stockholders entitled to receive such rights or warrants" and "such Record Date"
within the meaning of Section 10(c)(2) and (B) any shares of Common Stock
included in such dividend or distribution shall not be deemed "outstanding at
the close of business on the Record Date fixed for such determination" within
the meaning of Section 10(c)(1).
(5) In case the Corporation shall on or after the Issuance
Date, by dividend or otherwise, distribute to all holders of its Common Stock
cash (excluding any cash that is distributed upon a merger or consolidation to
which Section 10(d) applies or as part of a distribution referred to in Sections
10(c)(4) or 10(c)(6)) in an aggregate amount that, combined with (A) the
aggregate amount of any other such distributions to all holders of its Common
Stock made exclusively in cash within the 12 months preceding the date of
payment of such distribution, and in respect of which no adjustment pursuant to
this Section 10(c)(5) or Section 10(c)(6) has been made, and (B) the aggregate
of any cash plus the fair market value (as determined by the Board of Directors,
whose determination shall be conclusive and set forth in a Board Resolution) of
consideration payable in respect of any Tender Offer by the Corporation or any
Subsidiary for all or any portion of the Common Stock concluded within the 12
months preceding the date of payment of such distribution, and in respect of
which no adjustment pursuant to Section 10(c)(6) has been made, exceeds 10% of
the product of (x) the Current Market Price on the Record Date with respect to
such distribution TIMES (y) the number of shares of Common Stock outstanding on
such date, then, and in each such case, immediately after the close of business
on such date, unless the Corporation elects to reserve such cash for
distribution to the Holders upon the conversion of shares of Series B Preferred
Stock (and shall have made adequate provision) so that the Holders will receive
upon such conversion, in addition to the shares of Common Stock to which the
Holders are entitled, the amount of cash which the Holders would have received
if the Holders had, immediately prior to the Record Date for such distribution
of cash, converted their shares of Series B Preferred Stock into Common Stock,
the Conversion Price shall be reduced so that the same shall equal the price
determined by multiplying the Conversion Price in effect immediately prior to
the close of business on such Record Date by a fraction (i) the numerator of
which shall be equal to the Current Market Price on such Record Date less an
amount equal to the quotient of (x) the excess of such combined amount over such
10% and (y) the number of shares of Common Stock outstanding on such Record Date
and (ii) the denominator of which shall be equal to the Current Market Price on
such Record Date; PROVIDED, HOWEVER, that in the event the portion of the cash
so distributed applicable to one share of Common Stock is equal to or greater
than the Current Market Price of the Common Stock on such Record Date, in lieu
of the foregoing adjustment, adequate provision shall be made so that the
Holders shall have the right to receive upon conversion of shares of Series B
Preferred Stock the amount of cash the Holders would have received had the
Holders converted all of their shares of Series B Preferred Stock immediately
22
prior to such Record Date. In the event that such dividend or distribution is
not so paid or made, the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect if such dividend or distribution
had not been declared.
(6) In case a Tender Offer on or after the Issuance Date made
by the Corporation or any Subsidiary for all or any portion of the Common Stock
shall expire and such Tender Offer (as amended upon the expiration thereof)
shall require the payment to stockholders (based on the acceptance (up to any
maximum specified in the terms of the Tender Offer) of Purchased Shares (as
defined below)) of an aggregate consideration having a fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a Board Resolution) that combined together with (A) the
aggregate of the cash plus the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
Resolution), as of the expiration of such Tender Offer, of consideration payable
in respect of any other Tender Offers, by the Corporation or any Subsidiary for
all or any portion of the Common Stock expiring within the 12 months preceding
the expiration of such Tender Offer and in respect of which no adjustment
pursuant to this Section 10(c)(6) has been made and (B) the aggregate amount of
any distributions to all holders of the Corporation's Common Stock made
exclusively in cash within 12 months preceding the expiration of such Tender
Offer and in respect of which no adjustment pursuant to Section 10(c)(5) has
been made, exceeds 10% of the product of the Current Market Price as of the last
time (the "Expiration Time") tenders could have been made pursuant to such
Tender Offer (as it may be amended) times the number of shares of Common Stock
outstanding (including any tendered shares) at the Expiration Time, then, and in
each such case, immediately prior to the opening of business on the day after
the date of the Expiration Time, the Conversion Price shall be adjusted so that
the same shall equal the price determined by multiplying the Conversion Price in
effect immediately prior to close of business on the date of the Expiration Time
by a fraction of which the numerator shall be the number of shares of Common
Stock outstanding (including any tendered shares) at the Expiration Time
multiplied by the Current Market Price of the Common Stock on the Trading Day
next succeeding the Expiration Time and the denominator shall be the sum of (x)
the fair market value (determined as aforesaid) of the aggregate consideration
payable to stockholders based on the acceptance (up to any maximum specified in
the terms of the Tender Offer) of all shares validly tendered and not withdrawn
as of the Expiration Time (the shares deemed so accepted, up to any such
maximum, being referred to as the "Purchased Shares") and (y) the product of the
number of shares of Common Stock outstanding (less any Purchased Shares) at the
Expiration Time and the Current Market Price of the Common Stock on the Trading
Day next succeeding the Expiration Time, such reduction (if any) to become
effective immediately prior to the opening of business on the day following the
Expiration Time. In the event that the Corporation is obligated to purchase
shares pursuant to any such Tender Offer, but the Corporation is permanently
prevented by applicable law from effecting any such purchases or all such
purchases are rescinded, the Conversion Price shall again be adjusted to be the
Conversion Price which would then be in effect if such Tender Offer had not been
made. If the application of this Section 10(c)(6) to any Tender Offer would
result in an increase in the Conversion Price, no adjustment shall be made for
such Tender Offer under this Section 10(c)(6). If any Tender Offer is approved
by the members of the Board of Directors elected by the Holders pursuant to
Section 12(c), no adjustment shall be made for such Tender Offer under this
Section 10(c)(6).
23
(7) (i) In case at any time on or after the Issuance Date the
Corporation shall issue shares of its Common Stock or Common Stock Equivalents
(collectively, the "Newly Issued Shares"), other than an issuance pro rata to
all holders of its outstanding Common Stock, at a price per share below the
Conversion Price in effect at the time of such issuance, then following such
issuance of Newly Issued Shares the Conversion Price shall be adjusted as
provided in this Section 10(c)(7). The Conversion Price following any such
adjustment shall be determined by multiplying the Conversion Price immediately
prior to such adjustment by a fraction, of which the numerator shall be the sum
of (a) the number of shares of Common Stock outstanding immediately prior to the
issuance of the Newly Issued Shares (calculated on a fully-diluted basis
assuming the conversion of all options, warrants, purchase rights or convertible
securities which are exercisable at the time of the issuance of the Newly Issued
Shares) PLUS (b) the number of shares of Common Stock which the aggregate
consideration, if any, received by the Corporation for the number of Newly
Issued Shares would purchase at a price per share equal to the Conversion Price
in effect at the time of such issuance, and the denominator shall be the sum of
(X) the number of shares of Common Stock outstanding immediately prior to the
issuance of the Newly Issued Shares (calculated on a fully-diluted basis
assuming the exercise or conversion of all options, warrants, purchase rights or
convertible securities which are exercisable or convertible at the time of the
issuance of the Newly Issued Shares) PLUS (Y) the number of Newly Issued Shares.
The adjustment provided for in this Section 10(c)(7) may be expressed as the
following mathematical formula:
NCP = (O +(C / CP)) * CP
--------------
(O + N)
where,
C = aggregate consideration received by the Corporation for the
Newly Issued Shares
N = number of Newly Issued Shares
O = number of shares of Common Stock outstanding (on a fully
diluted basis, as described above) immediately prior to the
issuance of the Newly Issued Shares
CP = Conversion Price immediately prior to the issuance of the Newly
Issued Shares
NCP = Conversion Price immediately after the issuance of the Newly
Issued Shares
(ii) Notwithstanding the foregoing, no adjustment shall be made under this
Section 10(c)(7) by reason of:
(A) the issuance by the Corporation of shares of Common Stock pro
rata to all holders of the Common Stock so long as (i) any adjustment
to the Conversion Price that is required by Section 10(c)(1) is made
and (ii) the Corporation shall
24
have given notice of such issuance thereof to the Holders pursuant to
Section 10(e);
(B) the issuance by the Corporation of shares of Common Stock upon
conversion of the Series B Preferred Stock in accordance with the
terms hereof;
(C) the issuance by the Corporation of shares of Common Stock as
dividends on the Series B Preferred Stock, if any, in accordance with
the terms of Section 5;
(D) the issuance by the Corporation of shares of Common Stock to any
employee, officer or director of, or consultant to, the Corporation
pursuant to any stock option, incentive or employee stock purchase
plans or agreements approved by the Corporation's Board of Directors;
PROVIDED, HOWEVER, if the Board of Directors and/or its stockholders
within 12 months of the Issuance Date increase the number of shares
available for grant under the Corporation's 1993 Amended Incentive
Stock Option Plan, 1996 Director Stock Option Plan or 2001 Incentive
Stock Plan (each a "Plan"), other than any automatic increase provided
in any such Plans (so long as the calculation upon which such increase
is based, if it calculates the increase based on a percentage of the
outstanding capital stock of the Corporation, does not include the
Preferred Stock or Common Stock issued or issuable upon conversion of
the Preferred Stock), such increase shall be subject to adjustment
contemplated by this Section 10(c)(7);
(E) the issuance by the Corporation of shares of Common Stock or
other securities to any bank, equipment lessor or other similar
financial institution in connection with commercial credit
arrangements, equipment financing or similar transactions approved by
the Corporation's Board of Directors;
(F) the issuance by the Corporation of Newly Issued Shares in an
offering for cash for the account of the Corporation that is
underwritten on a firm commitment basis and (i) is registered under
the 1933 Act or (ii) is sold in an offering to "qualified
institutional buyers" as defined in, and in a transaction under, Rule
144A under the 1933 Act;
(G) the issuance by the Corporation for cash of Newly Issued Shares
in connection with a strategic alliance, collaboration, joint venture
or partnership of the Corporation with another Person which strategic
alliance, collaboration, joint venture or partnership relates to the
Corporation's business as conducted immediately prior thereto and
which Person is engaged in a business similar or related to the
business of the Corporation so long the number of shares issued in
such transaction does not exceed ten percent of the outstanding
capital stock of the Corporation (on a fully-diluted basis)
immediately prior to the issuance and such issuance is unanimously
approved by the directors of the Corporation elected pursuant to
Section 12(c)(1);
(H) the issuance by the Corporation of New Issued Shares in
connection with any merger, consolidation, business combination, share
exchange, acquisition of
25
all or any portion of the business or assets of another Person or any
similar transaction and such issuance is unanimously approved by the
directors of the Corporation elected pursuant to Section 12(c)(1);
(I) the issuance of any Merger Shares; and
(J) any other issuances by the Corporation that are unanimously
approved by the directors of the Corporation elected pursuant to
Section 12(c)(1).
(8) The Corporation may make such reductions in the Conversion
Price, in addition to those required by Sections 10(c)(1), (2), (3), (4), (5),
(6), or (7) as the Board of Directors considers to be advisable to avoid or
diminish any income tax to holders of Common Stock or rights to purchase Common
Stock resulting from any dividend or distribution of stock (or rights to acquire
stock) or from any event treated as such for income tax purposes.
(9) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such price; PROVIDED, HOWEVER, that any adjustments which by reason of this
Section 10(c)(9) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
10 shall be made by the Corporation and shall be made to the nearest cent or to
the nearest one hundredth of a share, as the case may be.
No adjustment need be made for a change in the par value of the Common
Stock or from par value to no par value or from no par value to par value.
(10) Whenever the Conversion Price is adjusted as herein
provided, the Corporation shall promptly, but in no event later than five (5)
Business Days thereafter, give notice to the Holders setting forth the
Conversion Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment, but which statement shall not include any
information which would be material non-public information for purposes of the
1934 Act. Failure to deliver such notice shall not affect the legality or
validity of any such adjustment.
(11) In any case in which this Section 10(c) provides that an
adjustment shall become effective immediately after a Record Date for an event,
the Corporation may defer until the occurrence of such event (i) issuing to the
Holders in connection with any conversion of shares of Series B Preferred Stock
after such Record Date and before the occurrence of such event the additional
shares of Common Stock issuable upon such conversion by reason of the adjustment
required by such event over and above the Common Stock issuable upon such
conversion before giving effect to such adjustment and (ii) paying to such
Holders any amount in cash in lieu of any fraction pursuant to Section 10(b)(6).
(12) For purposes of this Section 10(c), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Corporation but shall include shares issuable in respect of
scrip certificates issued in lieu of fractions of shares of Common Stock. The
Corporation will not pay any dividend or make any distribution on shares of
Common Stock held in the treasury of the Corporation other than dividends or
distributions payable only in shares of Common Stock.
26
(13) Before taking any action which would cause an adjustment
reducing the Conversion Price below the then par value, if any, of the shares of
Common Stock issuable upon conversion of the Series B Preferred Stock, the
Corporation shall take all corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue shares of such Common Stock at such adjusted Conversion Price.
(d) Effect of Reclassification, Consolidation, Merger or Sale.
(1) If any of the following events occur, namely (A) any
reclassification or change of the outstanding shares of Common Stock (other than
a change in par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination), (B) any
consolidation, merger or combination of the Corporation with another corporation
or other entity as a result of which holders of Common Stock shall be entitled
to receive stock, securities or other property or assets (including cash) with
respect to or in exchange for such Common Stock, or (C) any sale or conveyance
of the properties and assets of the Corporation as, or substantially as, an
entirety to any other corporation or other entity as a result of which holders
of Common Stock shall be entitled to receive stock, securities or other property
or assets (including cash) with respect to or in exchange for such Common Stock,
then the Corporation or the successor or purchasing corporation or other entity,
as the case may be, shall prior to such transaction amend its certificate of
incorporation or comparable instrument to provide that the shares of Series B
Preferred Stock, to the extent such shares shall remain outstanding, shall
following such transaction be convertible into the kind and amount of shares of
stock and other securities or property or assets (including cash) receivable
upon such reclassification, change, consolidation, merger, combination, sale or
conveyance by the holder of a number of shares of Common Stock issuable upon
conversion of shares of Series B Preferred Stock immediately prior to such
reclassification, change, consolidation, merger, combination, sale or conveyance
assuming such holder of Common Stock did not exercise such holder's rights of
election, if any, as to the kind or amount of securities, cash or other property
receivable upon such consolidation, merger, statutory exchange, sale or
conveyance (PROVIDED that, if the kind or amount of securities, cash or other
property receivable upon such consolidation, merger, statutory exchange, sale or
conveyance is not the same for each share of Common Stock in respect of which
such rights of election shall not have been exercised ("non-electing share"),
then for the purposes of this Section 10(d) the kind and amount of securities,
cash or other property receivable upon such consolidation, merger, statutory
exchange, sale or conveyance for each non-electing share shall be deemed to be
the kind and amount so receivable per share by a plurality of the non-electing
shares). Such written agreement shall provide for adjustments which shall be as
nearly equivalent as may be practicable to the adjustments provided for in this
Section 10. If, in the case of any such reclassification, change, consolidation,
merger, combination, sale or conveyance, the stock or other securities and
assets receivable thereupon by a holder of shares of Common Stock includes
shares of stock or other securities and assets of a corporation other than the
successor or purchasing corporation or other entity, as the case may be, in such
reclassification, change, consolidation, merger, combination, sale or
conveyance, then such other corporation or other entity shall also so amend its
certificate of incorporation or comparable instrument and the certificate(s) of
incorporation or comparable instruments so amended shall also contain such
additional provisions to protect the interests of the Holders as the Board of
Directors shall reasonably consider necessary by reason of the foregoing,
including, to the extent practicable, the provisions providing for the
redemption rights set forth in Section 11.
27
(2) The above provisions of this Section shall similarly apply
to successive reclassifications, changes, consolidations, mergers, combinations,
sales and conveyances .
(3) If this Section 10(d) applies to any event or occurrence,
Section 10(c) shall not apply.
(e) Notice to Holder Prior to Certain Actions. In case on or after
the Issuance Date:
(1) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock (other than in cash out of retained earnings);
or
(2) the Corporation shall authorize the granting to the holders
of its Common Stock of rights or warrants to subscribe for or purchase any share
of any class or any other rights or warrants; or
(3) the Board of Directors shall authorize any reclassification
of the Common Stock (other than a subdivision or combination of its outstanding
Common Stock, or a change in par value, or from par value to no par value, or
from no par value to par value), or any consolidation or merger or other
business combination transaction to which the Corporation is a party and for
which approval of any stockholders of the Corporation is required, or the sale
or transfer of all or substantially all of the assets of the Corporation; or
(4) there shall be pending the voluntary or involuntary
dissolution, liquidation or winding-up of the Corporation;
the Corporation shall give the Holders as promptly as possible but in any event
at least ten (10) Trading Days prior to the applicable date hereinafter
specified, a notice stating (A) the date on which a record is to be taken for
the purpose of such dividend, distribution or rights or warrants, or, if a
record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution or rights are to be
determined, or (B) the date on which such reclassification, consolidation,
merger, other business combination transaction, sale, transfer, dissolution,
liquidation or winding-up is expected to become effective or occur, and the date
as of which it is expected that holders of Common Stock of record who shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reclassification, consolidation, merger, other business
combination transaction, sale, transfer, dissolution, liquidation or winding-up
shall be determined. Such notice shall not include any information which would
be material non-public information for purposes of the 1934 Act. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
such dividend, distribution, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding-up. In the case of any such action
of which the Corporation gives such notice to the Holders or is required to give
such notice to the Holders, the Holders shall be entitled to give a Conversion
Notice which is contingent on the completion of such action.
SECTION 11. REPURCHASE UPON HOLDER OPTIONAL REPURCHASE EVENT.
28
(a) Repurchase Right Upon Holder Optional Repurchase Event. If a
Holder Optional Repurchase Event shall occur at any time when any shares of
Series B Preferred Stock are outstanding, then, in addition to any other rights
of the Holders, each Holder shall have the right, at such Holder's option, to
require the Corporation to repurchase all of such Holder's shares of Series B
Preferred Stock, or from time to time any portion thereof, on the date that is
five (5) Business Days after the date such Holder gives a Holder Notice with
respect to such Holder Optional Repurchase Event. Each share of Series B
Preferred Stock required to be so repurchased shall be repurchased at a price
equal to the Holder Optional Repurchase Price.
(b) Notices; Method Of Exercising Optional Repurchase Rights, Etc.
(1) On or before the fifth Business Day after the occurrence of
an Holder Optional Repurchase Event, the Corporation shall give to each Holder a
Corporation Notice of the occurrence of such Holder Optional Repurchase Event
and of the repurchase right set forth herein arising as a result thereof. The
Corporation Notice shall set forth:
(i) the date by which the optional repurchase right must be
exercised, and
(ii) a description of the procedure (set forth below) which
each such Holder must follow to exercise such Holder's optional repurchase
right. No failure of the Corporation to give a Corporation Notice or defect
therein shall limit the right of any Holder to exercise the Holder Optional
Repurchase right or affect the validity of the proceedings for the repurchase of
such Holder's shares of Series B Preferred Stock.
(2) To exercise its optional repurchase right, a Holder shall
deliver to the Corporation on or before the thirtieth day after a Corporation
Notice is given to such Holder (or if no Corporation Notice has been given to
such Holder, within 40 days after such Holder first learns of the Holder
Optional Repurchase Event) a Holder Notice to the Corporation setting forth the
name of such Holder, and number of such Holder's shares of Series B Preferred
Stock to be repurchased. A Holder Notice may be revoked by the Holder giving
such Holder Notice by giving notice of such revocation to the Corporation at any
time prior to the time the Corporation pays the applicable Holder Optional
Repurchase Price to such Holder.
(3) If a Holder shall have given a Holder Notice, then on the
applicable Holder Optional Repurchase Date (or such later date as such Holder
surrenders such Holder's certificates for the shares of Series B Preferred Stock
repurchased) the Corporation shall make payment in immediately available funds
of the applicable Holder Optional Repurchase Price to such account as specified
by such Holder in writing to the Corporation at least one (1) Business Day prior
to the applicable Holder Optional Repurchase Date. The Holder of such shares of
Series B Preferred Stock shall not be entitled to payment of the Holder Optional
Repurchase Price of such shares of Series B Preferred Stock until such Holder
shall have surrendered the certificate(s) for such shares of Series B Preferred
Stock to the Corporation or, in the case of the loss, theft or destruction of
any such certificate, given indemnity in accordance with Section 14(b).
29
(c) Other.
(1) A Holder Notice given by a Holder shall be deemed for all
purposes to be in proper form unless the Corporation notifies such Holder in
writing within three (3) Business Days after such Holder Notice has been given
(which notice shall specify all defects in such Holder Notice), and any Holder
Notice containing any such defect shall nonetheless be effective on the date
given if such Holder promptly undertakes to correct all such defects.
Notwithstanding the absence of any such undertaking from such Holder, no such
claim of error shall limit or delay performance of the Corporation's obligation
to repurchase all shares of Series B Preferred Stock not in dispute.
(2) If on or before the applicable date for repurchase pursuant
to this Section 11 the Corporation shall have failed to pay in full the Holder
Optional Repurchase Price for any shares of Series B Preferred Stock to be
repurchased to the holders thereof or to deposit the same with an Eligible Bank
in accordance with Section 14(c), then without in any way relieving the
Corporation of its obligation to pay such amount in accordance herewith (except
to the extent expressly provided in this Section 11(c)(2)), the Holder of any
such share of Series B Preferred Stock shall continue to have the right to
convert such share of Series B Preferred Stock into Common Stock in accordance
with Section 10(a) at any time prior to the date on which the Corporation pays
the Holder Optional Repurchase Price, as the case may be, of such share of
Series B Preferred Stock to such Holder (together with any amount due to such
holder pursuant to Section 14(d)) or so deposits the same (together with any
amount due to such Holder pursuant to Section 14(d)) and gives notice to such
Holder of such deposit; PROVIDED, HOWEVER, that the shares of Common Stock
received by such Holder upon any such conversion in certain circumstances may be
subject to restrictions on resale by such Holder arising under applicable
securities laws to the extent not registered for resale by such Holder pursuant
to the Registration Statement. If a Holder converts all or any portion of such
Holder's shares of Series B Preferred Stock as permitted by this Section
11(c)(2), the amount of the Holder Optional Repurchase Price due to such Holder
with respect to the number of shares of Series B Preferred Stock so converted
shall be reduced by the Stated Value for each share of Series B Preferred Stock
so converted.
(3) If a portion of the shares of Series B Preferred Stock
represented by a particular certificate are to be repurchased, upon surrender of
such certificate to the Corporation in accordance with the terms of this Section
11, the Corporation shall execute and deliver to the Holders of such certificate
without service charge, a new certificate or certificates, in such denomination
or denominations as requested by such Holder.
SECTION 12. VOTING RIGHTS; CERTAIN RESTRICTIONS AND COVENANTS.
(a) Voting Rights. Each Holder of Series B Preferred Stock shall be
entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of Series B Preferred Stock could be converted (pursuant
to Section 10) immediately after the close of business on the record date fixed
for such meeting or the effective date of such written consent and shall have
voting rights and powers equal to the voting rights and powers of the Common
Stock and shall be entitled to notice of any stockholders' meeting in accordance
with the bylaws of the Corporation; PROVIDED, HOWEVER, that except as set forth
in clause (c) below, the Holders shall have no voting rights with respect to any
other seats on the Board of
30
Directors. Except as otherwise provided herein or as required by law, the Series
B Preferred Stock shall vote together with the Common Stock at any annual or
special meeting of the stockholders and not as a separate class, and may act by
written consent in the same manner as the Common Stock.
(b) Certificate Of Incorporation; Certain Stock. The affirmative vote
or written consent of the Majority Holders, voting separately as a class, will
be required for (1) any amendment, alteration, or repeal, whether by merger or
consolidation or otherwise, of the Corporation's Certificate of Incorporation or
this Certificate of Designations if the amendment, alteration, or repeal
materially and adversely affects the powers, preferences, or special rights of
the Series B Preferred Stock, or (2) the creation or issuance of any Senior
Dividend Stock, Senior Liquidation Stock, Parity Dividend Stock or Parity
Liquidation Stock; PROVIDED, HOWEVER, that any increase in the authorized
Preferred Stock of the Corporation or the creation and issuance of any stock
which is both Junior Dividend Stock and Junior Liquidation Stock shall not be
deemed to affect materially and adversely such powers, preferences, or special
rights and any such increase or creation and issuance may be made without any
such vote by the Holders except as otherwise required by law; and PROVIDED
FURTHER, HOWEVER, that no such amendment, alteration or repeal shall (i) reduce
the Mandatory Redemption Price, Holder Optional Repurchase Price or Corporation
Redemption Price or the amount payable, if any, to a holder of shares of Series
B Preferred Stock pursuant to Section 5, (ii) change the definition of Majority
Holders, (iii) change the method of calculating the Conversion Price in a manner
adverse to the Holders or reduce the number of shares of Common Stock issuable
upon any conversion of shares of Series B Preferred Stock (other than any
reduction in the number of shares of Common Stock so issuable pursuant to an
amendment of the Certificate of Incorporation which effects a combination of the
outstanding shares of Common Stock and results in an adjustment in the
Conversion Price pursuant to Section 10(c)(3)), or (iv) amend, modify or repeal
any provision of this Section 12(b), unless in each such case referred to in the
preceding clauses (i) through (iv) such amendment, modification or repeal has
been approved by the affirmative vote or written consent of the Majority
Holders, voting separately as a class.
(c) Election of Directors. For so long as any shares of Series B
Preferred Stock remain outstanding: (1) the Holders, voting as a separate class,
shall be entitled to elect three (3) members of the Corporation's Board of
Directors at each meeting or pursuant to each consent of the Corporation's
stockholders for the election of directors, and to remove from office such
directors and to fill any vacancy caused by the resignation, death or removal of
such directors; and (2) the holders of Common Stock and the Holders, voting
together as a single class on an as-converted basis, shall be entitled to elect
the remaining members of the Board of Directors at each meeting or pursuant to
each consent of the Corporation's stockholders for the election of directors,
and to remove from office such directors and to fill any vacancy caused by the
resignation, death or removal of such directors.
(d) Repurchases of Series B Preferred Stock. The Corporation shall not
repurchase or otherwise acquire any shares of Series B Preferred Stock (other
than pursuant to Section 7(a), Section 9(a) or Section 11) unless the
Corporation offers to repurchase or otherwise acquire simultaneously a pro rata
portion of each Holder's shares of Series B Preferred Stock based on the ratio
of the number of shares of Series B Preferred Stock held by such Holder to the
31
total number of shares of Series B Preferred Stock outstanding for cash at the
same price per share.
SECTION 13. OUTSTANDING SHARES.
For purposes of this Certificate of Designations, all shares of Series B
Preferred Stock shall be deemed outstanding except (a) from the date a
Conversion Notice is given by a holder of Series B Preferred Stock, all shares
of Series B Preferred Stock converted into Common Stock (so long as the
Corporation shall issue the shares of Common Stock issuable upon such conversion
as and when required by this Certificate of Designations); (b) from the date of
registration of transfer, all shares of Series B Preferred Stock held of record
by the Corporation or any subsidiary or Affiliate (as defined herein) of the
Corporation (other than any original holder of shares of Series B Preferred
Stock) and (c) from the applicable Initial Mandatory Redemption Date and Final
Mandatory Redemption Date, Holder Optional Repurchase Date or Corporation
Redemption Date, all shares of Series B Preferred Stock which are redeemed, so
long as in each case the Mandatory Redemption Price, Holder Optional Repurchase
Price or Corporation Redemption Price, as the case may be, of such shares of
Series B Preferred Stock shall have been paid by the Corporation as and when due
hereunder or deposited in accordance with Section 14(c).
SECTION 14. MISCELLANEOUS.
(a) Notices. Any notices required or permitted to be given under the
terms of this Certificate of Designations shall be in writing and shall be
delivered by telephone line facsimile transmission or if no telephone line
facsimile transmission number shall have been provided for such purpose, shall
be delivered personally or by courier or by mail and shall be deemed given upon
receipt, if delivered by telephone line facsimile transmission, personally or by
courier or five days after being placed in the mail (certified mail, return
receipt requested, in the case of any such notice to a Person at an address in
the United States of America), if mailed (1) in the case of the Corporation,
addressed to the Corporation at 850 Maude Avenue, Mountain View, California
94043, Attention: Chief Financial Officer (telephone line facsimile transmission
number (650) 428-3545), or, (2) in the case of any Holder, at such Holder's
address or telephone line facsimile transmission number or address shown on the
stock books maintained by the Corporation with respect to the Series B Preferred
Stock or such other telephone line facsimile transmission number or address as
the Corporation shall have provided by notice to the Holders in accordance with
this Section 14(a) or any Holder shall have provided to the Corporation in
accordance with this Section 14(a).
(b) Replacement of Certificates. Upon receipt by the Corporation of
evidence reasonably satisfactory to the Corporation of the ownership of and the
loss, theft, destruction or mutilation of any certificate for shares of Series B
Preferred Stock and (1) in the case of loss, theft or destruction, of indemnity
from the Holder of the certificate for such shares of Series B Preferred Stock
reasonably satisfactory in form to the Corporation (and without the requirement
to post any bond or other security) or (2) in the case of mutilation, upon
surrender and cancellation of the certificate for such shares of Series B
Preferred Stock, the Corporation will execute and deliver to such Holder a new
certificate for such shares of Series B Preferred Stock without charge to such
Holder.
32
(c) Payment on Redemption; Deposit of Redemption Price. If any share
of Series B Preferred Stock is to be redeemed and any notice required in
connection therewith shall have been timely given as provided therein, the
applicable redemption price of such share of Series B Preferred Stock to be so
redeemed and with respect to which any such notice has been given shall become
due and payable on the applicable redemption date. On and after such redemption
date, provided that the Corporation shall have paid such redemption price to the
respective Holders who are entitled thereto on or prior to the applicable
redemption date or shall have deposited with an Eligible Bank on or prior to
such redemption date, to be held in trust for the respective Holders entitled
thereto, an amount sufficient to pay the applicable redemption price, then on
such redemption date the dividends on such share of Series B Preferred Stock
shall cease to accrue, and such share of Series B Preferred Stock shall be
deemed not to be outstanding and the Holder thereof shall not be entitled to any
rights of a Holder except to receive payment of the applicable redemption price
and all other rights hereunder with respect to such share of Series B Preferred
Stock shall cease. So long as the Corporation shall have so paid or deposited
the full amount of the applicable redemption price on a timely basis, no Holder
shall be entitled to interest on the amount so held by such Eligible Bank and,
so long as the Corporation shall be in compliance in all material respects with
its obligations to the Holders (including, without limitation, its obligations
under the Transaction Documents), the Corporation shall be entitled to any
interest paid by such Eligible Bank on the funds so deposited, subject to
applicable abandoned property and escheat laws. On presentation and surrender of
the certificate for such share of Series B Preferred Stock, such share shall be
redeemed at the applicable redemption price.
(d) Overdue Amounts. If the Corporation fails to pay when due or to
deposit with an Eligible Bank in accordance with Section 14(c) the full amount
of the Mandatory Redemption Price, the Holder Optional Repurchase Price or the
Corporation Redemption Price on or before the respective Initial Mandatory
Redemption Date and Final Mandatory Redemption Date, Holder Optional Repurchase
Date, Corporation Redemption Date or the date of redemption specified in Section
11(b), in each such case for the number of shares of Series B Preferred Stock to
be redeemed on such date or to pay any other amount to any Holder when due, then
the amount thereof shall bear interest at a rate of 5% per annum in excess of
the LIBOR Rate (or such lesser rate as shall be the maximum rate allowed by
applicable law) from such date until paid or so deposited in full or until such
share of Series B Preferred Stock is converted in accordance with this
Certificate of Designations (in which case such interest shall remain due and
payable).
(e) Certain Changes in Law. To the extent that the 1933 Act or the
1934 Act or any statutes, rules or regulations promulgated thereunder relating
to the registration for public sale of securities and/or the registration of
issuers thereof are superseded, replaced or repealed, the requirements of this
Certificate of Designations relating to such statutes, rules and regulations
shall be applied as nearly as practicable with respect to such successor
statutes, rules or regulations, if any, to achieve the purposes intended hereby.
In Witness Whereof, Microcide Pharmaceuticals, Inc., has caused this
certificate to be signed by one of its officers thereunto duly authorized as of
the [__] day of [_________], 2001.
33
MICROCIDE PHARMACEUTICALS, INC.
By: ___________________________________________
Name: _________________________________________
Title: ________________________________________
34
This Proxy is solicited on behalf of the Board of Directors
MICROCIDE PHARMACEUTICALS, INC.
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 2001
The undersigned stockholder of MICROCIDE PHARMACEUTICALS, INC., a Delaware
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and Proxy Statement, each dated , 2001, and hereby appoints
John Walker and James E. Rurka, and each of them, proxies and attorneys-in-
fact, with full power to each of substitution, on behalf and in the name of the
undersigned, to represent the undersigned at the Special Meeting of
Stockholders of MICROCIDE PHARMACEUTICALS, INC. to be held on , 2001, at
a.m. local time, at Microcide's offices located at 850 Maude Avenue,
Mountain View, California 94043, and at any adjournment or postponement, and to
vote all shares of common stock which the undersigned would be entitled to vote
if then and there personally present, on the matters set forth below:
1. APPROVAL OF THE ISSUANCE OF UP TO 5.55 MILLION SHARES OF COMMON STOCK
PURSUANT TO THE MERGER AGREEMENT:
[_] FOR [_] AGAINST [_] ABSTAIN
2. APPROVAL OF THE ISSUANCE OF UP TO 60,000 SHARES OF SERIES B CONVERTIBLE
REDEEMABLE PREFERRED STOCK PURSUANT TO THE SUBSCRIPTION AGREEMENTS:
[_] FOR [_] AGAINST [_] ABSTAIN
3. APPROVAL OF THE AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION TO
CHANGE THE NAME OF MICROCIDE TO ESSENTIAL THERAPEUTICS, INC.:
[_] FOR [_] AGAINST [_] ABSTAIN
and, in their discretion, upon any other matter or matters that may properly
come before the meeting or any adjournment or postponement.
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED "FOR" THE APPROVAL OF THE ISSUANCE OF SHARES OF COMMON
STOCK PURSUANT TO THE MERGER AGREEMENT, "FOR" THE APPROVAL OF THE ISSUANCE OF
SHARES OF PREFERRED STOCK PURSUANT TO THE SUBSCRIPTION AGREEMENTS, "FOR"
APPROVAL OF THE AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION AND AS
SAID PROXIES DEEM ADVISABLE ON ANY OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT.
Dated: , 2001 _____________________________________
Signature
_____________________________________
Signature
(This Proxy should be marked, dated and signed by the stockholder(s) exactly as
his or her name appears hereon, and returned promptly in the enclosed envelope.
Persons signing in a fiduciary capacity should so indicate. If shares are held
by joint tenants or as community property, both should sign.)