-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JnjyTqrsBA3nuvjcBYBZW/fmFe94KJOTKRSAq2o3cfFCuHEfFXurVWgHoMm5NVJw qHqIe7VBp+zQOi8tOpgTbg== 0000936392-97-001321.txt : 19971017 0000936392-97-001321.hdr.sgml : 19971017 ACCESSION NUMBER: 0000936392-97-001321 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 54 FILED AS OF DATE: 19971015 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMBICHEM INC CENTRAL INDEX KEY: 0001002276 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330617379 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-37981 FILM NUMBER: 97696371 BUSINESS ADDRESS: STREET 1: 9050 CAMINO STREET 2: SUITE 200 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195300484 MAIL ADDRESS: STREET 1: 9050 CAMINO SANTA FE CITY: SAN DIEGO STATE: CA ZIP: 92121 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ COMBICHEM, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 8731 33-0617379 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
9050 CAMINO SANTA FE, SAN DIEGO, CALIFORNIA 92121 (619) 530-0484 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) DR. VICENTE ANIDO, JR. PRESIDENT AND CHIEF EXECUTIVE OFFICER 9050 CAMINO SANTA FE SAN DIEGO, CALIFORNIA 92121 (619) 530-0484 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: FAYE H. RUSSELL, ESQ. FREDERICK T. MUTO, ESQ. THOMAS E. HORNISH, ESQ. ERIC J. LOUMEAU, ESQ. LANCE S. KURATA, ESQ. CHRISTOPHER W. KRUEGER, ESQ. BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD LLP 550 WEST "C" STREET, SUITE 1300 4365 EXECUTIVE DRIVE, SUITE 1100 SAN DIEGO, CALIFORNIA 92101 SAN DIEGO, CA 92121 (619) 234-1966 (619) 550-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE ================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------- Common stock, par value $0.001 per share................... 2,587,500 Shares $13.00 $ 33,637,500 $ 10,194 ===============================================================================================================
(1) Includes 337,500 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED OCTOBER 15, 1997 LOGO 2,250,000 SHARES COMMON STOCK All of the 2,250,000 shares of Common Stock offered hereby are being sold by CombiChem, Inc. ("CombiChem" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for information relating to the method of determining the initial public offering price. The Company has applied for quotation of the Common Stock on the Nasdaq National Market under the symbol "CCHM." -------------------------------------------------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. -------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================================ UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - ------------------------------------------------------------------------------------------------ Per Share................................. $ $ $ Total(3).................................. $ $ $ ================================================================================================
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $700,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to an additional 337,500 shares of Common Stock, solely to cover over-allotments if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. ---------------------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of BancAmerica Robertson Stephens, San Francisco, California on or about , 1997. BANCAMERICA ROBERTSON STEPHENS DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION UBS SECURITIES THE DATE OF THIS PROSPECTUS IS , 1997. 3 [DEPICTIONS OF COMBICHEM'S DISCOVERY PROCESS] CombiChem's computational drug discovery process combines proprietary software and rapid laboratory synthesis, with the promise of converging quickly and reliably on active lead candidates. By analyzing the data resulting from either prior information or the biological screening of compounds, the computer constructs software-based models, called hypotheses, that discriminate between the active and inactive compounds. The computer then uses these hypotheses to search the Company's proprietary Virtual Library to select a more focused collection of compounds (or library) for synthesis. CombiChem's chemists synthesize these compounds in the laboratory with the goal of generating lead candidates and, eventually, drug development candidates. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 4 NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ----- Summary................................................................................ 4 Risk Factors........................................................................... 6 Use of Proceeds........................................................................ 15 Dividend Policy........................................................................ 15 Capitalization......................................................................... 16 Dilution............................................................................... 17 Selected Financial Data................................................................ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................... 19 Business............................................................................... 23 Management............................................................................. 39 Certain Transactions................................................................... 52 Principal Stockholders................................................................. 54 Description of Capital Stock........................................................... 56 Shares Eligible for Future Sale........................................................ 59 Underwriting........................................................................... 61 Legal Matters.......................................................................... 62 Experts................................................................................ 62 Additional Information................................................................. 63 Index to Financial Statements.......................................................... F-1
------------------------ CombiChem was incorporated in California in May 1994 and subsequently reincorporated in Delaware in October 1997. The Company's executive offices are located at 9050 Camino Santa Fe, San Diego, California 92121, and its telephone number is (619) 530-0484. The Company intends to furnish to its stockholders annual reports containing audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited interim financial information for each of the first three fiscal quarters of each fiscal year of the Company. The Company has filed for trademark protection for the following: Discovery Engine(TM), Universal Informer Library(TM) and Cascader(TM). All other trademarks or service marks appearing in this Prospectus are the property of their respective holders. 3 5 SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. This Prospectus may contain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY CombiChem, Inc. is a computational drug discovery company that is applying its proprietary design technology and rapid synthesis capabilities to accelerate the discovery process for new drugs. The Company believes its approach offers pharmaceutical and biotechnology companies the opportunity to conduct their drug discovery efforts in a more productive and cost-effective manner. Using its proprietary Discovery Engine(TM) process, the Company focuses on the generation, evolution and optimization of potential new lead candidates for its collaborative partners, who will then develop, manufacture, market and sell any resulting drugs. CombiChem believes that its process is widely applicable to a variety of disease targets and therapeutic indications. To date, the Company has established collaborative agreements with Teijin Limited ("Teijin"), Roche Bioscience, a division of Syntex (U.S.A.) Inc. ("Roche Bioscience"), Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo"), ImClone Systems Incorporated ("ImClone") and Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc ("Elan/Athena"). In addition, the Company intends to use its approach on internal programs to discover new lead candidates and then to outlicense them to third parties, retaining a larger economic interest. The Company's proprietary Discovery Engine is a convergent, iterative process for drug discovery based on libraries (collections of compounds) designed for information rather than merely diversity. The design of such libraries requires the use of various computational and combinatorial chemistry technologies to select molecules that collectively probe the biological target in a systematic way to determine the chemical characteristics required for binding to such target. By identifying features that discriminate between active and inactive compounds, the computer constructs predictive models, called hypotheses, and then uses those models to select a more focused library of compounds. The computer selects compounds from the Company's proprietary Virtual Library, a computational representation of more than 500 billion drug-like molecules chosen for ease of laboratory synthesis. CombiChem believes that, by repeating this process of selecting, synthesizing and screening informative compounds and analyzing the resulting data, the Discovery Engine quickly converges on the most predictive hypothesis. This hypothesis describes the characteristics a compound must possess to be active against the target and, thus, is used to select a variety of potent lead candidates. CombiChem is applying its drug discovery approach to three important types of programs: (i) lead generation, where the goal is to find lead candidates against new biological targets; (ii) lead evolution, where the goal is to develop alternative structural series with the same biological activity profile; and (iii) lead optimization, where the goal is to modify a specific drug template to improve its biological activity. For novel targets where little or no information is available as well as those targets for which no suitable leads have been identified, the Company initiates the Discovery Engine process by making available for screening its Universal Informer Library(TM), which consists of a computer-designed, proprietary collection of approximately 10,000 physical compounds. CombiChem believes that its Discovery Engine has the following advantages: (i) generating lead candidates from multiple structural series that exhibit the same biological activity; (ii) generating lead structures against a wide range of targets including those for which little or no information is available; (iii) achieving rapid generation, evolution and optimization of lead candidates; and (iv) reducing synthesis and screening costs. The Company's design technology facilitates the use of small, informative libraries. The efficiency provided by the use of such informative libraries is expected to shorten the time required for the identification of lead candidates to less than two years. The Company's objective is to be the industry leader in the generation, evolution and optimization of novel lead candidates. The Company intends to utilize its scientific and technology assets in the discovery process through a mix of collaborative and internal programs by applying the following business strategies: (i) to establish multiple collaborations with large pharmaceutical and biotechnology companies focused on biological targets chosen by the collaborators; (ii) to partner with companies to apply discovery technologies to jointly agreed-upon biological targets; (iii) to conduct internal discovery efforts aimed at selected biological targets, retaining a larger economic interest in the subsequently outlicensed lead candidates; (iv) to expand collaborative opportunities in alternative industries such as the agrochemical field; and (v) to maintain technology leadership in both software development and rapid synthesis capabilities. 4 6 THE OFFERING Common Stock Offered by the Company........... 2,250,000 shares Common Stock Outstanding after the Offering... 13,168,505 shares(1) Use of Proceeds............................... To fund research and development, expansion of laboratory and office facilities, working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........ CCHM
SUMMARY FINANCIAL DATA (in thousands, except per share data)
PERIOD FROM MAY 23, 1994 (INCEPTION) YEAR ENDED NINE MONTHS ENDED TO DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------- ----------------------- 1994 1995 1996 1996 1997 ------------- ------- ------- ----------- ------- STATEMENT OF OPERATIONS DATA: Total revenue..................... $ -- $ 50 $ 2,967 $ 1,070 $ 4,599 Total operating expenses.......... (711) (6,763) (8,085) (5,519) (8,341) ------------- ------- ------- ----------- ------- Loss from operations.............. (711) (6,713) (5,118) (4,449) (3,742) ------------- ------- ------- ----------- ------- Net loss.......................... $(706) $(6,675) $(5,118) $(4,461) $(3,669) ========== ======= ======= ========= ======= Pro forma net loss per share(2)... $ (0.66) $ (0.45) ======= ======= Shares used in computing pro forma net loss per share(2).......... 7,797 8,192
SEPTEMBER 30, 1997 ------------------------------------------ PRO FORMA AS ACTUAL PRO FORMA(3) ADJUSTED(3)(4) -------- ------------ ------------ BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.... $ 8,402 $ 20,235 $ 44,645 Working capital...................................... 5,288 16,121 40,531 Total assets......................................... 13,363 25,196 49,606 Long-term obligations, less current portion.......... 2,377 2,377 2,377 Redeemable convertible preferred stock............... 23,130 -- -- Accumulated deficit.................................. (16,168) (12,835) (12,835) Total stockholders' equity (deficit)................. (15,852) 18,111 42,521
- --------------- (1) Based on the number of shares outstanding as of September 30, 1997. Includes: (i) 7,754,933 shares of Common Stock to be issued upon conversion of redeemable convertible preferred stock, par value $0.001 per share (the "Preferred Stock"), of the Company; (ii) an aggregate of 1,250,000 shares of Common Stock issued to ImClone and Elan/Athena in October 1997; and (iii) 901,658 shares of Common Stock which are currently subject to repurchase by the Company. Excludes: (i) 441,696 shares of Common Stock issuable upon the exercise of stock options outstanding as of September 30, 1997, with a weighted average exercise price of $2.81 per share, all of which are exercisable and 26,177 of which are vested; and (ii) 139,478 shares of Common Stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $2.27 per share. See "Capitalization." (2) Computed on the basis described for pro forma net loss per share in Note 1 of Notes to Financial Statements. (3) Gives effect to (i) the conversion of the Preferred Stock into Common Stock effective upon the closing of this offering; and (ii) the receipt of up-front payments and the sale of an aggregate of 1,250,000 shares of Common Stock to ImClone and Elan/Athena in October 1997. (4) Adjusted to reflect the sale of 2,250,000 shares of Common Stock offered hereby, assuming a public offering price of $12.00 per share (the mid-point of the range set forth on the front cover) less estimated underwriting discounts and commissions and other expenses of this offering. See "Use of Proceeds." Except as otherwise indicated herein, all information contained in this Prospectus (i) gives effect to a one-for-four reverse split of the Common Stock, (ii) reflects the conversion of all outstanding shares of Preferred Stock into an aggregate of 7,754,933 shares of Common Stock, effective upon the closing of this offering, and (iii) assumes no exercise of the Underwriters' over-allotment option. 5 7 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of the Common Stock offered hereby. The Prospectus may contain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. NEW AND UNCERTAIN TECHNOLOGY AND BUSINESS The Company's Discovery Engine process is novel and has not yet been shown to be successful in the discovery of lead candidates that have been subsequently developed into commercialized drugs. Furthermore, the Company's drug discovery efforts are focused on some targets the functions of which are not yet known. Development of new pharmaceutical products is highly uncertain, and no assurance can be given that the Company's drug discovery process will result in lead candidates that will be safe or efficacious or commercially successful as products. Failure to validate the Company's technology through the successful discovery of lead candidates would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's strategy, which is unproven, is to use its proprietary design technology for the purpose of rapidly identifying, optimizing and obtaining proprietary rights to as many lead candidates and development candidates as possible. The Company's ability to achieve profitability in the near term depends entirely on its ability to enter into additional collaborative agreements with third parties and to maintain the agreements it currently has in place. The pricing and nature of the Company's collaborative relationships is such that there may only be a limited number of pharmaceutical, biotechnology and agrochemical companies that will be its potential customers. The Company's ability to succeed is also dependent upon the acceptance by potential customers of its Discovery Engine process as an effective tool in new drug discovery. Historically, pharmaceutical, biotechnology and agrochemical companies have conducted lead candidate identification and optimization within their own research departments, due to the highly proprietary nature of the activities being conducted, the central importance of these activities to their drug discovery and development efforts and the desire to obtain maximum patent and other proprietary protection on the results of their internal programs. In order to achieve its business objectives, the Company must convince these companies that its technology and capabilities justify the outsourcing of their programs to the Company. There can be no assurance that the Company will be able to attract any future customers on acceptable terms for its products and services or develop a sustainable, profitable business. Failure to do so will have a material adverse effect on the Company's business, financial condition and results of operations. See "Business." LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company has had a limited operating history. For the period from May 23, 1994 (inception) to December 31, 1994, and for the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1997, the Company had net losses of approximately $0.7 million, $6.7 million, $5.1 million and $3.7 million, respectively. As of September 30, 1997, the Company had an accumulated deficit of approximately $16.2 million. The Company's expansion of its operations and enhancements to its Discovery Engine and related drug discovery technology will result in significant expenses over the next several years that may not be offset by significant revenue. The Company's ability to achieve profitability in the near term depends entirely on its ability to enter into additional collaborative agreements with third parties and to maintain the agreements it currently has in place. To date, substantially all revenue received by the Company has been from upfront fees and research and development funding paid pursuant to existing collaborative agreements with third parties. The Company has not yet received any revenue from the achievement of milestones or license fees from the discovery, development or sale of a commercial drug by a customer, and no such revenue is expected for at least several years, if at all. An element of the Company's commercialization strategy is the potential development and licensing to others of lead compounds or drug development candidates identified by the Company through its internal programs, at its own expense, for potential 6 8 pharmaceutical development. To date, no such license has been entered into, and there can be no assurance that any such license will be entered into on acceptable terms in the future, if at all. The Company is unable to predict when, or if, it will become profitable. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON COLLABORATORS The Company's strategy depends upon the formation of multiple collaborative arrangements with third parties on a regular basis. To date, the Company has entered into five such arrangements, and substantially all of its revenue has been from its collaborative arrangements. There can be no assurance that the Company will be able to continue to establish additional collaborative arrangements, that any such arrangements will be on terms favorable to the Company, or that current or any future collaborative arrangements will ultimately be successful. Failure to enter into additional collaborative agreements on favorable terms would have a material adverse effect on the Company's business, financial condition and results of operations. Further, CombiChem's receipt of revenue from collaborative arrangements is affected by the timing of efforts expended by the Company and its collaborators and the timing of lead compound identification by the Company. The Company's products and services will only result in commercialized pharmaceutical products generating milestone payments and royalties upon the successful outcome of significant preclinical and clinical development, the procurement of requisite regulatory approvals, the establishment of manufacturing, sales and marketing capabilities and the achievement of successful marketing. The Company does not currently intend to perform any of these activities. Therefore, the Company will be dependent upon the expertise and dedication of sufficient resources by third parties to develop and commercialize products based on library compounds produced and lead compounds discovered or optimized by the Company. In addition, there can be no assurance that any such development or commercialization efforts by third parties would be successful. Should a collaborative partner fail to develop or commercialize a compound or product to which it has rights from the Company, the Company may not receive any future milestone payments and will not receive any royalties associated with such compound or product. In addition, the Company's collaborative arrangements with its partners do not obligate the partners to develop or commercialize lead compounds discovered or optimized by the Company. Each collaborative partner may independently move forward with a competing lead candidate developed either by such partner internally or by one of such partners, including the Company's competitors. The potential drugs developed by a collaborative partner may be derivative of the lead compounds provided to the customer by the Company. While the Company's existing collaborative agreements provide that the Company retain milestone and royalty payment rights with respect to drugs developed from certain derivative compounds, there can be no assurance that disputes will not arise over the application of payment provisions to such drugs. There can be no assurance that current or future collaborative partners, if any, will not pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including the Company's competitors, as a means for developing treatments for the diseases targeted by collaborative arrangements with the Company. Furthermore, there can be no assurance that conflicts will not arise between collaborative partners as to proprietary rights to particular compounds in the Company's libraries. The amount and timing of resources that current and future collaborators, if any, devote to collaborations with the Company are not within the control of the Company. There can be no assurance that such collaborators will perform their obligations as expected. Further, the Company's collaborations generally may be terminated by its collaborators upon short notice and following an uncured material breach, which terminations would result in a loss of anticipated revenue. Termination of the Company's existing or future collaborative agreements, if any, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's strategy also involves obtaining targets from third parties for screening against its compound libraries. There can be no assurance that the Company would continue to have access to such targets, novel or otherwise, on an ongoing basis. Furthermore, despite the Company's installation of independent teams to conduct each collaborative project, there can be no assurance that conflicts will not arise among collaborators as to the rights to overlapping lead candidate compounds developed independently as a result of being identified through the use of the Company's technologies. Failure to manage multiple existing and future collaborator relationships successfully, maintain confidentiality among such relationships or prevent 7 9 the occurrence of such conflicts could lead to disputes that result in, among other things, a significant strain on management resources, legal claims involving significant time and expense and loss of reputation, a loss of capital or a loss of current or future collaborators, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Strategy" and "Business -- CombiChem's Collaborative Arrangements." SIGNIFICANT FLUCTUATIONS IN QUARTERLY RESULTS To date, all revenue received by the Company has been from the payment of upfront fees and research and development funding paid pursuant to collaborative agreements. The Company expects that a significant portion of its revenue for the foreseeable future will be comprised of such payments. The timing of certain revenue in the future will depend upon the completion of certain milestones as provided for in the Company's collaborative agreements. In any one fiscal quarter the Company may receive multiple or no payments from its several collaborators. Operating results may therefore vary substantially from quarter to quarter and will not necessarily be indicative of results in subsequent periods. There can be no assurance that such quarterly fluctuations in revenue or financial results will not have a material impact on the Company's stock price. DEPENDENCE ON PATENTS AND PROPRIETARY RIGHTS The Company's success will depend in large part on its own, its licensees' and its licensors' ability to obtain and defend patents for each party's respective technologies and the compounds and other products, if any, resulting from the application of such technologies, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the United States and in foreign countries. The patent positions of pharmaceutical and biotechnology companies, including the Company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. The Company has pending United States and foreign patent applications relating to various aspects of its technology, certain systems, materials and methods used in screening compounds and the libraries or compounds contained therein. These patent applications are either owned by the Company or rights under them are licensed to the Company. To date, none of the patent applications owned by the Company have been issued. To the extent that any foreign patent application filed in the European Patent Office or the Japanese Patent Office issues as a patent, a challenge to the validity of such patent may be presented in an opposition proceeding. There can be no assurance that patents will issue as a result of any such pending applications or that, if issued, such patents will be sufficiently broad to afford protection against competitors with similar technologies. The Company is aware of two United States patents issued to a third party that claim proprietary rights in a computer-based system and method for automatically generating chemical compounds. Although the Company believes that its current activities do not infringe these patents, there can be no assurance that the Company's belief would be affirmed in any litigation over the patents or that the Company's future technological developments would be outside the scope of these patents. Further, there can be no assurance that the third party will not seek to assert such patent rights against the Company, which would result in significant legal costs and require substantial management resources, and there can be no assurance that the Company would be able to obtain a license from the third party, if required, on commercially reasonable terms, if at all. The inability of the Company either to demonstrate non-infringement of these and other current and future patents, whether issued in the United States or overseas, or to obtain the appropriate licenses, would have a material adverse effect on the Company's business, financial condition and operations. Moreover, there can be no assurance that the Company or its customers will be able to obtain patent protection for lead compounds or pharmaceutical products based upon the Company's or such customers' technologies. There can be no assurance that any patents issued to the Company or its collaborative partners, or for which the Company has license rights, will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. To the extent that the Company or its consultants or collaborators use intellectual property owned by others in their work for the Company, disputes may also arise as to the rights in related or resulting know-how and inventions. Litigation may be necessary to enforce the Company's patent and license rights or to determine the scope and validity of others' proprietary rights. Any such litigation whether or not the outcome thereof is favorable to the Company, could result in substantial cost to and diversion of effort by the Company. Further, United States patents do not provide any remedies for 8 10 infringement that occurred before the patent is issued. The commercial success of the Company will also depend upon successfully avoiding the infringement of current and future patents issued to competitors and upon maintaining the technology licenses upon which certain of the Company's current products are, or any future products under development might be, based. If competitors of the Company prepare and file patent applications in the United States that claim inventions also claimed by the Company or its collaborators, the Company or its collaborators may have to participate in interference proceedings declared by the United States Patent and Trademark Office ("PTO") to determine the priority of invention, which could result in substantial cost to the Company, even if the outcome is favorable to the Company. An adverse outcome could subject the Company to significant liabilities to third parties and require the Company to license disputed rights from third parties or cease using the technology. A United States patent application is maintained under conditions of confidentiality while the application is pending in the PTO, so that the Company cannot determine the inventions being claimed in pending patent applications filed by its competitors in the PTO. A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to the Company's business. Some of these technologies, applications or patents may conflict with the Company's technologies or patent applications. Such conflict could limit the scope of the patents, if any, that the Company may be able to obtain, or result in the denial of the Company's patent applications. In addition, there can be no assurance that the Company would be able to obtain licenses to patents held by third parties that may cover the Company's activities at a reasonable cost, if at all, or that the Company would be able to develop or obtain any alternative technologies. The Company currently has certain licenses from third parties and in the future may require additional licenses from other parties in order to refine its Discovery Engine further and to allow its collaborators to develop, manufacture and market commercially viable products effectively. There can be no assurance that (i) such licenses will be obtainable on commercially reasonable terms, if at all; (ii) any patents underlying such licenses will be valid and enforceable; or (iii) the proprietary nature of any patented technology underlying such licenses will remain proprietary. The Company relies substantially on certain technologies that are not patentable or proprietary and are therefore available to the Company's competitors. The Company also relies on certain proprietary trade secrets and know-how that are not patentable. Although the Company has taken steps to protect its unpatented trade secrets and know-how, in part through the use of confidentiality agreements with its employees, consultants and certain of its contractors, there can be no assurance that (i) these agreements will not be breached, (ii) the Company would have adequate remedies for any breach, or (iii) the Company's trade secrets will not otherwise become known or be independently developed or discovered by competitors. Failure by the Company to protect all or part of its patents, trade secrets and know-how could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Patents and Proprietary Information." COMPETITION AND RISKS OF OBSOLESCENCE OF TECHNOLOGY Many organizations are actively attempting to identify, optimize and generate lead compounds for potential pharmaceutical development. The Company competes with the research departments of pharmaceutical companies, biotechnology companies, combinatorial chemistry companies and research and academic institutions as well as other computationally based drug discovery companies. Many of these competitors have greater financial and human resources and more experience in research and development than the Company. Historically, large pharmaceutical companies have maintained close control over their research activities, including the synthesis, screening and optimization of chemical compounds. Many of these companies, which represent one of the largest potential markets for CombiChem's products and services, are internally developing combinatorial and computational approaches and other methodologies to improve productivity, including major investments in robotics technology to permit the automated parallel synthesis of compounds. In addition, these companies may already have large collections of compounds previously synthesized or ordered from chemical supply catalogs or other sources against which they may screen new targets. Other sources of compounds include compounds extracted from natural products, such as plants and microorganisms, and compounds created using rational drug design. Academic institutions, governmental agencies and other research organizations are also conducting research in areas in which the Company is working, either on 9 11 their own or through collaborative efforts. The Company anticipates that it will face increased competition in the future as new companies enter the market and advanced technologies become available. The Company's processes may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of the Company's competitors. The existing approaches of the Company's competitors or new approaches or technology developed by the Company's competitors may be more effective than those developed by the Company. See "Business -- Competition." DEPENDENCE ON SCALE-UP AND MANAGEMENT OF GROWTH The Company's success will depend on the expansion of its operations to service additional collaborative arrangements and the management of these expanded operations. To be cost-effective in its delivery of services and products, the Company must enhance productivity through further automation of its processes and improvements to its technology generally. In addition, the Company must successfully structure and manage multiple additional collaborative relationships, including maintaining the confidentiality of the research being provided to multiple customers. There can be no assurance that the Company will be successful in adding technical personnel as needed to meet the staffing requirements of any additional collaborative relationship. In addition, there can be no assurance that the Company will be successful in its engineering efforts to automate its processes further or in its initiatives to improve its technology. Failure to achieve any of these goals could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business -- CombiChem's Collaborative Arrangements" and "Business -- Employees." DEPENDENCE ON KEY EMPLOYEES The Company is highly dependent on the principal members of its scientific and management staff. The loss of one or more key members of the Company's scientific or management staff could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's future success will also depend in part on the continued service of its key design engineering, scientific, software and management personnel and on its ability to identify, hire and retain any additional personnel. There is intense competition for such qualified personnel in the areas of the Company's activities, and there can be no assurance that the Company will be able to continue to attract and retain such personnel necessary for the development of the Company's business. Failure to attract and retain key personnel could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees" and "Management." GOVERNMENT REGULATION Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by a customer or collaborator of the Company or, in the event the Company decides to develop a drug beyond the preclinical phase, by the Company. The nature and the extent to which such regulation may apply to the Company's customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by the Company's customers will require regulatory approval by governmental agencies prior to commercialization. In particular, human pharmaceutical therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures established by the United States Food and Drug Administration (the "FDA") and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of such products. Non-compliance with applicable requirements can result in fines, warning letters, recall or seizure of products, clinical study holds or delays, total or partial suspension of production, refusal of the government to grant approvals, and civil and criminal penalties. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time-consuming and require the expenditure of substantial resources. Generally, in order to gain FDA approval, a company first must conduct preclinical studies in the laboratory and in animal models to gain preliminary information on a compound's efficacy and to identify any safety problems. Preclinical studies must be conducted by laboratories that comply with FDA regulations 10 12 regarding Good Laboratory Practices. The results of these studies are submitted as a part of an Investigational New Drug application (an "IND") that the FDA must review before human clinical trials of an investigational drug can begin. In order to commercialize any products, the Company or its customer will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain FDA and foreign regulatory authority approval of any such products. Clinical trials are normally done in three phases and generally take two to five years but may take longer to complete. After completion of clinical trials of a new product, FDA and foreign regulatory authority marketing approval must be obtained. If the product is classified as a new drug, the Company or its customer will be required to file a New Drug Application (an "NDA") and receive approval before commercial marketing of the drug. The testing and approval processes require substantial time and effort, and there can be no assurance that any approval will be granted on a timely basis, if at all. NDAs submitted to the FDA can take, on average, two to five years to obtain approval. If questions arise during the FDA review process, approval can take more than five years. Even if FDA regulatory clearances are obtained, a marketed product is still subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, as well as possible civil or criminal sanctions. Domestic manufacturing facilities of the Company or its customers are subject to biannual inspections by the FDA and must comply with the FDA's current Good Manufacturing Practices regulations. To comply with such regulations, a manufacturer must spend funds, time and effort in the areas of production and quality control to ensure full technical compliance. The FDA stringently applies regulatory standards for manufacturing. For marketing outside the United States, the Company or its customer will also be subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING Although the Company anticipates that its existing capital resources, including the proceeds from the October 1997 collaborations and the net proceeds from this offering, will be adequate to fund the Company's operations at least through 1998, there can be no assurance that changes will not occur that would consume available capital resources before such time. The Company anticipates that it will be required to raise additional capital over a period of several years in order to continue to conduct its operations. Such capital may be raised through additional public or private financings, as well as collaborative arrangements, borrowings and other available sources. There can be no assurance that the Company's collaborative arrangements will produce revenue adequate to fund the Company's operating expenses. The Company's capital requirements depend on numerous factors, including the ability of the Company to enter into additional collaborative arrangements, competing technological and market developments, changes in the Company's existing collaborative relationships, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, the purchase of additional capital equipment, the progress of the Company's drug discovery programs and the progress of the commercialization of milestone- and royalty-bearing compounds by the Company's customers. The Company does not currently plan independently to develop, manufacture or market any drugs it discovers. To the extent that additional capital is needed, it may be raised through the sale of equity or convertible debt securities, and the issuance of such securities could result in dilution to the Company's existing stockholders. There can be no assurance that additional funding, if necessary, will be available on favorable terms, if at all. If adequate funds are not available, the Company may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, products or potential markets that the Company would not otherwise relinquish. The failure to receive additional funding would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 11 13 UNCERTAINTY OF PHARMACEUTICAL PRICING AND HEALTH CARE REFORM The Company expects that substantially all of its revenue in the foreseeable future will be derived from products and services provided to the pharmaceutical and biotechnology industries. Accordingly, the Company's success in the foreseeable future is directly dependent upon the success of the companies within those industries and their continued demand for the Company's products and services. The level of revenue and profitability of pharmaceutical companies may be affected by the continuing efforts of governmental and third-party payors to contain or reduce the costs of health care through various means and the initiatives of third-party payors with respect to the availability of reimbursement. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to governmental control. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state proposals to implement similar governmental control. It is uncertain what legislative proposals may be adopted or what actions federal, state or private payors for health care goods and services may take in response to any health care reform proposals or legislation. To the extent that such proposals or reforms have a material adverse effect on the business, financial condition and profitability of pharmaceutical and biotechnology companies that are actual or prospective collaborators for certain of the Company's products and services, the Company's business, financial condition and results of operations may be adversely affected. HAZARDOUS MATERIALS The research and development processes of the Company involve the controlled use of hazardous materials. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. In addition, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations in the future. The occurrence of any such event could have a material adverse effect on the Company's business, financial condition and results of operations. SHARES ELIGIBLE FOR FUTURE SALE Future sales of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Based on the number of shares outstanding as of September 30, 1997 (after giving effect to the issuance of an aggregate of 1,250,000 shares to collaborative partners in October 1997), upon completion of this offering, the Company will have 13,168,505 shares of Common Stock outstanding, assuming no exercise of currently outstanding options. Of these shares, the 2,250,000 shares sold in this offering (plus any additional shares sold upon exercise of the Underwriters' overallotment option) will be freely transferable without restriction under the Securities Act of 1933, as amended (the "Securities Act"), unless they are held by "affiliates" of the Company as that term is used under the Securities Act and the regulations promulgated thereunder. Each holder who signed a lock-up agreement has agreed, subject to certain limited exceptions, not to sell or otherwise dispose of any of the shares held by them as of the date of this Prospectus for a period of 180 days after the date of this Prospectus without the prior written consent of BancAmerica Robertson Stephens. At the end of such 180-day period, approximately 11,502,437 shares of Common Stock (including approximately 52,657 shares issuable upon exercise of vested options) will be eligible for immediate resale, subject to compliance with Rule 144 and Rule 701. The remainder of the approximately 1,666,068 shares of Common Stock outstanding or issuable upon exercise of options held by existing stockholders or option holders will become eligible for sale at various times over a period of less than two years and could be sold earlier if the holders exercise any available registration rights or upon vesting pursuant to the Company's standard four year vesting schedule. The holders of 7,754,933 shares of Common Stock have the right in certain circumstances to require the Company to register their shares under the Securities Act for resale to the public. If such holders, by exercising their demand registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have an adverse effect 12 14 on the market price for the Company's Common Stock. If the Company were required to include in a Company-initiated registration shares held by such holders pursuant to the exercise of their piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise needed capital. In addition, the Company expects to file immediately upon the effective date of this registration statement, a registration statement on Form S-8 registering a total of approximately 1,925,606 shares of Common Stock including those outstanding shares which may be repurchased by the Company and shares issuable upon exercise of outstanding stock options or reserved for issuance under the Company's stock incentive plan and employee stock purchase plan. See "Management -- Benefit Plans," "Description of Capital Stock -- Registration Rights," "Shares Eligible for Future Sale" and "Underwriting." CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS Upon completion of this offering, the Company's executive officers, directors and affiliated entities together will beneficially own approximately 30.1% of the outstanding shares of Common Stock (29.4% if the Underwriters' overallotment option is exercised in full). As a result, these stockholders will be able to exercise control over matters requiring stockholder approval, including the election of directors and mergers, consolidations and sales of all or substantially all of the assets of the Company. This may prevent or discourage tender offers for Common Stock unless the terms are approved by such stockholders. See "Principal Stockholders." NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the offering. The initial offering price will be determined by negotiations between the Company and the Underwriters and is not necessarily indicative of the market price at which the Common Stock of the Company will trade after this offering. The market prices for securities of life sciences companies have been highly volatile, and the market has experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Announcements of technological innovations or new commercial products by the Company or its competitors, developments concerning proprietary rights, including patents and litigation matters, publicity regarding actual or potential results with respect to products or compounds under development by the Company or its strategic partners, regulatory developments in both the United States and foreign countries, public concern as to the efficacy of new technologies, general market conditions, as well as quarterly fluctuations in the Company's revenue and financial results among other factors, may have a significant impact on the market price of the Common Stock. In particular, the realization of any of the risks described in these "Risk Factors" could have a dramatic and adverse impact on such market price. See "Underwriting." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND DELAWARE LAW The Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") authorizes the Board of Directors to issue, without stockholder approval, 5,000,000 shares of Preferred Stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of Common Stock. Although the Company has no current plans to issue any shares of Preferred Stock, the issuance of Preferred Stock or of rights to purchase Preferred Stock could be used to discourage an unsolicited acquisition proposal. In addition, the possible issuance of Preferred Stock could discourage a proxy contest, make more difficult the acquisition of a substantial block of the Company's Common Stock or limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. The Company's Certificate of Incorporation provides for staggered terms for the members of the Board of Directors. A staggered Board of Directors and certain provisions of the Company's by-laws and of Delaware law applicable to the Company could delay or make more difficult a merger, tender offer or proxy contest involving the Company. Further, the Company's stock option plans generally provide for the acceleration of vesting of options granted under such plans in the event of certain transactions which result in a change of control of the Company. In addition, the Company is subject to Section 203 of the General 13 15 Corporate Law of Delaware which, subject to certain exceptions, restricts certain transactions and business combinations between a corporation and a stockholder owning 15% or more of the corporation's outstanding voting stock (an "interested stockholder") for a period of three years from the date the stockholder becomes an interested stockholder. These provisions may have the effect of delaying or preventing a change of control of the Company without action by the stockholders and, therefore, could adversely affect the price of the Company's Common Stock. See "Management," "Description of Capital Stock -- Preferred Stock" and "Description of Capital Stock -- Possible Anti-Takeover Effect of Certain Charter Provisions -- Delaware Anti-Takeover Statute." BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS The Company's management will have broad discretion to allocate proceeds of this offering to uses that it believes are appropriate. There can be no assurance that the proceeds of this offering can or will be invested to yield a positive return. See "Use of Proceeds." DILUTION Purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution in the net tangible book value of their investment from the initial offering price. Additional dilution will occur upon exercise of outstanding options. See "Dilution" and "Shares Eligible for Future Sale." 14 16 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,250,000 shares of Common Stock offered hereby are estimated to be approximately $24.4 million ($28.2 million if the Underwriters' over-allotment option is exercised in full), assuming a public offering price of $12.00 per share (the mid-point of the range set forth on the front cover) and after deducting the estimated underwriting discounts and commissions and other estimated offering expenses. The principal purposes of this offering are to increase the Company's equity capital and to create a public market for the Company's Common Stock in order to facilitate future access by the Company to public equity markets as well as to create liquidity for its existing stockholders. The Company intends to use the net proceeds of this offering, together with its existing cash and cash equivalents and short-term investments, to fund research and development, expansion of laboratory and office facilities, working capital and general corporate purposes. The Company may also use a portion of the net proceeds for the acquisition of businesses, technologies or products complementary to those of the Company. There are no present arrangements or agreements for any such acquisitions. The amounts actually expended for each purpose may vary significantly depending upon numerous factors, including the amount and timing of additional collaborative agreements, the progress of the Company's development, technological advances, the commercial potential of the Company's services and the status of the Company's competitors. The Company believes that its existing cash, cash equivalents and short-term investments, combined with the net proceeds of this offering, its committed future contract revenue, projected funding from equipment leases and interest income will be adequate to satisfy its capital requirements and fund operations at least through 1998. Pending application of the net proceeds as described above, the Company intends to invest the net proceeds of this offering in short-term investment-grade securities. DIVIDEND POLICY The Company has never declared or paid dividends on its capital stock. The Company does not anticipate paying any cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs and plans for expansion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 15 17 CAPITALIZATION The following table sets forth as of September 30, 1997 (i) the actual capitalization of the Company, (ii) the pro forma capitalization of the Company, after giving effect to the receipt of up-front payments and the sale of Common Stock to ImClone and Elan/Athena in October 1997 and the conversion of all outstanding shares of Preferred Stock into Common Stock effective upon the closing of this offering, and (iii) pro forma as adjusted to give effect to the sale by the Company of 2,250,000 shares of Common Stock offered hereby, assuming a public offering price of $12.00 per share (the mid-point of the range set forth on the front cover) less estimated underwriting discounts and commissions and other expenses of this offering.
SEPTEMBER 30, 1997 ----------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED -------- --------- -------- (in thousands) Cash, cash equivalents and short-term investments.......... $ 8,402 $ 20,235 $ 44,645 ======== ======== ======== Long-term obligations, less current portion................ $ 2,377 $ 2,377 $ 2,377 Redeemable convertible preferred stock: Preferred Stock, $0.001 par value; 63,196,296 shares authorized and 7,754,933 shares issued and outstanding actual; 5,000,000 shares authorized and no shares issued and outstanding pro forma and pro forma as adjusted.............................................. 23,130 -- -- Stockholders' equity (deficit):............................ Common Stock, $0.001 par value; 80,000,000 shares authorized actual; 1,913,572 shares issued and outstanding actual; 40,000,000 shares authorized pro forma and pro forma as adjusted; 10,918,505 shares issued and outstanding pro forma; and 13,168,505 shares issued and outstanding pro forma as adjusted(1)........................................... 2 11 13 Additional paid-in capital............................... 1,976 32,597 57,005 Notes receivable from stockholders....................... (336) (336) (336) Deferred compensation.................................... (1,326) (1,326) (1,326) Accumulated deficit...................................... (16,168) (12,835) (12,835) -------- -------- -------- Total stockholders' equity (deficit).................. (15,852) 18,111 42,521 -------- -------- -------- Total capitalization............................. $ 9,655 $ 20,488 $ 44,898 ======== ======== ========
- --------------- (1) Includes 901,658 shares of Common Stock which are currently subject to repurchase by the Company. Excludes: (i) 441,696 shares of Common Stock issuable upon the exercise of stock options outstanding as of September 30, 1997, with a weighted average exercise price of $2.81 per share, all of which are exercisable and 26,177 of which are vested; and (ii) 139,478 shares of Common Stock issuable upon the exercise of outstanding warrants, with a weighted average exercise price of $2.27 per share. 16 18 DILUTION The pro forma net tangible book value of the Company at September 30, 1997 was $18,111,000 or $1.66 per share of Common Stock. Pro forma net tangible book value per share of Common Stock represents the amount of total tangible assets of the Company less total liabilities divided by the number of shares of the Common Stock outstanding after giving effect to the conversion of all outstanding shares of Preferred Stock into 7,754,933 shares of Common Stock upon the completion of this offering and the sale of an aggregate of 1,250,000 shares of Common Stock to ImClone and Elan/Athena in October 1997. After giving effect to the sale of the 2,250,000 shares of Common Stock offered hereby assuming a public offering price of $12.00 per share, the mid-point of the range set forth on the front cover, less estimated underwriting discounts and commissions and other expenses of this offering, the Company's net tangible book value as of September 30, 1997 would have been $42,521,000 or $3.23 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value per share of Common Stock of $1.57 to existing stockholders and immediate dilution in pro forma net tangible book value of $8.77 per share to new investors purchasing Common Stock in this offering. The following table illustrates the per share dilution: Assumed initial public offering price............................... $12.00 Pro forma net tangible book value of Common Stock as of September 30, 1997........................................... $1.66 Increase attributable to new investors......................... 1.57 Pro forma net tangible book value of Common Stock after this offering.......................................................... 3.23 ------ Dilution to new investors(1)........................................ $ 8.77 ======
- --------------- (1) If the Underwriters' over-allotment option is exercised in full, dilution per share to new investors would be $8.57. The following table summarizes, on a pro forma basis as of September 30, 1997 (after giving effect to the sale of 1,250,000 shares of Common Stock to collaborative partners in October 1997), the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing stockholders and by new investors purchasing shares in this offering (before deduction of estimated underwriting discounts and commissions and other expenses of this offering):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- ----------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ----------- ------- ----------- ------- --------- Existing stockholders................ 10,918,505 82.9% $31,333,859 53.7% $ 2.87 New investors........................ 2,250,000 17.1 27,000,000 46.3 12.00 ------------ ---- ---------- ---- Total.............................. 13,168,505 100.0% $58,333,859 100.0% ============ ==== ========== ====
All of the above computations assume no exercise of outstanding options or warrants to purchase Common Stock. As of September 30, 1997, options to purchase 441,696 shares of Common Stock were outstanding at a weighted average exercise price of approximately $2.81 per share under the Company's stock option plan and warrants to purchase 139,478 shares of Common Stock were outstanding at a weighted average exercise price of approximately $2.27 per share. To the extent these options become vested and are exercised, or the warrants are exercised, there will be further dilution to new investors. 17 19 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's statements of operations for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997, and with respect to the Company's balance sheets at December 31, 1995 and 1996 and September 30, 1997, are derived from the financial statements of the Company that have been audited by Ernst & Young LLP, which are included elsewhere herein and are qualified by reference to such financial statements. The balance sheet data at December 31, 1994 has been derived from the financial statements audited by Ernst & Young LLP, which are not included herein. The unaudited statement of operations data for the nine months ended September 30, 1996 have been derived from unaudited financial statements also appearing herein which in the opinion of management include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position and results of operations for the unaudited interim periods. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and notes thereto appearing elsewhere in this Prospectus.
PERIOD FROM MAY 23, 1994 YEAR ENDED NINE MONTHS ENDED (INCEPTION) TO DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------- ------------------- 1994 1995 1996 1996 1997 -------------- ------- ------- ------- ------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Total Revenue....................... $ -- $ 50 $ 2,967 $ 1,070 $ 4,599 Expenses: Research and development expenses....................... 413 4,763 5,240 3,810 5,985 General and administrative expenses....................... 298 2,000 2,845 1,709 2,356 ------ -------- -------- -------- -------- Total operating expenses............ 711 6,763 8,085 5,519 8,341 ------ -------- -------- -------- -------- Loss from operations................ (711) (6,713) (5,118) (4,449) (3,742) Interest income, net................ 5 38 -- (12) 273 Foreign tax expense................. -- -- -- -- (200) ------ -------- -------- -------- -------- Net loss............................ $ (706) $(6,675) $(5,118) $(4,461) $(3,669) ====== ======== ======== ======== ======== Pro forma net loss per share(1)..... $ (0.66) $ (0.45) ======== ======== Shares used in computing pro forma net loss per share(1)............ 7,797 8,192 -------- --------
DECEMBER 31, ------------------------------- SEPTEMBER 30, 1994 1995 1996 1997 ------ ------- -------- ------------- (in thousands) BALANCE SHEET DATA: Cash, cash equivalents and short term investments................................... $1,622 $ 3,136 $ 12,533 $ 8,402 Working capital................................. 1,420 1,990 9,271 5,288 Total assets.................................... 1,796 4,150 16,658 13,363 Long-term obligations, less current portion..... -- 424 1,753 2,377 Redeemable convertible preferred stock.......... 2,250 9,650 23,107 23,130 Accumulated deficit............................. (706) (7,381) (12,499) (16,168) Total stockholders' equity (deficit)............ (682) (7,261) (12,363) (15,852)
- --------------- (1) See Note 1 of Notes to Financial Statements for information concerning the computation of pro forma net loss per share and shares used in computing pro forma net loss per share. 18 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW CombiChem is a computational drug discovery company that is applying its proprietary design technology and rapid synthesis capabilities to accelerate the discovery process for new drugs. The Company believes its approach offers pharmaceutical and biotechnology companies the opportunity to conduct their drug discovery efforts in a more productive and cost-effective manner. Using its proprietary Discovery Engine process, the Company focuses on the generation, evolution and optimization of potential new lead candidates for its collaborative partners, who will then develop, manufacture, market and sell any resulting drugs. CombiChem believes that its process is widely applicable to a variety of disease targets and therapeutic indications. Through September 30, 1997, the Company has established collaborative agreements with Teijin, Roche Bioscience and Sumitomo, and in October 1997 the Company established collaborative agreements with ImClone and Elan/Athena. In addition, the Company intends to use its approach on internal programs to discover new lead candidates and then to outlicense them to third parties, while retaining a larger economic interest. Since inception in May 1994, and including the October 1997 collaborative agreements, the Company has raised $31.3 million through private sales of equity securities. The Company's revenue to date is primarily attributable to three major corporate collaborations: Teijin, entered into in March 1996, Roche Bioscience, entered into in October 1996, and Sumitomo, entered into in August 1997. Under these collaborations, the Company has received aggregate payments of $8.7 million through September 30, 1997 and has recognized an aggregate of $7.5 million as revenue, including $4.5 million of technology access fees and $3.0 million of contract research revenue. Revenue from milestone payments will be recognized when the results or events stipulated in the agreement have been achieved. To date, the Company has not achieved any milestones under any of its collaboration agreements. The Company is also entitled to receive royalty payments if any product is commercialized under the collaborations. To date, the Company has not earned any revenue related to product sales, and such revenue is not expected for the next few years, if at all. The Company has not been profitable since inception and has incurred a cumulative net loss of $16.2 million through September 30, 1997. Losses have resulted principally from costs incurred in research and development activities related to the Company's efforts to develop its technologies and from the associated administrative costs required to support these efforts. The Company's ability to achieve profitability is dependent on its ability to market its technology to pharmaceutical, biotechnology or agrochemical companies. In connection with the collaborative agreements entered into in October 1997, the Company received aggregate proceeds of $7.5 million from the sale of Common Stock and $3.3 million for upfront technology access fees to be recognized as revenue in the fourth quarter of 1997. Included in the upfront technology access fees is $2.0 million representing a premium paid by the collaborators over the fair market value of the Common Stock. RESULTS OF OPERATIONS Nine Months Ended September 30, 1997 and 1996 Revenue The Company's revenue for the nine-month period ended September 30, 1997 increased $3.5 million to $4.6 million from $1.1 million for the same period in 1996. This was attributable to revenue related to the Company's collaborative agreements and the technology access fee received from Sumitomo. The Company 19 21 began recognizing revenue from the Teijin and Roche Bioscience collaborations in March and October 1996, respectively. The Company began recognizing contract research revenue from the Sumitomo collaboration in August 1997. Operating Expenses The Company's research and development expenses for the nine-month period ended September 30, 1997 increased $2.2 million to $6.0 million from $3.8 million for the same period in 1996. This increase reflects increased research and development expenses incurred both on behalf of collaborators and in support of the development of the Company's technology. The Company has the ability to direct its scientific personnel to work either on its collaborative agreements or on its internal research projects as needs arise. The Company expects research and development spending to increase over the next several years due to increased activities related to collaborations, internal programs and technology development. The Company's general and administrative expenses for the nine-month period ended September 30, 1997 increased $0.7 million to $2.4 million from $1.7 million for the same period in 1996. This increase reflects increased business development activities and administrative support for the Company's expansion in 1997. These expenses will likely continue to increase in future periods to support the projected growth of the Company. Net Loss The Company's net loss for the nine-month period ended September 30, 1997 decreased $0.8 million to $3.7 million from $4.5 million for the same period in 1996. The decrease is primarily attributable to additional revenue generated from corporate collaborations during 1997. Years Ended December 31, 1996 and 1995 Revenue The Company's revenue for the year ended December 31, 1996 increased to $3.0 million from $50,000 for the same period in 1995. This increase was attributable to revenue related to the Company's collaborative agreements with Teijin and Roche Bioscience which were entered into during 1996. Operating Expenses The Company's research and development expenses for the year ended December 31, 1996 increased $0.4 million to $5.2 million from $4.8 million for the same period in 1995. This increase reflects increased research and development expenses on behalf of collaborators and for the development of the Company's technology, including investment in the Company's discontinued automated synthesis instruments. The Company's general and administrative expenses for the year ended December 31, 1996 increased $0.8 million to $2.8 million from $2.0 million for the same period in 1995. This increase was primarily due to costs associated with increased business development activities and administrative support, which accompanied the Company's expansion during 1996. Net Loss The Company's net loss for the year ended December 31, 1996 decreased $1.6 million to $5.1 million from $6.7 million for the same period in 1995. The decrease was primarily attributable to the increase in revenue generated from the Teijin and Roche Bioscience collaborations. Year Ended December 31, 1995 and Eight-Month Period Ended December 31, 1994 Revenue The Company's revenue for the year ended December 31, 1995 consisted of $50,000 of grant revenue. No revenue was earned by the Company in 1994. 20 22 Operating Expenses The Company's research and development expenses for the year ended December 31, 1995 increased $4.4 million to $4.8 million from $0.4 million for the eight-month period ended December 31, 1994. This increase primarily reflects the expansion and development of the Company's technologies and a full year of operations in 1995. The Company's general and administrative expenses for the year ended December 31, 1995 increased $1.7 million to $2.0 million from $0.3 million for the eight-month period ended December 31, 1994, reflecting increased business development activities and administrative support as well as a full year of operations in 1995. Net Loss The Company's net loss for the year ended December 31, 1995 increased $6.0 million to $6.7 million from $0.7 million for the eight-month period ended December 31, 1994. This increase was primarily attributable to the Company's scale-up of research and development activities and a full year of operations. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, the Company held cash and cash equivalents and marketable securities with a value of $8.4 million. The Company's working capital at September 30, 1997 was $5.3 million. After giving effect to the execution of the two additional collaborative agreements in October 1997 cash and cash equivalents and marketable securities would have been $20.2 million and working capital would have been $16.1 million. The Company has funded operations to date with sales of preferred stock and common stock totaling $31.3 million, payments from corporate collaborators totaling $18.7 million, and the utilization of capital equipment lease financing totaling $4.6 million. The Company has maintained capital lease arrangements since 1994. Under these arrangements, the Company has funded certain capital expenditures with lease terms ranging from 36 to 48 months in duration. As of September 30, 1997, the Company had utilized $4.5 million of the available $7.9 million financing facility. Net cash used in financing activities for the nine-month period ended September 30, 1997 was $164,000, primarily reflecting payments on capital equipment financing. Net cash provided by financing activities for the year ended December 31, 1996 was $12.2 million, largely due to a $13.0 million equity investment. Net cash provided by financing activities for the year ended December 31, 1995 was $7.8 million, resulting mainly from capital contributions and proceeds from bridge financing. Net cash used in operating activities for the nine-month period ended September 30, 1997 and for the year ended December 31, 1996 was $3.7 million and $2.4 million, respectively, primarily due to the Company's scale-up of research and development activities. Net cash provided by investing activities during the nine-month period ended September 30, 1997 was $7.8 million, resulting primarily from maturities of short-term investments. Net cash used in investing activities for the year ended December 31, 1996 was $12.6 million as compared to $0.2 million for the year ended December 31, 1995. This increase primarily reflects purchases of short-term investments. Although the Company anticipates that its existing capital resources, including the proceeds from the October 1997 collaborations and the net proceeds from this offering, will be adequate to fund the Company's operations at least through 1998, there can be no assurance that changes will not occur that would consume available capital resources before such time. The Company anticipates that it will be required to raise additional capital over a period of several years in order to continue to conduct its operations. Such capital may be raised through additional public or private financings, as well as collaborative arrangements, borrowings and other available sources. There can be no assurance that the Company's collaborative arrangements will produce revenue adequate to fund the Company's operating expenses. The Company's capital requirements depend on numerous factors, including the ability of the Company to enter into additional collaborative arrangements, competing technological and market developments, changes in the Company's existing collaborative relationships, the cost of filing, prosecuting, defending and enforcing patent 21 23 claims and other intellectual property rights, the purchase of additional capital equipment, the progress of the Company's drug discovery programs and the progress of the commercialization of milestone- and royalty-bearing compounds by the Company's customers. The Company does not currently plan independently to develop, manufacture or market any drugs it discovers. To the extent that additional capital is needed, it may be raised through the sale of equity or convertible debt securities, and the issuance of such securities could result in dilution to the Company's existing stockholders. There can be no assurance that additional funding, if necessary, will be available on favorable terms, if at all. If adequate funds are not available, the Company may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, products or potential markets that the Company would not otherwise relinquish. The failure to receive additional funding would have a material adverse effect on the Company's business, financial condition and results of operations. NET OPERATING LOSSES At December 31, 1996, the Company had available net operating loss ("NOL") carryforwards of approximately $11.7 million for federal and California income tax purposes, which will begin to expire in 2009 and 2002, respectively. In addition, the Company had federal and California research and development credit carryforwards of approximately $104,000 and $144,000, respectively, which will begin to expire in 2010. The Company's ability to utilize such NOL carryforwards may be limited under Section 382 of the Internal Revenue Code in the event of certain cumulative changes of ownership of the Company. NEW ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which supersedes APB Opinion No. 15. SFAS No. 128 replaces the presentation of primary earnings per share (EPS) with "Basic EPS" which reflects only the weighted-average common shares outstanding for the period. Companies with complex capital structures, including the Company, will also be required to present "Diluted EPS" that reflect the potential dilution, if any, of common stock equivalents such as employee stock options and warrants to purchase common stock. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997. 22 24 BUSINESS OVERVIEW CombiChem is a computational drug discovery company that is applying its proprietary design technology and rapid synthesis capabilities to accelerate the discovery process for new drugs. The Company believes its approach offers pharmaceutical and biotechnology companies the opportunity to conduct their drug discovery efforts in a more productive and cost-effective manner. Using its proprietary Discovery Engine process, the Company focuses on the generation, evolution and optimization of potential new lead candidates for its collaborative partners who will then develop, manufacture, market and sell any resulting drugs. CombiChem believes that its process is widely applicable to a variety of disease targets and therapeutic indications. To date, the Company has established collaborative agreements with Teijin, Roche Bioscience, Sumitomo, ImClone and Elan/Athena. In addition, the Company intends to use its approach on internal programs to discover new lead candidates and then to outlicense them to third parties, retaining a larger economic interest in such candidates. INDUSTRY BACKGROUND During the past decade, significant advances in life sciences research and the increasing appreciation of the complexity of biological processes have highlighted the productivity limitations of traditional approaches to drug discovery. These limitations, together with increased competition in the pharmaceutical and biotechnology industries, have created intense pressure on companies involved with drug development to reconsider the allocation of their research budgets and to improve the cost-effectiveness of their drug discovery process. Between 1976 and 1996, the number of new chemical entities approved by the FDA remained relatively constant, ranging between 12 to 30 per year, despite a more than 10-fold increase in research and development spending by pharmaceutical and biotechnology companies. Furthermore, it typically takes 12 to 15 years from the original concept of modulating the activity of a particular biological target to the market introduction of a drug that performs such a function. The average cost of bringing a new drug to market has been estimated to be in excess of $300 million. Frustrated with the inefficiencies of traditional drug discovery approaches, pharmaceutical and biotechnology companies are beginning to embrace new enabling technologies, such as combinatorial chemistry, genomics, structure-based drug design, high-throughput screening and information technologies, in order to gain a competitive advantage by accelerating the time to develop and commercialize new compounds. These technologies also have the potential to reduce significantly the cost associated with drug discovery. The Traditional Drug Discovery Process and its Limitations The traditional path to discovering a therapeutic drug compound typically begins with the identification of one or more biological targets that are believed to mediate a disease state. A biological test or assay based on a target is then developed, predicated on the scientific belief that a compound binding with this target may have a therapeutic benefit with respect to the disease under study. Such an assay facilitates the screening (testing to determine which of the compounds have the desired activity against the target) of a collection of hundreds to thousands of candidate compounds (a library) that have been synthesized in the laboratory. Compounds that bind to the target protein and modulate its activity are referred to as hits. Medicinal chemists optimize these hits until they have sufficient potency to become lead candidates and then improve their preclinical characteristics (such as potency, specificity and in vivo profile) further with the goal of producing drug development candidates. 23 25 In summary, the traditional drug discovery process consists of the following steps: [DRUG DISCOVERY PROCESS FLOW CHART] The traditional drug discovery process shown above is extremely expensive, inefficient and unreliable. Failure at any point during this discovery process would typically force the scientist either to abandon the project or to return to the initial starting point and repeat the process. As a result, the discovery of a novel therapeutic agent for a specified target can take years or can fail entirely. In recent years, the advent of robotic high-throughput screening and automated synthesis technologies, such as combinatorial chemistry and parallel synthesis, has begun to relieve one apparent bottleneck involving screening, synthesis and purification of compounds in the library. While these technologies facilitate the mechanics of drug discovery, they address neither the unreliability of the process nor its principal inefficiency: the number of iterations required to find a lead candidate. To address these problems, a novel approach is needed that can provide information to improve the selection of each subsequent library of compounds to synthesize, potentially reducing the number of iterations. Only by improving the processes of data analysis and compound selection can a laborious, iterative procedure be forced to converge on the lead candidates with the most desirable pharmacological profiles. Current Combinatorial Chemistry and Computational Approaches and Their Limitations Combinatorial chemistry involves the rapid creation of large collections of chemical compounds for the purpose of identifying hits through random screening. Combinatorial chemistry has made possible the synthesis of thousands or even millions of molecules in a short period of time instead of the traditional approach of synthesizing only one molecule at a time. Over the last decade, the field of combinatorial chemistry has evolved from only companies that design and synthesize molecules to include those that develop software and automation to facilitate design and synthesis. These companies tend to use highly varied approaches, including: focusing on single, pure compounds versus making mixtures; building large versus small, focused libraries; automating part versus all of the process; and using or not using medicinal chemistry as a principal guiding force. Computational methods are also employed in drug discovery. These methods involve the use of computer-based and information technologies to manage large chemical databases, to examine X-ray crystal structures of the target when available (structure-based drug design), to operate the assorted automated devices available for the synthesis of libraries, to determine how changes in the structure affect the activity of a molecule (SAR activity) and to generate "virtual libraries" using chemical building blocks from readily available sources. Currently, the dominant method of pursuing drug discovery focuses on screening large libraries to search for a lead candidate directly in the library, or at least a hit, which can then be optimized by the more traditional techniques of medicinal chemistry to generate a development candidate. The Company believes this brute-force, trial-and-error approach is flawed because limited or no information has been factored into the library design to force the iterative drug discovery process to converge. This limitation in current combinatorial chemistry approaches is underscored by the fact that most compound libraries used for screening have been constructed with the sole objective of isolating a development candidate with the highest binding affinity to a target. In order to achieve this objective against all possible targets, it is believed such libraries would have to contain in excess of 100 million compounds, which size is well beyond current synthesis capabilities. In addition, the challenge of drug discovery is not only to find a lead candidate that exhibits 24 26 activity against a biological target. It is also important to ensure that the lead candidate will have characteristics that will enable it to overcome the more difficult in vivo hurdles of toxicity, metabolism or problems with oral administration, none of which will become evident until early preclinical testing. Unless information can be extracted about which characteristics are most necessary for binding, it is difficult to know how to modify a compound to maintain tight binding affinity while overcoming in vivo hurdles. Furthermore, if no hits are found after the screening of a traditional combinatorial library, a scientist has no starting point for the drug discovery process. While both combinatorial chemistry and computational approaches are useful in drug discovery to some degree, they are severely taxed by the complexity of properly using the information available for library design, as evidenced by the following drawbacks: (i) the inability to derive and integrate information both from compounds that are active and those that are inactive against the target; (ii) the inability to probe the target in order to compute ways of improving the predictive models or hypotheses; and (iii) the inability to handle the dual requirements of speed and quality when large data sets must be analyzed. The Company believes that these inabilities to use information efficiently constitute fundamental reasons that current discovery approaches have been only moderately successful in generating lead candidates and development candidates, despite the large number of initial hits. COMBICHEM'S SOLUTION AND ADVANTAGES The Company believes that it offers a solution to drug discovery by combining its proprietary design technology and rapid synthesis capabilities in a unique way. The Company's convergent, iterative process for drug discovery -- its Discovery Engine (see the following diagram) -- is based on libraries designed for information. The design of libraries for information involves the selection of compounds that collectively probe the biological target in a systematic way to determine the chemical characteristics required for binding to such target. By identifying features that discriminate between active and inactive compounds, the computer constructs predictive models, called hypotheses, and then uses those models to select a more focused library of compounds. The computer selects compounds from the Company's proprietary Virtual Library, a computational representation of more than 500 billion drug-like molecules chosen for the ease of laboratory synthesis. CombiChem believes that by repeating this process of selecting, synthesizing and screening informative compounds and analyzing the resulting data, the Discovery Engine quickly converges on the most predictive hypothesis. This hypothesis describes the characteristics a compound must possess to be active against the target and, thus, is used to select a variety of potent lead candidates. Each cycle of the Discovery Engine refines the computer's definition of the best hypothesis for the target in question. After several cycles, the resulting hypothesis can be used to design highly potent compounds from a broad range of chemical classes including those not readily amenable to combinatorial synthesis techniques. By facilitating the design of a variety of potent compounds for preclinical testing, the Discovery Engine has the potential to increase greatly the likelihood that at least one of these compounds passes the in vivo and other downstream hurdles and eventually becomes a commercial drug. 25 27 [DISCOVERY ENGINE FLOW CHART] CombiChem believes that the advantages of its Discovery Engine include the following: Generating lead candidates from multiple structural series that exhibit the same biological activity. By using predictive hypotheses to search the more than 500 billion-molecule Virtual Library, multiple structural series of compounds that have the same effect on the target can be identified. The availability of multiple structural series increases the likelihood that at least one of these molecules will overcome the in vivo hurdles in preclinical development. In addition, this provides an opportunity for the Company and its collaborators to enhance the intellectual property position that potentially can be developed around these compounds by having more than one patentable structural series. Generating lead structures against a wide range of targets including those for which little or no information is available. The Universal Informer Library consists of a computer-designed, proprietary collection of approximately 10,000 physical compounds that can be screened against targets where little or no information is available about the molecular structures that may be active against those targets. Once the Universal Informer Library has been screened, the information obtained can be used to start the Discovery Engine process. In addition, because the technology is not dependent on having prior knowledge about the target (e.g., an X-ray crystal structure representative of the target), it can potentially be used to discover drugs against any target the activity of which could be modified through binding a small molecule. Achieving rapid generation, evolution and optimization of lead candidates. By combining flexible design technology and rapid synthesis, the Company's Discovery Engine can produce lead candidates for any of the three types of drug discovery programs -- lead generation, lead evolution or lead optimization -- with less than two years of effort. See "CombiChem's Discovery Programs." 26 28 Reducing synthesis and screening costs. The Company's design technology facilitates the use of small, informative libraries. Use of these small libraries decreases the costs associated with synthesis and screening. In addition, the Virtual Library of drug-like molecules has been explicitly constructed for the ease of laboratory synthesis. STRATEGY The Company's objective is to be the industry leader in the generation, evolution and optimization of novel lead candidates. The Company intends to utilize its scientific and technology assets in the discovery process through a mix of collaborative and internal programs by applying the following business strategies: To establish multiple collaborations with large pharmaceutical and biotechnology companies focused on biological targets chosen by the collaborators. The Company intends to collaborate with large pharmaceutical and biotechnology companies on fully funded programs aimed at biological targets chosen by these collaborators. The Company's collaborative efforts are exclusively focused on the discovery process, with a particular emphasis on the discovery of novel compounds against biological targets. The Company believes its technology platform provides it with opportunities to establish multiple collaborations, which may be for the same disease state, thereby building a portfolio of opportunities that may include upfront fees, research support, milestone payments and royalties. To partner with companies to apply discovery technologies to jointly agreed-upon biological targets. In addition to collaborations on designated biological targets, the Company intends to establish arrangements for jointly funded discovery programs aimed at jointly agreed-upon biological targets, typically with biotechnology companies. In these arrangements, the Company and its partner will choose an appropriate biological target, the Company will apply its discovery technologies to develop novel compounds against the specific target, and the partner will fully fund and complete the drug development process. The Company and its partner will share in the economic interest resulting from their efforts. To conduct internal discovery efforts aimed at selected biological targets, retaining a larger economic interest in the subsequently outlicensed lead candidates. The Company also intends to conduct its own internally funded discovery programs by choosing biological targets of current scientific interest and working in collaboration with screening companies. After identifying lead candidates that are ready for development, the Company intends to outlicense them, retaining a larger economic interest in such candidates as they are developed and commercialized by a third party. To expand collaborative opportunities in alternative industries such as the agrochemical field. The Company has initially targeted large pharmaceutical and biotechnology companies in its marketing efforts. The Company is considering additional opportunities in alternative industries, including the agrochemical field. To maintain technology leadership in both software development and rapid synthesis capabilities. The Company intends to continue to extend its technology leadership through enhancements of existing software, design of future generations of software and continued advancements of its synthesis capabilities. The Company believes that these developments will allow it to decrease the time required to discover lead candidates and to maintain its technology leadership and competitive advantage. COMBICHEM'S PROCESS: THE DISCOVERY ENGINE The successful implementation of the Company's Discovery Engine process requires the direct involvement of and interaction between its chemists and its software applications team. This process consists of the following steps: Data analysis -- the compilation and analysis of screening data, literature information and available data about the target. The starting point for a drug discovery program varies depending on the amount of prior information that is available. The collaborator may have tested its corporate collection of compounds or some other chemical library and have information regarding structures of compounds that are initial hits (moderately active compounds), information regarding structures that are inactive against the particular 27 29 target or prior information about the target structure itself. On the other hand, if little or no prior information or screening data is available on the initial hits or target, the Company will make available for screening its proprietary Universal Informer Library as a way of generating a relevant set of information with which to initiate the Discovery Engine. See "CombiChem's Proprietary Technologies -- Universal Informer Library." The analysis of the available information is a critical step in the process because it will determine what type of program will be undertaken -- lead generation, lead evolution or lead optimization -- and the resources that will be required. See "CombiChem's Discovery Programs." Hypothesis generation -- the software-based generation of models that predict the biological activity of molecular structures. Once the analysis of the available data is completed by the Company's chemists and software applications team, the information is used as input for hypothesis generation, the first step of which involves conformational analysis. - Conformational analysis. Conformational analysis is performed on each active and inactive molecule to determine which shapes or conformations such molecules can take. Because it is typically unknown which of these shapes a particular molecule will assume when it shows its greatest activity against a biological target, all reasonable conformations are computationally described and analyzed. The Company's proprietary technology allows for the analysis of large data sets and complex molecular structures to be completed with both quality and speed. - Hypothesis generator. Using the screening data and the results of conformational analysis, the hypothesis generation software produces computational models (called hypotheses) that attempt to explain the observed differences in biological activity between active and inactive molecules. In the early phases of a discovery program, the hypothesis generator will often generate many hypotheses that are consistent with the data, but the repeated application of the Discovery Engine systematically tests the hypotheses, eliminating some while strengthening others by providing supporting data. Repeating this procedure quickly results in predictive hypotheses. The Company believes that its proprietary design technology differs from others currently in use in that it (i) includes all of the screening data (including inactives) in generating hypotheses, (ii) takes into account a much broader characterization of molecule-target interaction and (iii) forces convergence to a predictive model of the important binding features by probing the target systematically using rapid synthesis and screening. Virtual Library search -- the computational search of the Virtual Library to find molecular structures that fit the hypotheses. Once the hypotheses have been generated, they are used to search the Company's proprietary Virtual Library to identify molecular structures that have the features represented in the hypotheses. The Virtual Library is a computational representation of more than 500 billion drug-like molecules chosen for the ease of laboratory synthesis. For each hypothesis that is generated, a more focused library of tens to hundreds of molecules from the Virtual Library will be chosen by the computer for synthesis in the laboratory. The Virtual Library is generated and searched by proprietary design technology, which can exploit much larger libraries than is possible with commercially available tools. See "CombiChem's Proprietary Technologies -- Virtual Library." Library synthesis -- the laboratory synthesis of molecular structures that are selected from the Virtual Library using a wide range of chemistries. Once the more focused library of compounds is designed, using molecules chosen from the Virtual Library, the Company's chemists are responsible for synthesizing the compounds in the laboratory. Unlike many combinatorial chemistry groups, the chemists are not restricted to particular chemical reactions or a limited list of structural templates, thus providing maximum flexibility to synthesize the libraries quickly. See "CombiChem's Proprietary Technologies -- Synthesis and Analytical Chemistry Technology." The above four steps in the Discovery Engine process are completed by project teams within the Company. Once the molecules are synthesized, those libraries are then sent to the partner (or a contract group) for screening. Data from these assays will be available to the Company for the next iteration of the cycle. With each such iteration, the Discovery Engine provides more information, improving the hypotheses and increasing the likelihood of discovering active molecules with desirable pharmacological characteristics. 28 30 Eventually, the hypotheses will converge to provide lead compounds that warrant further testing as development candidates. It currently takes the Company's scientists approximately three months to advance through the steps in one Discovery Engine cycle. Depending upon the information available to start a project, it may take two to four iterations of the cycle to generate strongly predictive hypotheses that may eventually yield novel and highly active lead candidates. The Company's Discovery Engine process is being validated by both its active collaborative programs and retrospective analysis of drug discovery examples taken from the recent scientific literature. In one such example, the Company applied its design technology to a project where the data provided was a compilation of third-party research into the design of HIV protease inhibitors. The objective was to determine whether CombiChem's process could be used to discover novel inhibitors for the enzyme given a collection of only weakly active hits from screening. The Company generated hypotheses with distinct features by collecting information on eight weakly active HIV protease inhibitors and 500 randomly selected inactive molecules with the same drug-like characteristics as the weakly active compounds. Each of these weakly active compounds was found by either an academic or commercial team in the early phases of trying to discover an HIV protease drug. To assess whether the generated hypotheses are, in fact, able to predict the activities of new molecules, several highly potent HIV protease inhibitors, including currently marketed drugs, were added to a virtual library of several hundred inactive compounds. Using the hypotheses, the computer searched the Virtual Library, and the search produced a list of highly ranked protease inhibitors with a variety of chemical structures, including some of the highly potent HIV protease inhibitors currently under development or marketed by major pharmaceutical companies. The structures selected from the Virtual Library differ significantly from those used to develop the hypotheses, validating the Company's capabilities in lead evolution. The Company has similarly validated its technology on over a dozen other literature data sets and on several programs with collaborators. In one lead evolution program with a collaborator, for example, the Company has already been successful in evolving from one structural series to multiple, novel structural series while improving the biological activity. These results and a variety of equally successful applications of the Discovery Engine demonstrate the viability of the Company's computational drug discovery methods and the strength of its proprietary technology. COMBICHEM'S PROPRIETARY TECHNOLOGIES To implement its Discovery Engine process, CombiChem has developed and assembled an integrated set of proprietary technologies. These include the following: Universal Informer Library The use of many traditional drug discovery approaches presupposes the existence of prior information to start the process. However, recent efforts such as the Human Genome Project and others are producing a number of novel targets about which there is limited prior information. In addition, there are many known targets for which no suitable leads have been identified. To address these situations, CombiChem developed a Universal Informer Library ("UIL"). The UIL consists of a computer-designed, proprietary collection of approximately 10,000 physical compounds. Unlike other libraries that are used to identify lead structures directly after screening, the UIL is used to gather information concerning the relevant binding features that are important to the target. The compounds in the UIL are highly promiscuous molecules, having the potential to bind to many different targets. Screening against the UIL is therefore intended to provide a few, weakly active compounds against the background of many, varied inactive compounds. Using this data, hypotheses may be extracted, which allow the Discovery Engine to be initiated. The UIL was designed to provide hits for virtually all possible targets, but if there is some reason to expect certain structural features to be relevant to a particular target, the UIL can be augmented with compounds that contain those features. In this way, information gained from prior experience can be incorporated into the UIL; this may improve the hypotheses and therefore reduce the number of cycles required to converge. 29 31 The Company has validated its UIL approach by screening a subset of the UIL against a wide range of targets and achieving an outcome comparable to that typically seen in the pharmaceutical industry with libraries containing hundreds of thousands of compounds. Virtual Library CombiChem's Virtual Library is a computational representation of more than 500 billion drug-like molecules chosen for the ease with which they can be synthesized in the laboratory. To maximize the likelihood that the Virtual Library will contain potent, patentable compounds active against most targets, the Company has populated it with hundreds of novel structural templates, each of which has two to four sites at which a wide variety of structural changes can be made synthetically using available chemicals. This chemistry can also be scaled up to give ready access to quantities of each lead candidate sufficient to perform early preclinical testing. The Virtual Library is generated and searched by two components of the Company's proprietary software: Virtual Library Cascader(TM) software and Virtual Library Search software. See "-- Design Technology." Synthesis and Analytical Chemistry Technology Once the Virtual Library is searched for collections of molecules that match the hypotheses, the Company's chemists initiate synthesis of these molecules in the laboratory. The challenge for CombiChem's chemists is to select the technique that will most quickly achieve the synthesis of the library. While there is considerable debate throughout the industry about the relative merits of various methods of chemical synthesis (solid versus solution phase, for example), CombiChem's chemists have the flexibility to use the appropriate approach for each specific synthesis task. The Company believes it has expertise in most or all of the readily used techniques and, in addition, has access to a number of new proprietary methods. As long as relatively straightforward chemistry is applied to library production, synthesis is generally not the rate-limiting step. The challenge lies in the isolation and purification of the library compounds. The Company applies several approaches, including a number of proprietary semi-automated techniques, to facilitate these procedures in order to achieve its purity standards of greater than 85%. Design Technology The Company relies on its proprietary design technology in order to complete several of the key steps in its Discovery Engine. The proprietary design technology includes: Conformational analysis software -- a computer program for identifying the distinct three-dimensional shapes of a molecule. Conformational analysis is performed on each active and inactive molecule to determine which shapes or conformations such molecules can take. Because it is typically unknown which of these shapes a particular molecule will assume when it shows its greatest activity against a biological target, all reasonable conformations are computationally described and analyzed. The Company has developed proprietary conformational analysis software, which rapidly determines all the distinct, reasonable shapes each molecule can assume. Both the speed and the thoroughness of the conformational analysis software distinguish it from commercial chemistry software and permit the Discovery Engine to handle large data sets. Hypothesis generation software -- a computer program for analyzing screening data to identify the requirements a potential drug must satisfy to bind to this target. Once conformational analysis has been applied to each of the screened molecules, the Company's proprietary hypothesis generation software produces computational models that can estimate the biological activity of chemical structures. These models, called hypotheses, are generated by applying methods from statistics, information theory, physical chemistry and computer science to the screening data in order to identify the differences between active compounds and inactive compounds. The predictive capabilities of the computational models and the novel algorithms used to produce them distinguish the Company's hypothesis generator from commercial chemistry software. Virtual Library Cascader software -- a computer program for conveniently describing virtual libraries. The Cascader software facilitates the rapid specification of virtual libraries to the computer. By providing 30 32 databases of reagents and descriptions of reactions to the Cascader, a chemist can quickly describe large libraries of compounds to the computer. The Cascader can use the resulting description to construct explicit subsets of the large virtual library and to present the structures to the chemist and to the Virtual Library Search software. Virtual Library Search software -- a computer program for selecting molecules from the Virtual Library that, when synthesized and screened, will provide the most information about additional binding requirements. The Virtual Library search software uses hypotheses to estimate computationally the potency of prospective compounds in order to increase the likelihood that the chemists devote their synthesis efforts to compounds that fit the hypotheses and are thus most likely to bind to the target. By using the computer to test the compounds in the Virtual Library against the hypotheses, the Discovery Engine can rapidly identify both putatively active compounds (which satisfy several different hypotheses) and informative ones (which discriminate among hypotheses). Searching virtual libraries with billions of compounds has generally not been possible with commercial chemistry software. Each cycle of the Discovery Engine refines the computer's assessment of the best hypothesis for the target in question. After several cycles, the resulting hypothesis can be used to design highly potent compounds from a broad range of chemical classes including those not readily amenable to combinatorial synthesis techniques. By facilitating the design of a variety of potent compounds for preclinical testing, the Discovery Engine has the potential to increase greatly the likelihood that at least one of these compounds passes the in vivo and other downstream hurdles and eventually becomes a commercial drug. COMBICHEM'S DISCOVERY PROGRAMS The Company has applied, and intends to continue to apply, its technology to discover lead compounds for biological targets chosen by its collaborators. In addition, the Company will select, either jointly with a partner (most likely a biotechnology company) or on its own, a biological target of interest. In the first instance, where the Company is working on a target chosen by a collaborator, the commercial terms are negotiated based on a number of factors, including the number of targets to be included in the collaboration and the type of program -- lead generation, lead evolution or lead optimization. Depending upon the type of program, CombiChem will work on the program for a period of one to two years. A dedicated project team, funded by the collaborator, consisting of applications scientists and synthetic, medicinal and analytical chemists will be assigned. The team composition and size is dependent upon the type of program and its objectives. To ensure confidentiality, the Company provides target exclusivity to each of its collaborators, and each team works in a dedicated laboratory. At the conclusion of the program, assuming its objectives have been met, the program team will transfer the lead structure(s) to the collaborator. At this point, the work at CombiChem will be completed, but the partner will continue to develop the lead candidate. As the collaborator develops the lead candidate and reaches certain agreed-to objectives, the Company will receive milestone payments. Eventually, when the lead candidate becomes a marketed drug, the Company will receive royalties on the sales of the drug. In the jointly funded programs or the internal programs, the Company will pay for all or part of the work to be completed and, either jointly or on its own, will outlicense the lead structures to a partner for the development and commercialization phases. Depending upon the data available, the Discovery Engine can be applied to three types of discovery programs undertaken by the Company: lead generation, lead evolution and lead optimization. Lead generation uses the UIL to generate information for the Discovery Engine in situations where little or no prior information is known about the target. Lead evolution begins with existing information (either from the collaborator or from the scientific literature) regarding a lead candidate with the objective of identifying different structural series that can provide either other development options or an enhanced patent position. The evolution path may be chosen either as an outgrowth of a lead optimization program or directly from a collaborator's established lead candidate series. Lead optimization involves a lead candidate provided by a collaborator that requires improvement prior to being identified as a drug development candidate. Using CombiChem's computational drug discovery approach, initial libraries are constructed around a given 31 33 template. Using a convergent, iterative process, subsequent libraries are increasingly focused as increased activity (e.g., affinity, selectivity) is achieved. Current Collaborative Discovery Programs The Company's current collaborative discovery programs are as follows:
- --------------------------------------------------------------------------------------------------- COMPANY NAME TARGET OR THERAPEUTIC AREA OF FOCUS TYPE OF PROGRAM - --------------------------------------------------------------------------------------------------- Teijin G-protein coupled receptor Lead evolution(1) Roche Bioscience Protein-Protein interaction Lead optimization Enzyme Lead evolution Receptor Lead optimization Sumitomo Target implicated in osteoarthritis Lead evolution and rheumatoid arthritis ImClone Multiple targets in oncology Lead generation, lead evolution Elan/Athena Multiple targets in central nervous Lead generation, lead evolution, system conditions lead optimization - ---------------------------------------------------------------------------------------------------
(1) Started as a lead optimization program. Internal Discovery Programs The Company intends to pursue a number of internal programs as a means of enhancing its ability to generate revenue and profits. The Company has selected dopamine D-4, a target believed to have a role in schizophrenia, as its first internally funded program. The Company believes the schizophrenia market has significant potential, as currently marketed drugs have a number of unwanted side effects. The Company intends to identify lead candidates for the D-4 receptor (with partial D-2 activity) as well as other future internal targets and thereafter to outlicense such lead candidates to third parties, retaining a larger economic interest in these programs. Additional internal programs will be identified and funded as the Company's resources allow. COMBICHEM'S COLLABORATIVE ARRANGEMENTS The Company's business model is to enter into collaborative arrangements focused on drug discovery efforts to improve the Company's chances of achieving profitability and to minimize its financing requirements. Commercial terms of a collaborative arrangement are driven by the number and nature of the targets. The key components of the commercial terms typically contained in the Company's collaborations include upfront fees, research support, milestone payments and royalties. The Company has the following collaborative arrangements: Teijin Limited In March 1996, the Company entered into a collaborative agreement with Teijin providing for a one-year program on a G-protein coupled receptor target. In March 1997, the Company and Teijin amended their agreement to extend the collaboration for an additional year. While the initial focus of the collaboration was lead optimization, the effort was redirected to lead evolution during the course of the research. Under the agreement, Teijin made an upfront payment to CombiChem and agreed to provide research funding and milestone payments upon the achievement of certain preclinical and clinical milestones. Teijin also committed internal resources to the discovery effort. Teijin will make royalty payments on products resulting from the collaboration. CombiChem retains the rights to the compounds arising under this collaboration in North and South America; Teijin has rights to these compounds in Asia and Europe with a right of first negotiation to acquire CombiChem's rights. Under the original agreement, Teijin has rights to expand or extend the program for up to two successive one-year terms. Either party may terminate the agreement in the event of a material 32 34 breach remaining uncured for 60 days. As of September 30, 1997, Teijin had paid the Company an aggregate of $1.5 million. Roche Bioscience, a division of Syntex (U.S.A.) Inc. In October 1996, the Company entered into a collaborative agreement with Roche Bioscience providing for a broad two-year program to perform research against three initial targets, including a protein-protein interaction, an enzyme and a receptor, with an option to add additional targets. Roche Bioscience can elect one of the approaches -- lead generation, lead evolution or lead optimization -- for each research program against each collaboration target. A program may be initiated at any time during the term of the collaboration, thereby extending the term to allow for completion of each program. Under the agreement, Roche Bioscience made an upfront payment to CombiChem and agreed to provide research funding and to make milestone payments upon the achievement of certain preclinical and clinical milestones. Roche Bioscience will make royalty payments on worldwide sales of products resulting from the collaboration. Upon completion of the first year of the agreement, Roche Bioscience may terminate the collaboration at any time upon six months' prior written notice. Certain special conditions could also allow Roche Bioscience to terminate with 45 days' prior written notice. As of September 30, 1997, Roche Bioscience had paid the Company an aggregate of $4.0 million. Sumitomo Pharmaceuticals Co., Ltd. In August 1997, the Company entered into a collaborative agreement with Sumitomo providing for a two-year lead evolution program on a target that is believed to play a fundamental role in osteoarthritis and rheumatoid arthritis. Under the agreement, Sumitomo made an upfront payment and agreed to provide research funding and milestone payments upon the achievement of certain preclinical and clinical milestones. Sumitomo will make royalty payments on worldwide sales of products resulting from the collaboration. Sumitomo may extend the research period for up to four successive six-month periods upon mutual agreement. The agreement may be terminated by either party 90 days following an uncured material breach. As of September 30, 1997, Sumitomo had paid the Company an aggregate of $3.3 million. ImClone Systems Incorporated In October 1997, the Company entered into a collaborative agreement with ImClone providing for a two-year program to identify and characterize novel small molecule inhibitors to multiple targets for development in oncology. The agreement provides for ImClone's access to the Company's Universal Informer Library and Virtual Library under the supervision of the research management committee composed of representatives of the Company and ImClone. Under the terms of the agreement, ImClone will provide the Company with research support payments, milestone payments upon the achievement of certain program objectives and royalties on worldwide product sales of therapeutic products that may arise out of the collaboration. The agreement may be terminated by either party 90 days following an uncured material breach or by ImClone within 30 days prior to the one-year anniversary by providing 90 days' prior written notice. In connection with the collaborative agreement, ImClone made an equity investment in the Company. Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc In October 1997, the Company entered into a collaborative agreement with Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc providing for a three-year program to discover novel therapeutic compounds for treatment of central nervous system conditions. The agreement provides for Elan/Athena's access to the Universal Informer Library as deemed necessary by the research management committee composed of Elan/Athena and CombiChem representatives. Under the agreement, Elan/Athena will provide the Company with upfront and research support payments, as well as milestone payments upon the achievement of pre-determined objectives. Elan/Athena will also make royalty payments on worldwide sales of products resulting from the collaboration. The agreement may be terminated by either party 90 days following an uncured material breach or by Elan/Athena after the one-year anniversary upon 90 days prior 33 35 written notice. In connection with the collaborative agreement, Elan International Services Ltd., an affiliate of Elan/Athena, made an equity investment in the Company. COMPETITION Many organizations are actively attempting to identify, optimize and generate lead compounds for potential pharmaceutical development. The Company competes with the research departments of pharmaceutical companies, biotechnology companies, combinatorial chemistry companies and research and academic institutions as well as other computationally based drug discovery companies. Many of these competitors have greater financial and human resources and more experience in research and development than the Company. Historically, large pharmaceutical companies have maintained close control over their research activities, including the synthesis, screening and optimization of chemical compounds. Many of these companies, which represent one of the largest potential markets for CombiChem's products and services, are internally developing combinatorial and computational approaches and other methodologies to improve productivity, including major investments in robotics technology to permit the automated parallel synthesis of compounds. In addition, these companies may already have large collections of compounds previously synthesized or ordered from chemical supply catalogs or other sources against which they may screen new targets. Other sources of compounds include compounds extracted from natural products, such as plants and microorganisms, and compounds created using rational drug design. Academic institutions, governmental agencies and other research organizations are also conducting research in areas in which the Company is working, either on their own or through collaborative efforts. The Company anticipates that it will face increased competition in the future as new companies enter the market and advanced technologies become available. The Company's processes may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of the Company's competitors. The existing approaches of the Company's competitors or new approaches or technology developed by the Company's competitors may be more effective than those developed by the Company. PATENTS AND PROPRIETARY INFORMATION The Company's success will depend in large part on its own, its licensees' and its licensors' ability to obtain and defend patents for each party's respective technologies and the compounds and other products, if any, resulting from the application of such technologies, maintain trade secrets and operate without infringing upon the proprietary rights of others, both in the United States and in foreign countries. The patent positions of pharmaceutical and biotechnology companies, including the Company, are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. The Company has pending United States and foreign patent applications relating to various aspects of its technology, certain systems, materials and methods used in screening compounds and the libraries or compounds contained therein. These patent applications are either owned by the Company or rights under them are licensed to the Company. To date, none of the patent applications owned by the Company have been issued. To the extent that any foreign patent application filed in the European Patent Office or the Japanese Patent Office issues as a patent, a challenge to the validity of such patent may be presented in an opposition proceeding. There can be no assurance that patents will issue as a result of any such pending applications or that, if issued, such patents will be sufficiently broad to afford protection against competitors with similar technologies. The Company is aware of two United States patents issued to a third party that claim proprietary rights in a computer-based system and method for automatically generating chemical compounds. Although the Company believes that its current activities do not infringe these patents, there can be no assurance that the Company's belief would be affirmed in any litigation over the patents or that the Company's future technological developments would be outside the scope of these patents. Further, there can be no assurance that the third party will not seek to assert such patent rights against the Company, which would result in significant legal costs and require substantial management resources, and there can be no assurance that the Company would be able to obtain a license from the third party, if required, on commercially reasonable terms, if at all. The inability of the Company either to demonstrate non-infringement of these and other current and future patents, whether issued in the United States or overseas, or to obtain the appropriate licenses, would have a material adverse effect on the Company's business, financial condition and operations. Moreover, there can be no assurance 34 36 that the Company or its customers will be able to obtain patent protection for lead compounds or pharmaceutical products based upon the Company's or such customers' technologies. There can be no assurance that any patents issued to the Company or its collaborative partners, or for which the Company has license rights, will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide competitive advantages to the Company. To the extent that the Company or its consultants or collaborators use intellectual property owned by others in their work for the Company, disputes may also arise as to the rights in related or resulting know-how and inventions. Litigation may be necessary to enforce the Company's patent and license rights or to determine the scope and validity of others' proprietary rights. Any such litigation, whether or not the outcome thereof is favorable to the Company, could result in substantial cost to and diversion of effort by the Company. Further, United States patents do not provide any remedies for infringement that occurred before the patent is issued. The commercial success of the Company will also depend upon successfully avoiding the infringement of current and future patents issued to competitors and upon maintaining the technology licenses upon which certain of the Company's current products are, or any future products under development might be, based. If competitors of the Company prepare and file patent applications in the United States that claim inventions also claimed by the Company or its collaborators, the Company or its collaborators may have to participate in interference proceedings declared by the PTO to determine the priority of invention, which could result in substantial cost to the Company, even if the outcome is favorable to the Company. An adverse outcome could subject the Company to significant liabilities to third parties and require the Company to license disputed rights from third parties or cease using the technology. A United States patent application is maintained under conditions of confidentiality while the application is pending in the PTO, so that the Company cannot determine the inventions being claimed in pending patent applications filed by its competitors in the PTO. A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to the Company's business. Some of these technologies, applications or patents may conflict with the Company's technologies or patent applications. Such conflict could limit the scope of the patents, if any, that the Company may be able to obtain, or result in the denial of the Company's patent applications. In addition, there can be no assurance that the Company would be able to obtain licenses to patents held by third parties that may cover the Company's activities at a reasonable cost, if at all, or that the Company would be able to develop or obtain any alternative technologies. The Company currently has certain licenses from third parties and in the future may require additional licenses from other parties in order to refine its Discovery Engine further and to allow its collaborators to develop, manufacture and market commercially viable products effectively. There can be no assurance that (i) such licenses will be obtainable on commercially reasonable terms, if at all; (ii) any patents underlying such licenses will be valid and enforceable; or (iii) the proprietary nature of any patented technology underlying such licenses will remain proprietary. The Company relies substantially on certain technologies that are not patentable or proprietary and are therefore available to the Company's competitors. The Company also relies on certain proprietary trade secrets and know-how that are not patentable. Although the Company has taken steps to protect its unpatented trade secrets and know-how, in part through the use of confidentiality agreements with its employees, consultants and certain of its contractors, there can be no assurance that (i) these agreements will not be breached, (ii) the Company would have adequate remedies for any breach, or (iii) the Company's trade secrets will not otherwise become known or be independently developed or discovered by competitors. Failure by the Company to protect all or part of its patents, trade secrets and know-how could have a material adverse effect on the Company's business, financial condition and results of operations. GOVERNMENT REGULATION Regulation by governmental entities in the United States and other countries will be a significant factor in the production and marketing of any pharmaceutical products that may be developed by a customer or collaborator of the Company or, in the event the Company decides to develop a drug beyond the preclinical phase, by the Company. The nature and the extent to which such regulation may apply to the Company's customers will vary depending on the nature of any such pharmaceutical products. Virtually all pharmaceutical products developed by the Company's customers will require regulatory approval by governmental agencies prior to commercialization. In particular, human pharmaceutical therapeutic products are subject to rigorous 35 37 preclinical and clinical testing and other approval procedures established by the FDA and by foreign regulatory authorities. Various federal and, in some cases, state statutes and regulations also govern or influence, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of such products. Non-compliance with applicable requirements can result in fines, warning letters, recall or seizure of products, clinical study holds or delays, total or partial suspension of production, refusal of the government to grant approvals, and civil and criminal penalties. The process of obtaining these approvals and the subsequent compliance with appropriate federal and foreign statutes and regulations are time-consuming and require the expenditure of substantial resources. Generally, in order to gain FDA approval, a company first must conduct preclinical studies in the laboratory and in animal models to gain preliminary information on a compound's efficacy and to identify any safety problems. Preclinical studies must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. The results of these studies are submitted as a part of an IND that the FDA must review before human clinical trials of an investigational drug can begin. In order to commercialize any products, the Company or its customer will be required to sponsor and file an IND and will be responsible for initiating and overseeing the clinical studies to demonstrate the safety and efficacy that are necessary to obtain FDA and foreign regulatory authority approval of any such products. Clinical trials are normally done in three phases and generally take two to five years but may take longer to complete. After completion of clinical trials of a new product, FDA and foreign regulatory authority marketing approval must be obtained. If the product is classified as a new drug, the Company or its customer will be required to file an NDA and receive approval before commercial marketing of the drug. The testing and approval processes require substantial time and effort, and there can be no assurance that any approval will be granted on a timely basis, if at all. NDAs submitted to the FDA can take, on average, two to five years to obtain approval. If questions arise during the FDA review process, approval can take more than five years. Even if FDA regulatory clearances are obtained, a marketed product is still subject to continual review, and later discovery of previously unknown problems or failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market, as well as possible civil or criminal sanctions. Domestic manufacturing facilities of the Company or its customers are subject to bannial inspections by the FDA and must comply with the FDA's current Good Manufacturing Practices regulations. To comply with such regulations, a manufacturer must spend funds, time and effort in the areas of production and quality control to ensure full technical compliance. The FDA stringently applies regulatory standards for manufacturing. For marketing outside the United States, the Company or its customer will also be subject to foreign regulatory requirements governing human clinical trials and marketing approval for pharmaceutical products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. The research and development processes of the Company involve the controlled use of hazardous materials. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company believes that its activities currently comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. In addition, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations in the future. The occurrence of any such event could have a material adverse effect on the Company's business, financial condition and results of operations. MARKETING The Company markets its products directly to customers through participation in trade conferences and seminars and publications in scientific and trade journals. To date, the Company has sold its product offering to its collaborative partners primarily through the efforts of its senior management and dedicated business development professionals. In addition, the Company 36 38 utilizes outside consultants to supplement its business development activities in targeted geographies or industries. FACILITIES The Company currently leases and occupies approximately 34,000 square feet of laboratory and office space in San Diego, California. The Company also leases office space in Palo Alto, California at two separate locations and under two separate leases; one lease is for approximately 4,500 square feet and the other is for approximately 6,000 square feet. The Company is currently planning to move its Palo Alto operations from the smaller location to the larger location and to sublet the smaller space. The San Diego lease expires in May 2006; the Palo Alto lease for 4,500 square feet expires in October 1998; and the Palo Alto lease for 6,000 square feet expires in October 2002. EMPLOYEES As of September 30, 1997, the Company had 56 full-time employees, 31 of whom have Ph.D. degrees. Of these employees, 42 were engaged in research and development and 14 were engaged in marketing and general administration. None of the Company's employees is covered by collective bargaining agreements. Management considers its relations with its employees to be good. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings. SCIENTIFIC ADVISORY BOARD The Company has formed a Scientific Advisory Board ("SAB"), which consists of eight individuals with demonstrated expertise in the fields of molecular biology, medicinal and synthetic chemistry, computer science and biochemistry. Members of the SAB review the Company's research, development and operations activities and are available for consultation with the Company's management and staff relating to their respective areas of expertise. The SAB holds regular meetings. The Scientific Advisors are reimbursed for their expenses in connection with their service and are paid for attending meetings. In addition, the Scientific Advisors either hold options to purchase Common Stock or own varying amounts of Common Stock of the Company that were purchased pursuant to their individual consulting agreements with the Company. The Scientific Advisors are expected to devote only a small portion of their time to the business of the Company. The Scientific Advisors are all employed by or have consulting agreements with entities other than the Company. Each Scientific Advisor has entered into a consulting agreement with the Company that contains confidentiality and nondisclosure provisions that prohibit the disclosure of confidential information to anyone outside the Company. Also, the consulting agreements contain exclusivity provisions restricting the Scientific Advisors from providing service to or investing in any competitor of the Company without the Company's consent. All inventions, discoveries or other intellectual property that comes to the attention of each Scientific Advisor while performing services under a consulting agreement with the Company will be assigned to the Company. The current members of the SAB are as follows: Sydney Brenner, Ph.D. Dr. Brenner is the President and Director of Science at The Molecular Sciences Institute, Inc. This follows an academic career at the University of Cambridge, UK, where he pioneered many of the developments in modern biology and molecular biology. Dennis Curran, Ph.D. Dr. Curran is the Distinguished Service Professor of Chemistry and the Bayer Professor of Chemistry at The University of Pittsburgh. His research focus is fluorous chemistry. Samuel J. Danishefsky, Ph.D. Dr. Danishefsky holds a Chair in Chemistry at Columbia University and the Kettering Chair at The Sloan-Kettering Institute for Cancer Research. Following the award of his Ph.D. by Harvard University in 1962, he has had a distinguished career in synthetic and medicinal chemistry. 37 39 Kim Janda, Ph.D. Dr. Janda is the Ely R. Callaway, Jr., Professor of Chemistry at The Scripps Research Institute ("TSRI"), Department of Chemistry and holds a joint appointment with The Skaggs Institute for Chemical Biology at TSRI. Dr. Janda is widely recognized for his work in combinatorial chemistry and biochemistry. Dr. Janda received a B.S. in Clinical Chemistry from the University of South Florida, a M.S. in Organic Chemistry from the University of Arizona and a Ph.D. in Organic Chemistry with a minor in Medicinal Chemistry from the University of Arizona. William Jorgensen, Ph.D. Dr. Jorgensen is the Whitehead Professor of Chemistry at Yale University, where he has been since 1990. Dr. Jorgensen is widely known for his work in organic and computational chemistry. He received a B.A. in Chemistry from Princeton and a Ph.D. in Chemical Physics from Harvard University. Richard Lathrop, Ph.D. Dr. Lathrop is an Assistant Professor at the University of California, Irvine in the Department of Information and Computer Science, where he has been since July 1995. Dr. Lathrop is widely recognized for his work in the area of advanced computational techniques with applications in the domain of molecular biology. Dr. Lathrop received a B.A. in Mathematics from Reed College in Portland, and an M.S. in Computer Science and a Ph.D. in Artificial Intelligence from the Massachusetts Institute of Technology. His research interests are focused on artificial intelligence and advanced computational techniques. William Scott, Ph.D. Dr. Scott received a Ph.D. in Biochemistry in 1967 from the California Institute of Technology. His subsequent career has spanned both academia at Rockefeller University, and industry with Bristol-Myers Squibb. Dr. Scott is also a Director of the Company. See "Management -- Executive Officers, Key Employees and Directors." Chi-Huey Wong, Ph.D. Dr. Wong is a Professor and Ernest W. Hahn Chair in Chemistry at TSRI, where he has been since 1989, and holds a joint appointment with The Skaggs Institute for Chemical Biology at TSRI. Dr. Wong has published numerous papers in the area of Bioorganic and Synthetic Chemistry. Dr. Wong received a B.S. in Chemistry and Biochemistry and an M.S. in Biochemistry from National Taiwan University, received a Ph.D. in Organic Chemistry from the Massachusetts Institute of Technology and was a Postdoctoral Fellow in Chemistry at Harvard University. 38 40 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The executive officers, key employees and directors of the Company as of September 30, 1997, are as follows:
NAME AGE POSITION - ------------------------------------------ --- ------------------------------------------ Pierre R. Lamond(1)(3).................... 67 Chairman of the Board and Director Vicente Anido, Jr., Ph.D.(1).............. 44 President, Chief Executive Officer and Director Peter L. Myers, Ph.D...................... 53 Vice President, Chief Scientific Officer, Chief Operating Officer and Director Karin Eastham............................. 47 Vice President, Finance and Administration and Chief Financial Officer Klaus Gubernator, Ph.D. .................. 44 Vice President, Special Projects Lee R. McCracken.......................... 39 Vice President, Business Development John Saunders, Ph.D....................... 49 Vice President, Medicinal Chemistry Steven L. Teig............................ 36 Vice President, Advanced Technology Philippe O. Chambon, M.D., Ph.D.(1)(2).... 39 Director Arthur Reidel(3).......................... 46 Director William Scott, Ph.D.(2)................... 57 Director
- --------------- (1) Member of Executive Committee. (2) Member of Compensation Committee. (3) Member of Audit Committee. Pierre R. Lamond. Mr. Lamond has served as Chairman of the Board and a Director of the Company since May 1995. Mr. Lamond is a General Partner of Sequoia Capital, a venture capital limited partnership with over $500 million under management. Prior to joining Sequoia Capital in 1981, Mr. Lamond was a Vice President and Technical Director of National Semiconductor Corporation ("National Semiconductor") from 1976 to 1981. He began his career in 1957 at Transitron Corporation and joined Fairchild Semiconductor Company in 1961. In 1967, he was one of the co-founders of National Semiconductor where he managed the semiconductor division until 1974. From 1974 through 1975, he was President of Coherent, Inc., a laser company. He served as President of Advent, an early pioneer of projection television from 1975 through 1976. Mr. Lamond is Chairman of Cypress Semiconductor Corporation and Vitesse Semiconductor Corporation, Director of CKS Group, and a director of a number of private companies. Vicente Anido, Jr., Ph.D. Dr. Anido has served as President and Chief Executive Officer and as a Director of the Company since joining the Company in March 1996. Prior to that, Dr. Anido served as President of the Americas Region at Allergan, Inc. from June 1993, where he was responsible for that company's commercial operations for North and South America with approximately $500 million in revenue. Prior to that, Dr. Anido spent almost 18 years at Marion Laboratories and Marion Merrell Dow, Inc. and served as Vice President, Business Management of its U.S. Prescription Products Division from 1991 until June 1993. Dr. Anido holds a B.S. in Pharmacy from West Virginia University, an M.S. in Pharmaceutical Sciences from West Virginia University and a Ph.D. in Pharmacy Administration from the University of Missouri, Kansas City. Peter L. Myers, Ph.D. Dr. Myers has served as a Director, Vice President and Chief Scientific Officer of the Company since joining the Company in March 1995. Dr. Myers has also served as Chief Operating Officer of the Company since September 1995 and served as the acting Chief Executive Officer from September 1995 to March 1996. Prior to joining the Company, Dr. Myers served as Vice President, Drug Discovery and Development at Onyx Pharmaceuticals Inc. from November 1993 through March 1995, where he was responsible for all aspects of drug discovery and development leading to potential novel classes of anti-cancer drugs. Prior to that, Dr. Myers served as Vice President, Chemistry Research of Glaxo Inc. Research Institute 39 41 from January 1991 through December 1993. Dr. Myers holds a B.S. in Chemistry and a Ph.D. in Organic Chemistry from Leeds University. Karin Eastham. Ms. Eastham joined the Company as Vice President, Finance and Administration and Chief Financial Officer in April 1997. Prior to joining the Company, Ms. Eastham served as Vice President, Finance and Administration and Chief Financial Officer of Cytel Corporation, a drug research and development company, from October 1992 through April 1997. Prior to that, Ms. Eastham was Vice President, Finance and Administration of Pritsker Corporation, a simulation-based computer software company, from May 1990 through October 1992. Ms. Eastham received a B.S. in Accounting and an M.B.A. from Indiana University. She is a Certified Public Accountant. Klaus Gubernator, Ph.D. Dr. Gubernator joined the Company in August 1997 as Vice President, Special Projects. Prior to joining the Company, he served as Research Section Head in Pharmaceutical Research at F. Hoffmann-La Roche Ltd. in Basel, Switzerland from 1987 to 1997, contributing to cardiovascular and antibacterial projects as well as developing structure-based design and bioinformatics technologies. Dr. Gubernator received his Ph.D. degree in Chemistry from the University of Heidelberg. Lee R. McCracken. Mr. McCracken has served as Vice President, Business Development since joining the Company in May 1996. Prior to joining the Company, Mr. McCracken served as Vice President, Business Development at Watson Laboratories, the operating subsidiary of Watson Pharmaceuticals, from January 1996 through May 1996. Prior to that, Mr. McCracken served as Managing Director of Pacific Pharma and as Director, Business Development, for the Americas Region at Allergan, Inc. from May 1992 through December 1995. Prior to entering the pharmaceutical industry, Mr. McCracken was a venture capitalist with 3i Capital and Union Venture Corporation. Mr. McCracken received a B.S. in Marketing from Santa Clara University, an M.S. in Computer Science from the University of Dayton and an M.B.A. from The Anderson School at UCLA. John Saunders, Ph.D. Dr. Saunders joined the Company in October 1995 as Vice President, Medicinal Chemistry. Prior to joining the Company, Dr. Saunders served as Head of Medicinal Chemistry II from August 1989 through September 1995 and also as Head of the Antiviral Research Management Committee from July 1995 through September 1995 at Glaxo-Wellcome, plc. Dr. Saunders received a first class honors degree in Chemistry from Newcastle University in England and a Ph.D. from Cambridge University. Steven L. Teig. Mr. Teig has served as Vice President, Advanced Technology since February 1997 and previously served as Vice President, Design Technology from July 1995. Prior to joining the Company, Mr. Teig co-founded BioCAD Corp., a commercial developer of drug discovery software for medicinal chemists, in June 1989 and served as its Chief Technical Officer until its merger with Molecular Simulations, Inc. ("MSI"). Thereafter, Mr. Teig served as President and Chief Technical Officer of Entropix Corporation, a subsidiary of MSI, from August 1994 through July 1995. Prior to pursuing drug discovery technology, Mr. Teig co-founded Tangent Systems Corporation, a developer of integrated circuit design software, which was subsequently acquired by Cadence Design Systems, Inc. Mr. Teig holds a B.S.E. in Electrical Engineering and Computer Science from Princeton University. Philippe O. Chambon, M.D., Ph.D. Dr. Chambon is a General Partner of the Sprout Group. He joined Sprout in May 1995. From May 1993 to April 1995, Dr. Chambon served as Manager in the Healthcare Practice of The Boston Consulting Group, a leading management consulting firm. Previously, Dr. Chambon was an executive with Sandoz Pharmaceuticals Corporation, a leading pharmaceutical company, from September 1987 to April 1993. In his last capacity there, he was the Executive Director of New Product Management. He is currently a director of Transcend Therapeutics and of several private companies. Dr. Chambon received an M.D. (with honors) and Ph.D. from the University of Paris and an M.B.A. from Columbia University. Arthur Reidel. Mr. Reidel has served as a director of the Company since September 1997. He currently serves as President, Chief Executive Officer and Chairman of the Board of Pharsight Corporation, a privately held software corporation, a position he has held since April 1996, and as a director from April 1995. Prior to that, he was a private investor/consultant from April 1995 to March 1996. From October 1994 to March 1995, 40 42 he served as Vice President, Business Development of Viewlogic Systems, Inc., a publicly held software firm. Mr. Reidel has served as a director of MacNeil Schwendler from December 1993 and as a director of Formation Systems, Inc. from 1996 to the present. Mr. Reidel has also served as President and Chief Executive Officer, Sunrise Test Systems, Inc., a privately held software firm, from December 1992 to March 1994 (Viewlogic Systems, Inc. acquired Sunrise Test Systems, Inc. in September 1994), and Vice President of Weitek Corporation from July 1991 to December 1992. Mr. Reidel received an B.S. in mathematics from Massachusetts Institute of Technology. William Scott, Ph.D. Dr. Scott has served as a director of the Company since January 1997. Since March 1997, Dr. Scott has served as the Chief Executive Officer of Physiome Sciences, Inc. From 1983 until December 1996, Dr. Scott served in various executive positions with Bristol-Myers Squibb Pharmaceutical Research Institute and as its Senior Vice President, Drug Discovery Research since 1991. Dr. Scott received a B.S. in Chemistry from the University of Illinois and a Ph.D. in Biochemistry from the California Institute of Technology and was an NIH Postdoctoral Fellow at The Rockefeller University. Dr. Scott serves on the Board of Directors of a private company. Members of the Board currently hold office and serve until the next annual meeting of the stockholders of the Company or until their respective successors have been elected. The Board is currently comprised of six directors. Under the Company's Bylaws, as amended, beginning with the next annual meeting of stockholders the Company's Board will be classified into three classes of directors serving staggered three-year terms, with one class of directors to be elected at each annual meeting of stockholders. The classification of directors has the effect of making it more difficult to change the composition of the Board. See "Description of Capital Stock -- Possible Anti-Takeover Effect of Certain Charter Provisions." All executive officers are appointed annually by and serve at the discretion of the Board. All of the Company's executive officers are employed by the Company at will. Pursuant to the Company's 1997 Stock Incentive Plan, which was adopted by the Board and approved by the Company's stockholders in October, 1997, directors who are not officers or employees of the Company will receive periodic option grants beginning with the next annual meeting of stockholders. See "-- Benefit Plans." COMMITTEES OF THE BOARD OF DIRECTORS The Company has a standing Compensation Committee currently composed of Dr. Chambon and Dr. Scott. The Compensation Committee reviews and acts on matters relating to compensation levels and benefit plans for executive officers and key employees of the Company, including salary and stock options. The Compensation Committee is also responsible for granting stock awards, stock options and stock appreciation rights and other awards to be made under the Company's existing incentive compensation plans. The Company also has a standing Audit Committee composed of Mr. Lamond and Mr. Reidel. The Audit Committee assists in selecting the Company's independent auditors and in designating services to be performed by, and maintaining effective communication with, those auditors. The Company also has a standing Executive Committee currently composed of Mr. Lamond, Dr. Anido and Dr. Chambon. The Executive Committee has the authority to exercise all powers of the Board of Directors not designated to another committee when the Board of Directors is not in session. 41 43 EXECUTIVE COMPENSATION Summary of Cash and Certain Other Compensation The following table sets forth the aggregate compensation earned by the Company's President and Chief Executive Officer (both current and former) and each of the other four most highly compensated executive officers whose salary and bonus for 1996 exceeded $100,000 (the "Named Executive Officers") for services rendered in all capacities to the Company for the year ended December 31, 1996: SUMMARY COMPENSATION TABLE(1)
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION --------------- ------------------------------------ SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY(2) BONUS(3) COMPENSATION OPTIONS/SARS(#) COMPENSATION - ---------------------------------- --------- -------- ------------- --------------- ------------ Vicente Anido, Jr., Ph.D.(4) President, Chief Executive Officer and Director............ $ 200,417 $55,226 $ -- 422,417 $ -- Peter L. Myers, Ph.D.(5) Chief Scientific Officer and Chief Operating Officer, Acting Chief Executive Officer and Director............ 225,233 43,050 -- -- -- John Saunders, Ph.D. Vice President, Medical Chemistry............... 145,000 23,200 27,125(6) -- -- Lee R. McCracken(7) Vice President, Business Development............ 101,740 16,917 -- 72,500 -- Steven L. Teig Vice President, Advanced Technology............. 137,025 21,924 -- -- -- Lynn Caporale, Ph.D.(8) Vice President, Strategic Development..................... 144,834 22,000 -- -- 130,572(9)
- --------------- (1) Pursuant to Instruction to Item 402(b) of Regulation S-K promulgated by the Securities and Exchange Commission (the "Commission"), information with respect to fiscal years prior to 1996 has not been included as the Company was not a reporting company pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the information has not been previously reported to the Commission in response to a filing requirement. (2) Includes amounts deferred pursuant to the Company's 401(k) Plan. (3) Includes cash payments for bonuses earned by the Named Executive Officers during 1996. (4) Dr. Anido was hired in March 1996. (5) Dr. Myers served as the Company's Chief Executive Officer from August 1995 until March 1996. (6) Payments to cover relocation expenses. (7) Mr. McCracken was hired in May 1996. (8) Dr. Caporale resigned from the Company in November 1996. (9) Represents payments of $27,572 made in 1996 for accrued vacation and severance benefits, and payments of $103,000 made in 1997 for severance payments accrued in 1996. See "-- Employment Arrangements and Change of Control Arrangements." 42 44 Stock Options The following table sets forth information concerning stock option grants made to each of the Named Executive Officers for the year ended December 31, 1996. The Company granted no stock appreciation rights ("SARs") to Named Executive Officers during 1996. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ------------------------------------------------------- ANNUAL RATES OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERMS(3) OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION ------------------- NAME GRANTED(1) FISCAL YEAR PER SHARE(2) DATE 5% 10% - ---------------------------- ------------ ------------ ------------ ---------- -------- -------- Vicente Anido, Jr., Ph.D.... 422,417 79.5% $ 0.30 03/13/06 $208,717 $343,050 Peter L. Myers, Ph.D........ -- -- -- -- -- -- John Saunders, Ph.D......... -- -- -- -- -- -- Lee R. McCracken............ 72,500 13.6 0.30 05/08/06 35,822 58,878 Steven L. Teig.............. -- -- -- -- -- -- Lynn Caporale, Ph.D......... -- -- -- -- -- --
- --------------- (1) The grant dates for these options are as follows: March 14, 1996 for Dr. Anido's option and May 9, 1996 for Mr. McCracken's option. Each option has a maximum term of 10 years measured from the grant date, subject to earlier termination upon the optionee's cessation of service with the Company. Each option is immediately exercisable for all the option shares; however, any shares purchased under the option will be subject to repurchase by the Company, at the option exercise price paid per share, should the optionee leave the Company prior to vesting in the shares. Dr. Anido's option was fully vested with respect to 10% of the option shares on the grant date, another 15% of the option shares vested upon his completion of one year of service measured from the grant date, and the balance of the option shares vest in a series of equal monthly installments over Dr. Anido's 36-month period of service measured from the first anniversary of the grant date. The shares subject to Mr. McCracken's option vest as follows: 25% upon his completion of one year of service measured from the grant date and the balance in a series of 36 successive equal monthly installments over his continued period of service thereafter. The options were granted under the 1995 Stock Option/Stock Issuance Plan and will be incorporated into the new 1997 Stock Option Plan on the effective date of the Offering, but will continue to be governed by their existing terms. See "Benefit Plans -- 1997 Stock Incentive Plan." (2) The exercise price per share of options granted represented the fair market value of the underlying shares of Common Stock on the dates the respective options were granted as determined by the Board, considering all relevant factors. The exercise price may be paid in cash or in shares of Common Stock valued at fair market value on the exercise date or a combination of cash and shares or any other form of consideration approved by the Board. After the effective date of the Registration Statement of which this Prospectus is a part, the fair market value of shares of Common Stock will be determined in accordance with certain provisions of the Company's 1995 Stock Option/Stock Issuance Plan based on the closing selling price per share of Common Stock on the date in question on the primary exchange or national market system on which the Company's common stock is listed or reported. If shares of the Common Stock are not listed or admitted to trading on any stock exchange nor traded on the Nasdaq National Market, then the fair market value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. (3) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the Commission. The price used for computing this appreciation is the exercise price of the options, not the price of Common Stock in this offering. There is no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the 10-year option term will be at the assumed 5% or 10% levels or at any other defined level. 43 45 Option Exercises and Holdings The following table provides information concerning option exercises during 1996 by the Named Executive Officers and the value of unexercised options held by each of the Named Executive Officers as of December 31, 1996. No SARs were exercised during 1996 or outstanding as of December 31, 1996. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS SHARES DECEMBER 31, 1996(#) AT DECEMBER 31, 1996(3) ACQUIRED ON VALUE ------------------------------ ------------------------------ NAME EXERCISE(#) REALIZED(1) EXERCISABLE(2) UNEXERCISABLE EXERCISABLE(2) UNEXERCISABLE - ----------------------- ----------- ----------- -------------- ------------- -------------- ------------- Vicente Anido, Jr., Ph.D................. -- $-- 422,417 -- $ 42,242 $-- Peter L. Myers, Ph.D................. -- -- -- -- -- -- John Saunders, Ph.D.... -- -- -- -- -- -- Lee R. McCracken....... 72,500 -- -- -- -- -- Steven L. Teig......... -- -- -- -- -- -- Lynn Caporale, Ph.D.... -- -- -- -- -- --
- --------------- (1) "Value realized" is calculated on the basis of the fair market value of the Common Stock on the date of exercise minus the exercise price and does not necessarily indicate that the optionee sold such stock. (2) The options are immediately exercisable, but any shares purchased thereunder will be subject to repurchase by the Company, at the original option exercise price paid per share, should Dr. Anido leave the Company prior to vesting in the shares. As of October 15, 1997, Dr. Anido had vested in 167,204 of those shares. (3) "Value" is defined as fair market price of the Common Stock at fiscal year-end ($0.40) less exercise price. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the year ended December 31, 1996, the Compensation Committee of the Company's Board established the levels of compensation for the Company's executive officers. The current members of the Company's Compensation Committee are Dr. Chambon and Dr. Scott. See "Certain Transactions." EMPLOYMENT ARRANGEMENTS AND CHANGE OF CONTROL ARRANGEMENTS In March 1996, the Company and Dr. Anido entered into an agreement whereby Dr. Anido is employed as President and Chief Executive Officer of the Company. Pursuant to his agreement, Dr. Anido receives an annual base salary of $260,000, which is reviewed annually by the Board of Directors, and is eligible for a bonus of up to 25% of his annual base salary to be awarded at the discretion of the Board of Directors. In the event the Company terminates Dr. Anido's employment without "cause," Dr. Anido will be entitled to receive an aggregate severance benefit of 12 months of his base salary and benefits less amounts received by Dr. Anido from other full-time employment during that period. In addition, pursuant to his employment agreement Dr. Anido received options to purchase 420,000 shares of Common Stock with an exercise price of $0.30 per share. The shares subject to the option vest over Dr. Anido's four-year period of service with the Company measured from the option grant date. Dr. Anido's employment agreement also provides Dr. Anido with a right to maintain his pro rata interest in the Company by purchasing new securities issued in a financing other than a public offering, subject to certain exceptions. In March 1995, the Company and Dr. Myers entered into an agreement whereby Dr. Myers is employed as Chief Scientific Officer and Chief Operating Officer of the Company. Pursuant to his agreement, Dr. Myers (i) received a signing bonus of $26,250 towards the purchase of Company stock, (ii) receives an annual base salary of $210,000, which is reviewed annually by the President and Chief Executive Officer, and (iii) is eligible for a bonus of up to 25% of his annual base salary to be awarded at the discretion of the Board of 44 46 Directors. In connection with the employment agreement, Dr. Myers was provided a home loan. In the event the Company terminates Dr. Myers' employment without "cause," Dr. Myers will be entitled to receive an aggregate severance benefit of nine months of his base salary and benefits, unless he obtains full-time employment prior to the end of that period, and nine months accelerated vesting to be applied to any vesting requirements under any stock option or stock purchase agreements outstanding between Dr. Myers and the Company at the time of his termination without cause. Simultaneous with the execution of Dr. Myers' employment agreement, the Company and Dr. Myers entered into a Stock Purchase Agreement whereby Dr. Myers purchased 87,500 shares of Common Stock at $0.30 per share. Those shares vest over Dr. Myers' four-year period of service with the Company measured from the option grant date. In March 1997, the Company and Ms. Eastham entered into an agreement whereby she is employed as Vice President, Finance and Administration and Chief Financial Officer. Pursuant to her agreement, Ms. Eastham (i) receives an annual base salary of $186,000, which is reviewed annually by the Chief Executive Officer and Board of Directors, and (ii) is eligible for a bonus of up to 20% of her annual base salary to be awarded at the discretion of the Board of Directors. In the event the Company terminates Ms. Eastham's employment without "cause" within two years after her date of hire, Ms. Eastham will be entitled to receive an aggregate severance benefit of her base salary and benefits for six months, unless she obtains full-time employment prior to the end of that six-month period. Simultaneous with the execution of Ms. Eastham's employment agreement, the Company and Ms. Eastham entered into a Stock Option Agreement granting her an option to purchase 87,500 shares of Common Stock with an exercise price of $0.40 per share. The shares subject to the option vest over her four-year period of service with the Company measured from the grant date. In January 1996, the Company and Dr. Saunders entered into an agreement whereby Dr. Saunders is employed as Vice President, Medicinal Chemistry of the Company. Pursuant to his agreement, Dr. Saunders receives an annual base salary of $145,000, which is reviewed annually by the President and Chief Executive Officer, and is eligible for a bonus of up to 20% of his annual base salary to be awarded at the discretion of the Board of Directors. Simultaneous with the execution of the employment agreement, the Company and Dr. Saunders entered into a stock option agreement granting him an option to purchase 83,825 shares of the Company's common stock with an exercise price of $0.248 per share. The shares subject to that option vest over Dr. Saunders' four-year period of service with the Company measured from the option grant date. In May 1996, the Company and Mr. McCracken entered into an agreement whereby he is employed as Vice President, Business Development of the Company. Pursuant to his agreement, Mr. McCracken received a signing bonus of $10,000 and receives an annual base salary of $145,000, which is reviewed annually by the President and Chief Executive Officer. In addition, Mr. McCracken is eligible for a bonus of up to 20% of his annual base salary. In the event the Company terminates Mr. McCracken's employment without "cause," Mr. McCracken will be entitled to receive an aggregate severance benefit of nine months of his base salary and benefits. Simultaneous with the execution of Mr. McCracken's employment agreement, the Company and Mr. McCracken entered into a stock option agreement granting Mr. McCracken an option to purchase 72,500 shares of Common Stock with an exercise price of $0.30 per share. The shares subject to the option vest over Mr. McCracken's four-year period of service measured from the option grant date. In July 1995, the Company and Mr. Teig entered into an agreement whereby he is employed as Vice President of the Company. Pursuant to his agreement, Mr. Teig receives an annual base salary of $135,000, which is reviewed annually by the Board of Directors. In addition, Mr. Teig is eligible for a bonus of up to 20% of his annual base salary to be awarded at the discretion of the Board of Directors. Simultaneous with the execution of the employment agreement, the Company and Mr. Teig entered into a stock purchase agreement whereby Mr. Teig purchased 50,000 shares of Common Stock at $0.30 per share. Under such stock purchase agreement, the shares will vest, and the Company's repurchase rights will accordingly lapse over Mr. Teig's four-year period of employment measured from the date of issuance. Pursuant to his employment agreement, Mr. Teig was granted, and subsequently exercised, an option to purchase 61,250 shares of Company's Common Stock with an exercise price of $0.40 per share. Those shares vest over Mr. Teig's four-year period of service measured from option grant date. 45 47 In November 1994, the Company and Dr. Caporale entered into an agreement whereby she was employed as Vice President, Strategic Development. Pursuant to the agreement, Dr. Caporale received an annual base salary of $160,000 subject to review and adjustments by the Board of Directors, and a bonus of up to 20% of her annual base salary. In November 1996, Dr. Caporale resigned from the Company and the employment agreement terminated. As a result of her termination, Dr. Caporale received an aggregate severance benefit of nine months of her base salary and benefits. Simultaneous with the execution of the employment agreement, the Company and Dr. Caporale entered into a stock purchase agreement, whereby Dr. Caporale purchased 43,750 shares of Common Stock at $0.20 per share, and 29,785 were vested at the termination of Dr. Caporale's employment with the Company. In connection with an acquisition of the Company by merger or asset sale, each outstanding option held by the Chief Executive Officer and the other Named Executive Officers under the Predecessor Plan will terminate, unless those options are assumed by the successor corporation. However, any options granted to such individuals in the future under the 1997 Stock Incentive Plan will automatically accelerate in full, except to the extent such options are to be assumed by the successor corporation. See "Benefit Plans -- 1997 Stock Incentive Plan." In addition, the Compensation Committee as Plan Administrator of the 1997 Stock Incentive Plan will have the authority to provide for the accelerated vesting of the shares of Common Stock subject to outstanding options held by the Chief Executive Officer and the Named Executive Officers, or any unvested shares of Common Stock subject to direct issuances held by such individuals, in connection with the termination of the officer's employment following: (i) a merger or asset sale in which these options are assumed or the repurchase rights applicable to those shares are assigned or (ii) certain changes in control of the Company. DIRECTOR COMPENSATION The Company reimburses its directors for all reasonable and necessary travel and other incidental expenses incurred in connection with their attendance at meetings of the Board. Directors are not currently compensated for serving on the Board. The Company has previously granted to certain non-employee Board members an option to purchase 20,000 shares of Common Stock, and beginning with the first annual meeting of stockholders following this offering, each such Board member who continues to serve as a non-employee Board member will automatically be granted an additional option to purchase 5,000 shares of Common Stock. In addition, each individual who first becomes a non-employee Board member at any time after this offering will receive a 20,000-share option grant on the date such individual joins the Board, and beginning with the first annual meeting of stockholders following this offering, each such non-employee Board member who is to continue to serve as a non-employee Board member will automatically be granted an option to purchase 5,000 shares of Common Stock, provided such individual has served on the Board for at least six months. These options will have an exercise price equal to 100% of the fair market value of the Common Stock on the grant date. The shares subject to each automatic option grant will vest over a four-year period, with 25% of the option shares vesting upon completion of one year of Board service from the grant date and the balance of the option shares vesting in a equal monthly installments over the next three years. See "-- Benefit Plans -- 1997 Stock Incentive Plan." BENEFIT PLANS 1997 Stock Incentive Plan The Company's 1997 Stock Incentive Plan (the "1997 Plan") is intended to serve as the successor equity incentive program to the Company's 1995 Stock Option/Stock Issuance Plan, as amended (the "Predecessor Plan"). The 1997 Plan was adopted by the Board and the stockholders on October 7, 1997. The 1997 Plan is to become effective on the date the Underwriting Agreement for this offering is executed (the "Plan Effective Date"). A total of 1,080,603 shares of Common Stock have been authorized for issuance under the 1997 Plan. Such share reserve consists of (i) the number of shares available for issuance under the Predecessor Plan on the Plan Effective Date, including the shares subject to outstanding options, and (ii) an additional increase of 46 48 approximately 800,000 shares. To the extent any unvested shares of Common Stock issued under the Predecessor Plan are repurchased by the Company after the Plan Effective Date, at the exercise price paid per share, in connection with the holder's termination of service, those repurchased shares will be added to the reserve of Common Stock available for issuance under the 1997 Plan. In no event may any one participant in the 1997 Plan receive option grants, separately exercisable stock appreciation rights or direct stock issuances for more than 500,000 shares of Common Stock in the aggregate per calendar year. On the Plan Effective Date, outstanding options and unvested shares issued under the Predecessor Plan will be incorporated into the 1997 Plan, and no further option grants will be made under the Predecessor Plan. The incorporated options will continue to be governed by their existing terms, unless the Plan Administrator elects to extend one or more features of the 1997 Plan to those options. Except as otherwise noted below, the incorporated options have substantially the same terms as will be in effect for grants made under the Discretionary Option Grant Program of the 1997 Plan. The 1997 Plan is divided into five separate components: (i) the Discretionary Option Grant Program under which eligible individuals in the Company's employ or service (including officers, non-employee Board members and consultants) may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 100% of their fair market value on the grant date, (ii) the Stock Issuance Program under which such individuals may, in the Plan Administrator's discretion, be issued shares of Common Stock directly, through the purchase of such shares at a price not less than 100% of their fair market value at the time of issuance or as a bonus tied to the performance of services, (iii) the Salary Investment Option Grant Program which may, in the Plan Administrator's sole discretion, be activated for one or more calendar years and, if so activated, will allow executive officers and other highly compensated employees the opportunity to apply a portion of their base salary to the acquisition of special below-market stock option grants, (iv) the Automatic Option Grant Program under which option grants will automatically be made at periodic intervals to eligible non-employee Board members to purchase shares of Common Stock at an exercise price equal to 100% of their fair market value on the grant date and (v) the Director Fee Option Grant Program which may, in the Plan Administrator's sole discretion, be activated for one or more calendar years and, if so activated, will allow non-employee Board members the opportunity to apply a portion of the annual retainer fee, if any, otherwise payable to them in cash each year to the acquisition of special below-market option grants. The Discretionary Option Grant Program and the Stock Issuance Program will be administered by the Compensation Committee. The Compensation Committee as Plan Administrator will have complete discretion to determine which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the Federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The Compensation Committee will also have the exclusive authority to select the executive officers and other highly compensated employees who may participate in the Salary Investment Option Grant Program in the event that program is activated for one or more calendar years, but neither the Compensation Committee nor the Board will exercise any administrative discretion with respect to option grants under the Salary Investment Option Grant Program or under the Automatic Option Grant or Director Fee Option Grant Program for the non-employee Board members. All grants under those three latter programs will be made in strict compliance with the express provisions of each such program. The exercise price for the shares of Common Stock subject to option grants made under the 1997 Plan may be paid in cash or in shares of Common Stock valued at fair market value on the exercise date. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the Plan Administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise or purchase. 47 49 The Plan Administrator will have the authority, with the consent of the affected option holders, to effect the cancellation of outstanding options under the Discretionary Option Grant Program (including options incorporated from the Predecessor Plan) in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. Stock appreciation rights are authorized for issuance under the Discretionary Option Grant Program which provide the holders with the election to surrender their outstanding options for an appreciation distribution from the Company equal to the excess of (i) the fair market value of the vested shares of Common Stock subject to the surrendered option over (ii) the aggregate exercise price payable for such shares. Such appreciation distribution may be made in cash or in shares of Common Stock. None of the incorporated options from the Predecessor Plan contain any stock appreciation rights. In the event that the Company is acquired by merger or asset sale, each outstanding option under the Discretionary Option Grant Program which is not to be assumed by the successor corporation will automatically accelerate in full, and all unvested shares under the Discretionary Option Grant and Stock Issuance Programs will immediately vest, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the successor corporation. The Plan Administrator will have complete discretion to grant one or more options under the Discretionary Option Grant Program which will become fully exercisable for all the option shares in the event those options are assumed in the acquisition and the optionee's service with the Company or the acquiring entity terminates within a designated period following such acquisition. The vesting of outstanding shares under the Stock Issuance Program may be accelerated upon similar terms and conditions. The Plan Administrator will also have the authority to grant options which will immediately vest upon an acquisition of the Company, whether or not those options are assumed by the successor corporation. The Plan Administrator is also authorized under the Discretionary Option Grant and Stock Issuance Programs to grant options and to structure repurchase rights so that the shares subject to those options or repurchase rights will immediately vest in connection with a change in control of the Company (whether by successful tender offer for more than fifty percent (50%) of the outstanding voting stock or a change in the majority of the Board by reason of one or more contested elections for Board membership), with such vesting to occur either at the time of such change in control or upon the subsequent termination of the individual's service within a designated period following such change in control. The options incorporated from the Predecessor Plan will terminate upon an acquisition of the Company by merger or asset sale, unless those options are assumed by the successor entity. However, the Plan Administrator will have the discretion to extend the acceleration provisions of the 1997 to those options. In the event the Plan Administrator elects to activate the Salary Investment Option Grant Program for one or more calendar years, each executive officer and other highly compensated employee of the Company selected for participation may elect, prior to the start of the calendar year, to reduce his or her base salary for that calendar year by a specified dollar amount not less than $10,000 nor more than $50,000. If such election is approved by the Plan Administrator, the individual will automatically be granted, on the first trading day in January of the calendar year for which that salary reduction is to be in effect, a non-statutory option to purchase that number of shares of Common Stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of Common Stock on the grant date. The option will be exercisable at a price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the total spread on the option shares at the time of grant (the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares) will be equal to the amount of salary invested in that option. The option will vest in a series of twelve (12) equal monthly installments over the calendar year for which the salary reduction is to be in effect and will be subject to full and immediate vesting upon certain changes in the ownership or control of the Company. The Company has previously granted to certain non-employee Board members an option to purchase 20,000 shares of Common Stock, and beginning with the first annual meeting of stockholders following this offering, each such Board member who is to continue to serve as a non-employee Board member will automatically be granted an additional option to purchase 5,000 shares of Common Stock. In addition, each individual who first becomes a non-employee Board member at any time after the Plan Effective Date will 48 50 receive a 20,000-share option grant on the date such individual joins the Board, and on the date of each Annual Stockholders Meeting held after the Plan Effective Date, each such non-employee Board member who is to continue to serve as a non-employee Board member will automatically be granted an option to purchase 5,000 shares of Common Stock, provided such individual has served on the Board for at least six months. Each automatic grant for the non-employee Board members will have a term of 10 years, subject to earlier termination following the optionee's cessation of Board service. Each automatic option will be immediately exercisable for all of the option shares; however, any unvested shares purchased under the option will be subject to repurchase by the Company, at the exercise price paid per share, should the optionee cease Board service prior to vesting in those shares. The shares subject to each automatic option grant will vest over a four-year period, as follows: (i) 25% of the option shares upon the optionee's completion of one year of Board service measured from the grant date and (ii) the balance of the option shares in a series of 36 successive equal monthly installments upon the optionee's completion of each additional month of service measured from the first anniversary of the grant date. However, the shares will immediately vest in full upon certain changes in control or ownership of the Company or upon the optionee's death or disability while a Board member. Should the Director Fee Option Grant Program be activated in the future, each non-employee Board member will have the opportunity to apply all or a portion of any annual retainer fee otherwise payable in cash to the acquisition of a below-market option grant. The option grant will automatically be made on the first trading day in January in the year for which the retainer fee would otherwise be payable in cash. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of Common Stock on the grant date. As a result, the total spread on the option (the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares) will be equal to the portion of the retainer fee invested in that option. The option will become exercisable for the option shares in a series of twelve (12) equal monthly installments over the calendar year for which the election is to be in effect. However, the option will become immediately exercisable for all the option shares upon (i) certain changes in the ownership or control of the Company or (ii) the death or disability of the optionee while serving as a Board member. The shares subject to each option under the Salary Investment Option Grant, Automatic Option Grant and Director Fee Option Grant Programs will immediately vest upon (i) an acquisition of the Company by merger or asset sale or (ii) the successful completion of a tender offer for more than 50% of the Company's outstanding voting stock or a change in the majority of the Board effected through one or more contested elections for Board membership. Limited stock appreciation rights will automatically be included as part of each grant made under the Automatic Option Grant, Salary Investment Option Grant and Director Fee Option Grant Programs and may be granted to one or more officers of the Company as part of their option grants under the Discretionary Option Grant Program. Options with such a limited stock appreciation right may be surrendered to the Company upon the successful completion of a hostile tender offer for more than 50% of the Company's outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from the Company in an amount per surrendered option share equal to the excess of (i) the highest price per share of Common Stock paid in connection with the tender offer over (ii) the exercise price payable for such share. The Board may amend or modify the 1997 Plan at any time, subject to any required stockholder approval. The 1997 Plan will terminate on the earliest of (i) October 31, 2007, (ii) the date on which all shares available for issuance under the 1997 Plan have been issued as fully vested shares or (iii) the termination of all outstanding options in connection with certain changes in control or ownership of the Company. 49 51 1997 Employee Stock Purchase Plan The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board and approved by the stockholders in October 1997 and will become effective immediately upon the execution of the Underwriting Agreement for this offering. The Purchase Plan is designed to allow eligible employees of the Company and participating subsidiaries to purchase shares of Common Stock, at semi-annual intervals, through their periodic payroll deductions under the Purchase Plan, and a reserve of 150,000 shares of Common Stock has been established for this purpose. The Purchase Plan will be implemented in a series of successive offering periods, each with a maximum duration for 24 months. However, the initial offering period will begin on the execution date of the Underwriting Agreement and will end on the last business day in July 1999. The next offering period will commence on the first business day in August 1999, and subsequent offering periods will commence as designated by the Plan Administrator. Individuals who are eligible employees (scheduled to work more than 20 hours per week for more than 5 calendar months per year) on the start date of any offering period may enter the Purchase Plan on that start date or on any subsequent semi-annual entry date (the first business day of February or August each year). Individuals who become eligible employees after the start date of the offering period may join the Purchase Plan on any subsequent semi-annual entry date within that offering period. Payroll deductions may not exceed 10% of total cash earnings, and the accumulated payroll deductions of each participant will be applied to the purchase of shares on his or her behalf on each semi-annual purchase date (the last business day in January and July each year) at a purchase price per share equal to 85% of the lower of (i) the fair market value of the Common Stock on the participant's entry date into the offering period or (ii) the fair market value on the semi-annual purchase date. In no event, however, may any participant purchase more than 1,250 shares on any one semi-annual purchase date. Should the fair market value per share of Common Stock on any purchase date be less than the fair market value per share on the start date of the two-year offering period, then that offering period will automatically terminate, and a new two-year offering period will begin on the next business day, with all participants in the terminated offering to be automatically transferred to the new offering period. In the event the Company is acquired by merger or asset sale, all outstanding purchase rights will automatically be exercised immediately prior to the effective date of such acquisition. The purchase price will be equal to 85% of the lower of (i) the fair market value per share of Common Stock on the participant's entry date into the offering period in which such acquisition occurs or (ii) the fair market value per share of Common Stock immediately prior to such acquisition. The Purchase Plan will terminate on the earlier of (i) the last business day in July 2007, (ii) the date on which all shares available for issuance under the Purchase Plan shall have been sold pursuant to purchase rights exercised thereunder or (iii) the date on which all purchase rights are exercised in connection with an acquisition of the Company by merger or asset sale. The Board may at any time alter, suspend or discontinue the Purchase Plan. However, certain amendments to the Purchase Plan may require stockholder approval. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS The Company's Certificate of Incorporation eliminates, subject to certain exceptions, directors' personal liability to the Company or its stockholders for monetary damages for breaches of fiduciary duties. The Certificate of Incorporation does not, however, eliminate or limit the personal liability of a director for (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law or (iv) any transaction from which the director derived an improper personal benefit. 50 52 The Company's Bylaws provide that the Company shall indemnify its directors and executive officers to the fullest extent permitted under the Delaware General Corporation Law and may indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. In addition, the Company has entered into indemnification agreements with its directors and officers. The indemnification agreements contain provisions that require the Company, among other things, to indemnify its directors and executive officers against certain liabilities (other than liabilities arising from intentional or knowing and culpable violations of law) that may arise by reason of their status or service as directors or executive officers of the Company or other entities to which they provide service at the request of the Company and to advance expenses they may incur as a result of any proceeding against them as to which they could be indemnified. The Company believes that these provisions and agreements are necessary to attract and retain qualified directors and officers. The Company has obtained an insurance policy covering directors and officers for claims that such directors and officers may otherwise be required to pay or for which the Company is required to indemnify them, subject to certain exclusions. 51 53 CERTAIN TRANSACTIONS Since its formation in May 1994, the Company has issued, in private placement transactions, shares of its Preferred Stock as follows (not adjusted for the one-for-four reverse stock split): 1,000,000 shares of Series A Preferred Stock at a price of $0.50 per share in August and November 1994; 2,226,667 shares of Series B Preferred Stock at a price of $0.75 per share in November 1994; 17,158,486 shares of Series C Preferred Stock at a price of $0.62 per share in August 1995, September 1995 and April 1996; 9,869,205 shares of Series D Preferred Stock at a price of $1.00 per share in November 1996; 232,500 shares of Series J Preferred Stock at a price of $0.10 per share in June 1997; 200,000 shares of Series Z Preferred Stock at a price of $0.50 in October 1994; and 337,777 shares of Series Z as consideration pursuant to an asset purchase agreement. The purchasers of Preferred Stock include, among others, the following directors, executive officers and holders of more than 5% of the Company's outstanding stock and their respective affiliates (all shares of Preferred Stock are convertible into Common Stock on a four-for-one basis):
PREFERRED STOCK EXECUTIVE OFFICERS, DIRECTORS -------------------------------------------------------- TOTAL AND 5% STOCKHOLDERS SERIES A SERIES B SERIES C SERIES D SERIES J CONSIDERATION - ----------------------------------------- -------- --------- --------- --------- --------- ------------- Pierre R. Lamond(1)...................... 400,000 1,333,334 2,169,801 948,837 -- $ 3,494,114 Philippe O. Chambon, M.D., Ph.D.(2)...... -- -- 4,838,710 1,168,198 -- 4,168,198 Vicente Anido, Jr., Ph.D................. -- -- -- 240,000 -- 240,000 Lee R. McCracken(3)...................... -- -- -- 35,000 -- 35,000 Steven L. Teig........................... -- -- -- 20,000 122,500 32,250 Entities affiliated with Sequoia Capital(1)............................. 400,000 1,333,334 2,169,801 948,837 -- 3,494,114 Entities affiliated with Sprout Capital(2)............................. -- -- 4,838,710 1,168,198 -- 4,168,198 Entities affiliated with Sorrento Growth Partners(4)............................ -- -- 2,419,357 584,099 -- 2,084,100 Entities affiliated with Brinson Venture Capital Fund(5)........................ -- -- 3,225,807 600,000 -- 2,600,000
- --------------- (1) Includes 4,348,842 shares purchased by Sequoia Capital VI, 238,949 shares purchased by Sequoia Technology Partners VI, 128,043 shares purchased by Sequoia XXIV and 63,115 shares purchased by Sequoia 1995, each of which is affiliated with Sequoia Partners. Sequoia Partners is the general partner of Sequoia Capital VI. Sequoia Partners has eight general partners, who are also the general partners of Sequoia Technology Partners VI. Also includes 73,023 shares issuable to the entities affiliated with Sequoia Partners upon exercise of warrants at an exercise price of $0.62 per share. In addition, the entities affiliated with Sequoia Partners purchased 100,000 shares of Common Stock of the Company in November 1994 (see below). Mr. Lamond is a Director of the Company and a general partner of Sequoia Partners. Mr. Lamond disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (2) Includes 5,545,317 shares purchased by Sprout Capital VII, L.P. and 461,591 shares purchased by DLJ Capital Corporation. Dr. Chambon is a Director of the Company and a general partner of Sprout Capital VII, L.P., and DLJ Capital Corporation is the general partner of Sprout Capital VII, L.P. Dr. Chambon is a Divisional Vice President of DLJ Capital Corporation. Dr. Chambon disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (3) Held by The Rufus L. McCracken Trust, dated 6/21/91, of which Mr. McCracken is the sole trustee. (4) Includes 999,206 shares purchased by Sorrento Ventures II, L.P. and 2,004,250 shares purchased by Sorrento Growth Partners I, L.P. (5) Includes 536,452 shares purchased by the First National Bank of Chicago as Custodian to the Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III and 3,289,355 shares purchased by the First National Bank of Chicago as Custodian to the Brinson Venture Capital Fund III, L.P. Holders of Preferred Stock are entitled to certain registration rights with respect to the Common Stock issued or issuable upon conversion thereof. See "Description of Capital Stock -- Registration Rights." 52 54 In November 1994, the Company sold the following number of shares of Common Stock to the respective entities at a price of $0.20 per share: 22,750 shares to Sequoia Capital VI; 1,250 shares to Sequoia Technology Partners VI; and 1,000 shares to Sequoia XXIV. In October 1997, the Company sold 1,000,000 shares of its Common Stock to Elan International Services Ltd. in conjunction with entering into a collaborative agreement. In February 1997, the Company made a loan in the amount of $96,000 to Dr. Anido, the President, Chief Executive Officer and a Director of the Company, which loan is secured by shares of Common Stock issuable to Dr. Anido upon the exercise of options. The loan is represented by a promissory note which is due and payable on the earlier of February 23, 2002 or the occurrence of certain events, such as the expiration of the 190-day period following completion of an initial public offering. The loan bears no interest. The entire amount of the loan is currently outstanding. In June 1997, the Company made a loan in the amount of $23,044 to Dr. Anido which is secured by shares of Common Stock issuable to Dr. Anido upon the exercise of options. The loan is represented by a promissory note which is due and payable in three annual installments and is due in full upon the third anniversary of the loan. The loan bears an interest rate of 6.14%. The entire amount of the loan is currently outstanding. In September 1995, the Company made a loan in the amount of $150,000 to Dr. Myers, the Vice President, Chief Scientific Officer, Chief Operating Officer and a Director of the Company, which loan is secured by shares of Common Stock. The loan is represented by a promissory note which is due and payable on the earlier of September 5, 2000 or the occurrence of certain events, such as the expiration of the 180-day period following completion of a public offering. The loan bears an interest equal to the applicable minimum Federal rate on the date of the loan. The entire amount of the loan is currently outstanding. In August 1996, the Company made a loan in the amount of $66,125 to Dr. Saunders for relocation in connection with employment, which is secured by a deed of trust. The loan is represented by a promissory note which is due and payable on the earlier of August 28, 1999 or the occurrence of certain events, such as the expiration of the 30-day period following the date Dr. Saunders ceases to be a full-time employee of the Company. The loan bears no interest. Dr. Saunders has made a principal payment of $22,000. For information regarding employment agreements with Named Executive Officers, see "Management -- Employment Agreements and Change of Control Arrangements." All of the Company's officers are employed by the Company at will. The Company has entered into indemnification agreements with each of its directors and executive officers. See "Management -- Limitations on Liability and Indemnification Matters." The Company expects that all future transactions between the Company and its officers, directors and principal stockholders and their affiliates will be approved in accordance with the Delaware General Corporation Law by a majority of the Board, as well as by a majority of the independent and disinterested directors of the Board, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 53 55 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of October 15, 1997, and as adjusted to reflect the sale of the shares of the Common Stock offered hereby by the Company, by (i) all those known by the Company to be beneficial owners of more than 5% of its outstanding Common Stock, (ii) each director of the Company, (iii) each of the Named Executive Officers of the Company and (iv) all directors and executive officers of the Company as a group.
PERCENTAGE OF SHARES SHARES BENEFICIALLY OWNED(2) BENEFICIALLY ---------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) PRIOR TO OFFERING AFTER OFFERING - ---------------------------------------------------------- ------------ ----------------- -------------- Sprout Capital VII, L.P. and affiliated entities(3)....... 1,501,729 13.7% 11.4% 3000 Sand Hill Road Building 4, Suite 270 Menlo Park, CA 94025 Sequoia Capital VI and affiliated entities(4)............. 1,237,999 11.3% 9.4% 3000 Sand Hill Road Building 4, Suite 280 Menlo Park, CA 94025 Elan International Services Ltd........................... 1,000,000 9.1% 7.6% 102 St. James Court Flatts Smiths, FL04 Bermuda Brinson MAP Venture Capital Fund III and affiliated entities(5)............................................. 956,453 8.7% 7.2% 209 S. LaSalle Street Chicago, IL 60604-1295 Sorrento Growth Partners I, L.P. and affiliated entities(6)............................................. 750,867 6.8% 5.7% 4225 Executive Square, Suite 1400 San Diego, CA 92037 Pierre R. Lamond(4)....................................... 1,237,999 11.3% 9.4% Vicente Anido, Jr., Ph.D.(7).............................. 582,417 5.3% 4.4% Peter L. Myers, Ph.D.(8).................................. 272,500 2.5% 2.0% Philippe O. Chambon, MD., Ph.D.(3)........................ 1,501,729 13.7% 11.4% Arthur Reidel(9).......................................... 20,000 * * William Scott, Ph.D.(10).................................. 20,000 * * Lee R. McCracken(11)...................................... 93,750 * * John Saunders, Ph.D....................................... 83,825 * * Steven L. Teig(12)........................................ 246,875 2.2% 1.9% Lynn Caporale, Ph.D....................................... 38,062 * * 201 W. 70th Street New York, NY 10023 All directors and executive officers as a group (9 persons)(13).............................. 4,067,145 36.2% 30.1%
- --------------- * Represents beneficial ownership of less than one percent of the outstanding shares of the Company's Common Stock. (1) Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Share ownership in each case includes shares issuable upon exercise of certain outstanding options as described in the footnotes below. The address for those individuals for which an address is not otherwise indicated is: 9050 Camino Santa Fe, San Diego, CA 92121. 54 56 (2) Percentage of ownership is calculated pursuant to Commission Rule 13d-3(d)(1). (3) Includes 1,386,331 shares purchased by Sprout Capital VII, L.P. and 115,398 shares purchased by DLJ Capital Corporation. DLJ Capital Corporation is the managing general partner of Sprout Capital VII, L.P. Dr. Chambon is a Director of the Company, a general partner of Sprout Capital VII, L.P. and Divisional Vice President of DLJ Capital Corporation. Dr. Chambon disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (4) Includes 1,109,962 shares held by Sequoia Capital VI, 60,988 shares held by Sequoia Technology Partners VI, 33,012 shares held by Sequoia XXIV and 15,780 shares held by Sequoia 1995, each of which is affiliated with Sequoia Partners. Sequoia Partners is the general partner of Sequoia Capital VI. Sequoia Partners has eight general partners, who are also the general partners of Sequoia Technology Partners VI. Also includes 16,613, 913 and 731 shares held by Sequoia Capital VI, Sequoia Technology Partners VI and Sequoia XXIV, respectively, issuable upon exercise of warrants exercisable within 60 days of October 15, 1997. Mr. Lamond is a Director of the Company and a general partner of Sequoia Partners. Mr. Lamond disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (5) Includes 134,113 shares purchased by the First National Bank of Chicago as Custodian to the Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III and 822,340 shares purchased by The First National Bank of Chicago as Custodian to the Brinson Venture Capital Fund III, L.P. (6) Includes 249,803 shares held by Sorrento Ventures II, L.P. and 501,064 shares held by Sorrento Growth Partners I, L.P. (7) Includes 100,000 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (8) Includes 50,000 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (9) Includes 20,000 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (10) Includes 20,000 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (11) Includes 8,750 shares held by the Rufus L. McCracken Trust, dated 6/21/91, of which Mr. McCracken is the sole Trustee. Includes 12,500 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (12) Includes 50,000 shares issuable upon exercise of options exercisable within 60 days of October 15, 1997. (13) Includes 270,757 shares issuable upon the exercise of options or warrants exercisable within 60 days of October 15, 1997. 55 57 DESCRIPTION OF CAPITAL STOCK Upon completion of this offering, the Company will be authorized to issue 40,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000 shares of undesignated Preferred Stock, $0.001 par value per share. COMMON STOCK As of September 30, 1997, there were 9,668,505 shares of Common Stock outstanding and held of record by approximately 125 stockholders. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferences that may be applicable to any outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board out of funds legally available. See "Dividend Policy." All outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK After completion of this offering, the Board will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix the rights, priorities, preferences, qualifications, limitations and restrictions, including dividend rights, conversion rights, voting rights, terms of redemption, terms of sinking funds, liquidation preferences and the number of shares constituting any series or the designation of such series, which could decrease the amount of earnings and assets available for distribution to holders of Common Stock or adversely affect the rights and powers, including voting rights, of the holders of the Common Stock. The issuance of Preferred Stock could have the effect of delaying or preventing a change in control of the Company or make removal of management more difficult. Additionally, the issuance of Preferred Stock may have the effect of decreasing the market price of the Common Stock and may adversely affect the voting and other rights of the holders of Common Stock. There are currently no shares of Preferred Stock outstanding and the Company has no current plans to issue any of the Preferred Stock. WARRANTS In December 1994, in conjunction with an equipment lease financing, the Company issued a warrant to Comdisco, Inc. to purchase up to 20,914 shares of Common Stock at $2.00 per share, exercisable at any time and prior to the earlier of December 20, 2004 or five years following the Company's initial public offering. The warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of the warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. The warrant provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. In June 1995, in connection with a product development collaboration, the Company issued a warrant to LJL BioSystems, Inc. to purchase 8,750 shares of Common Stock, exercisable at any time and prior to June 15, 2000, at $0.30 per share. The warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of the warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. In August 1995, in connection with the Series C Preferred Stock private placement, the Company issued warrants to five investors to purchase an aggregate of 30,242 shares of Common Stock, exercisable at any time and prior to August 2000 at $2.48 per share. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of the warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. Each warrant provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. 56 58 In April 1996, in conjunction with equipment lease financings, the Company issued warrants to Comdisco, Inc. to purchase up to an aggregate of 35,383 shares of Common Stock at $2.48 per share, exercisable at any time and prior to the earlier of April 2003 or three years after the Company's initial public offering. The number of shares issuable pursuant to these warrants was dependent on the aggregate amount financed with Comdisco, and pursuant to these warrants, Comdisco has the right to purchase an aggregate of 26,647 shares of the Company. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of each warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. Each warrant provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. In May 1996, in conjunction with an equipment lease financing, the Company issued warrants to Silicon Valley Bank and MMC/GATX Partnership No. 1 to purchase up to 6,896 and 21,331 shares of Common Stock, respectively, at $2.48 per share, respectively, exercisable at any time and prior to the earlier of May 2006 or five years following the Company's initial public offering. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of each warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. Each warrant provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. In June 1996, in conjunction with equipment lease financings, the Company issued warrants to Comdisco, Inc. to purchase up to an aggregate of 24,698 shares of Common Stock at $2.48 per share, exercisable at any time and prior to the earlier of June 2003 or three years after the Company's initial public offering. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of each warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. Each warrant provides that the warrant holder may exercise the warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. REGISTRATION RIGHTS The holders of approximately 7,754,933 shares of Common Stock or their permitted transferees (the "Holders") are entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of agreements between the Company and such Holders, if the Company proposes to register any of its securities under the Securities Act for its own account, such Holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein, provided, among other conditions, that the underwriters of any such offering have the right to limit the number of shares included in such registration. In addition, Holders of at least 50% of approximately 7,754,933 shares of Common Stock with demand registration rights may require the Company to prepare and file a registration statement under the Securities Act with respect to the shares entitled to demand registration rights, and the Company is required to use its diligent best efforts to effect such registration, subject to certain conditions and limitations. The Company is not obligated to effect more than two of these stockholder-initiated registrations nor to effect such a registration within 180 days following an offering of the Company's securities, including the Offering made hereby. The Holders may also request the Company to register such shares on Form S-3 provided the shares registered have an aggregate market value of at least $500,000. The Company is not obligated to effect more than one of these registrations pursuant to Form S-3 in any 12-month period. Generally, the Company is required to bear the expense of all such registrations. The registration rights of each Holder expires at such time after the Offering as all shares held by such Holder can be sold within any three-month period pursuant to Rule 144. All rights of the Holders to require registration of the resale of their shares in connection with this Offering have been waived. 57 59 POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS Restated Certificate of Incorporation and Restated Bylaws The Company's Restated Certificate of Incorporation authorizes the Board to establish one or more series of undesignated Preferred Stock, the terms of which can be determined by the Board at the time of issuance. See "-- Preferred Stock." The Restated Certificate of Incorporation also provides that all stockholder action must be effected at a duly called meeting of stockholders and not by a consent in writing. The Company's Restated Bylaws provide that the Company's Board will be classified into three classes of directors beginning at the next annual meeting of stockholders. See "Management -- Executive Officers, Key Employees and Directors." In addition, the Restated Bylaws do not permit stockholders of the Company to call a special meeting of stockholders; only the Company's Chief Executive Officer, President, Chairman of the Board or a majority of the Board are permitted to call a special meeting of stockholders. The Restated Bylaws also require that stockholders give advance notice to the Company's secretary of any nominations for director or other business to be brought by stockholders at any stockholders' meeting and require a supermajority vote of members of the Board and/or stockholders to amend certain Restated Bylaw provisions. These provisions of the Restated Certificate of Incorporation and the Restated Bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions may also have the effect of preventing changes in the management of the Company. Delaware Anti-Takeover Statute The Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder (defined as any person or entity that is the beneficial owner of at least 15% of a corporation's voting stock) for a period of three years following the time that such stockholder became an interested stockholder, unless: (i) prior to such time, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder's becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding, for purposes of determining the number of shares outstanding, those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) at or subsequent to such time, the business combination is approved by the Board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include:. (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, lease, exchange, mortgage, transfer, pledge or other disposition involving the interested stockholder and 10% or more of the assets of the corporation; (iii) subject to certain exceptions, any transaction which results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is American Stock Transfer and Trust Company. 58 60 SHARES ELIGIBLE FOR FUTURE SALE Based upon the number of shares outstanding as of September 30, 1997 (after giving effect to the issuance of an aggregate of 1,250,000 shares to collaborative partners in October 1997), upon completion of this offering, there will be 13,168,505 shares of Common Stock of the Company outstanding. There were also approximately 26,177 shares covered by vested options outstanding, which are not considered to be outstanding shares. Of the outstanding shares, 3,183,575 shares, including the 2,250,000 shares of Common Stock sold in this offering, will be immediately eligible for resale in the public market without restriction under the Securities Act, except that any shares purchased in this offering by affiliates of the Company ("Affiliates"), as that term is defined in Rule 144 under the Securities Act ("Rule 144"), may generally only be resold in compliance with applicable provisions of Rule 144. Beginning approximately 90 days after the date of this Prospectus, approximately 867,573 additional shares of Common Stock (including approximately 42,727 shares covered by options exercisable within the 90-day period following the date of this Prospectus) will become eligible for immediate resale in the public market, subject to compliance as to certain of such shares with applicable provisions of Rules 144 and 701. The Company, the executive officers and directors of the Company and certain security holders have agreed pursuant to lock-up agreements that they will not, without the prior written consent of BancAmerica Robertson Stephens, offer, sell or otherwise dispose of the shares of Common Stock beneficially owned by them for a period of 180 days from the date of this Prospectus. Each holder who signed a lock-up agreement has agreed, subject to certain limited exceptions, not to sell or otherwise dispose of any of the shares held by them as of the date of this Prospectus for a period of 180 days after the date of this Prospectus without the prior written consent of BancAmerica Robertson Stephens. At the end of such 180-day period, approximately 11,502,437 shares of Common Stock (including approximately 52,657 shares issuable upon exercise of vested options) will be eligible for immediate resale, subject to compliance with Rule 144 and Rule 701. The remainder of the approximately 1,666,068 shares of Common Stock outstanding or issuable upon exercise of options held by existing stockholders or option holders will become eligible for sale at various times over a period of less than two years and could be sold earlier if the holders exercise any available registration rights or upon vesting pursuant to the Company's standard four year vesting schedule. In general, under Rule 144 as recently amended, beginning approximately 90 days after the effective date of the Registration Statement of which this Prospectus is a part, a stockholder, including an Affiliate, who has beneficially owned his or her restricted securities (as that term is defined in Rule 144) for at least one year from the later of the date such securities were acquired from the Company or (if applicable) the date they were acquired from an Affiliate is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately 132,000 shares immediately after the offering) or the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule 144, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted securities were acquired from the Company or (if applicable) the date they were acquired from an Affiliate of the Company, a stockholder who is not an Affiliate of the Company at the time of sale and has not been an Affiliate of the Company for at least three months prior to the sale is entitled to sell the shares immediately without compliance with the foregoing requirements under Rule 144. Securities issued in reliance on Rule 701 (such as shares of Common Stock that may be acquired pursuant to the exercise of certain options granted prior to this offering) are also restricted securities and, beginning 90 days after the date of this Prospectus, may be sold by stockholders other than an Affiliate of the Company subject only to the manner of sale provisions of Rule 144 and by an Affiliate under Rule 144 without compliance with its one-year holding period requirement. Prior to this offering, there has been no public market for the Common Stock. No prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price of the Common Stock prevailing from time to time. The Company is unable to estimate the number of shares that may be sold in the public market pursuant to Rule 144, since this will depend on the market price 59 61 of the Common Stock, the personal circumstances of the sellers and other factors. Nevertheless, sales of significant amounts of the Common Stock of the Company in the public market could adversely affect the market price of the Common Stock and could impair the Company's ability to raise capital through an offering of its equity securities. In addition, the Company intends to register on the effective date of this offering a total of 1,925,606 shares of Common Stock subject to outstanding options or reserved for issuance under the Company's 1997 Stock Incentive Plan or outstanding shares which are subject to repurchase by the Company plus 150,000 shares of Common Stock reserved for issuance under its 1997 Employee Stock Purchase Plan. Further, upon expiration of such lock-up agreements, holders of approximately 7,754,933 shares of Common Stock will be entitled to certain registration rights with respect to such shares. If such holders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have a material adverse effect on the market price of the Common Stock. 60 62 UNDERWRITING The Underwriters named below, acting through their representatives, BancAmerica Robertson Stephens, Donaldson, Lufkin & Jenrette Securities Corporation and UBS Securities LLC (the "Representatives"), have severally agreed with the Company, subject to the terms and conditions of the Underwriting Agreement, to purchase the numbers of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER OF UNDERWRITER SHARES ------------------------------------------------------------------ ---------- BancAmerica Robertson Stephens.................................... Donaldson, Lufkin & Jenrette Securities Corporation............... UBS Securities LLC................................................ --------- Total................................................... 2,250,000 =========
The Representatives have advised the Company that the Underwriters propose to offer shares of the Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Company has granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 337,500 additional shares of Common Stock, at the same price per share as will be paid for the 2,250,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 2,250,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 2,250,000 shares are being sold. The Underwriting Agreement contains covenants of indemnity among the Underwriters and the Company against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the Underwriting Agreement. Each officer and director and certain holders of shares of the Company's Common Stock have agreed with the Representatives, for a period of 180 days after the date of this Prospectus (the "Lock-Up Period"), subject to certain exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock owned as of the date of this Prospectus or thereafter acquired directly by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of BancAmerica Robertson Stephens. However, BancAmerica Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. There are no agreements between the Representatives and any of the Company's stockholders providing consent by the Representatives to the sale of shares prior to the expiration of the Lock-Up Period. The Company has agreed that during the Lock-Up Period, the Company will not, subject to certain exceptions, without the prior written consent of BancAmerica Robertson Stephens, (i) consent to the disposition of any shares held by stockholders prior to the expiration of the Lock-Up Period or (ii) issue, sell, contract to sell or otherwise dispose of, any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock, other than the Company's sale of shares in this offering, the issuance of Common Stock upon the exercise of outstanding options and warrants and the Company's issuance of options and stock under the existing stock option and stock purchase plans. See "Shares Eligible for Future Sale." 61 63 The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock offered hereby will be determined through negotiations between the Company and the Representatives. Among the factors to be considered in such negotiations are prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. Certain persons participating in this offering may engage in transactions, including syndicate covering transactions or the imposition of penalty bids, which may involve the purchase of Common Stock on the Nasdaq National Market or otherwise. Such transactions may stabilize or maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market and, if commenced, may be discontinued at any time. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, San Diego, California. Partners of such firm own 2,500 shares of the Company's Common Stock. Certain legal matters will be passed upon for the Underwriters by Cooley Godward LLP, San Diego, California. EXPERTS The financial statements of CombiChem for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997 appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 62 64 ADDITIONAL INFORMATION The Company has filed with the Commission the Registration Statement under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules filed therewith. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus regarding the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respect by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of all of any part thereof may be obtained at prescribed rates from the Commission's Public Reference Section at such addresses. Also, the Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Upon approval of the Common Stock for quotation on the Nasdaq National Market, such reports, proxy and information statements and other information also can be inspected at the office of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. 63 65 COMBICHEM, INC. INDEX TO FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors..................................... F-2 Balance Sheets at December 31, 1995 and 1996 and September 30, 1997................... F-3 Statements of Operations for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and 1997....................................................... F-4 Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for the period from May 23, 1994 (inception) through September 30, 1997..................... F-5 Statements of Cash Flows for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 (unaudited) and 1997....................................................... F-6 Notes to Financial Statements......................................................... F-7
F-1 66 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders CombiChem, Inc. We have audited the accompanying balance sheets of CombiChem, Inc. as of December 31, 1995 and 1996 and September 30, 1997, and the related statements of operations, redeemable preferred stock and stockholders' equity (deficit), and cash flows for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CombiChem, Inc. at December 31, 1995 and 1996 and September 30, 1997, and the results of its operations and its cash flows for the period from May 23, 1994 (inception) to December 31, 1994, the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP October 15, 1997 F-2 67 COMBICHEM, INC. BALANCE SHEETS ASSETS
PRO FORMA STOCKHOLDERS' EQUITY AT DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, --------------------------- ------------- ------------- 1995 1996 1997 1997 ----------- ------------ ------------- ------------- (unaudited) Current assets: Cash and cash equivalents.................... $ 3,135,588 $ 366,983 $ 4,286,957 Short-term investments....................... -- 12,166,132 4,114,700 Restricted cash.............................. -- 325,000 -- Prepaid expenses and other current assets.... 191,076 543,647 518,568 ----------- ------------ ------------ Total current assets................. 3,326,664 13,401,762 8,920,225 Property and equipment, net.................... 634,230 2,899,155 4,080,130 Deposits and other assets...................... 36,018 138,095 156,481 Notes receivable from employee/stockholders.... 152,866 218,991 206,301 ----------- ------------ ------------ Total assets......................... $ 4,149,778 $ 16,658,003 $ 13,363,137 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses........ $ 636,033 $ 1,243,139 $ 1,422,516 Deferred revenue............................. -- 2,130,000 1,187,501 Notes payable................................ 540,000 -- -- Current portion of obligations under capital leases.................................... 160,521 758,085 1,021,946 ----------- ------------ ------------ Total current liabilities............ 1,336,554 4,131,224 3,631,963 Deferred rent.................................. -- 30,409 76,023 Obligations under capital leases, less current portion...................................... 423,711 1,752,646 2,377,410 Commitments Redeemable convertible preferred stock, $.001 par value, 63,196,296 shares authorized; 3,868,063, 7,696,808 and 7,754,933 shares issued and outstanding at December 31, 1995 and 1996 and September 30, 1997, respectively (5,000,000 shares authorized, no shares issued and outstanding pro forma)............ 9,650,425 23,106,728 23,129,968 $ -- Stockholders' equity (deficit): Common stock, $.001 par value, 80,000,000 shares authorized; 660,165, 711,605, and 1,913,572 shares issued and outstanding at December 31, 1995 and 1996 and September 30, 1997, respectively, (40,000,000 shares authorized, 9,668,505 shares issued and outstanding pro forma).................... 660 712 1,913 9,668 Additional paid-in capital................... 119,057 135,340 1,976,428 25,098,641 Deferred compensation........................ -- -- (1,325,597) (1,325,597) Notes receivable from stockholders........... -- -- (336,562) (336,562) Accumulated deficit.......................... (7,380,629) (12,499,056) (16,168,409) (16,168,409) ----------- ------------ ------------ ------------ Total stockholders' equity (deficit).......................... (7,260,912) (12,363,004) (15,852,227) 7,277,741 ----------- ------------ ------------ ------------ Total liabilities and stockholders' equity (deficit)................... $ 4,149,778 $ 16,658,003 $ 13,363,137 $ 13,363,137 =========== ============ ============ ============
See accompanying notes. F-3 68 COMBICHEM, INC. STATEMENTS OF OPERATIONS
NINE MONTHS ENDED PERIOD FROM SEPTEMBER 30, MAY 23, 1994 ------------------------- (INCEPTION) TO YEAR ENDED DECEMBER 31, 1996 DECEMBER 31 ------------------------- ----------- 1994 1995 1996 1997 -------------- ----------- ----------- (unaudited) ----------- Revenue: Revenue under collaborative agreements................. $ -- $ -- $ 2,920,000 $ 1,022,500 $ 4,598,999 Grant revenue................. -- 50,440 47,400 47,400 -- --------- ----------- ----------- ----------- ----------- Total revenue......... -- 50,440 2,967,400 1,069,900 4,598,999 Operating expenses: Research and development...... (413,305) (4,763,043) (5,240,253) (3,810,328) (5,985,365) General and administrative.... (297,313) (2,000,652) (2,845,074) (1,708,842) (2,355,942) --------- ----------- ----------- ----------- ----------- Total operating expenses............ (710,618) (6,763,695) (8,085,327) (5,519,170) (8,341,307) --------- ----------- ----------- ----------- ----------- Loss from operations............ (710,618) (6,713,255) (5,117,927) (4,449,270) (3,742,308) Interest income................. 4,547 94,737 144,639 86,153 437,594 Interest expense................ -- (56,040) (145,139) (97,570) (164,639) Foreign tax expense............. -- -- -- (200,000) --------- ----------- ----------- ----------- ----------- Net loss........................ $ (706,071) $(6,674,558) $(5,118,427) $(4,460,687) $(3,669,353) ========= =========== =========== =========== =========== Pro forma net loss per share.... $ (0.66) $ (0.45) =========== =========== Shares used in calculating pro forma net loss per share...... 7,797,050 8,191,596 =========== ===========
See accompanying notes. F-4 69 COMBICHEM, INC. STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
STOCKHOLDERS' EQUITY (DEFICIT) REDEEMABLE CONVERTIBLE ---------------------------------------------- PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------------- ------------------ PAID-IN DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION --------- ----------- --------- ------ ---------- ------------ Issuance of common stock........................... -- $ -- 433,125 $ 433 $ 23,567 $ -- Sale of Series A preferred stock................... 250,000 500,000 -- -- -- -- Issuance of Series Z preferred stock for technology....................................... 50,000 100,000 -- -- -- -- Sale of Series B preferred stock................... 550,000 1,650,000 -- -- -- -- Net loss........................................... -- -- -- -- -- -- --------- ----------- --------- ------ ---------- ------------ Balance at December 31, 1994......................... 850,000 2,250,000 433,125 433 23,567 -- Sale of common stock............................... -- -- 194,750 195 58,230 -- Issuance of common stock for technology............ -- -- 100,000 100 39,900 -- Sale of Series B preferred stock................... 6,669 20,000 -- -- -- -- Sale of Series C preferred stock................... 2,808,702 6,877,749 -- -- -- -- Conversion of notes payable and interest into Series C preferred stock......................... 202,692 502,676 -- -- -- -- Repurchase and cancellation of common stock........ -- -- (67,710) (68) (2,640) -- Net loss........................................... -- -- -- -- -- -- --------- ----------- --------- ------ ---------- ------------ Balance at December 31, 1995......................... 3,868,063 9,650,425 660,165 660 119,057 -- Sale of common stock............................... -- -- 74,000 74 22,126 -- Sale of Series C preferred stock................... 1,278,240 3,142,045 -- -- -- -- Sale of Series D preferred stock................... 2,467,310 9,853,345 -- -- -- -- Conversion of notes payable and interest into Series Z preferred stock......................... 83,195 460,913 -- -- -- -- Repurchase and cancellation of common stock........ -- -- (22,560) (22) (5,843) -- Net loss........................................... -- -- -- -- -- -- --------- ----------- --------- ------ ---------- ------------ Balance at December 31, 1996......................... 7,696,808 23,106,728 711,605 712 135,340 -- Sale of common stock............................... -- -- 32,500 32 19,718 -- Sale of Series J preferred stock................... 58,125 23,240 Deferred compensation related to stock options..... -- -- -- -- 1,401,075 (1,401,075) Amortization of deferred compensation.............. -- -- -- -- -- 75,478 Sale of common stock for notes receivable.......... -- -- 1,169,467 1,169 420,295 -- Repayment of notes receivable...................... -- -- -- -- -- -- Net loss........................................... -- -- -- -- -- -- --------- ----------- --------- ------ ---------- ------------ Balance at September 30, 1997........................ 7,754,933 $23,129,968 1,913,572 $1,913 $1,976,428 $(1,325,597) ======== ========== ======== ====== ========= ============ NOTES RECEIVABLE TOTAL FROM ACCUMULATED STOCKHOLDERS' STOCKHOLDERS DEFICIT EQUITY (DEFICIT) ------------ ------------ ---------------- Issuance of common stock........................... $ -- $ -- $ 24,000 Sale of Series A preferred stock................... -- -- -- Issuance of Series Z preferred stock for technology....................................... -- -- -- Sale of Series B preferred stock................... -- -- -- Net loss........................................... -- (706,071) (706,071) ------------ ------------ ---------------- Balance at December 31, 1994......................... -- (706,071) (682,071) Sale of common stock............................... -- -- 58,425 Issuance of common stock for technology............ -- -- 40,000 Sale of Series B preferred stock................... -- -- -- Sale of Series C preferred stock................... -- -- -- Conversion of notes payable and interest into Series C preferred stock......................... -- -- -- Repurchase and cancellation of common stock........ -- -- (2,708) Net loss........................................... -- (6,674,558) (6,674,558) ------------ ------------ ---------------- Balance at December 31, 1995......................... -- (7,380,629) (7,260,912) Sale of common stock............................... -- -- 22,200 Sale of Series C preferred stock................... -- -- -- Sale of Series D preferred stock................... -- -- -- Conversion of notes payable and interest into Series Z preferred stock......................... -- -- -- Repurchase and cancellation of common stock........ -- -- (5,865) Net loss........................................... -- (5,118,427) (5,118,427) ------------ ------------ ---------------- Balance at December 31, 1996......................... -- (12,499,056) (12,363,004) Sale of common stock............................... -- -- 19,750 Sale of Series J preferred stock................... Deferred compensation related to stock options..... -- -- -- Amortization of deferred compensation.............. -- -- 75,478 Sale of common stock for notes receivable.......... (421,464) -- -- Repayment of notes receivable...................... 84,902 -- 84,902 Net loss........................................... -- (3,669,353) (3,669,353) ------------ ------------ ---------------- Balance at September 30, 1997........................ $ (336,562) $(16,168,409) $(15,852,227) =========== =========== ==============
See accompanying notes. F-5 70 COMBICHEM, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM MAY 23, 1994 NINE MONTHS ENDED (INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, ------------------------- ------------------------- 1994 1995 1996 1996 1997 -------------- ----------- ----------- ----------- ----------- (unaudited) Cash flows from operating activities: Net loss.......................................... $ (706,071) $(6,674,558) $(5,118,427) $(4,460,687) $(3,669,353) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization..................... 4,946 106,763 310,765 211,094 559,823 Deferred rent..................................... -- -- 30,409 -- 45,614 Deferred revenue.................................. -- -- 2,130,000 212,500 (942,499) In-process research and development acquired for convertible notes payable and accrued interest........................................ -- 591,358 -- -- -- In-process research and development acquired for note payable.................................... 35,000 -- -- -- -- Amortization of deferred compensation............. -- -- -- -- 75,478 Stock issued for technology....................... 100,000 40,000 -- -- -- Interest payable converted to preferred stock..... 2,676 20,913 20,913 -- Change in operating assets and liabilities: Prepaid expenses and other current assets....... (26,081) (135,440) (352,571) (333,809) 25,079 Accounts payable and accrued expenses........... 192,938 443,095 607,106 (50,909) 179,377 ---------- ----------- ----------- ----------- ----------- Net cash used in operating activities...... (399,268) (5,626,106) (2,371,805) (4,400,898) (3,726,481) Cash flows from investing activities: Purchases of short-term investments............... -- -- (12,166,132) -- (3,601,045) Maturities of short-term investments.............. -- -- -- -- 11,652,477 Purchases of property and equipment............... (107,061) -- (238,315) (237,590) (235,203) Deposits and other assets......................... (45,941) 9,923 (102,077) 7,444 (18,386) Notes receivable from employees................... -- (179,555) (66,125) (79,165) 12,690 ---------- ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities............................... (153,002) (169,632) (12,572,649) (309,311) 7,810,533 Cash flows from financing activities: Principal payments under capital lease obligations..................................... -- (108,870) (410,876) (176,528) (616,970) Issuance of redeemable convertible preferred stock, net of issuance costs.................... 2,150,000 6,897,749 12,995,390 3,151,156 11,063 Issuance of common stock, net of repurchased shares.......................................... 24,000 55,717 16,335 (2,195) 116,829 Payments on note payable.......................... -- (35,000) (100,000) (100,000) -- Restricted cash given as collateral for letter of credit.......................................... -- -- (325,000) (325,000) 325,000 Proceeds from convertible notes payable........... -- 750,000 -- -- -- Repayments of convertible notes payable........... -- (250,000) -- -- -- ---------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities............................... 2,174,000 7,309,596 12,175,849 2,547,433 (164,078) ---------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents....................................... 1,621,730 1,513,858 (2,768,605) (2,162,776) 3,919,974 Cash and cash equivalents at beginning of period.... -- 1,621,730 3,135,588 3,135,588 366,983 ---------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period.......... $1,621,730 $ 3,135,588 $ 366,983 $ 972,812 $ 4,286,957 ========== =========== =========== =========== =========== Supplemental disclosures of cash flow information Interest paid....................................... $ -- $ 56,040 $ 124,226 $ 64,636 $ 169,329 ========== =========== =========== =========== =========== Supplemental schedule of noncash investing and financing activities Capital lease obligations entered into for equipment......................................... $ -- $ 693,102 $ 2,337,375 $ 1,168,828 $ 1,523,627 ========== =========== =========== =========== =========== Conversion of convertible notes payable and interest payable to redeemable convertible preferred stock............................................. $ -- $ 502,676 $ 440,000 $ 440,000 $ -- ========== =========== =========== =========== ===========
See accompanying notes. F-6 71 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business CombiChem, Inc. is a computational drug discovery company that is applying its proprietary design technology and rapid synthesis capabilities to accelerate the discovery process for new drugs. The Company believes its approach offers pharmaceutical and biotechnology companies the opportunity to conduct their drug discovery efforts in a more productive and cost-effective manner. Using its Discovery Engine(TM) process, the Company focuses on the generation, evolution and optimization of potential new lead candidates for its collaborative partners, who will then develop, manufacture, market and sell any resulting drugs. CombiChem believes that its process is widely applicable to a variety of disease targets and therapeutic indications. In addition, the Company intends to use its approach on internal programs to discover new lead candidates and then to outlicense them to third parties, retaining a larger economic interest in such candidates. Cash, Cash Equivalents and Short-term Investments Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less when purchased. The Company generally invests its excess cash in U.S. government securities. Short-term investments are recorded at amortized cost plus accrued interest which approximates market value. The Company applies Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115) to its investments. Under SFAS No. 115, the Company classifies its short-term investments as "Available-for-Sale" and records such assets at estimated fair value in the balance sheet, with unrealized gains and losses, if any, reported in stockholders' equity. As of December 31, 1996 and September 30, 1997, the cost of cash equivalents and short-term investments approximated estimated fair value. Concentration of Credit Risk The Company invests its excess cash in debt instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. The Company historically has not experienced any material losses on its cash equivalents or short-term investments. Property and Equipment Property and equipment are carried at cost. Depreciation of equipment is computed using the straight-line method over the estimated useful lives of the assets, generally three to seven years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or the remaining term of the lease. Amortization of equipment under capital leases is reported with depreciation of property and equipment. Impairment of Long-Lived Assets In 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The adoption had no impact on the Company's financial statements. F-7 72 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), which supersedes APB Opinion No. 15. SFAS No. 128 replaces the presentation of primary earnings per share (EPS) with "Basic EPS" which reflects only the weighted-average common shares outstanding for the period. Companies with complex capital structures, including the Company, will also be required to present "Diluted EPS" that reflect the potential dilution, if any, of common stock equivalents such as employee stock options and warrants to purchase common stock. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997. Revenues under Collaborative Agreements and Research and Development Costs The Company currently generates revenue primarily through its collaborative agreements, which provide for the analysis of data, design of informative compound libraries and synthesis of compounds utilizing the Company's proprietary technology. Contract research revenue is recognized at the time that research activities are performed under the terms of the research contracts. Contract payments are generally received in advance of the performance of the related research activities. Such payments received in excess of amounts earned are recorded as deferred contract research revenue. Technology access fees are recognized as revenue when earned. These fees are nonrefundable, and the Company has no future performance obligations related to such fees. Net Loss Per Share Historical net loss per share is computed using the weighted average number of common shares outstanding during the periods presented. Common equivalent shares resulting from stock options, warrants to purchase redeemable convertible preferred stock and redeemable convertible preferred stock are excluded from the computation as their effect would be antidilutive, except that the Securities and Exchange Commission requires common and common share equivalents issued during the twelve-month period prior to the initial filing of a proposed public offering to be included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the assumed initial public offering price). Historical net loss per share information is as follows:
PERIOD FROM MAY 23, 1994 (INCEPTION) TO NINE MONTHS ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, SEPTEMBER 30, -------------- ------------------------ ----------------------- 1994 1995 1996 1996 1997 -------------- ---------- ---------- ---------- ---------- Net loss per share.......................... $ (0.29) $ (2.33) $ (1.73) $ (1.51) $ (1.24) ========= ========= ========= ========= ========= Shares used in computing net loss per share..................................... 2,406,794 2,869,475 2,962,113 2,962,113 2,962,113 ========= ========= ========= ========= =========
Pro Forma Net Loss Per Share Pro forma net loss per share has been computed as described above and also gives effect to the conversion of the redeemable convertible preferred stock, which will convert to common stock upon completion of the Company's initial public offering, using the as if-converted method from the original date of issuance. Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), F-8 73 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and related Interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of the Company's employee stock options is not less than the market price of the underlying stock on the date of grant, no compensation expense is recognized. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim Financial Information The accompanying financial statements for the nine months ended September 30, 1996 are unaudited but include all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair statement of the operating results and cash flows for such period. Pro Forma Stockholders' Equity In September 1997, the Board of Directors authorized management of the Company to file a Registration Statement with the Securities and Exchange Commission for the Company to sell shares of its common stock in an initial public offering. If the initial public offering contemplated by this Prospectus is consummated under the terms presently anticipated, all outstanding shares of redeemable convertible preferred stock at September 30, 1997 will automatically convert into 7,754,933 common shares. The pro forma stockholders' equity does not reflect the equity investments made in conjunction with the collaboration agreements described in Note 10. 2. BALANCE SHEET INFORMATION Investments There were no realized gains or losses on the sale of securities for either the period ended September 30, 1997 or the year ended December 31, 1996. The amortized cost of debt securities at September 30, 1997, by contractual maturity, are shown below. The amortized costs approximates fair value. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations with out prepayment penalties.
COST ---------- Available for sale: Due in one year or less........................................ $3,610,293 Due in one to five years....................................... 504,407 ---------- $4,114,700 ==========
F-9 74 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 2. BALANCE SHEET INFORMATION (CONTINUED) Property and Equipment Property and equipment consist of the following:
DECEMBER 31, SEPTEMBER 30, ---------------------- ------------- 1995 1996 1997 --------- ---------- ------------- Laboratory and computer equipment......... $ 670,948 $1,759,990 $ 3,055,611 Leasehold improvements.................... -- 1,373,465 1,689,685 Office furniture, fixtures and equipment............................... 74,991 188,174 317,131 --------- ----------- ----------- 745,939 3,321,629 5,062,427 Less accumulated depreciation and amortization............................ (111,709) (422,474) (982,297) --------- ----------- ----------- $ 634,230 $2,899,155 $ 4,080,130 ========= =========== ===========
3. NOTES PAYABLE During 1996, the Company repaid a $100,000 non-interest bearing note with cash and converted two notes payable totaling $440,000 and the related accrued interest into 83,195 shares of Series Z redeemable convertible preferred stock. 4. COMMITMENTS Leases The Company leases its facilities under an operating lease agreement that expires in May 2006. Rent expense was approximately $86,000, $383,000, $232,000 and $395,000 for the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1996 and 1997, respectively. Lease payments are subject to future increases based upon the Consumer Price Index. The Company leases certain equipment under capital lease obligations. Cost and accumulated amortization of equipment under capital leases were $349,000 and $104,000 at December 31, 1995, $3,054,000 and $349,000 at December 31, 1996 and $4,578,000 and $845,000 at September 30, 1997, respectively. F-10 75 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 4. COMMITMENTS Annual future minimum obligations for operating and capital leases as of September 30, 1997 are as follows:
OPERATING CAPITAL LEASES LEASES ---------- ----------- Three months ending December 31: 1997................................... $ 113,524 $ 358,431 Year ending December 31: 1998................................... 458,365 1,433,722 1999................................... 421,201 1,194,044 2000................................... 437,638 641,923 2001................................... 449,966 296,634 2002................................... 346,207 -- Thereafter....................................... 1,862,189 -- ---------- ----------- Total minimum lease payments....................... $4,089,090 3,924,754 ========== Less amount representing interest.................. (525,398) ----------- Present value of obligations under capital leases........................................... 3,399,356 Less current portion............................... (1,021,946) ----------- Long-term obligations under capital leases......... $ 2,377,410 ===========
Consulting Agreements The Company has entered into various consulting agreements with members of its Scientific Advisory Board and others for aggregate minimum annual fees of approximately $118,000. The agreements are cancelable by either party with limited notice. During the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 and 1997, the Company expensed approximately $27,000, $43,000, $35,000 and $42,000, respectively, for fees and expense reimbursements paid to these consultants. 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Changes in Capitalization In September 1997, the Company's Board of Directors approved the reincorporation of the Company in Delaware which was accomplished through a merger of the existing California corporation into a new Delaware corporation. The ratio of exchange was four shares of the California corporation to one share of the Delaware corporation. The number of authorized shares of the new Delaware corporation are 40,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. All share and per share amounts and stock option data have been restated to retroactively give effect to the reincorporation and the related change in shares outstanding. F-11 76 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) Redeemable Convertible Preferred Stock A summary of redeemable convertible preferred stock issued and outstanding is as follows:
LIQUIDATION SHARES PREFERENCE ---------- ----------- Series A.............................................. 250,000 $ 500,000 Series B.............................................. 556,669 1,670,000 Series C.............................................. 4,289,634 10,638,261 Series D.............................................. 2,467,310 9,869,205 Series Z.............................................. 133,195 266,389 --------- ----------- 7,696,808 $22,943,855 ========= ===========
In 1994, the Company issued Series A and B redeemable convertible preferred stock for cash at $2.00 and $3.00 per share, respectively. In October 1994, the Company acquired certain intellectual property rights in exchange for 50,000 shares of the Company's Series Z redeemable convertible preferred stock valued at $2.00 per share. During 1996, the Company converted two outstanding notes and related accrued interest totalling $460,913 into 83,195 shares of Series Z redeemable convertible preferred stock. In August 1995, the Company received approximately $6.9 million in net proceeds from the issuance of 2,808,702 shares of Series C redeemable convertible preferred stock at $2.48 per share. Pursuant to the terms of certain promissory notes, the Company converted $502,676 of principal and accrued interest into 202,692 shares of Series C redeemable convertible preferred stock at $2.48 per share. In April 1996, upon the achievement of certain milestones, the Company received an additional $3.1 million in net proceeds from the issuance of an additional 1,278,240 shares of Series C redeemable convertible preferred stock at $2.48 per share. In November 1996, the Company received approximately $9.9 million in net proceeds from the issuance of 2,467,310 shares of Series D redeemable convertible preferred stock at $4.00 per share. At the option of the holder, the shares of Series A, B, C, D and Z redeemable convertible preferred stock are convertible at any time into common stock on a one-for-one basis, subject to certain anti-dilution adjustments. The preferred shares automatically convert into common stock upon the earlier of: 1) the closing of an underwritten public offering of common stock at not less than $16.00 per common share and an aggregate offering price of not less than $12 million or 2) the written election of at least 70% of the preferred stockholders. The preferred stockholders have voting rights equal to the common shares they would own upon conversion. The Company has reserved 7,696,808 shares of common stock for issuance upon conversion of the Series A, B, C, D and Z redeemable convertible preferred stock. The Company's Amended and Restated Articles of Incorporation provide for redemption of Series A, B, C and D redeemable convertible preferred stock at any time after December 31, 1998, at the request of at least 70% of the holders of such series. The redemption price is equal to the original issue price plus any declared but unpaid dividends. The preferred shareholders are entitled to noncumulative annual dividends of $0.16, $0.24, $0.20, $0.32 and $0.16 per share of Series A, B, C, D and Z redeemable convertible preferred stock, respectively, if and when such dividends are declared by the Board of Directors. No dividends have been declared to date. In connection with employment agreements, certain employees will be entitled to receive options to purchase the Company's Series J convertible preferred stock upon the achievement of certain milestones. F-12 77 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) Some of the milestones were met during 1997, and in connection therewith, the Company issued 58,125 shares of Series J convertible preferred stock to the employees. 1995 Stock Option/Stock Issuance Plan In 1995, the Board of Directors adopted the 1995 Stock Option/Stock Issuance Plan (the Plan), under which 2,355,069 shares of common stock are reserved for issuance upon exercise of options or stock issuances by the Company to certain employees of and consultants to the Company. Under the stock option program, options may be designated as incentive stock options or nonstatutory stock options. Options under the Plan have a term of up to ten years from the date of grant. The exercise price of incentive stock options must equal at least the fair market value on the date of grant, and the exercise price of nonstatutory stock options may be no less than 85% of the fair market value on the date of grant. Options generally vest over four to five years. The Company recorded $1,401,075 of deferred compensation for options granted during the nine months ended September 30, 1997, representing the difference between the option exercise price and the deemed fair value for financial statement presentation purposes. The Company is amortizing the deferred compensation over the vesting period of the options. The Company recorded $75,476 of compensation expense during the nine months ended September 30, 1997. The Company recorded $53,474 of additional deferred compensation representing the difference between the option exercise price and the deemed fair value for financial statement presentation purposes for stock options granted in October 1997. Under the stock issuance program, selected employees and consultants may be issued shares of common stock at no less than 85% of the fair market value on the date of grant. The vesting schedule for each share issuance is determined by the Board of Directors as Plan Administrator. The Company has the option to repurchase, at the original issue price, the unvested shares in the event of termination of service. At September 30, 1997, 901,658 shares were subject to repurchase by the Company. Information with respect to the Plan is as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE ---------- -------------- Granted............................................ 562,980 $ 0.30 Exercised.......................................... -- -- Cancelled.......................................... -- -- ---------- Balance at December 31, 1995......................... 562,980 0.30 Granted............................................ 531,479 0.30 Exercised.......................................... (72,589) 0.30 Cancelled.......................................... (12,536) 0.30 ---------- Balance at December 31, 1996......................... 1,009,334 0.30 Granted............................................ 621,813 2.19 Exercised.......................................... (1,159,377) 0.36 Cancelled.......................................... (30,074) 0.33 ---------- ------ Balance at September 30, 1997........................ 441,696 $ 2.81 ========= ==========
At September 30, 1997, options to purchase 441,696 shares were exercisable and 681,407 shares remain available for grant. F-13 78 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) Following is a further breakdown of the options outstanding as of September 30, 1997:
WEIGHTED AVERAGE WEIGHTED WEIGHTED EXERCISE RANGE OF AVERAGE AVERAGE PRICE OF EXERCISE OPTIONS REMAINING EXERCISE OPTIONS OPTIONS PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE EXERCISABLE - ------------- ----------- ------------- -------- ----------- ----------- $0.30 - $0.40 107,195 8.54 $ 0.33 107,195 $0.33 $1.00 29,375 9.81 1.00 29,375 1.00 $2.00 - $3.00 28,879 8.45 2.43 28,879 2.43 $4.00 276,247 4.90 4.00 276,247 4.00 ------- ---- ----- ------- ----- 441,696 6.37 $ 2.81 441,696 $2.81 ======= ==== ===== ======= =====
Adjusted pro forma information regarding net loss and net loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options and stock purchase plan under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using the "Minimum Value" method for option pricing with the following assumptions for 1995, 1996 and 1997: risk-free interest rates of 6.50%; dividend yield of 0%; and a weighted-average expected life of the options of five years. For purposes of adjusted pro forma disclosures, the estimated fair value of the options are amortized to expense over the vesting period. The Company's adjusted pro forma information is as follows:
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED --------------------------- SEPTEMBER 30, 1995 1996 1997 ----------- ----------- ------------- Adjusted pro forma net loss............ $(6,678,067) $(5,137,253) $(3,692,783) Adjusted pro forma net loss per share................................ $ (2.33) $ (0.66) $ (0.45)
The weighted-average fair value of options granted during 1995 and 1996 was $.08 and during 1997 was $0.56. The pro forma effect on net loss for 1995, 1996 and 1997 is not likely to be representative of the pro forma effects on reported net income or loss in future years because these amounts reflect less than four year of vesting. Warrants At September 30, 1997, the Company has issued warrants to purchase an aggregate of 130,728 shares of redeemable convertible preferred stock at prices ranging from $2.00 to $2.48 per share. The warrants are exercisable in whole or in part through various dates. The Company also has issued warrants to purchase 8,750 shares of common stock at $0.30 per share. The warrants are exercisable in whole or in part at any time at or prior to June 2000. 6. NOTES RECEIVABLE FROM EMPLOYEE/STOCKHOLDERS During 1995, the Company lent $150,000 to an employee and stockholder for the purchase of a residence in connection with the individual's employment agreement. The note bears interest at approximately 5.8% and matures on the earlier of (i) September 5, 2000, (ii) 30 days following cessation of employment, (iii) 180 days following the date at which the Company completes a successful initial public offering of shares F-14 79 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 6. NOTES RECEIVABLE FROM EMPLOYEE/STOCKHOLDERS (CONTINUED) of its common stock, or (iv) the date on which more than 50% of the Company's outstanding shares of common stock are acquired by a single purchaser or a group of purchasers. The note is secured by 87,500 shares of the Company's common stock owned by the employee at the date of the note, plus any capital stock thereafter acquired. In August 1996, the Company lent $66,125 to an employee for relocation in connection with employment, which is secured by a deed of trust. The loan is represented by a promissory note which is due and payable on the earlier of August 28, 1999 or the occurrence of certain events, such as expiration of the 30-day period following the date the individual ceases to be a full time employee of the Company. The loan bears no interest, and principal payments of $22,000 have been made to date. During 1997, the Company instituted an employee loan program whereby the proceeds of the loan are used to purchase common stock from the exercise of the employee's stock options. Under the program, the employee pays 25% of the total exercise price, and the Company loans the employee the remaining 75% of the purchase price. The loans bear interest at an adjustable rate that is the minimum rate allowable by the Internal Revenue Service, subject to quarterly adjustments by the Company. The loans will be repaid through 3 equal payments on the first three anniversary dates of the loan. The Company has $337,000 in loans outstanding at September 30, 1997. 7. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS Teijin Limited In March 1996, the Company entered into a collaborative agreement with Teijin Limited ("Teijin") providing for a one-year program on a G-protein coupled receptor target. In March 1997, the Company and Teijin amended their agreement to extend the collaboration for an additional year. While the initial focus of the collaboration was lead optimization, the effort was redirected to lead evolution during the course of the research. Under the agreement, Teijin made an upfront payment to CombiChem and agreed to provide research funding and milestone payments upon the achievement of certain preclinical and clinical milestones. Teijin also committed internal resources to the discovery effort. Teijin will make royalty payments on products resulting from the collaboration. CombiChem retains the rights to the compounds arising under this collaboration in North and South America; Teijin has rights to these compounds in Asia and Europe with a right of first negotiation to acquire CombiChem's rights. Under the original agreement, Teijin has rights to expand or extend the program for up to two successive one-year terms. Either party may terminate the agreement in the event of a material breach remaining uncured for 60 days. As of September 30, 1997, Teijin had paid the Company an aggregate of $1.5 million. Roche Bioscience, a division of Syntex (U.S.A.) Inc. In October 1996, the Company entered into a collaborative agreement with Roche Bioscience providing for a broad two-year program to perform research against three initial targets, including a protein-protein interaction, an enzyme and a receptor, with an option to add additional targets. Roche Bioscience can elect one of the approaches -- lead generation, lead evolution or lead optimization -- for each research program against each collaboration target. A program may be initiated at any time during the term of the collaboration, thereby extending the term to allow for completion of each program. Under the agreement, Roche Bioscience made an upfront payment to CombiChem and agreed to provide research funding and to make milestone payments upon the achievement of certain preclinical and clinical milestones. Roche Bioscience will make royalty payments on worldwide sales of products resulting from the collaboration. Upon completion of the first year of the agreement, Roche Bioscience may terminate the collaboration at any time upon six months' prior F-15 80 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 7. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS (CONTINUED) written notice. Certain special conditions could also allow Roche Bioscience to terminate with 45 days' prior written notice. As of September 30, 1997, Roche Bioscience had paid the Company an aggregate of $4.0 million. Sumitomo Pharmaceuticals Co., Ltd. In August 1997, the Company entered into a collaborative agreement with Sumitomo Pharmaceuticals, Co., Ltd. (Sumitomo) providing for a two-year lead evolution program on a target that is believed to play a fundamental role in osteoarthritis and rheumatoid arthritis. Under the agreement, Sumitomo made an upfront payment and agreed to provide research funding and milestone payments upon the achievement of certain preclinical and clinical milestones. Sumitomo will make royalty payments on worldwide sales of products resulting from the collaboration. Sumitomo may extend the research period for up to four successive six-month periods upon mutual agreement. The agreement may be terminated by either party 90 days following an uncured material breach. As of September 30, 1997, Sumitomo had paid the Company an aggregate of $3.3 million. 8. BENEFIT PLAN Company sponsors a benefit plan which covers employees who meet certain age and service requirements. Employees may contribute a portion of their earnings each plan year subject to certain Internal Revenue Service limitations. The Company made no contributions to the Plan for the years ended December 31, 1994, 1995 and 1996, and the nine months ended September 30, 1996 and 1997, respectively. 9. INCOME TAXES At December 31, 1996, the Company had federal and California income tax net operating loss carryforwards of approximately $11,694,000 and $11,652,000, respectively. The federal and California tax loss carryforwards will begin to expire in 2009 and 2002, respectively, unless previously utilized. The Company also has federal and California research tax credit carryforwards of approximately $104,000 and $144,000, respectively, which will begin to expire in 2010 unless previously utilized. Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of the Company's net operating loss and credit carryforwards may be limited because of cumulative changes in ownership of more than 50% which occurred during 1995. However, the Company does not believe such limitation will have a material effect upon the utilization of these carryforwards. Significant components of the Company's deferred tax assets are shown below. A valuation allowance, which was increased by $2,253,000 in 1996, has been recognized to offset the deferred tax assets as of December 31, 1995 and 1996 as realization of such assets is uncertain. F-16 81 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 9. INCOME TAXES (CONTINUED)
DECEMBER 31, --------------------------- 1995 1996 ----------- ----------- Deferred tax assets: Net operating loss carryforwards................ $ 2,651,000 $ 4,792,000 Research and development credits................ 179,000 198,000 Other........................................... 29,000 122,000 ----------- ----------- Total deferred tax assets......................... 2,859,000 5,112,000 Valuation allowance for deferred tax assets....... (2,859,000) (5,112,000) ----------- ----------- Net deferred tax assets........................... $ -- $ -- =========== ===========
10. SUBSEQUENT EVENTS Collaborative Agreements ImClone Systems Incorporated In October 1997, the Company entered into a collaborative agreement with ImClone Systems Incorporated (ImClone) providing for a two-year program to identify and characterize novel small molecule inhibitors to multiple targets for development in oncology. The agreement provides for ImClone's access to the Company's Universal Informer Library and Virtual Library under the supervision of the research management committee composed of representatives of the Company and ImClone. Under the terms of the agreement, ImClone will provide the Company with research support payments, milestone payments upon the achievement of certain program objectives and royalties on worldwide product sales of therapeutic products that may arise out of the collaboration. The agreement may be terminated by either party 90 days following an uncured material breach or by ImClone within 30 days prior to the one-year anniversary by providing 90 days' prior written notice. In connection with the collaborative agreement, ImClone made an equity investment in the Company. Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc In October 1997, the Company entered into a collaborative agreement with Athena Neurosciences, Inc., a wholly owned subsidiary of Elan Corporation, plc. (Elan/Athena) providing for a three-year program to discover novel therapeutic compounds for treatment of central nervous system conditions. The agreement provides for Elan/Athena's access to the Universal Informer Library as deemed necessary by the research management committee composed of Elan/Athena and CombiChem representatives. Under the agreement, Elan/Athena will provide the Company with upfront and research support payments, as well as milestone payments upon the achievement of pre-determined objectives. Elan/Athena will also make royalty payments on worldwide sales of products resulting from the collaboration. The agreement may be terminated by either party 90 days following an uncured material breach or by Elan/Athena after the one-year anniversary upon 90 days prior written notice. In connection with the collaborative agreement, Elan International Services Ltd., an affiliate of Elan/Athena, made an equity investment in the Company. 1997 Stock Incentive Plan The Company's 1997 Stock Incentive Plan (the 1997 Plan) is intended to serve as the successor equity incentive program to the Company's 1995 Stock Option/Stock Issuance Plan, as amended (the "Predecessor Plan"). The 1997 Plan was adopted by the Board and the stockholders on October 7, 1997, and a total of 1,080,603 shares of Common Stock have been authorized for issuance under the 1997 Plan. Under the stock option program, options may be designated as incentive stock options or nonstatutory stock options. Options under the plan have a term of up to ten years from the date of grant. The exercise price of options shall be F-17 82 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 10. SUBSEQUENT EVENTS (CONTINUED) fixed by the plan administrator, but shall not be less than 100% of the fair market value per share of common stock on the option grant dates. 1997 Employee Stock Purchase Plan In October 1997, the Company adopted the 1997 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 150,000 shares for issuance, thereunder. The Purchase Plan permits eligible employees of the Company to purchase shares of Common Stock, at semi-annual intervals, through periodic payroll deductions. Payroll deductions may not exceed 10% of the participant's base salary, and the purchase price will not be less than 85% of the lower of the fair market value of the stock at either the beginning or the end of the semi-annual intervals. F-18 83 [DEPICTIONS OF ACTIVE SITES AND COMPOUNDS] Using only the structures of compounds screened against a known HIV protease target, CombiChem's Discovery Engine(TM) has generated a hypothesis (a computational model), as depicted here, which illustrates potentially important characteristics of the HIV protease active site. X-ray crystallography has determined the actual three-dimensional structure of the active site of the HIV protease target, as shown here. CombiChem's computer-generated hypothesis has accurately identified the important characteristics of the HIV protease active site in detail as demonstrated by the lock-and-key structural fit depicted in this overlay. 84 [COMBICHEM LOGO] 85 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered. All the amounts shown are estimates, except for the registration fee, the Nasdaq National Market filing fee and the NASD fee. Registration fee.................................................. $ 10,194 Nasdaq National Market fee........................................ 50,000 NASD fee.......................................................... 3,864 Blue Sky fees and expenses........................................ 10,000 Printing and engraving expenses................................... 180,000 Legal fees and expenses........................................... 250,000 Accounting fees and expenses...................................... 125,000 Transfer Agent and Registrar fees................................. 5,000 Miscellaneous expenses............................................ 65,942 -------- TOTAL................................................... $700,000 ========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the Delaware General Corporation Law permits indemnification of officers and directors of the Company under certain conditions and subject to certain limitations. Section 145 of the Delaware General Corporation Law also provides that a corporation has the power to purchase and maintain insurance on behalf of its officers and directors against any liability asserted against such person and incurred by him or her in such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of Section 145 of the Delaware General Corporation Law. Article VII, Section 1 of the Restated Bylaws of the Company provides that the Company shall indemnify its directors and executive officers to the fullest extent not prohibited by the Delaware General Corporation Law. The rights to indemnity thereunder continue as to a person who has ceased to be a director, officer, employee or agent and inure to the benefit of the heirs, executors and administrators of the person. In addition, expenses incurred by a director or executive officer in defending any civil, criminal, administrative or investigative action, suit or proceeding by reason of the fact that he or she is or was a director or officer of the Company (or was serving at the Company's request as a director or officer of another corporation) shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Company as authorized by the relevant section of the Delaware General Corporation Law. As permitted by Section 102(b)(7) of the Delaware General Corporation Law, Article V, Section (A) of the Company's Restated Certificate of Incorporation provides that a director of the Company shall not be personally liable for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or acts or omissions that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived any improper personal benefit. The Company has entered into indemnification agreements with each of its directors and executive officers. Generally, the indemnification agreements attempt to provide the maximum protection permitted by Delaware law as it may be amended from time to time. Moreover, the indemnification agreements provide for certain additional indemnification. Under such additional indemnification provisions, however, an individual II-1 86 will not receive indemnification for judgments, settlements or expenses if he or she is found liable to the Company (except to the extent the court determines he or she is fairly and reasonably entitled to indemnity for expenses), for settlements not approved by the Company or for settlements and expenses if the settlement is not approved by the court. The indemnification agreements provide for the Company to advance to the individual any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding. In order to receive an advance of expenses, the individual must submit to the Company copies of invoices presented to him or her for such expenses. Also, the individual must repay such advances upon a final judicial decision that he or she is not entitled to indemnification. The Company has purchased directors' and officers' liability insurance. The Company intends to enter into additional indemnification agreements with each of its directors and executive officers to effectuate these indemnity provisions. The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions by which the Underwriters have agreed to indemnify the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, each director of the Company, and each officer of the Company who signs this Registration Statement, with respect to information furnished in writing by or on behalf of the Underwriters for use in the Registration Statement. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since September 30, 1994, the Company has sold and issued the following unregistered securities (which numbers have not been adjusted for the one-for-four reverse stock split effected in October 1997). (1) From September 30, 1994 to September 30, 1997, the Company issued an aggregate of 6,694,638 options to purchase Common Stock with exercise prices ranging from $0.062 to $0.25 per share under the Predecessor Plan and an aggregate of 4,927,858 shares of Common Stock were issued through the exercise of options granted under the Predecessor Plan for an aggregate exercise price of $405,241. For additional information concerning these transactions, reference is made to the information contained under the caption "Management -- Benefit Plans" in the form of the Prospectus included herein. (2) On October 12, 1995, the Company issued 200,000 shares of Series Z Preferred Stock to Sydney Brenner for an aggregate consideration of $100,000. (3) On October 18, 1994, the Company issued 500,000 shares of Common Stock to Robert A. Curtis, former Chief Executive Officer of the Company, at $.01 per share, of which 229,160 were vested as of the date of the termination of his employment in October 1995. (4) On October 18, 1994, the Company issued an aggregate of 2,500 shares of Common Stock to one investor for an aggregate consideration of $25. (5) On November 1, 1994, the Company issued an aggregate of 400,000 shares of Series A Preferred Stock to certain funds advised by Sequoia Capital for an aggregate consideration of $200,000. (6) From November 23, 1994 through January 15, 1995, the Company issued an aggregate of 2,226,667 shares of Series B Preferred Stock to certain funds advised by Sequoia Capital, Forward Ventures II, L.P. and an individual investor for an aggregate consideration of $1,670,000. (7) On November 1, 1994, the Company issued an aggregate of 100,000 shares of Common Stock to certain venture funds advised by Sequoia Capital for an aggregate consideration of $5,000. (8) On November 8, 1994, the Company issued an aggregate of 175,000 shares of Common Stock to one investor for an aggregate consideration of $8,750. (9) On November 18, 1994, the Company issued an aggregate of 10,000 shares of Common Stock to one investor for an aggregate consideration of $500. II-2 87 (10) In December 1994, the Company issued a warrant to purchase 83,655 shares of Series Z Preferred Stock to Comdisco, Inc. at an exercise price of $0.50 per share in connection with an equipment lease financing. (11) From January 1, 1995 through April 24, 1995, the Company issued an aggregate of 130,000 shares of Common Stock to eight investors for an aggregate consideration of $9,750. (12) On March 20, 1995, the Company issued an aggregate of 400,000 shares of Common Stock to The Scripps Research Institute for an aggregate consideration of $40,000. (13) From April 25, 1995 through July 30, 1995, the Company issued an aggregate of 650,000 shares of Common Stock to three investors for an aggregate consideration of $48,750. (14) On June 15, 1995, the Company issued a warrant to purchase 35,000 shares of Common Stock to LJL BioSystems, Inc. at an exercise price of $0.075. (15) In connection with an asset purchase agreement dated August 4, 1995, the Company issued an aggregate of 332,777 shares of Series Z Preferred Stock to Molecular Simulations, Inc. from June 1996 through July 1996 in consideration for certain technology rights. (16) On August 5, 1995, the Company issued 6,000 shares of Common Stock to Ken Rubenstein at $.075 per share in connection with a consulting agreement. (17) On August 17, 1995, August 25, 1995 and September 11, 1995, the Company issued an aggregate of 12,045,576 shares of Series C Preferred Stock to various venture capital funds and certain other investors for an aggregate consideration of $7,468,257. (18) On August 17, 1995, the Company issued warrants to purchase 120,968 shares of Series C Preferred Stock at an exercise price of $0.62 per share. (19) On September 7, 1995, the Company issued 8,065 shares of Series C Preferred Stock to one investor for an aggregate consideration of $5,000. (20) In December 1995, the Company issued an aggregate of 232,500 shares of Series J Preferred Stock to three employees upon the exercise of options to purchase Series J Preferred Stock at an exercise price of $0.10. (21) On April 9, 1996, the Company issued an aggregate of 5,104,845 shares of Series C Preferred Stock to various venture capital funds and certain other investors for an aggregate consideration of $3,165,003. (22) In April 1996 and June 1996, the Company issued warrants to purchase an aggregate of 240,321 shares of Series C Preferred Stock to Comdisco, Inc. at an exercise price of $0.62 per share in connection with an equipment lease financing. (23) In May 1996, the Company issued warrants to purchase an aggregate of 112,903 shares of Series Z Preferred Stock to Silicon Valley Bank and MMC/GATX Partnership No. 1 at an exercise price of $0.62 per share in connection with an equipment lease financing. (24) On November 15, 1996, the Company issued an aggregate of 9,869,205 shares of Series D Preferred Stock to various venture capital funds and certain other investors for an aggregate consideration of $9,869,205. (25) On January 23, 1997, the Company issued an aggregate of 5,000 shares of Common Stock to one investor at $0.10 per share pursuant to a Restricted Stock Issuance Agreement for an aggregate consideration of $500. (26) On June 11, 1997, the Company issued an aggregate of 40,000 shares of Common Stock to one investor at $0.10 per share for an aggregate consideration of $4,000. (27) On July 1, 1997, the Company issued an aggregate of 45,000 shares of Common Stock to the University of Pittsburgh for technology rights valued at $11,250. II-3 88 (28) On October 7, 1997, the Company issued an aggregate of 50,000 shares of Common Stock to two investors for past services rendered to the Company. (29) On October 10, 1997, the Company issued an aggregate of 1,000,000 shares of Common Stock to ImClone Systems Incorporated in conjunction with a collaboration agreement. (30) On October 15, 1997, the Company issued an aggregate of 4,000,000 shares of Common Stock to Elan International Services Ltd., in conjunction with a collaboration agreement. The sales and issuances of securities in the above transactions were deemed to be exempt under the Act by virtue of Section 4(2) thereof and/or Regulation D and Rule 701 promulgated thereunder as transactions not involving any public offering. The purchasers in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends were affixed to the stock certificates issued in such transactions. Similar representations of investment intent were obtained and similar legends imposed in connection with any subsequent transfers of any such securities. The Company believes that all recipients had adequate access, through employment or other relationships, to information about the Company to make an informed investment decision. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------------------- 1.1+ Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Company, as amended. 3.2 Form of Amended and Restated Certificate of Incorporation of the Company to become effective immediately prior to the Offering. 3.3 Bylaws of the Company, as amended. 3.4 Form of Restated Bylaws of the Company to be effective upon completion of the Offering. 4.1+ Form of Certificate for Common Stock. 5.1 Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common Stock being registered. 10.1 Preferred Stock Purchase Agreement for Series A Preferred Stock between the Company and Forward Ventures II, L.P., dated August 26, 1994. 10.2 Preferred Stock Purchase Agreement for Shares of Series Z Preferred Stock between the Company and Sydney Brenner, dated October 14, 1994. 10.3 Stock Purchase Agreement for Shares of Series A Preferred Stock and Common Stock between the Company and the investors listed on Exhibit A thereto, dated November 1, 1994. 10.4 Stock Purchase Agreement Series B Preferred Stock between the Company and the purchasers listed on Exhibit A thereto, dated November 29, 1994. 10.5 Series C Preferred Stock Purchase Agreement between the Company and the purchasers listed on Schedule A thereto, dated August 17, 1995. 10.6 Stock Purchase Agreement for Series C Preferred Stock between the Company and Todd Schmidt dated September 7, 1995. 10.7* Supplemental Purchase Agreement between the Company and the purchasers on Schedule A thereto, dated April 8, 1996. 10.8* Series D Preferred Stock Purchase Agreement between the Company and the purchasers listed on Schedule A thereto, dated November 15, 1996. 10.9 Amended and Restated Investors' Rights Agreement between the Company and the stockholders listed on Schedule A thereto, dated November 15, 1996. 10.10 Series J Preferred Stock Purchase Agreement between the Company and Steve Teig, dated June 10, 1997.
II-4 89
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------------------- 10.11 Series J Preferred Stock Purchase Agreement between the Company and Jonathan Greene, dated June 11, 1997. 10.12 Series J Preferred Stock Purchase Agreement between the Company and Andrew Smellie, dated June 11, 1997. 10.13 Warrant Agreement to Purchase Shares of the Series Z Preferred Stock, as amended between the Company and Comdisco, Inc., dated December 20, 1994. 10.14 Common Stock Purchase Warrant between the Company and LJL BioSystems, Inc., dated June 15, 1995. 10.15 Form of Warrant to Purchase Shares of Series C Preferred Stock between the Company and the purchasers listed on Schedule A thereto, dated August 17, 1995. 10.16 Form of Warrant Agreement to Purchase Shares of Series C Preferred Stock of the Company, between the Company and Comdisco, Inc. in the amounts listed on Schedule A thereto. 10.17 Form of Warrant to Purchase Shares of Series Z Preferred Stock between the Company and the purchasers listed on Schedule A thereto, dated May 20, 1996. 10.18 Master Lease Agreement with the Company and Comdisco Inc., dated November 6, 1994, Schedule VL-1, dated November 11, 1994, Schedule VL-2 dated April 15, 1996 and Schedule VL-3 dated April 15, 1996. 10.19* Collaboration Agreement between the Company and Teijin Limited, dated March 29, 1996, as amended. 10.20* Collaborative Research and License Agreement between the Company and Roche Bioscience, dated October 25, 1996. 10.21* Research and Technology Development Agreement between the Company and Sumitomo Pharmaceuticals Co., Ltd., dated August 18, 1997. 10.22*+ Collaborative Research and License Agreement between the Company and ImClone Systems Incorporated, dated October 10, 1997. 10.23*+ Collaborative Research and License Agreement between the Company and Athena Neurosciences, Inc., dated October 15, 1997. 10.24 Full Recourse Secured Promissory Note and Stock Pledge Agreement between the Company and Peter Myers, dated September 5, 1995. 10.25 Promissory Note Secured by Deed of Trust between the Company and John Saunders, dated August 30, 1996. 10.26 Promissory Note between the Company and Vicente Anido, Jr., dated February 24, 1997. 10.27 Pledge Agreement between the Company and Vicente Anido, Jr., dated February 24, 1997. 10.28 Promissory Note Secured by Stock Pledge Agreement between the Company and Vicente Anido, Jr., dated June 6, 1997 10.29 Stock Pledge Agreement between the Company and Vicente Anido, Jr., dated June 6, 1997. 10.30 Employment Agreement with Peter Myers, dated March 1, 1995. 10.31 Employment Agreement with John Saunders, dated January 1, 1996. 10.32 Employment Agreement with Steven Teig, dated July 1, 1995. 10.33 Employment Agreement with Vicente Anido, Jr., dated March 14, 1996. 10.34 Employment Agreement with Lee R. McCracken, dated May 13, 1996. 10.35 Employment Letter with Karin Eastham, dated March 14, 1997. 10.36 Standard Industrial/Commercial Single-Tenant Lease between the Company and Campson corporation, dated December 22, 1995. 10.37 Standard Office Lease-Full Service between the Company and Nearon Enterprises, LLC, dated October 24, 1996. 10.38 Lease Agreement between Harbor Investment Partners and the Company, dated October 6, 1997.
II-5 90
EXHIBIT NUMBER DESCRIPTION - ------- --------------------------------------------------------------------------------- 10.39 1995 Stock Option/Stock Issuance Plan. 10.40 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant. 10.41 1995 Stock Option/Stock Issuance Plan Form of Stock Option Agreement. 10.42 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase Agreement. 10.43 1995 Stock Option/Stock Issuance Plan Form of Restricted Stock Issuance Agreement. 10.44 1997 Stock Incentive Plan. 10.45 1997 Employee Stock Purchase Plan. 10.46 Form of Indemnification Agreement between the Company and each of its directors. 10.47 Form of Indemnification Agreement between the Company and each of its officers. 11.1 Statement of Computation of pro forma net loss per share. 23.1 Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney (see page II-8). 27.1 Financial Data Schedule.
- --------------- + To be filed by amendment. * Certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text (the "Mark"). This Exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Company's Application Requesting Confidential Treatment under Rule 406 under the Securities Act. (b) Financial Statement Schedules included separately in the Registration Statement. All other schedules are omitted because they are not required, are not applicable or the information is included in the Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS. The undersigned hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described in Item 14, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or II-6 91 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 92 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, County of San Diego, State of California, on the 15th day of October, 1997. COMBICHEM, INC. By: /s/ VICENTE ANIDO, JR. ------------------------------------ Vicente Anido, Jr. President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Vicente Anido, Jr. and Mr. Pierre Lamond, or either of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any registration statement related to this Registration Statement and filed pursuant to Rule 462 under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------- ----------------------------------- ------------------- /s/ VICENTE ANIDO, JR. President, Chief Executive Officer October 15, 1997 - ----------------------------------- and Director (Principal Executive (Vicente Anido, Jr.) Officer) Vice President of October 15, 1997 Finance and Administration and Chief /s/ KARIN EASTHAM Financial Officer (Principal - ----------------------------------- Financial (Karin Eastham) and Accounting Officer) /s/ PIERRE LAMOND Chairman of the Board and Director October 15, 1997 - ----------------------------------- (Pierre Lamond) /s/ PETER L. MYERS Director October 15, 1997 - ----------------------------------- (Peter L. Myers) /s/ PHILIPPE O. CHAMBON Director October 15, 1997 - ----------------------------------- (Philippe O. Chambon) /s/ ARTHUR REIDEL Director October 15, 1997 - ----------------------------------- (Arthur Reidel) /s/ WILLIAM SCOTT Director October 15, 1997 - ----------------------------------- (William Scott)
II-8 93 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- --------------------------------------------------------------------- ------------ 1.1+ Form of Underwriting Agreement. 3.1 Certificate of Incorporation of the Company, as amended. 3.2 Form of Amended and Restated Certificate of Incorporation of the Company to become effective immediately prior to the Offering. 3.3 Bylaws of the Company, as amended. 3.4 Form of Restated Bylaws of the Company to be effective upon completion of the Offering. 4.1+ Form of Certificate for Common Stock. 5.1 Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common Stock being registered. 10.1 Preferred Stock Purchase Agreement for Series A Preferred Stock between the Company and Forward Ventures II, L.P., dated August 26, 1994. 10.2 Preferred Stock Purchase Agreement for Shares of Series Z Preferred Stock between the Company and Sydney Brenner, dated October 14, 1994. 10.3 Stock Purchase Agreement for Shares of Series A Preferred Stock and Common Stock between the Company and the investors listed on Exhibit A thereto, dated November 1, 1994. 10.4 Stock Purchase Agreement Series B Preferred Stock between the Company and the purchasers listed on Exhibit A thereto, dated November 29, 1994. 10.5 Series C Preferred Stock Purchase Agreement between the Company and the purchasers listed on Schedule A thereto, dated August 17, 1995. 10.6 Stock Purchase Agreement for Series C Preferred Stock between the Company and Todd Schmidt dated September 7, 1995. 10.7* Supplemental Purchase Agreement between the Company and the purchasers on Schedule A thereto, dated April 8, 1996. 10.8* Series D Preferred Stock Purchase Agreement between the Company and the purchasers listed on Schedule A thereto, dated November 15, 1996. 10.9 Amended and Restated Investors' Rights Agreement between the Company and the stockholders listed on Schedule A thereto, dated November 15, 1996. 10.10 Series J Preferred Stock Purchase Agreement between the Company and Steve Teig, dated June 10, 1997. 10.11 Series J Preferred Stock Purchase Agreement between the Company and Jonathan Greene, dated June 11, 1997. 10.12 Series J Preferred Stock Purchase Agreement between the Company and Andrew Smellie, dated June 11, 1997. 10.13 Warrant Agreement to Purchase Shares of the Series Z Preferred Stock, as amended between the Company and Comdisco, Inc., dated December 20, 1994. 10.14 Common Stock Purchase Warrant between the Company and LJL BioSystems, Inc., dated June 15, 1995. 10.15 Form of Warrant to Purchase Shares of Series C Preferred Stock between the Company and the purchasers listed on Schedule A thereto, dated August 17, 1995. 10.16 Form of Warrant Agreement to Purchase Shares of Series C Preferred Stock of the Company, between the Company and Comdisco, Inc. in the amounts listed on Schedule A thereto.
94
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- --------------------------------------------------------------------- ------------ 10.17 Form of Warrant to Purchase Shares of Series Z Preferred Stock between the Company and the purchasers listed on Schedule A thereto, dated May 20, 1996. 10.18 Master Lease Agreement with the Company and Comdisco Inc., dated November 6, 1994, Schedule VL-1, dated November 11, 1994, Schedule VL-2 dated April 15, 1996 and Schedule VL-3 dated April 15, 1996. 10.19* Collaboration Agreement between the Company and Teijin Limited, dated March 29, 1996, as amended. 10.20* Collaborative Research and License Agreement between the Company and Roche Bioscience, dated October 25, 1996. 10.21* Research and Technology Development Agreement between the Company and Sumitomo Pharmaceuticals Co., Ltd., dated August 18, 1997. 10.22*+ Collaborative Research and License Agreement between the Company and ImClone Systems Incorporated, dated October 10, 1997. 10.23*+ Collaborative Research and License Agreement between the Company and Athena Neurosciences, Inc., dated October 15, 1997. 10.24 Full Recourse Secured Promissory Note and Stock Pledge Agreement between the Company and Peter Myers, dated September 5, 1995. 10.25 Promissory Note Secured by Deed of Trust between the Company and John Saunders, dated August 30, 1996. 10.26 Promissory Note between the Company and Vicente Anido, Jr., dated February 24, 1997. 10.27 Pledge Agreement between the Company and Vicente Anido, Jr., dated February 24, 1997. 10.28 Promissory Note Secured by Stock Pledge Agreement between the Company and Vicente Anido, Jr., dated June 6, 1997 10.29 Stock Pledge Agreement between the Company and Vicente Anido, Jr., dated June 6, 1997. 10.30 Employment Agreement with Peter Myers, dated March 1, 1995. 10.31 Employment Agreement with John Saunders, dated January 1, 1996. 10.32 Employment Agreement with Steven Teig, dated July 1, 1995. 10.33 Employment Agreement with Vicente Anido, Jr., dated March 14, 1996. 10.34 Employment Agreement with Lee R. McCracken, dated May 13, 1996. 10.35 Employment Letter with Karin Eastham, dated March 14, 1997. 10.36 Standard Industrial/Commercial Single-Tenant Lease between the Company and Campson corporation, dated December 22, 1995. 10.37 Standard Office Lease-Full Service between the Company and Nearon Enterprises, LLC, dated October 24, 1996. 10.38 Lease Agreement between Harbor Investment Partners and the Company, dated October 6, 1997. 10.39 1995 Stock Option/Stock Issuance Plan. 10.40 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant. 10.41 1995 Stock Option/Stock Issuance Plan Form of Stock Option Agreement. 10.42 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase Agreement. 10.43 1995 Stock Option/Stock Issuance Plan Form of Restricted Stock Issuance Agreement. 10.44 1997 Stock Incentive Plan.
95
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- --------------------------------------------------------------------- ------------ 10.45 1997 Employee Stock Purchase Plan. 10.46 Form of Indemnification Agreement between the Company and each of its directors. 10.47 Form of Indemnification Agreement between the Company and each of its officers. 11.1 Statement of Computation of pro forma net loss per share. 23.1 Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney (see page II-8). 27.1 Financial Data Schedule.
- --------------- + To be filed by amendment. * Certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text (the "Mark"). This Exhibit has been filed separately with the Secretary of the Commission without the Mark pursuant to the Company's Application Requesting Confidential Treatment under Rule 406 under the Securities Act. EX-3.1 2 EXHIBIT 3.1 1 EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF COMBICHEM, INC, a Delaware Corporation The undersigned, a natural person (the "Sole Incorporator"), for the purpose of organizing a corporation to conduct business and promote the purpose hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware hereby certifies that: ARTICLE I The name of this corporation is CombiChem, Inc. ARTICLE II The address of the corporation's registered office in the State of Delaware is 30 Old Rudnick Lane, City of Dover, County of Kent 19901. The name of its registered agent at such address is CorpAmerica, Inc. ARTICLE III The purpose of this corporation is to engage in any lawful act for which a corporation may now or hereafter be organized under the Delaware General Corporation Law. ARTICLE IV A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is One Hundred Forty-Three Million One Hundred Seventy-Six Thousand Two Hundred Ninety-Six (143,196,296) shares. Eighty Million (80,000,000) shares shall be Common Stock, with a par value of $0.001 per share and Sixty Three Million One Hundred Seventy-Six Thousand Two Hundred Ninety-Six (63,196,296) shares shall be Preferred Stock, with a par value of $0.001 per share. The Preferred Stock authorized by these Restated Articles of Incorporation shall be issued by series as set forth herein. The first series of Preferred Stock shall be designated "Series A Preferred Stock" and shall consist of One Million (1,000,000) shares. The second series of Preferred Stock shall be designated "Series B Preferred Stock" and shall consist of Two Million Two Hundred Twenty-Six Thousand Six Hundred Sixty-Seven (2,226,667) shares. The third series of Preferred Stock shall be designated "Series C Preferred Stock" and shall consist of Seventeen Million Five Hundred Nineteen Thousand Seven Hundred Seventy-Six (17,519,776) shares. The fourth series of Preferred Stock shall be designated "Series D Preferred Stock" and shall consist of Nine Million Eight Hundred Fifty-Nine Thousand Two Hundred Five (9,869,205) shares. The fifth series of Preferred Stock shall be designated "Series J Preferred Stock" and shall consist of Four Hundred Sixty-Five Thousand (465,000) 2 shares. The sixth series of Preferred Stock shall be designated "Series Z Preferred Stock" and shall consist of One Million Five Hundred Thousand (1,500,000) shares. The seventh series of Preferred Stock shall be designated "Series A-1 Preferred Stock: and shall consist of One Million (1,000,000) shares. The eighth series of Preferred Stock shall be designated "Series B-1 Preferred Stock" and shall consist of Two Million Two Hundred Twenty-Six Thousand Six Hundred Sixty-Seven (2,226,667) shares. The ninth series of Preferred Stock shall be designated "Series C-1 Preferred Stock" and shall consist of Seventeen Million Five Hundred Nineteen Thousand Seven Hundred Seventy-Six (17,519,776) shares. The tenth series of Preferred Stock shall be designated "Series D-1 Preferred Stock" and shall consist of Nine Million Eight Hundred Fifty-Nine Thousand Two Hundred Five (9,869,205) shares. B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock authorized by this Certificate of Incorporation may be issued from time to time in one or more series. The rights, preferences, privileges and restrictions granted to and imposed on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series J Preferred Stock, the Series Z Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock, the Series C-1 Preferred Stock and the Series D-1 Preferred Stock are as set forth below in this Article IV(B). Subject to compliance with applicable protective voting rights ("Protective Provisions") which have been or may be granted to the Preferred Stock or any series thereof in Certificates of Determination or this corporation's Articles of Incorporation, as amended from time to time, the Board of Directors is also authorized to increase or decrease the number of shares of any series (other than the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock, the Series C-1 Preferred Stock and the Series D-1 Preferred Stock), prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 1. Dividend Provisions. (a) The holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be entitled to receive dividends in any fiscal year, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Series J Preferred Stock or the Common Stock of this corporation, at the rate of $0.04 per share of Series A Preferred Stock, $0.06 per share of Series B Preferred Stock, $0.0496 per share 3 of Series C Preferred Stock, $0.08 per share of Series D Preferred Stock, $0.04 per share of Series Z Preferred Stock, $0.04 per share of Series A-1 Preferred Stock, $0.06 per share of Series B-1 Preferred Stock, $0.0496 per share of Series C-1 Preferred Stock and $0.08 per share of Series D-1 Preferred Stock (each subject to appropriate adjustments for stock splits, stock dividends, combinations or other recapitalizations) per annum, payable quarterly when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. After full dividends on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series Z Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock, the Series C-1 Preferred Stock and the Series D-1 Preferred Stock for all past dividend periods and the then current dividend period have been paid, the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock and the holders of shares of Series J Preferred Stock and Common Stock shall participate ratably in any dividends or other distributions (as distributions are defined below). (b) For purposes of this subsection 1, unless the context otherwise requires, "distribution(s)" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, or the purchase or redemption of shares of this corporation (other than repurchases of common stock held by directors, employees or consultants of this corporation upon termination of their employment or services pursuant to agreements providing for such repurchase) for cash or property, including any such transfer, purchase or redemption by a subsidiary of this corporation. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock that may from time to time come into existence, the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of Series J Preferred Stock or Common Stock by reason of their ownership thereof, an amount per share equal to the sum of (i) $0.50 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price"), (ii) $0.75 for each outstanding share of Series B Preferred Stock (the "Original Series B Issue Price"), (iii) $0.62 for each outstanding share of Series C Preferred Stock (the "Original Series C Issue Price"), (iv) $1.00 for each outstanding share of Series D Preferred Stock (the "Original Series D Issue Price"), (v) $0.50 for each outstanding share of Series Z Preferred Stock (the "Original Series Z Issue Price"), (vi) $0.50 for each outstanding share of Series A-1 Preferred Stock (the "Original Series A-1 Issue Price"), (vii) $0.75 for each outstanding share of Series B-1 Preferred Stock (the "Original Series B-1 Issue Price"), (viii) $0.62 for each outstanding share of Series C-1 Preferred Stock (the "Original Series C-1 Issue Price"), (ix) $1.00 for each outstanding share of Series D-1 Preferred Stock (the "Original Series D-1 Issue Price") (each subject to appropriate adjustments for stock splits, stock dividends, combinations or other recapitalizations) and (x) an amount equal to declared but unpaid dividends on such share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 3. 4 Preferred Stock, respectively. If upon the occurrence of such event, the assets and funds thus distributable among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock that may from time to time come into existence, the entire assets and funds of the corporation legally available for distribution shall be distributed (x) first ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock in proportion to the aggregate liquidation preferences of each respective series, and ratably among the holders of that series in proportion to the amount of such stock owned by each such holder, and (y) thereafter ratably among the holders of the Series Z Preferred Stock in proportion to the amount of such stock owned by each such holder. (b) Upon the completion of the distribution required by subparagraph (a) of this Section 2 and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the remaining assets of the corporation available for distribution to stockholders shall be distributed among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock, Series D-1 Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (with each share of Preferred Stock participating on an "as-converted-into-Common-Stock" basis). (c) A consolidation or merger of this corporation with or into any other corporation or corporations in which fifty percent (50%) or more of the voting power of the corporation held by the stockholders of the corporation immediately prior to the merger or consolidation is transferred (excluding reincorporations of the corporation the sole purpose of which is to change the state of incorporation), or a sale, conveyance or disposition of all or substantially all of the assets of this corporation or the effectuation by the corporation of a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is transferred, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2. 3. Redemption. (a) At any time after December 31, 1998, but within forty-five (45) days (the "Redemption Date") after the receipt by this corporation of a written request from the holders of not less than seventy percent (70%) of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock treated as a single class, that all of such holders' shares be redeemed, and immediately prior to the surrender by such holders of the certificates representing such shares, this corporation shall, to the extent it may lawfully do so, redeem all of the then outstanding 4. 5 shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock by paying in cash therefor a sum per share equal to the Original Series A Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series A Preferred Stock, the Original Series B Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series B Preferred Stock, the Original Series C Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series C Preferred Stock, the Original Series D Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series D Preferred Stock, the Original Series A-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series A-1 Preferred Stock, the Original Series B-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series B-1 Preferred Stock, the Original Series C-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series C-1 Preferred Stock and the Original Series D-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series D-1 Preferred Stock (such amounts are hereinafter referred to herein as the "Redemption Prices"). (b) Not less than fifteen (15) days prior to the Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock at the address last shown on the records of this corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder (which shall be all of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A- 1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock held by such holder), the Redemption Date, the Redemption Prices of each of the respective series to be redeemed from such holder, the place at which payment may be obtained and calling upon such holder to surrender to this corporation, in the manner and at the place designated, his, her or its certificate or certificates representing all of the shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock held by such holder (the "Redemption Notice"). Except as provided in subsection 3(c) of this Division B of Article IV, on or after the Redemption Date, each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock 5. 6 shall surrender to this corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Prices of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. (c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Prices, all rights of the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock as holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, respectively (except the right to receive the respective Redemption Prices without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the corporation legally available for redemption of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock on the Redemption Date are insufficient to redeem the total number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock in proportion to the Redemption Prices of the respective series, and ratably among the holders of each series in proportion to the amount of such stock owned by each such holder. Notwithstanding anything herein to the contrary, the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the corporation are legally available for the redemption of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the corporation has become obliged to redeem on the Redemption Date but which it has not redeemed. (d) The shares of Series J Preferred Stock and Series Z Preferred Stock are not redeemable. 4. Conversion. The holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 6. 7 Preferred Stock and Series D-1 Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and, in the case of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, on or prior to the fifth day prior to the Redemption Date, if any, as may have been fixed in the Redemption Notice, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) the Original Series A Issue Price for each share of Series A Preferred Stock, (ii) the Original Series B Issue Price for each share of Series B Preferred Stock, (iii) the Original Series C Issue Price for each share of Series C Preferred Stock, (iv) the Original Series D Issue Price for each share of Series D Preferred Stock, (v) $0.10 for each share of Series J Preferred Stock (the "Original Series J Issue Price"), (vi) the Original Series Z Issue Price for each share of Series Z Preferred Stock, (vii) the Original Series A-1 Issue Price for each share of Series A-1 Preferred Stock, (viii) the Original Series B-1 Issue Price for each share of Series B-1 Preferred Stock, (ix) the Original Series C-1 Issue Price for each share of Series C-1 Preferred Stock and (x) the Original Series D-1 Issue Price for each share of Series D-1 Preferred Stock, in each case by the Conversion Price at the time in effect for such share. The initial Conversion Price per share for shares of Series A Preferred Stock shall be the Original Series A Issue Price, for shares of Series B Preferred Stock shall be the Original Series B Issue Price, for shares of Series C Preferred Stock shall be the Original Series C Issue Price, for shares of Series D Preferred Stock shall be the Original Series D Issue Price, for shares of Series J Preferred Stock shall be the Original Series J Issue Price, for shares of Series Z Preferred Stock shall be the Original Series Z Issue Price, for shares of Series A-1 Preferred Stock shall be the Original Series A-1 Issue Price, for shares of Series B-1 Preferred Stock shall be the Original Series B-1 Issue Price, for shares of Series C-1 Preferred Stock shall be the Original Series C-1 Issue Price and for shares of Series D-1 Preferred Stock shall be the Original Series D-1 Issue Price; provided, however, that the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and the Series Z Preferred Stock shall each be subject to adjustment as set forth in subsections 4(d) and 4(e) of this Division B of Article IV and the Conversion Price for the Series J Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock, the Series C-1 Preferred Stock and the Series D-1 Preferred Stock shall be subject to adjustment as set forth in subsection 4(e) of this Division B of Article IV. (b) Automatic Conversion. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such series immediately upon the earlier of (i) the closing of the corporation's sale of its Common 7. 8 Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which (exclusive of underwriting discounts, commissions and expenses) is not less than $4.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and $12,000,000 in the aggregate or (ii) the date specified by written consent or agreement of the holders of at least seventy percent (70%) of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, voting together as a single class. (c) Mechanics of Conversion. Before any holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock shall be entitled to convert the same into shares of Common Stock, he, she or it shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for such stock and shall give written notice to this corporation at its principal corporate office of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to each such holder, or to the nominee or nominees of each such holder, (i) a certificate or certificates for the number of shares of Common Stock to which each such holder shall be entitled as aforesaid and (ii) a cash payment of all declared but unpaid dividends on the converted shares as of the date of conversion. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and/or Series D-1 Preferred Stock shall not be deemed to have converted such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock until immediately prior to the closing of such sale of securities. 8. 9 (d) Conversion Price Adjustments of Series A, Series B, Series C, Series D and Series Z Preferred Stock for Certain Dilutive Issuances. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series Z Preferred Stock shall be subject to adjustment from time to time as follows: (i)(A) If the corporation shall issue, after the date upon which any shares of Series D Preferred Stock were first issued (the "Purchase Date"), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including, without limitation, the number of shares of Common Stock issuable upon the conversion of the Preferred Stock) plus the number of shares of Common Stock that the aggregate consideration received by the corporation for such issuance would purchase at such Conversion Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including, without limitation, the number of shares of Common Stock issuable upon the conversion of the Preferred Stock) plus the number of shares of such Additional Stock. (B) No adjustment of the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series Z Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections 4(d)(i)(E)(3) and 4(d)(i)(E)(4) of this Division B of Article IV, no adjustment of such Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. 9. 10 (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options or warrants to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options or warrants to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 4(d)(i) and subsection 4(d)(ii) of this Division B of Article IV: (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options or warrants to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options, warrants or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D) of this Division B of Article IV), if any, received by the corporation upon the issuance of such options, warrants or rights plus the minimum exercise price provided in such options, warrants or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options or warrants to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options, warrants or rights were issued and for a consideration equal to the consideration, if any, received by the corporation for any such securities and related options, warrants or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options, warrants or rights (the consideration in each case to be determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D) of this Division B of Article IV). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options, warrants or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series Z Preferred Stock, to the extent in any way affected by or computed using such 10. 11 options, warrants, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options, warrants or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options, warrants or rights, the termination of any such rights to convert or exchange or the expiration of any options, warrants or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series Z Preferred Stock, to the extent in any way affected by or computed using such options, warrants, rights or securities or options, warrants or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options, warrants or rights, upon the conversion or exchange of such securities or upon the exercise of the options, warrants or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4(d)(i)(E)(1) and (2) of this Division B of Article IV shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 4(d)(i)(E)(3) or (4) of this Division B of Article IV. (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E) of this Division B of Article IV) by this corporation after the Purchase Date other than: (A) shares of Common Stock issued upon conversion of the Preferred Stock; or (B) up to 6,220,274 shares of Common Stock (as adjusted for any stock splits or other recapitalization) issuable or issued to employees, consultants or directors of this corporation pursuant to stock option plans or arrangements approved by the Board of Directors of the corporation; or (C) Common Stock issued pursuant to a transaction described in subsection 4(e)(i) of this Division B of Article IV; or (D) shares of Common Stock or warrants to purchase shares of Common Stock issued in connection with a bona fide acquisition of another business, whether by merger, consolidation or purchase of assets, or bona fide equipment leasing transactions unanimously approved by the Board of Directors of this corporation; or 11. 12 (E) shares of Preferred Stock issued upon exercise of any options or warrants to purchase the corporation's Preferred Stock outstanding as of the Purchase Date. (e) Conversion Price Adjustments of Preferred Stock for Certain Splits and Combinations. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be subject to adjustment from time to time as follows: (i) In the event the corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subsection 4(d)(i)(E) of this Division B of Article IV. (ii) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (f) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(e)(i) of this Division B of Article IV, then, in each such case for the purpose of this subsection 4(f), the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, 12. 13 Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (g) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2 of this Division B of Article IV) provision shall be made so that the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, respectively, the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (h) No Impairment. Unless approved in accordance with Sections 6 and 7 of this Division B of Article IV, this corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock against impairment. 13. 14 (i) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock. (j) Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, at least 20 days prior to the date specified therein, a 14. 15 notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (k) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, in addition to such other remedies as shall be available to each holder of any of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, using its best efforts to obtain the requisite stockholder approval of any necessary amendment to these articles. (l) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation. (m) Special Mandatory Conversion. (i) At any time following the Purchase Date, if (a) the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock are entitled to exercise the right of first refusal (the "Right of First Refusal") set forth in Section 2.3 of the Amended or Restated Investors' Rights Agreement dated on or about November 12, 1996, by and between this corporation and certain investors, as amended from time to time (the "Rights Agreement"), with respect to an equity financing of the corporation in an aggregate amount of at least $500,000 (the "Equity Financing"), (b) this corporation has complied with its notice obligations, or such obligations have been waived, under the Right of First Refusal with respect to such Equity Financing and this corporation thereafter proceeds to consummate the Equity Financing and (c) such holder, including such holder's affiliates (collectively, a "Non- Participating Holder") does not by 15. 16 exercise of such holder's Right of First Refusal acquire his, her or its Pro Rata Share (as defined in Section 2.3 of the Rights Agreement) offered in such Equity Financing (a "Mandatory Offering"), then all of such Non-Participating Holder's shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock shall automatically and without further action on the part of such holder be converted effective upon, subject to and immediately prior to, the consummation of the Mandatory Offering (the "Mandatory Offering Date") into an equivalent number of shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, respectively ("Special Mandatory Conversion"); provided, however, that no such conversion shall occur in connection with a particular Equity Financing if, pursuant to the written request of the Board of Directors and subject to the approval of the holders of a majority of the outstanding Preferred Stock, such holder agrees in writing to waive his, her or its Right of First Refusal with respect to such Equity Financing. Upon conversion pursuant to this subsection 4(m)(i), the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock so converted shall be cancelled and not subject to reissuance. (ii) The holder of any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock converted pursuant to this subsection 4(m) shall deliver to this corporation during regular business hours at the office of any transfer agent of the corporation for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock or at such other place as may be designated by the corporation, the certificate or certificates for the shares so converted, duly endorsed or assigned in blank or to this corporation. As promptly as practicable thereafter, this corporation shall issue and deliver to such holder, at the place designated by such holder, a certificate or certificates for the number of full shares of the Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and/or Series D-1 Preferred Stock to be issued and such holder shall be deemed to have become a stockholder of record of such Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and/or Series D-1 Preferred Stock on the Mandatory Offering Date unless the transfer books of this corporation are closed on that date, in which event he, she or it shall be deemed to have become a stockholder of record of such Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and/or Series D-1 Preferred Stock on the next succeeding date on which the transfer books are open. (iii) In the event that any shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and/or Series D-1 Preferred Stock are issued, concurrently with such issuance, this corporation shall use its best efforts to take all such action as may be required, including amending its Articles of Incorporation, (a) to cancel all authorized shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock that remain unissued after such issuance, (b) to create and reserve for issuance upon Special Mandatory Conversion of any then outstanding Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock a new series of Preferred Stock equal in number to the number of shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock so cancelled and designated Series A-2 Preferred Stock, Series B-2 Preferred Stock, Series C-2 Preferred Stock and Series D-2 Preferred Stock, with 16. 17 the designations, powers, preferences and rights and the qualifications, limitations and restrictions identical to those then applicable to the Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, respectively, except that the Conversion Price for such shares of Series A-2 Preferred Stock, Series B-2 Preferred Stock, Series C-2 Preferred Stock and Series D-2 Preferred Stock once initially issued shall be the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price and the Series D Conversion Price, respectively, in effect immediately prior to such issuance and (c) to amend the provisions of this subsection 4(m) to provide that any subsequent Special Mandatory Conversion will be into shares of Series A-2 Preferred Stock, Series B-2 Preferred Stock, Series C-2 Preferred Stock and Series D-2 Preferred Stock rather than Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock, respectively. This corporation shall take the same actions with respect to the Series A-2 Preferred Stock, Series B-2 Preferred Stock, Series C-2 Preferred Stock and Series D-2 Preferred Stock and each subsequently authorized series of Preferred Stock upon initial issuance of shares of the last such series to be authorized. The right to receive any dividend declared but unpaid at the time of conversion on any shares of Preferred Stock converted pursuant to the provisions of this subsection 4(m) shall accrue to the benefit of the new shares of Preferred Stock issued upon conversion thereof. (iv) A copy of the Rights Agreement is on file at the offices of this corporation and will be made available upon request and without charge. 5. Voting Rights. The holder of each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, and Series C-1 Preferred Stock and Series D-1 Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). 6. Protective Provisions for Series A, Series B, Series C, Series D, Series Z, Series A-1, Series B-1, Series C-1 and Series D-1 Preferred Stock. So long as any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred 17. 18 Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least seventy percent (70%) of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, voting together as a single class: (a) alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock so as to affect materially or adversely the shares; or (b) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock; or (c) reclassify any shares of Common Stock or Preferred Stock to give those shares a preference over, or to make those shares on a parity with, the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (d) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment. 7. Protective Provisions for Series C and Series C-1 Preferred Stock. So long as any shares of Series C Preferred Stock or Series C-1 Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock voting together as a single class: (a) amend the corporation's Articles of Incorporation to alter or change the rights, preferences or privileges of the shares of Series C Preferred Stock or Series C-1 Preferred Stock so as to affect materially or adversely the shares; or (b) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series C Preferred Stock or Series C-1 Preferred Stock 18. 19 (other than pursuant to subsection (m) of Section 4 of Division B of this Article IV hereof); or (c) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series C Preferred Stock or Series C-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (d) reclassify any shares of Common Stock to give those shares a preference over, or to make those shares on a parity with, the Series C Preferred Stock or Series C-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (e) pay dividends upon or redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock other than shares of Series C Preferred Stock or Series C-1 Preferred Stock; provided, however, that this restriction shall not apply to (i) the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment, or (ii) the redemption of any share or shares of Preferred Stock in accordance with the provisions of Section 3 of this Division B of Article IV; or 8. Protective Provisions for Series D and Series D-1 Preferred Stock. So long as any shares of Series D Preferred Stock or Series D-1 Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series D Preferred Stock and Series D-1 Preferred Stock voting together as a single class: (a) amend the corporation's Articles of Incorporation to alter or change the rights, preferences or privileges of the shares of Series D Preferred Stock or Series D-1 Preferred Stock so as to affect materially or adversely the shares; or (b) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series D Preferred Stock or Series D-1 Preferred Stock (other than pursuant to subsection (m) of Section 4 of Division B of this Article IV hereof); or (c) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series D Preferred Stock or Series D-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (d) reclassify any shares of Common Stock to give those shares a preference over, or to make those shares on a parity with, the Series D Preferred Stock or 19. 20 Series D-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (e) pay dividends upon or redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock other than shares of Series D Preferred Stock or Series D-1 Preferred Stock; provided, however, that this restriction shall not apply to (i) the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment, or (ii) the redemption of any share or shares of Preferred Stock in accordance with the provisions of Section 3 of this Division B of Article IV; or 9. Protective Provisions for Series C, Series D, Series C-1 and Series D-1 Preferred Stock. So long as any shares of Series C Preferred Stock, Series D Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series C Preferred Stock, Series D Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, voting together as a single class: (a) sell, convey or otherwise dispose of or encumber all or substantially all of its assets or business or merge with or into or consolidate with any other entity (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is disposed of; or (b) increase the authorized number of directors of the corporation to more than eight (8). 10. Status of Redeemed or Converted Stock. In the event (a) any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock shall be redeemed pursuant to Section 3 of this Division B of Article IV or (b) any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock shall be converted pursuant to Section 4 of this Division B of Article IV, the shares so redeemed or converted shall be cancelled, together with a like number of shares of Common Stock, and such shares and shall not be issuable by the corporation. The Articles of Incorporation of this corporation shall be appropriately amended to effect the corresponding reduction in the corporation's authorized capital stock. 11. Repurchase of Shares. Each holder of an outstanding share of Preferred Stock shall be deemed to have consented, for purposes of Sections 160 and/or 173 of the Delaware General Corporation Law, to distributions made by the corporation in connection 20. 21 with the repurchase of shares of Common Stock issued to or held by employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment. C. Common Stock. 1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation Rights. Upon the liquidation, dissolution or winding up of the corporation, the assets of the corporation shall be distributed as provided in Section 2 of division B of this Article IV. 3. Redemption. The Common Stock is not redeemable. 4. Voting Rights. The holder of each share of Common Stock shall have the right to one vote with respect to such share, and shall be entitled to notice of any stockholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE V A. Exculpation. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is hereafter amended to further reduce or to authorize, with the approval of the corporation's stockholders, further reductions in the liability of the corporation's directors for breach of fiduciary duty, then a director of the corporation shall not be liable for any such breach to the fullest extent permitted by the Delaware General Corporation Law as so amended. B. Indemnification. To the extent permitted by applicable law, this corporation is also authorized to provide indemnification of (and advancement of expenses to) such agents (and any other persons to which Delaware law permits this corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the corporation, its stockholders, and others. 21. 22 C. Effect of Repeal or Modification. Any repeal or modification of any of the foregoing provisions of this Article V shall be prospective and shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of the corporation with respect to any acts or omissions of such director occurring prior to, such repeal or modification. ARTICLE VI Elections of directors need not be by written ballot except and to the extent provided in the Bylaws of the corporation. ARTICLE VII No holder of shares of stock of the corporation shall have any preemptive or other right, except as such rights are expressly provided by contract, to purchase or subscribe for or receive any shares of any class, or series thereof, of stock of the corporation, whether now or hereafter authorized, or any warrants, options, bonds, debentures or other securities convertible into, exchangeable for or carrying any right to purchase any share of any class, or series thereof, of stock; but such additional shares of stock and such warrants, options, bonds, debentures or other securities convertible into, exchangeable for or carrying any right to purchase any shares of any class, or series thereof, of stock may be issued or disposed of by the Board of Directors to such persons, and on such terms and for such lawful consideration as in its discretion it shall deem advisable or as the corporation shall have by contract agreed. ARTICLE VIII The corporation is to have a perpetual existence. ARTICLE IX The corporation reserves the right to repeal, alter, amend or rescind any provision contained in this Certificate of Incorporation and/or any provision contained in any amendment to or restatement of this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. ARTICLE X The Board of Directors may from time to time make, amend, supplement or repeal the Bylaws by the requisite affirmative vote of Directors as set forth in the Bylaws; provided, however, that the stockholders may change or repeal any bylaw adopted by the Board of Directors by the requisite affirmative vote of stockholders as set forth in the Bylaws; and, provided further, that no amendment or supplement to the Bylaws adopted by the Board of Directors shall vary or conflict with any amendment or supplement thus adopted by the stockholders. 22. 23 ARTICLE XI The name and mailing address of the incorporator is Lisa A. McQuen, 550 West "C" Street, Suite 1200, San Diego, California 92101. [Remainder of This Page Intentionally Left Blank] 23. 24 IN WITNESS WHEREOF, this Certificate of Incorporation has been signed under the seal of the corporation as of this 18th day of September, 1997 by the undersigned who affirms that the statements made herein are true and correct. /s/ Lisa A. McQuen ------------------------------------- Lisa A. McQuen [SIGNATURE PAGE TO CERTIFICATE OF INCORPORATION OF COMBICHEM, INC.] 24. 25 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF COMBICHEM, INC. CombiChem, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That resolutions were duly adopted by the Board of Directors of the Corporation setting forth proposed amendments to the Certificate of Incorporation of the Corporation, and declaring said amendments to be advisable and recommended for approval by the stockholders of the Corporation. The resolutions setting forth the proposed amendments are as follows: NOW, THEREFORE, BE IT RESOLVED, that Section A of Article IV of the Certificate of Incorporation of the Corporation be amended in its entirety to read as follows: "A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is One Hundred Forty-Three Million One Hundred Ninety-Six Thousand Two Hundred Ninety-Six (143,196,296) shares. Eighty Million (80,000,000) shares shall be Common Stock and Sixty Three Million One Hundred Ninety-Six Thousand Two Hundred Ninety-Six (63,196,296) shares shall be Preferred Stock. The Preferred Stock authorized by these Restated Articles of Incorporation shall be issued by series as set forth herein. The first series of Preferred Stock shall be designated "Series A Preferred Stock" and shall consist of One Million (1,000,000) shares. The second series of Preferred Stock shall be designated "Series B Preferred Stock" and shall consist of Two Million Two Hundred Twenty-Six Thousand Six Hundred Sixty-Seven (2,226,667) shares. The third series of Preferred Stock shall be designated "Series C Preferred Stock" and shall consist of Seventeen Million Five Hundred Nineteen Thousand Seven Hundred Seventy-Six (17,519,776) shares. The fourth series of Preferred Stock shall be designated "Series D Preferred Stock" and shall consist of Nine Million Eight Hundred Sixty-Nine Thousand Two Hundred Five (9,869,205) shares. The fifth series of Preferred Stock shall be designated "Series J Preferred Stock" and shall consist of Four Hundred Sixty-Five Thousand (465,000) shares. The sixth series of Preferred 26 Stock shall be designated "Series Z Preferred Stock" and shall consist of One Million Five Hundred Thousand (1,500,000) shares. The seventh series of Preferred Stock shall be designated "Series A-1 Preferred Stock: and shall consist of One Million (1,000,000) shares. The eighth series of Preferred Stock shall be designated "Series B-1 Preferred Stock" and shall consist of Two Million Two Hundred Twenty-Six Thousand Six Hundred Sixty-Seven (2,226,667) shares. The ninth series of Preferred Stock shall be designated "Series C-1 Preferred Stock" and shall consist of Seventeen Million Five Hundred Nineteen Thousand Seven Hundred Seventy-Six (17,519,776) shares. The tenth series of Preferred Stock shall be designated "Series D-1 Preferred Stock" and shall consist of Nine Million Eight Hundred Sixty-Nine Thousand Two Hundred Five (9,869,205) shares. Upon the amendment of this Article IV as set forth herein, each four (4) shares of Common Stock, $0.001 par value per share, issued and outstanding at such time shall be combined, reclassified and converted into one (1) share of Common Stock, $0.001 par value per share ("new shares"). No fractional share shall be issued upon the combination, reclassification and conversion of any share or shares of Common Stock. If the combination, reclassification and conversion of the shares of Common Stock represented by each certificate (including, for this purpose, a holder of a certificate of shares of Common Stock issuable upon the conversion of Preferred Stock) would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, issue the holder one additional share. An amount shall be transferred from capital to surplus so that the amount of capital represented by the new shares in the aggregate at the time of filing of this Certificate of Amendment shall equal the aggregate number of new shares multiplied by $0.001. Unless otherwise requested by the holders thereof, the share certificates representing the shares outstanding prior to the filing of this Certificate of Amendment shall represent such number of new shares as combined, reclassified and converted following the filing of this Certificate of Amendment. Upon surrender by a holder of Common Stock of a certificate or certificates for Common Stock, $0.001 par value, duly endorsed, at the office of this Corporation, this Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Common Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of new shares to which such holder shall be entitled as aforesaid." SECOND: That, thereafter, the stockholders approved the foregoing amendment by written consent in accordance with Section 228 of the Delaware General Corporation Law. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. The total number -2- 27 of outstanding shares of the Corporation is 7,650,924 shares of Common Stock, 1,000,000 shares of Series A Preferred Stock, 2,226,667 shares of Series B Preferred Stock, 17,158,486 shares of Series C Preferred Stock, 9,869,205 shares of Series D Preferred Stock, 232,500 shares of Series J Preferred Stock and 532,777 shares of Series Z Preferred Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required, such required vote being (a) a majority of the outstanding shares of Common Stock and (b) a majority of the outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series Z Preferred Stock (voting together on an as-converted basis) (c) a majority of the outstanding shares of Series C Preferred Stock and (d) a majority of the outstanding shares of Series D Preferred Stock. FOURTH: That the capital of said Corporation shall not be reduced under or by reason of said amendment. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -3- 28 IN WITNESS WHEREOF, said CombiChem, Inc. has caused this certificate to be signed by Karin Eastham, its Vice President of Finance/Administration, this 14th day of October, 1997. By: /s/ Karin Eastham ------------------------------- Karin Eastham, Vice President Finance/Administration [SIGNATURE PAGE TO CERTIFICATE OF AMENDMENT] EX-3.2 3 EXHIBIT 3.2 1 EXHIBIT 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF COMBICHEM, INC., a Delaware corporation CombiChem, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is CombiChem, Inc. The original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on September 19, 1997 and was amended pursuant to a Certificate of Amendment of Certificate of Incorporation of the Corporation filed with the Secretary of State of the State of Delaware on October 14, 1997. 2. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, the Amended and Restated Certificate of Incorporation was adopted by the corporation's Board of Directors and stockholders, the stockholders of the corporation having approved the Amended and Restated Certificate of Incorporation by the written consent of the holders of at least a majority of the outstanding shares in accordance with Section 228 thereof, and written notice having been given in accordance with the requirements of such Section. The Amended and Restated Certificate of Incorporation restates, integrates and amends the provisions of the Certificate of Incorporation of this corporation. 3. The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: ARTICLE I The name of this corporation is CombiChem, Inc. ARTICLE II The address of this corporation's registered office in the State of Delaware is 30 Old Rudnick Lane, City of Dover, County of Kent 19901. The name of its registered agent at such address is CorpAmerica, Inc. ARTICLE III The purpose of this corporation is to engage in any lawful act or activity for which a corporation may now or hereafter be organized under the Delaware General Corporation Law. 2 ARTICLE IV (A) Classes of Stock. This corporation is authorized to issue two classes of stock, denominated Common Stock and Preferred Stock. The Common Stock shall have a par value of $0.001 per share and the Preferred Stock shall have a par value of $0.001 per share. The total number of shares of Common Stock which the Corporation is authorized to issue is Forty Million (40,000,000), and the total number of shares of Preferred Stock which the Corporation is authorized to issue is Five Million (5,000,000), which shares of Preferred Stock shall be undesignated as to series. (B) Issuance of Preferred Stock. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing one or more certificates pursuant to the Delaware General Corporation Law (each, a "Preferred Stock Designation"), to fix or alter from time to time the designations, powers, preferences and rights of each such series of Preferred Stock and the qualifications, limitations or restrictions thereof, including without limitation the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preferences of any wholly-unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. (C) Rights, Preferences, Privileges and Restrictions of Common Stock. 1. Dividend Rights. Subject to the prior or equal rights of holders of all classes of stock at the time outstanding having prior or equal rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Redemption. The Common Stock is not redeemable upon demand of any holder thereof or upon demand of this corporation. 3. Voting Rights. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any stockholders' meeting in accordance with the Bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE V (A) Exculpation. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a -2- 3 director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is hereafter amended to further reduce or to authorize, with the approval of the corporation's stockholders, further reductions in the liability of the corporation's directors for breach of fiduciary duty, then a director of the corporation shall not be liable for any such breach to the fullest extent permitted by the Delaware General Corporation Law as so amended. (B) Indemnification. To the extent permitted by applicable law, this corporation is also authorized to provide indemnification of (and advancement of expenses to) such agents (and any other persons to which Delaware law permits this corporation to provide indemnification) through bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the Delaware General Corporation Law, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the corporation, its stockholders, and others. (C) Effect of Repeal or Modification. Any repeal or modification of any of the foregoing provisions of this Article V shall be prospective and shall not adversely affect any right or protection of a director, officer, agent or other person existing at the time of, or increase the liability of any director of the corporation with respect to any acts or omissions of such director occurring prior to, such repeal or modification. ARTICLE VI Elections of directors need not be by written ballot except and to the extent provided in the Bylaws of the corporation. At the 1998 Annual Meeting of Stockholders, the Directors shall be classified into three classes, as nearly equal in number as possible as determined by the Board of Directors, with the term of office of the first class to expire at the 1999 Annual Meeting of Stockholders, the term of office of the second class to expire at the 2000 Annual Meeting of Stockholders and the term of office of the third class to expire at the 2001 Annual Meeting of Stockholders. At each Annual Meeting of Stockholders following such initial classification and election, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third succeeding Annual Meeting of Stockholders after their election. Additional directorships resulting from an increase in the number of Directors shall be apportioned among the classes as equally as possible as determined by the Board of Directors. ARTICLE VII No holder of shares of stock of the corporation shall have any preemptive or other right, except as such rights are expressly provided by contract, to purchase or subscribe for or receive any shares of any class, or series thereof, of stock of the corporation, whether now or hereafter authorized, or any warrants, options, bonds, debentures or other securities -3- 4 convertible into, exchangeable for or carrying any right to purchase any share of any class, or series thereof, of stock; but such additional shares of stock and such warrants, options, bonds, debentures or other securities convertible into, exchangeable for or carrying any right to purchase any shares of any class, or series thereof, of stock may be issued or disposed of by the Board of Directors to such persons, and on such terms and for such lawful consideration as in its discretion it shall deem advisable or as the corporation shall have by contract agreed. ARTICLE VIII The corporation is to have a perpetual existence. ARTICLE IX The corporation reserves the right to repeal, alter, amend or rescind any provision contained in this Amended and Restated Certificate of Incorporation and/or any provision contained in any amendment to or restatement of this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. ARTICLE X The Board of Directors may from time to time make, amend, supplement or repeal the Bylaws by the requisite affirmative vote of Directors as set forth in the Bylaws; provided, however, that the stockholders may change or repeal any bylaw adopted by the Board of Directors by the requisite affirmative vote of stockholders as set forth in the Bylaws; and, provided further, that no amendment or supplement to the Bylaws adopted by the Board of Directors shall vary or conflict with any amendment or supplement thus adopted by the stockholders. ARTICLE XI No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws, and no action shall be taken by the stockholders by written consent. ARTICLE XII Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -4- 5 IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation has been signed under the seal of the corporation as of this ____ day of October, 1997. COMBICHEM, INC., a Delaware corporation By:_______________________________ Vicente Anido, Jr. President and Chief Executive Officer ATTEST: ___________________________________________________ Faye H. Russell, Secretary [SIGNATURE PAGE TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF COMBICHEM, INC.] EX-3.3 4 EXHIBIT 3.3 1 EXHIBIT 3.3 BYLAWS OF COMBICHEM, INC. ARTICLE I OFFICES Section 1. The registered office shall be in the City of Dover, County of Kent, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held in the City of San Diego, State of California, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders, commencing with the year 1998, shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which 2 they shall elect by a plurality vote a board of directors, and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders holding not less than ten percent (10%) of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. 3 Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the certificate of incorporation, a different vote is -3- 4 required, in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the certificate of incorporation each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 11. Unless otherwise provided in the certificate of incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS Section 1. The number of directors which shall constitute the whole board shall not be less than five (5) nor more than nine (9), the exact number of directors to be fixed from time to time within such limit by duly adopted resolutions of the Board of Directors. The exact number of directors presently authorized shall be eight (8) until changed within the limits set -4- 5 forth above, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 3. The business of the corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. The first meeting of each newly elected Board of Directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting -5- 6 and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. Section 7. Special meetings of the board may be called by the President on four (4) days' notice to each director by mail or 48 hours' notice to each director either personally or by telegram; special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of two directors unless the board consists of only one director, in which case special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of the sole director. Section 8. At all meetings of the board a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. -6- 7 Section 9. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 10. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. COMMITTEES OF DIRECTORS Section 11. The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of two or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors -7- 8 in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 12. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. COMPENSATION OF DIRECTORS Section 13. Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. REMOVAL OF DIRECTORS -8- 9 Section 14. Unless otherwise restricted by the certificate of incorporation or bylaw, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors. ARTICLE IV NOTICES Section 1. Whenever, under the provisions of the statutes or of the certificate of incorporation or of these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 1. The officers of the corporation shall be elected by the Board of Directors and shall include a President, a Secretary and a Chief Financial Officer. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also elect a Chief Financial Officer and/or one or more Vice Presidents, Assistant Secretaries and Assistant Chief Financial Officer. Any -9- 10 number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide. Section 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall elect a President, a Secretary and a Chief Financial Officer. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 5. The officers of the corporation shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. THE CHAIRMAN OF THE BOARD Section 6. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. Section 7. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board and as may be provided by law. THE PRESIDENT AND VICE PRESIDENT -10- 11 Section 8. The President shall be the chief executive officer of the corporation; and in the absence of the Chairman and Vice Chairman of the Board he shall preside at all meetings of the stockholders and the Board of Directors. He shall have general and active management of the business of the corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Section 9. He shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. Section 10. In the absence of the President or in the event of his inability or refusal to act, the Vice President, if any, (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARY Section 11. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the Board of Directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or President, under -11- 12 whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Section 12. The Assistant Secretary, or, if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. THE CHIEF FINANCIAL OFFICER AND ASSISTANT CHIEF FINANCIAL OFFICER Section 13. The Chief Financial Officer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. Section 14. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his transactions as Chief Financial Officer and of the financial condition of the corporation. -12- 13 Section 15. If required by the Board of Directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 16. The Assistant Chief Financial Officer, or if there shall be more than one, the Assistant Chief Financial Officer in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election) shall, in the absence of the Chief Financial Officer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the Chief Financial Officer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. ARTICLE VI CERTIFICATE OF STOCK Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President and the Chief Financial Officer or an Assistant Chief Financial Officer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. -13- 14 If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualification, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a -14- 15 condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. -15- 16 REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. CHECKS -16- 17 Section 3. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. FISCAL YEAR Section 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL Section 5. The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. INDEMNIFICATION Section 6. The corporation shall indemnify its officers, directors, employees and agents to the full extent permitted by the General Corporation Law of Delaware. ARTICLE VIII AMENDMENT Section 1. These bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the certificate of incorporation at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new bylaws be contained in the notice of such special meeting. If the power to adopt, amend or -17- 18 repeal bylaws is conferred upon the Board of Directors by the certificate of incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal bylaws. -18- 19 CERTIFICATE OF SECRETARY The undersigned, being the Secretary of CombiChem, Inc., a Delaware corporation, does hereby certify the foregoing to be the Bylaws of said Corporation, as adopted by the directors of the Corporation and which remain in full force and effect as of the date hereof. Executed at San Diego, California effective as of September 19, 1997. /S/ Faye H. Russell -------------------------------------- Faye H. Russell, Secretary -19- EX-3.4 5 EXHIBIT 3.4 1 EXHIBIT 3.4 RESTATED BYLAWS OF COMBICHEM, INC. ARTICLE I OFFICES Section 1. Registered Office. The registered office shall be in the City of Dover, County of Kent, State of Delaware. Section 2. Other Offices. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. All meetings of the stockholders for the election of Directors shall be held in the City of San Diego, State of California, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of California as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of California, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meeting. (a) The annual meeting of the stockholders of the corporation, for the purpose of election of Directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. (b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (A) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (B) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (C) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal 2 executive offices of the corporation no later than the date specified in the corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders, which date shall be not less than one hundred twenty (120) calendar days in advance of the date of such proxy statement; provided, however, that in the event that no annual meeting was held in the previous year or the date of the annual meeting has been changed by more than thirty (30) days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received a reasonable time before the solicitation is made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as a proponent to a stockholder proposal. In addition to the foregoing, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholder's meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act to the extent such regulations require notice that is different from the notice required above. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this paragraph (b) of this Section 2. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this paragraph (b), and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this paragraph (c) shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation entitled to vote in the election of Directors at the meeting who complies with the notice procedures set forth in this paragraph (c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation in accordance with the provisions of paragraph (b) of this Section 2. Such stockholder's notice shall set forth (i) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a Director: (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation that are beneficially owned by such person, (D) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, and (E) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the 1934 Act (including without limitation such person's -2- 3 written consent to being named in the proxy statement, if any, as a nominee and to serving as a Director if elected); and (ii) as to such stockholder giving notice, the information required to be provided pursuant to subitems (ii), (iii) and (iv) of paragraph (b) of this Section 2. At the request of the Board of Directors, any person nominated by a stockholder for election as a Director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the corporation unless nominated in accordance with the procedures set forth in this paragraph (c). The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws, and if he should so determine, he shall so declare at the meeting, and the defective nomination shall be disregarded. Section 3. Notice of Annual Meeting. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. Section 4. Voting List. The officer who has charge of the stock ledger of the corporation shall prepare and make, or have prepared and made, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, as amended from time to time, may only be called as provided in this Section 5 by the President, Chief Executive Officer or Chairman of the Board and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors. Such request shall state the purpose or purposes of the proposed meeting. The place, date and time of any special meeting shall be determined by the Board of Directors. Such determination shall include the record date for determining the stockholders having the right of and to vote at such meeting. Section 6. Notice of Special Meeting. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Action at Special Meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. -3- 4 Section 8. Quorum and Adjournments. (a) The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation, as amended from time to time. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (b) When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of statutes or of the Certificate of Incorporation, as amended from time to time, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 9. Voting Rights. Unless otherwise provided in the Certificate of Incorporation, as amended from time to time, each stockholder shall at every meeting of the stockholders be entitled to one (1) vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three (3) years from its date, unless the proxy provides for a longer period. Section 10. Action Without Meeting. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with these Bylaws, and no action shall be taken by the stockholders by written consent. ARTICLE III Directors Section 1. Classes, Number, Term of Office and Qualification. At the 1998 Annual Meeting of Stockholders, the Directors shall be classified into three classes, as nearly equal in number as possible as determined by the Board of Directors, with the term of office of the first class to expire at the 1999 Annual Meeting of Stockholders, the term of office of the second class to expire at the 2000 Annual Meeting of Stockholders and the term of office of the third class to expire at the 2001 Annual Meeting of Stockholders. At each Annual Meeting of Stockholders following such initial classification and election, Directors elected to succeed those Directors whose terms expire shall be elected for a term of office to expire at the third succeeding Annual Meeting of Stockholders after their election. Additional directorships resulting from an increase in the number of Directors shall be apportioned -4- 5 among the classes as equally as possible as determined by the Board of Directors. The number of Directors which shall constitute the whole Board shall be between five (5) and nine (9) Directors, and the exact number shall be fixed by resolution of the majority of the Board of Directors (notwithstanding the provisions of Article X, Section 1, paragraph (c)), with the number initially fixed at six (6). The number of Directors shall be determined by resolution of sixty-six and two-thirds percent (66-2/3%) of the Directors then in office or by sixty-six and two-thirds percent (66-2/3%) of the stockholders at the annual meeting of the stockholders, and each Director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. Vacancies. Vacancies may be filled only by a majority of the Directors then in office, though less than a quorum, or by a sole remaining Director. Each Director so chosen shall hold office until a successor is duly elected and shall qualify or until his earlier death, resignation or removal. If there are no Directors in office, then an election of Directors may be held in the manner provided by statute. If, at the time of filling any vacancy, the Directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such Directors, summarily order an election to be held to fill any such vacancies, or to replace the Directors chosen by the Directors then in office. Section 3. Powers. The business of the corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation, as amended from time to time, or by these Bylaws directed or required to be exercised or done by the stockholders. Section 4. Regular and Special Meetings. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of California. Section 5. Annual Meeting. The annual meeting of each newly elected Board of Directors shall be held without notice other than this Bylaw immediately after, and at the same place as, the annual meeting of stockholders. In the event the annual meeting of any newly elected Board of Directors shall not be held immediately after, and at the same place as, the annual meeting of stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors. Section 6. Notice of Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. Section 7. Notice of Special Meetings. Special meetings of the Board may be called by the Chief Executive Officer or President on no less than forty-eight (48) hours notice to each Director either personally, or by telephone, mail, telegram or facsimile; special meetings -5- 6 shall be called by the Chief Executive Officer, President or Secretary in like manner and on like notice on the written request of two Directors unless the Board consists of only one Director, in which case special meetings shall be called by the Chief Executive Officer, President or Secretary in like manner and on like notice on the written request of the sole Director. A written waiver of notice, signed by the person entitled thereto, whether before or after the time of the meeting stated therein, shall be deemed equivalent to notice. Section 8. Quorum. At all meetings of the Board a majority of the Directors shall constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation, as amended from time to time. If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation, as amended from time to time, or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 10. Meetings by Telephone Conference Calls. Unless otherwise restricted by the Certificate of Incorporation, as amended from time to time, or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 11. Committees. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the Directors of the corporation. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence of disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, as -6- 7 amended from time to time, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, unless the resolution or the Certificate of Incorporation, as amended from time to time, expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 12. Fees and Compensation. Unless otherwise restricted by the Certificate of Incorporation, as amended from time to time, or these Bylaws, the Board of Directors shall have the authority to fix the compensation of Directors. The Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as Director. No such payment shall preclude any Director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 13. Removal. Subject to any limitations imposed by law or the Certificate of Incorporation, as amended from time to time, the Board of Directors, or any individual Director, may be removed from office at any time only with cause by the affirmative vote of the holders of at least a majority of shares entitled to vote at an election of Directors. ARTICLE IV NOTICES Section 1. Notice. Whenever, under the provisions of the statutes or of the Certificate of Incorporation, as amended from time to time, or of these Bylaws, notice is required to be given to any Director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such Director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to Directors may also be given by telephone, telegram and facsimile. Section 2. Waiver of Notice. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation, as amended from time to time, or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. -7- 8 ARTICLE V OFFICERS Section 1. Enumeration. The officers of the corporation shall be chosen by the Board of Directors and shall be a Chief Executive Officer, a Chief Financial Officer and a Secretary. The Board of Directors may elect from among its members a Chairman of the Board and a Vice Chairman of the Board. The Board of Directors may also choose a President, one or more Vice Presidents and one or more Assistant Secretaries. Any number of offices may be held by the same person, unless the Certificate of Incorporation, as amended from time to time, or these Bylaws otherwise provide. The compensation of all officers and agents of the corporation shall be fixed by the Board of Directors, and no officer shall be prevented from receiving such compensation by virtue of his also being a Director of the corporation. Section 2. Election or Appointment. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a Chief Executive Officer, Chief Financial Officer and a Secretary and may choose a President, one or more Vice Presidents and one or more Assistant Secretaries. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 3. Tenure, Removal and Vacancies. The officers of the corporation shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. Section 4. Chairman of the Board. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. The Chairman of the Board shall have and may exercise such powers as are, from time to time, assigned by the Board and as may be provided by law. Section 5. Vice Chairman of the Board. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. The Vice Chairman of the Board shall have and may exercise such powers as are, from time to time, assigned by the Board and as may be provided by law. Section 6. Chief Executive Officer. The Chief Executive Officer of the corporation shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and the officers of the corporation. The Chief Executive Officer shall preside at all meetings of the stockholders and, in the absence or nonexistence of a Chairman or Vice Chairman of the Board at all meetings of the Board of Directors. The Chief -8- 9 Executive Officer shall have the general powers and duties of management usually vested in the Chief Executive Officer of a corporation, including general supervision, direction and control of the business and supervision of other officers of the corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. The Chief Executive Officer shall, without limitation, have the authority to execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation. Section 7. President. Subject to such supervisory powers as may be given by these Bylaws or the Board of Directors to the Chairman of the Board or the Chief Executive Officer, if there be such officers, the President shall have general supervision, direction and control of the business and supervision of other officers of the corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. In the event a Chief Executive Officer shall not be appointed, the President shall have the duties of such office. Section 8. Vice Presidents. The Vice President, or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors, shall, in the absence or disability of the President, act with all of the powers and be subject to all the restrictions of the President. The Vice Presidents shall also perform such other duties and have such other powers as the Board of Directors, the President or these Bylaws may, from time to time, prescribe. Section 9. Secretary. The Secretary shall attend all meetings of the Board of Directors, all meetings of the committees thereof and all meetings of the stockholders and record all the proceedings of the meetings in a book or books to be kept for that purpose. Under the Chief Executive Officer's or President's supervision, the Secretary shall give, or cause to be given, all notices required to be given by these Bylaws or by law; shall have such powers and perform such duties as the Board of Directors, the Chief Executive Officer, the President or these Bylaws may, from time to time, prescribe; and shall have custody of the seal of the corporation. The Secretary, or an Assistant Secretary, shall have authority to affix the seal of the corporation to any instrument requiring it and when so affixed, it may be attested by his or her signature or by the signature of such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his or her signature. Section 10. Assistant Secretary. The Assistant Secretary, if any, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, shall, in the absence, disability or refusal to act of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer, the President, the Secretary or these Bylaws may, from time to time, prescribe. -9- 10 Section 11. Chief Financial Officer. The Chief Financial Officer shall act as Treasurer and shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his or her transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, the Chief Financial Officer shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 12. Other Officers, Assistant Officers and Agents. Officers, assistant officers and agents, if any, other than those whose duties are provided for in these Bylaws, shall have such authority and perform such duties as may from time to time be prescribed by the Board of Directors, the Chief Executive Officer or the President. Section 13. Absence or Disability of Officers. In the case of the absence or disability of any officer of the corporation and of any person hereby authorized to act in such officer's place during such officer's absence or disability, the Board of Directors may delegate the powers and duties of such officer to any officer or to any Director, or to any other person who it may select. ARTICLE VI CERTIFICATES OF STOCK Section 1. Certificates of Stock. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman or Vice Chairman of the Board of Directors, or the President or a Vice President and the Chief Financial Officer or an Assistant Chief Financial Officer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. Certificates may be issued for partly paid shares and in such case upon the face or back of the certificates issued to represent any such partly paid shares, the total amount of the consideration to be paid therefor, and the amount paid thereon shall be specified. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, -10- 11 participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 2. Execution of Certificates. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 4. Transfer of Stock. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Section 5. Fixing Record Date. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholder or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. -11- 12 Section 6. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII INDEMNIFICATION Section 1. Indemnification of Directors and Executive Officers. The corporation shall indemnify its Directors and executive officers to the fullest extent not prohibited by the Delaware General Corporation Law; provided, however, that the corporation may limit the extent of such indemnification by individual contracts with its Directors and executive officers; and, provided, further, that the corporation shall not be required to indemnify any Director or executive officer in connection with any proceeding (or part thereof) initiated by such person or any proceeding by such person against the corporation or its Directors, officers, employees or other agents unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, and (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law. Section 2. Indemnification of Other Officers, Employees and Other Agents. The corporation shall have power to indemnify its other officers, employees and other agents as set forth in the Delaware General Corporation Law. Section 3. Good Faith. (a) For purposes of any determination under this Bylaw, a Director or officer shall be deemed to have acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, to have had no reasonable cause to believe that any conduct was unlawful, if such Director's or officer's action is based on information, opinions, reports and statements, including financial statements and other financial data, in each case prepared or presented by: (1) one or more officers or employees of the corporation whom the Director or executive officer believed to be reliable and competent in the matters presented; (2) counsel, independent accountants or other persons as to matters which the Director or executive officer believed to be within such person's professional competence; and -12- 13 (3) with respect to a Director, a committee of the Board upon which such Director does not serve, as to matters within such Committee's designated authority, which committee the Director believes to merit confidence; so long as, in each case, the Director or executive officer acts without knowledge that would cause such reliance to be unwarranted. (b) The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which was reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal proceeding, that the person had reasonable cause to believe that his or her consent was unlawful. (c) The provisions of this Section 3 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth by the Delaware General Corporation Law. Section 4. Expenses. The corporation shall advance, prior to the final disposition of any proceeding, promptly following request therefor, all expenses incurred by any Director or officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to Section 4 of this Bylaw, no advance shall be made by the corporation if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. Section 5. Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to Directors and officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the Director or officer. Any right to indemnification or advances granted by this Bylaw to a Director or officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his or her claim. The corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the -13- 14 amount claimed. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 6. Non-Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, as amended from time to time, Bylaws, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its Directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law. Section 7. Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a Director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 8. Insurance. To the fullest extent permitted by the Delaware General Corporation Law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw. Section 9. Amendments. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation. Section 10. Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each Director and officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. Section 11. Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply: (a) The term "proceeding" shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of the testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative. -14- 15 (b) The term "expenses" shall be broadly construed and shall include, without limitation, court costs, attorneys' fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding. (c) The term the "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its Directors, officers, and employees or agents, so that any person who is or was a Director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (d) References to a "Director," "officer," "employee," or "agent" of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as a Director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise. (e) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a Director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such Director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Bylaw. ARTICLE VIII LOANS TO OFFICERS Section 1. Loans to Officers. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the Corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this Bylaw shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. -15- 16 ARTICLE IX GENERAL PROVISIONS Section 1. Declaration of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, as amended from time to time, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation, as amended from time to time. Section 2. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purposes as the Directors shall think conducive to the interest of the corporation, and the Directors may modify or abolish any such reserve in the manner in which it was created. Section 3. Execution of Corporate Instruments. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 4. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. Section 5. Corporate Seal. The Board of Directors may adopt a corporate seal having inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE X AMENDMENTS Section 1. Amendments. (a) Except as otherwise set forth in Section 9 of Article VII of these Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of a majority of the voting power of all of the then-outstanding shares of capital stock of the corporation entitled to vote generally in the election of Directors (the "Voting Stock"). The Board of Directors shall also have the power, if such power is conferred upon the Board of Directors by the Certificate of Incorporation, as amended from time to time, to adopt, amend or repeal Bylaws by a vote of the majority of the Board of Directors unless a greater or different vote is required pursuant to the provisions of the Bylaws, the Certificate of Incorporation or any applicable provision of law. -16- 17 (b) Notwithstanding any other provisions of these Bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, the Certificate of Incorporation, as amended from time to time, or any Preferred Stock Designation (as the term is defined in the Certificate of Incorporation, as amended), the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this paragraph (b) or Section 2, Section 5 or Section 10 of Article II or Section 1, Section 2 or Section 13 of Article III of these Bylaws. (c) Notwithstanding any other provisions of these Bylaws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, the Certificate of Incorporation, as amended from time to time, or any Preferred Stock Designation (as the term is defined in the Certificate of Incorporation, as amended from time to time), the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the Continuing Directors (as defined below), shall be required to alter, amend or repeal this paragraph (c) or Section 2, Section 5 or Section 10 of Article II or Section 1, Section 2 or Section 13 of Article III of these Bylaws. For purposes of this paragraph, "Continuing Director" shall mean either (i) those Directors (the "Original Directors") who are members of the Board of Directors on the date these Restated Bylaws are adopted; or (ii) Directors who are nominated for election or are elected by (A) a majority of the six (6) Original Directors or (B) Directors, constituting a then majority of the Board of Directors, who were all either Original Directors or were nominated for election or elected by a then majority of the Board of Directors whose nomination or election can be traced directly through other Directors to the Original Directors. -17- 18 CERTIFICATE OF SECRETARY The undersigned, being the Secretary of CombiChem, Inc., a Delaware corporation, does hereby certify the foregoing to be the Bylaws of said Corporation, as adopted by the requisite vote or votes of the stockholders and Directors of the Corporation and which remain in full force and effect as of the date hereof. Executed at San Diego, California effective as of_______, 1997. __________________________________ Faye H. Russell, Secretary EX-5.1 6 EXHIBIT 5.1 1 EXHIBIT 5.1 October 15, 1997 CombiChem, Inc. 9050 Camino Santa Fe San Diego, CA 92121 Re: 2,587,500 Shares of Common Stock of CombiChem, Inc. Ladies and Gentlemen: We have acted as counsel to CombiChem, Inc., a Delaware corporation (the "Company"), in connection with the proposed issuance and sale by the Company of up to 2,587,500 shares of the Company's Common Stock (the "Shares"), pursuant to the Company's Registration Statement on Form S-1 filed on October 15, 1997 (the "Registration Statement"). This opinion is being furnished in accordance with the requirements of Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K under the Securites Act of 1933, as amended (the "Act"). In connection with this opinion, we have examined the Registration Statement and related Prospectus, the Company's Certificate of Incorporation, as amended through the date hereof, the Amended and Restated Certificate of Incorporation, which the Registration Statement contemplates will become effective immediately prior to the issuance and sale of the Shares, the Company's bylaws, as amended through the date hereof, the restated bylaws which the Registration Statement contemplates will become effective immediately prior to the issuance and sale of the Shares and the originals, or copies certified to our satisfaction, of such records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below (the "Documents"). We are relying (without any independent investigation thereof) upon the truth and accuracy of the statements set forth in such Documents. On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Shares have been duly authorized, and if, as and when issued in accordance with the Registration Statement and Prospectus (as amended and supplemented through the date of issuance) will be validly issued, fully paid and nonassessable. 2 CombiChem, Inc. October 15, 1997 Page 2 We consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the reference to this firm under the caption "Legal Matters" in the Prospectus which is part of the Registration Statement. In giving this consent, we do not thereby admit that we are within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. This opinion is expressed as of the date hereof and we disclaim any undertaking to advise you of any subsequent changes in applicable law or in the facts stated or assumed herein which may alter, affect or modify the opinion expressed herein. Our opinion is expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise, as to any other matters relating to the Company or the Shares. Very truly yours, /s/ BROBECK, PHLEGER & HARRISON LLP BROBECK, PHLEGER & HARRISON LLP EX-10.1 7 EXHIBIT 10.1 1 EXHIBIT 10.1 PREFERRED STOCK PURCHASE AGREEMENT (600,000 Shares of Series A Preferred Stock) By and Between ChemCom Pharmaceuticals, Inc., a California corporation and Forward Ventures II, L.P., a Delaware limited partnership 2 TABLE OF CONTENTS
Page ---- 1. Sale of Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Representations and Warranties of the Company . . . . . . . . . . . . . 1 (a) Organization and Standing; Articles and Bylaws . . . . . . . . . 1 (b) Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . 2 (c) Authorization . . . . . . . . . . . . . . . . . . . . . . . . . 2 (d) Validity of the Shares . . . . . . . . . . . . . . . . . . . . . 2 4. Representations and Warranties of the Purchaser . . . . . . . . . . . . 2 (a) Authorization . . . . . . . . . . . . . . . . . . . . . . . . . 2 (b) Investment Intent . . . . . . . . . . . . . . . . . . . . . . . 2 (c) Reliance Upon the Purchaser's Representations . . . . . . . . . 3 (d) Restricted Securities . . . . . . . . . . . . . . . . . . . . . 3 (e) Receipt of Information . . . . . . . . . . . . . . . . . . . . . 3 (f) Investment Experience . . . . . . . . . . . . . . . . . . . . . 3 (g) Limitations on Disposition . . . . . . . . . . . . . . . . . . . 4 (h) Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5. Market Standoff Agreement . . . . . . . . . . . . . . . . . . . . . . . 4 6. Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . 5 (a) Delivery of Financial Statements . . . . . . . . . . . . . . . . 5 (b) Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (c) Termination of Covenants . . . . . . . . . . . . . . . . . . . . 5 (d) Stock Registration . . . . . . . . . . . . . . . . . . . . . . . 5 7. The Purchaser's Right to Purchase Additional Shares . . . . . . . . . . 5 8. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (a) Further Instruments and Actions . . . . . . . . . . . . . . . . 8 (b) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (c) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 8 (d) Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 8 (e) Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . 8 (f) Counsel to the Company . . . . . . . . . . . . . . . . . . . . . 8
-i- 3 PREFERRED STOCK PURCHASE AGREEMENT (600,000 Shares of Series A Preferred Stock) THIS SERIES A PREFERRED STOCK PURCHASE AGREEMENT ("Agreement") is made as of August 26, 1994, by and between ChemCom Pharmaceuticals, Inc., a California corporation (the "Company"), and Forward Ventures II, L.P., a Delaware limited partnership (the "Purchaser," which term includes successors and assigns). WHEREAS, the Purchaser desires to make a cash payment to the Company as consideration for obtaining a fixed number of preferred shares of the Company's capital stock; and WHEREAS, the Company desires to sell a fixed number of preferred shares of the Company's capital stock to the Purchaser; and WHEREAS, certain defined terms used in this Agreement are referenced in Section 8 hereof. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchaser hereby agree as follows: 1. Sale of Preferred Shares. Subject to the terms and conditions of this Agreement, the Purchaser hereby purchases, and the Company hereby sells to the Purchaser, six hundred thousand (600,000) shares of the Company's Series A Preferred Stock (the "Shares") at a price of fifty cents ($0.50) per share, for an aggregate sum of three hundred thousand dollars ($300,000.00) (the "Purchase Price"). 2. Closing. The purchase and sale of the Shares shall take place at the offices of the Company, simultaneous with the execution of this Agreement, or at such other place and time as the Company and the Purchaser shall mutually agree, either orally or in writing (the "Closing"). At the Closing, the Purchaser shall pay the Purchase Price to the Company by check, wire transfer, cancellation of indebtedness, or such other form of payment as shall be mutually agreed upon by the Purchaser and the Company. At the Closing, subject to the terms and conditions hereof, the Company shall deliver to the Purchaser a certificate, registered in the name the Purchaser designates by notice to the Company, representing the Shares purchased by the Purchaser, dated the date of the Closing. 3. Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchaser as follows: (a) Organization and Standing; Articles and Bylaws. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as presently conducted. The Company has furnished the Purchaser or its special counsel with copies of its Articles of Incorporation and its Bylaws. Said -1- 4 copies are true, correct, and complete and contain all amendments through the date of the Closing. (b) Capitalization. The authorized capital stock of the Company, immediately prior to the Closing, will consist of (a) 30,000,000 shares of no par value Common Stock, 1,825,000 shares of which are issued and outstanding or committed for issuance on the date hereof; and (b) 10,000,000 shares of no par value Preferred Stock, of which: (i) 1,000,000 shares have been designated Series A Preferred Stock, 600,000 shares of which are being sold and issued to the Purchaser pursuant to this Agreement; and (ii) 1,500,000 shares have been designated Series Z Preferred Stock, 600,000 shares of which are issued and outstanding or reserved for issuance on the date hereof. All issued and outstanding shares of the Company's capital stock have been duly authorized and validly issued and are fully paid and nonassessable. (c) Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all the Company's obligations under this Agreement and the Stock Registration Rights Agreement, and for the authorization, issuance, sale and delivery of the Shares and the Common Shares issuable upon conversion thereof ("Underlying Common Shares") has been taken prior to the Closing. This Agreement, when executed and delivered by the Company and the Purchasers, and the Stock Registration Rights Agreement shall constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors. (d) Validity of the Shares. The Shares and the Underlying Common Shares will be validly issued, fully paid and nonassessable. 4. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: (a) Authorization. The Purchaser has the requisite legal power and authority to enter into this Agreement and that this Agreement when executed shall constitute a valid and legally binding obligation of the Purchaser. (b) Investment Intent. This Agreement is made with the Purchaser in reliance upon its representation to the Company, which by its execution hereof it confirms, that the Shares have been acquired with its own funds for investment for an indefinite period for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that it has no present intention of selling, granting participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that it does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations, to such person or to any third person, with respect to any of the Shares. -2- 5 (c) Reliance Upon the Purchaser's Representations. The Purchaser understands (i) that the Shares are not, and the Underlying Common Shares acquired on conversion thereof at the time of issuance may not be, registered under the Securities Act or qualified under the California Corporate Securities Law of 1968, as amended (the "Law"), and (ii) that the Shares are being issued to the Purchaser on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof and/or Regulation D promulgated thereunder and the exemption from qualification provided by Section 25102(f) of the Law, and (iii) that the Company's reliance on such exemptions is predicated on the Purchaser's representations set forth herein. The Purchaser realizes that the basis for the exemptions may not be present if, notwithstanding such representations, the Purchaser has in mind merely acquiring the Shares for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. The Purchaser does not have any such intention. These exemptions only exempt the issuance of the Shares to the Purchaser and not any sale or other disposition of the Shares or any interest therein by the Purchaser. (d) Restricted Securities. The Purchaser hereby confirms that the Purchaser has been informed that the Shares are restricted securities under the Securities Act and may not be resold or transferred unless the Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. In addition, the Purchaser understands that any resale or transfer must comply with applicable state securities laws. Accordingly, the Purchaser hereby acknowledges that the Purchaser is prepared to hold the Shares for an indefinite period, and that the Purchaser is familiar with the provisions of Rule 144 of the Securities and Exchange Commission issued under the Securities Act, and is aware that Rule 144 is not presently available to exempt the sale of the Shares from the registration requirements of the Securities Act. (e) Receipt of Information. The Purchaser acknowledges that it has received all the information it considers necessary or appropriate for deciding whether to purchase the Shares. The Purchaser further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and the business, properties, prospects, and financial condition of the Company, and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy or any information furnished to it or to which it had access. (f) Investment Experience. In connection with the investment representations made herein, the Purchaser represents that it is an "accredited investor' as defined in Section 501 of Regulation D, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, has the ability to bear the economic risks of its investment and has been furnished with and has had access to all of the information it considers necessary or appropriate to evaluate the risks and merits of an investment in the Shares, and has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. -3- 6 (g) Limitations on Disposition. The purchaser agrees that in no event will it make a disposition of any of the Shares, unless and until (a) it shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (b) it shall have furnished the Company with an opinion of counsel satisfactory to the Company to the effect that (i) such disposition will not require registration of such Shares under the Securities Act, or (ii) that appropriate action necessary for compliance with the Securities Act has been taken, or (c) the Company shall have waived, expressly and in writing, its rights under clauses (a) and (b) of this subparagraph. The opinion shall also indicate that the disposition is exempt from, in compliance with, or qualified under all applicable state securities laws. (h) Legends. All certificates representing any shares of Shares of the Company subject to the provisions of this Agreement shall have endorsed thereon customary legends regarding: (1) Restrictions on transfer under the Federal Securities Act of 1933. (2) Market Stand-Off Agreements pursuant to Section 5 hereof. (3) Any legend required by state securities laws. 5. Market Stand-Off Agreement. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, the Purchaser shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to the Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for one hundred eighty (180) days from and after the effective date of such registration statement or such longer time as may be required by the Company's underwriters. The limitations of this Section 5 shall remain in effect for the two-year period immediately following the effective date of the Company's initial public offering and shall thereafter terminate and cease to have any force or effect. (b) In the event any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding common shares is effected without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this Section 5 to the same extent the Shares are at such time covered by such provisions. (c) In order to enforce the limitations of this Section 5, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. -4- 7 (d) The obligations in this Section 5 shall not apply to a registration relating solely to employee benefit plan shares or to a Rule 145 transaction registered on Form S-4. 6. Covenants of the Company. (a) Delivery of Financial Statements. The Company shall deliver to the Purchaser: (1) as soon as practicable after the end of each fiscal year of the Company, audited financial statements for such fiscal year, prepared in accordance with generally accepted accounting principles ("GAAP") together with an annual report of the Company; (2) as soon as practicable after the end of each of the first three (3) quarters of each fiscal year of the Company, unaudited financial statements for such fiscal quarter; (3) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as the Purchaser or any assignee of the Purchaser may from time to time reasonably request, provided, however, that the Company shall not be obligated under provision of this Agreement to provide information which it deems in good faith to be a trade secret or similar confidential information. (b) Inspection. The Company shall permit the Purchaser, at the Purchaser's expense, to visit and inspect the Company's properties, to examine its books of account and records, and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Purchaser; provided, however, that the Company shall not be obligated pursuant to this section to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. (c) Termination of Covenants. The covenants set forth in this Section 6 shall terminate and be of no further force or effect upon the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Securities Act in connection with the firm commitment underwritten offering of its securities to the general public. (d) Stock Registration. Simultaneous with entering into this Agreement, the Company and the Purchaser are also entering into a Stock Registration Rights Agreement which grants certain rights to the Purchaser to have the Underlying Common Shares registered. 7. The Purchaser's Right to Purchase Additional Shares. (a) Subject to the terms and conditions specified in this Section 7, the Company hereby grants to the Purchaser a right to purchase a pro rata share of New Securities (as hereinafter defined) equal to the ratio of (i) the number of Common Shares owned by the Purchaser immediately prior to the issuance of New Securities, assuming full conversion into Common Shares of all convertible securities held by the Purchaser, and (ii) to the total number -5- 8 of Common Shares outstanding immediately prior to the issuance of New Securities, assuming full conversion into Common Shares of all convertible securities outstanding prior to the issuance of the New Securities (the "Pro Rata Share"). For purposes of this Section 7, a Purchaser includes any general partners and affiliates of a Purchaser. A Purchaser shall be entitled to apportion the right to purchase additional Shares hereby granted it among itself and its partners and affiliates in such proportions as it deems appropriate. Not later than thirty calendar days after the Company sells any shares solely for cash (excluding however securities described in Section 7(e) hereof), including any common shares, preferred shares, or securities convertible into any shares ("New Securities"), the Company shall make an offering of some of the New Securities to the Purchaser in accordance with the following provisions: (b) The Company shall deliver a notice by certified mail ("Notice') to the Purchaser stating (i) the number of New Securities sold and available for sale, (ii) the number of such New Securities the Purchaser is entitled to purchase, as the Purchaser's Pro Rata Share, and (iii) the price and terms upon which the New Securities were sold or are to be sold. (c) Within 20 calendar days after the Company provides such Notice, each Purchaser may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to the Purchaser's Pro Rata Share of the New Securities. (d) If any party elects not to obtain its Pro Rata Share of the New Securities, the Company may, during the 90-day period following the expiration of the period provided in subsection 7(c) hereof, assign the right to purchase the remaining unsubscribed portion of such New Securities to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice without offering any of such un-subscribed New Securities to the Purchaser. If the Company does not enter into an agreement for the sale of the New Securities within such period, or if such agreement is not consummated within such 90-day period, the Company's right to assign the right to purchase the New Securities provided hereunder shall be deemed to be revoked and such New Securities shall not be offered to any third party unless first re-offered to the Purchaser in accordance herewith. (e) Notwithstanding any other provision to the contrary, the right to purchase New Securities contained in this Section 7 shall not be applicable (i) to the issuance or sale of common shares (or options thereof) to employees, officers, directors, or consultants for the primary purpose of soliciting or retaining their service which are approved by the Board of Directors; (ii) to or after the consummation of a bona fide, firmly underwritten public offering of shares of common stock, registered under the Securities Act pursuant to a registration statement; (iii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities; (iv) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of shares or otherwise; (v) to any borrowings, direct or indirect, from any lender or other persons by the Company, whether or not presently authorized, including any type or loan or payment evidenced by any type of debt instrument; (vi) to securities issued to vendors, lessors, landlords, customers or to other persons in similar commercial situations with the Company if -6- 9 such issuance is approved by the Board of Directors; (vii) to securities issued in connection with obtaining lease financing, whether issued to a lessor, guarantor or other person; (viii) to securities issued in connection with any stock split, stock dividend or recapitalization of the Company; and (ix) to securities issued to persons or entities with which the Company has business relationships provided that such issuances are for other than primarily equity financing purposes. (f) The right to purchase New Securities set forth in this Section 7 may not be assigned or transferred except that (i) such right is assignable by the Purchaser to any wholly owned subsidiary or parent of, or to any corporation or entity that is, within the meaning of the Act, controlling, controlled by or under common control with, any such Purchaser, and (ii) such right is assignable between and among any of the Purchasers of the Company's preferred stock. 8. Defined Terms. When used herein the following defined terms shall have the respective definitions as set forth below: Accredited Investor shall have the meaning set forth in Section 4(f). Agreementshall have the meaning set forth in the first paragraph. Closingshall have the meaning set forth in Section 2. Companyshall have the meaning set forth in first paragraph. GAAPshall have the meaning set forth in Section 6(a)(1). Law shall have the meaning set forth in Section 4(c). New Securities shall have the meaning set forth in Section 7(a). Notice shall have the meaning set forth in Section 7(b). Pro Rata Shareshall have the meaning set forth in Section 7(a). Purchase Price shall have the meaning set forth in Section 1. Purchasershall have the meaning set forth in the first paragraph. Shares shall have the meaning set forth in Section 1. Underlying Common Sharesshall have the meaning set forth in Section 3(c). -7- 10 9. Miscellaneous. (a) Further Instruments and Actions. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (b) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at its address hereinafter shown below its signature or at such other address as such party may designate by advance written notice to the other party hereto. (c) Governing Law. This Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Agreement shall be determined in accordance with the laws of the State of California. (d) Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon the Purchaser, its successors and assigns. (e) Amendments and Waivers. This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, written or oral. This Agreement may only be amended with the written consent of the parties hereto, or the successors or assigns of the foregoing, and no oral waiver or amendment shall be effective under any circumstances whatsoever. (f) Counsel to the Company. The Purchaser acknowledges and agrees that this Agreement has been prepared by Gray Cary Ware & Freidenrich, counsel to the Company, which counsel has represented the interests of the Company and not those of the Purchaser with respect to the transactions documented by this Agreement. The Purchaser further acknowledges and agrees that the Purchaser has been provided the opportunity and encouraged to consult with counsel of the Purchaser's own choosing with respect to this Agreement. The Purchaser certifies and acknowledges that the Purchaser has carefully read all of the provisions of this Agreement and that the Purchaser fully understands and shall fully and faithfully comply with such provisions. -8- 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMPANY: ChemCom Pharmaceuticals, Inc., a California corporation By: /s/ Standish Fleming ----------------------------------- Standish Fleming, President Address: 10975 Torreyana Road Suite 250 San Diego, California 92121 PURCHASER: Forward Ventures II, L.P., a Delaware limited partnership By: Forward 11 Associates, L.P., a Delaware limited partnership its General Partner By: /s/ Standish Fleming ------------------------------ Standish Fleming, a General Partner Address: 10975 Torreyana Road Suite 250 San Diego, California 92121 [Signature Page to Series A Preferred Stock Purchase Agreement] -9- EX-10.2 8 EXHIBIT 10.2 1 EXHIBIT 10.2 PREFERRED STOCK PURCHASE AGREEMENT (200,000 Shares of Series Z Preferred Stock) By and Between CombiChem, Inc., a California corporation and Dr. Sydney Brenner 2 TABLE OF CONTENTS
Page ---- 1. Sale of Preferred Stock..................................................... 1 2. Closing..................................................................... 1 3. Representations and Warranties by the Company............................... 2 (a) Organization and Standing; Articles and Bylaws....................... 2 (b) Capitalization....................................................... 2 (c) Authorization........................................................ 2 (d) Validity of the Shares............................................... 2 4. Representations and Warranties by the Purchaser............................. 2 (a) Authorization........................................................ 2 (b) Investment Intent.................................................... 3 (c) Reliance Upon the Purchaser's Representations........................ 3 (d) Restricted Securities................................................ 3 (e) Receipt of Information............................................... 3 (f) Investment Experience................................................ 4 (g) Limitations on Disposition........................................... 4 (h) Public Sale.......................................................... 4 (i) Legends.............................................................. 4 5. Company Right of First Refusal.............................................. 5 6. Market Standoff Agreement................................................... 5 7. Covenants of the Company.................................................... 5 (a) Delivery of Financial Statements..................................... 5 (b) Termination of Covenants............................................. 6 (c) Stock Registration................................................... 6 8. Defined Terms............................................................... 6 9. Miscellaneous............................................................... 6 (a) Further Instruments and Actions...................................... 6 (b) Notices.............................................................. 7 (c) Governing Law........................................................ 7 (d) Successors and Assigns............................................... 7 (e) Amendments and Waivers............................................... 7 (f) Counsel to the Company............................................... 7
3 EXHIBITS Exhibit A Technology List Exhibit B Patent Assignment Agreement Exhibit C Consent of Spouse 4 PREFERRED STOCK PURCHASE AGREEMENT (200,000 Shares of Series Z Preferred Stock) THIS SERIES Z PREFERRED STOCK PURCHASE AGREEMENT ("Agreement") is made as of October 12, 1994, by and between CombiChem, Inc., a California corporation (the "Company"), and Dr. Sydney Brenner (the "Purchaser," which term includes Purchaser's heirs, executors, guardians, successors and assigns). WHEREAS, the Purchaser is the owner of certain intellectual property rights and other rights to technology as set forth on Exhibit A (the "Technology"); WHEREAS, the Purchaser desires to transfer all of Purchaser's rights, title and interest to the Technology to the Company as consideration for obtaining a fixed number of shares of the Company's preferred stock; and WHEREAS, the Company desires to obtain all of the Purchaser's right, title and interest to the Technology and the Company is willing to sell a fixed number of shares of the Company's preferred stock to Purchaser to obtain such rights and stock. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchaser hereby agree as follows: 1. Sale of Preferred Stock. Subject to the terms and conditions of this Agreement, the Purchaser hereby purchases, and the Company hereby sells to the Purchaser, 200,000 shares of the Company's Series Z Preferred Stock (the "Shares") at a price per share of fifty cents ($0.50). As consideration for the Shares, the Purchaser hereby transfers and assigns to the Company all of the Purchaser's right, title and interest in and to the Technology. The Parties agree that the Technology has an aggregate value of one hundred thousand dollars ($100,000). The Purchaser also agrees to execute any additional agreements, instruments or documents which the Company, in its absolute discretion, deems necessary or appropriate to transfer the Technology to the Company. 2. Closing. The purchase and sale of the Shares shall take place at the offices of the Company, simultaneous with the execution of this Agreement, or at such other place and time as the Company and the Purchaser shall mutually agree, either orally or in writing (the "Closing"). At the Closing, Purchaser shall deliver to the Company such agreements, instruments and documents as may be necessary to effect the transfer of the Technology to the Company, including, but not limited to, six (6) duly executed patent assignment agreements substantially in the form attached hereto as Exhibit B (individually a "Patent Assignment Agreement"). Promptly following the Closing, Purchaser shall deliver to the Company a duly executed Consent of Spouse agreement in the form attached hereto as Exhibit C. Within ten (10) business days following the Closing, after the Purchaser has delivered the Consent of Spouse agreement, the Company shall deliver to the Purchaser a certificate, registered in the name the Purchaser designates by notice -1- 5 to the Company, representing the Shares to be purchased by the Purchaser from the Company, dated the date of the Closing. 3. Representations and Warranties by the Company. The Company hereby represents and warrants to the Purchaser as follows: (a) Organization and Standing; Articles and Bylaws. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as presently conducted. The Company has furnished the Purchaser or its special counsel with copies of its Articles of Incorporation and its Bylaws. Said copies are true, correct, and complete and contain all amendments through the date of the Closing. (b) Capitalization. The authorized capital stock of the Company, immediately prior to the Closing, will consist of (a) 30,000,000 shares of no par value Common Stock, 1,825,000 shares of which are issued and outstanding or committed for issuance on the date hereof; and (b) 10,000,000 shares of no par value Preferred Stock, of which: (i) 1,000,000 shares have been designated Series A Preferred Stock, 1,000,000 shares of which are issued and outstanding or committed for issuance on the date hereof; and (ii) 1,500,000 shares have been designated Series Z Preferred Stock, 200,000 shares of which are being sold and issued to Purchaser pursuant to this Agreement. All issued and outstanding shares of the Company's capital stock have been duly authorized and validly issued and are fully paid and nonassessable. (c) Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all the Company's obligations under this Agreement and the Stock Registration Rights Agreement, and for the authorization, issuance, sale and delivery of the Shares and the Common Shares issuable upon conversion thereof ("Underlying Common Shares") has been taken prior to the Closing. This Agreement, when executed and delivered by the Company and the Purchasers, and the Stock Registration Rights Agreement shall constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors. (d) Validity of the Shares. The Shares and the Underlying Common Shares will be validly issued, fully paid and nonassessable. 4. Representations and Warranties by the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: (a) Authorization. The Purchaser has the requisite legal power and -2- 6 authority to enter into this Agreement and that this Agreement when executed shall constitute a valid and legally binding obligation of the Purchaser. (b) Investment Intent. This Agreement is made with the Purchaser in reliance upon Purchaser's representation to the Company, which by Purchaser's execution hereof Purchaser confirms, that the Shares have been acquired with Purchaser's own property (transfer of the Technology) for investment for an indefinite period for Purchaser's own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that Purchaser has no present intention of selling, granting participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that Purchaser does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations, to such person or to any third person, with respect to any of the Shares. (c) Reliance Upon the Purchaser's Representations. The Purchaser understands (i) that the Shares are not, and the Underlying Common Shares acquired on conversion thereof at the time of issuance may not be, registered under the Securities Act or qualified under the California Corporate Securities Law of 1968, as amended (the "LAW"), and (ii) that the Shares are being issued to the Purchaser on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof and/or Regulation D promulgated thereunder and the exemption from qualification provided by Section 25102(f) of the Law, and (iii) that the Company's reliance on such exemptions is predicated on the Purchaser's representations set forth herein. The Purchaser realizes that the basis for the exemptions may not be present if, notwithstanding such representations, the Purchaser has in mind merely acquiring the Shares for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. The Purchaser does not have any such intention. These exemptions only exempt the issuance of the Shares to the Purchaser and not any sale or other disposition of the Shares or any interest therein by the Purchaser. (d) Restricted Securities. The Purchaser hereby confirms that the Purchaser has been informed that the Shares are restricted securities under the Securities Act and may not be resold or transferred unless the Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. In addition, the Purchaser understands that any resale or transfer must comply with applicable state securities laws. Accordingly, the Purchaser hereby acknowledges that the Purchaser is prepared to hold the Shares for an indefinite period, and that the Purchaser is familiar with the provisions of Rule 144 of the Securities and Exchange Commission issued under the Securities Act, and is aware that Rule 144 is not presently available to exempt the sale of the Shares from the registration requirements of the Securities Act. (e) Receipt of Information. The Purchaser acknowledges that Purchaser has received all the information Purchaser considers necessary or appropriate for deciding whether to purchase the Shares. The Purchaser further represents that Purchaser has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of -3- 7 the offering of the Shares and the business, properties, prospects, and financial condition of the Company, and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy or any information furnished to Purchaser or to which Purchaser had access. (f) Investment Experience. In connection with the investment representations made herein the Purchaser represents that Purchaser has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of Purchaser's investment, has the ability to bear the economic risks of Purchaser's investment and has been furnished with and has had access to all of the information Purchaser considers necessary or appropriate to evaluate the risks and merits of an investment in the Shares, and has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. (g) Limitations on Disposition. The Purchaser agrees that in no event will Purchaser make a disposition of any of the Shares, unless and until (a) Purchaser shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (b) Purchaser shall have furnished the Company with an opinion of counsel satisfactory to the Company to the effect that (i) such disposition will not require registration of such Shares under the Securities Act, or (ii) that appropriate action necessary for compliance with the Securities Act has been taken, or (c) the Company shall have waived, expressly and in writing, its rights under clauses (a) and (b) of this subparagraph. The opinion shall also indicate that the disposition is exempt from, in compliance with, or qualified under all applicable state securities laws. (h) Public Sale. The Purchaser agrees not to make, without the prior written consent of the Company, any public offering or sale of the Shares, or of the Underlying Common Shares, although permitted to do so pursuant to Rule 144(k) promulgated under the Securities Act, until the earlier of (i) six months after the date on which the Company effects its initial registered public offering pursuant to the Securities Act, or (ii) five years after the date of the Closing of this Agreement. (i) Legends. All certificates representing any shares of Shares of the Company subject to the provisions of this Agreement shall have endorsed thereon customary legends regarding: (1) Restrictions on transfer under the Federal Securities Act of 1933. (2) Market Standoff Agreement pursuant to Section 6 hereof. (3) Rights of First refusal upon any resale of the Shares, pursuant to Section 5 hereof. -4- 8 (4) Any legend required by state securities laws. 5. Company Right of First Refusal. Before any shares of the Company registered in the name of the Purchaser may be sold or transferred (including transfer by operation of law or other involuntary transfer, but excluding transfers by gift, will or intestate succession of the Purchaser) such shares shall first be offered to the Company in the manner and in accordance with the procedures and terms as set forth in Article VI of the Company's Bylaws. This right of first refusal shall terminate upon the closing of the Company's initial public offering of the common shares of the Company. 6. Market Standoff Agreement. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, the Purchaser shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to the Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for one hundred eighty (180) days from and after the effective date of such registration statement or such longer time as may be required by the Company's underwriters. The limitations of this Section 6 shall remain in effect for the two-year period immediately following the effective date of the Company's initial public offering and shall thereafter terminate and cease to have any force or effect. (b) In the event any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding common shares is effected without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this Section 6 to the same extent the Shares are at such time covered by such provisions. (c) In order to enforce the limitations of this Section 6, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. (d) The obligations in this Section 6 shall not apply to a registration relating solely to employee benefit plan shares or to a Rule 145 transaction registered on Form S-4. 7. Covenants of the Company. (a) Delivery of Financial Statements. The Company shall deliver to the Purchaser: (1) as soon as practicable after the end of each fiscal year of the -5- 9 Company, audited financial statements for such fiscal year, prepared in accordance with generally accepted accounting principles ("GAAP") together with an annual report of the Company; and (2) As soon as practicable after the end of each of the first three (3) quarters of each fiscal year of the Company, unaudited financial statements for such fiscal quarter. (b) Termination of Covenants. The covenants set forth above in this Section 7 shall terminate and be of no further force or effect upon the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Act in connection with the firm commitment underwritten offering of its securities to the general public. (c) Stock Registration. Simultaneous with entering into this Agreement, the Company and the Purchaser are also entering into a Stock Registration Rights Agreement which grants certain rights to the Purchaser to have the Underlying Common Shares registered. 8. Defined Terms. When used herein the following defined terms shall have the respective definitions as set forth below: Agreement shall have the meaning set forth in the first paragraph. Closing shall have the meaning set forth in Section 2. Company shall have the meaning set forth in the first paragraph. GAAP shall have the meaning set forth in Section 7(a)(1). Law shall have the meaning set forth in Section 4(c). The Purchaser shall have the meaning set forth in the first paragraph. Shares shall have the meaning set forth in Section 1. Technology shall have the meaning set forth in the second paragraph. Underlying Common Shares shall have the meaning set forth in Section 3(c). 9. Miscellaneous. (a) Further Instruments and Actions. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. -6- 10 (b) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at Purchaser's address hereinafter shown below Purchaser's signature or at such other address as such party may designate by advance written notice to the other party hereto. (c) Governing Law. This Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Agreement shall be determined in accordance with the laws of the State of California. (d) Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon the Purchaser, Purchaser's heirs, executors, administrators, guardians, successors and assigns. (e) Amendments and Waivers. This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, written or oral. This Agreement may only be amended with the written consent of the parties hereto, or the successors or assigns of the foregoing, and no oral waiver or amendment shall be effective under any circumstances whatsoever. (f) Counsel to the Company. The Purchaser acknowledges and agrees that this Agreement has been prepared by Gray Cary Ware & Freidenrich, counsel to the Company, which counsel has represented the interests of the Company and not those of the Purchaser with respect to the transactions documented by this Agreement. The Purchaser further acknowledges and agrees that the Purchaser has been provided the opportunity and encouraged to consult with counsel of the Purchaser's own choosing with respect to this Agreement. The Purchaser certifies and acknowledges that the Purchaser has carefully read all of the provisions of this Agreement and that the Purchaser fully understands and shall fully and faithfully comply with such provisions. -7- 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMPANY: CombiChem, Inc., a California corporation By: /s/ STANDISH FLEMING ---------------------------------------- Standish Fleming, President Address: 10975 Torreyana Road Suite 230 San Diego, California 92121 THE PURCHASER: /s/ SYDNEY BRENNER -------------------------------------------- Dr. Sydney Brenner Address: 17B St. Edwards Passage Cambridge CB2 3P5 England [Signature Page to Series Z Preferred Stock Purchase Agreement] -8- 12 EXHIBIT A LIST OF TECHNOLOGY See attached. -9- 13 EXHIBIT A "PATENTS" 1. Sydney Brenner, "Combinatorial libraries and methods for their use," US Patent Application Serial No. 07/978,646, filed November 19, 1992. 2. Sydney Brenner, "Combinatorial libraries and methods for their use," US Patent Application Serial No. 08/168,966, filed December 15, 1993 (continuation in part of 07/978,646). 3. Sydney Brenner, "Combinatorial libraries and methods for their use," US Patent Application Serial No. 08/281,195, filed July 26, 1994 (continuation in part of 08/168,966). 4. Sydney Brenner, "Multidimensional conduit combinatorial library synthesis device," US Patent Application Serial No. 08/281,194, filed July 26, 1994. -10- 14 EXHIBIT B PATENT ASSIGNMENT AGREEMENT See attached. -11- 15 ASSIGNMENT WHEREAS, I, SYDNEY BRENNER, hereinafter referred to as "ASSIGNOR," have invented certain new and useful improvements as described and set forth in the below-identified application for United States Letters Patent: Title of Invention: "Combinatorial libraries and methods for their use." Date of Execution: Filing Date: 11/19/92 Serial No.: 07/978,646. WHEREAS, COMBICHEM, INC., hereinafter referred to as "ASSIGNEE", is desirous of acquiring the entire right, title and interest in the said invention and application and in any Letters Patent which may be granted on the same; NOW, THEREFORE, TO ALL WHOM IT MAY CONCERN: Be it known that, for One Dollar ($1.00) and other good and valuable considerations, receipt of which is hereby acknowledged by Assignor, Assignor has sold, assigned and transferred, and by these presents does sell, assign and transfer unto the said Assignee, and Assignee's successors and assigns, all right, title and interest in and to the said invention, said application for United States Letters Patent, and any Letters Patent which may hereafter be granted on the same in the United States and all countries throughout the world including any divisions, renewals, continuations in whole or in part, substitutions, conversions, reissues, prolongations or extensions thereof, said interest to be held and enjoyed by said Assignee as fully and exclusively as it would have been held and enjoyed by said Assignor had this assignment and transfer not been made, to the full end and term of any such Letters Patent. Assignor further agrees that he will, without charge to said Assignee, but at Assignee's expense, cooperate with Assignee in the prosecution of said application and/or applications, execute, verify, acknowledge and deliver all such further papers, including applications for Letters Patent and for the reissue thereof, and instruments of assignment and transfer thereof, and will perform such other acts as Assignee lawfully may request, to obtain or maintain Letters Patent for said invention and improvement in any and all countries, and to vest title thereto in said Assignee, or Assignee's successors and assigns. IN TESTIMONY WHEREOF, Assignor has hereunto signed his name to this assignment on the date indicated below. Dated: October 12, 1994 _____________________________________ SYDNEY BRENNER STATE OF CALIFORNIA ) ) ss COUNTY OF SAN DIEGO ) On October 12, 1994, before me, the undersigned Notary Public, personally appeared SYDNEY BRENNER, personally known to me or proved to me on the basis of satisfactory evidence to be the person whose name is subscribed to the within instrument, and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. [SEAL] -12- 16 CONSENT OF SPOUSE I, May Woolf Brenner, spouse of Dr. Sydney Brenner, have read and approve the foregoing Series Z Stock Purchase Agreement dated October 12, 1994 (the "Agreement"). I hereby appoint my spouse as my attorney-in-fact in respect to the transfer or exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement, the Technology transferred thereto as consideration for the Shares or in the Shares issued pursuant thereto under the community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: October 20, 1994 /s/ MAY WOOLF BRENNER ---------------------------------- May Woolf Brenner -13- EX-10.3 9 EXHIBIT 10.3 1 EXHIBIT 10.3 STOCK PURCHASE AGREEMENT PREFERRED AND COMMON (400,000 Shares of Series A Preferred Stock and 100,000 Shares of Common Stock) By and Between COMBICHEM, INC., a California corporation and SEQUOIA CAPITAL VI, a California limited partnership SEQUOIA TECHNOLOGY PARTNERS VI, a California limited partnership and SEQUOIA XXIV, a California limited partnership 2 TABLE OF CONTENTS 1. Sale of Series A Preferred and Common Stock . . . . . . . . . . . . . . 1 2. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Representations and Warranties of the Company . . . . . . . . . . . . . . 2 (a) Organization and Standing; Articles and Bylaws . . . . . . . . . . 2 (b) Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (c) Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (d) Validity of the Shares . . . . . . . . . . . . . . . . . . . . . . . . 3 (e) Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (f) Stockholders, Directors and Officers; Indebtedness . . . . . . . . . . 3 (g) Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (h) Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (i) Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (j) Title to Properties; Liens and Encumbrances . . . . . . . . . . . . . . 4 (k) Franchises, Licenses, Trademarks, Patents and Other Rights . . . . . . 4 (l) Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (m) Compliance With Other Instruments . . . . . . . . . . . . . . . . . . . 4 (n) Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (o) Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (p) Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4. Representations and Warranties of the Purchaser . . . . . . . . . . . . . . . . 5 (a) Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (b) Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (c) Reliance Upon the Purchasers' Representations . . . . . . . . . . . . . 5 (d) Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . 6 (e) Receipt of Information . . . . . . . . . . . . . . . . . . . . . . . . 6 (f) Investment Experience . . . . . . . . . . . . . . . . . . . . . . . . . 6 (g) Limitations on Disposition . . . . . . . . . . . . . . . . . . . . . . 6 (h) Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5. Market Standoff Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6. Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (a) Delivery of Financial Statements . . . . . . . . . . . . . . . . . . . 8 (b) Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (c) Termination of Covenants . . . . . . . . . . . . . . . . . . . . . . . 8 (d) Stock Registration . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (e) Prompt Payment of Taxes, etc . . . . . . . . . . . . . . . . . . . . . 8 (f) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (g) Key Person Life Insurance . . . . . . . . . . . . . . . . . . . . . . . 9 (h) Approval of Expenditures . . . . . . . . . . . . . . . . . . . . . . . 9
3 (j) Maintenance of Corporate Existence, etc . . . . . . . . . . . . . . . . 9 (k) Election of Directors . . . . . . . . . . . . . . . . . . . . . . . 10 (l) Availability of Common Stock for Conversion . . . . . . . . . . . . . . 10 (m) Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (n) Confidentiality and Assignment Protections . . . . . . . . . . . . . . 10 7. The Purchasers' Rights to Purchase Additional Shares . . . . . . . . . . . . . . 10 8. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (a) Further Instruments and Actions . . . . . . . . . . . . . . . . . . . . 13 (b) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (c) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (d) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (e) Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . 13 (f) Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . 13 (g) Counsel to the Company . . . . . . . . . . . . . . . . . . . . . . . . 13
EXHIBITS Exhibit A Schedule of Shares Purchased by Purchasers Exhibit B Schedule of Exceptions Exhibit C Schedule of Current Shareholders Exhibit D Schedule of Patent, Trademark and Copyright Rights Exhibit E Schedule of Material Contracts Exhibit F Confidentiality and Invention Assignment Provisions 4 STOCK PURCHASE AGREEMENT (400,000 Shares of Series A Preferred Stock and 100,000 Shares of Common Stock) THIS STOCK PURCHASE AGREEMENT ("Agreement") is made as of November 1, 1994, by and between CombiChem, Inc., a California corporation (the "Company"), and SEQUOIA CAPITAL VI, a California limited partnership SEQUOIA TECHNOLOGY PARTNERS VI, a California limited partnership, and SEQUOIA XXIV, a California limited partnership (collectively, the "Purchasers"), which term includes successors and assigns). WHEREAS, the Purchasers desire to make a cash payment to the Company as consideration for obtaining a fixed number of preferred and common shares of the Company's capital stock; and WHEREAS, the Company desires to sell a fixed number of common and preferred shares of the Company's capital stock to the Purchasers; and WHEREAS, certain defined terms used in this Agreement are referenced in Section 8 hereof. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchasers hereby agree as follows: 1. Sale of Series A Preferred and Common Stock. Subject to the terms and conditions of this Agreement, the Purchasers hereby purchase, and the Company hereby sells to the Purchasers, an aggregate of 400,000 shares of the Company's Series A Preferred Stock (the "Preferred Shares") and an aggregate of 100,000 shares of Common Stock (the "Common Shares") (together, the "Shares") at prices of fifty cents ($0.50) per Series A Preferred share and five cents ($.05) per Common share, for an aggregate sum of two hundred five thousand dollars ($205,000.00) (the "Purchase Price"), as specified in Exhibit A. 2. Closing. The purchase and sale of the Shares shall take place at the offices of Gray, Cary, Ware & Freidenrich simultaneous with the execution of this Agreement, or at such other place and time as the Company and the Purchasers shall mutually agree, either orally or in writing (the "Closing"). At the Closing, the Purchasers shall pay the Purchase Price to the Company by check, wire transfer, cancellation of indebtedness, or such other form of payment as shall be mutually agreed upon by the Purchasers and the Company. At the Closing, subject to the terms and conditions hereof, the Company shall deliver to the Purchasers certificates, registered in the name the Purchasers designate by notice to the Company, representing the Shares purchased by the Purchasers, dated the date of the Closing. -1- 5 3. Representations and Warranties of the Company. Except as specifically disclosed in this Agreement, in the schedule of exceptions attached hereto as Exhibit B and incorporated by reference, or as otherwise learned by the Purchaser, the Company hereby represents and warrants to the Purchasers as follows: (a) Organization and Standing: Articles and Bylaws. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as presently conducted. The Company is duly qualified to do business as a foreign corporation in each jurisdiction in which the conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the Company's business. The Company has furnished the Purchasers or their special counsel with copies of its Articles of Incorporation and its Bylaws. Said copies are true, correct, and complete and contain all amendments through the date of the Closing. (b) Capitalization. The authorized capital stock of the Company, immediately prior to the Closing, will consist of (a) 30,000,000 shares of no par value Common Stock, 1,447,500 shares of which are issued and outstanding or committed for issuance on the date hereof, plus 100,000 of which are being sold and issued to the Purchasers pursuant to this Agreement; and (b) 10,000,000 shares of no par value Preferred Stock, of which: (i) 1,000,000 shares have been designated Series A Preferred Stock, 600,000 shares of which are issued and outstanding and 400,000 of which are being sold and issued to the Purchasers pursuant to this Agreement; and (ii) 1,500,000 shares have been designated Series Z Preferred Stock, 600,000 shares of which are issued and outstanding or reserved for issuance on the date hereof (325,000 to 400,000 shares are reserved for issuance to The Scripps Research Institute ("Scripps") in return for Scripps granting certain licensing rights to the Company). All issued and outstanding shares of the Company's capital stock are represented on Exhibit C hereto, have been duly authorized and validly issued, and are fully paid and nonassessable. (c) Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all the Company's obligations under this Agreement and the Stock Registration Rights Agreement, and for the authorization, issuance, sale and delivery of the Shares and the Common Shares issuable upon conversion thereof ("Underlying Common Shares") has been taken prior to the Closing. This Agreement, when executed and delivered by the Company and the Purchasers, and the Stock Registration Rights Agreement shall constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors. The execution, delivery and performance by the Company of this Agreement and compliance herewith and the sale and issuance of the Shares and Common Stock issuable upon conversion of the Shares will not result in any violation of and will not conflict with, or result in a breach of any of the terms of, or constitute a default under, any provision of state or federal law to which the Company is subject, the Company's Articles of Incorporation or Bylaws, each -2- 6 as amended, or any provision of any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation or other restriction to which the Company is a party or by which it is bound, the breach of or default under which would have a material adverse effect upon the business or operations of the Company, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company pursuant to any such term. The Shares, when issued in compliance with the provisions of this Agreement will be validly issued, fully paid and nonassessable and will be free of any liens or encumbrances; provided, however, that the Shares (and the Common Stock issuable upon conversion thereof) may be subject to restrictions on transfer under state and/or federal securities laws. The shares of Common Stock issuable upon conversion of the Shares have been duly and validly reserved and are not subject to any preemptive rights or rights of first refusal, and upon issuance, will be validly issued, fully paid and nonassessable. (d) Validity of the Shares. The Shares and the Underlying Common Shares will be validly issued, fully paid and nonassessable. (e) Subsidiaries. The Company has no subsidiaries and does not own of record or beneficially any capital stock or equity interest or investment in any corporation, association or business entity. (f) Stockholders, Directors and Officers: Indebtedness. The Company is not currently indebted to its officers, directors or stockholders or any of their respective relatives, other than travel, relocation, normal compensation and other expenses which are advanced and reimbursed in the ordinary course of business. To the best of the Company's knowledge, none of the officers or directors or significant employees or consultants of the Company, has, individually or collectively, a material interest in any entity which is a competitor, customer or supplier of (or has any existing contractual relationship with) the Company. (g) Disclosure. This Agreement and the Exhibits hereto do not contain any untrue statement of a material fact and do not omit to state a material fact necessary in order to make the statements contained herein or therein not misleading. The Company has provided the Purchasers with all the information which the Purchasers have requested for deciding whether to purchase the Shares and all information which the Company believes is reasonably necessary to enable the Purchasers to make such a decision. (h) Litigation. There are no actions, suits, proceedings or investigations pending, or to the Company's knowledge, claims asserted, to which the Company is a party or its property is subject, which might result in any material adverse change in the business or financial condition of the Company or any of its properties or assets, or in any material impairment of the right or ability of the Company to carry on its business as now conducted, or in any material liability on the part of the Company, and none which question the validity of this Agreement or any action taken or to be taken in connection herewith. -3- 7 (i) Consents. No consent, approval, qualification, order or authorization of, or filing with, any governmental authority, is required in connection with the Company's valid execution, delivery or performance of this Agreement, or the offer, sale or issuance of the Shares by the Company, the conversion of the Shares, the issuance of Common Stock upon conversion of the Shares, or the consummation of any other transaction contemplated on the part of the Company hereby, except filings required pursuant to the applicable federal and state securities laws and blue sky laws, which filings, the Company covenants to complete within fifteen (15) days of the Closing. (j) Title to Properties: Liens and Encumbrances. The Company has good and marketable title to its properties and assets and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, security interest, conditional sale agreement, encumbrance or charge, except (i) tax, materialmen's or like liens for obligations not yet due or payable or being contested in good faith by appropriate proceedings, or (ii) possible minor liens or encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company and which have not arisen otherwise then in the ordinary course of business. (k) Franchises, Licenses, Trademarks, Patents and Other Rights. To the best of the Company's knowledge, it has all franchises, permits, licenses and other similar authority necessary for the conduct of its business, the lack of which could materially and adversely affect the operations or condition, financial or otherwise, of the Company, and it is not in default in any material respect under any of such franchises, permits, liens or other similar authority. To the best of Company's knowledge, the Company possesses certain patent, trademark, trade name and copyright rights as set forth on Exhibit D. To the best of Company's knowledge, the Company's intellectual property rights are sufficient to allow Company to proceed with its business as planned and Company is not aware of any infringements of its intellectual property rights. Reasonable security measures have been taken by the Company to protect the secrecy, confidentiality and value of the Company's trade secrets, confidential information, and intellectual property rights referred to in this Section 3(k). (l) Offering. Subject to the truth and accuracy of the Purchasers' representations set forth in this Agreement, the offer, sale and issuance of the Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), and from any applicable blue sky requirements of the State of California. (m) Compliance With Other Instruments. The Company is not in violation of any term of its Articles of Incorporation or Bylaws nor any material term of any mortgage, indenture, contract, agreement, instrument, judgment, decree, order, statute, rule or regulation to which the Company is subject and a violation of which would have a material adverse effect on the condition, financial or otherwise, or operations of the Company. -4- 8 (n) Employees. To the best of the Company's knowledge and belief, no employee of the Company is in violation of any term of any employment contract, patent disclosure agreement, non-competition agreement, or any restrictive covenant to a former employer relating to the right of any such employee to be employed by the Company because of the nature of the business conducted or presently proposed to be conducted by the Company or to the use of trade secrets or proprietary information of others. There is neither pending nor, to the Company's knowledge and belief, threatened any actions, suits, proceedings or claims, or to its knowledge any basis therefor or threat thereof with respect to any contract, agreement, covenant or obligation referred to in the preceding sentence. The Company does not have any collective bargaining agreement covering any of its employees. (o) Material Contracts. A true and complete list of all contracts, agreements and investments with respect to which the Company is party and has an obligation in excess of Twenty Thousand Dollars ($20,000) is set forth on Exhibit E. (p) Board of Directors. As of the Closing, the Company's Board of Directors will consist of Ivor Royston, Robert Curtis and Peter Bick. 4. Representations and Warranties of the Purchaser. The Purchasers hereby represent and warrant to the Company as follows: (a) Authorization. The Purchasers have the requisite legal power and authority to enter into this Agreement and that this Agreement when executed shall constitute a valid and legally binding obligation of the Purchaser. (b) Investment Intent. This Agreement is made with the Purchasers in reliance upon their representation to the Company, which by their execution hereof they confirm, that the Shares have been acquired with their own funds for investment for an indefinite period for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that they have no present intention of selling, granting participation in, or otherwise distributing the same. By executing this Agreement, the Purchasers further represent that they do not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participation, to such person or to any third person, with respect to any of the Shares. (c) Reliance Upon the Purchasers' Representations. The Purchasers understand (i) that the Shares are not, and the Underlying Common Shares acquired on conversion thereof at the time of issuance may not be, registered under the Securities Act or qualified under the California Corporate Securities Law of 1968, as amended (the "Law"), and (ii) that the Shares are being issued to the Purchasers on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof and/or Regulation D promulgated thereunder and the exemption from qualification provided by Section 25102(f) of the Law, and (iii) that the Company's reliance on -5- 9 such exemptions is predicated on the Purchasers' representations set forth herein. The Purchasers realize that the basis for the exemptions may not be present if, notwithstanding such representations, the Purchasers have in mind merely acquiring the Shares for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. The Purchasers do not have any such intention. These exemptions only exempt the issuance of the Shares to the Purchasers and not any sale or other disposition of the Shares or any interest therein by the Purchasers. (d) Restricted Securities. The Purchasers hereby confirm that they have been informed that the Shares are restricted securities under the Securities Act and may not be resold or transferred unless the Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. In addition, the Purchasers understand that any resale or transfer must comply with applicable state securities laws. Accordingly, the Purchasers hereby acknowledge that they are prepared to hold the Shares for an indefinite period, and that the Purchasers are familiar with the provisions of Rule 144 of the Securities and Exchange Commission issued under the Securities Act, and are aware that Rule 144 is not presently available to exempt the sale of the Shares from the registration requirements of the Securities Act. (e) Receipt of Information. The Purchasers acknowledge that they have received all the information they consider necessary or appropriate for deciding whether to purchase the Shares. The Purchasers further represent that they have had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and the business, properties, prospects, and financial condition of the Company, and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy or any information furnished to them or to which they had access. (f) Investment Experience. In connection with the investment representations made herein, the Purchasers represent that each of them; is an "accredited investor" as defined in Section 501 of Regulation D, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, has the ability to bear the economic risks of its investment and has been furnished with and has had access to all of the information it considers necessary or appropriate to evaluate the risks and merits of an investment in the Shares, and has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. (g) Limitations on Disposition. The Purchasers agree that in no event will they make a disposition of any of the Shares, unless and until (a) they shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (b) they shall have furnished the Company with an opinion of counsel satisfactory to the Company to the effect that (i) such disposition will not require registration of such Shares under the Securities Act, or (ii) that appropriate action necessary for compliance with the Securities Act has been taken, or (c) the -6- 10 Company shall have waived, expressly and in writing, its rights under clauses (a) and (b) of this subparagraph. The opinion shall also indicate that the disposition is exempt from, in compliance with, or qualified under all applicable state securities laws. (h) Legends. All certificates representing any shares of Shares of the Company subject to the provisions of this Agreement shall have endorsed thereon customary legends regarding: (1) Restrictions on transfer under the Federal Securities Act of 1933. (2) Market Stand-Off Agreements pursuant to Section 5 hereof. (3) Any legend required by state securities laws. 5. Market Stand-off Agreement. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, the Purchasers shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to the Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for one hundred eighty (180) days from and after the effective date of such registration statement or such longer time as may be required by the Company's underwriters. The limitations of this Section 5 shall remain in effect for the two-year period immediately following the effective date of the Company's initial public offering and shall thereafter terminate and cease to have any force or effect. (b) In the event any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding common shares is effected without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this Section 5 to the same extent the Shares are at such time covered by such provisions. (c) In order to enforce the limitations of this Section 5, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. (d) The obligations in this Section 5 shall not apply to a registration relating solely to employee benefit plan shares or to a Rule 145 transaction registered on Form S-4. -7- 11 6. Covenants of the Company. (a) Delivery of Financial Statements. The Company shall deliver to the Purchasers: (1) as soon as practicable after the end of each fiscal year of the Company, audited financial statements for such fiscal year, prepared in accordance with generally accepted accounting principles ("GAAP") together with an annual report of the Company, all in reasonable detail and certified by an independent public accountant of recognized national standing selected by the Company; (2) as soon as practicable after the end of each month of each fiscal year of the Company, unaudited financial statements for such month, prepared in accordance with generally accepted accounting principles consistently applied, subject to changes resulting from year-end audit adjustments and the absence of notes, all in reasonable detail and certified by the principal financial or accounting officer of the Company; (3) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as the Purchasers or any assignee of the Purchasers may from time to time reasonably request, provided, however, that the Company shall not be obligated under provision of this Agreement to provide information which it deems in good faith to be a trade secret or similar confidential information. (b) Inspection. The Company shall permit the Purchasers, at their expense, to visit and inspect the Company's properties, to examine its books of account and records, and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Purchaser; provided, however, that the Company shall not be obligated pursuant to this section to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. (c) Termination of Covenants. The covenants set forth in this Section 6 shall terminate and be of no further force or effect upon the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Securities Act in connection with the firm commitment underwritten offering of its securities to the general public where the gross proceeds to the Company are at least five million dollars ($5,000,000). (d) Stock Registration. Simultaneous with entering into this Agreement, the Company and the Purchasers are also entering into a Stock Registration Rights Agreement which grants certain rights to the Purchasers to have the Common Shares and the shares of common stock issuable upon conversion of the Preferred Shares registered. (e) Prompt Payment of Taxes, etc. The Company will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, -8- 12 assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company or any subsidiary; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto, and provided further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. (f) Insurance. The Company will keep its assets and those of its subsidiaries which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in the Company's line of business, in amounts sufficient to allow it to replace any of its properties which might be damaged or destroyed. The Company will maintain with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated. (g) Key Person Life Insurance. The Company shall use reasonable efforts to obtain and maintain with financially sound and reputable insurers, an annually renewable key person term life insurance policy in the amount of $1,000,000 on the life of its chief executive officer. Such policy shall name the company as loss payee and shall be maintained by the Company with financially sound and reputable insurers. The Board of Directors shall decide whether to renew this policy on an annual basis, in its sole discretion. (h) Approval of Expenditures. Until the Company obtains an aggregate,cash investment of three million dollars ($3,000,000) in the Company's capital stock, (i) the Company shall submit each year's proposed annual budget to the Company's Board of Directors prior to year-end and such budget must be approved by not less than seventy-five percent (75%) of the Company's Board of Directors; (ii) the Company shall not make any expenditure in excess of $50,000 (which is not provided for in the Company's approved annual budget) unless such expenditure is approved by an affirmative vote of not less than seventy-five percent (75%) of the Company's Board of Directors; and (iii) the Company shall not liquidate or otherwise dispose of any assets with a value in excess of $50,000 without an affirmative vote of not less than seventy-five percent (75%) of the Company's Board of Directors. (i) Accounts and Records. The Company will keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis. (j) Maintenance of Corporate Existence, etc. The Company shall maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use patents, processes, licenses, trademarks, trade names or copyrights owned or possessed by it or any subsidiary and deemed by the Company to be material to the conduct of their business. -9- 13 (k) Election of Directors. Effective upon the closing date of this Agreement, the Company shall cause Peter Bick to be appointed to the Company's Board of Directors. So long as the Purchasers own not less than a combined total of the greater of (i) 300,000 shares or (ii) 25% of the Company's Preferred Stock (including shares of Common Stock issued upon conversion of the Preferred Stock and as adjusted for stock splits, etc.), the Purchasers shall have the right to nominate for election to the Company's Board of Directors (the "Board") one member of the Board (the "Preferred Director"). The name of the person(s) so nominated shall be subject to approval by the Company, which approval shall not be unreasonably withheld. The parties hereto agree that the initial Preferred Director shall be Peter Bick. The Company agrees to take all actions necessary or appropriate to present the Preferred Director to the shareholders for election and approval as a director. Robert Curtis and Forward Ventures II, L.P. agree to take all action necessary to elect the Preferred Director to the Board of Directors of the Company and each of them agrees to vote such shareholder's shares in favor of election of the Preferred Director. If a Preferred Director resigns or is removed by a vote of the Company's shareholders, or if his or her Board seat is otherwise vacated for any reason, then the Purchasers shall have the right to nominate his or her replacement, subject to the Company's approval, which approval shall not be unreasonably withheld, and Robert Curtis and Forward Ventures II, L.P. agree to vote each of such shareholder's shares for the election of such replacement Preferred Director. The provisions of this Section 6(k) shall be construed to constitute the granting of proxies coupled with an interest. (l) Availability of Common Stock for Conversion. The Company will from time to time, in accordance with the laws of the State of California, increase the authorized amount of Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall be insufficient to permit conversion of all the then outstanding shares of Series A Preferred Stock. (m) Stock Option Plan. The Company hereby agrees not to issue, sell or otherwise transfer in excess of one million three hundred thousand (1,300,000) shares of the Company's Common Stock to employees, directors, officers or consultants of the Company pursuant to any stock option plan or other arrangement approved by the Board of Directors; provided, however, that this one million three hundred thousand (1,300,000) share limitation shall not include any shares of Common Stock issued prior to the date hereof (n) Confidentiality and Assignment Protections. The Company and each person now or hereafter employed in any technical capacity by it or any subsidiary with access to confidential information will enter into an agreement that contains the following confidential information and assignment provisions substantially in the form of Exhibit F hereto. 7. The Purchasers' Rights to Purchase Additional Shares. (a) Subject to the terms and conditions specified in this Section 7, the Company hereby grants to the Purchasers a right to purchase a pro rata share of New Securities (as -10- 14 hereinafter defined) equal to the ratio of (i) the aggregate number of shares of the Company's Common Stock owned by the Purchasers immediately prior to the issuance of New Securities (assuming full conversion of all owned convertible securities into shares of Common Stock of), and (ii) to the total number of shares of Common Stock outstanding on a fully diluted basis immediately prior to the issuance of New Securities (the "Pro Rata Share"). For purposes of this Section 7, Purchasers include any general partners and affiliates of a Purchaser. Purchasers shall be entitled to apportion the right to purchase additional Shares hereby granted them among themselves and their partners and affiliates in such proportions as they deem appropriate. Not later than thirty calendar days after the Company sells any shares solely for cash (excluding however securities described in Section 7(e) hereof), including any common shares, preferred shares, or securities convertible into any shares ("New Securities"), the Company shall make an offering of some of the New Securities to the Purchasers in accordance with the following provisions: (b) The Company shall deliver a notice by certified mail ("Notice") to the Purchasers stating (i) the number of New Securities sold and available for sale, (ii) the number of such New Securities the Purchasers are entitled to purchase, as the Purchasers' Pro Rata Shares, and (iii) the price and terms upon which the New Securities were sold or are to be sold. (c) Within 20 calendar days after the Company provides such Notice, each Purchaser may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to the Purchasers' Pro Rata Share of the New Securities. (d) If any party elects not to obtain its Pro Rata Share of the New Securities, the Company may, during the 90-day period following the expiration of the period provided in subsection 7(c) hereof, assign the right to purchase the remaining unsubscribed portion of such New Securities to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice without offering any of such unsubscribed New Securities to the Purchaser. If the Company does not enter into an agreement for the sale of the New Securities within such period, or if such agreement is not consummated within such 90-day period, the Company's right to assign the right to purchase the New Securities provided hereunder shall be deemed to be revoked and such New Securities shall not be offered to any third party unless first re-offered to the Purchasers in accordance herewith. (e) Notwithstanding any other provision to the contrary, the right to purchase New Securities contained in this Section 7 shall not be applicable (i) to the issuance or sale of up to 1,300,000 shares of the Company's Common Stock (or related options) issued to employees, directors, officers or consultants of the Company pursuant to any stock option plan or other arrangement approved by the Board of Directors which number may be increased by the approval of not less than seventy-five percent (75%) of the Board of Directors, provided, however, that only a majority approval of the Company's Board of Directors shall be required after the Company has obtained an aggregate cash investment of Three Million Dollars -11- 15 ($3,000,000) in its capital stock; (ii) to or after the consummation of a bona fide, firmly underwritten public offering of shares of common stock, registered under the Securities Act pursuant to a registration statement; (iii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities; (iv) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of shares or otherwise; (v) to securities issued in connection with obtaining real estate lease financing, whether issued to a lessor, guarantor or other person; (vi) to securities issued in connection with any borrowings, direct or indirect, from financial institutions by the Company, including without limitation, equipment lease financing arrangements approved by the Board of Directors; (vii) to securities issued pursuant to the acquisition of license or other rights, assets or technology with third parties or in connection with corporate partnering arrangements with third parties, provided that such arrangements are approved by not less than seventy-five percent (75%) of the Company's Board of Directors; and (viii) to securities issued in connection with any stock split, stock dividend or recapitalization of the Company. (f) The right to purchase New Securities set forth in this Section 7 may not be assigned or transferred except that (i) such right is assignable by the Purchasers to any wholly owned subsidiary or parent of, or to any corporation or entity that is, within the meaning of the Act, controlling, controlled by or under common control with, any such Purchaser, and (ii) such right is assignable between and among any of the Purchasers of the Company's preferred stock. 8. Defined Terms. When used herein the following defined terms shall have the respective definitions as set forth below: Accredited Investor shall have the meaning set forth in Section 4(f). Agreement shall have the meaning set forth in the first paragraph. Closing shall have the meaning set forth in Section 2. Company shall have the meaning set forth in first paragraph. GAAP shall have the meaning set forth in Section 6(a)(1). Law shall have the meaning set forth in Section 4(c). New Securities shall have the meaning set forth in Section 7(a). Notice shall have the meaning set forth in Section 7(b). Pro Rata Shares shall have the meaning set forth in Section 7(a). Purchase Price shall have the meaning set forth in Section 1. -12- 16 Purchasers shall have the meaning set forth in the first paragraph. Shares shall have the meaning set forth in Section 1. Underlying Common Shares shall have the meaning set forth in Section 3(c). 9. Miscellaneous. (a) Further Instruments and Actions. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (b) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at its address hereinafter shown below its signature or at such other address as such party may designate by advance written notice to the other party hereto. (c) Expenses. The Company and the Purchasers shall bear their own expenses and legal fees incurred with respect to this Agreement and the transactions contemplated hereby; provided, however, that the Company will pay the reasonable legal fees and out-of-pocket expenses of Wilson, Sonsini, Goodrich & Rosati, special counsel to the Purchasers, in an amount not to exceed $6,000. (d) Governing Law. This Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Agreement shall be determined in accordance with the laws of the State of California. (e) Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon the Purchaser, its successors and assigns. (f) Amendments and Waivers. This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, written or oral. This Agreement may only be amended with the written consent of the parties hereto, or the successors or assigns of the foregoing, and no oral waiver or amendment shall be effective under any circumstances whatsoever. (g) Counsel to the Company. The Purchasers acknowledge and agree that this Agreement has been prepared by Gray Cary Ware & Freidenrich, counsel to the Company, which counsel has represented the interests of the Company and not those of the Purchasers with respect -13- 17 to the transactions documented by this Agreement. The Purchasers further acknowledge and agree that the Purchasers have been provided the opportunity and encouraged to consult with counsel of the Purchasers' own choosing with respect to this Agreement. The Purchasers certify and acknowledge that the Purchasers have carefully read all of the provisions of this Agreement and that the Purchasers fully understand and shall fully and faithfully comply with such provisions. -14- 18 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMPANY: COMBICHEM, INC., Address: a California corporation 10975 Torreyana Road, Suite 230 San Diego, California 92121 By: /s/ Robert A. Curtis ---------------------------------------- Robert A. Curtis, Chief Executive Officer PURCHASERS: By: /s/ Peter S. Bick ---------------------------------------- Peter Bick ---------------------------------------- In the Capacity indicated for each of the following entities: SEQUOIA CAPITAL VI, Address: a California Limited Partnership 3000 Sand Hill Road a General Partner Building 4, Suite 280 Menlo Park, California 94025 SEQUOIA TECHNOLOGY PARTNERS VI, Address: a California Limited Partnership 3000 Sand Hill Road a General Partner Building 4, Suite 280 Menlo Park, California 94025 SEQUOIA XXIV Address: a California Limited Partnership 3000 Sand Hill Road a General Partner Building 4, Suite 280 Menlo Park, California 94025 [Signature Page to Sequoia Stock Purchase Agreement] 19 EXHIBIT A SCHEDULE OF SHARES PURCHASED BY PURCHASER
Number of Shares Number of Shares Purchaser of Preferred of Common - --------- ------------ --------- SEQUOIA CAPITAL VI 364,000 91,000 SEQUOIA TECHNOLOGY PARTNERS VI 20,000 5,000 SEQUOIA XXIV 16,000 4,000 ------- ------ Total Shares 400,000 100,000
20 EXHIBIT B SCHEDULE OF EXCEPTIONS 1. Employees (Section 3(f)) Robert Curtis owns stock in and is a former officer of Pharmacopeia which is a competitor of the Company. 2. Litigation (Section (3h)) Affymax and Company have independent patent rights which may be blocking. Affymax currently utilizes the name CombiChem in its presentations. 3. Intellectual Property (Section 3(k)) The Company is a start up entity which is in the process of negotiating with The Scripps Research Institute and Johnson and Johnson to secure licensing rights to certain patents and other intellectual property which may be important to the operation of the Company's current and future business. The Company is not aware of any competing intellectual property rights held by third parties which adversely affect the Company's right to utilize its intellectual property or the conduct of the Company's current or future business endeavors. 21 EXHIBIT C SCHEDULE OF STOCK HOLDERS (Common and Preferred) 22 COMBICHEM, INC. COMMON STOCK LEDGER
Cert # No. of Shares Shareholder Date issued ====================================================================================================== 1 175,000 KIM D. JANDA September 28th, 1994 - ------------------------------------------------------------------------------------------------------ 2 150,000 CHI-HUEY WONG September 28th, 1994 - ------------------------------------------------------------------------------------------------------ 3 150,000 DALE L. BOGER September 28th, 1994 - ------------------------------------------------------------------------------------------------------ 4 10,000 ERIC ERB September 28th, 1994 - ------------------------------------------------------------------------------------------------------ 5 37,500 STANDISH FLEMING September 28th, 1994 - ------------------------------------------------------------------------------------------------------ 6 37,500 ROYSTON FAMILY TRUST September 28th, 1994 - ------------------------------------------------------------------------------------------------------ 7 150,000 SYDNEY BRENNER September 28th, 1994 - ------------------------------------------------------------------------------------------------------ 8 225,000 FORWARD VENTURES II, L.P. September 28th, 1994 - ------------------------------------------------------------------------------------------------------ 9 10,000 JEFFREY SOLLENDER September 28th, 1994 - ------------------------------------------------------------------------------------------------------ 10 500,000 ROBERT CURTIS September 28th, 1994 - ------------------------------------------------------------------------------------------------------ 11 2,500 GAIL ERWIN October 18, 1994 - ------------------------------------------------------------------------------------------------------ TOTAL 1,447,500 October 28, 1994 ======================================================================================================
PREFERRED STOCK LEDGER
====================================================================================================== Cert # No. of Shareholder Date issued Shares - ------------------------------------------------------------------------------------------------------ PA1 600,000 FORWARD VENTURES II, L.P. August 26th, 1994 - ------------------------------------------------------------------------------------------------------ PZ1 200,000 SYDNEY BRENNER October 12th, 1994 - ------------------------------------------------------------------------------------------------------ TOTAL 800,000 ======================================================================================================
23 EXHIBIT D SCHEDULE OF PATENT, TRADEMARK AND COPYRIGHT RIGHTS 1. PATENTS (a) The Company has been assigned rights to the following patents: (1) Sydney Brenner, "Combinatorial libraries and methods for their use," US Patent Application Serial No. 07/978,646, filed November 19,1992. (2) Sydney Brenner, "Combinatorial libraries and methods for their use," US Patent Application Serial No. 08/168,966, filed December 15, 1993 (continuation in part of 07/978,646). (3) Sydney Brenner, "Combinatorial libraries and methods for their use," US Patent Application Serial No. 08/281,195, filed July 26, 1994 (continuation in part of 08/168,966). (4) Sydney Brenner, "Multidimensional conduit combinatorial library synthesis device," US Patent Application Serial No. 08/281,194, filed July 26, 1994. (b) The Company is in the process of negotiating licenses to use the following patents from The Scripps Research Institute and Johnson and Johnson: See attached TSRI Technology License Letter of Understanding Known Issues Affymax Corporation's Patent Application (International Application No. PCT/US92/07815) may prove to be blocking on the Brenner/Lemer/Janda Patent Applications (U.S. Serial No. 07/860,445 or International Application No. PCT US93/20243). The Company does not have a licensing agreement with Johnson & Johnson and does not have a definitive written agreement with Scripps Research Institute beyond the Letter of Understanding. 2. TRADEMARKS The Company has been assigned the following intent to use trademark applications: COMBICHEM Serial No. 74/363,514 COMBICHEM Serial No. 74/363,515 24 Known Issues Affymax Corporation has attempted to register the CombiChem trademark in the United States and such attempt was rejected. To the Company's knowledge, Affymax has not registered the CombiChem trademark in Europe. The Company has not registered the CombiChem trademark outside of the United States. 3. COPYRIGHTS The Company does not possess any registered copyrights. 25 EXHIBIT E SCHEDULE OF MATERIAL CONTRACTS 1. Asset Purchase Agreement with CombiChem, Inc., a Delaware corporation 2. Promissory Note to CombiChem, Inc., a Delaware corporation 3. Series A Stock Purchase Agreement with Forward Ventures II, LP. 4. Series Z Stock Purchase Agreement with Dr. Sydney Brenner 5. Series Z Stock Registration Rights 6. Employment Agreements with Robert Curtis, Eric Erb and Jeffrey Sollender 7. Consulting Agreements w/ Brenner, Boger, Janda and Wong 8. Termination Agreement dated October 20, 1994 with David Palella dba BioScience Ventures; Company currently owes Mr. Palella $25,000 9. Sublease of Research Space from Science Applications International Corporation l0. $175,000 Purchase Order for NMR Equipment ll. $25,000 Purchase Order for Ionized Water Purifier 12. The Scripps Research Institute Licensing Letter of Understanding 13. Comdisco Equipment Lease Letter of Understanding 26 EXHIBIT F CONFIDENTIALITY AND INVENTION ASSIGNMENT PROVISIONS See attached. 27 I Inventions, Trade Secrets and Confidentiality. A. Definitions. 1. Invention Defined. As used herein "Invention" means Inventions, discoveries, concepts, and ideas, whether patentable or copyrightable or not, including but not limited to processes, methods, formulas, techniques, devices, designs, programs (including computer programs), computer graphics, apparatus, products, as well as improvements thereof or know-how related thereto, relating to any present or anticipated business or activities of Employer. 2. Trade Secret Defined. As used herein "Trade Secret" means, without limitation, any document or information relating to Employer's products, processes or services, including documents and information relating to Inventions, and to the research, development, engineering or manufacture of Inventions, and to Employer's purchasing, customer or supplier lists and pricing policies, which documents or information have been disclosed to Employee or known to Employee as a consequence of or through Employee's employment by Employer (including documents, information or Inventions conceived, originated, discovered or developed by Employee), which is not generally known in the relevant trade or industry. 3. Protected Information. As used in this Agreement, the term "Protected Information" shall mean, without limitation, all trade secrets, confidential or proprietary information, and all other knowledge, data, know-how, processes, information, documents or materials, owned, developed or possessed by Employer, whether in tangible or intangible form, the confidentiality of which Employer takes reasonable measures to protect, and which pertains in any manner to subjects which include, but are not limited to, Employer's research operations, customers (including identifies of customers and prospective customers, identities of individual contacts at business entities which are customers or prospective customers, preferences, businesses or habits), business relationships, engineering data or results, specifications, concepts, methods, processes, rates or schedules, customer or vendor information, products (including prices, costs, sales or content), financial information or measures, business methods, future business plans, data bases, computer programs, designs, models, operating procedures, and knowledge of the organization. B. Inventions. 1. Disclosure of Prior Inventions. Employee hereby warrants and represents that Employee has identified and described on Exhibit A, attached hereto and incorporated by reference, all Inventions, innovations, improvements, discoveries and patents made, conceived or acquired by Employee prior to the Period of Employment in which Employee has any interest whatsoever (the "Prior Inventions") and that as of the date this Agreement is executed, Exhibit A contains a complete list of all Prior Inventions. Employee represents that Employee has no rights in any Inventions other than those Prior Inventions specified in Exhibit A. If there are no Prior Inventions listed on Exhibit A, Employee represents that Employee has not made any Prior Inventions prior to the execution of this Agreement. 28 2. Disclosure. Employee shall disclose promptly to Employer each Invention, whether or not reduced to practice, which is conceived or learned by Employee (either alone or jointly with others) during the term of his employment with Employer. Employee shall disclose in confidence to Employer all patent applications filed by or on behalf of Employee during the term of his employment and for a period of one year thereafter. 3. Employer Property; Assignment. Employee acknowledges and agrees that all Inventions which are discovered, conceived, developed, made, produced or prepared by Employee (alone or in conjunction with others) during the duration of Employee's employment with Employer shall be the sole property of Employer. Said property rights of Employer include without limitation all domestic and foreign patent rights, rights of registration or other protection under the patent and copyright laws, and all other rights pertaining to the Inventions. Employee further agrees that all services, products and Inventions that directly or indirectly result from engagement with Company shall be deemed "works for hire" as that term is defined in Title 17 of the United States Codes and accordingly all rights associated therewith shall vest in the Company. Notwithstanding the foregoing, Employee hereby assigns to Employer all of Employee's right, title and interest in any such services, products and Inventions, in the event any such services, products and Inventions shall be determined not to constitute "works for hire." 4. Exclusion Notice. The assignment by Employee of Inventions under this Agreement does not apply to any Inventions which are owned or controlled by Employee prior to the commencement of employment of Employee by Employer (all of which are set forth on Exhibit A). Additionally, Employee is not required to assign an idea or invention where the invention or idea meets all of the following criteria, namely in the invention or idea: (i) was created or conceived without the use of any of Employer's equipment, supplies, facilities, or trade secret information, and (ii) was developed entirely on Employee's own time, and (iii) does not relate to the business of Employer, and (iv) does not relate to Employer's actual or demonstrably anticipated research or development, and (v) does not result from any work performed by Employee for Employer. Employee has reviewed the notification in this Section 6.2.4 and in Exhibit B (the "Limited Exclusion Notification"), attached hereto and incorporated by reference, and agrees that Employee's signature on the Limited Exclusion Notification acknowledges receipt of the notification. 5. Inventions Within One Year of Separation Presumed to Belong to Employer. All inventions improvements, concepts or discoveries claimed to have been made or conceived by Employee during the first year following the termination of the Period of Employment and related in any way to Employer's business, work or investigations shall be presumed to have been made or conceived during the Period of Employment and shall be subject to the provisions of this Agreement unless Employee can conclusively establish the contrary to the Employer or a court of competent jurisdiction. 29 6. Disclosure and Prior Review.of Articles. Employee agrees that, while an employee of Employer and for three years following the termination, for any reason, of Employee's employment with Employer, at least fifteen days prior to submission for publication of any article or contribution from or by Employee, which article or contribution deals with or makes reference to the Employer's field of endeavors, any Inventions, any Protected Information or any other subject pertaining to Employer, Employee shall deliver a copy of such article or publication to Employer and shall request Employer's permission to publish such articles which consent shall not be unreasonably withheld. 7. Patents and Copyrights; Attorney-in-Fact. Both before and after termination of this Agreement (and with reasonable compensation paid by Employer to Employee after termination), Employee agrees to assist the Employer to apply for, obtain and enforce patents on, and to apply for, obtain and enforce copyright protection and registration of, the Inventions described in Section 6.2.2 in any and all countries. To that end, Employee shall (at Employer's request) without limitation, testify in any proceeding, and execute any documents and assignments determined to be necessary or convenient for use in applying for, obtaining, registering and enforcing patent or copyright protection involving any of the Inventions. Employee hereby irrevocably appoints Employer, and its duly authorized officers and agents, as Employee's agent and attorney-in-fact to act for and in behalf of Employee in filing all patent applications, applications for copyright protection and registration, amendments, renewals, and all other appropriate documents in any way related to the Inventions described in Section 6.2.3. The decision to file (or not to file) a patent application or applications on any Inventions shall be in the Company's sole discretion. C. Trade Secrets. 1. Ownership of Trade Secrets and Protected Information. All Trade Secrets and Protected Information, and any Derivatives thereof whether created by Employer or Employee, alone or in conjunction with others, shall be and remain the property of Employer and no license or other rights to the Trade Secrets or Protected Information is granted or implied hereby. For purposes of this Agreement, "Derivatives" shall mean: (i) for copyrightable or copyrighted material, any translation, abridgement, revision or other form in which an existing work may be recast, transformed or adapted; (ii) for patentable or patented material, any improvement thereon; and (iii) for material which is protected by trade secret, any new material derived from such existing trade secret material, including new material which may be protected by copyright, patent and/or trade secret. All materials (including without limitation, documents, drawings, models, apparatus, sketches, designs and lists) furnished to Employee shall remain the property of Employer and shall be returned to it promptly at its request, together with any copies thereof. 2. Covenant Not to Divulge Trade Secrets. Employee acknowledges and agrees that Employer is entitled to prevent the disclosure of Employer's Trade Secrets or Protected Information. As a portion of the consideration for the employment of Employee and for the compensation being paid to Employee by Employer, Employee agrees at all times during the term of the employment by Employer and thereafter to hold in strictest confidence, and not to use, disclose or allow to be disclosed to any person, firm, or corporation, Employer's Trade 30 Secrets or Protected Information, including Trade Secrets developed by Employee, other than disclosures to persons who have entered into confidentiality agreements with Employer without Employer's express prior written consent. 3. Term. This Agreement shall govern all communications between the parties that are made during the period from the effective date of this Agreement to the date on which either party receives from the other written notice that the Agreement is being terminated, provided, however, that the obligations set forth in Section 6 shall continue for a period of five years after the termination of this Agreement. D. No Adverse Use. Employee will not at any time during the Period of Employment or thereafter use Employer's Trade Secrets, Protected Information or Inventions in any manner which may directly or indirectly have an adverse effect upon Employer's business, nor will Employee perform any acts which would tend to reduce Employer's proprietary value in Employer's Trade Secrets, Protected Information or Inventions. II Covenant Not to Compete. Employee agrees that, during Employee's employment, Employee will not directly or indirectly compete with Employer in any way, and that Employee will not act as an officer, director, employee, consultant, shareholder, lender, or agent of any other entity which is engaged in any business of the same nature as, or in competition with, the business in which Employer is now engaged or in which Employer becomes engaged during the term of Employee's employment, or which is involved in science or technology which is similar to Employer's science or technology. During Employee's employment, and for a period of one (1) year thereafter, Employee shall not directly or indirectly through another entity (i) induce or attempt to induce any employee of Employer or any subsidiary of Employer to leave the employ of Employer or such subsidiary, or in any way interfere with the relationship between the Employer or any subsidiary and the employee thereof; (ii) hire any person who was an employee of Employer or any subsidiary at any time; or (iii) induce or attempt to induce any customer, supplier, licensee, licensor or other party which has a contractual relationship with Employer or its subsidiaries or affiliates to cease doing business with Employer or any such subsidiary (including, without limitation, making any negative statements or communications about Employer or its affiliates). 31 III Employee's Representations. Employee represents and warrants that Employee (i) is free to enter into this Agreement and to perform each of the terms and covenants contained herein, (ii) is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and (iii) will not be in violation or breach of any other agreement by reason of Employee's execution and performance of this Agreement and Employee has identified any exceptions on Exhibit C ("Possible Violations of Third Party Rights") attached hereto and incorporated by reference. 32 EXHIBIT A PRIOR INVENTIONS _________ Yes, I claim an ownership interest in the following Inventions. ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ _________ No, I do not claim an ownership interest in any Inventions. By:___________________________________ Dated:________________________________ Witnessed by: ____________________________________ ____________________________________ (Printed Name of Representative) Dated:______________________________ 33 EXHIBIT B LIMITED EXCLUSION NOTIFICATION THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between you and the Company does not require you to assign or offer to assign to the Company any invention that you developed entirely on your own time without using the Company's equipment, supplies, facilities or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the Company's business, or actual or demonstrably anticipated research or development of the Company. (2) Result from any work performed by you for the Company. To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between the Company and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I ACKNOWLEDGE RECEIPT of a copy of this notification. By:___________________________________ Dated:________________________________ Witnessed by: ____________________________________ ____________________________________ (Printed Name of Representative) Dated:______________________________ 34 EXHIBIT C POSSIBLE VIOLATIONS OF THIRD PARTY AGREEMENTS OR THIRD PARTY INTELLECTUAL PROPERTY RIGHTS _________ I am aware of the following potential violations of former consulting, employment or other third party agreements, or infringements upon the intellectual property rights of third parties which could occur due to my contemplated activities and duties pursuant to that certain Consulting Agreement of even date herewith or that have occurred due to any of my previous activities performed on behalf of the Company. Describe in detail any potential violations or infringements: ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ _________ I am unaware of any potential violations of former consulting, employment or other third party agreements, or of any infringements upon the intellectual property rights of third parties which could occur due to my contemplated activities and duties pursuant to that certain Employment Agreement of even date herewith or that have occurred due to any of my previous activities performed on behalf of the Company. By:___________________________________ Dated:________________________________ Witnessed by: ____________________________________ ____________________________________ (Printed Name of Representative) Dated:______________________________ EX-10.4 10 EXHIBIT 10.4 1 EXHIBIT 10.4 STOCK PURCHASE AGREEMENT SERIES B PREFERRED By and Between COMBICHEM, INC., a California corporation and SEQUOIA CAPITAL VI, a California limited partnership SEQUOIA TECHNOLOGY PARTNERS VI, a California limited partnership SEQUOIA XXIV, a California limited partnership FORWARD VENTURES II, L.P., a Delaware limited partnership November 29, 1994 2 TABLE OF CONTENTS
Page ---- 1. Sale of Series B Preferred Stock . . . . . . . . . . . . . . . . . . . . . . 1 2. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. Representations and Warranties of the Company . . . . . . . . . . . . . . . 2 (a) Organization and Standing; Articles and Bylaws . . . . . . . . . . . 2 (b) Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (c) Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (d) Validity of the Shares . . . . . . . . . . . . . . . . . . . . . . . 3 (e) Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (f) Stockholders, Directors and Officers; Indebtedness . . . . . . . . . 3 (g) Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (i) Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (j) Title to Properties; Liens and Encumbrances . . . . . . . . . . . . 3 (k) Franchises, Licenses, Trademarks, Patents and Other Rights . . . . . 4 (1) Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (m) Compliance With Other Instruments . . . . . . . . . . . . . . . . . 4 (n) Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (o) Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 5 (p) Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . 5 (q) Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . 5 4. Representations and Warranties of the Purchaser . . . . . . . . . . . . . . 5 (a) Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (b) Investment Intent . . . . . . . . . . . . . . . . . . . . . . . . . 5 (c) Reliance Upon the Purchasers Representations . . . . . . . . . . . . 5 (d) Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . 6 (e) Receipt of Information . . . . . . . . . . . . . . . . . . . . . . . 6 (f) Investment Experience . . . . . . . . . . . . . . . . . . . . . . . 6 (g) Limitations on Disposition . . . . . . . . . . . . . . . . . . . . . 6 (h) Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5. Market Standoff Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 7 6. Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (a) Delivery of Financial Statements . . . . . . . . . . . . . . . . . 8 (b) Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (e) Termination of Covenants . . . . . . . . . . . . . . . . . . . . . . 8 (d) Stock Registration . . . . . . . . . . . . . . . . . . . . . . . . . 8 (e) Prompt Payment of Taxes, etc . . . . . . . . . . . . . . . . . . . . 9 (f) Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (g) Key Person Life Insurance . . . . . . . . . . . . . . . . . . . . . 9
3 (h) Approval of Expenditures . . . . . . . . . . . . . . . . . . . . . . 9 (j) Maintenance of Corporate Existence, etc. . . . . . . . . . . . . . . 9 7. The Purchasers' Rights to Purchase Additional Shares . . . . . . . . . . . . 10 8. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 9. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (a) Further Instruments and Actions . . . . . . . . . . . . . . . . . . 12 (b) Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 (c) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (e) Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . 13 (f) Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . 13 (g) Counsel to the Company . . . . . . . . . . . . . . . . . . . . . . . 13
EXHIBITS Exhibit A Schedule of Shares Purchased by Purchasers Exhibit B Schedule of Exceptions Exhibit C Schedule of Current Shareholders Exhibit D Schedule of Patent, Trademark and Copyright Rights Exhibit E Schedule of Material Contracts Exhibit F Employee Agreement Regarding Confidentiality and Assignment of Inventions 4 STOCK PURCHASE AGREEMENT SERIES B PREFERRED THIS STOCK PURCHASE AGREEMENT ("Agreement") is made as of November 29, 1994, by and between CombiChem, Inc., a California corporation (the "Company"), and SEQUOIA CAPITAL VI, a California limited partnership SEQUOIA TECHNOLOGY PARTNERS VI, a California limited partnership, SEQUOIA XXIV, a California limited partnership, and FORWARD VENTURES II, L.P., a Delaware limited partnership (collectively, the "Purchasers"), which term includes any permitted successors and assigns. WHEREAS, the Purchasers desire to make a cash payment to the Company as consideration for obtaining a fixed number of preferred shares of the Company's capital stock; and WHEREAS, the Company desires to sell a fixed number of preferred shares of the Company's capital stock to the Purchasers; and WHEREAS, certain defined terms used in this Agreement are referenced in Section 9 hereof. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchasers hereby agree as follows: 1. Sale of Series B Preferred Stock. Subject to the terms and conditions of this Agreement, the Purchasers hereby purchase from the Company, and the Company hereby agrees to issue and sell to the Purchasers at the Closing, that number of shares of the Company's Series B Preferred Stock indicated opposite each Purchaser's name on the Schedule of Purchasers, attached hereto as Exhibit A and incorporated by reference herein, at a purchase price of seventy-five cents ($0.75) per share (collectively, the "Shares"). 2. Closing. The purchase and sale of the Shares shall take place at the offices of Gray, Cary, Ware & Freidenrich at 2:00 p.m. on November 29, 1994, and/or at such other place and time as the Company and any of the Purchasers shall mutually agree, either orally or in writing (the "Closing"). At the Closing, subject to the terms and conditions hereof, the Company shall deliver to the Purchasers certificates, registered in the name the Purchasers designate by notice to the Company, representing the Shares purchased by the Purchasers, dated the date of the Closing, and the Purchasers shall pay the Purchase Price to the Company by check, wire transfer, or such other form of payment as shall be mutually agreed upon by the Purchasers and the Company. At the discretion of the Company, sale of the Shares to the Purchasers may occur in multiple, separate closings up to December 15, 1994. 3. Representations and Warranties of the Company. Except as specifically disclosed in this Agreement, in the schedule of exceptions attached hereto as Exhibit B and incorporated by reference, or as otherwise learned by the Purchaser, the Company hereby represents and warrants to the Purchasers as follows: 5 (a) Organization and Standing, Articles and Bylaws. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of California, and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as presently conducted. The Company is duly qualified to do business as a foreign corporation in each jurisdiction in which the conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the Company's business. The Company has furnished the Purchasers or their special counsel with copies of its Articles of Incorporation and its Bylaws. Said copies are true, correct, and complete and contain all amendments through the date of the Closing. (b) Capitalization. The authorized capital stock of the Company, consists of 30,000,000 shares of no par value common stock and 10,000,000 shares of no par value preferred stock. The first series of preferred stock is comprised of 1,000,000 shares designated "Series A Preferred Stock". The second series of preferred stock is comprised of 1,500,000 shares designated "Series Z Preferred Stock." The third series of preferred stock is comprised of 2,226,667 shares designated "Series B Preferred Stock." Immediately prior to the Closing, there are issued and outstanding 1,547,500 shares of the Company's Common Stock, 1,000,000 shares of Series A Preferred Stock, and 200,000 shares of Series Z Preferred Stock. All issued and outstanding shares of the Company's capital stock are represented on Exhibit C hereto, have been duly authorized and validly issued by the Company in compliance with applicable federal and state securities laws, and are fully paid and nonassessable. (c) Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all the Company's obligations under this Agreement and the Stock Registration Rights Agreement, and for the authorization, issuance, sale and delivery of the Shares and the shares of Common Stock issuable upon conversion thereof ("Underlying Common Shares") has been taken prior to the Closing. This Agreement, when executed and delivered by the Company and the Purchasers, and the Stock Registration Rights Agreement shall constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors. The execution, delivery and performance by the Company of this Agreement and compliance herewith and the sale and issuance of the Shares and Common Stock issuable upon conversion of the Shares will not result in any violation of and will not conflict with, or result in a breach of any of the terms of, or constitute a default under, any provision of state or federal law to which the Company is subject, the Company's Articles of Incorporation or Bylaws, each as amended, or any provision of any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation or other restriction to which the Company is a party or by which it is bound, the breach of or default under which would have a material adverse effect upon the business or operations of the Company, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company pursuant to any such term. The Shares, when issued in compliance with the provisions of this Agreement will be 2 6 validly issued, fully paid and nonassessable and will be free of any liens or encumbrances; provided, however, that the Shares (and the Common Stock issuable upon conversion thereof) may be subject to restrictions on transfer under state and/or federal securities laws. The shares of Common Stock issuable upon conversion of the Shares have been duly and validly reserved and are not subject to any preemptive rights or rights of first refusal, and upon issuance, will be validly issued, fully paid and nonassessable. (d) Validity of the Shares. The Shares and the Underlying Common Shares will be validly issued, fully paid and nonassessable. (e) Subsidiaries. The Company has no subsidiaries and does not own of record or beneficially any capital stock or equity interest or investment in any corporation, association or business entity. (f) Stockholders, Directors and Officers; Indebtedness. The Company is not currently indebted to its officers, directors or stockholders or any of their respective relatives, other than travel, relocation, normal compensation and other expenses which are advanced and reimbursed in the ordinary course of business. To the best of the Company's knowledge, none of the officers or directors or significant employees or consultants of the Company, has, individually or collectively, a material interest in any entity which is a competitor, customer or supplier of (or has any existing contractual relationship with) the Company. (g) Disclosure. This Agreement and the Exhibits hereto do not contain any untrue statement of a material fact and do not omit to state a material fact necessary in order to make the statements contained herein or therein not misleading. The Company has provided the Purchasers with all the information which the Purchasers have requested for deciding whether to purchase the Shares and all information which the Company believes is reasonably necessary to enable the Purchasers to make such a decision. (h) Litigation. There are no actions, suits, proceedings or investigations pending, or to the Company's knowledge, claims asserted, to which the Company is a party or its property is subject, which might result in any material adverse change in the business or financial condition of the Company or any of its properties or assets, or in any material impairment of the right or ability of the Company to carry on its business as now conducted, or in any material liability on the part of the Company, and none which question the validity of this Agreement or any action taken or to be taken in connection herewith. (i) Consents. No consent, approval, qualification, order or authorization of, or filing with, any governmental authority, is required in connection with the Company's valid execution, delivery or performance of this Agreement, or the offer, sale or issuance of the Shares by the Company, the conversion of the Shares, the issuance of Common Stock upon conversion of the Shares, or the consummation of any other transaction contemplated on the part of the Company hereby, except filings required pursuant to the applicable federal and state securities 3 7 laws and blue sky laws, which filings, the Company covenants to complete within fifteen (15) days of the Closing. (j) Title to Properties; Liens and Encumbrances. The Company has good and marketable title to its properties and assets and has good title to all its leasehold interests, in each case subject to no mortgage, pledge, lien, security interest, conditional sale agreement, encumbrance or charge, except (i) tax, materialmen's or like liens for obligations not yet due or payable or being contested in good faith by appropriate proceedings, or (ii) possible minor liens or encumbrances which do not in any case materially detract from the value of the property subject thereto or materially impair the operations of the Company and which have not arisen otherwise then in the ordinary course of business. (k) Franchises, Licenses, Trademarks, Patents and Other Rights. To the best of the Company's knowledge, it has all franchises, permits, licenses and other similar authority necessary for the conduct of its business, the lack of which could materially and adversely affect the operations or condition, financial or otherwise, of the Company, and it is not in default in any material respect under any of such franchises, permits, liens or other similar authority. To the best of Company's knowledge, the Company possesses certain patent, trademark, trade name and copyright rights as set forth on Exhibit D. To the best of Company's knowledge, the Company's intellectual property rights are sufficient to allow Company to proceed with its business as planned and Company is not aware of any infringements of its intellectual property rights. Reasonable security measures have been taken by the Company to protect the secrecy, confidentiality and value of the Company's trade secrets, confidential information, and intellectual property rights referred to in this Section 3(k). (l) Offering. Subject to the truth and accuracy of the Purchasers' representations set forth in this Agreement, the offer, sale and issuance of the Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), and from any applicable blue sky requirements of the State of California. (m) Compliance With Other Instruments. The Company is not in violation of any term of its Articles of Incorporation or Bylaws nor any material term of any mortgage, indenture, contract, agreement, instrument, judgment, decree, order, statute, rule or regulation to which the Company is subject and a violation of which would have a material adverse effect on the condition, financial or otherwise, or operations of the Company. (n) Employees. To the best of the Company's knowledge and belief, no employee of the Company is in violation of any term of any employment contract, patent disclosure agreement, non-competition agreement, or any restrictive covenant to a former employer relating to the right of any such employee to be employed by the Company because of the nature of the business conducted or presently proposed to be conducted by the Company or to the use of trade secrets or proprietary information of others. There is neither pending nor, to 4 8 the Company's knowledge and belief, threatened any actions, suits, proceedings or claims, or to its knowledge any basis therefor or threat thereof with respect to any contract, agreement, covenant or obligation referred to in the preceding sentence. The Company does not have any collective bargaining agreement covering any of its employees. (o) Material Contracts. A true and complete list of all contracts, agreements and investments with respect to which the Company is party and has an obligation in excess of Twenty Thousand Dollars ($20,000) is set forth on Exhibit E. (p) Board of Directors. The Company's Board of Directors consists of Ivor Royston, Robert Curtis and Peter Bick. (q) Stock Option Plan. Commencing on November 1, 1994, the Company has agreed not to issue, sell or otherwise transfer in excess of one million three hundred thousand (1,300,000) shares of the Company's Common Stock to employees, directors, officers or consultants of the Company pursuant to any stock option plan or other arrangement approved by the Board of Directors, which number may be increased by the approval of not less than seventy-five percent (75%) of the Board of Directors; provided, however, that this one million three hundred thousand (1,300,000) share limitation shall not include any shares of Common Stock issued prior to November 1, 1994. 4. Representations and Warranties of the Purchaser. The Purchasers hereby represent and warrant to the Company as follows: (a) Authorization. The Purchasers have the requisite legal power and authority to enter into this Agreement and that this Agreement when executed shall constitute a valid and legally binding obligation of the Purchaser. (b) Investment Intent. This Agreement is made with the Purchasers in reliance upon their representation to the Company, which by their execution hereof they confirm, that the Shares have been acquired with their own funds for investment for an indefinite period for its own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that they have no present intention of selling, granting participation in, or otherwise distributing the same. By executing this Agreement, the Purchasers further represent that they do not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participation, to such person or to any third person, with respect to any of the Shares. (c) Reliance Upon the Purchasers' Representations. The Purchasers understand (i) that the Shares are not, and the Underlying Common Shares acquired on conversion thereof at the time of issuance may not be, registered under the Securities Act or qualified under the California Corporate Securities Law of 1968, as amended (the "Law"), and (ii) that the Shares are being issued to the Purchasers on the ground that the sale provided for in this Agreement and 5 9 the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof and/or Regulation D promulgated thereunder and the exemption from qualification provided by Section 25102(f) of the Law, and (iii) that the Company's reliance on such exemptions is predicated on the Purchasers' representations set forth herein. The Purchasers realize that the basis for the exemptions may not be present if, notwithstanding such representations, the Purchasers have in mind merely acquiring the Shares for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. The Purchasers do not have any such intention. These exemptions only exempt the issuance of the Shares to the Purchasers and not any sale or other disposition of the Shares or any interest therein by the Purchasers. (d) Restricted Securities. The Purchasers hereby confirm that they have been informed that the Shares are restricted securities under the Securities Act and may not be resold or transferred unless the Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. In addition, the Purchasers understand that any resale or transfer must comply with applicable state securities laws. Accordingly, the Purchasers hereby acknowledge that they are prepared to hold the Shares for an indefinite period, and that the Purchasers are familiar with the provisions of Rule 144 of the Securities and Exchange Commission issued under the Securities Act, and are aware that Rule 144 is not presently available to exempt the sale of the Shares from the registration requirements of the Securities Act. (e) Receipt of Information. The Purchasers acknowledge that they have received all the information they consider necessary or appropriate for deciding whether to purchase the Shares. The Purchasers further represent that they have had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and the business, properties, prospects, and financial condition of the Company, and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy or any information furnished to them or to which they had access. (f) Investment Experience. In connection with the investment representations made herein, the Purchasers represent that each of them; is an "accredited investor" as defined in Section 501 of Regulation D, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, has the ability to bear the economic risks of its investment and has been furnished with and has had access to all of the information it considers necessary or appropriate to evaluate the risks and merits of an investment in the Shares, and has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. (g) Limitations on Disposition. The Purchasers agree that in no event will they make a disposition of any of the Shares, unless and until (a) they shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (b) they shall have furnished the 6 10 Company with an opinion of counsel satisfactory to the Company to the effect that (i) such disposition will not require registration of such Shares under the Securities Act, or (ii) that appropriate action necessary for compliance with the Securities Act has been taken, or (c) the Company shall have waived, expressly and in writing, its rights under clauses (a) and (b) of this subparagraph. The opinion shall also indicate that the disposition is exempt from, in compliance with, or qualified under all applicable state securities laws. (h) Legends. All certificates representing any shares of Shares of the Company subject to the provisions of this Agreement shall have endorsed thereon customary legends regarding: (1) Restrictions on transfer under the Federal Securities Act of 1933. (2) Market Stand-Off Agreements pursuant to Section 5 hereof. (3) Any legend required by state securities laws. 5. Market Stand-off Agreement. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, the Purchasers shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to the Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for one hundred eighty (180) days from and after the effective date of such registration statement or such longer time as may be required by the Company's underwriters. The limitations of this Section 5 shall remain in effect for the two-year period immediately following the effective date of the Company's initial public offering and shall thereafter terminate and cease to have any force or effect. (b) In the event any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding common shares is effected without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this Section 5 to the same extent the Shares are at such time covered by such provisions. (c) In order to enforce the limitations of this Section 5, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. (d) The obligations in this Section 5 shall not apply to a registration relating solely to employee benefit plan shares or to a Rule 145 transaction registered on Form S-4. 7 11 6. Covenants of the Company. (a) Delivery of Financial Statements. The Company shall deliver to the Purchasers: (1) as soon as practicable after the end of each fiscal year of the Company, audited financial statements for such fiscal year, prepared in accordance with generally accepted accounting principles ("GAAP") together with an annual report of the Company, all in reasonable detail and certified by an independent public accountant of recognized national standing selected by the Company; (2) as soon as practicable after the end of each month of each fiscal year of the Company, unaudited financial statements for such month, prepared in accordance with generally accepted accounting principles consistently applied, subject to changes resulting from year-end audit adjustments and the absence of notes, all in reasonable detail and certified by the principal financial or accounting officer of the Company; (3) such other information relating to the financial condition, business, prospects or corporate affairs of the Company as the Purchasers or any assignee of the Purchasers may from time to time reasonably request, provided, however, that the Company shall not be obligated under provision of this Agreement to provide information which it deems in good faith to be a trade secret or similar confidential information. (b) Inspection. The Company shall permit the Purchasers, at their expense, to visit and inspect the Company's properties, to examine its books of account and records, and to discuss the Company's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by the Purchaser; provided, however, that the Company shall not be obligated pursuant to this section to provide access to any information which it reasonably considers to be a trade secret or similar confidential information. (c) Termination of Covenants. The covenants set forth in this Section 6 shall terminate and be of no further force or effect upon the consummation of the sale of securities pursuant to a registration statement filed by the Company under the Securities Act in connection with the firm commitment underwritten offering of its securities to the general public where the gross proceeds to the Company are at least five million dollars ($5,000,000). (d) Stock Registration. Simultaneous with entering into this Agreement, the Company and the Purchasers are entering into a Amendment to the Series A Amended and Restated Stock Registration Rights Agreement (the "Amendment"), to amend the definition of "Shares" under that certain Series A Amended and Restated Stock Registration Rights Agreement, dated November 1, 1994 (the "Stock Registration Agreement"), to include the shares of Series B Preferred Stock purchased pursuant to this Agreement. 8 12 (e) Prompt Payment of Taxes, etc. The Company will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company or any subsidiary; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto, and provided further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. (f) Insurance. The Company will keep its assets and those of its subsidiaries which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in the Company's line of business, in amounts sufficient to allow it to replace any of its properties which might be damaged or destroyed. The Company will maintain with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated. (g) Key Person Life Insurance. The Company shall use reasonable efforts to obtain and maintain with financially sound and reputable insurers, an annually renewable key person term life insurance policy in the amount of $1,000,000 on the life of its chief executive officer. Such policy shall name the company as loss payee and shall be maintained by the Company with financially sound and reputable insurers. The Board of Directors shall decide whether to renew this policy on an annual basis, in its sole discretion. (h) Approval of Expenditures. Until the Company obtains an aggregate cash investment of three million dollars ($3,000,000) in the Company's capital stock, (i) the Company shall submit each year's proposed annual budget to the Company's Board of Directors prior to year-end and such budget must be approved by not less than seventy-five percent (75%) of the Company's Board of Directors; (ii) the Company shall not make any expenditure in excess of $50,000 (which is not provided for in the Company's approved annual budget) unless such expenditure is approved by an affirmative vote of not less than seventy-five percent (75%) of the Company's Board of Directors; and (iii) the Company shall not liquidate or otherwise dispose of any assets with a value in excess of $50,000 without an affirmative vote of not less than seventy-five percent (75%) of the Company's Board of Directors. (i) Accounts and Records. The Company will keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis. (j) Maintenance of Corporate Existence, etc. The Company shall maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights 9 13 to use patents, processes, licenses, trademarks, trade names or copyrights owned or possessed by it or any subsidiary and deemed by the Company to be material to the conduct of their business. (k) Availability of Common Stock for Conversion. The Company will from time to time, in accordance with the laws of the State of California, increase the authorized amount of Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall be insufficient to permit conversion of all the then outstanding shares of Series B Preferred Stock. (l) Employee Invention and Proprietary Rights Assignment Agreement. The Company and each person now or hereafter employed in any technical capacity by it or any subsidiary with access to confidential information will enter into an Employee Agreement Regarding Confidentiality and Assignment of Inventions substantially in the form attached hereto as Exhibit F hereto, or an alternative agreement which provides substantially similar protection to the Company. 7. The Purchasers' Rights to Purchase Additional Shares. (a) Subject to the terms and conditions specified in this Section 7, the Company hereby grants to the Purchasers a right to purchase a pro rata share of New Securities (as hereinafter defined) equal to the ratio of (i) the aggregate number of shares of the Company's Common Stock owned by the Purchasers immediately prior to the issuance of New Securities (assuming full conversion of all owned convertible securities into shares of Common, Stock of), and (ii) to the total number of shares of Common Stock outstanding on a fully diluted basis immediately prior to the issuance of New Securities (the "Pro Rata Share"). For purposes of this Section 7, Purchasers include any general partners and affiliates of a Purchaser. Purchasers shall be entitled to apportion the right to purchase additional Shares hereby granted them among themselves and their partners and affiliates in such proportions as they deem appropriate. Not later than thirty calendar days after the Company sells any shares solely for cash (excluding however securities described in Section 7(e) hereof), including any common shares, preferred shares, or securities convertible into any shares ("New Securities"), the Company shall make an offering of some of the New Securities to the Purchasers in accordance with the following provisions: (b) The Company shall deliver a notice by certified mail ("Notice") to the Purchasers stating (i) the number of New Securities sold and available for sale, (ii) the number of such New Securities the Purchasers are entitled to purchase, as the Purchasers' Pro Rata Shares, and (iii) the price and terms upon which the New Securities were sold or are to be sold. (c) Within 20 calendar days after the Company provides such Notice, each Purchaser may elect to purchase or obtain, at the price and on the terms specified in the Notice, up to the Purchasers' Pro Rata Share of the New Securities. 10 14 (d) If any party elects not to obtain its Pro Rata Share of the New Securities, the Company may, during the 90-day period following the expiration of the period provided in subsection 7(c) hereof, assign the right to purchase the remaining unsubscribed portion of such New Securities to any person or persons at a price not less than, and upon terms no more favorable to the offeree than those specified in the Notice without offering any of such unsubscribed New Securities to the Purchaser. If the Company does not enter into an agreement for the sale of the New Securities within such period, or if such agreement is not consummated within such 90-day period, the Company's right to assign the right to purchase the New Securities provided hereunder shall be deemed to be revoked and such New Securities shall not be offered to any third party unless first re-offered to the Purchasers in accordance herewith. (e) Notwithstanding any other provision to the contrary, the right to purchase New Securities contained in this Section 7 shall not be applicable (i) to the issuance or sale of up to one million three hundred thousand (1,300,000) shares of the Company's Common Stock (or related options), issued after November 1, 1994, to employees, directors, officers or consultants of the Company pursuant to any stock option plan or other arrangement approved by the Board of Directors which number may be increased by the approval of not less than seventy-five percent (75%) of the Board of Directors, provided, however, that only a majority approval of the Company's Board of Directors shall be required after the Company has obtained an aggregate cash investment of Three Million Dollars ($3,000,000) in its capital stock; (ii) to or after the consummation of a bona fide, firmly underwritten public offering of shares of common stock, registered under the Securities Act pursuant to a registration statement; (iii) the issuance of securities pursuant to the conversion or exercise of convertible or exercisable securities; (iv) the issuance of securities in connection with a bona fide business acquisition of or by the Company, whether by merger, consolidation, sale of assets, sale or exchange of shares or otherwise; (v) to securities issued in connection with obtaining real estate lease financing, whether issued to a lessor, guarantor or other person; (vi) to securities issued in connection with any borrowings, direct or indirect, from financial institutions by the Company, including without limitation, equipment lease financing arrangements approved by the Board of Directors; (vii) to securities issued pursuant to the acquisition of license or other rights, assets or technology with third parties or in connection with corporate partnering arrangements with third parties, provided that such arrangements are approved by not less than seventy-five percent (75%) of the Company's Board of Directors; and (viii) to securities issued in connection with any stock split, stock dividend or recapitalization of the Company. (f) The right to purchase New Securities set forth in this Section 7 may not be assigned or transferred except that (i) such right is assignable by the Purchasers to any wholly owned subsidiary or parent of, or to any corporation or entity that is, within the meaning of the Act, controlling, controlled by or under common control with, any such Purchaser, and (ii) such right is assignable between and among, any of the Purchasers of the Company's preferred stock. (g) With respect to rights to purchase additional shares, substantially similar to the rights provided in Section 7 of this Agreement which were previously granted to the 11 15 Purchasers, the Purchasers hereby waive all rights to notice from the Company and to purchase any additional shares arising from the Company's sale of the Shares pursuant to this Agreement, and from the Company's sale, prior to January 16, 1995, of up to 26,667 Shares of Series B stock to be offered for sale to Lynn H. Caporale. 8. Defined Terms. When used herein the following defined terms shall have the respective definitions as set forth below: Accredited Investor shall have the meaning set forth in Section 4(f). Agreement shall have the meaning set forth in the first paragraph. Closing shall have the meaning set forth in Section 2. Company shall have the meaning set forth in first paragraph. GAAP shall have the meaning set forth in Section 6(a)(1). Law shall have the meaning set forth in Section 4(c). New Securities shall have the meaning set forth in Section 7(a). Notice shall have the meaning set forth in Section 7(b). Pro Rata Shares shall have the meaning set forth in Section 7(a). Purchase Price shall have the meaning set forth in Section 1. Purchasers shall have the meaning set forth in the first paragraph. Shares shall have the meaning set forth in Section 1. Underlying Common Shares shall have the meaning set forth in Section 3(c). 9. Miscellaneous. (a) Further Instruments and Actions. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (b) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed 12 16 to the other party hereto at its address hereinafter shown below its signature or at such other address as such party may designate by advance written notice to the other party hereto. (c) Expenses. The Company and the Purchasers shall bear their own expenses and legal fees incurred with respect to this Agreement and the transactions contemplated hereby; provided, however, that the Company will pay the reasonable legal fees of Wilson, Sonsini, Goodrich & Rosati, as special counsel to some of the Purchasers, in an amount not to exceed $4,000, plus reasonable out-of-pocket expenses. (d) Governing Law. This Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Agreement shall be determined in accordance with the laws of the State of California. (e) Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon the Purchaser, its successors and assigns. (f) Amendments and Waivers. This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, written or oral. This Agreement may only be amended with the written consent of the parties hereto, or the successors or assigns of the foregoing, and no oral waiver or amendment shall be effective under any circumstances whatsoever. (g) Counsel to the Company. The Purchasers acknowledge and agree that this Agreement has been prepared by Gray Cary Ware & Freidenrich, counsel to the Company, which counsel has represented the interests of the Company and not those of the Purchasers with respect to the transactions documented by this Agreement. The Purchasers further acknowledge and agree that the Purchasers have been provided the opportunity and encouraged to consult with counsel of the Purchasers' own choosing with respect to this Agreement. The Purchasers certify and acknowledge that the Purchasers have carefully read all of the provisions of this Agreement and that the Purchasers fully understand and shall fully and faithfully comply with such provisions. 13 17 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMPANY: COMBICHEM, INC., a California corporation Address: 10975 Torreyana Road, Suite 230 San Diego, California 92121 By: /s/ Robert A. Curtis Robert A. Curtis, Chief Executive Officer PURCHASERS: By: /s/ PIERRE LAMOND ----------------------------------- ----------------------------------- In the Capacity indicated for each of the following entities: SEQUOIA CAPITAL VI, Address: a California Limited Partnership 3000 Sand Hill Road a General Partner Building 4, Suite 280 Menlo Park, California 94025 SEQUOIA TECHNOLOGY PARTNERS Address: VI, a California Limited Partnership 3000 Sand Hill Road a General Partner Building 4, Suite 280 Menlo Park, California 94025 SEQUOIA XXIV Address: a California Limited Partnership 3000 Sand Hill Road a General Partner Building 4, Suite 280 Menlo Park, California 94025 [Signature Page to Series B Stock Purchase Agreement] 14 18 FORWARD VENTURES II, L.P., Address: a Delaware limited partnership 10975 Torreyana Road, Suite 230 San Diego, California 92121 By: Forward II Associates, L.P., a Delaware limited partnership, its General Partner By: /s/ Ivor Royston ---------------------------------------- Ivor Royston, a General Partner [Signature Page to Series B Stock Purchase Agreement] 15 19 EXHIBIT A SCHEDULE OF SHARES PURCHASED BY PURCHASER
Number of Shares Purchaser of Preferred Purchase Price - --------- ------------ -------------- SEQUOIA CAPITAL VI 1,213,334 910,000.50 SEQUOIA TECHNOLOGY PARTNERS VI 66,667 50,000.25 SEQUOIA XXIV 53,333 39,999.75 FORWARD VENTURES II, L.P. 866,666 649,999.50 Total 2,200,000 1,650,000.00
20 EXHIBIT B SCHEDULE OF EXCEPTIONS 1. Capitalization (Section 3(b)) 175,000 shares of Common Stock have been committed for issuance in that certain Employment Offer to Lynn H. Caporale dated November 8, 1994; 10,000 shares of Common Stock have been committed for issuance in that certain Employment Offer Letter Agreement with Bobbie Bosley dated November 18, 1994. 325,000 to 400,000 shares of Series Z Preferred are reserved for issuance to The Scripps Research Institute ("Scripps") in that certain Scripps Research Institute Licensing Letter of Understanding dated August 23, 1994; Up to 150,000 shares of Series Z Preferred are presently committed for issuance pursuant to that certain Warrant Commitment Letter with Comdisco, Inc. dated November 23, 1994 and this number could increase due to anti-dilution protection given pursuant to the proposed warrant agreement; and 26,667 shares of Series B Preferred have been offered for sale to Lynn H. Caporale in that certain Employment Offer to Lynn H. Caporale dated November 8, 1994. 2. Employees (Section 3(f)) Robert A. Curtis owns stock in and is a former officer of Pharmacopeia which is a competitor of the Company; and Lynn H. Caporale owns stock in and is a former employee of Merck. 3. Litigation (Section (3h)) Affymax and Company have independent patent rights which may be blocking. Affymax currently utilizes the name CombiChem in its presentations. 4. Intellectual Property (Section 3(k)) The Company is a start up entity which is in the process of negotiating with The Scripps Research Institute and Johnson and Johnson to secure licensing rights to certain patents and other intellectual property which may be important to the operation of the Company's current and future business. The Company is not aware of any competing intellectual property rights held by third parties which adversely affect the Company's right to utilize its intellectual property or the conduct of the Company's current or future business endeavors. 21 EXHIBIT C SCHEDULE OF STOCK HOLDERS (Common and Preferred) 22 COMBICHEM, INC. COMMON STOCK LEDGER
======================================================================================================= Cert # No. of Shares Shareholder Date issued - ------------------------------------------------------------------------------------------------------- 1 175,000 KIM D. JANDA September 28th, 1994 - ------------------------------------------------------------------------------------------------------- 2 150,000 CHI-HUEY WONG September 28th, 1994 - ------------------------------------------------------------------------------------------------------- 3 150,000 DALE L. BOGER September 28th, 1994 - ------------------------------------------------------------------------------------------------------- 4 10,000 ERIC ERB September 28th, 1994 - ------------------------------------------------------------------------------------------------------- 5 37,500 STANDISH FLEMING September 28th, 1994 - ------------------------------------------------------------------------------------------------------- 6 37,500 ROYSTON FAMILY TRUST September 28th, 1994 - ------------------------------------------------------------------------------------------------------- 7 150,000 SYDNEY BRENNER September 28th, 1994 - ------------------------------------------------------------------------------------------------------- 8 225,000 FORWARD VENTURES II, L.P. September 28th, 1994 - ------------------------------------------------------------------------------------------------------- 9 10,000 JEFFREY SOLLENDER September 28th, 1994 - ------------------------------------------------------------------------------------------------------- 10 500,000 ROBERT CURTIS October 18, 1994 - ------------------------------------------------------------------------------------------------------- 11 2,500 GAIL ERWIN October 28, 1994 - ------------------------------------------------------------------------------------------------------- 12 91,000 SEQUOIA CAPITAL VI November 1, 1994 - ------------------------------------------------------------------------------------------------------- 13 5,000 SEQUOIA TECHNOLOGY PARTNERS VI November 1, 1994 - ------------------------------------------------------------------------------------------------------- 14 4,000 SEQUOIA XXIV November 1, 1994 - ------------------------------------------------------------------------------------------------------- 15 10,000 BOBBIE BOSLEY November 18, 1994* - ------------------------------------------------------------------------------------------------------- 16 175,000 LYNN A CAPORALE November 8, 1994* - ------------------------------------------------------------------------------------------------------- TOTAL 1,732,500 =======================================================================================================
* Shares contractually committed as of the date hereof pursuant to offer letters executed as of the dates indicated, but issuances have not yet been completed. 23 PREFERRED STOCK LEDGER
======================================================================================================= Cert # No. of Shares Shareholder Date issued - ------------------------------------------------------------------------------------------------------- PA1 600,000 FORWARD VENTURES II, L.P. August 26th, 1994 - ------------------------------------------------------------------------------------------------------- PA2 364,000 SEQUOIA CAPITAL VI November 1, 1994 - ------------------------------------------------------------------------------------------------------- PA3 20,000 SEQUOIA TECHNOLOGY PARTNERS VI November 1, 1994 - ------------------------------------------------------------------------------------------------------- PA4 16,000 SEQUOIA XXIV November 1, 1994 ======================================================================================================= TOTAL 1,000,000 Series A ======================================================================================================= PZ1 200,000 SYDNEY BRENNER October 12th, 1994 ======================================================================================================= TOTAL 1,200,000 Preferred =======================================================================================================
24 EXHIBIT D SCHEDULE OF PATENT, TRADEMARK AND COPYRIGHT RIGHTS 1. PATENTS (a) The Company has been assigned rights to the following patents: (1) Sydney Brenner, "Combinatorial libraries and methods for their use," US Patent Application Serial No. 07/978,646, filed November 19, 1992. (2) Sydney Brenner, "Combinatorial libraries and methods for their use," US Patent Application Serial No. 08/168,966, filed December 15, 1993 (continuation in part of 07/978,646). (3) Sydney Brenner, "Combinatorial libraries and methods for their use," US Patent Application Serial No. 08/281,195, filed July 26, 1994 (continuation in part of 08/168,966). (4) Sydney Brenner, "Multidimensional conduit combinatorial library synthesis device," US Patent Application Serial No. 08/281,194, filed July 26, 1994. (b) The Company is in the process of negotiating licenses to use the following patents from The Scripps Research Institute and Johnson and Johnson: See attached TSRI Technology License Letter of Understanding Known Issues Affymax Corporation's Patent Application (International Application No. PCT/US92/07815) may prove to be blocking on the Brenner/Lemer/Janda Patent Applications (U.S. Serial No. 07/860,445 or International Application No. PCT US93/20243). The Company does not have a licensing agreement with Johnson & Johnson and does not have a definitive written agreement with Scripps Research Institute beyond the Letter of Understanding. 2. TRADEMARKS The Company has been assigned the following intent to use trademark applications: COMBICHEM Serial No. 74/363,514 COMBICHEM Serial No. 74/363,515 25 Known Issues Affymax Corporation has attempted to register the CombiChem trademark in the United States and such attempt was rejected. To the Company's knowledge, Affymax has not registered the CombiChem trademark in Europe. The Company has not registered the CombiChem trademark outside of the United States. 3. COPYRIGHTS The Company does not possess any registered copyrights. 26 EXHIBIT E SCHEDULE OF MATERIAL CONTRACTS 1. Asset Purchase Agreement with CombiChem, Inc., a Delaware corporation dated September 28, 1994; 2. Promissory Note to CombiChem, Inc., a Delaware corporation dated September 28, 1994; 3. Series A Stock Purchase Agreement with Forward Ventures II, L.P.,a Delaware limited partnership dated August 26, 1994; (plus supplement) 4. Series Z Stock Purchase Agreement with Dr. Sydney Brenner dated October 12, 1994; 5. Series Z Stock Registration Rights Agreement with Dr. Sydney Brenner dated October 12, 1994; 6. Employment Agreements with Robert A. Curtis dated October 18, 1994, Eric Erb dated August 16, 1994 and Jeffrey Sollender dated June 23, 1994; 7. Consulting Agreements with Dr. Sydney Brenner dated August 10, 1994, Dale L. Boger dated July 25, 1994, Kim D. Janda dated August 9, 1994, and Chi-Huey Wong dated August 11, 1994; 8. Termination Agreement dated October 20, 1994 with David Palella dba BioScience Ventures; Company currently owes Mr. Palella $25,000; 9. Sublease of Research Space from Science Applications International Corporation dated September 1, 1994; 10. $175,000 Purchase Order for NMR Equipment 11 $25,000 Purchase Order for Ionized Water Purifier 12. Tenant Improvement Contract(s) and change orders thereto aggregating to $25,000; 13. The Scripps Research Institute Licensing Letter of Understanding dated August 23, 1994; 14. Equipment Master Lease and VL-1 Schedule Agreement dated November 16, 1994 with Comdisco, Inc. and Warrant Commitment Letter dated November 23, 1994; 15. Stock Purchase Agreement Preferred and Common with Sequoia Capital dated November 1, 1994; 16. Amended and Restated Series A Registration Rights Agreement dated November 1, 1994; 17. Employment Offer to Lynn H. Caporale dated November 8, 1994; and 18. Employment Offer Letter Agreement with Bobbie Bosley dated November 18, 1994. 27 EXHIBIT F COMBICHEM, INC. EMPLOYEE AGREEMENT REGARDING CONFIDENTIALITY AND ASSIGNMENT OF INVENTIONS This Agreement is intended to formalize in writing certain understandings and procedures which have been in effect since the time I was initially, employed by CombiChem, Inc., a California corporation (the "Company"). In return for my new or continued employment by the Company, I acknowledge and agree that: 1. No Conflict. I will perform for the Company such duties as may be designated by the Company from time to time. During my period of employment by the Company, I will devote my best efforts to the interests of the Company and will not engage in other employment or in any activities determined by the Company to be detrimental to the best interests of the Company without the prior written consent of the Company. 2. Period of Employment. As used herein. the period of my employment includes any time in which I may be retained by the Company as a consultant. 3. Prior Work. All previous work done by me for the Company relating in any way to the conception, design, development or support of products for the Company is the property of the Company. 4. Proprietary Information. My employment creates a relationship of confidence and trust between the Company and me with respect to any information: (a) Applicable to the business of the Company; or (b) Applicable to the business of any client or customer of the Company, which may be made known to me by the company or by any client or customer of the Company, or learned by me in such context during the period of my employment. All of such information has commercial value in the business in which Company is engaged and is hereinafter called "Proprietary Information." By way of illustration, but not limitation, Proprietary Information includes any and all technical and non-technical information including patent, copyright, trade secret, and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents, and formulae related to the current, future and proposed products and services of Company, and includes, without limitation, its respective information concerning research, experimental work, development, design details and specifications, engineering, financial information, procurement 28 requirements, purchasing manufacturing, customer lists, business forecasts, sales and merchandising and marketing plans and information. 5. Nondisclosure of Proprietary Information. All Proprietary Information is the sole property of the Company, its assigns, and its customers and the Company, its assigns and its customers shall be the sole owner of all patents, copyrights, maskworks, trade secrets and other rights in connection therewith. I hereby assign to the Company any rights I may have or acquire in such Proprietary Information. At all times, both during my employment by the Company and after its termination, I will keep in confidence and trust all Proprietary Information, and I will not use or disclose any Proprietary Information or anything directly relating to it without the written consent of the Company, except as may be necessary in the ordinary course of performing my duties as an employee of the Company. Notwithstanding the foregoing, it is understood that, at all such times, I am free to use information which is generally known in the trade or industry not as a result of a breach of this Agreement and my own skill, knowledge, know-how and experience to whatever extent and in whatever way I wish. 6. Return of Materials. Upon termination of my employment or at the request of the Company before termination, I will deliver to the Company all written and tangible material in my possession incorporating the Proprietary Information or otherwise relating to the Company's business. 7. Inventions. As used in this Agreement, the term "Inventions" means any and all new or useful art, discovery, improvement, technical development, or invention whether or not patentable, and all related know-how, designs, maskworks, trademarks, formulae, processes, manufacturing techniques, trade secrets, ideas, artwork, software or other copyrightable or patentable works. 8. No Adverse Use. I will not at any time during the Period of Employment or thereafter use the Company's Proprietary Information or Inventions in any manner which may directly or indirectly have an adverse effect upon the Company's business, nor will I perform any acts which would tend to reduce the Company's proprietary value in the Company's Proprietary Information or Inventions. 9. Disclosure of Prior Inventions. I have identified on Exhibit A ("Prior Inventions') attached hereto all Inventions relating in any way to the Company's business or demonstrably anticipated research and development which were made by me prior to my employment with the Company ("Prior Inventions"), and I represent that such list is complete. I represent that I have no rights in any such Inventions other than those Prior Inventions specified in Exhibit A ("Prior Inventions"). If there is no such list on Exhibit A ("Prior Inventions"), I represent that I have made no such Prior Inventions at the time of signing this Agreement. 10. Ownership of Company Inventions; License of Prior Inventions. I hereby agree promptly to disclose and describe to the Company, and I hereby assign and agree to assign to the Company or its designee, my entire right, title, and interest in and to all Inventions and 29 any associated intellectual property rights which I may solely or jointly conceive, develop or reduce to practice during the period of my employment with the Company (a) which relate at the time of conception or reduction to practice of the invention to the Company's business or actual or demonstrably anticipated research or development, or (b) which were developed on any amount of the Company's time or with the use of any of the Company's equipment, supplies, facilities or trade secret information, or (c) which resulted from any work I performed for the Company ("Company Inventions"). I agree to grant the Company or its designees a royalty free, irrevocable, worldwide license (with rights to sublicense through multiple tiers of distribution) to practice all applicable patent, copyright and other intellectual rights relating to any Prior Inventions which I incorporate, or permit to be incorporated, in any Company Inventions. Notwithstanding the foregoing, I agree that I will not incorporate, or permit to be incorporated, such Prior Inventions in any Company Inventions without the Company's prior written consent. 11. Future Inventions. I recognize that Inventions or Proprietary Information relating to my activities while working for the Company and conceived or made by me, alone or with others, within one (1) year after termination of my employment may have been conceived in significant part while employed by the Company. Accordingly, I agree that such Inventions and Proprietary Information shall be presumed to have been conceived during my employment with the Company and are to be assigned to the Company unless and until I have established the contrary. 12. Nonassignable Inventions. This Agreement does not apply to an Invention which qualifies fully as a nonassignable Invention under the provisions of Section 2870 of the California Labor Code. I have reviewed the notification in Exhibit B ("Limited Exclusion Notification") and agree that my signature acknowledges receipt of the notification. However, I agree to disclose promptly in writing to the company all Inventions made or conceived by me during the term of my employment and for one (1) year thereafter, whether or not I believe such Inventions are subject to this Agreement, to permit a determination by the Company as to whether or not the Inventions should be the property of the Company. Any such information will be received in confidence by the Company. 13. Disclosure and Prior Review of Articles. I agree that, while an employee of the Company and for three years following the termination, for any reason, of my employment with the Company, at least fifteen days prior to submission for publication of any article or contribution from or by me, which article or contribution deals with or makes reference to the Company's field of endeavors, any Inventions, any Proprietary Information or any other subject pertaining to the Company, I shall deliver a copy of such article or publication to the Company and shall request the Company's permission to publish such articles which consent shall not be unreasonably withheld. 14. Cooperation in Perfecting Rights to Inventions. (a) I agree to perform, during and after my employment, all acts deemed necessary or desirable by the Company to permit and assist it, at its expense, in obtaining and enforcing the full benefits, enjoyment, rights and title throughout the world in the Inventions 30 hereby assigned to the Company. Such acts may include, but are not limited to, execution of documents and assistance or cooperation in the registration and enforcement of applicable patents, copyrights, maskworks or other legal proceedings. (b) In the event that the Company is unable for any reason to secure my signature to any document required to apply for or execute any patent, copyright, mask work or other applications with respect to any Inventions (including improvements, renewals, extensions, continuations, divisions or continuations in part thereof), I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agents and attorneys-in-fact to act for and on my behalf and instead of me, to execute and file any such application and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, maskworks or other rights thereon with the same legal force and effect as if executed by me. 15. No Violation of Rights of Third Parties. My performance of all the terms of this Agreement and as an employee of the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by me prior to my employment with the Company, and I will not disclose to the Company, or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or others. I am not a party to any other agreement which will interfere with my full compliance with this Agreement. I agree not to enter into any agreement, whether written or oral, in conflict with the provisions of this Agreement. To my knowledge, no former employer has claimed or could claim that my activities under this Agreement violate any previous employment agreement with or infringe upon the intellectual property rights of any former employer except as disclosed on Exhibit C ("Possible Violations of Former Employment Agreements") attached hereto. 16. Survival. This Agreement (a) shall survive my employment by the Company, (b) does not in any way restrict my right or the right of the Company to terminate my employment at any time, for any reason or for no reason, (c) inures to the benefit of successors and assigns of the Company, and (d) is binding upon my heirs and legal representatives. 17. No Solicitation. During the term of my employment with the Company and for a period of two (2) years thereafter, I will not solicit, encourage, or cause others to solicit or encourage any employees of the Company to terminate their employment with the Company. 18. Injunctive Relief. A breach of any of the promises or agreements contained herein will result in irreparable and continuing damage to the Company for which there will be no adequate remedy at law, and the Company shall be entitled to injunctive relief and/or a decree for specific performance, and such other relief as may be proper (including monetary damages if appropriate). 19. Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (i) by personal delivery when delivered personally; (ii) by overnight courier upon written 31 verification of receipt; (iii) by telecopy or facsimile transmission upon acknowledgement of receipt of electronic transmission; or (iv) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to the addresses set forth above or such other address as either party may specify in writing. 20. Governing Law. This Agreement shall be governed in all respects by the laws of the United States of America and by the laws of the State of California, as such laws are applied to agreements entered into and to be performed entirely within California between California residents. 21. Severability. Should any provisions of this Agreement be held by a court of law to be illegal, invalid or unenforceable, the legality, validity and enforceability of the remaining provisions of this Agreement shall not be affected or impaired thereby. 22. Waiver. The waiver by the Company of a breach of any provision of this Agreement by me shall not operate or be construed as a waiver of any other or subsequent breach by me. 23. Entire Agreement. This Agreement represents my entire understanding with the Company with respect to the subject matter of this Agreement and supersedes all previous understandings, written or oral. This Agreement may be amended or modified only with the written consent of both me and the Company. No oral waiver, amendment or modification shall be effective under any circumstances whatsoever. 32 I certify and acknowledge that I have carefully read all of the provisions of this Agreement and that I understand and will fully and faithfully comply with such provisions. COMPANY: EMPLOYEE: COMBICHEM, INC., a California corporation By: __________________________ By: _____________________________ Title: __________________________ Printed Name:____________________ Dated: ________________________ Dated: ________________________ 33 Exhibit A PRIOR INVENTIONS ________ Yes, I claim an ownership interest in the following inventions. ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ _________ No, I do not claim an ownership interest in any inventions. By:___________________________________ ______________________________________ (Printed Name of Employee) Date:_________________________________ Witnessed by: ___________________________________ ___________________________________ (Printed Name of Representative) Dated:_____________________________ 34 Exhibit B LIMITED EXCLUSION NOTIFICATION THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between you and the Company does not require you to assign or offer to assign to the Company any invention that you developed entirely on your own time without using the Company's equipment, supplies, facilities or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the Company's business, or actual or demonstrably anticipated research or development of the Company. (2) Result from any work performed by you for the Company. To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between the Company and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I ACKNOWLEDGE RECEIPT of a copy of this notification. By:___________________________________ Dated:________________________________ Witnessed by: ___________________________________ ___________________________________ (Printed Name of Representative) Dated:_____________________________ 35 Exhibit C POSSIBLE VIOLATIONS OF FORMER EMPLOYMENT AGREEMENTS OR FORMER EMPLOYER'S INTELLECTUAL PROPERTY RIGHTS _________ I am aware of the following potential violations of former employment agreements, or infringements upon the intellectual property rights of former employer(s) which could occur due to my contemplated activities under the Employee Agreement or that have occurred due to my previous activities on behalf of the Company. Describe in detail any potential violations or infringements: ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ ____________________________________________________________________ _________ I am unaware of any potential violations of former employment agreements, or infringements upon the intellectual property rights of former employer(s) which could occur due to my contemplated activities under the Employee Agreement or that have occurred due to my previous activities on behalf of the Company. By:___________________________________ ___________________________________ ___________________________________ (Printed Name of Employee) Date:_________________________________ Witnessed by: ____________________________________ ____________________________________ (Printed Name of Representative) Dated:______________________________ EX-10.5 11 EXHIBIT 10.5 1 EXHIBIT 10.5 COMBICHEM, INC. SERIES C PREFERRED STOCK PURCHASE AGREEMENT __________________________________ August 17, 1995 2
TABLE OF CONTENTS ----------------- Page ---- 1. Purchase and Sale of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Sale and Issuance of Series C Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Closings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Representations and Warranties of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.1 Organization; Good Standing; Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.3 Valid Issuance of Preferred and Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.4 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.5 Capitalization and Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.7 Contracts and Other Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.8 Related-Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.9 Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.10 Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.11 Compliance with Other Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.12 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.13 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.14 Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.15 Title to Property and Assets; Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.16 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.17 Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.18 Patents and Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.19 Manufacturing and Marketing Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.20 Employees; Employee Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.21 Proprietary Information and Inventions Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.22 Tax Returns, Payments and Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.23 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.24 Environmental and Safety Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.25 Minute Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.26 Real Property Holding Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.27 Small Business Concern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.28 Qualified Small Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3. Representations and Warranties of the Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.2 Purchase Entirely for Own Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.3 Reliance Upon Investors' Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.4 Receipt of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.5 Investment Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 i
3 3.6 Accredited Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.7 Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.8 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.9 Public Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.10 Non-U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4. Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5. Conditions of Investor's Obligations at Closings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.3 Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.4 Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.5 Proceedings and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.6 Small Business Concern Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.7 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.8 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.9 Opinion of Company Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.10 Investors' Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.11 Co-Sale Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.12 No Change in Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.13 No Acceleration of Vesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.14 Filing of Restated Articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6. Conditions of the Company's Obligations at Closings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.1 Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.2 Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.3 Co-Sale Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.2 Survival of Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.3 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 7.6 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.8 Finder's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.9 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.10 Attorneys Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.11 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.13 Corporate Securities Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.14 Exculpation Among Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ii. 4 COMBICHEM, INC. SERIES C PREFERRED STOCK PURCHASE AGREEMENT THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is made as of the 17th day of August, 1995, by and between CombiChem, Inc., a California corporation (the "Company"), and each of the persons listed on Schedule A hereto, each of which is herein referred to as an "Investor." THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Stock. 1.1 Sale and Issuance of Series C Preferred Stock. 1.1.1 The Company shall adopt and file with the Secretary of State of California on or before the First Closing (as defined below) an Amended and Restated Articles of Incorporation in the form attached hereto as Exhibit A (the "Restated Articles"). 1.1.2 Subject to the terms and conditions of this Agreement, each Investor agrees, severally and not jointly, to purchase at each Closing and the Company agrees to sell and issue to each Investor, severally and not jointly, at each Closing that number of shares of the Company's Series C Preferred Stock set forth opposite each Investor's name on Schedule A hereto under the headings "First Closing" and "Second Closing," respectively, at a price of $0.62 per share for an aggregate amount to be sold to all Investors at the First Closing and Second Closing of at least 14,516,129 shares. 1.2 Closings. 1.2.1 The first tranche of the purchase and sale of the Series C Preferred Stock will occur in a series of one or more closings, the first of which shall take place at the offices of Brobeck, Phleger & Harrison, 550 West C Street, Suite 1300, San Diego, California, at 10:00 a.m. on August 17, 1995, or at such other time and place as the Company and Investors acquiring in the aggregate more than half the shares of Series C Preferred Stock sold pursuant hereto shall mutually agree in writing (the "Initial Closing"). Additional closings within the first tranche may occur no later than 45 days after August 17, 1995 at such additional times, dates and places as the Company and Investors acquiring in the aggregate more than half the shares of Series C Preferred Stock sold pursuant hereto shall mutually agree in writing (which times, dates and places are designated collectively as the "Follow-on Closing"; collectively, the Initial Closing and the Follow-on Closing shall be known as the "First Closing"). 1.2.2 The second tranche will occur in one closing (the "Second Closing" and collectively with the First Closing, a "Closing") which shall take place after the 5 First Closing on the earlier of: (a) on or before March 31, 1996 upon the achievement of all of the following (collectively, the "Milestones"): (I) completion of the following five combinatorial libraries: amidazole, integrin, central nervous system, G Protein and dipeptide mimic; (II) completion of the beta test model of CombiSyn SP 100; and (III) completion of a diversity measure software program; or (b) on or before June 30, 1996 in the event that all of the Milestones have not been achieved on or before March 31, 1996, and holders of a majority of the shares of Series C Preferred Stock sold at the First Closing determine to proceed with the Second Closing. The purchase and sale of the Series C Preferred Stock at the Second Closing shall take place at the offices of Brobeck, Phleger & Harrison, 550 West C Street, Suite 1300, San Diego, California, at such time and place as the Company and Investors acquiring in the aggregate more than half the shares of Series C Preferred Stock sold pursuant to the Second Closing shall mutually agree in writing. 1.2.3 At each Closing, the Company shall deliver to each Investor a certificate representing the shares of Series C Preferred Stock that such Investor is purchasing against payment of the purchase price therefor by check, wire transfer, cancellation of indebtedness or such other form of payment as shall be mutually agreed upon by such Investor and the Company. In the event that payment by an Investor is made, in whole or in part, by cancellation of indebtedness, then such Investor shall surrender to the Company for cancellation at such Closing any evidence of such indebtedness or shall execute an instrument of cancellation in form and substance reasonably acceptable to the Company. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to each Investor that, except as set forth on a Schedule of Exceptions furnished each Investor and special counsel for the Investors, which exceptions shall be deemed to be representations and warranties as if made hereunder: 2.1 Organization; Good Standing; Qualification. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of California, has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted, to execute and deliver this Agreement, the Investors' Rights Agreement, and any other agreement to which the Company is a party and the execution and delivery of which is contemplated hereby (the "Ancillary Agreements"), to issue and sell the Series C Preferred Stock and the Common Stock issuable upon conversion thereof, and to carry out the provisions of this Agreement, the Investors' Rights Agreement, the Restated Articles and any Ancillary Agreement. The Company is not qualified to do business as a foreign corporation in any jurisdiction and such qualification is not now required. 2.2 Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement the Investors' Rights Agreement and any Ancillary Agreement, the performance of all obligations of the Company hereunder and thereunder at the Closing and the authorization, issuance (or reservation for issuance), sale, and delivery of the Series C Preferred Stock being 2. 6 sold hereunder, the warrants issuable pursuant to certain convertible revolving promissory notes, the principal and accrued interest on which are being converted into Series C Preferred Stock at the Initial Closing (the "Series C Warrants"), the Series C Preferred Stock issuable upon exercise of the Series C Warrants, the Series C-1 Preferred Stock issuable upon conversion of the Series C Preferred Stock and the Common Stock issuable upon conversion of the Series C Preferred Stock or Series C-1 Preferred Stock has been taken or will be taken prior to the Initial Closing, and this Agreement, the Investors' Rights Agreement, and any Ancillary Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities law. 2.3 Valid Issuance of Preferred and Common Stock. The Series C Preferred Stock that is being purchased by the Investors hereunder and the Series C Warrants, when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Investors' Rights Agreement (and with respect to the Series C Warrants, pursuant to the terms thereof) and under applicable state and federal securities laws. The Series C-1 Preferred Stock issuable upon conversion of the Series C Preferred Stock purchased under this Agreement and the Common Stock issuable upon conversion of such Series C Preferred Stock and the Series C-1 Preferred Stock have been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Restated Articles, will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. The Series C Preferred Stock that is being purchased hereunder, the Series C Warrants, the Series C Preferred Stock issuable upon exercise thereof, the Series C-1 Preferred Stock issuable upon conversion of the Series C Preferred Stock and the Common Stock issuable upon conversion of the Series C Preferred Stock or Series C-1 Preferred Stock are not subject to any pre-emptive rights or rights of first refusal which have not been previously waived. 2.4 Governmental Consents. No consent, approval, qualification, order or authorization of, or filing with, any local, state or federal governmental authority is required on the part of the Company in connection with the Company's valid execution, delivery or performance of this Agreement, the offer, sale or issuance of the Series C Preferred Stock by the Company, the issuance of the Series C Warrants by the Company or the issuance of Series C Preferred Stock upon exercise of the Series C Warrants, the issuance of Series C-1 Preferred Stock upon conversion of the Series C Preferred Stock or the issuance of Common Stock upon conversion of the Series C Preferred Stock or Series C-1 Preferred Stock, except (i) the filing of the Restated Articles with the Secretary of State of the State of California, and 3. 7 (ii) such filings as have been made prior to Initial Closing, except that any notices of sale required to be filed under applicable state securities laws, which will be timely filed within the applicable periods therefor. 2.5 Capitalization and Voting Rights. The authorized capital of the Company consists, or will consist prior to the Initial Closing, of: 2.5.1 Preferred Stock. 50,418,334 shares of Preferred Stock, no par value (the "Preferred Stock"), of which 1,000,000 shares have been designated Series A Preferred Stock, all of which are issued and outstanding, 2,226,667 shares have been designated Series B Preferred Stock, all of which are issued and outstanding, 1,500,000 shares have been designated Series Z Preferred Stock, 200,000 of which are issued and outstanding, 465,000 shares have been designated Series J Preferred Stock, none of which are issued and outstanding, 1,000,000 shares have been designated Series A-1 Preferred Stock, none of which are issued and outstanding, 2,226,667 shares have been designated Series B-1 Preferred Stock, none of which are issued and outstanding, 21,000,000 shares have been designated Series C-1 Preferred Stock, none of which are issued and outstanding, and 21,000,000 shares have been designated Series C Preferred Stock, at least 14,516,129 of which will be sold pursuant to this Agreement. The rights, privileges and preferences of the Series A, Series B, Series C, Series J, Series Z, Series A-1, Series B-1 and Series C-1 Preferred Stock will be as stated in the Restated Articles. 2.5.2 Common Stock. 60,000,000 shares of common stock ("Common Stock"), no par value, of which 2,917,500 shares are issued and outstanding. 2.5.3 The outstanding shares of Preferred Stock and Common Stock are owned by the shareholders and in the numbers specified in Exhibit C hereto. 2.5.4 The outstanding shares of Preferred Stock and Common Stock have been issued in accordance with the registration or qualification provisions of the Securities Act of 1933, as amended (the "Securities Act") and any relevant state securities laws or pursuant to valid exemptions therefrom. 2.5.5 Except for (A) the conversion privileges of the Preferred Stock, (B) the rights provided in paragraph 2.3 of the Investors' Rights Agreement (which rights replace similar rights of first refusal set forth in certain stock purchase agreements pursuant to which certain holders of the Company's Series A, Series B and Series Z Preferred Stock purchased their shares), (C) currently outstanding options to purchase 50,000 shares of Common Stock granted to employees or consultants pursuant to the Company's 1995 Stock Option/Stock Issuance Plan (the "Plan"), (D) options to purchase 465,000 shares of Series J Preferred Stock granted or to be granted to certain employees in connection with their employment by the Company, (E) 120,968 shares of Series C Preferred Stock issuable upon conversion of the Series C Warrants, (F) up to 83,655 shares of Series Z Preferred Stock issuable upon conversion of warrants issued (or to be issued) in connection with the Company's equipment 4. 8 lease line, (G) 35,000 shares of Common Stock issuable upon conversion of warrants outstanding at the Initial Closing and (H) up to 325,807 shares of Series Z Preferred Stock issuable in connection with that certain Agreement dated August 4, 1995 among the Company, Molecular Simulations Inc. and Entropix Corporation, there are not outstanding any options, warrants, rights (including conversion or preemptive rights and rights of first refusal) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. In addition to the aforementioned options, the Company has reserved an additional 3,370,274 shares of its Common Stock for purchase or upon exercise of options to be granted in the future under the Plan or other employee arrangement approved by the Board of Directors of the Company. The Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any persons that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of the Company. 2.6 Subsidiaries. The Company does not own or control, directly or indirectly, any interest in any other corporation, association or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 2.7 Contracts and Other Commitments. The Schedule of Exceptions contains a complete list of all of the following agreements to which the Company is a party: (a) all contracts, agreements and instruments which involve a commitment by, or payments to, the Company in excess of $50,000.00; (b) all stock purchase agreements; (c) all loan or debt agreements; (d) all employment agreements; (e) all licenses of any patent, trade secret or other proprietary right to or from the Company; and (f) all indemnification agreements (collectively, the "Material Agreements"). All the Material Agreements are valid and binding obligations of the Company, in full force and effect in all material respects. The Company is not aware of any material default, either pending or threatened, with respect to the Material Agreements. The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its charter documents or Bylaws, which adversely affects its business as presently conducted or as currently proposed to be conducted, its properties or its financial condition. The Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $25,000 or in excess of $50,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) 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. The Company has not engaged in the past three months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than 50% of the voting power of 5. 9 the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 2.8 Related-Party Transactions. No employee, officer or director of the Company or member of his or her immediate family thereof is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. To the best of the Company's knowledge, no officer or director or any member of their immediate families is, directly or indirectly, interested in any material contract with the Company. 2.9 Registration Rights. Except as provided in the Investors' Rights Agreement, the Company is not obligated to register under the Securities Act any of its presently outstanding securities or any of its securities that may subsequently be issued. 2.10 Permits. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of the Company and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.11 Compliance with Other Instruments. The Company is not in violation or default in any material respect of any provision of its Restated Articles or Bylaws or in any material respect of any provision of any mortgage, indenture, agreement, instrument or contract to which it is a party or by which it is bound or, to the best of its knowledge, of any federal or state judgment, order, writ, decree, statute, rule or regulation applicable to the Company. The execution, delivery and performance by the Company of this Agreement, the Investors' Rights Agreement and any Ancillary Agreement, and the consummation of the transactions contemplated hereby and thereby will not result in any such violation or be in material conflict with or constitute, with or without the passage of time or giving of notice, either a material default under any such provision or an event that results in the creation of any material lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations, or any of its assets or properties. 2.12 Litigation. There is no action, suit, proceeding or investigation pending or currently threatened against the Company. The foregoing includes, without limitation, any 6. 10 action, suit, proceeding, or investigation pending or currently threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, their obligations under any agreements with prior employers, or negotiations by the Company with potential backers of, or investors in, the Company or its proposed business. The Company is not a party to, or to the best of its knowledge, named in any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit or proceeding by the Company currently pending or that the Company currently intends to initiate. 2.13 Disclosure. The Company has provided each Investor with all the information reasonably available to it without undue expense that such Investor has requested for deciding whether to purchase the Series C Preferred Stock and all information which the Company believes is reasonably necessary to enable such Investor to make such decision. Neither this Agreement nor any other written statements or certificates made or delivered in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 2.14 Offering. Subject in part to the truth and accuracy of each Investor's representations set forth in this Agreement, the offer, sale and issuance of the Series C Preferred Stock as contemplated by this Agreement are exempt from the registration requirements of the Securities Act, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.15 Title to Property and Assets; Leases. Except (a) as reflected in the Financial Statements (as defined below), (b) for liens for current taxes not yet delinquent, (c) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (d) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation, or (e) for minor defects in title, none of which, individually or in the aggregate materially interferes with the use of such property, the Company owns its property and assets free and clear of all mortgages, liens, claims and encumbrances. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances, subject to clauses (a)-(e) above. 2.16 Financial Statements. The Company has delivered to each Investor its unaudited financial statements (balance sheet and profit and loss statement, statement of stockholders' equity and statement of changes in financial position including notes thereto) at December 31, 1994 and for the fiscal year then ended and its unaudited financial statements (balance sheet and profit and loss statement including notes thereto) as at and for the six-month period ended June 30, 1995 (the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other, except that the Financial Statements may not contain all footnotes required by generally accepted accounting principles. 7. 11 The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, subject to normal year-end audit adjustments. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to June 30, 1995 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company. Except as disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.17 Changes. To the best of the Company's knowledge, since June 30, 1995, there has not been any event or condition of any type that has materially and adversely affected the business, properties, prospects or financial condition of the Company. 2.18 Patents and Trademarks. To the best of its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, servicemarks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others. The Schedule of Exceptions contains a complete list of patents and pending patent applications of the Company. Except for agreements with its own employees or consultants, substantially in the form referenced in paragraph 2.21 below, there are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company 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, proprietary rights and processes of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets or other proprietary rights of any other person or entity. The Company is not aware that any of it employees 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 the use of such employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the best of the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to use any inventions of any of its employees (or persons it currently intends to hire) made prior to their employment by the Company. 8. 12 2.19 Manufacturing and Marketing Rights. The Company has not granted rights to manufacture, produce, assemble, license, market or sell its products to any other person and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 2.20 Employees; Employee Compensation. To the best of the knowledge of the Company, there is no strike or labor dispute or union organization activities pending or threatened between it and its employees. None of the Company's employees belongs to any union or collective bargaining unit. To the best of its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity and other laws related to employment. To the best of the Company's knowledge, no employee of the Company is or will be in violation of any judgment, decree or order, or any term of any employment contract, patent disclosure agreement or other contract or agreement relating to the relationship of any such employee with the Company or any other party because of the nature of the business conducted or to be conducted by the Company or to the utilization by the employee of his best efforts with respect to such business. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of the Company is terminable at the will of the Company. 2.21 Proprietary Information and Inventions Agreements. Each employee and officer of the Company has executed a Proprietary Information and Inventions Agreement substantially in the form or forms that have been delivered to special counsel for the Investors. 2.22 Tax Returns, Payments and Elections. The Company has filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due, except those contested by it in good faith. The provision for taxes of the Company as shown in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to be treated as an S corporation or a collapsible corporation pursuant to Section 341(f) of Section 1362(a) of the Code, nor has it made any other elections pursuant to the Code (other than elections which relate solely to methods of accounting, depreciation or amortization) which would have a material effect on the business, properties, prospects or financial condition of the Company. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Since the date of the Financial Statements, the Company has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company has withheld 9. 13 or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositaries. 2.23 Insurance. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, in amounts customary for companies similarly situated. The Company has in full force and effect term life insurance, payable to the Company, on the life of Robert A. Curtis in the amount of $1,000,000. 2.24 Environmental and Safety Laws. To the best of its knowledge, the Company is not in violation of any applicable statute, law, or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law, or regulation. 2.25 Minute Books. The copy of the minute books of the Company provided to the Investor's special counsel contain minutes of all meetings of directors and stockholders and all actions by written consent without a meeting by the directors and stockholders since the time of incorporation and reflect all actions by the directors (and any committee of directors) and stockholders with respect to all transactions referred to in such minutes accurately in all material respects. 2.26 Real Property Holding Corporation. The Company is not a real property holding corporation within the meaning of the Internal Revenue Code Section 897(c)(2) and any regulations promulgated thereunder. 2.27 Small Business Concern. The Company, together with its "affiliates" (as that term is defined in Section 121.401 of Title 13 of the Code of Federal Regulations), is a "small business concern" within the meaning of the Small Business Investment Act of 1958, as amended, and the regulations thereunder, including Section 121.802(a)(2) of Title 13 of the Code of Federal Regulations. The information set forth in the documents provided to the Investors pursuant to Section 4.6 below is accurate and complete. 2.28 Qualified Small Business. The Company represents and warrants to the Investors that, to the best of its knowledge, the shares of Series C Preferred Stock offered hereby should qualify as "Qualified Small Business Stock" as defined in Section 1202(c) of the Internal Revenue Code of 1986, as amended (the "Code") as of the date hereof. The Company will use reasonable efforts to comply with the reporting and recordkeeping requirements of Section 1202 of the Code and any regulations promulgated thereunder, and agrees not to repurchase any stock of the Company if such repurchase would cause such shares not to so qualify as "Qualified Small Business Stock." 3. Representations and Warranties of the Investors. Each Investor hereby represents and warrants that: 10. 14 3.1 Authorization. Each Investor represents that it has full power and authority to enter into this Agreement and that this Agreement constitutes a valid and legally binding obligation of such Investor. 3.2 Purchase Entirely for Own Account. This Agreement is made with each Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Series C Preferred Stock to be purchased by such Investor and the Common Stock issuable upon conversion thereof (collectively, the "Securities") will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, each Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 3.3 Reliance Upon Investors' Representations. Each Investor understands that the Series C Preferred Stock is not, and any Common Stock acquired on conversion thereof at the time of issuance may not be, registered under the Securities Act on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to section 4(2) thereof, and that the Company's reliance on such exemption is predicated on the Investors' representations set forth herein. Each Investor realizes that the basis for the exemption may not be present if, notwithstanding such representations, the Investor has in mind merely acquiring shares of the Stock for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. No Investor has any such intention. 3.4 Receipt of Information. Each Investor represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series C Preferred Stock and the business, properties, prospects and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to which it had access. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investors to rely thereon. 3.5 Investment Experience. Each Investor represents that it is experienced in evaluating and investing in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Series C Preferred Stock. If other than an individual, Investor also represents it has not been organized for the purpose of acquiring the Series C Preferred Stock. 11. 15 3.6 Accredited Investor. Each Investor as to itself severally and not jointly further represents to the Company that except as otherwise disclosed to the Company, in writing, prior to its execution hereof: 3.6.1 such Investor is an "Accredited Investor" (as defined in the rules and regulations promulgated under the Securities Act); or 3.6.2 The capital contribution of the Investor does not exceed 10% of the Investor's net worth or, in the case of an individual, joint net worth with that person's spouse. 3.7 Restricted Securities. Each Investor understands that the Securities may not be sold, transferred or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Securities or an available exemption from registration under the Securities Act, the Securities must be held indefinitely. In particular, each Investor is aware that the Securities may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 is the availability of current information to the public about the Company. Such information is not now available and the Company has no present plans to make such information available. 3.8 Legends. To the extent applicable, each certificate or other document evidencing any of the Series C Preferred Stock or any Common Stock issued upon conversion thereof shall be endorsed with the legends set forth below, and each Investor covenants that, except to the extent such restrictions are waived by the Company, such Investor shall not transfer the shares represented by any such certificate without complying with the restrictions on transfer described in the legends endorsed on such certificate: 3.8.1 The following legend under the Securities Act: "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3.8.2 In the case of an Investor who is not a citizen or resident of the United States or Canada, or any state, territory or possession thereof, including but not limited to any 12. 16 estate of any such person, or any corporation, partnership, trust or other entity created or existing under the laws thereof, or any entity controlled or owned by any of the foregoing (a "U.S. Person") and is not an Accredited Investor: "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF PRIOR TO ONE YEAR FROM THE DATE OF THE CLOSING AT WHICH SUCH SHARES WERE PURCHASED, WITHIN THE UNITED STATES, CANADA, THEIR TERRITORIES AND POSSESSIONS OR ANY AREA SUBJECT TO THEIR JURISDICTION OR TO ANY CITIZEN OR RESIDENT OF THE UNITED STATES OR CANADA, OR ANY STATE, TERRITORY OR POSSESSION THEREOF, INCLUDING ANY ESTATE OF SUCH PERSON OR ANY CORPORATION, PARTNERSHIP, TRUST OR OTHER ENTITY CREATED OR EXISTING UNDER THE LAWS THEREOF, AND THEREAFTER MAY NOT BE SO TRANSFERRED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3.9 Public Sale. Each Investor agrees not to make, without the prior written consent of the Company, any public offering or sale of the Securities, although permitted to do so pursuant to Rule 144(k) promulgated under the Securities Act, until the earlier of (i) the date on which the Company effects its initial registered public offering pursuant to the Securities Act or (ii) the date on which it becomes a registered company pursuant to section 12(g) of the Securities Exchange Act of 1934 or (iii) five years after the Closing of the sale of such Securities to Investor by the Company. 3.10 Non-U.S. Person. If Investor is not a U.S. Person, such Investor hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the shares of Series C Preferred Stock offered hereunder or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of such shares, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents which may need to be obtained and (iv) the income tax and other tax consequences, if any, which may be relevant to the purchase, holding, redemption, sale or transfer of the Interest. Such Investor's subscription and payment for, and its continued beneficial ownership of the shares of Series C Preferred 13. 17 Stock offered hereunder will not violate any applicable securities or other laws of its jurisdiction. 4. Covenants of the Company. 4.1 Covenants. Prior to the Initial Closing, the Company shall: 4.1.1 not effect any change in management (at the level of vice president and above), except that the Company may add a Vice President of Chemistry acceptable to holders of a majority of the Series C Preferred Stock to be purchased hereunder; or 4.1.2 have confirmed that there is not in place any acceleration of vesting of stock options or waiver by the Company of repurchase rights with respect to stock beneficially held by an employee or consultant of the Company, each of which would occur in the event of a sale of all or substantially all of the assets of the Company, a merger of the Company with or into another entity or a liquidation of the Company. 4.2 Continuing Covenants. So long as any shares of Preferred Stock are outstanding, the Company shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the shares of Preferred Stock then outstanding: 4.2.1 change the authorized number of directors to be other than between five (5) and nine (9); or 4.2.2 put into place or effect any acceleration of vesting of stock options or waiver of repurchase rights with respect to stock beneficially held by an employee or consultant of the Company, each in the event of a sale of all or substantially all of the assets of the Company, a merger of the Company with or into another entity or a liquidation of the Company. 5. Conditions of Investor's Obligations at Closings. The obligations of each Investor under Section 1.1(b) or Section 1.4 of this Agreement are subject to the fulfillment on or before a Closing of each of the following conditions: 5.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 5.2 Performance. The Company shall have performed and complied with all agreements, obligations, covenants and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 14. 18 5.3 Compliance Certificate. The President of the Company shall deliver to each Investor at the Closing a certificate certifying that the conditions specified in paragraphs 5.1, 5.2, 5.4, 5.6, 5.7, 5.8, 5.10, 5.11, 5.12, 5.13 and 5.14 have been fulfilled. 5.4 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series C Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing. 5.5 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Investors' special counsel, which shall have received all such counterpart original and certified or other copies of such documents as it may reasonably request. 5.6 Small Business Concern Documents. The Company shall have executed and delivered to each Investor who requests them, a Size Status Declaration on SBA Form 480 and an Assurance of Compliance on SBA Form 652, and shall have provided to each Investor who so requests information necessary for the preparation of a Portfolio Financing Report on SBA Form 1031. 5.7 Bylaws. Article III, Section 2 of the Bylaws of the Company shall provide that the authorized number of directors of the Company shall be between five (5) and nine (9), with the number currently set at six (6). The range of directors shall not be changed without consent of holders of a majority of the Preferred Stock. 5.8 Board of Directors. The directors of the Company shall be Mr. Lamond and Drs. Bick, Chambon, Curtis, Myers and Royston. 5.9 Opinion of Company Counsel. Each Investor shall have received from Brobeck, Phleger & Harrison, counsel for the Company, an opinion, dated the date of the Closing, in form and substance satisfactory to special counsel to the Investors. 5.10 Investors' Rights Agreement. The Company and each Investor shall have entered into the Investors' Rights Agreement in the form attached as Exhibit B. 5.11 Co-Sale Agreements. Robert Curtis, Peter Myers, Steve Teig, Sydney Brenner, Kim Janda, Chi-Huey Wong and Dale Boger (collectively, the "Founders") shall each have entered into a Co-Sale Agreement in the form attached hereto as Exhibit D. 5.12 No Change in Management. The Company shall have confirmed that there shall have been no change in management (at the level of vice president and above) prior to the Initial Closing, except that the Company may have added a Vice President of Chemistry acceptable to a majority in interest of the Investors. 15. 19 5.13 No Acceleration of Vesting. The Company shall have confirmed that there is not in place, as of the Closing, any acceleration of vesting of stock options or waiver of repurchase rights with respect to stock beneficially held by an employee or consultant of the Company, each in the event of a sale of all or substantially all of the assets of the Company, a merger of the Company with or into another entity or a liquidation of the Company. 5.14 Filing of Restated Articles. The Company shall adopt and file with the Secretary of State of California the Restated Articles, and such Restated Articles shall have been accepted for filing by the Secretary of State of the California. 6. Conditions of the Company's Obligations at Closings. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by that Investor: 6.1 Representations and Warranties. The representations and warranties of the Investor contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 6.2 Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series C Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing. 6.3 Co-Sale Agreements. The Founders shall each have entered into a Co-Sale Agreement in the form attached hereto as Exhibit D. 7. Miscellaneous. 7.1 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except as specifically set forth herein or therein. 7.2 Survival of Warranties. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. 7.3 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including permitted transferees of any shares of Series C Preferred Stock sold hereunder or any Common Stock issued upon conversion thereof). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, 16. 20 obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.4 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 7.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.6 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.7 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified by hand or professional courier service or five days after deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 7.8 Finder's Fees. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Investor or any of its officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 7.9 Expenses. Irrespective of whether a Closing is effected, the Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If the Initial Closing is effected, the Company shall, at the Initial Closing, reimburse the reasonable fees of special counsel for the Investors which are anticipated to be approximately $20,000 and shall, upon receipt of a bill therefor, reimburse the out-of-pocket expenses of such counsel incurred in connection with the First Closing. If the Second Closing is effected, the Company shall, at the Second Closing, reimburse the reasonable fees of special counsel for the Investors which are anticipated to be approximately 17. 21 $3,500 and shall, upon receipt of a bill therefor, reimburse the reasonable out-of-pocket expenses of such counsel incurred in connection with the Second Closing. 7.10 Attorneys Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Investors' Rights Agreement, or the Restated Articles, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.11 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of more than 50% of the Common Stock (that has not been sold to the public) issued or issuable upon conversion of the Series C Preferred Stock. Any amendment or waiver effected in accordance with this Section shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities have been converted), each future holder of all such securities and the Company. 7.12 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 7.13 Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 7.14 Exculpation Among Investors. Each Investor acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Investor agrees that no Investor nor the respective controlling persons, officers, directors, partners, agents or employees of any Investor shall be liable for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the Series C Preferred Stock (and Common Stock issued upon conversion thereof). 18. 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: /s/ Robert A. Curtis ----------------------------- Robert A. Curtis, President INVESTORS: SPROUT CAPITAL VII, L.P. ------------------------------------- NAME OF INVESTOR By: DLJ Capital Corporation Managing General Partner By: /s/ Philippe Chambon ----------------------------- Philippe Chambon, M.D., Ph. D. Attorney-In-Fact Address:3000 Sand Hill Road, 4-270 ----------------------------- Menlo Park, CA 94025 -----------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 23 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ---------------------------------- Robert A. Curtis, President INVESTORS: DLJ CAPITAL CORPORATION ------------------------------------- NAME OF INVESTOR By: /s/ Philippe Chambon, M.D., Ph. D --------------------------------- Attorney-In-Fact Address: 3000 Sand Hill Road, 4-270 ---------------------------- Menlo Park, CA 94025 ----------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 24 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ------------------------------------- Robert A. Curtis, President INVESTORS: SOFINNOVA VENTURES III L.P. By: /s/ Alix Marduel, M.D. ------------------------------------ Alix Marduel, M.D. General Partner Sofinnova Management L.P. Address: One Market Plaze, Steuart Tower ------------------------------- Suite 2630 ------------------------------- San Francisco, CA 94105 -------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 25 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ------------------------------------- Robert A. Curtis, President INVESTORS: SINGAPORE BIO-INNOVATIONS PTE LTD ---------------------------------------- NAME OF INVESTOR By: /s/ Yong-Sea Teoh ------------------------------------ Title: Director & General Manager --------------------------------- Address:250 North Bridge Road #24-00 -------------------------------- Raffles City Tower -------------------------------- Singapore 0617 --------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 26 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: -------------------------------------- Robert A. Curtis, President INVESTORS: SEQUOIA CAPITAL VI SEQUOIA TECHNOLOGY PARTNERS VI SEQUOIA XXIV ----------------------------------------- NAME OF INVESTOR By: /S/ Peter Bick -------------------------------------- Title: ---------------------------------- Address: --------------------------------- ---------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 27 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: -------------------------------------- Robert A. Curtis, President INVESTORS: ----------------------------------------- NAME OF INVESTOR By: /s/ Michael S. Grossman ------------------------------------- Title: Owner ---------------------------------- Address: --------------------------------- ---------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 28 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: -------------------------------------- Robert A. Curtis, President INVESTORS: STEVEN M. LASH ----------------------------------------- NAME OF INVESTOR By:/s/ Steven M. Lash -------------------------------------- Title: ---------------------------------- Address: 13342 Mira Loma Ct. -------------------------------- Poway, CA 92064 --------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 29 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: --------------------------------------------------- Robert A. Curtis, President INVESTORS: First Interstate Bank of California Trustee for SK International Securities Corporation 401(k) Profit Sharing Plan em Stephen J. Kandel TR#508263200 ---------------------------------------------- NAME OF INVESTOR By: /s/ Mary Jo Topp 8/16/95 -------------------------------------------------- Title: Assistant Vice President/Account Executive ----------------------------------------------- Address: Attn Mary Jo Topp -------------------------------------------- 4365 Executive Drive, 17th Floor -------------------------------------------- San Diego, Ca 92121 --------------------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 30 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ----------------------------------- Robert A. Curtis, President INVESTORS: Byron T. Franzen -------------------------------------- NAME OF INVESTOR By: /s/ Byron T. Franzen ---------------------------------- Title: ------------------------------- Address: 610 C Street, N.E. ----------------------------- Washington, D.C. 20002 -----------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 31 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: -------------------------------------- Robert A. Curtis, President INVESTORS: DLJSC FBO Byron T. Franzen ----------------------------------------- NAME OF INVESTOR By:/s/ Belinda Faulkner for DLJSC -------------------------------------- Title: Custodian ---------------------------------- Address:One Pershing Plaza --------------------------------- Jersey City, NJ 07399 ---------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 32 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ------------------------------------- Robert A. Curtis, President INVESTORS: M.L. Lawrence Revocable Trust ---------------------------------------- NAME OF INVESTOR By: /s/ Rebecca Wood ------------------------------------ Title: Trustee --------------------------------- Address: Corporate Office ------------------------------- 1500 Orange Avenue ------------------------------- Coronado, CA 92118 -------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 33 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ------------------------------------------ Robert A. Curtis, President INVESTORS: Farley Inc. --------------------------------------------- NAME OF INVESTOR By: /s/ Carl C. Shil ----------------------------------------- Title: Vice President -------------------------------------- Address: 233 South Wacker Drive, Suite 5000 ------------------------------------ Chicago, IL 60606 ------------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 34 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: -------------------------------------------------------- Robert A. Curtis, President INVESTORS: Sorrento Ventures II, L.P. ----------------------------------------------------------- NAME OF INVESTOR By: /s/ Robert M. Jaffe ------------------------------------------------------- President, Sorrento Associates, Inc. General Partner, Sorrento Equity Partners L.P. Title: General Partner, Sorrento Ventures II L.P. ---------------------------------------------------- Address: 4225 Executive Square, Suite 1450 -------------------------------------------------- San Diego, CA 92037 --------------------------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 35 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: -------------------------------------------------------- Robert A. Curtis, President INVESTORS: Sorrento Growth Partners I, L.P. ----------------------------------------------------------- NAME OF INVESTOR By: /s/ Robert M. Jaffe ------------------------------------------------------- President, Sorrento Growth, Inc. General Partner, Sorrento Growth Partners, L.P. Title: General Partner, Sorrento Growth Partners I, L.P. ---------------------------------------------------- Address: 4225 Executive Square, Suite 1450 -------------------------------------------------- San Diego, CA 92037 --------------------------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 36 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: -------------------------------------- Robert A. Curtis, President INVESTORS: Comdisco, Inc. ----------------------------------------- NAME OF INVESTOR By: /s/ Jill C. Hanses ------------------------------------- Title: Assistant Vice President ---------------------------------- Address: 6111 N. River Rd. ------------------------------- Rosemont, IL 60018 -------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 37 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: --------------------------------------------- Robert A. Curtis, President INVESTORS: Brinson Venture Capital Fund III, L.P. by its general partner Brinson Partners, Inc. ----------------------------------------------- NAME OF INVESTOR By: /s/ Terry Gould ------------------------------------------- Title: Terry Gould, Partner ---------------------------------------- Address: Brinson Partners, Inc. -------------------------------------- 209 S. LaSalle Street, Suite 114 -------------------------------------- Chicago, IL 60604-1295 --------------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 38 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: -------------------------------------------- Robert A. Curtis, President INVESTORS: Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III ----------------------------------------------- NAME OF INVESTOR By: /s/ Terry Gould ------------------------------------------- Title: Terry Gould, Asst. Trust Officer ---------------------------------------- Address: c/o Brinson Partners, Inc. -------------------------------------- 209 S. LaSalle Street, Suite 114 -------------------------------------- Chicago, IL 60604-1295 --------------------------------------
[SIGNATURE PAGE TO SERIES C PREFERRED STOCK PURCHASE AGREEMENT] 39
SCHEDULE OF PURCHASERS FIRST CLOSING SECOND CLOSING SERIES C NUMBER CONVERSION NUMBER OF INVESTOR WARRANTS OF SHARES OF NOTES CASH SHARES -------- -------- --------- -------- ---- ------ Sprout Capital VII, L.P. -0- 3,126,821 -0- $1,938,629.02 1,340,066 DLJ Capital Corporation -0- 260,276 -0- $161,371.12 111,547 Sofinnova Ventures III, L.P. -0- 1,129,033 -0- $700,000.46 483,871 Singapore Bio-Innovations Ptd, Ltd -0- 564,517 -0- $350,000.54 241,936 Sequoia Capital VI 66,450 1,335,646 $381,675.83 $446,424.69 572,420 Sequoia Technology Partners VI 3,652 73,388 $20,971.20 $24,529.36 31,452 Sequoia XXIV 2,921 58,710 $16,776.96 $19,623.24 25,162 PaineWebber Incorporated as Custodian of the Michael Grossman Rollover IRA 3,312 37,218 $23,075.16 -0- -0- Steven M. Lash 1,440 16,185 $10,034.70 -0- -0- First Interstate Bank as Trustee for SK International Securities Corp. 401(k)PS em Stephen J. Kandel 7,199 80,874 $50,141.88 -0- -0- Byron T. Franzen -0- 56,452 -0- $35,000.24 24,194 IRA FBO Byron T. Franzen -0- 112,904 -0- $70,000.48 48,388 M.L. Lawrence Revocable Trust -0- 225,807 -0- $140,000.34 96,775
SCHEDULE OF PURCHASERS INVESTOR CASH TOTAL INVESTMENT -------- ---- ---------------- Sprout Capital VII, L.P. $830,840.92 $2,769,469.94 DLJ Capital Corporation $69,159.14 $230,530.26 Sofinnova Ventures III, L.P. $300,000.02 $1,000,000.48 Singapore Bio-Innovations Ptd, Ltd $150,000.32 $500,000.86 Sequoia Capital VI $354,900.40 $1,183,000.92 Sequoia Technology Partners VI $19,500.24 $65,000.80 Sequoia XXIV $15,600.44 $52,000.64 PaineWebber Incorporated as Custodian of the Michael Grossman Rollover IRA -0- $23,075.16 Steven M. Lash -0- $10,034.70 First Interstate Bank as Trustee for SK International Securities Corp. 401(k)PS em Stephen J. Kandel -0- $50,141.88 Byron T. Franzen $15,000.28 $50,000.52 IRA FBO Byron T. Franzen $30,000.56 $100,001.04 M.L. Lawrence Revocable Trust $60,000.50 $200,000.84
40
SCHEDULE OF PURCHASERS FIRST CLOSING SECOND CLOSING SERIES C NUMBER CONVERSION NUMBER OF INVESTOR WARRANTS OF SHARES OF NOTES CASH SHARES -------- -------- --------- -------- ---- ------ Farley Inc. -0- 846,775 -0- $525,000.50 362,904 Sorrento Ventures II, L.P. -0- 564,517 -0- $350,000.54 241,936 Sorrento Growth Partners I, L.P. -0- 1,129,033 -0- $700,000.46 483,871 Comdisco, Inc. -0- 169,355 -0- $105,000.10 72,581 Brinson Venture Capital Fund III, L.P. -0- 1,941,441 -0- $1,203,693.42 832,046 Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III -0- 316,624 -0- $196,306.88 135,696 TOTALS: 84,974 12,045,576 $502,675.73 $6,965,581.39 5,104,845
SCHEDULE OF PURCHASERS INVESTOR CASH TOTAL INVESTMENT -------- ---- ---------------- Farley Inc. $225,000.48 $750,000.98 Sorrento Ventures II, L.P. $150,000.32 $500,000.86 Sorrento Growth Partners I, L.P. $300,000.02 $1,000,000.48 Comdisco, Inc. $45,000.22 $150,000.32 Brinson Venture Capital Fund III, L.P. $515,868.52 $1,719,561.94 Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III $84,131.52 $280,438.40 TOTALS: $3,165,003.90 $10,633,261.02
41 EXHIBIT A AMENDED AND RESTATED ARTICLES OF INCORPORATION 42 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF COMBICHEM, INC., a California Corporation The undersigned Robert A. Curtis and Craig S. Andrews hereby certify that: ONE: They are the duly elected and acting President and Secretary, respectively, of said corporation. TWO: The Articles of Incorporation of said corporation shall be amended and restated to read in full as follows: ARTICLE I The name of this corporation is CombiChem, Inc. ARTICLE II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is One Hundred Ten Million Four Hundred Eighteen Thousand Three Hundred Thirty-Four (110,418,334) shares. Sixty Million (60,000,000) shares shall be Common Stock and Fifty Million Four Hundred Eighteen Thousand Three Hundred Thirty-Four (50,418,334) shares shall be Preferred Stock. The Preferred Stock authorized by these Restated Articles of Incorporation shall be issued by series as set forth herein. The first series of Preferred Stock shall be designated "Series A Preferred Stock" and shall consist of One Million (1,000,000) shares. The second series of Preferred Stock shall be designated "Series B Preferred Stock" and shall consist of Two Million Two Hundred Twenty-Six Thousand Six Hundred Sixty-Seven (2,226,667) shares. The third series of Preferred Stock shall be designated "Series C Preferred Stock" and shall consist of Twenty-One Million (21,000,000) shares. The fourth series of Preferred Stock shall be designated "Series J Preferred Stock" and shall consist of Four Hundred Sixty-Five Thousand (465,000) shares. The fifth series of Preferred Stock shall be designated "Series Z Preferred Stock" and shall consist of One Million Five Hundred Thousand (1,500,000) shares. The sixth series of Preferred Stock shall be designated "Series A-1 Preferred Stock" and shall consist of One Million (1,000,000) shares. The seventh series of Preferred Stock shall be designated "Series B-1 Preferred Stock" and shall consist of Two Million Two Hundred Twenty-Six Thousand Six Hundred Sixty-Seven (2,226,667) shares. The eighth series of 43 Preferred Stock shall be designated "Series C-1 Preferred Stock" and shall consist of Twenty-One Million (21,000,000) shares. B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock authorized by these Restated Articles of Incorporation may be issued from time to time in one or more series. The rights, preferences, privileges and restrictions granted to and imposed on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series J Preferred Stock, the Series Z Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock and the Series C-1 Preferred Stock are as set forth below in this Article III(B). Subject to compliance with applicable protective voting rights ("Protective Provisions") which have been or may be granted to the Preferred Stock or any series thereof in Certificates of Determination or the corporation's Articles of Incorporation, as amended from time to time, the Board of Directors is also authorized to increase or decrease the number of shares of any series (other than the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock and the Series C-1 Preferred Stock), prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 1. Dividend Provisions. (a) The holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall be entitled to receive dividends in any fiscal year, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Series J Preferred Stock or the Common Stock of this corporation, at the rate of $0.04 per share of Series A Preferred Stock, $0.06 per share of Series B Preferred Stock, $0.0496 per share of Series C Preferred Stock, $0.04 per share of Series Z Preferred Stock, $0.04 per share of Series A-1 Preferred Stock, $0.06 per share of Series B-1 Preferred Stock and $0.0496 per share of Series C-1 Preferred Stock (each subject to appropriate adjustments for stock splits, stock dividends, combinations or other recapitalizations) per annum, payable quarterly when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. After full dividends on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series Z Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock and the Series C-1 Preferred Stock for all past dividend periods and the then current dividend period have been paid, the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock and the holders of shares of Series J Preferred Stock and Common Stock shall participate ratably in any dividends or other distributions (as distributions are defined below). 2. 44 (b) For purposes of this subsection 1, unless the context other requires, "distribution(s)" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, or the purchase or redemption of shares of this corporation (other than repurchases of common stock held by directors, employees or consultants of this corporation upon termination of their employment or services pursuant to agreements providing for such repurchase) for cash or property, including any such transfer, purchase or redemption by a subsidiary of this corporation. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock that may from time to time come into existence, the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of Series J Preferred Stock or Common Stock by reason of their ownership thereof, an amount per share equal to the sum of (i) $0.50 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price"), (ii) $0.75 for each outstanding share of Series B Preferred Stock (the "Original Series B Issue Price"), (iii) $0.62 for each outstanding share of Series C Preferred Stock (the "Original Series C Issue Price"), (iv) $0.50 for each outstanding share of Series Z Preferred Stock (the "Original Series Z Issue Price"), (v) $0.50 for each outstanding share of Series A-1 Preferred Stock (the "Original Series A-1 Issue Price"), (vi) $0.75 for each outstanding share of Series B-1 Preferred Stock (the "Original Series B-1 Issue Price"), (vii) $0.62 for each outstanding share of Series C-1 Preferred Stock (the "Original Series C-1 Issue Price") and (viii) an amount equal to declared but unpaid dividends on such share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, respectively. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock that may from time to time come into existence, the entire assets and funds of the corporation 3. 45 legally available for distribution shall be distributed (x) first ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock in proportion to the aggregate liquidation preferences of each respective series, and ratably among the holders of that series in proportion to the amount of such stock owned by each such holder, and (y) second ratably among the holders of the Series Z Preferred Stock in proportion to the amount of such stock owned by each such holder. (b) Upon the completion of the distribution required by subparagraph (a) of this Section 2 and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the remaining assets of the corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (with each share of Preferred Stock participating on an "as-converted-into-common-stock" basis). (c) A consolidation or merger of this corporation with or into any other corporation or corporations in which fifty percent (50%) or more of the voting power of the corporation held by the shareholders of the corporation immediately prior to the merger or consolidation is transferred (excluding reincorporations of the corporation the sole purpose of which is to change the state of incorporation), or a sale, conveyance or disposition of all or substantially all of the assets of this corporation or the effectuation by the corporation of a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is transferred, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2. 3. Redemption. (a) At any time after December 31, 1998, but within forty-five (45) days (the "Redemption Date") after the receipt by this corporation of a written request from the holders of not less than seventy percent (70%) of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock treated as a single class, that all of such holders' shares be redeemed, and immediately prior to the surrender by such holders of the certificates representing such shares, this corporation shall, to the extent it may lawfully do so, redeem all of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock by paying in cash therefor a sum per share equal to the Original Series A Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series A Preferred Stock, the Original Series B Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series B Preferred Stock, the Original Series C Issue Price (as adjusted for any stock dividends, combinations or splits with 4. 46 respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series C Preferred Stock, the Original Series A-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series A-1 Preferred Stock, the Original Series B-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series B-1 Preferred Stock and the Original Series C-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series C-1 Preferred Stock (such amounts are hereinafter referred to herein as the "Redemption Prices"). (b) Not more than fifteen (15) days prior to the Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock at the address last shown on the records of this corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder (which shall be all of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock held by such holder), the Redemption Date, the Redemption Prices of each of the respective series to be redeemed from such holder, the place at which payment may be obtained and calling upon such holder to surrender to this corporation, in the manner and at the place designated, his, her or its certificate or certificates representing all of the shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock held by such holder (the "Redemption Notice"). Except as provided in subsection 3(c) of this Division B of Article III, on or after the Redemption Date, each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall surrender to this corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Prices of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. (c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Prices, all rights of the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock as holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, respectively (except the right to receive the respective Redemption Prices without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the corporation legally available for redemption of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, 5. 47 Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock on the Redemption Date are insufficient to redeem the total number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock in proportion to the Redemption Prices of the respective series, and ratably among the holders of each series in proportion to the amount of such stock owned by each such holder. Notwithstanding anything herein to the contrary, the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the corporation are legally available for the redemption of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the corporation has become obliged to redeem on the Redemption Date but which it has not redeemed. (d) The shares of Series J Preferred Stock and Series Z Preferred Stock are not redeemable. 4. Conversion. The holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and, in the case of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, on or prior to the fifth day prior to the Redemption Date, if any, as may have been fixed in the Redemption Notice, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) the Original Series A Issue Price for each share of Series A Preferred Stock, (ii) the Original Series B Issue Price for each share of Series B Preferred Stock, (iii) the Original Series C Issue Price for each share of Series C Preferred Stock, (iv) the Original Series J Issue Price for each share of Series J Preferred Stock, (v) the Original Series Z Issue Price for each share of Series Z Preferred Stock, (vi) the Original Series A-1 Issue Price for each share of Series A-1 Preferred Stock, (vii) the Original Series B-1 Issue Price for each share of Series B-1 Preferred Stock and (viii) the Original Series C-1 Issue Price for each share of Series C-1 Preferred Stock in each case by the Conversion Price at the time in effect for such share. The initial Conversion Price per share for shares of Series A Preferred Stock shall be the Original Series A Issue Price, for 6. 48 shares of Series B Preferred Stock shall be the Original Series B Issue Price, for shares of Series C Preferred Stock shall be the Original Series C Issue Price, for shares of Series J Preferred Stock shall be the Original Series J Issue Price, for shares of Series Z Preferred Stock shall be the Original Series Z Issue Price, for shares of Series A-1 Preferred Stock shall be the Original Series A-1 Issue Price, for shares of Series B-1 Preferred Stock shall be the Original Series B-1 Issue Price and for shares of Series C-1 Preferred Stock shall be the Original Series C-1 Issue Price; provided, however, that the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock and the Series Z Preferred Stock shall each be subject to adjustment as set forth in subsections 4(d) and 4(e) of this Division B of Article III and the Conversion Price for the Series J Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock and the Series C-1 Preferred Stock shall be subject to adjustment as set forth in subsection 4(e) of this Division B of Article III. (b) Automatic Conversion. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such series immediately upon the earlier of (i) the corporation's sale of its Common Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which (exclusive of underwriting discounts, commissions and expenses) is not less than $4.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and $12,000,000 in the aggregate or (ii) the date specified by written consent or agreement of the holders of at least seventy percent (70%) of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock voting together as a single class. (c) Mechanics of Conversion. Before any holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock shall be entitled to convert the same into shares of Common Stock, he, she or it shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for such stock and shall give written notice to this corporation at its principal corporate office of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to each such holder, or to the nominee or nominees of each such holder, (i) a certificate or certificates for the number of shares of Common Stock to which each such holder shall be entitled as aforesaid and (ii) a cash payment of all accrued but unpaid dividends on the converted shares as of the date of conversion. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock to be converted, and the 7. 49 person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and/or Series C-1 Preferred Stock shall not be deemed to have converted such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock until immediately prior to the closing of such sale of securities. (d) Conversion Price Adjustments of Series A, Series B, Series C and Series Z Preferred Stock for Certain Dilutive Issuances. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series Z Preferred Stock shall be subject to adjustment from time to time as follows: (i)(A) If the corporation shall issue, after the date upon which any shares of Series C Preferred Stock were first issued (the "Purchase Date"), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including, without limitation, the number of shares of Common Stock issuable upon the conversion of the Preferred Stock) plus the number of shares of Common Stock that the aggregate consideration received by the corporation for such issuance would purchase at such Conversion Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including, without limitation, the number of shares of Common Stock issuable upon the conversion of the Preferred Stock) plus the number of shares of such Additional Stock. (B) No adjustment of the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series Z Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections 4(d)(i)(E)(3) 8. 50 and 4(d)(i)(E)(4) of this Division B of Article III, no adjustment of such Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options or warrants to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options or warrants to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 4(d)(i) and subsection 4(d)(ii) of this Division B of Article III: (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options or warrants to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options, warrants or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D) of this Division B of Article III), if any, received by the corporation upon the issuance of such options, warrants or rights plus the minimum exercise price provided in such options, warrants or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options or warrants to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options, warrants or rights were issued and for a consideration equal to the consideration, if any, received by the corporation for any such securities and related options, warrants or rights 9. 51 (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options, warrants or rights (the consideration in each case to be determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D) of this Division B of Article III). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options, warrants or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series Z Preferred Stock, to the extent in any way affected by or computed using such options, warrants, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options, warrants or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options, warrants or rights, the termination of any such rights to convert or exchange or the expiration of any options, warrants or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series Z Preferred Stock, to the extent in any way affected by or computed using such options, warrants, rights or securities or options, warrants or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options, warrants or rights, upon the conversion or exchange of such securities or upon the exercise of the options, warrants or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4(d)(i)(E)(1) and (2) of this Division B of Article III shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 4(d)(i)(E)(3) or (4) of this Division B of Article III. (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E) of this Division B of Article III) by this corporation after the Purchase Date other than: (A) shares of Common Stock issued upon conversion of the Preferred Stock; or 10. 52 (B) up to 4,892,774 shares of Common Stock issuable or issued to employees, consultants or directors of this corporation pursuant to stock option plans or arrangements approved by the Board of Directors of this corporation (which, as of the Purchase Date, consisted of 1,472,500 shares of Common Stock issued and outstanding, 50,000 shares of Common Stock reserved for issuance upon exercise of options outstanding and 3,370,274 shares of Common Stock reserved for issuance upon exercise of options or grant of shares to be issued after the Purchase Date); or (C) Common Stock issued pursuant to a transaction described in subsection 4(e)(i) of this Division B of Article III; or (D) shares of Common Stock or warrants to purchase shares of Common Stock issued in connection with a bona fide acquisition of another business, whether by merger, consolidation or purchase of assets, or bona fide equipment leasing transactions unanimously approved by the Board of Directors of this corporation; or (E) shares of Preferred Stock issued upon exercise of any options or warrants to purchase the corporation's Preferred Stock outstanding as of the Purchase Date. (e) Conversion Price Adjustments of Preferred Stock for Certain Splits and Combinations. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall be subject to adjustment from time to time as follows: (i) In the event the corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents 11. 53 determined from time to time in the manner provided for deemed issuances in subsection 4(d)(i)(E) of this Division B of Article III. (ii) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (f) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(e)(i) of this Division B of Article III, then, in each such case for the purpose of this subsection 4(f), the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (g) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2 of this Division B of Article III) provision shall be made so that the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, respectively, the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 12. 54 Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (h) No Impairment. Unless approved in accordance with Sections 6 and 7 of this Division B of Article III, this corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock against impairment. (i) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A Preferred 13. 55 Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock. (j) Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, at least 20 days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (k) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, in addition to such other remedies as shall be available to each holder of any of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, using its best efforts to obtain the requisite shareholder approval of any necessary amendment to these articles. (l) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation. (m) Special Mandatory Conversion. 14. 56 (i) At any time following the Purchase Date, if (a) the holders of shares of Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock are entitled to exercise the right of first refusal (the "Right of First Refusal") set forth in Section 2.3 of the Investors' Rights Agreement dated on or about August 17, 1995, by and between this corporation and certain investors, as amended from time to time (the "Rights Agreement"), with respect to an equity financing of the corporation in an aggregate amount of at least $500,000 (the "Equity Financing"), (b) this corporation has complied with its notice obligations, or such obligations have been waived, under the Right of First Refusal with respect to such Equity Financing and this corporation thereafter proceeds to consummate the Equity Financing and (c) such holder, including such holder's affiliates (collectively, a "Non-Participating Holder") does not by exercise of such holder's Right of First Refusal acquire his, her or its Pro Rata Share (as defined in Section 2.3 of the Rights Agreement) offered in such Equity Financing (a "Mandatory Offering"), then all of such Non-Participating Holder's shares of Series A Preferred Stock, Series B Preferred Stock and/or Series C Preferred Stock shall automatically and without further action on the part of such holder be converted effective upon, subject to, and immediately prior to, the consummation of the Mandatory Offering (the "Mandatory Offering Date") into an equivalent number of shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, respectively ("Special Mandatory Conversion"); provided, however, that no such conversion shall occur in connection with a particular Equity Financing if, pursuant to the written request of the Board of Directors and subject to the approval of the holders of a majority of the outstanding Preferred Stock, such holder agrees in writing to waive his, her or its Right of First Refusal with respect to such Equity Financing. Upon conversion pursuant to this subsection 4(m)(i), the shares of Series A Preferred Stock, Series B Preferred Stock and/or Series C Preferred Stock so converted shall be cancelled and not subject to reissuance. (ii) The holder of any shares of Series A Preferred Stock, Series B Preferred Stock and/or Series C Preferred Stock converted pursuant to this subsection 4(m) shall deliver to this corporation during regular business hours at the office of any transfer agent of the corporation for the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock or at such other place as may be designated by the corporation, the certificate or certificates for the shares so converted, duly endorsed or assigned in blank or to this corporation. As promptly as practicable thereafter, this corporation shall issue and deliver to such holder, at the place designated by such holder, a certificate or certificates for the number of full shares of the Series A-1 Preferred Stock, Series B-1 Preferred Stock and/or Series C-1 Preferred Stock to be issued and such holder shall be deemed to have become a shareholder of record of such Series A-1 Preferred Stock, Series B-1 Preferred Stock and/or Series C-1 Preferred Stock on the Mandatory Offering Date unless the transfer books of this corporation are closed on that date, in which event he, she or it shall be deemed to have become a shareholder of record of such Series A-1 Preferred Stock, Series B-1 Preferred Stock and/or Series C-1 Preferred Stock on the next succeeding date on which the transfer books are open. (iii) In the event that any shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock and/or Series C-1 Preferred Stock are issued, concurrently with such issuance, this corporation shall use its best efforts to take all such action as may be 15. 57 required, including amending its Articles of Incorporation, (a) to cancel all authorized shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock that remain unissued after such issuance, (b) to create and reserve for issuance upon Special Mandatory Conversion of any then outstanding Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock a new series of Preferred Stock equal in number to the number of shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock so cancelled and designated Series A-2 Preferred Stock, Series B-2 Preferred Stock and Series C-2 Preferred Stock, with the designations, powers, preferences and rights and the qualifications, limitations and restrictions identical to those then applicable to the Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, respectively, except that the Conversion Price for such shares of Series A-2 Preferred Stock, Series B-2 Preferred Stock and Series C-2 Preferred Stock once initially issued shall be the Series A Conversion Price, the Series B Conversion Price and the Series C Conversion Price, respectively, in effect immediately prior to such issuance and (c) to amend the provisions of this subsection 4(m) to provide that any subsequent Special Mandatory Conversion will be into shares of Series A-2 Preferred Stock, Series B-2 Preferred Stock and Series C-2 Preferred Stock rather than Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock, respectively. This corporation shall take the same actions with respect to the Series A-2 Preferred Stock, Series B-2 Preferred Stock and Series C-2 Preferred Stock and each subsequently authorized series of Preferred Stock upon initial issuance of shares of the last such series to be authorized. The right to receive any dividend declared but unpaid at the time of conversion on any shares of Preferred Stock converted pursuant to the provisions of this subsection 4(m) shall accrue to the benefit of the new shares of Preferred Stock issued upon conversion thereof. (iv) A copy of the Rights Agreement is on file at the offices of this corporation and will be made available upon request and without charge. 5. Voting Rights. The holder of each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one- half being rounded upward). 16. 58 6. Protective Provisions for Series A, Series B, Series C, Series Z, Series A-1, Series B-1 and Series C-1 Preferred Stock. So long as any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least seventy percent (70%) of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, voting together as a single class: (a) alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock so as to affect materially or adversely the shares; or (b) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock; or (c) reclassify any shares of Common Stock or Preferred Stock to give those shares a preference over, or to make those shares on a parity with, the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (d) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment. 7. Protective Provisions for Series C and Series C-1 Preferred Stock. So long as any shares of Series C Preferred Stock or Series C-1 Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock, voting together as a single class: (a) amend the corporation's Articles of Incorporation to alter or change the rights, preferences or privileges of the shares of Series C Preferred Stock or Series C-1 Preferred Stock so as to affect materially or adversely the shares; or 17. 59 (b) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series C Preferred Stock or Series C-1 Preferred Stock (other than pursuant to Article III(B)(4)(m) hereof); or (c) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series C Preferred Stock or Series C-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (d) reclassify any shares of Common Stock to give those shares a preference over, or to make those shares on a parity with, the Series C Preferred Stock or Series C-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (e) pay dividends upon or redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock other than shares of Series C Preferred Stock or Series C-1 Preferred Stock; provided, however, that this restriction shall not apply to (i) the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment, or (ii) the redemption of any share or shares of Preferred Stock in accordance with the provisions of Section 3 of this Division B of Article III; or (f) sell, convey or otherwise dispose of or encumber all or substantially all of its assets or business or merge into or consolidate with any other entity (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is disposed of; or (g) increase the authorized number of directors of the corporation to more than eight (8). 8. Status of Redeemed or Converted Stock. In the event (a) any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock shall be redeemed pursuant to Section 3 of this Division B of Article III or (b) any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock shall be converted pursuant to Section 4 of this Division B of Article III, the shares so redeemed or converted shall be cancelled, together with a like number of shares of Common Stock, and such shares and shall not be issuable by the corporation. The Articles of Incorporation of this corporation shall be appropriately amended to effect the corresponding reduction in the corporation's authorized capital stock. 18. 60 9. Repurchase of Shares. Each holder of an outstanding share of Preferred Stock shall be deemed to have consented, for purposes of Sections 502, 503 and 506 of the California Corporations Code, to distributions made by the corporation in connection with the repurchase of shares of Common Stock issued to or held by employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment. C. Common Stock. 1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation Rights. Upon the liquidation, dissolution or winding up of the corporation, the assets of the corporation shall be distributed as provided in Article III(B)(2). 3. Redemption. The Common Stock is not redeemable. 4. Voting Rights. The holder of each share of Common Stock shall have the right to one vote, and shall be entitled to notice of any shareholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE IV A. Elimination of Liability. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. B. Indemnification. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with the agents, vote of shareholders or disinterested directors, or otherwise in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. C. Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article IV by the shareholders of the corporation shall not adversely affect any right or protection of an officer or director of the corporation pursuant to this Article IV existing at the time of such repeal or modification. 19. 61 * * * THREE: The foregoing amendment has been approved by the Board of Directors of said corporation. FOUR: The foregoing amendment and restatement was approved by the holders of the requisite number of shares of said corporation in accordance with Sections 902 and 903 of the California Corporations Code; the total number of outstanding shares of each class entitled to vote with respect to the foregoing amendment was 2,917,500 shares of Common Stock, 1,000,000 shares of Series A Preferred Stock, 2,226,667 shares of Series B Preferred Stock and 200,000 shares of Series Z Preferred Stock. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required, such required vote being (1) a majority of the outstanding shares of Common Stock voting separately, (2) a majority of the outstanding shares of each of Series A, Series B and Series Z Preferred Stock, each voting separately, (3) a majority of the outstanding shares of Preferred Stock, voting together as a single class, (4) seventy percent (70%) of the outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series Z Preferred Stock, voting together as a single class, and (5) a majority of the outstanding shares of Common Stock, Series A Preferred Stock, Series B Preferred Stock and Series Z Preferred Stock, voting together as a single class. 20. 62 IN WITNESS WHEREOF, the undersigned have executed this certificate on August ___, 1995. ----------------------------------------- Robert A. Curtis, President ----------------------------------------- Craig S. Andrews, Secretary
The undersigned certify under penalty of perjury that they have read the foregoing Amended and Restated Articles of Incorporation and know the contents thereof, and that the statements therein are true. Executed at San Diego, California, on August ___, 1995. ----------------------------------------- Robert A. Curtis ----------------------------------------- Craig S. Andrews
63 EXHIBIT B INVESTORS' RIGHTS AGREEMENT 64 COMBICHEM, INC. ____________________ INVESTORS' RIGHTS AGREEMENT August 17, 1995 65
TABLE OF CONTENTS Page ---- SECTION 1 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS . . . . . . . . . . . . . . . . . . . . 2 1.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Requested Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Company Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.4 Expenses of Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.5 Registration on Form S-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.6 Registration Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.7 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.8 Information by Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.9 Limitations on Registration of Issues of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.10 Rule 144 Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.11 Transfer or Assignment of Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.12 Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.13 "Market Stand-Off" Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.14 Allocation of Registration Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 1.15 Delay of Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.16 Termination of Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 2 COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.1 Basic Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.2 Additional Information and Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.3 Right of First Refusal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.4 Key Person Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.5 Representation on Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.6 Termination of Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 3 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.2 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.3 Entire Agreement; Amendment; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.4 Notices, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.5 Delays or Omissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.6 Rights; Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.7 Information Confidential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.8 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 3.9 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
66 INVESTORS' RIGHTS AGREEMENT This Investors' Rights Agreement (this "Agreement") is made and entered into as of the 17th day of August, 1995 by and among CombiChem, Inc., a California corporation (the "Company"), and the persons identified on Exhibit A attached hereto (the "Investors"). RECITALS WHEREAS, certain of the Investors possess registration rights pursuant to that certain Amended and Restated Stock Registration Rights Agreement dated November 1, 1994, as amended through the date hereof between the Company and such Investors (the "Rights Agreement"); and WHEREAS, the Company has entered into a Series Z Stock Registration Rights Agreement (the "Series Z Rights Agreement") with Dr. Sydney Brenner ("Brenner") pursuant to which Brenner has certain registration with respect to shares of Series Z Preferred Stock; and WHEREAS, certain of the Investors possess information rights, rights of first refusal and other rights, and the Company is obligated thereunder, pursuant to (a) Sections 5, 6 and 7 of (i) that certain Preferred Stock Purchase Agreement between the Company and Forward Ventures II, L.P. dated August 26, 1994 and (ii) that certain Stock Purchase Agreement Preferred and Common among the Company, Sequoia Capital VI, Sequoia Technology Partners VI and Sequoia XXIV dated November 1, 1994 (the "Series A Provisions") and/or (b) Sections 5, 6 and 7 of that certain Stock Purchase Agreement Series B Preferred among the Company and certain of the Investors dated November 29, 1994 (the "Series B Provisions") and/or (c) Sections 6 and 7 of that certain Preferred Stock Purchase Agreement dated October 12, 1994 between the Company and Brenner (the "Series Z Provisions") (collectively, the Rights Agreement, the Series Z Rights Agreement, the Series A Provisions, the Series B Provisions and the Series Z Provisions shall be known as the "Prior Agreements"); and WHEREAS, the Rights Agreement and the Series Z Rights Agreement may each be modified or amended with the written consent of the Company and the holders of a majority of the Registrable Securities (as defined in the Rights Agreement or the Series Z Rights Agreement, respectively) then outstanding; the Series A Provisions may be modified or amended with the written consent of the parties thereto; the Series B Provisions may be modified or amended with the written consent of the parties thereto; the Series Z Provisions may be modified or amended with the written consent of the parties thereto; and WHEREAS, the Investors which are parties thereto desire to terminate the Prior Agreements and to accept the rights created pursuant hereto in lieu of the rights granted to them under the Prior Agreements; and 67 WHEREAS, certain Investors are parties to the Series C Preferred Stock Purchase Agreement dated as of the date hereof among the Company and such Investors (the "Series C Agreement"), certain of the Investors' obligations under which are conditioned upon the execution and delivery by such Investors and the Company of this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the Investors who are parties to the Prior Agreements agree that the Prior Agreements shall be superseded and replaced in their entirety by this Agreement, and all parties hereto further agree as follows: SECTION 1 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: (a) "Closing" shall mean the date of the initial sale of shares of the Company's Series C Preferred Stock. (b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (c) "Holder" shall mean any Investor who holds Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 1.11 hereof. (d) "Initial Offering" shall mean the Company's first firm commitment underwritten public offering of its Common Stock registered under the Securities Act. (e) "Initiating Holders" shall mean any Holder or Holders who in the aggregate hold not less than fifty percent (50%) of the outstanding Registrable Securities. For purposes of such calculation, Holders of Shares shall be considered to hold the shares of Common Stock then issuable upon conversion of such Shares. (f) "Other Shareholders" shall mean persons other than Holders who, by virtue of agreements with the Company, are entitled to include their securities in certain registrations. (g) "Registrable Securities" shall mean (i) shares of Common Stock issued or issuable pursuant to the conversion of the Shares and (ii) any Common Stock issued -2- 68 as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to or in exchange for or in replacement of the shares referenced in (i) above; provided, however, that Registrable Securities shall not include any such securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under this Section 1 are not assigned. (h) The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. (i) "Registration Expenses" shall mean all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, fees and disbursements of one counsel for the Holders (solely with respect to registrations pursuant to Sections 1.2 and 1.3 hereof), blue sky fees and expenses, expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). (j) "Rule 144" shall mean Rule 144 as promulgated by the SEC under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the SEC. (k) "Rule 145" shall mean Rule 145 as promulgated by the SEC under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the SEC. (l) "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (m) "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time, corresponding to such act. (n) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel for any Holder (other than the fees and disbursements of the one counsel included in Registration Expenses). (o) "Shares" shall mean shares of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series Z Preferred Stock, Series A- -3- 69 1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock held by the Investors. 1.2 Requested Registration. (a) Request for Registration. If the Company shall receive from Initiating Holders at any time or times not earlier than the earlier of (i) January 1, 1998 or (ii) six (6) months after the effective date of the first registration statement filed by the Company covering an underwritten offering of any of its securities to the general public, a written request specifying that it is made pursuant to this Section 1.2 that the Company effect a registration with respect to all or a part of the Registrable Securities having a reasonably anticipated aggregate offering price, net of underwriting discounts and commissions, that exceeds $12,000,000, the Company will: (i) promptly give written notice of the proposed registration to all other Holders; and (ii) as soon as practicable, use its diligent best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with the Securities Act) as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is effective. The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 1.2: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; or (B) After the Company has effected two such registrations pursuant to this Section 1.2(a) and such registrations have been declared or ordered effective; or (C) During the period starting with the date of filing of and ending on a date one hundred eighty (180) days after the effective date of a registration pursuant to Section 1.3 hereof; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or -4- 70 (D) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made under Section 1.5 hereof. (b) Subject to the foregoing Section 1.2(a)(ii) (A) through (D), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders; provided, however, that if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be seriously detrimental to the Company and the Board of Directors of the Company concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such Holders a certificate signed by the president of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for the period during which such disclosure would be seriously detrimental, provided, that the Company may not defer the filing for a period of more than ninety (90) days after receipt of the request of the Initiating Holders, and, provided further, that (except as provided in Section 1.2(a)(ii)(C) above) the Company shall not defer its obligation in this manner more than once in any twelve-month period. The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 1.2(b) and 1.14 hereof, include other securities of the Company and may include securities of the Company being sold for the account of the Company. (c) Underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 1.2 and the Company shall include such information in the written notice referred to in Section 1.2(a)(i) above. The right of any Holder to registration pursuant to Section 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder with respect to such participation and inclusion) to the extent provided herein. A Holder may elect to include in such underwriting all or a part of the Registrable Securities he holds. (d) Procedures. If the Company shall request inclusion in any registration pursuant to Section 1.2 of securities being sold for its own account, or if other persons shall request inclusion in any registration pursuant to Section 1.2, the Initiating Holders shall, on behalf of all Holders, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 1 (including Section 1.13). The Company shall (together with all Holders, and other persons proposing to distribute their securities through such underwriting) enter into an -5- 71 underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders, which underwriter(s) are reasonably acceptable to the Company. Notwithstanding any other provision of this Section 1.2, if the representative of the underwriters advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 1.14 hereof. If the person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the Initiating Holders. The securities so excluded shall also be withdrawn from registration. Any Registrable Securities or other securities excluded shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 1.2(d), then the Company shall offer to all holders who have retained rights to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares withdrawn, with such shares to be allocated among such Holders requesting additional inclusion in accordance with Section 1.14. 1.3 Company Registration. (a) Company Registration. If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights (other than pursuant to Section 1.2 hereof), other than a registration relating solely to employee benefit plans, or a registration relating solely to a Rule 145 transaction, or a registration on any registration form which does not permit secondary sales, or the first registration under the Securities Act filed by the Company for an offering of its securities to the general public, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 1.3(b) below, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder within twenty (20) days after the written notice from the Company described in Section 1.3(a)(i) above is effective. Such written request may specify all or a part of a Holder's Registrable Securities for inclusion. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 1.3(a)(i). In such event the right of any Holder to registration pursuant to Section 1.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders -6- 72 proposing to distribute their securities through such underwriting shall (together with the Company and the holders of other securities of the Company distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding any other provision of this Section 1.3, if the representative of the underwriters advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitations set forth below) exclude all Registrable Securities from, or limit the number of Registrable Securities to be included in, the registration and underwriting. The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account and thereafter as set forth in Section 1.13. If any person does not agree to the terms of any such underwriting, he shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration or if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion in accordance with Section 1.14 hereof. 1.4 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Sections 1.3 and 1.5 hereof, and the first two registrations pursuant to Section 1.2 hereof shall be borne by the Company; provided, however, that if the Holders bear the Registration Expenses for any registration proceeding begun pursuant to Section 1.2 and subsequently withdrawn by the Holders registering shares therein, such registration proceeding shall not be counted as a requested registration pursuant to Section 1.2 hereof, except in the event that such withdrawal is based upon material adverse information relating to the Company that is different from the information known or available (upon request from the Company or otherwise) to the Holders requesting registration at the time of their request for registration under Section 1.2, in which event such registration shall not be treated as a counted registration for purposes of Section 1.2 hereof even though the Holders do not bear the Registration Expenses for such registration. All Selling Expenses relating to securities so registered shall be borne by the holders of such securities pro rata on the basis of the number of shares of securities so registered on their behalf. 1.5 Registration on Form S-3. -7- 73 (a) After the Initial Offering, the Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form or forms. After the Company has qualified for the use of Form S-3, in addition to the rights contained in the foregoing provisions of this Section 1, the Holders of Registrable Securities shall have the right to request registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holder or Holders), provided, however, that the Company shall not be obligated to effect any such registration if (i) the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) on Form S-3 at an aggregate price to the public of less than $500,000, or (ii) in the event that the Company shall furnish the certification described in paragraph 1.2(a)(ii) (but subject to the limitations set forth therein) or (iii) in a given twelve-month period, after the Company has effected one (1) such registration in any such period. (b) If a request complying with the requirements of Section 1.5(a) hereof is delivered to the Company, the provisions of Sections 1.2(a)(i) and (ii) and Section 1.2(b) hereof shall apply to such registration. If the registration is for an underwritten offering, the provisions of Sections 1.2(c) and 1.2(d) hereof shall apply to such registration. 1.6 Registration Procedures. In the case of each registration effected by the Company pursuant to Section 1, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use its best efforts to: (a) Keep such registration effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that (i) such 120-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment which (I) includes any prospectus required by Section 10(a)(3) of the Securities Act or (II) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (I) and (II) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; -8- 74 (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish such number of prospectuses and other documents incident thereto, including any preliminary prospectus or amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act on the happening of any event as a result of which the prospectus included in such registration statement, 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 not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an 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 or incomplete in the light of the circumstances then existing; (e) Use all reasonable efforts to register and qualify the securities covered by the registration statement under such other securities or Blue Sky laws of such jurisdiction as shall be reasonably requested by the Holders; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such state or jurisdiction; (f) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; (g) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; (h) Otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section II(a) of the Securities Act; -9- 75 (i) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 1.2 hereof, the Company will enter into an underwriting agreement reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting agreement contains customary underwriting provisions and provided further that if the underwriter so requests the underwriting agreement will contain customary contribution provisions; and (j) Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that such registration statement with respect to such securities becomes effective, (A) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (B) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. 1.7 Indemnification. (a) The Company will indemnify each Holder, each of its officers, directors and partners, legal counsel and accountants and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 1 and each underwriter, if any, and each person who controls within the meaning of Section 15 of the Securities Act any underwriter, against all expenses, claims, losses, damages and liabilities (or actions, proceedings or settlements in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors, partners, legal counsel and accountants and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such -10- 76 case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein. It is agreed that the indemnity agreement contained in this Section 1.7(a) 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 the Company (which consent has not been unreasonably withheld). (b) Each Holder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors, officers, partners, legal counsel and accountants and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, each other such Holder and Other Shareholder and each of their officers, directors and partners, and each person controlling such Holder or Other Shareholder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Holders, Other Shareholders, directors, officers, partners, legal counsel and accountants, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder; provided, however, that the obligations of such Holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). (c) Each party entitled to indemnification under this Section 1.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1, to the extent such failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, -11- 77 consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the indemnification provided for in this Section 1.7 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 1.8 Information by Holder. Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 1. 1.9 Limitations on Registration of Issues of Securities. From and after the date of this Agreement, the Company shall not, without the prior written consent of a majority in interest of the Holders, enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are more favorable than the registration rights granted to the Holders hereunder. 1.10 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: -12- 78 (a) Make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (b) File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; (c) So long as a Holder owns any Registrable Securities, furnish to the Holder forthwith upon written request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Holder to sell any such securities without registration. 1.11 Transfer or Assignment of Registration Rights. The rights to cause the Company to register securities granted to a Holder by the Company under Sections 1.2, 1.3 and 1.5 may be transferred or assigned by a Holder only to a transferee or assignee of not less than 25,000 shares of Registrable Securities (as presently constituted and subject to subsequent adjustments for stock splits, stock dividends, reverse stock splits and the like), and only provided that the Company is given written notice at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and provided further that the transferee or assignee of such rights assumes the obligations of such Holder under this Article 1. 1.12 Restrictions on Transfer. (a) Each Holder agrees not to transfer or dispose of all or any portion of the Registrable Securities unless and until the proposed transferee has agreed in writing for the benefit of the Company to be bound by this Section 1.12, provided and to the extent this Section 1.12 is then applicable and: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) Such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (B) if requested by the Company, -13- 79 such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, to the effect that such disposition will not require registration of such shares under the Securities Act. Notwithstanding the provisions of subsections (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer (A) by a Holder which is a partnership to its partners or retired partners in accordance with partnership interests, (B) to a Holder's family member or trust for the benefit of an individual Holder, provided that the transferee will be subject to the terms of this Section 1.12 to the same extent as if he were an original Holer hereunder, or (C) pursuant to Rule 144(k); provided, however, that the Company must be satisfied in its reasonable discretion that the proposed sale of securities fully qualifies with all Rule 144 requirements. (b) Each certificate representing Registrable Securities shall (unless otherwise permitted by the provisions of this Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws): "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 1.13 "Market Stand-Off" Agreement. If requested by the Company and an underwriter of Common Stock (or other securities) of the Company, an Investor shall not sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by such Investor (other than those included in the registration) during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act, provided that all Holders and officers and directors of the Company enter into similar agreements. The obligations described in this Section 1.13 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future, or a registration relating solely to a Rule 145 transaction on Form S-4, Form S-14 or Form S-15 or similar forms which may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 1.14 Allocation of Registration Opportunities. In any circumstance in which all of the Registrable Securities and other shares of Common Stock of the Company -14- 80 (including shares of Common Stock issued or issuable upon conversion of shares of any currently unissued series of Preferred Stock of the Company) with registration rights (the "Other Shares") requested to be included in a registration on behalf of the Holders or other selling shareholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares which may be so included, the number of shares of Registrable Securities and Other Shares which may be so included shall be allocated among the Holders and other selling shareholders requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling shareholders, assuming conversion; provided, however, that, so that such allocation shall not operate to reduce the aggregate number of Registrable Securities and Other Shares to be included in such registration, if any Holder or other selling shareholder does not request inclusion of the maximum number of shares of Registrable Securities and Other Shares allocated to him pursuant to the above-described procedure, the remaining portion of his allocation shall be reallocated among those requesting Holders and other selling shareholders whose allocations did not satisfy their requests pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling shareholders, assuming conversion, and this procedure shall be repeated until all of the shares of Registrable Securities and Other Shares that may be included in the registration on behalf of the Holders and other selling shareholders have been so allocated. The Company shall not limit the number of Registrable Securities to be included in a registration pursuant to this Agreement in order to include shares held by shareholders with no registration rights or to include Founder's Stock or any other shares of stock issued to employees, officers, directors or consultants pursuant to the Company's stock option plan, or with respect to registrations under Sections 1.2 or 1.5 hereof, in order to include in such registration securities registered for the Company's own account or included at the request of the Company pursuant to Section 1.3 hereof without the prior written consent of seventy percent (70%) of the Holders; provided, further, that in no event will the amount of securities of the selling Holders included in a registration pursuant to Section 1.3 hereof be reduced below twenty percent (20%) of the total amount of securities included in such offering, unless such offering is the Initial Offering of the Company's securities in which case the selling shareholders may be excluded entirely if the underwriters make the determination described above and no other shareholder's securities are included. For purposes of determining allocation hereunder, for any selling shareholder which is a Holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons will be deemed to be a single "selling shareholder," and any pro-rata reduction with respect to such "selling shareholder" will be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder." 1.15 Delay of Registration. No Holder shall have any right to take and, action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. -15- 81 1.16 Termination of Registration Rights. The right of any Holder to request registration or inclusion in any registration pursuant to Sections 1.2, 1.3 or 1.5 shall terminate on the closing of the first Company-initiated registered public offering of Common Stock of the Company, provided that all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period, or on such date after the closing of the first Company-initiated registered public offering of Common Stock of the Company as all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period. SECTION 2 COVENANTS OF THE COMPANY The Company hereby covenants and agrees, so long as any Holder owns any Registrable Shares as follows: 2.1 Basic Financial Information. The Company will furnish the following reports to each Holder: (a) As soon as practicable after the end of each fiscal year of the Company, and in any event within ninety (90) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such fiscal year, and consolidated statements of income and sources and applications of funds of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by independent public accountants of recognized national standing selected by the Company. (b) As soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and consolidated statements of income and sources and applications of funds of the Company and its subsidiaries for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year and to the Company's operating plan then in effect and approved by its Board of Directors, subject to changes resulting from normal year-end audit adjustments, all in reasonable detail and certified by the principal financial or accounting officer of the Company, except that such balance sheet need not contain the notes required by generally accepted accounting principles. 2.2 Additional Information and Rights. -16- 82 (a) The Company will permit any Investor, so long as such Investor (or its representative) owns at least 200,000 Shares, or such number of shares of Common Stock issued upon conversion of 200,000 or more Shares, or any combination thereof (as presently constituted and subject to subsequent adjustment for stock splits, stock dividends, reverse stock splits, recapitalizations and the like) (a "Significant Holder") (or a representative of any Significant Holder) to visit and inspect any of the properties of the Company, including its books of account and other records (and make copies thereof and take extracts therefrom), and to discuss its affairs, finances and accounts with the Company's officers and its independent public accountants, all at such reasonable times and as often as any such person may reasonably request. (b) Until the earlier to occur of (i) the date on which the Company is subject to the reporting requirements of Sections 13(a) or 15(d) of the Exchange Act, or (ii) the date on which quotations for the Common Stock of the Company are reported by the automated quotations systems operated by the National Association of Securities Dealers, Inc., or by an equivalent quotations system, the Company will deliver the reports described below in this Section 2.2 to each Significant Holder: (i) As soon as practical after the end of each month and in any event within thirty (30) days thereafter a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such month and consolidated statements of income and of sources and applications of funds of the Company and its subsidiaries, for each month and for the current fiscal year of the Company to date, all subject to normal year-end audit adjustments, prepared in accordance with generally accepted accounting principles consistently applied and certified by the principal financial or accounting officer of the Company, together with a comparison of such statements to the corresponding periods of the prior fiscal year and to the Company's operating plan then in effect and approved by its Board of Directors. (c) The provisions of Section 2.1 and this Section 2.2 shall not be in limitation of any rights which any Holder or Significant Holder may have with respect to the books and records of the Company and its subsidiaries, or to inspect their properties or discuss their affairs, finances and accounts, under the laws of the jurisdictions in which they are incorporated. (d) Anything in Section 2 to the contrary notwithstanding, no Holder or Significant Holder by reason of this Agreement shall have access to any trade secrets or classified information of the Company. Each Significant Holder hereby agrees to hold in confidence and trust and not to misuse or disclose any confidential information provided pursuant to this Section 2.2. (e) Each Holder who represents to the Company that it is a "venture capital operating company" for purposes of Department of Labor Regulation Section 2510.3-101 shall in addition have the right to consult with and advise the officers of the Company as to the management of the Company. -17- 83 2.3 Right of First Refusal. The Company hereby grants to each Holder who owns any shares of Series A, Series B, Series C, Series A-1, Series B-1 or Series C-1 Preferred Stock (the "Cash Preferred") or any shares of Common Stock issued upon conversion of the Cash Preferred (the "Rights Holder") the right of first refusal to purchase a Pro Rata Share (as defined in this Section 2.3) of New Securities (as defined in this Section 2.3) which the Company may, from time to time, propose to sell and issue. A Rights Holder's Pro Rata Share, for purposes of this right of first refusal, is the ratio of the number of shares of Common Stock owned by such Rights Holder immediately prior to the issuance of New Securities, assuming full conversion of the Shares, to the total number of shares of Common Stock outstanding immediately prior to the issuance of New Securities, assuming full conversion of the Shares and exercise of all outstanding rights, options and warrants to acquire Common Stock of the Company. Each Rights Holder shall have a right of over-allotment such that if any Rights Holder fails to exercise its right hereunder to purchase its Pro Rata Share of New Securities, the other Rights Holders may purchase the non-purchasing Rights Holder's portion on a pro rata basis within ten (10) days from the date such non-purchasing Rights Holder fails to exercise its right hereunder to purchase its pro rata share of New Securities. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock (including Common Stock and/or Preferred Stock) of the Company whether now authorized or not, and rights, options or warrants to purchase such capital stock, and securities of any type whatsoever that are, or may become, convertible into capital stock; provided that the term "New Securities" does not include (i) securities purchased under the Series C Agreement; (ii) securities issued upon conversion of the Shares; (iii) securities issued pursuant to the acquisition of another business entity or business segment of any such entity by the Company by merger, purchase of substantially all the assets or other reorganization whereby the Company will own not less than fifty-one percent (51%) of the voting power of such business entity or business segment of any such entity; (iv) any borrowings, direct or indirect, from financial institutions or other persons by the Company, whether or not presently authorized, including any type of loan or payment evidenced by any type of debt instrument, provided such borrowings do not have any equity features including warrants, options or other rights to purchase capital stock and are not convertible into capital stock of the Company; (v) securities issued to employees, consultants, officers or directors of the Company pursuant to any stock option, stock purchase or stock bonus plan, agreement or arrangement approved by the Board of Directors; (vi) securities issued to vendors or customers or to other persons in similar commercial situations with the Company if such issuance is approved by the Board of Directors; (vii) securities issued in connection with obtaining lease financing, whether issued to a lessor, guarantor or other person; (viii) securities issued in a firm commitment underwritten public offering pursuant to a registration under the Securities Act with an aggregate offering price to the public in excess of $5.0 million; (ix) securities issued in connection with any stock split, stock dividend or recapitalization of the Company; and (x) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of New Securities pursuant to subsections (i) through (ix) above. -18- 84 (b) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Rights Holder written notice of its intention, describing the type of New Securities, and their price and the general terms upon which the Company proposes to issue the same. Each Rights Holder shall have twenty (20) days after any such notice is effective to agree to purchase such Rights Holder's Pro Rata Share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) In the event the Rights Holders fail to exercise fully the right of first refusal within said twenty (20)-day period and after the expiration of the ten (10)-day period for the exercise of the over-allotment provisions of this Section 2.3, the Company shall have one hundred twenty (120) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within one hundred twenty (120) days from the date of said agreement) to sell the New Securities respecting which the Rights Holders' right of first refusal option set forth in this Section 2.3 was not exercised, at a price and upon terms no more favorable to the purchasers thereof than specified in the Company's notice to Rights Holders pursuant to Section 2.3(b). In the event the Company has not sold within said one hundred twenty (120)-day period or entered into an agreement to sell the New Securities within said one hundred twenty (120)-day period (or sold and issued New Securities in accordance with the foregoing within one hundred twenty (120) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first again offering such securities to the Rights Holders in the manner provided in Section 2.3(b) above. (d) At any time following the date of this Agreement, if the Company has complied with its notice obligations pursuant to this Section 2.3, or such obligations have been waived, and the Company thereafter proceeds to issue or sell New Securities and a Rights Holder does not acquire his, her or its Pro Rata Share (a "Non-Participating Rights Holder"), then all of such Non-Participating Rights Holder's Cash Preferred shall automatically and without further action on the part of such holder be converted, pursuant to Article III(B)(4)(m) of the Company's Amended and Restated Articles of Incorporation, effective upon, subject to, and concurrently with, the consummation of the issuance and sale of the New Securities into an equivalent number of shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, respectively; provided, however, that no such conversion shall occur in connection with a particular issuance of sale of New Securities if, pursuant to the written request of this corporation, such holder agrees in writing to waive his, her or its right of first refusal hereunder with respect to such issuance or sale. (e) The right of first refusal granted under this Agreement shall expire upon, and shall not be applicable to, the first sale of Common Stock of the Company to the public effected pursuant to a registration statement filed with, and declared effective by, the SEC under the Securities Act, with proceeds of more than $5,000,000. -19- 85 (f) The right of first refusal set forth in this Section 2.3 may not be assigned or transferred, except that (i) such right is assignable by each Rights Holder to any wholly owned subsidiary or parent of, or to any corporation or entity that is, within the meaning of the Securities Act, controlling, controlled by or under common control with, any such Rights Holder, and (ii) such right is assignable between and among any of the Rights Holders. 2.4 Key Person Life Insurance. The Company has as of the date hereof obtained from financially sound and reputable insurers term life insurance on the life of Steve Teig in the amount of $2,000,000 (the "Teig Insurance"), and shall maintain with financially sound and reputable insurers the Teig Insurance and term life insurance on the life of Robert Curtis in the amount of $1,000,000, except as otherwise decided in accordance with policies adopted by the Company's Board of Directors. Such policies shall name the Company as loss payee and shall not be cancelable by the Company without prior approval of the Board of Directors. 2.5 Representation on Board of Directors. So long as any Shares remain outstanding, the Company will use its best efforts to cause and maintain the election to the Board of Directors of (a) two people designated by the holders of a majority of the Series C Preferred Stock outstanding, including Common Stock issued upon conversion of such Series C Preferred Stock (each a "Series C Director"), and (b) two people designated by the holders of a majority of the Series A and Series B Preferred Stock outstanding, including Common Stock issued upon conversion of such Series A and B Preferred Stock. One Series C Director shall be designated by The Sprout Group and the other Series C Director shall be designated, subject to the consent of The Sprout Group, by a holder of at least 2,419,355 shares of Series C Preferred Stock in the aggregate. In the event that two or more holders of Series C Preferred Stock, other than The Sprout Group, each hold in excess of 2,419,355 shares of Series C Preferred Stock, then that holder holding the greatest number of shares of Series C Preferred Stock shall have the right to designate the remaining Series C Director. In the event that two or more such holders hold an equal number of Series C Preferred Stock, then The Sprout Group shall determine which of them shall designate the remaining Series C Director. The Company further agrees that it will take all actions reasonably necessary, including increasing the current number of directors in accordance with the provisions of the Company's Bylaws, to permit all such designations of directors to occur on or immediately prior to the regular meeting of the Board of Directors to be scheduled in September 1995, but in no event later than September 30, 1995. For purposes of the designation of the Series C Director, a holder shall include an Investor who has purchased or agreed to purchase at least 2,419,355 shares of Series C Preferred Stock pursuant to the Series C Preferred Stock Purchase Agreement of even date herewith. For the purposes of this paragraph, a "holder" shall include the affiliates of any holder. -20- 86 2.6 Termination of Covenants. The covenants set forth in this Section 2 shall terminate and be of no further force and effect after the time of effectiveness of the Company's first firm commitment underwritten public offering registered under the Securities Act. SECTION 3 MISCELLANEOUS 3.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California, as if entered into by and between California residents exclusively for performance entirely within California. 3.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 3.3 Entire Agreement; Amendment; Waiver. This Agreement (including the Exhibits hereto) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Company and the holders of at least fifty percent (50%) of the Registrable Shares and any such amendment, waiver, discharge or termination shall be binding on all the Holders, but in no event shall the obligation of any Holder hereunder be materially increased, except upon the written consent of such Holder. 3.4 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by United States first-class mail, postage prepaid, or delivered personally addressed by hand or special courier (a) if to a Holder, as indicated on the list of Holders attached hereto as Exhibit A, or at such other address as such Investor or permitted assignee shall have furnished to the Company in writing, or (b) if to the Company, at 11099 N. Torrey Pines Road, Suite 200, La Jolla, California 92037, or at such other address as the Company shall have furnished to each holder in writing. All such notices and other written communications shall be effective (i) if mailed, five (5) days after mailing and (ii) if delivered, upon delivery. 3.5 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Holder, upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement or any waiver on the part of any -21- 87 Holder of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Holder, shall be cumulative and not alternative. 3.6 Rights; Separability. Unless otherwise expressly provided herein, a Holder's rights hereunder are several rights, not rights jointly held with any of the other Holders. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 3.7 Information Confidential. Each Holder acknowledges that the information received by them pursuant hereto may be confidential and for its use only, and it will not use such confidential information in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information, and its attorneys), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or such Holder is required to disclose such information by a governmental body. 3.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 3.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. [Remainder of Page Intentionally Left Blank] -22- 88 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------------- Title: ------------------------------------ HOLDER: ------------------------------------------- [Name of Holder] By: --------------------------------------- Title: ------------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 89 EXHIBIT A INVESTORS Forward Ventures II, L.P. Sequoia Capital VI Sequoia Technology Partners VI Sequoia XXIV Lynn H. Caporale Sydney Brenner Sprout Capital VII, L.P. DLJ Capital Corporation Sofinnova Ventures III, L.P. Singapore Bio-Innovations Pte, Ltd PaineWebber Incorporated as Custodian of the Michael Grossman Rollover IRA Steven M. Lash First Interstate Bank as Trustee for SK International Securities Corp. 401(k)PS em Stephen J. Kandel Byron T. Franzen IRA FBO Byron T. Franzen M.L. Lawrence Revocable Trust Farley Inc. Ambex Technologies Sorrento Ventures II, L.P. Sorrento Growth Partners I, L.P. Comdisco, Inc. Brinson Venture Capital Fund III, L.P. Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III 90 EXHIBIT C SHAREHOLDER LIST
CLASS/SERIES SHAREHOLDER NO. SHARES ------------ ----------------------------------------- ---------- Common Kim D. Janda 175,000 Common Chi-Huey Wong 150,000 Common Dale L. Boger 150,000 Common Eric Erb 10,000 Common Standish Fleming 37,500 Common Trustees of Royston Family Trust UTA 2/12/82 37,500 Common Sydney Brenner 150,000 Common Forward Ventures II, L.P. 225,000 Common Jeffrey Sollender 10,000 Common Robert A. Curtis 500,000 Common Gail Erwin 2,500 Common Sequoia Capital VI 91,000 Common Sequoia Technology Partners VI 5,000 Common Sequoia XXIV 4,000 Common Lynn H. Caporale 175,000 Common Bobbie J. Bosley 10,000 Common Eric Erb 5,000 Common Angelo Castillino, Ph.D. 20,000 Common Peter A. Bick 20,000 Common Soan Cheng 20,000 Common Daniel C. M. Sun 10,000 Common Gail Erwin 40,000 Common Christine M. Tarby 14,000
91
CLASS/SERIES SHAREHOLDER NO. SHARES ------------ ----------------------------------------- ---------- Common Peter M. Wirsching, Ph.D. 11,764 Common Richard A. Lerner, M.D. 83,000 Common The Scripps Research Institute 305,236 Common Peter Myers 350,000 Common Jonathan Greene 100,000 Common Steven Teig 200,000 Common Ken Rubenstein 6,000 TOTAL COMMON: 2,917,500 Series A Forward Ventures II, L.P. 600,000 Series A Sequoia Capital VI 364,000 Series A Sequoia Technology Partners VI 20,000 Series A Sequoia XXIV 16,000 TOTAL SERIES A: 1,000,000 Series B Sequoia Capital VI 1,213,334 Series B Sequoia Technology VI 66,667 Series B Sequoia Capital VI 53,333 Series B Forward Ventures II, L.P. 866,666 Series B Lynn H. Caporale 26,667 TOTAL SERIES B: 2,226,667 Series Z Sydney Brenner 200,000 TOTAL SERIES Z: 200,000
92 EXHIBIT D CO-SALE AGREEMENT 93 COMBICHEM, INC. CO-SALE AGREEMENT This Co-Sale Agreement is made as of the _____ day of August, 1995, by and among Robert A. Curtis, Peter Myers, Steven Teig, Sydney Brenner, Kim Janda, Chi-Huey Wong and Dale Boger (individually, a "Founder" and, collectively, the "Founders"), CombiChem, Inc., a California corporation (the "Company"), and the undersigned holders of Series A, B or C Preferred Stock of the Company (the "Shareholders"). In consideration of the mutual covenants set forth herein, the parties agree as follows: 1. Definitions. (a) "Stock" shall mean shares of the Company's Common Stock or Preferred Stock or Series Z Preferred Stock now owned or subsequently acquired by the Founders. (b) "Preferred Stock" shall mean the Company's outstanding Series A, Series B, Series C, Series J, Series Z, Series A-1, Series B-1 and Series C-1 Preferred Stock. (c) "Common Stock" shall mean the Company's Common Stock and shares of Common Stock issued or issuable upon conversion of the Company's outstanding Preferred Stock. 2. Sales by Founder. (a) If a Founder proposes to sell or transfer any shares of Stock in one or more related transactions which will result in (i) the transfer of 1,000 or more shares of Stock by such Founder or (ii) the transferee of such shares holding more than 50% of the Common Stock, then such Founder shall promptly give written notice (the "Notice") to the Company and the Shareholders at least twenty (20) days prior to the closing of such sale or transfer. The Notice shall describe in reasonable detail the proposed sale or transfer including, without limitation, the number of shares of Stock to be sold or transferred, the nature of such sale or transfer, the consideration to be paid and the name and address of each prospective purchaser or transferee. In the event that the sale or transfer is being made pursuant to the provisions of Sections 3(a) or 3(b) hereof, the Notice shall state under which paragraph the sale or transfer is being made. (b) Each Shareholder shall have the right, exercisable upon written notice to such Founder within 15 days after receipt of the Notice, to participate in such sale of Stock on the same terms and conditions. To the extent one or more of the Shareholders exercise such right of participation in accordance with the terms and conditions set forth below, the number of shares of Stock that the Founder may sell in the transaction shall be correspondingly reduced. -1- 94 (c) Each Shareholder may sell all or any part of that number of shares of Stock equal to the product obtained by multiplying (i) the aggregate number of shares of Stock covered by the Notice by (ii) a fraction the numerator of which is the number of shares of Common Stock owned by the Shareholders at the time of the sale or transfer and the denominator of which is the total number of shares of Common Stock owned by the Founder and the Shareholders at the time of the sale or transfer. (d) If any Shareholder fails to elect to fully participate in such Founder's sale pursuant to this Section 2, the Founder shall give notice of such failure to the Shareholders who did so elect (the "Participants"). Such notice may be made by telephone if confirmed in writing within two (2) days. The Participants shall have five (5) days from the date such notice was given to agree to sell their pro rata share of the unsold portion. For purposes of this Section 2(d), a Participant's pro rata share shall be the ratio of (x) the number of shares of Common Stock held by such Participant to (y) the total number of shares of Common Stock held by the Participants and the Founder. (e) Each Participant shall effect its participation in the sale by promptly delivering to the Founder for transfer to the prospective purchaser one or more certificates, properly endorsed for transfer, which represent: (i) the type and number of shares of Common Stock which such Participant elects to sell; or (ii) that number of shares of Series A, Series B or Series C Preferred Stock which is at such time convertible into the number of shares of Common Stock which such Participant elects to sell; provided, however, that if the prospective purchaser objects to the delivery of Series A, Series B or Series C Preferred Stock in lieu of Common Stock, such Participant shall convert such Preferred Stock into Common Stock and deliver Common Stock as provided in Section 2(e)(i) above. The Company agrees to make any such conversion concurrent with the actual transfer of such shares to the purchaser. (f) The stock certificate or certificates that the Participant delivers to the Founder pursuant to Section 2(e) shall be transferred to the prospective purchaser in consummation of the sale of the Stock pursuant to the terms and conditions specified in the Notice, and the Founder shall concurrently therewith remit to such Participant that portion of the sale proceeds to which such Participant is entitled by reason of its participation in such sale. To the extent that any prospective purchaser or purchasers prohibits such assignment or otherwise refuses to purchase shares or other securities from a Participant exercising its rights of co-sale hereunder, the Founder shall not sell to such prospective purchaser or purchasers any Stock unless and until, simultaneously with such sale, the Founder shall purchase such shares or other securities from such Participant. (g) The exercise or non-exercise of the rights of the Participants hereunder to participate in one or more sales of Stock made by the Founder shall not adversely affect their rights to participate in subsequent sales of Stock subject to Section 2(a). 3. Exempt Transfers. -2- 95 (a) Notwithstanding the foregoing, the co-sale rights of the Shareholders shall not apply to (i) any pledge of Stock made pursuant to a bona fide loan transaction that creates a mere security interest or (ii) any transfer to the ancestors, descendants or spouse or to trusts for the benefit of such persons or a Founder; provided that (A) the transferring Founder shall inform the Shareholders of such pledge or transfer prior to effecting it and (B) the pledgee or transferee shall furnish the Shareholders with a written agreement to be bound by and comply with all provisions of Section 2. Such transferred Stock shall remain "Stock" hereunder, and such pledgee or transferee shall be treated as a "Founder" for purposes of this Agreement. (b) Notwithstanding the foregoing, the provisions of Section 2 shall not apply to the sale of any Stock (i) to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act") or (ii) to the Company. 4. Prohibited Transfers. (a) In the event a Founder should sell any Stock in contravention of the co-sale rights of the Shareholders under this agreement (a "Prohibited Transfer"), the Shareholders, in addition to such other remedies as may be available at law, in equity or hereunder, shall have the put option provided below, and the Founder shall be bound by the applicable provisions of such option. (b) In the event of a Prohibited Transfer, each Shareholder shall have the right to sell to the Founder the type and number of shares of Stock equal to the number of shares each Shareholder would have been entitled to transfer to the purchaser had the Prohibited Transfer under Section 2(c) hereof been effected pursuant to and in compliance with the terms thereof. Such sale shall be made on the following terms and conditions: (i) The price per share at which the shares are to be sold to the Founder shall be equal to the price per share paid by the purchaser to the Founder in the Prohibited Transfer. The Founder shall also reimburse each Shareholder for any and all reasonable fees and expense, including reasonable legal fees and expense, incurred pursuant to the exercise or the attempted exercise of the Shareholder's rights under Section 2. (ii) Within ninety (90) days after the later of the dates on which the Shareholder (A) received notice of the Prohibited Transfer or (B) otherwise become aware of the Prohibited Transfer, each Shareholder shall, if exercising the option created hereby, deliver to the Founder the certificate or certificates representing shares to be sold, each certificate to be properly endorsed for transfer. (iii) The Founder shall, upon receipt of the certificate or certificates for the shares to be sold by a Shareholder, pursuant to this Section 4(b), pay the aggregate purchase price therefor and the amount of reimbursable fees and expense, as specified in Section 4(b)(i), in cash or by other means acceptable to the Shareholder. -3- 96 (iv) Notwithstanding the foregoing, any attempt by a Founder to transfer Stock in violation of Section 2 hereof shall be void and the Company agrees it will not effect such a transfer nor will it treat any alleged transferee as the holder of such shares without the written consent of a majority in interest of the Shareholders. 5. Legend. (a) Each certificate representing shares of Stock now or hereafter owned by the Founders or issued to any person in connection with a transfer pursuant to Section 3(a) hereof shall be endorsed with the following legend: "THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CO-SALE AGREEMENT BY AND BETWEEN THE SHAREHOLDER, THE CORPORATION AND CERTAIN HOLDERS OF STOCK OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION." (b) Each Founder agrees that the Company may instruct its transfer agent to impose transfer restrictions on the shares represented by certificates bearing the legend referred to in Section 5(a) above to enforce the provisions of this Agreement and the Company agrees to promptly do so. The legend shall be removed upon termination of this Agreement. 6. Miscellaneous. 6.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Delaware. 6.2 Amendment. Any provision may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by the written consent of (i) as to the Company, only by the Company, (ii) as to the Shareholders, by persons holding more than fifty percent (50%) in interest of the Common Stock and Common Stock equivalents then held by the Shareholders and their assignees, pursuant to Section 6.3 hereof, and (iii) as to each Founder, such Founder, provided that any Shareholder may individually waive any of his rights hereunder without obtaining the consent of any other Shareholder. Any amendment or waiver effected in accordance with clauses (i), (ii) and (iii) of this paragraph shall be binding upon each Shareholder, its successors and assigns, the Company and the Founder in question. 6.3 Assignment of Rights. This Agreement and the rights and obligations of the parties hereunder shall inure to benefit of, and be binding upon, their respective successors, assigns and legal representatives. The rights of the Shareholders hereunder are only assignable (i) by each of such Shareholders to any other Shareholder or -4- 97 (ii) to an assignee or transferee who acquires all of the Common Stock purchased by a Shareholder or at least 25,000 shares of Common Stock. 6.4 Term. This Co-Sale Agreement shall terminate upon the earlier of (i) the closing of a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which (exclusive of underwriting discounts, commissions and expenses) is not less than $4.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and $12,000,000 in the aggregate, and (ii) the closing of the Company's sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or consolidation resulting in the exchange of the outstanding shares of the Company's capital stock for securities or consideration issued, or caused to be issued, by the acquiring entity or its subsidiary. 6.5 Ownership. Each Founder represents and warrants that he is the sole legal and beneficial owner of the shares of stock subject to this Co-Sale Agreement and that no other person has any interest (other than a community property interest) in such shares. 6.6 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery to the party to be notified or five days after deposit in the United States mail, by registered or certified mail, postage prepaid and properly addressed to the party to be notified as set forth on the signature page hereof or at such other address as such party may designate by ten (10) days' advance written notice to the other parties hereto. Notwithstanding the foregoing, the telephone notice permitted by Section 2(d) shall be effective at the time it is given. 6.7 Severability. In the event one or more of the provisions of this Co-Sale Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Co-Sale Agreement, and this Co-Sale Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 6.8 Attorney Fees. In the event that any dispute among the parties to this Co-Sale Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Co-Sale Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 6.9 Counterparts. This Co-Sale Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -5- 98 The foregoing agreement is hereby executed as of the date first above written. COMBICHEM, INC. By: ----------------------------------------- Title: -------------------------------------- Address ------------------------------------- ---------------------------------- ---------------------------------- SHAREHOLDERS: --------------------------------------------- (Print Name of Investor) --------------------------------------------- (Signature) --------------------------------------------- (Title, if applicable) Address --------------------------------------------- --------------------------------------------- ---------------------------------------------
[SIGNATURE PAGE TO CO-SALE AGREEMENT] 99 FOUNDERS: ------------------------------------------ (Print Name of Founder) ------------------------------------------ (Signature) Address ------------------------------------------ ------------------------------------------ ------------------------------------------
[SIGNATURE PAGE TO CO-SALE AGREEMENT] 100 CONSENT OF SPOUSE I acknowledge that I have read the foregoing Agreement and that I know its contents. I am aware that by its provisions if I and/or my spouse agree to sell all or part of the shares of the Company held of record by either or both of us, including my community interest in such shares, if any, co-sale rights (as described in the Agreement) must be granted to the Shareholders by the seller. I hereby agree that those shares and my interest in them, if any, are subject to the provisions of the Agreement and that I will take no action at any time to hinder operation of, or violate, the Agreement. ------------------------------------------ (Signature) 101 SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES This Schedule of Exceptions is made and given pursuant to Article II of the Series C Preferred Stock Purchase Agreement (the "Agreement"). The section numbers in this Schedule of Exceptions correspond to the section numbers in the Agreement; however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated into any other section number under the Agreement where such disclosure would otherwise be appropriate. Any terms defined in the Agreement shall have the same meaning when used in this Schedule of Exceptions as when used in the Agreement unless the context otherwise requires. Nothing herein constitutes an admission of any liability or obligation on the part of CombiChem nor an admission against CombiChem's interest. The inclusion of any schedule herein or any exhibit hereto should not be interpreted as indicating that CombiChem has determined that such an agreement or other matter is necessarily material to CombiChem. The Investors acknowledge that certain information contained in these schedules may constitute material confidential information relating to CombiChem which may not be used for any purpose other than that contemplated in the Agreement. 102 SCHEDULE 2.5 CAPITALIZATION AND VOTING RIGHTS Certain investors of the Company are parties to assignment agreements pursuant to which they have assigned the right to receive warrants issuable in connection with the Series C Preferred Stock financing to other investors. Schedule 2.5 103 SCHEDULE 2.7 CONTRACTS AND OTHER COMMITMENTS The Company is a party to the following agreements: (a) (i) Torrey Pines Science Park Industrial Real Estate Modified Gross Lease for 11025 N. Torrey Pines Road, La Jolla, CA 92037 dated November 1, 1991. (ii) Sublease for 11025 North Torrey Pines Road, La Jolla, CA 92037 dated August 24, 1994 and September 1, 1994. (iii) Sublease for 11025 N. Torrey Pines Road, La Jolla, CA 92037. (iv) Industrial Lease for 1221 Innsbruck Drive, Sunnyvale, CA dated December 7, 1992. (v) Second Sublease for 1225 Innsbruck Drive, Sunnyvale, CA and draft of Addendum No. 1. (vi) 11099 N. Torrey Pines Road, Suite 200, La Jolla, California Lease dated March 15, 1995 between Health Science Properties, Inc. and the Company. (vii) See (e)(iv) and (v) below. (viii) Pursuant to that certain Agreement dated August 4, 1995 among the Company, Molecular Simulations Inc.("MSI") and Entropix Corporation, the Company is obligated to make the following cash payments on or before December 31, 1995: (A) $100,000 and (B) at the sole discretion of MSI, either (i) a cash payment in an amount equal to $140,000 or (ii) 225,807 shares of Series Z Preferred Stock. In addition, the Company issued a promissory note to MSI for $300,000 payable June 15, 1996 in cash, or at the Company's option, by issuing 100,000 shares of Series Z Preferred Stock. (ix) In connection with the execution of the Agreement with MSI described in (viii) above and pursuant to a License Agreement dated August 4, 1995 between the Company and MSI ("MSI License Agreement"), the Company agreed to pay to MSI royalties equal to: (A) in connection with the sale of a single product, the lesser of 5% of net sales of such product or $25,000; (B) in connection with the sale of more than one product in a single transaction, the sum of (I) with respect to the first product included in such transaction, the lesser of 5% of net sales of such product or $25,000 and (II) with respect to the additional products, a flat royalty of $5,000 per additional product; or (C) in connection with a collaboration or contract research project, the lesser of 2% of net sales for such collaboration or contract research project or $100,000. The maximum aggregate royalties payable under the agreement is $5.0 million. (x) Certain employees have arrangements with the Company pursuant to which severance payments would be made following their termination of employment in certain circumstances. No such payments are currently being made. (xi) Pursuant to the Sublicense Agreement dated July 20, 1995 between the Company and Johnson & Johnson (the "J&J Sublicense"), the Company is required to make (A) aggregate payments of $100,000 (subject to certain Schedule 2.7 104 time and performance milestones), (B) an additional royalty of 1% of monetary compensation received in connection with a further sublicense of rights under the Agreement and (C) earned royalties 10% of net sales value of products sold under the agreement by the Company or affiliates or 10% of the royalty or other income received by the Company from sublicensee or third parties in consideration of granting of further sublicenses. (xii) See (c)(iii) below. (b) (i) Preferred Stock Purchase Agreement (600,000 Shares of Series A Preferred Stock) dated August 26, 1994 between the Company and Forward Ventures II, L.P. (ii) Common Stock Purchase Agreement (225,000 Shares of Common Stock) dated September 28, 1994 between the Company and Forward Ventures II, L.P. (iii) Preferred Stock Purchase Agreement (200,000 Shares of Series Z Preferred Stock) dated October 12, 1994 between the Company and Dr. Sydney Brenner. (iv) Stock Purchase Agreement Preferred and Common (400,000 Shares of Series A Preferred Stock and 100,000 Shares of Common Stock) dated November 1, 1994 among the Company, Sequoia Capital VI, Sequoia Technology Partners VI and Sequoia XXIV. (v) Stock Purchase Agreement Series B Preferred dated November 29, 1994 among the Company, Sequoia Capital VI, Sequoia Technology Partners VI, Sequoia XXIV and Forward Ventures II, L.P. (vi) Stock Purchase Agreement (Series B Preferred) dated January 15, 1995 between the Company and Lynn H. Caporale, Ph.D. (vii) Common Stock Purchase Agreement dated March 20, 1995 between the Company and The Scripps Research Institute, as amended through the date hereof. (viii) The Company is party to the following Common Stock Purchase Agreements:
AMOUNT OF NAME DATE SHARES Kim D. Janda 09/28/94 175,000 Chi-Huey Wong 09/28/94 150,000 Dale L. Boger 09/28/94 150,000 Eric Erb 09/28/94 10,000 Standish Fleming 09/28/94 37,500 Trustee of Royston Family Trust UTA 09/28/94 37,500 2/12/82
Schedule 2.7 105
AMOUNT OF NAME DATE SHARES Sydney Brenner 09/28/94 150,000 Jeffrey Sollender 09/28/94 10,000 Robert A. Curtis 10/18/94 500,000 Gail Erwin 10/18/94 2,500 Lynn H. Caporale 11/08/94 175,000 Bobbie J. Bosley 11/18/94 10,000 Eric D. Erb 01/01/95 5,000 Angelo J. Castellino 01/19/95 20,000 Peter A. Bick 01/23/95 20,000 Soan Cheng 01/23/95 20,000 Daniel C.M. Sun 01/30/95 10,000 Gail Erwin 02/06/95 40,000 Christine M. Tarby 04/24/95 14,000 Peter Myers 3/1/95 350,000 Steve Teig 6/2/95 200,000 Jonathon Greene 6/3/95 100,000
(ix) See (a) (viii) above. (x) The Company intends to enter into Series J Option Agreements with each of Steven Teig, Jonathan Greene and Andrew Smellie, pursuant to which an aggregate of 465,000 shares of Series J Preferred Stock may be issued. (xi) The Company had previously entered into (A) that certain Amended and Restated Stock Registration Rights Agreement dated November 1, 1994, as amended on November 29, 1994, January 15, 1995 and March 20, 1995 and (B) that certain Stock Registration Rights Agreement dated October 12, 1994 which granted to certain investors registration rights. These agreements are being terminated pursuant to Investors' Rights Agreement. (xii) Warrant Agreement with Comdisco, Inc., dated December 20, 1994 (xiii) Pursuant to a consulting agreement with Ken Rubenstein pursuant to which Mr. Rubenstein receives 1,000 shares of the Company's common stock for each month in which he performs consulting services. (xiv) The Company has granted an aggregate of 50,000 options to certain employees and consultants pursuant to which up to an aggregate of 50,000 shares of common stock may be issued. Schedule 2.7 106 (c) (i) Convertible Revolving Promissory Notes dated June 15, 1995 in favor of Sequoia Capital VI, Sequoia Technology Partners, Sequoia XXIV, Forward Ventures in the aggregate amount of $500,000. (ii) Convertible Revolving Promissory Notes dated July 20, 1995 in favor of Sequoia Capital VI, Sequoia Technology Partners, Sequoia XXIV, First Interstate Bank as Trustee for SK International Securities Corporation 401(k) Profit Sharing Plan EM Stephen J. Kandel TR#508263200, Dr. Michael Grossman, Rollover IRA and Steven Lash in the aggregate amount of $250,000 as of Closing (with an additional $250,000 available). (iii) Master Lease Agreement with Comdisco, Inc. ("Comdisco") dated November 16, 1994 (iv) See (a)(viii) above. (d) (i) The Company is party to employment agreements with the following individuals: Eric Erb; Robert A. Curtis; Lynn H. Caporale; Peter Myers; Jonathan Greene; Steven Teig; and Andrew Smellie. In addition, the Company is a party to offer letters and/or memoranda with the following employees in which certain terms and conditions of the employee's employment are set forth: Jeffrey D. Sollender; Bobbie Bosley; Daniel C. M. Sun; Angelo J. Castellino; Soan Cheng; Gail Erwin; Christine Tarby; Martha Salkin; Kevin Wheeler; and John Williams. (ii) The Company is a party to the following consulting agreements: Dale L. Boger (dated 05/01/94); Eric Erb (dated 07/01/94); Kim D. Janda (dated 08/09/94); Sydney Brenner (dated 08/10/94); Chi-Huey Wong (dated 08/11/94); Sue Ann Latterman (dated 12/23/94); and Ken Rubenstein (dated 2/4/95). The Company is negotiating a consulting agreement with Mark Edwards. The Company entered into a letter agreement dated July 25, 1995 with Transpect Incorporated ("Transpect") pursuant to which Transpect is retained as an advisor and consultant with respect to the establishment of a relationship with Daiichi Pharmaceutical Co., Ltd (or any company mutually agreed to). (e) (i) Agreement for Purchase and Sale of Assets dated September 28, 1994 among the Company, Combichem, Inc., a Delaware corporation, KPCB VI and KPCB IV-FF. (ii) License Agreement with The Scripps Research Institute ("Scripps License") (iii) Assignments of Dr. Sydney Brenner (iv) Letter of Intent - R&D Collaboration and Manufacturing and Supply Agreement with LJL Biosystems, Inc. dated March 15, 1995 as amended June 1, 1995 (v) Letter to LJL Biosystems, Inc. detailing revised payment schedule for COMBISYN 100 program dated July 21, 1995 (vi) See (a)(ix) above. (vii) Sublicense Agreement dated July 20, 1995 between the Company and Johnson & Johnson. (viii) Option Agreement with The Scripps Research Institute ("Scripps Option"). Schedule 2.7 107 (f) The Company intends to enter into indemnification agreements with each of the directors of the Company following the Closing. In addition, other agreements listed in this Schedule of Exceptions or to be entered into in connection with the Closing may contain indemnification provisions. (i) None (ii) See (a) above. (iii) The Company currently has a commitment to make relocation loans to the following employees in the following principal amounts: Robert A. Curtis ($150,000) and Peter Myers ($150,000). None of such loans is outstanding. (iv) See (a)(viii) and (a)(ix) above. In connection with the MSI transaction discussed above and in addition to the agreements noted above, the Company also entered into a separate License Agreement (pursuant to which it obtained a license to certain MSI products), an Acknowledgement and General Release (pursuant to which the operation of certain sections of Mr. Teig's prior contracts with MSI were waived and the Company and Mr. Teig were released from claims arising out of such released sections of the contracts). The sale of shares of Series C Preferred Stock in the proposed financing will result in a change of ownership of greater than 50% of the voting power of the Company prior to the Closing. The Company has performed all obligations and conditions required to be performed or met by it through the date hereof under each of the Scripps License and Scripps Option. The Scripps License is in full force and effect as of the date hereof. The Scripps Option has not been exercised, as of the date of the Closing. The Company will use its best efforts not to waive any rights of the Company under the Scripps License or Scripps Option, without the consent of a majority of the outstanding shares of Series C Preferred Stock (and shares of the Company's capital stock issuable upon exchange or conversion of the Series C Preferred Stock). Schedule 2.7 108 SCHEDULE 2.8 RELATED-PARTY TRANSACTIONS The Company is indebted to certain venture capital funds affiliated with directors pursuant to the Convertible Revolving Promissory Notes dated June 15, 1995 and the Convertible Revolving Promissory Notes dated July 20, 1995 (collectively, the "Notes"). All accrued interest and outstanding principal due under the Notes will be converted into shares of Series C Preferred Stock in connection with the Closing, except interest and principal owing to Forward Ventures II, L.P. which will be paid in full from the proceeds of the offering. Venture capital funds affiliated with directors participated in the Company's prior rounds of financing and will participate in the Series C Preferred Stock financing. Such directors may engage in the development and financing of other companies and/or research projects which may be developing, or may in the future develop, products which may compete directly, or indirectly, with the products intended to be developed by the Company. The Company currently has a commitment to make relocation loans to the following employees in the following principal amounts: Robert A. Curtis ($150,000) and Peter Myers ($150,000). None of such loans is outstanding. Schedule 2.8 109 SCHEDULE 2.9 REGISTRATION RIGHTS The registration rights in place prior to the closing with respect to shares of Common Stock issuable upon exercise of Series A Preferred Stock, Series B Preferred Stock and Dr. Brenner's shares of Series Z Preferred Stock will be replace with the registration rights set forth in the Investors' Rights Agreement. The Company is obligated to register shares of Common Stock issuable upon conversion of Series Z Preferred Stock issuable upon exercise of warrants issued (or to be issued) in connection with the Company's equipment lease line. Schedule 2.9 110 SCHEDULE 2.10 PERMITS The Company has completed its initial inspection by the Fire Marshall. Another inspection is scheduled to occur in the next month, following which a permit will be issued assuming compliance with all applicable rules and regulations. Schedule 2.10 111 SCHEDULE 2.15 TITLE TO PROPERTY AND ASSETS; LEASES Under the terms of the Company's agreement with Comdisco, Comdisco retains all rights to the equipment purchased under such lease, with the Company having an option to purchase at the completion of the term of the agreement. Schedule 2.15 112 SCHEDULE 2.16 FINANCIAL STATEMENTS The Company has entered into the agreements with MSI and Johnson & Johnson since June 30, 1995. In addition, the Company has incurred substantially all of the aggregate indebtedness under the Convertible Revolving Promissory Notes since June 30, 1995. The employee relocation loan commitments are not reflected on the June 30, 1995 financial statements. In addition, the contingent severance payments due under certain employment arrangements with the Company's employees are not reflected on the June 30, 1995 financial statements. Schedule 2.16 113 SCHEDULE 2.18 PATENTS AND TRADEMARKS A list of pending patent applications is attached hereto as Exhibit A to Schedule 2.18. The Company filed an intent to use application with the United States Patent and Trademark Office ("PTO") to register the mark COMBICHEM on February 26, 1993 in Class 42 for the services of combinatorial chemistry and molecular biology research and analysis. The application was inadvertently abandoned and a petition to revive the application, filed on June 14, 1995 with the PTO is now pending. The Company filed a duplicate application on June 5, 1995 in the event that the petition to revive is denied. This application is now pending. The Company filed an intent to use application to register the mark COMBICHEM on November 15, 1994 in Class 5 for pharmaceuticals and chemical compounds. An Office Action has been issued by the PTO citing two prior applications that may be confusingly similar to COMBICHEM if either of these applications matures into a registration. A response to the Office Action is due on October 27, 1995. An intent to use application for the mark COMBISYN was filed by the Company on February 13, 1995 and is now pending. The application was filed in Class 9 for scientific apparatus for use in synthesizing by combinatorial chemistry small molecules for use in scientific research. In connection with the MSI License Agreement, the Company received certain licenses to use MSI proprietary technology and granted to MSI an exclusive option to negotiate a distribution agreement with respect to a stand-alone chemical diversity measure software program. The J&J Sublicense contains a grant-back of a non-exclusive irrevocable royalty-free license (with the right to sublicense affiliates) under all patent improvements for the term of the agreement. Schedule 2.18 114 SCHEDULE 2.19 MANUFACTURING AND MARKETING RIGHTS Pursuant to the MSI License Agreement, the Company has granted to MSI an exclusive option to negotiate a distribution agreement with respect to a stand-alone chemical diversity measure software program. LJL Biosystems, Inc. is preparing test models of certain of the Company's products. Schedule 2.19 EX-10.6 12 EXHIBIT 10.6 1 EXHIBIT 10.6 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT ("Agreement") is made as of September 7, 1995 by and between CombiChem, Inc., a California corporation (the "Company") and Todd Schmidt, an individual resident of the State of California (the "Purchaser"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Sale of Series C Preferred Shares. Subject to the terms and conditions of this Agreement, the Purchaser hereby purchases, and the Company hereby sells to the Purchaser, 8,065 shares of the Company's Series C Preferred Stock (the "Shares") in consideration and for services previously rendered by the Purchaser to the Company (the "Purchase Price"). The Purchaser and the Company each agree that the consideration paid to the Company by the Purchaser has a fair market value on the Closing Date of $5,000 in the form of services rendered. 2. Closing. The purchase and sale of the Shares shall take place at the offices of the Company, simultaneous with the execution of this Agreement, or at such other place and time as the Company and the Purchaser shall mutually agree, either orally or in writing (the "Closing"). At the Closing, subject to the terms and conditions hereof, the Company shall deliver to the Purchaser a certificate, registered in the name Purchaser designates by notice to the Company, representing the Shares to be purchased by the Purchaser from the Company, dated the date of the Closing. 3. Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchaser as follows: (a) Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all the Company's obligations under this Agreement, and for the authorization, issuance, sale and delivery of the Shares has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by the Company and the Purchaser shall constitute a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors. 4. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: (a) Authorization. The Purchaser has the requisite legal power and authority to enter into this Agreement and that this Agreement when executed shall constitute a valid and legally binding obligation of the Purchaser. 2 (b) Investment Intent. This Agreement is made with the Purchaser in reliance upon his representation to the Company, which by its execution hereof he confirms, that the Shares have been acquired with his own property for investment for an indefinite period for his own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that Purchaser has no present intention of selling, granting participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that he does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations, to such person or to any third person, with respect to any of the Shares. (c) Reliance Upon the Purchaser's Representations. The Purchaser understands (i) that the Shares are not registered under the Securities Act of 1933, as amended (the "Securities Act") or qualified under the California Corporate Securities Law of 1968, as amended (the "Law"), and (ii) that the Shares are being issued to the Purchaser on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof and/or Regulation D promulgated thereunder and the exemption from qualification provided by Section 25102(f) of the Law, and (iii) that the Company's reliance on such exemptions is predicated on the Purchaser's representations set forth herein. The Purchaser realizes that the basis for the exemptions may not be present if, notwithstanding such representations, the Purchaser has in mind merely acquiring the Shares for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. The Purchaser does not have any such intention. These exemptions only exempt the issuance of the Shares to the Purchaser and not any sale or other disposition of the Shares or any interest therein by the Purchaser. (d) Restricted Securities. The Purchaser hereby confirms that the Purchaser has been informed that the Shares are restricted securities under the Securities Act and may not be resold or transferred unless the Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. In addition, the Purchaser understands that any resale or transfer must comply with applicable state securities laws. Accordingly, the Purchaser hereby acknowledges that the Purchaser is prepared to hold the Shares for an indefinite period, and that the Purchaser is familiar with the provisions of Rule 144 of the Securities and Exchange Commission issued under the Securities Act, and is aware that Rule 144 is not presently available to exempt the sale of the Shares from the registration requirements of the Securities Act. (e) Receipt of Information. The Purchaser acknowledges that he has received all the information he considers necessary or appropriate for deciding whether to purchase the Shares. The Purchaser further represents that he has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and the business, properties, prospects, and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort -2- 3 or expense) necessary to verify the accuracy of any information furnished to Purchaser or to which Purchaser had access. (f) Investment Experience. In connection with representations made herein, the Purchaser represents that he has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of his investment, has the ability to bear the economic risks of his investment and has been furnished with and has had access to all of the information he considers necessary or appropriate to evaluate the risks and merits of an investment in the Shares, and he had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. (g) Limitations on Disposition. The Purchaser agrees that in no event will he make a disposition of any of the Shares, unless and until (i) he shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (ii) he shall have furnished the Company with an opinion of counsel satisfactory to the Company to the effect that (a) such disposition will not require registration of such Shares under the Securities Act, or (b) that appropriate action necessary for compliance with the Securities Act has been taken, or (iii) the Company shall have waived, expressly and in writing, its rights under clauses (i) and (ii) of this subparagraph. The opinion shall also indicate that the disposition is exempt from, in compliance with, or qualified under all applicable state securities laws. (h) Public Sale. The Purchaser agrees not to make, without the prior written consent of the Company, any public offering or sale of the Shares, even if permitted to do so pursuant to Rule 144(k) promulgated under the Securities Act, until the earlier of (i) six months after the date on which the Company effects its initial registered public offering pursuant to the Securities Act or (ii) five years after the date of the Closing of this Agreement. (i) Legends. All certificates representing any shares of the Company subject to the provisions of this Agreement shall have endorsed thereon customary legends regarding: (1) Restrictions on transfer under the Securities Act. (2) Any legend required by state securities laws. 5. Market Stand-Off Agreement. The Purchaser hereby agrees that, during the period of duration specified by the Company and an underwriter of common stock or other securities of the Company, following the effective date of an initial registration statement of the Company filed under the Securities Act, it shall not, to the extent requested by the Company and such underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be -3- 4 similarly bound) any securities of the Company held by it at any time during such period except common stock included in such registration; provided, however, that: (a) such agreement shall not exceed 180 days for the first such registration statement of the Company which covers common stock (or other securities) to be sold on its behalf to the public in an underwritten offering; and (b) such agreement shall not exceed 90 days for any subsequent registration statement of the Company which covers common stock (or other securities) to be sold on its behalf to the public in an underwritten offering. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Shares of the Purchaser (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 6. Miscellaneous. (a) Further Assurances. Each of the parties hereby agrees to execute and deliver such other documents and to take such further actions as may reasonably be requested by the other party in order to consummate the transactions contemplated herein or to carry out the intent of this Agreement. (b) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below his signature or at such other address as such party may designate by advance written notice to the other party hereto. (c) Governing Law. This Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Agreement shall be determined in accordance with the laws of the State of California. (d) Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon the Purchaser, his successors and assigns. (e) Amendments and Waivers. This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, written or oral. This Agreement may only be amended with the written consent of the parties hereto, or the successors or assigns of the foregoing, and no oral waiver or amendment shall be effective under any circumstances whatsoever. -4- 5 (f) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. (g) Severable Provisions. The provisions of this Agreement are severable, and if any one or more provisions may be determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. (h) Separate Counsel. The Purchaser acknowledges and agrees that Brobeck, Phleger & Harrison represents solely the Company and has not represented his interests and that the Purchaser has been provided the opportunity and encouraged to consult with counsel of the Purchaser's own choosing with respect to this Agreement. The Purchaser certifies and acknowledges that the Purchaser has carefully read all of the provisions of this Agreement and that the Purchaser fully understands and shall fully and faithfully comply with such provisions. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -5- 6 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMPANY: COMBICHEM, INC., a California corporation By: /s/ Pierre Lamond ---------------------------------- Title: Chairman ------------------------------- Address: 9050 Camino Santa Fe San Diego, California 92121 PURCHASER: /s/ Todd Schmidt ------------------------------------- Todd Schmidt Address: 20740 Elfin Forest Road Escondido, CA 92029 [SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT] EX-10.7 13 EXHIBIT 10.7 1 EXHIBIT 10.7 SUPPLEMENTAL PURCHASE AGREEMENT THIS SUPPLEMENTAL PURCHASE AGREEMENT ("Agreement") is made as of April 8, 1996 by and among CombiChem, Inc., a California corporation (the "Company") and the investors listed on the Schedule of Investors attached as Schedule A hereto (the "Schedule of Investors"), each of which is herein referred to as a "Investor." Capitalized terms used herein which are not defined herein shall have the same meaning ascribed to them in the First Closing Agreement (as defined herein below) and all references to any section number used herein shall be deemed to be references to sections of this Agreement, unless otherwise stated. RECITAL A. The Company entered into a certain Series C Preferred Stock Purchase Agreement (the "First Closing Agreement") on August 17, 1995, by and among the Company and the investors listed on Schedule A thereto. B. Pursuant to the First Closing Agreement, each Investor has an obligation to purchase the number of shares set forth opposite such Investors name on the Schedule of Investors upon the achievement by the Company of the Milestones on or before March 31, 1996. THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Achievement of Milestones. By their signatures herein, the Investors indicate their intent to proceed with the Second Closing pursuant to Section 1.2.2(b) of the the First Closing Agreement on or about April 8, 1996. 2. Sale and Issuance of Series C Preferred Stock. Each Investor agrees, severally and not jointly, to purchase at the Second Closing (as defined herein below) and the Company agrees to sell and issue to each Investor, severally and not jointly, at the Second Closing (as defined herein below), that number of shares of the Company's Series C Preferred Stock set forth opposite each Investor's name on the Schedule of Investors at a price of $0.62 per share. 3. Second Closing. Such purchase and sale shall take place on April 8, 1996 at 11:00 A.M. (the "Second Closing Date"), at the offices of Brobeck, Phleger & Harrison, 550 West C Street, San Diego, California, or at such time and place as the Company and the Investors agree (the "Second Closing"). At the Second Closing, the Company will deliver to each Investor a certificate representing the Series C Preferred Stock which such Investor is purchasing as specified in the Schedule of Investors against payment of the purchase price therefor, by check or wire transfer payable to the Company. 2 4. Representations and Warranties of the Company. The Company hereby represents and warrants to each Investor that, except as set forth on the Supplemental Schedule of Exceptions, dated as of April 8, 1996, attached hereto as Exhibit A, the representations and warranties of the Company contained in Section 2 of the First Closing Agreement are true and accurate as of the Second Closing; provided, however, that (i) the term "Financial Statements" as used in Section 2 of the First Closing Agreement, for the purposes of the Second Closing, shall mean with respect to the representations and warranties made hereunder the Company's audited financial statements (balance sheet and profit and loss statement, statement of stockholders' equity and statement of changes in financial position including notes thereto) at December 31, 1995 and for the fiscal year then ended and its unaudited financial statements (balance sheet and profit and loss statement including notes thereto) as at and for the two-month period ended February 29, 1996 and (ii) all references to the date June 30, 1995 contained in Section 2 of the First Closing Agreement, for purposes of the Second Closing, shall be deemed to be references to February 29, 1996. 5. Covenants of the Company. So long as any shares of Preferred Stock are outstanding, the Company shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the shares of Preferred Stock then outstanding: 5.1.1 change the authorized number of directors to be other than between five (5) and nine (9); or 5.1.2 put into place or effect any acceleration of vesting of stock options or waiver of repurchase rights with respect to stock beneficially held by an employee or consultant of the Company, each in the event of a sale of all or substantially all of the assets of the Company, a merger of the Company with or into another entity or a liquidation of the Company. 6. Representations and Warranties of the Investor. As of the Second Closing, each Investor makes the representations and warranties to the Company set forth in Section 3 of the First Closing Agreement. 7. Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. -2- 3 8. Conditions of Investor's Obligations at Second Closing. The obligations of the Investors under Section 2 of this Agreement are subject to the fulfillment on or before the Second Closing of each of the following conditions: a. Representations and Warranties. The representations and warranties of the Company contained in Section 4 hereof and in Section 2 of the First Closing Agreement shall be true on and as of the Second Closing with the same effect as though such representations and warranties had been made on and as of the Second Closing. b. Performance. The Company shall have performed and complied with all agreements, obligations, covenants and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Second Closing. c. Compliance Certificate. The President of the Company shall deliver to each Investor at the Second Closing a certificate certifying that the conditions specified in Sections 8(a), 8(b) and 8(d) hereof have been fulfilled. d. Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series C Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the Second Closing. e. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Second Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Investors' special counsel, which shall have received all such counterpart original and certified or other copies of such documents as it may reasonably request. f. Opinion of Company Counsel. Each Investor shall have received from Brobeck, Phleger & Harrison LLP, counsel for the Company, an opinion, dated the date of the Second Closing, in form and substance satisfactory to special counsel to the Investors. 9. Conditions of the Company's Obligations at Second Closing. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Second Closing of each of the following conditions by that Investor: a. Representations and Warranties. The representations and warranties of the Investor contained in Section 6 hereof and in Section 3 of the First Closing Agreement shall be true on and as of the Second Closing with the same effect as though such representations and warranties had been made on and as of the Second Closing. b. Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series C Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the Second Closing. 10. Miscellaneous. -3- 4 a. Rights of Shares. Except as otherwise set forth in this Agreement, this Second Closing shall be deemed to have been made under the First Closing Agreement, and the shares of Series C Preferred Stock purchased hereunder shall receive the same rights and be subject to the same obligations under the First Closing Agreement, that certain Investors' Rights Agreement dated August 17, 1995 and the Co- Sale Agreement dated August 17, 1995, as the shares of the Series C Preferred Stock purchased pursuant to the First Closing Agreement, except as otherwise expressly set forth in such agreements. b. Survival of Warranties. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Second Closing. c. Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Series C Preferred Stock sold hereunder or any Common Stock issued upon conversion thereof). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. d. Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. e. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. f. Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. g. Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified by hand or professional courier service or five days after deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. h. Finder's Fee. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and -4- 5 expenses of defending against such liability or asserted liability) for which the Investor or any of its officers, partners, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. i. Expenses. Irrespective of whether the Second Closing is effected, the Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If the Second Closing is effected, the Company shall, at the Second Closing, reimburse the reasonable fees of special counsel for the Investors which are anticipated to be approximately $3,500 and shall, upon receipt of a bill therefor, reimburse out-of-pocket expenses of such counsel incurred in connection with the Second Closing. j. Attorney's Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. k. Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of more than 50% of the Common Stock (that has not been sold to the public) issued or issuable upon conversion of the Series C Preferred Stock. Any amendment or waiver effected in accordance with this Section shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities have been converted), each future holder of all such securities and the Company. l. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. m. Exculpation Among Investors. Each Investor acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Investor agrees that no Investor nor the respective controlling persons, officers, directors, partners, agents or employees of any Investor shall be liable for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the Series C Preferred Stock (and Common Stock issued upon conversion thereof). [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -5- 6 IN WITNESS WHEREOF, the parties have executed this Series A Preferred Stock Purchase Agreement as of the date first above written. COMBICHEM, INC. By: /s/ Vicente Anido -------------------------------- Vicente Anido, President INVESTORS: SPROUT CAPITAL VII, L.P. By: DLJ Capital Corporation Managing General Partner By: /s/ Philippe Chambon ------------------------------- Title: Attorney in Fact ---------------------------- Address: 3000 Sand Hill Road, 4-270 Menlo Park, CA 94025 DLJ CAPITAL CORPORATION By: /s/ Philippe Chambon --------------------------------- Title: Attorney in Fact ------------------------------ Address: 3000 Sand Hill Road, 4-270 Menlo Park, CA 94025 [SIGNATURE PAGE TO SUPPLEMENTAL PURCHASE AGREEMENT] 7 SOFINNOVA VENTURES III L.P. By: /s/ Alix Marduel, M.D. ------------------------------- Title: General Partner --------------------------- Address: One Market Plaza, Steuart Tower Suite 2630 San Francisco, CA 94105 SEQUOIA CAPITAL VI By: /s/ Pierre Lamond ------------------------------- Title: General Partner ----------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 SEQUOIA TECHNOLOGY PARTNERS VI By: /s/ Pierre Lamond -------------------------------- Title: General Partner ----------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 SEQUOIA 1995 By: /s/ Pierre Lamond -------------------------------- Title: General Partner ---------------------------- Address: 3000 Sand Hill Road, Building 4, Suite 280 Menlo Park, CA 94025 [SIGNATURE PAGE TO SUPPLEMENTAL PURCHASE AGREEMENT] 8 SINGAPORE BIO-INNOVATIONS PTE LTD By: /s/ illegible ------------------------------- Title: Director/General Manager ---------------------------- Address: 250 North Bridge Road #24-00 Raffles City Tower Singapore 0617 /s/ Byron T. Franzen ----------------------------------- BYRON T. FRANZEN Address: 610 C Street, N.E. Washington, D.C. 20002 IRA FBO BYRON T. FRANZEN /s/ Belinda Faulkner for DLJSC ------------------------------- By: Belinda Faulkner for DLJSC Title: Custodian Address: One Pershing Plaza Jersey City, NJ 07399 M. L. LAWRENCE REVOCABLE TRUST /s/ Rebecca Wood ------------------------------- By: Rebecca Wood Title: Trustee Address: Corporate Office 1500 Orange Avenue Coronado, CA 92118 [SIGNATURE PAGE TO SUPPLEMENTAL PURCHASE AGREEMENT] 9 FARLEY INC. By: /s/ Michael Bogaelie -------------------------------- Title: Vice President & Controller ----------------------- Address: 233 South Wacker Drive, Suite 5000 Chicago, IL 60606 SORRENTO VENTURES II, L.P. By: /s/ Robert M. Jaffe -------------------------------- President, Sorrento Associates, Inc. General Partner, Sorrento Equity Partners, L.P. Title: General Partner, Sorrento Ventures II, L.P. ------------------------------ Address: 4225 Executive Square, Suite 1450 San Diego, CA 92037 SORRENTO GROWTH PARTNERS I, L.P. By: /s/ Robert M. Jaffe -------------------------------- President, Sorrento Growth, Inc. General Partner, Sorrento Equity Growth Partners, I L.P. Title: General Partner, Sorrento Growth Partners I, L.P. --------------------------- Title: ----------------------------- Address: 4225 Executive Square, Suite 1450 San Diego, CA 92037 COMDISCO, INC. By: /s/ Jill C. Hanses --------------------------------- Title: Assistant Vice President ------------------------------ Address: 6111 N. River Road Rosemont, IL 60018 [SIGNATURE PAGE TO SUPPLEMENTAL PURCHASE AGREEMENT] 10 BRINSON VENTURE CAPITAL FUND III, L.P. By: Its General Partner, Brinson Partners, Inc. By: /s/ Terry Gould ---------------------------- Title: Partner, Brinson Partners, Inc. ------------------------------- Address: 209 S. LaSalle Street, Suite 114 Chicago, IL 60604-1295 BRINSON TRUST COMPANY AS TRUSTEE OF THE BRINSON MAP VENTURE CAPITAL FUND III By: /s/ Terry Gould -------------------------------- Title: Assistant Trust Officer, Brinson Trust Company ---------------------------- Address: 209 S. LaSalle Street, Suite 114 Chicago, IL 60604-1295 [SIGNATURE PAGE TO SUPPLEMENTAL PURCHASE AGREEMENT] 11 SCHEDULE A SCHEDULE OF INVESTORS SECOND CLOSING
NUMBER OF SHARES OF SERIES CASH PURCHASE PRICE FOR C PREFERRED STOCK TO BE SHARES OF SERIES C PREFERRED NAME OF INVESTOR PURCHASED STOCK ---------------- ------------ Sprout Capital VII, L.P. 1,340,066 $830,840.92 DLJ Capital Corporation 111,547 $69,159.14 Sofinnova Ventures III, L.P. 483,871 $300,000.02 Singapore Bio-Innovations Ptd, Ltd 241,936 $150,000.32 Sequoia Capital VI 572,420 $354,900.40 Sequoia Technology Partners VI 31,452 $19,500.24 Sequoia XXIV 25,162 $15,600.44 Byron T. Franzen 24,194 $15,000.28 IRA FBO Byron T. Franzen 48,388 $30,000.56 M.L. Lawrence Revocable Trust 96,775 $60,000.50 Farley Inc. 362,904 $225,000.48 Sorrento Ventures II, L.P. 241,936 $150,000.32 Sorrento Growth Partners I, L.P. 483,871 $300,000.02 Comdisco, Inc. 72,581 $45,000.22 Brinson Venture Capital Fund III, L.P. 832,046 $515,868.52 Brinson Trust Company as Trustee of 135,696 $84,131.52 the Brinson MAP Venture Capital Fund III TOTALS: 5,104,845 $3,165,003.90
[SIGNATURE PAGE TO SUPPLEMENTAL PURCHASE AGREEMENT] 12 EXHIBIT A SUPPLEMENTAL SCHEDULE OF EXCEPTIONS 13 SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES This Schedule of Exceptions is made and given pursuant to Section 4 of the Supplemental Purchase Agreement (the "Agreement"). The section numbers in this Schedule of Exceptions correspond to the section numbers in the Series C Preferred Stock Purchase Agreement dated August 17, 1995, by and among CombiChem, Inc. ("CombiChem") and the investors listed on Schedule A thereto (the "First Closing Agreement"); however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated into any other section number where such disclosure would otherwise be appropriate. Any terms defined in the Agreement or the First Closing Agreement shall have the same meaning when used in this Schedule of Exceptions as when used in the Agreement or the First Closing Agreement unless the context otherwise requires. Nothing herein constitutes an admission of any liability or obligation on the part of CombiChem nor an admission against CombiChem's interest. The inclusion of any schedule herein or any exhibit hereto should not be interpreted as indicating that CombiChem has determined that such an agreement or other matter is necessarily material to CombiChem. The Investors acknowledge that certain information contained in these schedules may constitute material confidential information relating to CombiChem which may not be used for any purpose other than that contemplated in the Agreement. 14 SCHEDULE 2.5 CAPITALIZATION AND VOTING RIGHTS Certain investors of the Company are parties to assignment agreements pursuant to which they have assigned the right to receive warrants issuable in connection with the Series C Preferred Stock financing to other investors. 12,053,641 shares of Series C Preferred Stock are issued and outstanding and up to an additional 5,104,845 shares of Series C Preferred Stock will be issued pursuant to the Agreement. 2,646,660 shares of Common Stock are issued and outstanding. There are currently outstanding options to purchase 3,089,920 shares of Common Stock pursuant to the Company's 1995 Stock Option/Stock Issuance Plan. In addition to the aforementioned options, the Company has reserved an additional 330,354 shares of its Common Stock for purchase or upon exercise of options to be granted in the future under the Plan. The Company intends to issue an option to purchase 840,000 shares of Common Stock to Vicente Anido pursuant to the Company's 1995 Stock Option/Stock Issuance Plan. Prior to issuing such option to Mr. Anido, the Company plans to (i) amend the Restated Articles in order to avoid triggering an antidilution adjustment and (ii) amend the Company's 1996 Stock Option/Stock Issuance Plan in order to authorize additional shares. The Company intends to grant warrants to Comdisco, Inc. pursuant to which 240,322 shares of Series C Preferred Stock may be issued. Vicente Anido has been granted a right to purchase a number of shares sufficient to allow him to maintain a 6% ownership percentage in the Company upon future financings. Vicente Anido has been granted the right to obtain a number of shares of the Company's Common Stock ("Shares") equal to 96,000 divided by (i) the per share price paid by investors in the Company next preferred stock financing (excluding the issuance of Series C Preferred Stock pursuant to the Agreement) occurring prior to September 15, 1996 or (ii) in the event the Company's next preferred stock financing has not occurred prior to September 15, 1996, $1.50. The Shares, or the purchase price therefore, are to be provided to Mr. Anido either as a one-time bonus or through a forgivable loan. Schedule 2.5 15 The outstanding shares of Preferred Stock and Common Stock are owned by the shareholders and in the numbers specified herein:
CLASS/SERIES SHAREHOLDER NO. SHARES ------------ ----------------------------------------- ---------- Common Kim D. Janda 175,000 Common Chi-Huey Wong 150,000 Common Dale L. Boger 150,000 Common Eric Erb 10,000 Common Standish Fleming 37,500 Common Trustees of Royston Family Trust UTA 2/12/82 37,500 Common Sydney Brenner 150,000 Common Forward Ventures II, L.P. 225,000 Common Jeffrey Sollender 10,000 Common Robert A. Curtis 229,160 Common Gail Erwin 2,500 Common Sequoia Capital VI 91,000 Common Sequoia Technology Partners VI 5,000 Common Sequoia XXIV 4,000 Common Lynn H. Caporale 175,000 Common Bobbie J. Bosley 10,000 Common Eric Erb 5,000 Common Angelo Castillino, Ph.D. 20,000 Common Peter A. Bick 20,000 Common Soan Cheng 20,000 Common Daniel C. M. Sun 10,000 Common Gail Erwin 40,000 Common Christine M. Tarby 14,000 Common Peter M. Wirsching, Ph.D. 11,764 Common Richard A. Lerner, M.D. 83,000 Common The Scripps Research Institute 305,236 Common Peter Myers 350,000
Schedule 2.5 16
CLASS/SERIES SHAREHOLDER NO. SHARES ------------ ----------------------------------------- ---------- Common Jonathan Greene 100,000 Common Steven Teig 200,000 Common Ken Rubenstein 6,000 TOTAL COMMON: 2,646,660 Series A Forward Ventures II, L.P. 600,000 Series A Sequoia Capital VI 364,000 Series A Sequoia Technology Partners VI 20,000 Series A Sequoia XXIV 16,000 TOTAL SERIES A: 1,000,000 Series B Sequoia Capital VI 1,213,334 Series B Sequoia Technology VI 66,667 Series B Sequoia Capital VI 53,333 Series B Forward Ventures II, L.P. 866,666 Series B Lynn H. Caporale 26,667 TOTAL SERIES B: 2,226,667 Series C Sprout Capitol VII, L.P. 3,126,821 Series C DLJ Capital Corporation 260,276 Series C Sofinnova Ventures III, L.P. 1,129,033 Series C Singapore Bio-Innovation Ptd., Ltd. 564,517 Series C Sequoia Capital VI 1,335,646 Series C Sequoia Technology Partners VI 73,388 Series C Sequoia XXIV 58,710 Series C PaineWebber Incorporated as Custodian of the Michael Grossman Rollover IRA 37,218 Series C Steven M. Lash 16,185
Schedule 2.5 17
CLASS/SERIES SHAREHOLDER NO. SHARES ------------ ----------------------------------------- ---------- Series C First Interstate Bank as Trustee for SK 80,874 International Securities Corp. 401(k) PS em Stephen J. Kendel Series C Byron T. Franzen 56,452 Series C IRA FBO Byron T. Franzen 112,904 Series C M.L. Lawrence Revocable Trust 225,807 Series C Farley Inc. 846,775 Series C Sorrento Ventures II, L.P. 564,517 Series C Sorrento Growth Partners I, L.P. 1,129,033 Series C Comdisco, Inc. 169,355 Series C Brinson Venture Capital Fund III, L.P. 1,941,441 Series C Brinson Trust Company as Trustee of the Brinson MAP 316,624 Venture Capital Fund III Series C Todd Schmidt 8,065 TOTAL SERIES C: 12,053,641 Series Z Sydney Brenner 200,000 TOTAL SERIES Z: 200,000
Schedule 2.5 18 SCHEDULE 2.7 CONTRACTS AND OTHER COMMITMENTS The Company is a party to the following agreements: (a) (i) Lease for 9050 Camino Santa Fe, San Diego, CA 92121 dated December 22, 1995. (ii) Industrial Lease for 1221 Innsbruck Drive, Sunnyvale, CA dated December 7, 1992. (iii) Second Sublease for 1225 Innsbruck Drive, Sunnyvale, CA and draft of Addendum No. 1. (iv) See (e)(iv) and (v) below. (v) Pursuant to that certain Agreement dated August 4, 1995 among the Company, Molecular Simulations Inc.("MSI") and Entropix Corporation, the Company was obligated to make the following cash payments on or before December 31, 1995: (A) $100,000 and (B) at the sole discretion of MSI, either (i) a cash payment in an amount equal to $140,000 or (ii) 225,807 shares of Series Z Preferred Stock (to date MSI has not made the election described in (B) and the Company has not made the payment). In addition, the Company issued a promissory note to MSI for $300,000 payable June 15, 1996 in cash, or at the Company's option, by issuing 100,000 shares of Series Z Preferred Stock. (vi) In connection with the execution of the Agreement with MSI described in (v) above and pursuant to a License Agreement dated August 4, 1995 between the Company and MSI ("MSI License Agreement"), the Company agreed to pay to MSI royalties equal to: (A) in connection with the sale of a single product, the lesser of 5% of net sales of such product or $25,000; (B) in connection with the sale of more than one product in a single transaction, the sum of (I) with respect to the first product included in such transaction, the lesser of 5% of net sales of such product or $25,000 and (II) with respect to the additional products, a flat royalty of $5,000 per additional product; or (C) in connection with a collaboration or contract research project, the lesser of 2% of net sales for such collaboration or contract research project or $100,000. The maximum aggregate royalties payable under the agreement is $5.0 million. (vii) Certain employees have arrangements with the Company pursuant to which severance payments would be made following their termination of employment in certain circumstances. No such payments are currently being made, except for payments being made to Robert A. Curtis whom the Company is obligated to pay an additional $58,230. (viii) Pursuant to the Sublicense Agreement dated July 20, 1995 between the Company and Johnson & Johnson (the "J&J Sublicense"), the Company has paid $40,000 to Johnson & Johnson and is required to make the following additional payments: (A) aggregate payments of $60,000 (subject to certain time and performance milestones) (B) an additional royalty of 1% of monetary compensation received in connection with a further sublicense of rights under the Agreement and (C) earned royalties 10% of Schedule 2.7 19 net sales value of products sold under the agreement by the Company or affiliates or 10% of the royalty or other income received by the Company from sublicensee or third parties in consideration of granting of further sublicenses. (ix) See (c)(i) below. (b) (i) Preferred Stock Purchase Agreement (600,000 Shares of Series A Preferred Stock) dated August 26, 1994 between the Company and Forward Ventures II, L.P. (ii) Common Stock Purchase Agreement (225,000 Shares of Common Stock) dated September 28, 1994 between the Company and Forward Ventures II, L.P. (iii) Preferred Stock Purchase Agreement (200,000 Shares of Series Z Preferred Stock) dated October 12, 1994 between the Company and Dr. Sydney Brenner. (iv) Stock Purchase Agreement Preferred and Common (400,000 Shares of Series A Preferred Stock and 100,000 Shares of Common Stock) dated November 1, 1994 among the Company, Sequoia Capital VI, Sequoia Technology Partners VI and Sequoia XXIV. (v) Stock Purchase Agreement Series B Preferred dated November 29, 1994 among the Company, Sequoia Capital VI, Sequoia Technology Partners VI, Sequoia XXIV and Forward Ventures II, L.P. (vi) Stock Purchase Agreement (Series B Preferred) dated January 15, 1995 between the Company and Lynn H. Caporale, Ph.D. (vii) Common Stock Purchase Agreement dated March 20, 1995 between the Company and The Scripps Research Institute, as amended through the date hereof. (viii) The Company is party to the following Common Stock Purchase Agreements:
AMOUNT OF SHARES NAME DATE CURRENTLY OUT- STANDING UNDER AGMTS Kim D. Janda 09/28/94 175,000 Chi-Huey Wong 09/28/94 150,000 Dale L. Boger 09/28/94 150,000 Eric Erb 09/28/94 10,000 Standish Fleming 09/28/94 37,500 Trustee of Royston Family Trust UTA 2/12/82 09/28/94 37,500
Schedule 2.7 20
AMOUNT OF SHARES NAME DATE CURRENTLY OUT- STANDING UNDER AGMTS Sydney Brenner 09/28/94 150,000 Jeffrey Sollender 09/28/94 10,000 Robert A. Curtis 10/18/94 229,160 Gail Erwin 10/18/94 2,500 Lynn H. Caporale 11/08/94 175,000 Bobbie J. Bosley 11/18/94 10,000 Eric D. Erb 01/01/95 5,000 Angelo J. Castellino 01/19/95 20,000 Peter A. Bick 01/23/95 20,000 Soan Cheng 01/23/95 20,000 Daniel C.M. Sun 01/30/95 10,000 Gail Erwin 02/06/95 40,000 Christine M. Tarby 04/24/95 14,000 Peter Myers 3/1/95 350,000 Steve Teig 6/2/95 200,000 Jonathon Greene 6/3/95 100,000
(ix) See (a)(vi) above. (x) The Company intends to enter into Series J Option Agreements with each of Steven Teig, Jonathan Greene and Andrew Smellie, pursuant to which an aggregate of 465,000 shares of Series J Preferred Stock may be issued. (x) The Company had previously entered into (A) that certain Amended and Restated Stock Registration Rights Agreement dated November 1, 1994, as amended on November 29, 1994, January 15, 1995 and March 20, 1995 and (B) that certain Stock Registration Rights Agreement dated October 12, 1994 which granted to certain investors registration rights. These agreements were terminated pursuant to Investors' Rights Agreement. (xi) Warrant Agreement with Comdisco, Inc., dated December 20, 1994 (xii) Pursuant to a consulting agreement with Ken Rubenstein pursuant to which Mr. Rubenstein received 1,000 shares of the Company's common stock for each month in which he performed consulting services. This consulting Schedule 2.7 21 agreement has been terminated, and Mr. Rubenstein received a total of 6,000 shares of the Company's Common Stock pursuant to the agreement. (xiii) The Company has granted an aggregate of 3,089,920 options to certain employees and consultants pursuant to which up to an aggregate of 3,089,920 shares of common stock may be issued. (xv) The First Closing Agreement. (xvi) The Company has entered into a Stock Purchase Agreement with Todd Schmidt pursuant to which Mr. Schmidt was issued 8,065 shares of the Company's Series C Preferred Stock. (xvii) The Company intends to enter into Warrant Agreements with Comdisco, Inc. pursuant to which 240,322 shares of Series C Preferred Stock may be issued. (c) (i) Master Lease Agreement with Comdisco, Inc. ("Comdisco") dated November 16, 1994 (ii) See (a)(v) above. (iii) The Company has made a loan to Peter Myers in the principal amount of $150,000. (iv) The Company expects to incur a commitment to John Saunders to make a loan for the purchase of a home in the principal amount of up to $70,000. (v) The Company is obligated to reimburse certain employees with respect to certain tax liabilities. The aggregate amount of these obligations are approximately $30,000. (d) (i) The Company is party to employment agreements with the following individuals: Eric Erb; Lynn H. Caporale; Peter Myers; Jonathan Greene; Steven Teig; Andrew Smellie; and Vicente Anido. In addition, the Company is a party to offer letters and/or memoranda with the following employees in which certain terms and conditions of the employee's employment are set forth: D. Barnum; S. Bondy; G. Bosley; A. Castellino; S. Cheng; D. Comer; G. Erwin; T. Fitzpatrick; K. Granlund-Moyer; D. Kassel; M. Ruis; M. Salkin; B. Shroyer; D. Sun; C. Tarby; K. Wheeler; J. Williams. (ii) The Company is a party to the following consulting agreements: H. Kiefer (dated 01/19/96); Dale L. Boger (dated 05/01/94); Kim D. Janda (dated 08/09/94); Sydney Brenner (dated 08/10/94); and Chi-Huey Wong (dated 08/11/94). The Company entered into a letter agreement dated July 25, 1995 with Transpect Incorporated ("Transpect") pursuant to which Transpect is retained as an advisor and consultant with respect to the establishment of a relationship with Daiichi Pharmaceutical Co., Ltd (or any company mutually agreed to). In addition, the Company is a party to Scientific Advisory Board Agreement with the following individuals: A. Bard (dated 09/07/95); D. Danishefsky (dated 04/08/95); W. Jorgensen (dated 05/18/95). Schedule 2.7 22 (e) (i) Agreement for Purchase and Sale of Assets dated September 28, 1994 among the Company, Combichem, Inc., a Delaware corporation, KPCB VI and KPCB IV-FF. (ii) License Agreement with The Scripps Research Institute ("Scripps License"). (iii) Assignments of Dr. Sydney Brenner. (iv) Letter of Intent - R&D Collaboration and Manufacturing and Supply Agreement with LJL Biosystems, Inc. dated March 15, 1995 as amended June 1, 1995, July 25, 1995 and August 16, 1995. (v) Letter to LJL Biosystems, Inc. detailing revised payment schedule for COMBISYN 100 program dated July 21, 1995. Letter from LJL Biosystems, Inc. detailing proposed engineering and pricing changes. (vi) See (a)(vii) above. (vii) Sublicense Agreement dated July 20, 1995 between the Company and Johnson & Johnson. (viii) Option Agreement with The Scripps Research Institute ("Scripps Option"). (ix) Evaluation Study and Test Site Agreement between the Company and Chugai Pharmaceutical pursuant to which Chugai has paid to the Company an amount equal to $300,000 in order to Beta Test the Company's product, which sum may be applied to future purchases of the Company's products, and a portion of which sum the Company may be required to return to Chugai in certain circumstances. (x) Collaboration Agreement dated on or about March 29, 1996 between the Company and Teijin Limited to design, synthesize and screen compound libraries for *** and *** . The Company retains all rights with respect to compounds in North America, Central America and South America subject to an option to acquire such rights granted to Teijin. Teijin retains all rights with respect to compounds in all other territories. The Company is entitled to receive a *** upfront fee, milestone payments, annual research funding and royalties from Teijin. (f) The Company intends to enter into indemnification agreements with each of the directors of the Company following the Second Closing. In addition, other agreements listed in this Schedule of Exceptions or to be entered into in connection with the Second Closing may contain indemnification provisions. (i) None (ii) See (a) above. (iii) See (c)(iii) and (c)(iv) above. (iv) See (a)(v) and (a)(vi) above. In connection with the MSI transaction discussed above and in addition to the agreements noted above, the Company also entered into a separate License Agreement (pursuant to which it obtained a license to certain MSI products), an Acknowledgement and General Release (pursuant to which the operation of certain sections of Mr. Teig's prior contracts with MSI were waived ***Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Schedule 2.7 23 and the Company and Mr. Teig were released from claims arising out of such released sections of the contracts). The sale of shares of Series C Preferred Stock pursuant to the First Closing Agreement resulted in a change of ownership of greater than 50% of the voting power of the Company prior to the date of the First Closing Agreement. The Company has performed all obligations and conditions required to be performed or met by it through the date hereof under each of the Scripps License and Scripps Option. The Scripps License is in full force and effect as of the date hereof. The Scripps Option has not been exercised, as of the date of the Closing. The Company will use its best efforts not to waive any rights of the Company under the Scripps License or Scripps Option, without the consent of a majority of the outstanding shares of Series C Preferred Stock (and shares of the Company's capital stock issuable upon exchange or conversion of the Series C Preferred Stock). Schedule 2.7 24 SCHEDULE 2.8 RELATED-PARTY TRANSACTIONS Venture capital funds affiliated with directors participated in the Company's prior rounds of financing and will purchase shares of the Company's Series C Preferred Stock pursuant to the Agreement. Such directors may engage in the development and financing of other companies and/or research projects which may be developing, or may in the future develop, products which may compete directly, or indirectly, with the products intended to be developed by the Company. See Schedule 2.7(c) above. Schedule 2.8 25 SCHEDULE 2.9 REGISTRATION RIGHTS The Company is obligated to register shares of Common Stock issuable upon conversion of Series Z Preferred Stock and Series C Preferred Stock issuable upon exercise of warrants issued (or to be issued) in connection with the Company's equipment lease lines. Schedule 2.9 26 SCHEDULE 2.10 PERMITS The Company is in the process of obtaining permits in connection with certain tenant improvements being made, or planned to be made at the Company's facility at 9050 Camino Santa Fe, San Diego, CA 92121. Schedule 2.10 27 SCHEDULE 2.15 TITLE TO PROPERTY AND ASSETS; LEASES Under the terms of the Company's lease lines, Comdisco retains all rights to the equipment purchased under such lines, with the Company having an option to purchase at the completion of the term of the agreement. Schedule 2.15 28 SCHEDULE 2.16 FINANCIAL STATEMENTS The contingent severance payments due under certain employment arrangements with the Company's employees are not reflected on the February 29, 1996 financial statements. Schedule 2.16 29 SCHEDULE 2.18 PATENTS AND TRADEMARKS A list of pending patent applications is attached hereto as Exhibit A to Schedule 2.18. The Company filed intent to use application Serial No. 74/363,514 with the United States Patent and Trademark Office ("PTO") to register the mark COMBICHEM on February 26, 1993 in Class 42 for the services of combinatorial chemistry and molecular biology research and analysis. The application was inadvertently abandoned and a petition to revive the application, filed on June 14, 1995 with the PTO was rejected. The Company filed a duplicate application on June 5, 1995 in case the petition to revive was denied. This application was suspended pending resolution of a prior application for the Company. The Company filed intent to use application Serial No. 74/363,515 to register the mark COMBICHEM on February 26, 1993 in Class 5 for the pharmaceuticals and chemical compounds. The application was inadvertently abandoned and a petition to revive the application was rejected. The Company filed a duplicate application on November 15, 1994. This application was suspended pending resolution of a prior application for the Company. An intent to use application for the mark COMBISYN was filed by the Company on February 13, 1995 and was approved from publication by the PTO. The application was filed in Class 9 for scientific apparatus for use in synthesizing by combinatorial chemistry small molecules for use in scientific research. An intent to use application for the mark COMBIWARE was filed by the Company November 7, 1995 and is now pending. The application was filed in Class 9 for computer software for use in scientific research, mainly, for the design and maintenance of chemical libraries and the automation of molecular synthesis in the field of combinatorial chemistry, an instruction and user manual sold as a unit therewith. In connection with the MSI License Agreement, the Company received certain licenses to use MSI proprietary technology and granted to MSI an exclusive option to negotiate a distribution agreement with respect to a stand-alone chemical diversity measure software program. The J&J Sublicense contains a grant-back of a non-exclusive irrevocable royalty-free license (with the right to sublicense affiliates) under all patent improvements for the term of the agreement. See Schedule 2.7. Schedule 2.18 30 SCHEDULE 2.19 MANUFACTURING AND MARKETING RIGHTS Pursuant to the MSI License Agreement, the Company has granted to MSI an exclusive option to negotiate a distribution agreement with respect to a stand-alone chemical diversity measure software program. LJL Biosystems, Inc. is preparing test models of certain of the Company's products. Schedule 2.19 31 SCHEDULE 2.23 INSURANCE The Company has covenanted to certain investors to maintain key man life insurance on the life of Steven Tieg in the amount of $2,000,000. The Company currently maintains only $1,350,000 in insurance on the life of Mr. Tieg. Schedule 2.23 32 EXHIBIT A TO SCHEDULE 2.18 The Company has applied for a patent application entitled "A TEMPLATE FOR SOLUTION PHASE SYNTHESIS OF COMBINATORIAL LIBRARIES", Docket Number 215/288, as of October 17, 1995. Schedule 2.23 EX-10.8 14 EXHIBIT 10.8 1 EXHIBIT 10.8 COMBICHEM, INC. SERIES D PREFERRED STOCK PURCHASE AGREEMENT ------------------------ November 15, 1996 2 TABLE OF CONTENTS
Page ---- 1. Purchase and Sale of Stock.................................................. 1 1.1 Sale and Issuance of Series D Preferred Stock........................ 1 1.2 Closing.............................................................. 1 2. Representations and Warranties of the Company............................... 2 2.1 Organization; Good Standing; Qualification........................... 2 2.2 Authorization........................................................ 2 2.3 Valid Issuance of Preferred and Common Stock......................... 2 2.4 Governmental Consents................................................ 3 2.5 Capitalization and Voting Rights..................................... 3 2.6 Subsidiaries......................................................... 4 2.7 Contracts and Other Commitments...................................... 4 2.8 Related-Party Transactions........................................... 5 2.9 Registration Rights.................................................. 5 2.10 Permits.............................................................. 5 2.11 Compliance with Other Instruments.................................... 6 2.12 Litigation........................................................... 6 2.13 Disclosure........................................................... 6 2.14 Offering............................................................. 6 2.15 Title to Property and Assets; Leases................................. 7 2.16 Financial Statements................................................. 7 2.17 Changes.............................................................. 7 2.18 Patents and Trademarks............................................... 8 2.19 Manufacturing and Marketing Rights................................... 8 2.20 Employees; Employee Compensation..................................... 8 2.21 Proprietary Information and Inventions Agreements.................... 9 2.22 Tax Returns, Payments and Elections.................................. 9 2.23 Insurance............................................................ 9 2.24 Environmental and Safety Laws........................................ 10 2.25 Minute Books......................................................... 10 2.26 Real Property Holding Corporation.................................... 10 2.27 Small Business Concern............................................... 10 2.28 Qualified Small Business............................................. 10 3. Representations and Warranties of the Investors............................. 10 3.1 Authorization........................................................ 10 3.2 Purchase Entirely for Own Account.................................... 10 3.3 Reliance Upon Investors' Representations............................. 11 3.4 Receipt of Information............................................... 11 3.5 Investment Experience................................................ 11 3.6 Accredited Investor.................................................. 11 3.7 Restricted Securities................................................ 12
i. 3 3.8 Legends.............................................................. 12 3.9 Public Sale.......................................................... 13 3.10 Non-U.S. Person...................................................... 13 4. Covenants of the Company.................................................... 14 5. Conditions of Investor's Obligations at Closing............................. 14 5.1 Representations and Warranties....................................... 14 5.2 Performance.......................................................... 14 5.3 Compliance Certificate............................................... 14 5.4 Qualifications....................................................... 14 5.5 Proceedings and Documents............................................ 14 5.6 Small Business Concern Documents..................................... 15 5.7 Opinion of Company Counsel........................................... 15 5.8 Investors' Rights Agreement.......................................... 15 5.9 Co-Sale Agreements................................................... 15 5.10 Filing of Restated Articles.......................................... 15 6. Conditions of the Company's Obligations at Closing.......................... 15 6.1 Representations and Warranties....................................... 15 6.2 Qualifications....................................................... 15 6.3 Co-Sale Agreements................................................... 15 7. Miscellaneous............................................................... 16 7.1 Entire Agreement..................................................... 16 7.2 Survival of Warranties............................................... 16 7.3 Successors and Assigns............................................... 16 7.4 Governing Law........................................................ 16 7.5 Counterparts......................................................... 16 7.6 Titles and Subtitles................................................. 16 7.7 Notices.............................................................. 16 7.8 Finder's Fees........................................................ 16 7.9 Expenses............................................................. 17 7.10 Attorneys' Fees...................................................... 17 7.11 Amendments and Waivers............................................... 17 7.12 Severability......................................................... 17 7.13 Corporate Securities Law............................................. 17 7.14 Exculpation Among Investors.......................................... 18
Exhibit A Amended and Restated Articles of Incorporation Exhibit B Amended and Restated Investors' Rights Agreement Exhibit C Current Shareholders Exhibit D Co-Sale Agreement Schedule A Schedule of Investors Schedule of Exceptions
ii. 4 COMBICHEM, INC. SERIES D PREFERRED STOCK PURCHASE AGREEMENT THIS SERIES D PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is made as of the 15th day of November, 1996, by and between CombiChem, Inc., a California corporation (the "Company"), and each of the persons listed on Schedule A hereto, each of which is herein referred to as an "Investor." THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Stock. 1.1 Sale and Issuance of Series D Preferred Stock. 1.1.1 The Company shall adopt and file with the Secretary of State of California on or before the Closing (as defined below) Amended and Restated Articles of Incorporation in the form attached hereto as Exhibit A (the "Restated Articles"). 1.1.2 Subject to the terms and conditions of this Agreement, each Investor agrees, severally and not jointly, to purchase at the Closing and the Company agrees to sell and issue to each Investor, severally and not jointly, at the Closing that number of shares of the Company's Series D Preferred Stock set forth opposite each Investor's name on Schedule A hereto under the heading "Closing," at a price of $1.00 per share for an aggregate amount to be sold to all Investors at the Closing of at least 9,869,205 shares. 1.2 Closing. The purchase and sale of the Series D Preferred Stock shall take place at the offices of Brobeck, Phleger & Harrison LLP, 550 West C Street, Suite 1200, San Diego, California, at 10:00 a.m., on November 15, 1996, or at such other time and place as the Company and Investors acquiring in the aggregate more than half the shares of Series D Preferred Stock sold pursuant hereto mutually agree upon orally or in writing (which time and place are designated as the "Closing"). At the Closing the Company shall deliver to each Investor a certificate representing the Series D Preferred Stock that such Investor is purchasing against payment of the purchase price therefor by check or wire transfer. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to each Investor that, except as set forth on a Schedule of Exceptions furnished each Investor and special counsel for the Investors, which exceptions shall be deemed to be representations and warranties as if made hereunder: 5 2.1 Organization; Good Standing; Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as now conducted and as proposed to be conducted, to execute and deliver this Agreement, the Amended and Restated Investors' Rights Agreement dated the date hereof in the form attached as Exhibit B ("the Investors' Rights Agreement"), and any other agreement to which the Company is a party and the execution and delivery of which is contemplated hereby (the "Ancillary Agreements"), to issue and sell the Series D Preferred Stock and the Common Stock issuable upon conversion thereof, and to carry out the provisions of this Agreement, the Investors' Rights Agreement, the Restated Articles and any Ancillary Agreement. The Company is not qualified to do business as a foreign corporation in any jurisdiction and such qualification is not now required. 2.2 Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the Investors' Rights Agreement and any Ancillary Agreement, the performance of all obligations of the Company hereunder and thereunder at the Closing and the authorization, issuance (or reservation for issuance), sale and delivery of the Series D Preferred Stock being sold hereunder, the Series D-1 Preferred Stock issuable upon conversion of the Series D Preferred Stock and the Common Stock issuable upon conversion of the Series D Preferred Stock or Series D-1 Preferred Stock has been taken or will be taken prior to the Closing, and this Agreement, the Investors' Rights Agreement, and any Ancillary Agreement constitute valid and legally binding obligations of the Company, enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, moratorium and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Investors' Rights Agreement may be limited by applicable federal or state securities law. 2.3 Valid Issuance of Preferred and Common Stock. The Series D Preferred Stock that is being purchased by the Investors hereunder will upon issuance and delivery hereunder be duly and validly issued, fully paid and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. The Series D-1 Preferred Stock issuable upon conversion of the Series D Preferred Stock purchased under this Agreement and the Common Stock issuable upon conversion of such Series D Preferred Stock and the Series D-1 Preferred Stock have been duly and validly reserved for issuance and, upon issuance in accordance with the terms of the Restated Articles, will be duly and validly issued, fully paid and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and the Investors' Rights Agreement and under applicable state and federal securities laws. The Series D Preferred Stock that is being purchased hereunder, the Series D-1 Preferred Stock issuable upon conversion of the Series D Preferred Stock and the Common Stock issuable upon conversion of the Series D Preferred 2. 6 Stock and Series D-1 Preferred Stock are not subject to any pre-emptive rights or rights of first refusal which have not been previously waived. 2.4 Governmental Consents. No consent, approval, qualification, order or authorization of, or filing with, any local, state or federal governmental authority is required on the part of the Company in connection with the Company's valid execution, delivery or performance of this Agreement, the offer, sale or issuance of the Series D Preferred Stock by the Company, the issuance of Series D-1 Preferred Stock upon conversion of the Series D Preferred Stock or the issuance of Common Stock upon conversion of the Series D Preferred Stock or Series D-1 Preferred Stock, except (i) the filing of the Restated Articles with the Secretary of State of the State of California, and (ii) such filings as have been made prior to the Closing, except Form D or any notices of sale required to be filed under applicable state securities laws, which will be timely filed within the applicable periods therefor. 2.5 Capitalization and Voting Rights. The authorized capital of the Company consists, or will consist prior to the Closing, of: 2.5.1 Preferred Stock. 63,196,296 shares of Preferred Stock, no par value (the "Preferred Stock"), of which 1,000,000 shares have been designated Series A Preferred Stock, all of which are issued and outstanding, 2,226,667 shares have been designated Series B Preferred Stock, all of which are issued and outstanding, 17,519,776 have been designated Series C Preferred Stock, 17,158,486 of which are issued and outstanding, 1,500,000 shares have been designated Series Z Preferred Stock, 532,777 of which are issued and outstanding, 465,000 shares have been designated Series J Preferred Stock, none of which are issued and outstanding, 1,000,000 shares have been designated Series A-1 Preferred Stock, none of which are issued and outstanding, 2,226,667 shares have been designated Series B-1 Preferred Stock, none of which are issued and outstanding, 17,519,776 shares have been designated Series C-1 Preferred Stock, none of which are issued and outstanding, 9,869,205 shares have been designated Series D Preferred Stock, all of which will be issued pursuant to this Agreement, and 9,869,205 shares have been designated Series D-1 Preferred Stock, none of which are issued and outstanding. The rights, privileges and preferences of the Series A, Series B, Series C, Series D, Series J, Series Z, Series A-1, Series B-1, Series C-1 and Series D-1 Preferred Stock will be as stated in the Restated Articles. 2.5.2 Common Stock. 80,000,000 shares of common stock ("Common Stock"), no par value, of which 2,714,327 shares are issued and outstanding. 2.5.3 The outstanding shares of Preferred Stock and Common Stock are owned by the shareholders and in the numbers specified in Exhibit C hereto. 2.5.4 The outstanding shares of Preferred Stock and Common Stock have been issued in accordance with the registration or qualification provisions of the Securities Act of 1933, as amended (the "Securities Act") and any relevant state securities laws or pursuant to valid exemptions therefrom. 3. 7 2.5.5 Except for (A) the conversion privileges of the Preferred Stock, (B) the rights provided in paragraph 2.3 of the Investors' Rights Agreement, (C) currently outstanding options to purchase 40,000 shares of Common Stock granted to an employee prior to the adoption of the Company's 1995 Stock Option/Stock Issuance Plan (the "Plan"), (D) currently outstanding options to purchase 4,420,337 shares of Common Stock granted to employees or consultants pursuant to the Plan, (E) options to purchase 465,000 shares of Series J Preferred Stock to be granted to certain employees in connection with their employment by the Company, (F) up to 196,558 shares of Series Z Preferred Stock issuable upon exercise of warrants issued (or to be issued) in connection with the Company's equipment lease line, (G) 35,000 shares of Common Stock issuable upon exercise of warrants outstanding at the Closing, (H) up to 240,321 shares of Series C Preferred Stock issuable upon exercise of warrants issued (or to be issued) in connection with the Company's equipment lease line and (I) 120,968 shares of Series C Preferred Stock issuable upon exercise of warrants outstanding at the Closing, there are not outstanding any options, warrants, rights (including conversion or preemptive rights and rights of first refusal) or agreements for the purchase or acquisition from the Company of any shares of its capital stock. In addition to the aforementioned options, the Company has reserved an additional 599,937 shares of its Common Stock for purchase or upon exercise of options to be granted in the future under the Plan or other employee arrangement approved by the Board of Directors of the Company. The Company is not a party or subject to any agreement or understanding, and, to the best of the Company's knowledge, there is no agreement or understanding between any persons that affects or relates to the voting or giving of written consents with respect to any security or the voting by a director of the Company. 2.6 Subsidiaries. The Company does not own or control, directly or indirectly, any interest in any other corporation, association or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement. 2.7 Contracts and Other Commitments. The Schedule of Exceptions contains a complete list of all of the following agreements and instruments to which the Company is a party: (a) all contracts, agreements and instruments which involve a commitment by, or payments to, the Company in excess of $50,000; (b) all stock purchase or redemption agreements; (c) all loan or debt agreements and other evidences of indebtedness, including guarantees; (d) all employment agreements and other agreements with or for the benefit of any director, officer, employee or 10% stockholder of the Company; (e) all licenses of any patent, trade secret or other proprietary right to or from the Company; and (f) all indemnification and noncompetition agreements (collectively, the "Material Agreements"). All the Material Agreements are valid and binding obligations of the Company, in full force and effect in all material respects. The Company is not aware of any material default, either pending or threatened, with respect to the Material Agreements. The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its charter documents or Bylaws, which adversely affects its business as presently conducted or as currently proposed to be conducted, its properties or its financial condition. 4. 8 The Company has not (I) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (II) incurred any indebtedness for money borrowed or incurred any other liabilities individually in excess of $25,000 or in excess of $50,000 in the aggregate, (III) made any loans or advances to any person, other than ordinary advances for travel expenses, or (IV) sold, exchanged or otherwise disposed of any of its assets or rights, nor entered into any agreement therefor, other than the sale of its inventory in the ordinary course of business. The Company has not engaged in the past three months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 2.8 Related-Party Transactions. No employee, officer or director of the Company or member of his or her immediate family thereof is indebted to the Company, nor is the Company indebted (or committed to make loans or extend or guarantee credit) to any of them. To the best of the Company's knowledge, none of such persons has any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, or any firm or corporation that competes with the Company, except that employees, officers or directors of the Company and members of their immediate families may own stock in publicly traded companies that may compete with the Company. To the best of the Company's knowledge, no officer or director or any member of their immediate families is, directly or indirectly, interested in any material contract with the Company. 2.9 Registration Rights. Except as provided in the Investors' Rights Agreement, the Company is not obligated to register under the Securities Act any of its presently outstanding securities or any of its securities that may subsequently be issued. 2.10 Permits. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of the Company and believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as planned to be conducted. The Company is not in default in any material respect under any of such franchises, permits, licenses or other similar authority. 2.11 Compliance with Other Instruments. The Company is not in violation or default in any material respect of any provision of its Restated Articles or Bylaws or in any material respect of any provision of, and no consent or approval of any third party is required under, any mortgage, indenture, agreement, instrument or contract to which it is a party or by 5. 9 which it is bound or, to the best of its knowledge, of any federal or state judgment, order, writ, decree, statute, rule or regulation applicable to the Company. The execution, delivery and performance by the Company of this Agreement, the Investors' Rights Agreement and any Ancillary Agreement, and the consummation of the transactions contemplated hereby and thereby will not result in any such violation or be in material conflict with or constitute, with or without the passage of time or giving of notice, either a material default under any such provision or an event that results in the creation of any material lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations, or any of its assets or properties. 2.12 Litigation. There is no action, suit, proceeding or investigation pending or currently threatened against the Company. The foregoing includes, without limitation, any action, suit, proceeding, or investigation pending or currently threatened involving the prior employment of any of the Company's employees, their use in connection with the Company's business of any information or techniques allegedly proprietary to any of their former employers, their obligations under any agreements with prior employers, or negotiations by the Company with potential backers of, or investors in, the Company or its proposed business. The Company is not a party to, or to the best of its knowledge, named in any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit or proceeding by the Company currently pending or that the Company currently intends to initiate. 2.13 Disclosure. The Company has provided each Investor with all the information reasonably available to it without undue expense that such Investor has requested for deciding whether to purchase the Series D Preferred Stock and all information which the Company believes is reasonably necessary to enable such Investor to make such decision. Neither this Agreement nor any other written statements or certificates made or delivered in connection herewith contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements herein or therein not misleading. 2.14 Offering. Subject in part to the truth and accuracy of each Investor's representations set forth in this Agreement, the offer, sale and issuance of the Series D Preferred Stock as contemplated by this Agreement are exempt from the registration requirements of the Securities Act, and neither the Company nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption. 2.15 Title to Property and Assets; Leases. Except (a) as reflected in the Financial Statements (as defined below), (b) for liens for current taxes not yet delinquent, (c) for liens imposed by law and incurred in the ordinary course of business for obligations not past due to carriers, warehousemen, laborers, materialmen and the like, (d) for liens in respect of pledges or deposits under workers' compensation laws or similar legislation, or (e) for minor defects in title, none of which, individually or in the aggregate materially interferes with the use of such property, the Company owns its property and assets free and clear of all mortgages, 6. 10 liens, claims and encumbrances. With respect to the property and assets it leases, the Company is in compliance with such leases and, to the best of its knowledge, holds a valid leasehold interest free of any liens, claims or encumbrances, subject to clauses (a)-(e) above. 2.16 Financial Statements. The Company has delivered to each Investor its audited financial statements (balance sheet and profit and loss statement, statement of shareholders' equity and statement of changes in financial position including notes thereto) at December 31, 1995 and for the fiscal year then ended (the "Audited Financial Statements") and its unaudited financial statements (balance sheet and profit and loss statement including notes thereto) as at and for the eight-month period ended August 31, 1996 (the "Unaudited Financial Statements" and, collectively with the Audited Financial Statements, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and with each other, except that the Unaudited Financial Statements may not contain all footnotes required by generally accepted accounting principles. The Financial Statements fairly present the financial condition and operating results of the Company as of the dates, and for the periods, indicated therein, subject to normal year-end audit adjustments. Except as set forth in the Financial Statements, the Company has no material liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to August 31, 1996 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in the Financial Statements, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company. Except as disclosed in the Financial Statements, the Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. The Company maintains and will continue to maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles. 2.17 Changes. To the best of the Company's knowledge, since August 31, 1996, there has not been any event or condition of any type that has materially and adversely affected the business, properties, prospects or financial condition of the Company. 2.18 Patents and Trademarks. To the best of its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, servicemarks, trade names, copyrights, trade secrets, licenses, information, proprietary rights and processes necessary for its business as now conducted and as proposed to be conducted without any conflict with or infringement of the rights of others. The Schedule of Exceptions contains a complete list of patents and pending patent applications of the Company. Except for agreements with its own employees or consultants, substantially in the form referenced in paragraph 2.21 below, there are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is the Company 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, proprietary rights and processes of any other person or entity. The Company has not received any communications alleging that the Company has violated or, by 7. 11 conducting its business as proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights, trade secrets or other proprietary rights of any other person or entity. After inquiry, the Company is not aware that any of its employees 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 the use of such employee's best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of this Agreement, nor the carrying on of the Company's business by the employees of the Company, nor the conduct of the Company's business as proposed, will, to the best of the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any contract, covenant or instrument under which any of such employees is now obligated. The Company does not believe it is or will be necessary to use any inventions of any of its employees (or persons it currently intends to hire) made prior to their employment by the Company. 2.19 Manufacturing and Marketing Rights. The Company has not granted rights to manufacture, produce, assemble, license, market or sell its products to any other person and is not bound by any agreement that affects the Company's exclusive right to develop, manufacture, assemble, distribute, market or sell its products. 2.20 Employees; Employee Compensation. To the best of the knowledge of the Company, there is no strike or labor dispute or union organization activities pending or threatened between it and its employees. None of the Company's employees belongs to any union or collective bargaining unit. To the best of its knowledge, the Company has complied in all material respects with all applicable state and federal equal employment opportunity and other laws related to employment. To the best of the Company's knowledge, no employee of the Company is or will be in violation of any judgment, decree or order, or any term of any employment contract, patent disclosure agreement or other contract or agreement relating to the relationship of any such employee with the Company or any other party because of the nature of the business conducted or to be conducted by the Company or to the utilization by the employee of his best efforts with respect to such business. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. Subject to general principles related to wrongful termination of employees, the employment of each officer and employee of the Company is terminable at the will of the Company. 2.21 Proprietary Information and Inventions Agreements. Each employee and officer of the Company has executed a Proprietary Information and Inventions Agreement substantially in the form or forms that have been delivered to special counsel for the Investors, and each consultant or other person who has contributed to the development of the Company's proprietary rights has assigned his or her rights therein to the Company. 8. 12 2.22 Tax Returns, Payments and Elections. The Company has filed all tax returns and reports as required by law. These returns and reports are true and correct in all material respects. The Company has paid all taxes and other assessments due, except those contested by it in good faith. The provision for taxes of the Company as shown in the Financial Statements is adequate for taxes due or accrued as of the date thereof. The Company has not elected pursuant to the Internal Revenue Code of 1986, as amended ("Code"), to be treated as an S corporation or a collapsible corporation pursuant to Section 341(f) or Section 1362(a) of the Code, nor has it made any other elections pursuant to the Code (other than elections which relate solely to methods of accounting, depreciation or amortization) which would have a material effect on the business, properties, prospects or financial condition of the Company. The Company has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. None of the Company's federal income tax returns and none of its state income or franchise tax or sales or use tax returns has ever been audited by governmental authorities. Since the date of the Financial Statements, the Company has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositaries. 2.23 Insurance. The Company has in full force and effect fire, general liability, and casualty insurance policies, with extended coverage, in amounts customary for companies similarly situated. The Company has in full force and effect term life insurance, payable to the Company, on the lives of those executive officers and in the amounts set forth in the Schedule of Exceptions. 2.24 Environmental and Safety Laws. To the best of its knowledge, the Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to the best of its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law, or regulation. 2.25 Minute Books. The copy of the minute books of the Company provided to the Investor's special counsel contain minutes of all meetings of directors and shareholders and all actions by written consent without a meeting by the directors and shareholders since the time of incorporation and reflect all actions by the directors (and any committee of directors) and shareholders with respect to all transactions referred to in such minutes accurately in all material respects. 2.26 Real Property Holding Corporation. The Company is not a real property holding corporation within the meaning of the Code Section 897(c)(2) and any regulations promulgated thereunder. 9. 13 2.27 Small Business Concern. The Company, together with its "affiliates" (as that term is defined in Section 121.401 of Title 13 of the Code of Federal Regulations), is a "small business concern" within the meaning of the Small Business Investment Act of 1958, as amended, and the regulations thereunder, including Section 121.802(a)(2) of Title 13 of the Code of Federal Regulations. The information set forth in the documents provided to the Investors pursuant to Section 5.6 below is accurate and complete. 2.28 Qualified Small Business. The Company represents and warrants to the Investors that, to the best of its knowledge, the shares of Series D Preferred Stock offered hereby should qualify as "Qualified Small Business Stock" as defined in Section 1202(c) of the Code as of the date hereof. The Company will use reasonable efforts to comply with the reporting and recordkeeping requirements of Section 1202 of the Code and any regulations promulgated thereunder, and agrees not to repurchase any stock of the Company if such repurchase would cause such shares not to so qualify as "Qualified Small Business Stock." 3. Representations and Warranties of the Investors. Each Investor hereby represents and warrants that: 3.1 Authorization. Each Investor represents that it has full power and authority to enter into this Agreement and that this Agreement constitutes a valid and legally binding obligation of such Investor. 3.2 Purchase Entirely for Own Account. This Agreement is made with each Investor in reliance upon such Investor's representation to the Company, which by such Investor's execution of this Agreement such Investor hereby confirms, that the Series D Preferred Stock to be purchased by such Investor and the Series D-1 Preferred Stock and the Common Stock issuable upon conversion thereof (collectively, the "Securities") will be acquired for investment for such Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, each Investor further represents that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. 3.3 Reliance Upon Investors' Representations. Each Investor understands that the Series D Preferred Stock is not, and any Series D-1 Preferred Stock or any Common Stock acquired on conversion thereof at the time of issuance may not be, registered under the Securities Act on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof, and that the Company's reliance on such exemption is predicated on the Investors' representations set forth herein. Each Investor realizes that the basis for the exemption may not be present if, notwithstanding such representations, the Investor has in mind merely acquiring the Securities for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. No Investor has any such intention. 10. 14 3.4 Receipt of Information. Each Investor represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Series D Preferred Stock and the business, properties, prospects and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to which it had access. The foregoing, however, does not limit or modify the representations and warranties of the Company in Section 2 of this Agreement or the right of the Investors to rely thereon. 3.5 Investment Experience. Each Investor represents that it is experienced in evaluating and investing in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities. If other than an individual, Investor also represents it has not been organized for the purpose of acquiring the Securities. 3.6 Accredited Investor. Each Investor as to itself severally and not jointly further represents to the Company that except as otherwise disclosed to the Company, in writing, prior to its execution hereof: 3.6.1 such Investor is an "Accredited Investor" (as defined in the rules and regulations promulgated under the Securities Act); or 3.6.2 the capital contribution of the Investor does not exceed 10% of the Investor's net worth or, in the case of an individual, joint net worth with that person's spouse. 3.7 Restricted Securities. Each Investor understands that the Securities may not be sold, transferred or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Securities or an available exemption from registration under the Securities Act, the Securities must be held indefinitely. In particular, each Investor is aware that the Securities may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 is the availability of current information to the public about the Company. Such information is not now available and the Company has no present plans to make such information available. 3.8 Legends. To the extent applicable, each certificate or other document evidencing any of the Securities shall be endorsed with the legends set forth below, and each Investor covenants that, except to the extent such restrictions are waived by the Company, such Investor shall not transfer the shares represented by any such certificate without complying with the restrictions on transfer described in the legends endorsed on such certificate: 11. 15 3.8.1 The following legend under the Securities Act: "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3.8.2 In the case of an Investor who is not a citizen or resident of the United States or Canada, or any state, territory or possession thereof, including but not limited to any estate of any such person, or any corporation, partnership, trust or other entity created or existing under the laws thereof, or any entity controlled or owned by any of the foregoing (a "U.S. Person") and is not an Accredited Investor: "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF PRIOR TO ONE YEAR FROM THE DATE OF THE CLOSING AT WHICH SUCH SHARES WERE PURCHASED, WITHIN THE UNITED STATES, CANADA, THEIR TERRITORIES AND POSSESSIONS OR ANY AREA SUBJECT TO THEIR JURISDICTION OR TO ANY CITIZEN OR RESIDENT OF THE UNITED STATES OR CANADA, OR ANY STATE, TERRITORY OR POSSESSION THEREOF, INCLUDING ANY ESTATE OF SUCH PERSON OR ANY CORPORATION, PARTNERSHIP, TRUST OR OTHER ENTITY CREATED OR EXISTING UNDER THE LAWS THEREOF, AND THEREAFTER MAY NOT BE SO TRANSFERRED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 3.9 Public Sale. Each Investor agrees not to make, without the prior written consent of the Company, any public offering or sale of the Securities, although permitted to 12. 16 do so pursuant to Rule 144(k) promulgated under the Securities Act, until the earlier of (i) the date on which the Company effects its initial registered public offering pursuant to the Securities Act or (ii) the date on which it becomes a registered company pursuant to section 12(g) of the Securities Exchange Act of 1934, as amended, or (iii) August 17, 2000. 3.10 Non-U.S. Person. If Investor is not a U.S. Person, such Investor hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the shares of Series D Preferred Stock offered hereunder or any use of this Agreement, including (i) the legal requirements within its jurisdiction for the purchase of such shares, (ii) any foreign exchange restrictions applicable to such purchase, (iii) any governmental or other consents which may need to be obtained and (iv) the income tax and other tax consequences, if any, which may be relevant to the purchase, holding, redemption, sale or transfer of the Interest. Such Investor's subscription and payment for, and its continued beneficial ownership of the shares of Series D Preferred Stock offered hereunder will not violate any applicable securities or other laws of its jurisdiction. 4. Covenants of the Company. 4.1 Continuing Covenants. So long as any shares of Preferred Stock are outstanding, the Company shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the shares of Preferred Stock then outstanding: 4.1.1 change the authorized number of directors to be other than between five (5) and nine (9); or 4.1.2 put into place or effect any acceleration of vesting of stock options or waiver of repurchase rights with respect to stock beneficially held by an employee or consultant of the Company, each in the event of a sale of all or substantially all of the assets of the Company, a merger of the Company with or into another entity or a liquidation of the Company. 5. Conditions of Investor's Obligations at Closing. The obligations of each Investor under Section 1.1.2 or Section 1.2 of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 5.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of the Closing. 13. 17 5.2 Performance. The Company shall have performed and complied with all agreements, obligations, covenants and conditions contained in this Agreement that are required to be performed or complied with by it on or before the Closing. 5.3 Compliance Certificate. The President of the Company shall deliver to each Investor at the Closing a certificate certifying that the conditions specified in paragraphs 5.1, 5.2, 5.4, 5.6, 5.8, 5.9 and 5.10 have been fulfilled. 5.4 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series D Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing. 5.5 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to the Investors' special counsel, which shall have received all such counterpart original and certified or other copies of such documents as it may reasonably request. 5.6 Small Business Concern Documents. The Company shall have executed and delivered to each Investor who requests them, a Size Status Declaration on SBA Form 480 and an Assurance of Compliance on SBA Form 652, and shall have provided to each Investor who so requests information necessary for the preparation of a Portfolio Financing Report on SBA Form 1031. 5.7 Opinion of Company Counsel. Each Investor shall have received from Brobeck, Phleger & Harrison, counsel for the Company, an opinion, dated the date of the Closing, in form and substance satisfactory to special counsel to the Investors. 5.8 Investors' Rights Agreement. The Company and each Investor shall have entered into the Investors' Rights Agreement in the form attached as Exhibit B. 5.9 Co-Sale Agreements. Vicente Anido, Robert Curtis, Peter Myers, Steve Teig, Sydney Brenner, Kim Janda, Chi-Huey Wong and Dale Boger (collectively, the "Founders"), a majority of the Shareholders (as defined thereunder) and the Company shall each have entered into a Co-Sale Agreement in the form attached hereto as Exhibit D. 5.10 Filing of Restated Articles. The Company shall adopt and file with the Secretary of State of California the Restated Articles, and such Restated Articles shall have been accepted for filing by the Secretary of State of California. 6. Conditions of the Company's Obligations at Closing. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions by that Investor: 14. 18 6.1 Representations and Warranties. The representations and warranties of the Investor contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 6.2 Qualifications. All authorizations, approvals or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Series D Preferred Stock pursuant to this Agreement shall be duly obtained and effective as of the Closing. 6.3 Co-Sale Agreements. The Founders, a majority of the Shareholders (as defined thereunder) and the Company shall each have entered into a Co-Sale Agreement in the form attached hereto as Exhibit D. 7. Miscellaneous. 7.1 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations or covenants except as specifically set forth herein or therein. 7.2 Survival of Warranties. The warranties, representations and covenants of the Company and Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. 7.3 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including permitted transferees of any shares of Series D Preferred Stock sold hereunder or any Series D-1 Preferred Stock or any Common Stock issued upon conversion thereof). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 7.4 Governing Law. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 7.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.6 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 15. 19 7.7 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified by hand or professional courier service or five (5) days after deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 7.8 Finder's Fees. Except for a finder's fee of $80,000 owed by the Company to Hanuko Dumas, each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. Each Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Investor or any of its officers, partners, employees or representatives is responsible. The Company agrees to indemnify and hold harmless each Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 7.9 Expenses. Irrespective of whether the Closing is effected, the Company shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. If the Closing is effected, the Company shall, at the Closing, reimburse the reasonable fees of special counsel for the Investors of not more than $20,000 and shall, upon receipt of a bill therefor, reimburse the reasonable out-of-pocket expenses of such counsel incurred in connection with the Closing. 7.10 Attorneys' Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Investors' Rights Agreement or the Restated Articles, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 7.11 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of more than 50% of the Common Stock (that has not been sold to the public) issued or issuable upon conversion of the Series D Preferred Stock (or Series D-1 Preferred Stock). Any amendment or waiver effected in accordance with this Section shall be binding upon each holder of any securities purchased under this Agreement at the time outstanding (including securities into which such securities have been converted), each future holder of all such securities and the Company. 16. 20 7.12 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 7.13 Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 7.14 Exculpation Among Investors. Each Investor acknowledges that it is not relying upon any person, firm or corporation, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Investor agrees that no Investor nor the respective controlling persons, officers, directors, partners, agents or employees of any Investor shall be liable for any action heretofore or hereafter taken or omitted to be taken by any of them in connection with the Series D Preferred Stock (and Common Stock issued upon conversion thereof). [Remainder of This Page Intentionally Left Blank] 17. 21 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: /s/ Vicente Anido ------------------------------------- Vicente Anido, President INVESTORS: --------------------------------- NAME OF INVESTOR By:______________________________________ Title:___________________________________ Address:_________________________________ _________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: _____________________________________ Vicente Anido, President INVESTORS: Japan Associated Finance Co., Ltd. ----------------------------------------- NAME OF INVESTOR By: /s/ Masaki Yoshida ------------------------------------- Title: President ---------------------------------- Address:_________________________________ _________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 23 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: _____________________________________ Vicente Anido, President INVESTORS: JAFCO G-5 Investment Enterprise Partnership ----------------------------------------- NAME OF INVESTOR By: /s/ Masaki Yoshida ------------------------------------- President Japan Associated Finance Co., Ltd Title: Its Executive Partner ---------------------------------- Address:_________________________________ _________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 24 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: _____________________________________ Vicente Anido, President INVESTORS: JAFCO R-1(A) Investment Enterprise Partnership ----------------------------------------- NAME OF INVESTOR By: /s/ Masaki Yoshida ------------------------------------- President Japan Associated Finance Co., Ltd Title: Its Executive Partner ---------------------------------- Address:_________________________________ _________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 25 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: _____________________________________ Vicente Anido, President INVESTORS: JAFCO R-1(B) Investment Enterprise Partnership ----------------------------------------- NAME OF INVESTOR By: /s/ Masaki Yoshida ------------------------------------- President Japan Associated Finance Co., Ltd Title: Its Executive Partner ---------------------------------- Address:_________________________________ _________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 26 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: _____________________________________ Vicente Anido, President INVESTORS: JAFCO R-2 Investment Enterprise Partnership ----------------------------------------- NAME OF INVESTOR By: /s/ Masaki Yoshida ------------------------------------- President Japan Associated Finance Co., Ltd Title: Its Executive Partner ---------------------------------- Address:_________________________________ _________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 27 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: _____________________________________ Vicente Anido, President INVESTORS: Brentwood Associates VII, L.P. By: Brentwood VII Ventures Its General Partner ----------------------------------------- NAME OF INVESTOR By: /s/ illegible ------------------------------------- Title: General Partner ---------------------------------- Address:_________________________________ _________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 28 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: _____________________________________ Vicente Anido, President INVESTORS: S.R. One, Limited ----------------------------------------- NAME OF INVESTOR By: /s/ Donald G. Parman ------------------------------------- Title: Vice President ---------------------------------- Address: Bay Colony Executive Park --------------------------------- 565 E. Swedesford Road, Suite 315 --------------------------------- Wayne, PA 19087 [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 29 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: Sprout Capital VII, L.P. -------------------------------------------- NAME OF INVESTOR By: /s/ Pierre Chambon ---------------------------------------- Title: Vice President Sprout Group ------------------------------------- Address: ___________________________________ ___________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 30 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: DLJ Capital Corporation -------------------------------------------- NAME OF INVESTOR By: /s/ Pierre Chambon ---------------------------------------- Title: Vice President Sprout Group ------------------------------------- Address: ___________________________________ ___________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 31 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: C.V. Sofinnova Ventures Partners III -------------------------------------------- NAME OF INVESTOR By: /s/ Alix Marduel, M.D. ---------------------------------------- Title: General Partner Sofinnova Management L.P. ------------------------------------- Address: ___________________________________ ___________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 32 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: SINGAPORE BIO-INNOVATIONS PTE LTD -------------------------------------------- NAME OF INVESTOR By: /S/ Yong-Sea Teoh ---------------------------------------- Title: Director & General Manager ------------------------------------- Address: 250 North Bridge Road #2400 ----------------------------------- Raffles City Tower ----------------------------------- Singapore 179101 [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 33 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: SEQUOIA CAPITAL VI SEQUOIA TECHNOLOGY PARTNERS VI SEQUOIA 1995 -------------------------------------------- NAME OF INVESTOR By: /s/ Pierre Lamond ---------------------------------------- Title: General Partner ------------------------------------- Address: ___________________________________ ___________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 34 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: Paine Webber, Custodian FBO Michael Grossman, IRA R/O -------------------------------------------- NAME OF INVESTOR By: /s/ illegible ---------------------------------------- Title: Branch Manager ------------------------------------- Address: 600 W. Broadway, Suite 2000 ----------------------------------- San Diego, CA 92103 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 35 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: Steven M. Lash -------------------------------------------- NAME OF INVESTOR By: /s/ Steven M. Lash ---------------------------------------- Title: ------------------------------------- Address: 13342 Mira Loma Ct. ----------------------------------- Poway, CA 92064 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 36 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: STEPHEN J. KANDEL -------------------------------------------- NAME OF INVESTOR By: /s/ Steven J. Kandel ---------------------------------------- Title: ------------------------------------- Address: 1021 Muirlands Drive ----------------------------------- La Jolla, CA 92037 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 37 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: BYRON FRANZEN -------------------------------------------- NAME OF INVESTOR By: /s/ Byron Franzen ---------------------------------------- Title: ------------------------------------- Address: ___________________________________ ___________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 38 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: The M. L. Lawrence Trust -------------------------------------------- NAME OF INVESTOR By: /s/ Rebecca Wood ---------------------------------------- Title: Trustee ------------------------------------- Address: 1500 Orange Avenue ----------------------------------- Coronado, CA 92118 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 39 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: FARLEY INC. -------------------------------------------- NAME OF INVESTOR By: /s/ Jeffrey Schroeder ---------------------------------------- Title: Chief Financial Officer ------------------------------------- Address: 233 South Wacker Drive, 5000 Sears Tower ----------------------------------- Chicago, IL 60606 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 40 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: SORRENTO VENTURE II, L.P. -------------------------------------------- NAME OF INVESTOR By: /s/ Robert M. Jaffe ---------------------------------------- President, Sorrento Associates, Inc. General Partner, Sorrento Equity Partners L.P. Title: General Partner, Sorrento Ventures II, L.P. ------------------------------------- Address: 4370 La Jolla Village Dr., Ste 1040 ----------------------------------- San Diego, CA 92122 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 41 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: SORRENTO GROWTH PARTNERS I, L.P. -------------------------------------------- NAME OF INVESTOR By: /s/ Robert M. Jaffe ---------------------------------------- President, Sorrento Growth, Inc. General Partner, Sorrento Equity Growth Partners I, L.P. Title: General Partner, Sorrento Growth Partners I, L.P. ------------------------------------- Address: 4370 La Jolla Village Dr., Ste 1040 ----------------------------------- San Diego, CA 92122 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 42 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: COMDISCO, INC. -------------------------------------------- NAME OF INVESTOR By: /s/ Jill C. Hansen ---------------------------------------- Title: Assistant Vice President ------------------------------------- Address: 6111 N. River Rd. ----------------------------------- Rosemont, IL 60018 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 43 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: Brinson Venture Capital Fund III, L.P. by its general partner, Brinson Partners, Inc. -------------------------------------------- NAME OF INVESTOR By: /s/ Terry Gould ---------------------------------------- Title: Partner Brinson Partners, Inc. ------------------------------------- Address: c/o Brinson Partners, Inc. ----------------------------------- 209 South LaSalle Street Suite 114 ----------------------------------- Chicago, IL 60604-1295 Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III -------------------------------------------- NAME OF INVESTOR By: /s/ Terry Gould ---------------------------------------- Title: Assistant Trust Officer Brinson Trust Company ------------------------------------- Address: c/o Brinson Partners, Inc. ----------------------------------- 209 South LaSalle Street Suite 114 ----------------------------------- Chicago, IL 60604-1295 [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 44 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: TODD SCHMIDT -------------------------------------------- NAME OF INVESTOR By: /s/ Todd Schmidt ---------------------------------------- Title: ------------------------------------- Address: 20740 Elfin Forrest Road ----------------------------------- Escondido, CA 92029 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 45 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: Vicente Anido, Jr. -------------------------------------------- NAME OF INVESTOR By: /s/ Vicente Anido, Jr. ---------------------------------------- Title: President & CEO ------------------------------------- Address: 1621 Baipide Drive ----------------------------------- Corona del Mar, CA 92625 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 46 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: JOHN T. CHAMBERS -------------------------------------------- NAME OF INVESTOR By: /s/ John T. Chambers ---------------------------------------- Title: Anido designee ------------------------------------- Address: 1980 Alpha Road ----------------------------------- Charleston, WV 25304 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 47 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: THE RUFUS L. MCRACKEN TRUST, DATED 6/21/91 -------------------------------------------- NAME OF INVESTOR By: /s/ Lee R. McCracken ---------------------------------------- Title: Trustee ------------------------------------- Address: 410 Flint Ave ----------------------------------- Long Beach, CA 90814 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 48 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: STEVEN TEIG -------------------------------------------- NAME OF INVESTOR By: /s/ Steven Teig ---------------------------------------- Title: ------------------------------------- Address: ___________________________________ ___________________________________ [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 49 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: FORWARD VENTURES II., L.P. -------------------------------------------- NAME OF INVESTOR By: /s/ Ivor Royston ---------------------------------------- Title: General Partner ------------------------------------- Address: 10975 Torreyana Rd., Ste 230 ----------------------------------- San Diego, CA 92121 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 50 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: LYNNE CAPORALE -------------------------------------------- NAME OF INVESTOR By: /s/ Lynn Caporale ---------------------------------------- Title: Vice President ------------------------------------- Address: 8115 Camino del Sol ----------------------------------- La Jolla, CA 92037 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 51 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMBICHEM, INC. By: ________________________________________ Vicente Anido, President INVESTORS: Faye Hunter Russell Trust U/A Dtd 7/11/88 -------------------------------------------- NAME OF INVESTOR By: /s/ Faye Hunter Russell ---------------------------------------- Title: Trustee ------------------------------------- Address: P.O. Box 1759 ----------------------------------- La Jolla, CA 92038 ----------------------------------- [SIGNATURE PAGE TO SERIES D PREFERRED STOCK PURCHASE AGREEMENT] 52 EXHIBIT A Amended and Restated Articles of Incorporation 53 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF COMBICHEM, INC., a California Corporation The undersigned Vicente Anido and Faye Russell hereby certify that: ONE: They are the duly elected and acting President and Secretary, respectively, of said corporation. TWO: The Articles of Incorporation of said corporation shall be amended and restated to read in full as follows: ARTICLE I The name of this corporation is CombiChem, Inc. ARTICLE II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III A. Classes of Stock. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is One Hundred Forty-Three Million One Hundred Seventy-Six Thousand Two Hundred Ninety-Six (143,196,296) shares. Eighty Million (80,000,000) shares shall be Common Stock and Sixty Three Million One Hundred Seventy-Six Thousand Two Hundred Ninety-Six (63,196,296) shares shall be Preferred Stock. The Preferred Stock authorized by these Restated Articles of Incorporation shall be issued by series as set forth herein. The first series of Preferred Stock shall be designated "Series A Preferred Stock" and shall consist of One Million (1,000,000) shares. The second series of Preferred Stock shall be designated "Series B Preferred Stock" and shall consist of Two Million Two Hundred Twenty-Six Thousand Six Hundred Sixty-Seven (2,226,667) shares. The third series of Preferred Stock shall be designated "Series C Preferred Stock" and shall consist of Seventeen Million Five Hundred Nineteen Thousand Seven Hundred Seventy-Six (17,519,776) shares. The fourth series of Preferred Stock shall be designated "Series D Preferred Stock" and shall consist of Nine Million Eight Hundred Fifty-Nine Thousand Two Hundred Five (9,869,205) shares. The fifth series of Preferred Stock shall be designated "Series J Preferred Stock" and shall consist of Four Hundred Sixty- Five Thousand (465,000) shares. The sixth series of Preferred Stock shall be designated "Series Z Preferred Stock" and shall consist of One Million Five Hundred Thousand 54 (1,500,000) shares. The seventh series of Preferred Stock shall be designated "Series A-1 Preferred Stock: and shall consist of One Million (1,000,000) shares. The eighth series of Preferred Stock shall be designated "Series B-1 Preferred Stock" and shall consist of Two Million Two Hundred Twenty-Six Thousand Six Hundred Sixty-Seven (2,226,667) shares. The ninth series of Preferred Stock shall be designated "Series C-1 Preferred Stock" and shall consist of Seventeen Million Five Hundred Nineteen Thousand Seven Hundred Seventy-Six (17,519,776) shares. The tenth series of Preferred Stock shall be designated "Series D-1 Preferred Stock" and shall consist of Nine Million Eight Hundred Fifty-Nine Thousand Two Hundred Five (9,869,205) shares. B. Rights, Preferences and Restrictions of Preferred Stock. The Preferred Stock authorized by these Restated Articles of Incorporation may be issued from time to time in one or more series. The rights, preferences, privileges and restrictions granted to and imposed on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series J Preferred Stock, the Series Z Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock, the Series C-1 Preferred Stock and the Series D-1 Preferred Stock are as set forth below in this Article III(B). Subject to compliance with applicable protective voting rights ("Protective Provisions") which have been or may be granted to the Preferred Stock or any series thereof in Certificates of Determination or this corporation's Articles of Incorporation, as amended from time to time, the Board of Directors is also authorized to increase or decrease the number of shares of any series (other than the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock, the Series C-1 Preferred Stock and the Series D-1 Preferred Stock), prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 1. Dividend Provisions. (a) The holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be entitled to receive dividends in any fiscal year, out of any assets legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of this corporation) on the Series J Preferred Stock or the Common Stock of this corporation, at the rate of $0.04 per share of Series A Preferred Stock, $0.06 per share of Series B Preferred Stock, $0.0496 per share of Series C Preferred Stock, $0.08 per share of Series D Preferred Stock, $0.04 per share of Series Z Preferred Stock, $0.04 per share of Series A-1 Preferred Stock, $0.06 per share of Series B-1 Preferred Stock, $0.0496 per share of Series C-1 Preferred Stock and $0.08 per share of Series D-1 Preferred Stock (each subject 2. 55 to appropriate adjustments for stock splits, stock dividends, combinations or other recapitalizations) per annum, payable quarterly when, as and if declared by the Board of Directors. Such dividends shall not be cumulative. After full dividends on the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred Stock, the Series Z Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock, the Series C-1 Preferred Stock and the Series D-1 Preferred Stock for all past dividend periods and the then current dividend period have been paid, the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock and the holders of shares of Series J Preferred Stock and Common Stock shall participate ratably in any dividends or other distributions (as distributions are defined below). (b) For purposes of this subsection 1, unless the context otherwise requires, "distribution(s)" shall mean the transfer of cash or property without consideration, whether by way of dividend or otherwise, or the purchase or redemption of shares of this corporation (other than repurchases of common stock held by directors, employees or consultants of this corporation upon termination of their employment or services pursuant to agreements providing for such repurchase) for cash or property, including any such transfer, purchase or redemption by a subsidiary of this corporation. 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of this corporation, either voluntary or involuntary, subject to the rights of series of Preferred Stock that may from time to time come into existence, the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of Series J Preferred Stock or Common Stock by reason of their ownership thereof, an amount per share equal to the sum of (i) $0.50 for each outstanding share of Series A Preferred Stock (the "Original Series A Issue Price"), (ii) $0.75 for each outstanding share of Series B Preferred Stock (the "Original Series B Issue Price"), (iii) $0.62 for each outstanding share of Series C Preferred Stock (the "Original Series C Issue Price"), (iv) $1.00 for each outstanding share of Series D Preferred Stock (the "Original Series D Issue Price"), (v) $0.50 for each outstanding share of Series Z Preferred Stock (the "Original Series Z Issue Price"), (vi) $0.50 for each outstanding share of Series A-1 Preferred Stock (the "Original Series A-1 Issue Price"), (vii) $0.75 for each outstanding share of Series B-1 Preferred Stock (the "Original Series B-1 Issue Price"), (viii) $0.62 for each outstanding share of Series C-1 Preferred Stock (the "Original Series C-1 Issue Price"), (ix) $1.00 for each outstanding share of Series D-1 Preferred Stock (the "Original Series D-1 Issue Price") (each subject to appropriate adjustments for stock splits, stock dividends, combinations or other recapitalizations) and (x) an amount equal to declared but unpaid dividends on such share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, respectively. If upon the occurrence of such event, the assets and funds thus 3. 56 distributable among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then, subject to the rights of series of Preferred Stock that may from time to time come into existence, the entire assets and funds of the corporation legally available for distribution shall be distributed (x) first ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock in proportion to the aggregate liquidation preferences of each respective series, and ratably among the holders of that series in proportion to the amount of such stock owned by each such holder, and (y) thereafter ratably among the holders of the Series Z Preferred Stock in proportion to the amount of such stock owned by each such holder. (b) Upon the completion of the distribution required by subparagraph (a) of this Section 2 and any other distribution that may be required with respect to series of Preferred Stock that may from time to time come into existence, the remaining assets of the corporation available for distribution to shareholders shall be distributed among the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock, Series D-1 Preferred Stock and Common Stock pro rata based on the number of shares of Common Stock held by each (with each share of Preferred Stock participating on an "as-converted-into-Common- Stock" basis). (c) A consolidation or merger of this corporation with or into any other corporation or corporations in which fifty percent (50%) or more of the voting power of the corporation held by the shareholders of the corporation immediately prior to the merger or consolidation is transferred (excluding reincorporations of the corporation the sole purpose of which is to change the state of incorporation), or a sale, conveyance or disposition of all or substantially all of the assets of this corporation or the effectuation by the corporation of a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is transferred, shall be deemed to be a liquidation, dissolution or winding up within the meaning of this Section 2. 3. Redemption. (a) At any time after December 31, 1998, but within forty-five (45) days (the "Redemption Date") after the receipt by this corporation of a written request from the holders of not less than seventy percent (70%) of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock treated as a single class, that all of such holders' shares be redeemed, and immediately prior to the surrender by such holders of the certificates representing such shares, this corporation shall, to the extent it may lawfully do so, redeem all of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series 4. 57 D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock by paying in cash therefor a sum per share equal to the Original Series A Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series A Preferred Stock, the Original Series B Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series B Preferred Stock, the Original Series C Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series C Preferred Stock, the Original Series D Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series D Preferred Stock, the Original Series A-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series A-1 Preferred Stock, the Original Series B-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series B-1 Preferred Stock, the Original Series C-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series C-1 Preferred Stock and the Original Series D-1 Issue Price (as adjusted for any stock dividends, combinations or splits with respect to such share) plus an amount equal to declared but unpaid dividends on such share for each share of Series D-1 Preferred Stock (such amounts are hereinafter referred to herein as the "Redemption Prices"). (b) Not less than fifteen (15) days prior to the Redemption Date, written notice shall be mailed, first class postage prepaid, to each holder of record (at the close of business on the business day next preceding the day on which notice is given) of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock at the address last shown on the records of this corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder (which shall be all of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock held by such holder), the Redemption Date, the Redemption Prices of each of the respective series to be redeemed from such holder, the place at which payment may be obtained and calling upon such holder to surrender to this corporation, in the manner and at the place designated, his, her or its certificate or certificates representing all of the shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock held by such holder (the "Redemption Notice"). Except as provided in subsection 3(c) of this Division B of Article III, on or after the Redemption Date, each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall surrender to this corporation the certificate or certificates representing such shares, in the 5. 58 manner and at the place designated in the Redemption Notice, and thereupon the Redemption Prices of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. (c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Prices, all rights of the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock as holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, respectively (except the right to receive the respective Redemption Prices without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the corporation legally available for redemption of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock on the Redemption Date are insufficient to redeem the total number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A- 1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock on such date, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock in proportion to the Redemption Prices of the respective series, and ratably among the holders of each series in proportion to the amount of such stock owned by each such holder. Notwithstanding anything herein to the contrary, the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the corporation are legally available for the redemption of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, such funds will immediately be used to redeem the balance of the shares which the corporation has become obliged to redeem on the Redemption Date but which it has not redeemed. (d) The shares of Series J Preferred Stock and Series Z Preferred Stock are not redeemable. 4. Conversion. The holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 6. 59 Preferred Stock and Series D-1 Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share and, in the case of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, on or prior to the fifth day prior to the Redemption Date, if any, as may have been fixed in the Redemption Notice, at the office of this corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (i) the Original Series A Issue Price for each share of Series A Preferred Stock, (ii) the Original Series B Issue Price for each share of Series B Preferred Stock, (iii) the Original Series C Issue Price for each share of Series C Preferred Stock, (iv) the Original Series D Issue Price for each share of Series D Preferred Stock, (v) $0.10 for each share of Series J Preferred Stock (the "Original Series J Issue Price"), (vi) the Original Series Z Issue Price for each share of Series Z Preferred Stock, (vii) the Original Series A-1 Issue Price for each share of Series A-1 Preferred Stock, (viii) the Original Series B-1 Issue Price for each share of Series B-1 Preferred Stock, (ix) the Original Series C-1 Issue Price for each share of Series C-1 Preferred Stock and (x) the Original Series D-1 Issue Price for each share of Series D-1 Preferred Stock, in each case by the Conversion Price at the time in effect for such share. The initial Conversion Price per share for shares of Series A Preferred Stock shall be the Original Series A Issue Price, for shares of Series B Preferred Stock shall be the Original Series B Issue Price, for shares of Series C Preferred Stock shall be the Original Series C Issue Price, for shares of Series D Preferred Stock shall be the Original Series D Issue Price, for shares of Series J Preferred Stock shall be the Original Series J Issue Price, for shares of Series Z Preferred Stock shall be the Original Series Z Issue Price, for shares of Series A-1 Preferred Stock shall be the Original Series A-1 Issue Price, for shares of Series B-1 Preferred Stock shall be the Original Series B-1 Issue Price, for shares of Series C-1 Preferred Stock shall be the Original Series C-1 Issue Price and for shares of Series D-1 Preferred Stock shall be the Original Series D-1 Issue Price; provided, however, that the Conversion Price for the Series A Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and the Series Z Preferred Stock shall each be subject to adjustment as set forth in subsections 4(d) and 4(e) of this Division B of Article III and the Conversion Price for the Series J Preferred Stock, the Series A-1 Preferred Stock, the Series B-1 Preferred Stock, the Series C-1 Preferred Stock and the Series D-1 Preferred Stock shall be subject to adjustment as set forth in subsection 4(e) of this Division B of Article III. (b) Automatic Conversion. Each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall automatically be converted into shares of Common Stock at the Conversion Price at the time in effect for such series immediately upon the earlier of (i) the closing of the corporation's sale of its Common 7. 60 Stock in a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which (exclusive of underwriting discounts, commissions and expenses) is not less than $4.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and $12,000,000 in the aggregate or (ii) the date specified by written consent or agreement of the holders of at least seventy percent (70%) of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, voting together as a single class. (c) Mechanics of Conversion. Before any holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock shall be entitled to convert the same into shares of Common Stock, he, she or it shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for such stock and shall give written notice to this corporation at its principal corporate office of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable thereafter, issue and deliver at such office to each such holder, or to the nominee or nominees of each such holder, (i) a certificate or certificates for the number of shares of Common Stock to which each such holder shall be entitled as aforesaid and (ii) a cash payment of all declared but unpaid dividends on the converted shares as of the date of conversion. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive the Common Stock upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and/or Series D-1 Preferred Stock shall not be deemed to have converted such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A- 1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock until immediately prior to the closing of such sale of securities. 8. 61 (d) Conversion Price Adjustments of Series A, Series B, Series C, Series D and Series Z Preferred Stock for Certain Dilutive Issuances. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series Z Preferred Stock shall be subject to adjustment from time to time as follows: (i)(A) If the corporation shall issue, after the date upon which any shares of Series D Preferred Stock were first issued (the "Purchase Date"), any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for such series in effect immediately prior to the issuance of such Additional Stock, the Conversion Price for such series in effect immediately prior to each such issuance shall forthwith (except as otherwise provided in this clause (i)) be adjusted to a price determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including, without limitation, the number of shares of Common Stock issuable upon the conversion of the Preferred Stock) plus the number of shares of Common Stock that the aggregate consideration received by the corporation for such issuance would purchase at such Conversion Price, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance (including, without limitation, the number of shares of Common Stock issuable upon the conversion of the Preferred Stock) plus the number of shares of such Additional Stock. (B) No adjustment of the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series Z Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent provided for in subsections 4(d)(i)(E)(3) and 4(d)(i)(E)(4) of this Division B of Article III, no adjustment of such Conversion Price pursuant to this subsection 4(d)(i) shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment. (C) In the case of the issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by this corporation for any underwriting or otherwise in connection with the issuance and sale thereof. (D) In the case of the issuance of the Common Stock for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined by the Board of Directors irrespective of any accounting treatment. 9. 62 (E) In the case of the issuance (whether before, on or after the applicable Purchase Date) of options or warrants to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock or options or warrants to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions shall apply for all purposes of this subsection 4(d)(i) and subsection 4(d)(ii) of this Division B of Article III: (1) The aggregate maximum number of shares of Common Stock deliverable upon exercise (assuming the satisfaction of any conditions to exercisability, including without limitation, the passage of time, but without taking into account potential antidilution adjustments) of such options or warrants to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options, warrants or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D) of this Division B of Article III), if any, received by the corporation upon the issuance of such options, warrants or rights plus the minimum exercise price provided in such options, warrants or rights (without taking into account potential antidilution adjustments) for the Common Stock covered thereby. (2) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange (assuming the satisfaction of any conditions to convertibility or exchangeability, including, without limitation, the passage of time, but without taking into account potential antidilution adjustments) for any such convertible or exchangeable securities or upon the exercise of options or warrants to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversion or exchange thereof shall be deemed to have been issued at the time such securities were issued or such options, warrants or rights were issued and for a consideration equal to the consideration, if any, received by the corporation for any such securities and related options, warrants or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the minimum additional consideration, if any, to be received by the corporation (without taking into account potential antidilution adjustments) upon the conversion or exchange of such securities or the exercise of any related options, warrants or rights (the consideration in each case to be determined in the manner provided in subsections 4(d)(i)(C) and (d)(i)(D) of this Division B of Article III). (3) In the event of any change in the number of shares of Common Stock deliverable or in the consideration payable to this corporation upon exercise of such options, warrants or rights or upon conversion of or in exchange for such convertible or exchangeable securities, including, but not limited to, a change resulting from the antidilution provisions thereof, the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series Z Preferred Stock, to the extent in any way affected by or computed using such 10. 63 options, warrants, rights or securities, shall be recomputed to reflect such change, but no further adjustment shall be made for the actual issuance of Common Stock or any payment of such consideration upon the exercise of any such options, warrants or rights or the conversion or exchange of such securities. (4) Upon the expiration of any such options, warrants or rights, the termination of any such rights to convert or exchange or the expiration of any options, warrants or rights related to such convertible or exchangeable securities, the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series Z Preferred Stock, to the extent in any way affected by or computed using such options, warrants, rights or securities or options, warrants or rights related to such securities, shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and convertible or exchangeable securities which remain in effect) actually issued upon the exercise of such options, warrants or rights, upon the conversion or exchange of such securities or upon the exercise of the options, warrants or rights related to such securities. (5) The number of shares of Common Stock deemed issued and the consideration deemed paid therefor pursuant to subsections 4(d)(i)(E)(1) and (2) of this Division B of Article III shall be appropriately adjusted to reflect any change, termination or expiration of the type described in either subsection 4(d)(i)(E)(3) or (4) of this Division B of Article III. (ii) "Additional Stock" shall mean any shares of Common Stock issued (or deemed to have been issued pursuant to subsection 4(d)(i)(E) of this Division B of Article III) by this corporation after the Purchase Date other than: (A) shares of Common Stock issued upon conversion of the Preferred Stock; or (B) up to 5,020,274 shares of Common Stock (as adjusted for any stock splits or other recapitalization) issuable or issued to employees, consultants or directors of this corporation pursuant to stock option plans or arrangements approved by the Board of Directors of the corporation; or (C) Common Stock issued pursuant to a transaction described in subsection 4(e)(i) of this Division B of Article III; or (D) shares of Common Stock or warrants to purchase shares of Common Stock issued in connection with a bona fide acquisition of another business, whether by merger, consolidation or purchase of assets, or bona fide equipment leasing transactions unanimously approved by the Board of Directors of this corporation; or 11. 64 (E) shares of Preferred Stock issued upon exercise of any options or warrants to purchase the corporation's Preferred Stock outstanding as of the Purchase Date. (e) Conversion Price Adjustments of Preferred Stock for Certain Splits and Combinations. The Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be subject to adjustment from time to time as follows: (i) In the event the corporation should at any time or from time to time after the Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents with the number of shares issuable with respect to Common Stock Equivalents determined from time to time in the manner provided for deemed issuances in subsection 4(d)(i)(E) of this Division B of Article III. (ii) If the number of shares of Common Stock outstanding at any time after the Purchase Date is decreased by a combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares. (f) Other Distributions. In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 4(e)(i) of this Division B of Article III, then, in each such case for the purpose of this subsection 4(f), the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, 12. 65 Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the corporation into which their shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the corporation entitled to receive such distribution. (g) Recapitalizations. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in this Section 4 or Section 2 of this Division B of Article III) provision shall be made so that the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, respectively, the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock after the recapitalization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (h) No Impairment. Unless approved in accordance with Sections 6 and 7 of this Division B of Article III, this corporation will not, by amendment of its Articles of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock against impairment. 13. 66 (i) No Fractional Shares and Certificate as to Adjustments. (i) No fractional shares shall be issued upon the conversion of any share or shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. Whether or not fractional shares are issuable upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion. (ii) Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock pursuant to this Section 4, this corporation, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. This corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for such series of Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of a share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock. (j) Notices of Record Date. In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, this corporation shall mail to each holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, at least 20 days prior to the date specified therein, a 14. 67 notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. (k) Reservation of Stock Issuable Upon Conversion. This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, in addition to such other remedies as shall be available to each holder of any of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, using its best efforts to obtain the requisite shareholder approval of any necessary amendment to these articles. (l) Notices. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation. (m) Special Mandatory Conversion. (i) At any time following the Purchase Date, if (a) the holders of shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Series D Preferred Stock are entitled to exercise the right of first refusal (the "Right of First Refusal") set forth in Section 2.3 of the Amended or Restated Investors' Rights Agreement dated on or about November 16, 1996, by and between this corporation and certain investors, as amended from time to time (the "Rights Agreement"), with respect to an equity financing of the corporation in an aggregate amount of at least $500,000 (the "Equity Financing"), (b) this corporation has complied with its notice obligations, or such obligations have been waived, under the Right of First Refusal with respect to such Equity Financing and this corporation thereafter proceeds to consummate the Equity Financing and (c) such holder, including such holder's affiliates (collectively, a "Non-Participating Holder") does not by 15. 68 exercise of such holder's Right of First Refusal acquire his, her or its Pro Rata Share (as defined in Section 2.3 of the Rights Agreement) offered in such Equity Financing (a "Mandatory Offering"), then all of such Non-Participating Holder's shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock shall automatically and without further action on the part of such holder be converted effective upon, subject to and immediately prior to, the consummation of the Mandatory Offering (the "Mandatory Offering Date") into an equivalent number of shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, respectively ("Special Mandatory Conversion"); provided, however, that no such conversion shall occur in connection with a particular Equity Financing if, pursuant to the written request of the Board of Directors and subject to the approval of the holders of a majority of the outstanding Preferred Stock, such holder agrees in writing to waive his, her or its Right of First Refusal with respect to such Equity Financing. Upon conversion pursuant to this subsection 4(m)(i), the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock so converted shall be cancelled and not subject to reissuance. (ii) The holder of any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock converted pursuant to this subsection 4(m) shall deliver to this corporation during regular business hours at the office of any transfer agent of the corporation for the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock or at such other place as may be designated by the corporation, the certificate or certificates for the shares so converted, duly endorsed or assigned in blank or to this corporation. As promptly as practicable thereafter, this corporation shall issue and deliver to such holder, at the place designated by such holder, a certificate or certificates for the number of full shares of the Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and/or Series D-1 Preferred Stock to be issued and such holder shall be deemed to have become a shareholder of record of such Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and/or Series D-1 Preferred Stock on the Mandatory Offering Date unless the transfer books of this corporation are closed on that date, in which event he, she or it shall be deemed to have become a shareholder of record of such Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and/or Series D-1 Preferred Stock on the next succeeding date on which the transfer books are open. (iii) In the event that any shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and/or Series D-1 Preferred Stock are issued, concurrently with such issuance, this corporation shall use its best efforts to take all such action as may be required, including amending its Articles of Incorporation, (a) to cancel all authorized shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock that remain unissued after such issuance, (b) to create and reserve for issuance upon Special Mandatory Conversion of any then outstanding Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock a new series of Preferred Stock equal in number to the number of shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock so cancelled and designated Series A-2 Preferred Stock, Series B-2 Preferred Stock, Series C-2 Preferred Stock and Series D-2 Preferred Stock, with 16. 69 the designations, powers, preferences and rights and the qualifications, limitations and restrictions identical to those then applicable to the Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, respectively, except that the Conversion Price for such shares of Series A-2 Preferred Stock, Series B-2 Preferred Stock, Series C-2 Preferred Stock and Series D-2 Preferred Stock once initially issued shall be the Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price and the Series D Conversion Price, respectively, in effect immediately prior to such issuance and (c) to amend the provisions of this subsection 4(m) to provide that any subsequent Special Mandatory Conversion will be into shares of Series A-2 Preferred Stock, Series B-2 Preferred Stock, Series C-2 Preferred Stock and Series D-2 Preferred Stock rather than Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock, respectively. This corporation shall take the same actions with respect to the Series A-2 Preferred Stock, Series B-2 Preferred Stock, Series C-2 Preferred Stock and Series D-2 Preferred Stock and each subsequently authorized series of Preferred Stock upon initial issuance of shares of the last such series to be authorized. The right to receive any dividend declared but unpaid at the time of conversion on any shares of Preferred Stock converted pursuant to the provisions of this subsection 4(m) shall accrue to the benefit of the new shares of Preferred Stock issued upon conversion thereof. (iv) A copy of the Rights Agreement is on file at the offices of this corporation and will be made available upon request and without charge. 5. Voting Rights. The holder of each share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock shall have the right to one vote for each share of Common Stock into which such Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock could then be converted, and with respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote, together with holders of Common Stock, with respect to any question upon which holders of Common Stock have the right to vote. Fractional votes shall not, however, be permitted and any fractional voting rights available on an as-converted basis (after aggregating all shares into which shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, and Series C-1 Preferred Stock and Series D-1 Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). 6. Protective Provisions for Series A, Series B, Series C, Series D, Series Z, Series A-1, Series B-1, Series C-1 and Series D-1 Preferred Stock. So long as any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred 17. 70 Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least seventy percent (70%) of the then outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, voting together as a single class: (a) alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock so as to affect materially or adversely the shares; or (b) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock; or (c) reclassify any shares of Common Stock or Preferred Stock to give those shares a preference over, or to make those shares on a parity with, the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (d) redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Common Stock; provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment. 7. Protective Provisions for Series C and Series C-1 Preferred Stock. So long as any shares of Series C Preferred Stock or Series C-1 Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series C Preferred Stock and Series C-1 Preferred Stock voting together as a single class: (a) amend the corporation's Articles of Incorporation to alter or change the rights, preferences or privileges of the shares of Series C Preferred Stock or Series C-1 Preferred Stock so as to affect materially or adversely the shares; or (b) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series C Preferred Stock or Series C-1 Preferred Stock 18. 71 (other than pursuant to subsection (m) of Section 4 of Division B of this Article III hereof); or (c) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series C Preferred Stock or Series C-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (d) reclassify any shares of Common Stock to give those shares a preference over, or to make those shares on a parity with, the Series C Preferred Stock or Series C-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (e) pay dividends upon or redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock other than shares of Series C Preferred Stock or Series C-1 Preferred Stock; provided, however, that this restriction shall not apply to (i) the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment, or (ii) the redemption of any share or shares of Preferred Stock in accordance with the provisions of Section 3 of this Division B of Article III; or 8. Protective Provisions for Series D and Series D-1 Preferred Stock. So long as any shares of Series D Preferred Stock or Series D-1 Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series D Preferred Stock and Series D-1 Preferred Stock voting together as a single class: (a) amend the corporation's Articles of Incorporation to alter or change the rights, preferences or privileges of the shares of Series D Preferred Stock or Series D-1 Preferred Stock so as to affect materially or adversely the shares; or (b) increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series D Preferred Stock or Series D-1 Preferred Stock (other than pursuant to subsection (m) of Section 4 of Division B of this Article III hereof); or (c) authorize or issue, or obligate itself to issue, any other equity security, including any other security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series D Preferred Stock or Series D- 1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (d) reclassify any shares of Common Stock to give those shares a preference over, or to make those shares on a parity with, the Series D Preferred Stock or 19. 72 Series D-1 Preferred Stock with respect to dividends, redemption or voting rights or upon liquidation; or (e) pay dividends upon or redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any share or shares of Preferred Stock or Common Stock other than shares of Series D Preferred Stock or Series D-1 Preferred Stock; provided, however, that this restriction shall not apply to (i) the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment, or (ii) the redemption of any share or shares of Preferred Stock in accordance with the provisions of Section 3 of this Division B of Article III; or 9. Protective Provisions for Series C, Series D, Series C-1 and Series D-1 Preferred Stock. So long as any shares of Series C Preferred Stock, Series D Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of a majority of the then outstanding shares of Series C Preferred Stock, Series D Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock, voting together as a single class: (a) sell, convey or otherwise dispose of or encumber all or substantially all of its assets or business or merge with or into or consolidate with any other entity (other than a wholly-owned subsidiary corporation) or effect any transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the corporation is disposed of; or (b) increase the authorized number of directors of the corporation to more than eight (8). 10. Status of Redeemed or Converted Stock. In the event (a) any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock shall be redeemed pursuant to Section 3 of this Division B of Article III or (b) any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series J Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock or Series D-1 Preferred Stock shall be converted pursuant to Section 4 of this Division B of Article III, the shares so redeemed or converted shall be cancelled, together with a like number of shares of Common Stock, and such shares and shall not be issuable by the corporation. The Articles of Incorporation of this corporation shall be appropriately amended to effect the corresponding reduction in the corporation's authorized capital stock. 11. Repurchase of Shares. Each holder of an outstanding share of Preferred Stock shall be deemed to have consented, for purposes of Sections 502, 503 and 506 of the California Corporations Code, to distributions made by the corporation in connection with the 20. 73 repurchase of shares of Common Stock issued to or held by employees, officers, directors, consultants or other persons performing services for the Company or any subsidiary pursuant to agreements under which the Company has the option to repurchase such shares at cost or upon the occurrence of certain events, such as the termination of employment. C. Common Stock. 1. Dividend Rights. Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the Common Stock shall be entitled to receive, when and as declared by the Board of Directors, out of any assets of the corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. Liquidation Rights. Upon the liquidation, dissolution or winding up of the corporation, the assets of the corporation shall be distributed as provided in Section 2 of division B of this Article III. 3. Redemption. The Common Stock is not redeemable. 4. Voting Rights. The holder of each share of Common Stock shall have the right to one vote with respect to such share, and shall be entitled to notice of any shareholders' meeting in accordance with the bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as may be provided by law. ARTICLE IV A. Elimination of Liability. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. B. Indemnification. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with the agents, vote of shareholders or disinterested directors, or otherwise in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. C. Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article IV by the shareholders of the corporation shall not adversely affect any right or protection of an officer or director of the corporation pursuant to this Article IV existing at the time of such repeal or modification. * * * 21. 74 THREE: The foregoing amendment has been approved by the Board of Directors of said corporation. FOUR: The foregoing amendment and restatement was approved by the holders of the requisite number of shares of said corporation in accordance with Sections 902 and 903 of the California Corporations Code; the total number of outstanding shares of each class entitled to vote with respect to the foregoing amendment was 2,618,327 shares of Common Stock, 1,000,000 shares of Series A Preferred Stock, 2,226,667 shares of Series B Preferred Stock, 17,158,486 shares of Series C Preferred Stock and 532,777 shares of Series Z Preferred Stock. No shares of Series J Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock are outstanding. The number of shares voting in favor of the foregoing amendment equaled or exceeded the vote required, such required vote being (1) a majority of the outstanding shares of Common Stock voting separately, (2) a majority of the outstanding shares of each of Series A, Series B, Series C and Series Z Preferred Stock, each voting separately, (3) a majority of the outstanding shares of Preferred Stock, voting together as a single class, (4) seventy percent (70%) of the outstanding shares of Series A, Series B, Series C and Series Z Preferred Stock, voting together as a single class, (5) a majority of the outstanding shares of Series C Preferred Stock, and (6) a majority of the outstanding shares of Common Stock, Series A, Series B, Series C and Series Z Preferred Stock, voting together as a single class. [Remainder of This Page Intentionally Left Blank] 22. 75 IN WITNESS WHEREOF, the undersigned have executed this certificate on October ___, 1996. ----------------------------------------- Vicente Anido, President ----------------------------------------- Faye H. Russell, Secretary The undersigned certify under penalty of perjury that they have read the foregoing Amended and Restated Articles of Incorporation and know the contents thereof, and that the statements therein are true. Executed at San Diego, California, on October ___, 1996. ----------------------------------------- Vicente Anido ----------------------------------------- Faye H. Russell 76 EXHIBIT B Amended and Restated Investors' Rights Agreement 77 COMBICHEM, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT November 15, 1996 78 TABLE OF CONTENTS
Page ---- SECTION 1 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS......................................................... 1 1.1 Certain Definitions......................................................... 1 1.2 Requested Registration...................................................... 3 1.3 Company Registration........................................................ 6 1.4 Expenses of Registration.................................................... 7 1.5 Registration on Form S-3.................................................... 8 1.6 Registration Procedures..................................................... 8 1.7 Indemnification............................................................. 10 1.8 Information by Holder....................................................... 12 1.9 Limitations on Registration of Issues of Securities......................... 13 1.10 Rule 144 Reporting.......................................................... 13 1.11 Transfer or Assignment of Registration Rights............................... 13 1.12 Restrictions on Transfer.................................................... 14 1.13 "Market Stand-Off" Agreement................................................ 15 1.14 Allocation of Registration Opportunities.................................... 15 1.15 Delay of Registration....................................................... 16 1.16 Termination of Registration Rights.......................................... 16 SECTION 2 COVENANTS OF THE COMPANY.................................................... 16 2.1 Basic Financial Information................................................. 16 2.2 Additional Information and Rights........................................... 17 2.3 Right of First Refusal...................................................... 18 2.4 Key Person Life Insurance................................................... 20 2.5 Representation on Board of Directors........................................ 21 2.6 Termination of Covenants.................................................... 21 SECTION 3 MISCELLANEOUS............................................................... 21 3.1 Governing Law............................................................... 21 3.2 Successors and Assigns...................................................... 21 3.3 Entire Agreement; Amendment; Waiver......................................... 21 3.4 Notices, etc................................................................ 22 3.5 Delays or Omissions......................................................... 22 3.6 Rights; Separability........................................................ 22 3.7 Information Confidential.................................................... 22 3.8 Titles and Subtitles........................................................ 23 3.9 Counterparts................................................................ 23
79 AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT This Amended and Restated Investors' Rights Agreement (this "Agreement") is made and entered into as of the 15th day of November, 1996 by and among CombiChem, Inc., a California corporation (the "Company"), and the persons identified on Exhibit A attached hereto (the "Investors"). RECITALS WHEREAS, certain of the Investors possess registration rights pursuant to that certain Investors' Rights Agreement dated August 17, 1995, as amended through the date hereof between the Company and such Investors (the "Rights Agreement") and certain of the Investors possess information rights, rights of first refusal and other rights, and the Company is obligated thereunder, pursuant to the Rights Agreement; and WHEREAS, the Rights Agreement may be modified or amended with the written consent of the Company and the holders of a majority of the Registrable Securities (as defined in the Rights Agreement) then outstanding; and WHEREAS, the Investors which are parties thereto, which Investors hold at least a majority of the Registrable Securities, desire to amend and restate the Rights Agreement and to accept the rights created pursuant hereto in lieu of the rights granted to them under the Rights Agreement; and WHEREAS, certain Investors are parties to the Series D Preferred Stock Purchase Agreement dated as of the date hereof among the Company and such Investors (the "Series D Agreement"), certain of the Investors' obligations under which are conditioned upon the execution and delivery by such Investors and the Company of this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the Investors who are parties to the Rights Agreement agree that the Rights Agreement shall be amended and restated in its entirety as set forth herein, and all parties hereto further agree as follows: SECTION 1 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: 80 (a) "Closing" shall mean the date of the initial sale of shares of the Company's Series D Preferred Stock. (b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (c) "Holder" shall mean any Investor who holds Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 1.11 hereof. (d) "Initial Offering" shall mean the Company's first firm commitment underwritten public offering of its Common Stock registered under the Securities Act. (e) "Initiating Holders" shall mean any Holder or Holders who in the aggregate hold not less than fifty percent (50%) of the outstanding Registrable Securities. For purposes of such calculation, Holders of Shares shall be considered to hold the shares of Common Stock then issuable upon conversion of such Shares. (f) "JAFCO Funds" shall mean Japan Associated Finance Co., Ltd. ("JAFCO") and certain Investment Enterprise Partnerships affiliated with JAFCO which are holders of Shares. (g) "Other Shareholders" shall mean persons other than Holders who, by virtue of agreements with the Company, are entitled to include their securities in certain registrations. (h) "Registrable Securities" shall mean (i) shares of Common Stock issued or issuable pursuant to the conversion of the Shares and (ii) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to or in exchange for or in replacement of the shares referenced in (i) above; provided, however, that Registrable Securities shall not include any such securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under this Section 1 are not assigned. (i) The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. (j) "Registration Expenses" shall mean all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all -2- 81 registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, fees and disbursements of one counsel for the Holders (solely with respect to registrations pursuant to Sections 1.2 and 1.3 hereof), blue sky fees and expenses, expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). (k) "Rule 144" shall mean Rule 144 as promulgated by the SEC under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the SEC. (l) "Rule 145" shall mean Rule 145 as promulgated by the SEC under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the SEC. (m) "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (n) "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time, corresponding to such act. (o) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel for any Holder (other than the fees and disbursements of the one counsel included in Registration Expenses). (p) "Shares" shall mean shares of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock held by the Investors. 1.2 Requested Registration. (a) Request for Registration. If the Company shall receive from Initiating Holders at any time or times not earlier than the earlier of (i) January 1, 1998 or (ii) six (6) months after the effective date of the first registration statement filed by the Company covering an underwritten offering of any of its securities to the general public, a written request specifying that it is made pursuant to this Section 1.2 that the Company effect a registration with respect to all or a part of the Registrable Securities having a reasonably anticipated aggregate offering price, net of underwriting discounts and commissions, that exceeds $12,000,000, the Company will: -3- 82 (i) promptly give written notice of the proposed registration to all other Holders; and (ii) as soon as practicable, use its diligent best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with the Securities Act) as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is effective. The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 1.2: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; or (B) After the Company has effected two such registrations pursuant to this Section 1.2(a) and such registrations have been declared or ordered effective; or (C) During the period starting with the date of filing of and ending on a date one hundred eighty (180) days after the effective date of a registration pursuant to Section 1.3 hereof; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (D) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made under Section 1.5 hereof. (b) Subject to the foregoing Section 1.2(a)(ii) (A) through (D), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders; provided, however, that if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be seriously detrimental to the Company and the Board of Directors of the Company concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such Holders a certificate signed by the president of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer -4- 83 such filing for the period during which such disclosure would be seriously detrimental, provided, that the Company may not defer the filing for a period of more than ninety (90) days after receipt of the request of the Initiating Holders, and, provided further, that (except as provided in Section 1.2(a)(ii)(C) above) the Company shall not defer its obligation in this manner more than once in any twelve-month period. The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 1.2(b) and 1.14 hereof, include other securities of the Company and may include securities of the Company being sold for the account of the Company. (c) Underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 1.2 and the Company shall include such information in the written notice referred to in Section 1.2(a)(i) above. The right of any Holder to registration pursuant to Section 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder with respect to such participation and inclusion) to the extent provided herein. A Holder may elect to include in such underwriting all or a part of the Registrable Securities he holds. (d) Procedures. If the Company shall request inclusion in any registration pursuant to Section 1.2 of securities being sold for its own account, or if other persons shall request inclusion in any registration pursuant to Section 1.2, the Initiating Holders shall, on behalf of all Holders, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 1 (including Section 1.13). The Company shall (together with all Holders, and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders, which underwriter(s) are reasonably acceptable to the Company. Notwithstanding any other provision of this Section 1.2, if the representative of the underwriters advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 1.14 hereof. If the person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the Initiating Holders. The securities so excluded shall also be withdrawn from registration. Any Registrable Securities or other securities excluded shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 1.2(d), then the Company shall offer to all holders who have retained rights to include securities in the registration the right to include additional securities -5- 84 in the registration in an aggregate amount equal to the number of shares withdrawn, with such shares to be allocated among such Holders requesting additional inclusion in accordance with Section 1.14. 1.3 Company Registration. (a) Company Registration. If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights (other than pursuant to Section 1.2 hereof), other than a registration relating solely to employee benefit plans, or a registration relating solely to a Rule 145 transaction, or a registration on any registration form which does not permit secondary sales, or the first registration under the Securities Act filed by the Company for an offering of its securities to the general public, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 1.3(b) below, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder within twenty (20) days after the written notice from the Company described in Section 1.3(a)(i) above is effective. Such written request may specify all or a part of a Holder's Registrable Securities for inclusion. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 1.3(a)(i). In such event the right of any Holder to registration pursuant to Section 1.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the holders of other securities of the Company distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding any other provision of this Section 1.3, if the representative of the underwriters advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitations set forth below) exclude all Registrable Securities from, or limit the number of Registrable Securities to be included in, the registration and underwriting. The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account and thereafter as set forth in Section 1.14. If any person does not agree to the terms of any such underwriting, he shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable -6- 85 Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration or if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion in accordance with Section 1.14 hereof. 1.4 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Sections 1.3 and 1.5 hereof, and the first two registrations pursuant to Section 1.2 hereof shall be borne by the Company; provided, however, that if the Holders bear the Registration Expenses for any registration proceeding begun pursuant to Section 1.2 and subsequently withdrawn by the Holders registering shares therein, such registration proceeding shall not be counted as a requested registration pursuant to Section 1.2 hereof, except in the event that such withdrawal is based upon material adverse information relating to the Company that is different from the information known or available (upon request from the Company or otherwise) to the Holders requesting registration at the time of their request for registration under Section 1.2, in which event such registration shall not be treated as a counted registration for purposes of Section 1.2 hereof even though the Holders do not bear the Registration Expenses for such registration. All Selling Expenses relating to securities so registered shall be borne by the holders of such securities pro rata on the basis of the number of shares of securities so registered on their behalf. -7- 86 1.5 Registration on Form S-3. (a) After the Initial Offering, the Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form or forms. After the Company has qualified for the use of Form S-3, in addition to the rights contained in the foregoing provisions of this Section 1, the Holders of Registrable Securities shall have the right to request registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holder or Holders), provided, however, that the Company shall not be obligated to effect any such registration if (i) the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) on Form S-3 at an aggregate price to the public of less than $500,000, or (ii) in the event that the Company shall furnish the certification described in paragraph 1.2(a)(ii) (but subject to the limitations set forth therein) or (iii) in a given twelve-month period, after the Company has effected one (1) such registration in any such period. (b) If a request complying with the requirements of Section 1.5(a) hereof is delivered to the Company, the provisions of Sections 1.2(a)(i) and (ii) and Section 1.2(b) hereof shall apply to such registration. If the registration is for an underwritten offering, the provisions of Sections 1.2(c) and 1.2(d) hereof shall apply to such registration. 1.6 Registration Procedures. In the case of each registration effected by the Company pursuant to Section 1, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use its best efforts to: (a) Keep such registration effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that (i) such 120-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment which (I) includes any prospectus required by Section 10(a)(3) of the Securities Act or (II) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (I) and (II) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; -8- 87 (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish such number of prospectuses and other documents incident thereto, including any preliminary prospectus or amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act on the happening of any event as a result of which the prospectus included in such registration statement, 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 not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an 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 or incomplete in the light of the circumstances then existing; (e) Use all reasonable efforts to register and qualify the securities covered by the registration statement under such other securities or Blue Sky laws of such jurisdiction as shall be reasonably requested by the Holders; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such state or jurisdiction; (f) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; (g) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; (h) Otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section II(a) of the Securities Act; -9- 88 (i) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 1.2 hereof, the Company will enter into an underwriting agreement reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting agreement contains customary underwriting provisions and provided further that if the underwriter so requests the underwriting agreement will contain customary contribution provisions; and (j) Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that such registration statement with respect to such securities becomes effective, (A) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (B) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. 1.7 Indemnification. (a) The Company will indemnify each Holder, each of its officers, directors and partners, legal counsel and accountants and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 1 and each underwriter, if any, and each person who controls within the meaning of Section 15 of the Securities Act any underwriter, against all expenses, claims, losses, damages and liabilities (or actions, proceedings or settlements in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors, partners, legal counsel and accountants and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such -10- 89 case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein. It is agreed that the indemnity agreement contained in this Section 1.7(a) 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 the Company (which consent has not been unreasonably withheld). (b) Each Holder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors, officers, partners, legal counsel and accountants and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, each other such Holder and Other Shareholder and each of their officers, directors and partners, and each person controlling such Holder or Other Shareholder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Holders, Other Shareholders, directors, officers, partners, legal counsel and accountants, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated specifically for use therein, provided, however, that the obligations of such Holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). (c) Each party entitled to indemnification under this Section 1.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1, to the extent such failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, -11- 90 consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the indemnification provided for in this Section 1.7 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 1.8 Information by Holder. Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 1. 1.9 Limitations on Registration of Issues of Securities. From and after the date of this Agreement, the Company shall not, without the prior written consent of a majority in interest of the Holders, enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are more favorable than the registration rights granted to the Holders hereunder. 1.10 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: -12- 91 (a) Make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (b) File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; (c) So long as a Holder owns any Registrable Securities, furnish to the Holder forthwith upon written request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Holder to sell any such securities without registration. 1.11 Transfer or Assignment of Registration Rights. The rights to cause the Company to register securities granted to a Holder by the Company under Sections 1.2, 1.3 and 1.5 may be transferred or assigned by a Holder only to a transferee or assignee of not less than 25,000 shares of Registrable Securities (as presently constituted and subject to subsequent adjustments for stock splits, stock dividends, reverse stock splits and the like), and only provided that the Company is given written notice at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and provided further that the transferee or assignee of such rights assumes the obligations of such Holder under this Article 1. 1.12 Restrictions on Transfer. (a) Each Holder agrees not to transfer or dispose of all or any portion of the Registrable Securities unless and until the proposed transferee has agreed in writing for the benefit of the Company to be bound by this Section 1.12, provided and to the extent this Section 1.12 is then applicable and: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) Such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (B) if requested by the Company, -13- 92 such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, to the effect that such disposition will not require registration of such shares under the Securities Act. Notwithstanding the provisions of subsections (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer (A) by a Holder which is a partnership to its partners or retired partners in accordance with partnership interests, (B) to a Holder's family member or trust for the benefit of an individual Holder, provided that the transferee will be subject to the terms of this Section 1.12 to the same extent as if he were an original Holder hereunder, or (C) pursuant to Rule 144(k); provided, however, that the Company must be satisfied in its reasonable discretion that the proposed sale of securities fully qualifies with all Rule 144 requirements. (b) Each certificate representing Registrable Securities shall (unless otherwise permitted by the provisions of this Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws): "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 1.13 "Market Stand-Off" Agreement. If requested by the Company and an underwriter of Common Stock (or other securities) of the Company, an Investor shall not sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by such Investor (other than those included in the registration) during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act, provided that all Holders and officers and directors of the Company enter into similar agreements. The obligations described in this Section 1.13 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future, or a registration relating solely to a Rule 145 transaction on Form S-4, Form S-14 or Form S-15 or similar forms which may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 1.14 Allocation of Registration Opportunities. In any circumstance in which all of the Registrable Securities and other shares of Common Stock of the Company -14- 93 (including shares of Common Stock issued or issuable upon conversion of shares of any currently unissued series of Preferred Stock of the Company) with registration rights (the "Other Shares") requested to be included in a registration on behalf of the Holders or other selling shareholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares which may be so included, the number of shares of Registrable Securities and Other Shares which may be so included shall be allocated among the Holders and other selling shareholders requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling shareholders, assuming conversion; provided, however, that, so that such allocation shall not operate to reduce the aggregate number of Registrable Securities and Other Shares to be included in such registration, if any Holder or other selling shareholder does not request inclusion of the maximum number of shares of Registrable Securities and Other Shares allocated to him pursuant to the above-described procedure, the remaining portion of his allocation shall be reallocated among those requesting Holders and other selling shareholders whose allocations did not satisfy their requests pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling shareholders, assuming conversion, and this procedure shall be repeated until all of the shares of Registrable Securities and Other Shares that may be included in the registration on behalf of the Holders and other selling shareholders have been so allocated. The Company shall not limit the number of Registrable Securities to be included in a registration pursuant to this Agreement in order to include shares held by shareholders with no registration rights or to include Founder's Stock or any other shares of stock issued to employees, officers, directors or consultants pursuant to the Company's stock option plan, or with respect to registrations under Sections 1.2 or 1.5 hereof, in order to include in such registration securities registered for the Company's own account or included at the request of the Company pursuant to Section 1.3 hereof without the prior written consent of seventy percent (70%) of the Holders; provided, further, that in no event will the amount of securities of the selling Holders included in a registration pursuant to Section 1.3 hereof be reduced below twenty percent (20%) of the total amount of securities included in such offering, unless such offering is the Initial Offering of the Company's securities in which case the selling shareholders may be excluded entirely if the underwriters make the determination described above and no other shareholder's securities are included. For purposes of determining allocation hereunder, (a) for any selling shareholder which is a Holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons will be deemed to be a single "selling shareholder," and (b) all of the JAFCO Funds together shall be deemed to be a "selling shareholder." Any pro-rata reduction with respect to any such "selling shareholder" will be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder." 1.15 Delay of Registration. No Holder shall have any right to take any, action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. -15- 94 1.16 Termination of Registration Rights. The right of any Holder to request registration or inclusion in any registration pursuant to Sections 1.2, 1.3 or 1.5 shall terminate on the closing of the first Company-initiated registered public offering of Common Stock of the Company, provided that all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period, or on such date after the closing of the first Company-initiated registered public offering of Common Stock of the Company as all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period. SECTION 2 COVENANTS OF THE COMPANY The Company hereby covenants and agrees, so long as any Holder owns any Registrable Shares as follows: 2.1 Basic Financial Information. The Company will furnish the following reports to each Holder: (a) As soon as practicable after the end of each fiscal year of the Company, and in any event within ninety (90) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such fiscal year, and consolidated statements of income and sources and applications of funds of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by independent public accountants of recognized national standing selected by the Company. (b) As soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and consolidated statements of income and sources and applications of funds of the Company and its subsidiaries for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year and to the Company's operating plan then in effect and approved by its Board of Directors, subject to changes resulting from normal year-end audit adjustments, all in reasonable detail and certified by the principal financial or accounting officer of the Company, except that such balance sheet need not contain the notes required by generally accepted accounting principles. 2.2 Additional Information and Rights. -16- 95 (a) The Company will permit any Investor, so long as such Investor or its representative (treating all the JAFCO Funds as a single Investor) owns at least 500,000 Shares, or such number of shares of Common Stock issued upon conversion of 500,000 or more Shares, or any combination thereof (as presently constituted and subject to subsequent adjustment for stock splits, stock dividends, reverse stock splits, recapitalizations and the like) (a "Significant Holder") (or a representative of any Significant Holder) to visit and inspect any of the properties of the Company, including its books of account and other records (and make copies thereof and take extracts therefrom), and to discuss its affairs, finances and accounts with the Company's officers and its independent public accountants, all at such reasonable times and as often as any such person may reasonably request. (b) Until the earlier to occur of (i) the date on which the Company is subject to the reporting requirements of Sections 13(a) or 15(d) of the Exchange Act, or (ii) the date on which quotations for the Common Stock of the Company are reported by the automated quotations systems operated by the National Association of Securities Dealers, Inc., or by an equivalent quotations system, the Company will deliver the reports described below in this Section 2.2 to each Significant Holder: (i) As soon as practical after the end of each month and in any event within thirty (30) days thereafter a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such month and consolidated statements of income and of sources and applications of funds of the Company and its subsidiaries, for each month and for the current fiscal year of the Company to date, all subject to normal year-end audit adjustments, prepared in accordance with generally accepted accounting principles consistently applied and certified by the principal financial or accounting officer of the Company, together with a comparison of such statements to the corresponding periods of the prior fiscal year and to the Company's operating plan then in effect and approved by its Board of Directors. (c) The provisions of Section 2.1 and this Section 2.2 shall not be in limitation of any rights which any Holder or Significant Holder may have with respect to the books and records of the Company and its subsidiaries, or to inspect their properties or discuss their affairs, finances and accounts, under the laws of the jurisdictions in which they are incorporated. (d) Anything in Section 2 to the contrary notwithstanding, no Holder or Significant Holder by reason of this Agreement shall have access to any trade secrets or classified information of the Company. Each Significant Holder hereby agrees to hold in confidence and trust and not to misuse or disclose any confidential information provided pursuant to this Section 2.2. (e) Each Holder who represents to the Company that it is a "venture capital operating company" for purposes of Department of Labor Regulation ss.2510.3-101 shall in addition have the right to consult with and advise the officers of the Company as to the management of the Company. -17- 96 2.3 Right of First Refusal. The Company hereby grants to each Holder and its affiliates who own any shares of Series A, Series B, Series C, Series D, Series A-1, Series B-1, Series C-1 or Series D-1 Preferred Stock (the "Cash Preferred") or any shares of Common Stock issued upon conversion of the Cash Preferred (the "Rights Holder") the right of first refusal to purchase a Pro Rata Share (as defined in this Section 2.3) of New Securities (as defined in this Section 2.3) which the Company may, from time to time, propose to sell and issue. A Rights Holder's Pro Rata Share, for purposes of this right of first refusal, is the ratio of the number of shares of Common Stock owned by such Rights Holder immediately prior to the issuance of New Securities, assuming full conversion of the Shares, to the total number of shares of Common Stock outstanding immediately prior to the issuance of New Securities, assuming full conversion of the Shares and exercise of all outstanding rights, options and warrants to acquire Common Stock of the Company. For purposes of this Section 2.3, each of the JAFCO Funds shall be deemed to have purchased its Pro Rata Share if one or more of the JAFCO Funds shall have purchased an amount of New Securities equal to the Pro Rata Share of the JAFCO Funds in the aggregate. Each Rights Holder shall have a right of over-allotment such that if any Rights Holder fails to exercise its right hereunder to purchase its pro rata share of New Securities, the other Rights Holders may purchase the non-purchasing Rights Holder's portion on a pro rata basis within ten (10) days from the date such non-purchasing Rights Holder fails to exercise its right hereunder to purchase its Pro Rata Share of New Securities. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock (including Common Stock and/or Preferred Stock) of the Company whether now authorized or not, and rights, options or warrants to purchase such capital stock, and securities of any type whatsoever that are, or may become, convertible into capital stock; provided that the term "New Securities" does not include (i) securities purchased under the Series D Agreement; (ii) securities issued upon conversion of the Shares; (iii) securities issued pursuant to the acquisition of another business entity or business segment of any such entity by the Company by merger, purchase of substantially all the assets or other reorganization whereby the Company will own not less than fifty-one percent (51%) of the voting power of such business entity or business segment of any such entity; (iv) any borrowings, direct or indirect, from financial institutions or other persons by the Company, whether or not presently authorized, including any type of loan or payment evidenced by any type of debt instrument, provided such borrowings do not have any equity features including warrants, options or other rights to purchase capital stock and are not convertible into capital stock of the Company; (v) securities issued to employees, consultants, officers or directors of the Company pursuant to any stock option, stock purchase or stock bonus plan, agreement or arrangement approved by the Board of Directors; (vi) securities issued to vendors or customers or to other persons in similar commercial situations with the Company if such issuance is approved by the Board of Directors; (vii) securities issued in connection with obtaining lease financing, whether issued to a lessor, guarantor or other person; (viii) securities issued in a firm commitment underwritten public offering pursuant to a registration under the Securities Act with an aggregate offering price to the public in excess of $5.0 million; (ix) securities issued in -18- 97 connection with any stock split, stock dividend or recapitalization of the Company; and (x) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of New Securities pursuant to subsections (i) through (ix) above. (b) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Rights Holder written notice of its intention, describing the type of New Securities, and their price and the general terms upon which the Company proposes to issue the same. Each Rights Holder shall have twenty (20) days after any such notice is effective to agree to purchase such Rights Holder's Pro Rata Share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) In the event the Rights Holders fail to exercise fully the right of first refusal within said twenty (20)-day period and after the expiration of the ten (10)-day period for the exercise of the over-allotment provisions of this Section 2.3, the Company shall have one hundred twenty (120) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within one hundred twenty (120) days from the date of said agreement) to sell the New Securities respecting which the Rights Holders' right of first refusal option set forth in this Section 2.3 was not exercised, at a price and upon terms no more favorable to the purchasers thereof than specified in the Company's notice to Rights Holders pursuant to Section 2.3(b). In the event the Company has not sold within said one hundred twenty (120)-day period or entered into an agreement to sell the New Securities within said one hundred twenty (120)-day period (or sold and issued New Securities in accordance with the foregoing within one hundred twenty (120) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first again offering such securities to the Rights Holders in the manner provided in Section 2.3(b) above. (d) At any time following the date of this Agreement, if the Company has complied with its notice obligations pursuant to this Section 2.3, or such obligations have been waived, and the Company thereafter proceeds to issue or sell New Securities and a Rights Holder does not acquire his, her or its Pro Rata Share (a "NonParticipating Rights Holder"), then all of such Non-Participating Rights Holder's Cash Preferred shall automatically and without further action on the part of such holder be converted, in accordance with the provisions of Article III(B)(4)(m) of the Company's Amended and Restated Articles of Incorporation. (e) The right of first refusal granted under this Agreement shall expire upon, and shall not be applicable to, the first sale of Common Stock of the Company to the public effected pursuant to a registration statement filed with, and declared effective by, the SEC under the Securities Act, with proceeds of more than $5,000,000. (f) The right of first refusal set forth in this Section 2.3 may not be assigned or transferred, except that (i) such right is assignable by each Rights Holder to any -19- 98 wholly owned subsidiary or parent of, or to any corporation or entity that is, within the meaning of the Securities Act, controlling, controlled by or under common control with, any such Rights Holder, and (ii) such right is assignable between and among any of the Rights Holders. 2.4 Key Person Life Insurance. The Company has as of the date hereof obtained from financially sound and reputable insurers term life insurance on the life of Steve Teig in the amount of [$2,000,000] (the "Teig Insurance"), and shall maintain with financially sound and reputable insurers the Teig Insurance except as otherwise decided in accordance with policies adopted by the Company's Board of Directors. Such policy shall name the Company as loss payee and shall not be cancelable by the Company without prior approval of the Board of Directors. 2.5 Representation on Board of Directors. So long as any Shares remain outstanding, the Company will use its best efforts to cause and maintain the election to the Board of Directors of (a) two people designated by the holders of a majority of the Series C Preferred Stock outstanding, including Common Stock issued upon conversion of such Series C Preferred Stock (each a "Series C Director"), and (b) two people designated by the holders of a majority of the Series A and Series B Preferred Stock outstanding, including Common Stock issued upon conversion of such Series A and B Preferred Stock. One Series C Director shall be designated by The Sprout Group and the other Series C Director shall be designated, subject to the consent of The Sprout Group, by a holder of at least 2,419,355 shares of Series C Preferred Stock in the aggregate. In the event that two or more holders of Series C Preferred Stock, other than The Sprout Group, each hold in excess of 2,419,355 shares of Series C Preferred Stock, then that holder holding the greatest number of shares of Series C Preferred Stock shall have the right to designate the remaining Series C Director. In the event that two or more such holders hold an equal number of Series C Preferred Stock, then The Sprout Group shall determine which of them shall designate the remaining Series C Director. For the purposes of this paragraph, a "holder" shall include the affiliates of any holder. 2.6 Termination of Covenants. The covenants set forth in this Section 2 shall terminate and be of no further force and effect after the time of effectiveness of the Company's first firm commitment underwritten public offering registered under the Securities Act. SECTION 3 MISCELLANEOUS 3.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California, as if entered into by and between California residents exclusively for performance entirely within California. -20- 99 3.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 3.3 Entire Agreement; Amendment; Waiver. This Agreement (including the Exhibits hereto) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Company and the holders of at least fifty percent (50%) of the Registrable Shares and any such amendment, waiver, discharge or termination shall be binding on all the Holders, but in no event shall the obligation of any Holder hereunder be materially increased, except upon the written consent of such Holder. 3.4 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by United States first-class mail, postage prepaid, or delivered personally addressed by hand or special courier (a) if to a Holder, as indicated on the list of Holders attached hereto as Exhibit A, or at such other address as such Investor or permitted assignee shall have furnished to the Company in writing, or (b) if to the Company, at 9050 Camino Santa Fe, San Diego, California 92121, or at such other address as the Company shall have furnished to each holder in writing. All such notices and other written communications shall be effective (i) if mailed, five (5) days after mailing and (ii) if delivered, upon delivery. 3.5 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Holder, upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement or any waiver on the part of any Holder of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Holder, shall be cumulative and not alternative. 3.6 Rights; Separability. Unless otherwise expressly provided herein, a Holder's rights hereunder are several rights, not rights jointly held with any of the other Holders. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 3.7 Information Confidential. Each Holder acknowledges that the information received by them pursuant hereto may be confidential and for its use only, and it -21- 100 will not use such confidential information in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information, and its attorneys), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or such Holder is required to disclose such information by a governmental body. 3.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 3.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. [Remainder of Page Intentionally Left Blank] -22- 101 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By:______________________________________ Title:___________________________________ HOLDER: ----------------------------------------- [Name of Holder] By:______________________________________ Title:___________________________________ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 102 EXHIBIT A INVESTORS Forward Ventures II, L.P. Sequoia Capital VI Sequoia Technology Partners VI Sequoia XXIV Sequoia 1995 Lynn H. Caporale Sydney Brenner Sprout Capital VII, L.P. DLJ Capital Corporation C. V. Sofinnova Ventures Partners III Singapore Bio-Innovations Pte, Ltd PaineWebber Incorporated as Custodian of the Michael Grossman Rollover IRA Steven M. Lash First Interstate Bank as Trustee for SK International Securities Corp. 401(k)PS em Stephen J. Kandel Byron T. Franzen IRA FBO Byron T. Franzen The M.L. Lawrence Trust Farley Inc. Sorrento Ventures II, L.P. Sorrento Growth Partners I, L.P. Comdisco, Inc. Brinson Venture Capital Fund III, L.P. (The First National Bank of Chicago as Custodian to the Brinson Venture Capital Fund III, L.P.) Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III (The First National Bank of Chicago as Custodian to the Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III) Japan Associated Finance Co., Ltd. JAFCO G-5 Investment Enterprise Partnership JAFCO R-1(A) Investment Enterprise Partnership JAFCO R-1(B) Investment Enterprise Partnership JAFCO R-2 Investment Enterprise Partnership Brentwood Associates VII, L.P. S.R. One Limited Stephen J. Kandel Todd Schmidt Vicente Anido John T. Chambers The Rufus L. McCracken Trust, dated 6/21/91 Steve Teig Faye Hunter Russell Trust U/A Dtd 7/11/88 Exhibit A 103 EXHIBIT C Current Shareholders 104 EXHIBIT C The outstanding shares of Preferred Stock and Common Stock are owned by the shareholders and in the numbers specified herein:
CLASS/SERIES SHAREHOLDER NO. SHARES ------------ ----------- ---------- Common Kim D. Janda 175,000 Common Chi-Huey Wong 150,000 Common Dale L. Boger 150,000 Common Eric Erb 10,000 Common Standish Fleming 37,500 Common Trustees of Royston Family Trust UTA 37,500 2/12/82 Common Sydney Brenner 150,000 Common Forward Ventures II, L.P. 225,000 Common Jeffrey Sollender 10,000 Common Robert A. Curtis 229,160 Common Gail Erwin 2,500 Common Sequoia Capital VI 91,000 Common Sequoia Technology Partners VI 5,000 Common Sequoia XXIV 4,000 Common Lynn H. Caporale 175,000 Common Bobbie J. Bosley 10,000 Common Eric Erb 5,000 Common Angelo Castillino, Ph.D. 20,000 Common Peter A. Bick 20,000 Common Soan Cheng 20,000 Common Daniel C. M. Sun 10,000 Common Gail Erwin 11,667 Common Christine M. Tarby 14,000 Common Peter M. Wirsching, Ph.D. 11,764 Common Richard A. Lerner, M.D. 83,000 Common The Scripps Research Institute 305,236
105
CLASS/SERIES SHAREHOLDER NO. SHARES ------------ ----------- ---------- Common Peter Myers 350,000 Common Jonathan Greene 100,000 Common Steven Teig 200,000 Common Ken Rubenstein 6,000 Common Vicente Anido 96,000 TOTAL COMMON: 2,714,327 Series A Forward Ventures II, L.P. 600,000 Series A Sequoia Capital VI 364,000 Series A Sequoia Technology Partners VI 20,000 Series A Sequoia XXIV 16,000 TOTAL SERIES A: 1,000,000 Series B Sequoia Capital VI 1,213,334 Series B Sequoia Technology VI 66,667 Series B Sequoia Capital VI 53,333 Series B Forward Ventures II, L.P. 866,666 Series B Lynn H. Caporale 26,667 TOTAL SERIES B: 2,226,667 Series C Sprout Capitol VII, L.P. 3,126,821 Series C DLJ Capital Corporation 260,276 Series C Sofinnova Ventures III, L.P. 1,129,033 Series C Singapore Bio-Innovation Ptd., Ltd. 564,517 Series C Sequoia Capital VI 1,335,646 Series C Sequoia Technology Partners VI 73,388 Series C Sequoia XXIV 58,710 Series C PainWebber Incorporated as Custodian of 37,218 the Michael Grossman Rollover IRA Series C Steven M. Lash 16,185
106
CLASS/SERIES SHAREHOLDER NO. SHARES ------------ ----------- ---------- Series C First Interstate Bank as Trustee for SK 80,874 International Securities Corp. 401(k) PS em Stephen J. Kendel Series C Byron T. Franzen 56,452 Series C M.L. Lawrence Revocable Trust 225,807 Series C Farley Inc. 846,775 Series C Sorrento Ventures II, L.P. 564,517 Series C Sorrento Growth Partners I, L.P. 1,129,033 Series C Comdisco, Inc. 169,355 Series C Brinson Venture Capital Fund III, L.P. 1,941,441 Series C Brinson Trust Company as Trustee of the 316,624 Brinson MAP Venture Capital Fund III Series C Todd Schmidt 8,065 Series C Spout Capital VII, L.P. 1,340,066 Series C DLJ Capital Corporation 111,547 Series C CV Sofinnova Ventures Partners III 483,871 Series C Singapore Bio-Innovations Pte Ltd 241,936 Series C Sequoia Capital VI 572,420 Series C Sequoia Technology Partners VI 31,452 Series C Sequoia 1995 25,162 Series C Byron T. Franzen 24,194 Series C M.L. Lawrence Trust 96,775 Series C Farley Inc. 362,904 Series C Sorrento Ventures II, L.P. 241,936 Series C Sorrento Growth Partners I, L.P. 483,871 Series C Comdisco, Inc. 72,581 Series C The First National Bank of Chicago as 832,046 Custodian to the Brinson Venture Capital Fund III, L.P.
107
CLASS/SERIES SHAREHOLDER NO. SHARES ------------ ----------- ---------- Series C The First National Bank of Chicago as 135,696 Custodian to the Brinson Trust Company as Trustee of the Brinson Map Venture Capital Fund III Series C Donaldson, Lufkin & Jenrette Securities 112,904 Corporation Custodian F/B/O Byron T. Franzen, Account # 4GH 017650 Series C Donaldson, Lufkin & Jenrette Securities 48,388 Corporation Custodian F/B/O Byron T. Franzen, Account # 4GH 017650 TOTAL SERIES C: 17,158,486 Series Z Sydney Brenner 200,000 Series Z Molecular Simulations, Inc. 106,971 Series Z Molecular Simulations, Inc. 225,806 TOTAL SERIES Z: 532,777
108 EXHIBIT D Co-Sale Agreement 109 COMBICHEM, INC. AMENDED AND RESTATED CO-SALE AGREEMENT This Amended and Restated Co-Sale Agreement (the "Agreement") is made as of the 15th day of November, 1996, by and among Vicente Anido, Robert A. Curtis, Peter Myers, Steven Teig, Sydney Brenner, Kim Janda, Chi-Huey Wong and Dale Boger (individually, a "Founder" and, collectively, the "Founders"), CombiChem, Inc., a California corporation (the "Company"), and the undersigned holders of Series A, B, C or D Preferred Stock of the Company (the "Shareholders"). WHEREAS, the Founders are subject to certain obligations and certain of the Shareholders have certain rights pursuant to that certain Co-Sale Agreement dated August 17, 1995 (the "Prior Agreement"); WHEREAS, the Prior Agreement may be amended or modified by the written consent of the Company, of Shareholders (as defined under the Prior Agreement) holding more than 50% in interest of the Common Stock then held and of each Founder; WHEREAS, the Company, the Shareholders (as defined under the Prior Agreement) and each Founder executing this Agreement desire to amend and restate the Prior Agreement and to accept the rights and obligations created hereunder in lieu of the rights and obligations granted to them under the Prior Agreement; and WHEREAS, certain Shareholders are parties to the Series D Preferred Stock Purchase Agreement dated the date hereof, certain of the Shareholders' obligations under which are conditioned upon the execution and delivery by such Shareholder and the Company of this Agreement. In consideration of the mutual covenants set forth herein, the parties agree as follows: 1. Definitions. (a) "Stock" shall mean shares of the Company's Common Stock or Preferred Stock or Series Z Preferred Stock now owned or subsequently acquired by the Founders. (b) "Preferred Stock" shall mean the Company's outstanding Series A, Series B, Series C, Series D, Series J, Series Z, Series A-1, Series B-1, Series C-1 and Series D-1 Preferred Stock. (c) "Common Stock" shall mean the Company's Common Stock and shares of Common Stock issued or issuable upon conversion of the Company's outstanding Preferred Stock. -1- 110 (d) "JAFCO Funds" shall mean Japan Associated Finance Co., Ltd. ("JAFCO") and certain Investment Enterprise Partnerships affiliated with JAFCO which are holders of Series D Preferred Stock or Series D-1 Preferred Stock. 2. Sales by Founder. (a) If a Founder proposes to sell or transfer any shares of Stock in one or more related transactions which will result in (i) the transfer of 1,000 or more shares of Stock by such Founder or (ii) the transferee of such shares holding more than 50% of the Common Stock, then such Founder shall promptly give written notice (the "Notice") to the Company and the Shareholders at least twenty (20) days prior to the closing of such sale or transfer. The Notice shall describe in reasonable detail the proposed sale or transfer including, without limitation, the number of shares of Stock to be sold or transferred, the nature of such sale or transfer, the consideration to be paid and the name and address of each prospective purchaser or transferee. In the event that the sale or transfer is being made pursuant to the provisions of Sections 3(a) or 3(b) hereof, the Notice shall state under which paragraph the sale or transfer is being made. (b) Each Shareholder shall have the right, exercisable upon written notice to such Founder within 15 days after receipt of the Notice, to participate in such sale of Stock on the same terms and conditions. To the extent one or more of the Shareholders exercise such right of participation in accordance with the terms and conditions set forth below, the number of shares of Stock that the Founder may sell in the transaction shall be correspondingly reduced. (c) Each Shareholder may sell all or any part of that number of shares of Stock equal to the product obtained by multiplying (i) the aggregate number of shares of Stock covered by the Notice by (ii) a fraction the numerator of which is the number of shares of Common Stock owned by the Shareholders at the time of the sale or transfer and the denominator of which is the total number of shares of Common Stock owned by the Founder and the Shareholders at the time of the sale or transfer. (d) If any Shareholder fails to elect to fully participate in such Founder's sale pursuant to this Section 2, the Founder shall give notice of such failure to the Shareholders who did so elect (the "Participants"); provided, however, that the JAFCO Funds shall be collectively deemed to be a single participant. Such notice may be made by telephone if confirmed in writing within two (2) days. The Participants shall have five (5) days from the date such notice was given to agree to sell their pro rata share of the unsold portion. For purposes of this Section 2(d), a Participant's pro rata share shall be the ratio of (x) the number of shares of Common Stock held by such Participant to (y) the total number of shares of Common Stock held by the Participants and the Founder. (e) Each Participant shall effect its participation in the sale by promptly delivering to the Founder for transfer to the prospective purchaser one or more certificates, properly endorsed for transfer, which represent: -2- 111 (i) the type and number of shares of Common Stock which such Participant elects to sell; or (ii) that number of shares of Preferred Stock which is at such time convertible into the number of shares of Common Stock which such Participant elects to sell; provided, however, that if the prospective purchaser objects to the delivery of Preferred Stock in lieu of Common Stock, such Participant shall convert such Preferred Stock into Common Stock and deliver Common Stock as provided in Section 2(e)(i) above. The Company agrees to make any such conversion concurrent with the actual transfer of such shares to the purchaser. (f) The stock certificate or certificates that the Participant delivers to the Founder pursuant to Section 2(e) shall be transferred to the prospective purchaser in consummation of the sale of the Stock pursuant to the terms and conditions specified in the Notice, and the Founder shall concurrently therewith remit to such Participant that portion of the sale proceeds to which such Participant is entitled by reason of its participation in such sale. To the extent that any prospective purchaser or purchasers prohibits such assignment or otherwise refuses to purchase shares or other securities from a Participant exercising its rights of co-sale hereunder, the Founder shall not sell to such prospective purchaser or purchasers any Stock unless and until, simultaneously with such sale, the Founder shall purchase such shares or other securities from such Participant. (g) The exercise or non-exercise of the rights of the Participants hereunder to participate in one or more sales of Stock made by the Founder shall not adversely affect their rights to participate in subsequent sales of Stock subject to Section 2(a). 3. Exempt Transfers. (a) Notwithstanding the foregoing, the co-sale rights of the Shareholders shall not apply to (i) any pledge of Stock made pursuant to a bona fide loan transaction that creates a mere security interest or (ii) any transfer to the ancestors, descendants or spouse or to trusts for the benefit of such persons or a Founder; provided that (A) the transferring Founder shall inform the Shareholders of such pledge or transfer prior to effecting it and (B) the pledgee or transferee shall furnish the Shareholders with a written agreement to be bound by and comply with all provisions of this Agreement. Such transferred Stock shall remain "Stock" hereunder, and such pledgee or transferee shall be treated as a "Founder" for purposes of this Agreement. (b) Notwithstanding the foregoing, the provisions of Section 2 shall not apply to the sale of any Stock (i) to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act") or (ii) to the Company. 4. Prohibited Transfers. (a) In the event a Founder should sell any Stock in contravention of the co-sale rights of the Shareholders under this agreement (a "Prohibited Transfer"), the -3- 112 Shareholders, in addition to such other remedies as may be available at law, in equity or hereunder, shall have the put option provided below, and the Founder shall be bound by the applicable provisions of such option. (b) In the event of a Prohibited Transfer, each Shareholder shall have the right to sell to the Founder the type and number of shares of Stock equal to the number of shares each Shareholder would have been entitled to transfer to the purchaser under Section 2(c) hereof had the Prohibited Transfer been effected pursuant to and in compliance with the terms thereof. Such sale shall be made on the following terms and conditions: (i) The price per share at which the shares are to be sold to the Founder shall be equal to the price per share paid by the purchaser to the Founder in the Prohibited Transfer. The Founder shall also reimburse each Shareholder for any and all reasonable fees and expense, including reasonable legal fees and expense, incurred pursuant to the exercise or the attempted exercise of the Shareholder's rights under Section 2. (ii) Within ninety (90) days after the later of the dates on which the Shareholder (A) received notice of the Prohibited Transfer or (B) otherwise became aware of the Prohibited Transfer, each Shareholder shall, if exercising the option created hereby, deliver to the Founder the certificate or certificates representing shares to be sold, each certificate to be properly endorsed for transfer. (iii) The Founder shall, upon receipt of the certificate or certificates for the shares to be sold by a Shareholder, pursuant to this Section 4(b), pay the aggregate purchase price therefor and the amount of reimbursable fees and expense, as specified in Section 4(b)(i), in cash or by other means acceptable to the Shareholder. (iv) Notwithstanding the foregoing, any attempt by a Founder to transfer Stock in violation of Section 2 hereof shall be void and the Company agrees it will not effect such a transfer nor will it treat any alleged transferee as the holder of such shares without the written consent of a majority in interest of the Shareholders. 5. Legend. (a) Each certificate representing shares of Stock now or hereafter owned by the Founders or issued to any person in connection with a transfer pursuant to Section 3(a) hereof shall be endorsed with the following legend: "THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CO-SALE AGREEMENT BY AND BETWEEN THE SHAREHOLDER, THE CORPORATION AND CERTAIN HOLDERS OF STOCK OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION." -4- 113 (b) Each Founder agrees that the Company may instruct its transfer agent to impose transfer restrictions on the shares represented by certificates bearing the legend referred to in Section 5(a) above to enforce the provisions of this Agreement and the Company agrees to promptly do so. The legend shall be removed upon termination of this Agreement. 6. Miscellaneous. 6.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Delaware. 6.2 Amendment. Any provision may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by the written consent of (i) as to the Company, only by the Company, (ii) as to the Shareholders, by persons holding more than fifty percent (50%) in interest of the Common Stock and Common Stock equivalents then held by the Shareholders and their assignees, pursuant to Section 6.3 hereof, and (iii) as to each Founder, such Founder, provided that any Shareholder may individually waive any of his rights hereunder without obtaining the consent of any other Shareholder. Any amendment or waiver effected in accordance with clauses (i), (ii) and (iii) of this paragraph shall be binding upon each Shareholder, its successors and assigns, the Company and the Founder in question. 6.3 Assignment of Rights. This Agreement and the rights and obligations of the parties hereunder shall inure to benefit of, and be binding upon, their respective successors, assigns and legal representatives. The rights of the Shareholders hereunder are only assignable (i) by each of such Shareholders to any other Shareholder or (ii) to an assignee or transferee who acquires all of the Common Stock purchased by a Shareholder or at least 25,000 shares of Common Stock. 6.4 Term. This Co-Sale Agreement shall terminate upon the earlier of (i) the closing of a firm commitment underwritten public offering pursuant to a registration statement on Form S-1 under the Securities Act of 1933, as amended, the public offering price of which (exclusive of underwriting discounts, commissions and expenses) is not less than $4.00 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and $12,000,000 in the aggregate, and (ii) the closing of the Company's sale of all or substantially all of its assets or the acquisition of the Company by another entity by means of merger or consolidation resulting in the exchange of the outstanding shares of the Company's capital stock for securities or consideration issued, or caused to be issued, by the acquiring entity or its subsidiary. 6.5 Ownership. Each Founder represents and warrants that he is the sole legal and beneficial owner of the shares of Stock subject to this Co-Sale Agreement and that no other person has any interest (other than a community property interest) in such shares. 6.6 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given upon personal delivery to the party to be -5- 114 notified or five days after deposit in the United States mail, by registered or certified mail, postage prepaid and properly addressed to the party to be notified as set forth on the signature page hereof or at such other address as such party may designate by ten (10) days' advance written notice to the other parties hereto. Notwithstanding the foregoing, the telephone notice permitted by Section 2(d) shall be effective at the time it is given. 6.7 Severability. In the event one or more of the provisions of this Co-Sale Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Co-Sale Agreement, and this Co-Sale Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 6.8 Attorney Fees. In the event that any dispute among the parties to this Co-Sale Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Co-Sale Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 6.9 Counterparts. This Co-Sale Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. [Remainder of This Page Intentionally Left Blank] -6- 115 The foregoing agreement is hereby executed as of the date first above written. COMBICHEM, INC. By:______________________________________ Title:___________________________________ Address: 9050 Camino Santa Fe San Diego, California 92121 SHAREHOLDERS: ----------------------------------------- (Print Name of Investor) ----------------------------------------- (Signature) ----------------------------------------- (Title, if applicable) Address: _________________________________________ _________________________________________ _________________________________________ FOUNDERS: ----------------------------------------- (Print Name of Founder) ----------------------------------------- (Signature) Address: _________________________________________ _________________________________________ _________________________________________ [SIGNATURE PAGE TO CO-SALE AGREEMENT] 116 CONSENT OF SPOUSE I acknowledge that I have read the foregoing Agreement and that I know its contents. I am aware that by its provisions if I and/or my spouse agree to sell all or part of the shares of the Company held of record by either or both of us, including my community interest in such shares, if any, co-sale rights (as described in the Agreement) must be granted to the Shareholders by the seller. I hereby agree that those shares and my interest in them, if any, are subject to the provisions of the Agreement and that I will take no action at any time to hinder operation of, or violate, the Agreement. ----------------------------------------- (Signature) 117 SCHEDULE A SCHEDULE OF INVESTORS
Closing --------------------------------------- Investor Number of Shares Cash -------- ---------------- ---- Japan Associated Finance Co., Ltd. ........................... 400,000 $ 400,000.00 JAFCO G-5 Investment Enterprise Partnership .................. 677,300 $ 677,300.00 JAFCO R-1(A) Investment Enterprise Partnership ............... 316,450 $ 316,450.00 JAFCO R-1(B) Investment Enterprise Partnership ............... 316,450 $ 316,450.00 JAFCO R-2 Investment Enterprise Partnership .................. 289,800 $ 289,800.00 Brentwood Associates VII, L.P. ............................... 2,000,000 $2,000,000.00 S.R. One Limited ............................................. 1,000,000 $1,000,000.00 Sprout Capital VII, L.P. ..................................... 1,078,430 $1,078,430.00 DLJ Capital Corporation ...................................... 89,768 $ 89,768.00 C.V. Sofinnova Ventures Partners III ......................... 194,699 $ 194,699.00 Singapore Bio-Innovations PTE, Ltd. .......................... 194,700 $ 194,700.00 Sequoia Capital VI ........................................... 863,442 $ 863,442.00 Sequoia Technology Partners VI ............................... 47,442 $ 47,442.00 Sequoia 95 ................................................... 37,953 $ 37,953.00 PaineWebber, Inc. FBO "Michael Grossman," IRA R/O ............ 8,985 $ 8,985.00 Steven M. Lash ............................................... 3,908 $ 3,908.00 Stephen J. Kandel ............................................ 19,525 $ 19,525.00 Byron T. Franzen ............................................. 58,411 $ 58,411.00 The M.L. Lawrence Trust ...................................... 77,880 $ 77,880.00 Farley Inc. .................................................. 292,050 $ 292,050.00 Sorrento Ventures II, L.P. ................................... 192,753 $ 192,753.00 Sorrento Growth Partners I, L.P. ............................. 391,346 $ 391,346.00 Comdisco, Inc. ............................................... 58,410 $ 58,410.00 The First National Bank of Chicago as Custodian to the Brinson Venture Capital Fund III, L.P. ............................... 515,868 $ 515,868.00 The First National Bank of Chicago as Custodian to the Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III ..................................................... 84,132 $ 84,132.00 Todd Schmidt ................................................. 8,065 $ 8,065.00 Vicente Anido ................................................ 240,000 $ 240,000.00 John T. Chambers (Anido designee) ............................ 240,000 $ 240,000.00 The Rufus L. McCracken Trust, dated 6/21/91 .................. 35,000 $ 35,000.00
118 SCHEDULE A SCHEDULE OF INVESTORS
Closing --------------------------------------- Investor Number of Shares Cash -------- ---------------- ---- Steve Teig.................................................. 20,000 $ 20,000.00 Forward Ventures II, L.P.................................... 100,000 $ 100,000.00 Lynn Caporale............................................... 6,438 $ 6,438.00 Faye Hunter Russell Trust U/A Dtd 7/11/88................... 10,000 $ 10,000.00 --------- ------------- TOTALS:............................................. 9,869,205 $9,869,205.00 ========= =============
119 SCHEDULE OF EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES This Schedule of Exceptions is made and given pursuant to Section 2 of the Series D Preferred Stock Purchase Agreement dated November 15, 1996 (the "Agreement") by and among CombiChem, Inc. ("CombiChem") and the investors listed on Schedule A thereto. The section numbers in this Schedule of Exceptions correspond to the section numbers in the Agreement; however, any information disclosed herein under any section number shall be deemed to be disclosed and incorporated into any other section number where such disclosure would otherwise be appropriate. Any terms defined in the Agreement shall have the same meaning when used in this Schedule of Exceptions as when used in the Agreement unless the context otherwise requires. Nothing herein constitutes an admission of any liability or obligation on the part of CombiChem nor an admission against CombiChem's interest. The inclusion of any schedule herein or any exhibit hereto should not be interpreted as indicating that CombiChem has determined that such an agreement or other matter is necessarily material to CombiChem. The Investors acknowledge that certain information contained in these schedules may constitute material confidential information relating to CombiChem which may not be used for any purpose other than that contemplated in the Agreement. 120 SCHEDULE 2.5 CAPITALIZATION AND VOTING RIGHTS Vicente Anido has been granted a right to purchase a number of shares sufficient to allow him to maintain a 6% ownership percentage in the Company upon future financings. A Consulting Group is to be paid $50,000 in shares of Capital Stock upon its completion of work. 121 SCHEDULE 2.7 CONTRACTS AND OTHER COMMITMENTS The Company is a party to the following agreements: (a) (i) Lease for 9050 Camino Santa Fe, San Diego, CA 92121 dated December 22, 1995. (ii) Industrial Lease for 1221 Innsbruck Drive, Sunnyvale, CA dated December 7, 1992. (iii) Second Sublease for 1225 Innsbruck Drive, Sunnyvale, CA and draft of Addendum No. 1. (iv) Pursuant to a License Agreement dated August 4, 1995 between the Company and Molecular Simulations Inc.("MSI"), the Company has agreed to pay to MSI royalties equal to: (A) in connection with the sale of a single product, the lesser of 5% of net sales of such product or $25,000; (B) in connection with the sale of more than one product in a single transaction, the sum of (I) with respect to the first product included in such transaction, the lesser of 5% of net sales of such product or $25,000 and (II) with respect to the additional products, a flat royalty of $5,000 per additional product; or (C) in connection with a collaboration or contract research project, the lesser of 2% of net sales for such collaboration or contract research project or $100,000. The maximum aggregate royalties payable under the agreement is $5.0 million. (v) Pursuant to the Sublicense Agreement dated July 20, 1995 between the Company and Johnson & Johnson (the "J&J Sublicense"), the Company has paid $40,000 to Johnson & Johnson and is required to make the following additional payments: (A) aggregate payments of $60,000 (subject to certain time and performance milestones) (B) an additional royalty of 1% of monetary compensation received in connection with a further sublicense of rights under the Agreement and (C) earned royalties 10% of net sales value of products sold under the agreement by the Company or affiliates or 10% of the royalty or other income received by the Company from sublicensee or third parties in consideration of granting of further sublicenses. (vi) See (c)(i) below. (vii) Pursuant to an agreement dated June 5, 1996 between the Company and Cerep, the Company will pay Cerep $50,000 in November or December 1996 in connection with a study of 2500 compounds. (viii) Pursuant to an agreement dated August 27, 1996 between the Company and DYAX CORP. ("Dyax"), the Company is required to pay Dyax an aggregate of $250,000 in increments of $50,000 at certain authorization or deliver events in connection with developing a separation and purification module. (ix) Standard Office Lease for 470 San Antonio Road, Palo Alto, CA 94306 dated October 29, 1996. Schedule 2.7 122 (b) (i) Preferred Stock Purchase Agreement (600,000 Shares of Series A Preferred Stock) dated August 26, 1994 between the Company and Forward Ventures II, L.P. (ii) Common Stock Purchase Agreement (225,000 Shares of Common Stock) dated September 28, 1994 between the Company and Forward Ventures II, L.P. (iii) Preferred Stock Purchase Agreement (200,000 Shares of Series Z Preferred Stock) dated October 12, 1994 between the Company and Dr. Sydney Brenner. (iv) Stock Purchase Agreement Preferred and Common (400,000 Shares of Series A Preferred Stock and 100,000 Shares of Common Stock) dated November 1, 1994 among the Company, Sequoia Capital VI, Sequoia Technology Partners VI and Sequoia XXIV. (v) Stock Purchase Agreement (Series B Preferred) dated November 29, 1994 among the Company, Sequoia Capital VI, Sequoia Technology Partners VI, Sequoia XXIV and Forward Ventures II, L.P. (vi) Stock Purchase Agreement (Series B Preferred) dated January 15, 1995 between the Company and Lynn H. Caporale, Ph.D. (vii) Common Stock Purchase Agreement dated March 20, 1995 between the Company and The Scripps Research Institute, as amended through the date hereof. (viii) The Company is party to the following Common Stock Purchase Agreements:
AMOUNT OF NAME DATE SHARES CURRENTLY OUT-STANDING UNDER AGMTS - ----------------------------------------------------------------------------- Kim D. Janda 09/28/94 175,000 Chi Huey Wong 09/28/94 150,000 Dale L. Boger 09/28/94 150,000 Eric Erb 09/28/94 10,000 Standish Fleming 09/28/94 37,500 Trustee of Royston Family Trust UTA 09/28/94 37,500 2/12/82 Sydney Brenner 09/28/94 150,000 Jeffrey Sollender 09/28/94 10,000 Lynn H. Caporale 11/08/94 175,000 Bobbie J. Bosley 11/18/94 10,000 Eric D. Erb 01/01/95 5,000
Schedule 2.7 123
AMOUNT OF NAME DATE SHARES CURRENTLY OUT-STANDING UNDER AGMTS - ----------------------------------------------------------------------------- Angelo J. Castellino 01/19/95 20,000 Peter A. Bick 01/23/95 20,000 Soan Cheng 01/23/95 20,000 Daniel C.M. Sun 01/30/95 10,000 Christine M. Tarby 04/24/95 14,000 Peter Myers 3/1/95 350,000 Steve Teig 6/2/95 200,000 Jonathon Greene 6/3/95 100,000
(ix) The Company has entered into Series J Option Agreements with each of Steven Teig, Jonathan Greene and Andrew Smellie, pursuant to which an aggregate of 465,000 shares of Series J Preferred Stock may be issued. (x) The Company had previously entered into (A) that certain Amended and Restated Stock Registration Rights Agreement dated November 1, 1994, as amended on November 29, 1994, January 15, 1995 and March 20, 1995 and (B) that certain Stock Registration Rights Agreement dated October 12, 1994 which granted to certain investors registration rights. These agreements were terminated pursuant to Investors' Rights Agreement. (xi) Warrant Agreement with Comdisco, Inc., dated December 20, 1994 (xii) Warrant Agreement with Sequoia Capital VI, dated August 17, 1995. (xiii) Warrant Agreement with Sequoia Technology Partners VI, dated August 17, 1995. (xiv) Warrant Agreement with Sequoia XXIV, dated August 17, 1995. (xv) Warrant Agreement with Paine Webber Incorporated as Custodian of the Michael Grossman Rollover IRA, dated August 17, 1995. (xvi) Warrant Agreement with First Interstate Bank as Trustee of SK International Securities Corp. 401(k) PS EM Stephen J. Kandel, dated August 17, 1995. (xvii) Warrant Agreement with Forward Ventures II, L.P., dated August 17, 1995. (xviii) Warrant Agreement with Steven M. Lash, dated August 17, 1995. (xix) Two Warrant Agreements with Comdisco, Inc., dated April 15, 1996. (xx) Warrant Agreement with Silicon Valley Bank, dated May 20, 1996. (xxi) Warrant Agreement with MMC/GATX Partnership No. 1, dated May 20, 1996. (xxii) Warrant Agreement with Comdisco, Inc., dated June 27, 1996. (xxiii) The Company entered into a consulting agreement with Ken Rubenstein pursuant to which Mr. Rubenstein received 6,000 shares of the Company's common stock. Schedule 2.7 124 (xxiv) Stock Purchase Agreement (Series C Preferred) dated August 17, 1995 among the Company and the persons listed on Schedule A thereto. (xxv) Stock Purchase Agreement (Series C Preferred) dated April 9, 1996 among the Company and the persons listed on Schedule A thereto. (c) (i) Master Lease Agreement with Comdisco, Inc. ("Comdisco") dated November 16, 1994. (ii) The Company has made a loan to Peter Myers in the principal amount of $150,0 00. (iii) The Company loaned $66,125 to John Saunders for purchase of a home; this loan is secured by a deed of trust. (iv) Loan and Security Agreement by and among Silicon Valley Bank and MMC/GATX Partnership No. 1 dated as of May 20, 1996. (d) (i) The Company is party to employment agreements with the following individuals: Lynn H. Caporale; Peter Myers; Jonathan Greene; L. McCracken; J. Saunders; Steven Teig; Andrew Smellie; and Vicente Anido. In addition, the Company is a party to offer letters and/or memoranda with the following employees in which certain terms and conditions of the employee's employment are set forth: Lucilla Andrews; D. Barnum; S. Bondy; B. Bosley; A. Castellino; R. Chavez; S. Cheng; D. Comer; K. Dyer; Eric Erb; T. Fitzpatrick; K. Granlund-Moyer; D. Kassel; V. Matov; W. Moree; A. Purshottham; M. Ramirez-Weinhouse; S. Ross; M. Ruis; M. Salkin; B. Shroyer; C. Smith; C. Tarby; J. Williams; L. Zeng. (ii) The Company is a party to the following consulting agreements: H. Kiefer (dated 01/19/96); Dale L. Boger (dated 05/01/94); Kim D. Janda (dated 08/09/94); Sydney Brenner (dated 08/10/94); Chi-Huey Wong (dated 08/11/94) and an ongoing relationship with a consulting group for team building and leadership. The Company entered into a letter agreement dated July 25, 1995 with Transpect Incorporated ("Transpect") pursuant to which Transpect is retained as an advisor and consultant with respect to the establishment of a relationship with Daiichi Pharmaceutical Co., Ltd (or any company mutually agreed to). In addition, the Company is a party to Scientific Advisory Board Agreement with the following individuals: A. Bard (dated 09/07/95); D. Danishefsky (dated 04/08/95); W. Jorgensen (dated 05/18/95). (e) (i) Agreement for Purchase and Sale of Assets dated September 28, 1994 among the Company, Combichem, Inc., a Delaware corporation, KPCB VI and KPCB IV-FF. (ii) License Agreement with The Scripps Research Institute ("Scripps License"). (iii) Assignments of Dr. Sydney Brenner. (iv) Sublicense Agreement dated July 20, 1995 between the Company and Johnson & Johnson. Schedule 2.7 125 (v) Option Agreement with The Scripps Research Institute ("Scripps Option"). (vi) Evaluation Study and Test Site Agreement between the Company and Chugai Pharmaceutical pursuant to which Chugai has paid to the Company an amount equal to $300,000 in order to Beta Test the Company's product, which sum may be applied to future purchases of the Company's products, and a portion of which sum the Company may be required to return to Chugai in certain circumstances. (vii) Collaboration Agreement dated on or about March 29, 1996 between the Company and Teijin Limited to design, synthesize and screen compound libraries for *** and *** . The Company retains all rights with respect to compounds in North America, Central America and South America subject to an option to acquire such rights granted to Teijin. Teijin retains all rights with respect to compounds in all other territories. The Company is entitled to receive a *** upfront fee, milestone payments, annual research funding and royalties from Teijin. (viii) License and Test Site Agreement by and between the Company and H. LUNDBECK A/S, a Danish corporation ("Lundbeck") dated May 20, 1996 pursuant to which Lundbeck may pay $200,000 to the Company, which sum may be applied to future purchases of the Company's products. To date, Lundbeck has paid the Company $120,000. (ix) The Company has entered into a collaborative agreement with Roche Bioscience pursuant to which certain rights are licensed. (x) See (a) above. (f) The Company has entered into indemnification agreements with each of the directors of the Company. In addition, other agreements listed in this Schedule of Exceptions may contain indemnification provisions. The Investors' Rights Agreement also contains indemnification agreements. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Schedule 2.7 126 (I) None. (II) See (a) above. (III) See (c)(ii) and (c)(iii) above. (IV) See (a)(iv) and (a)(v) above. In connection with the MSI transaction discussed above and in addition to the agreements noted above, the Company also entered into a separate License Agreement (pursuant to which it obtained a license to certain MSI products), an Acknowledgement and General Release (pursuant to which the operation of certain sections of Mr. Teig's prior contracts with MSI were waived and the Company and Mr. Teig were released from claims arising out of such released sections of the contracts). The Company has performed all obligations and conditions required to be performed or met by it through the date hereof under each of the Scripps License and Scripps Option. The Scripps License is in full force and effect, and the Scripps Option has not been exercised, as of the date hereof. The Company will use its best efforts not to waive any rights of the Company under the Scripps License or Scripps Option, without the consent of a majority of the outstanding shares of Series C and D Preferred Stock (and shares of the Company's capital stock issuable upon exchange or conversion of the Series C and D Preferred Stock). Schedule 2.7 127 SCHEDULE 2.8 RELATED-PARTY TRANSACTIONS Venture capital funds affiliated with directors participated in the Company's prior rounds of financing and will purchase shares of the Company's Series D Preferred Stock pursuant to the Agreement. Such directors may engage in the development and financing of other companies and/or research projects which may be developing, or may in the future develop, products which may compete directly, or indirectly, with the products intended to be developed by the Company. See Schedule 2.7(c) above. Schedule 2.8 128 SCHEDULE 2.9 REGISTRATION RIGHTS The Company is obligated to register shares of Common Stock issuable upon conversion of Series Z Preferred Stock and Series C Preferred Stock issuable upon exercise of warrants issued (or to be issued) in connection with the Company's equipment lease lines. Schedule 2.9 129 SCHEDULE 2.10 PERMITS The Company is in the process of obtaining permits in connection with certain tenant improvements being made, or planned to be made at the Company's facility at 9050 Camino Santa Fe, San Diego, CA 92121; compliance of such improvements with the American Disability Act has not yet been approved. Schedule 2.10 130 SCHEDULE 2.15 TITLE TO PROPERTY AND ASSETS; LEASES Under the terms of the Company's lease lines, Comdisco retains all rights to the equipment purchased under such lines, with the Company having an option to purchase at the completion of the term of the agreement. Under the terms of the Loan and Security Agreement by and among the Company, Silicon Valley Bank and MMC/GATX Partnership No. 1, Combichem Corporation retains all rights to the equipment, fixtures and personal property purchased using such funds, subject to security interest of lessors. Schedule 2.15 131 SCHEDULE 2.16 FINANCIAL STATEMENTS The contingent severance payments due under certain employment arrangements with the Company's employees are not reflected on the August 31, 1996 financial statements. Schedule 2.16 132 SCHEDULE 2.18 PATENTS AND TRADEMARKS The Company filed intent to use application Serial No. 74/363,514 with the United States Patent and Trademark Office ("PTO") to register the mark COMBICHEM on February 26, 1993 in Class 42 for the services of combinatorial chemistry and molecular biology research and analysis. The application was inadvertently abandoned and a petition to revive the application, filed on June 14, 1995 with the PTO was rejected. The Company filed a duplicate application Serial No. 74/684,382 on June 5, 1995 in case the petition to revive was denied. This application was suspended pending resolution of a prior application. The Company filed intent to use application Serial No. 74/363,515 to register the mark COMBICHEM on February 26, 1993 in Class 5 for the pharmaceuticals and chemical compounds. The application was inadvertently abandoned and a petition to revive the application was rejected. The Company filed a duplicate application Serial No. 74/599,352 on November 15, 1994. This application was suspended pending resolution of a prior application for the Company. An intent to use application for the mark COMBISYN was filed by the Company on February 13, 1995, and a Notice of Allowance was issued by the PTO on September 3, 1996. Upon the filing of an acceptable Statement of Use, the application will proceed to registration. The application was filed in Class 9 for scientific apparatus for use in synthesizing by combinatorial chemistry small molecules for use in scientific research. An intent to use application for the mark COMBIWARE was filed by the Company November 7, 1995 and was approved for publication by the PTO. The application was filed in Class 9 for computer software for use in scientific research, mainly, for the design and maintenance of chemical libraries and the automation of molecular synthesis in the field of combinatorial chemistry, an instruction and user manual sold as a unit therewith. In connection with the MSI License Agreement, the Company received certain licenses to use MSI proprietary technology and granted to MSI an exclusive option to negotiate a distribution agreement with respect to a stand-alone chemical diversity measure software program. The J&J Sublicense contains a grant-back of a non-exclusive irrevocable royalty-free license (with the right to sublicense affiliates) under all patent improvements for the term of the agreement. See Schedule 2.7. The Company has applied for a patent application entitled "A TEMPLATE FOR SOLUTION PHASE SYNTHESIS OF COMBINATORIAL LIBRARIES", Docket Number 215/288, as of October 17, 1995. Schedule 2.18 133 Hansruedi Kiefer assigned the Company all rights, title and interest in and to the work described as and/or entitled the CombiSyn Synthesizer pursuant to an Assignment Agreement dated as of January 1, 1996 and a Copyright Assignment dated January 19, 1996. Schedule 2.18 134 SCHEDULE 2.19 MANUFACTURING AND MARKETING RIGHTS Pursuant to the MSI License Agreement, the Company has granted to MSI an exclusive option to negotiate a distribution agreement with respect to a stand-alone chemical diversity measure software program. LJL Biosystems, Inc. has rights to manufacture original prototypes only; these prototypes were revised, and currently LJL Biosystems, Inc. is not manufacturing prototypes. Schedule 2.19 135 SCHEDULE 2.23 INSURANCE The Company has covenanted to certain investors to maintain key man life insurance on the life of Steven Tieg in the amount of $2,000,000. The Company currently maintains only $1,350,000 in insurance on the life of Mr. Tieg. EX-10.9 15 EXHIBIT 10.9 1 EXHIBIT 10.9 COMBICHEM, INC. AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT November 15, 1996 2 TABLE OF CONTENTS
Page ---- SECTION 1 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS.................................................. 1 1.1 Certain Definitions.................................................. 1 1.2 Requested Registration............................................... 3 1.3 Company Registration................................................. 6 1.4 Expenses of Registration............................................. 7 1.5 Registration on Form S-3............................................. 8 1.6 Registration Procedures.............................................. 8 1.7 Indemnification...................................................... 10 1.8 Information by Holder................................................ 12 1.9 Limitations on Registration of Issues of Securities.................. 13 1.10 Rule 144 Reporting................................................... 13 1.11 Transfer or Assignment of Registration Rights........................ 13 1.12 Restrictions on Transfer............................................. 14 1.13 "Market Stand-Off" Agreement......................................... 15 1.14 Allocation of Registration Opportunities............................. 15 1.15 Delay of Registration................................................ 16 1.16 Termination of Registration Rights................................... 16 SECTION 2 COVENANTS OF THE COMPANY............................................. 16 2.1 Basic Financial Information.......................................... 16 2.2 Additional Information and Rights.................................... 17 2.3 Right of First Refusal............................................... 18 2.4 Key Person Life Insurance............................................ 20 2.5 Representation on Board of Directors................................. 21 2.6 Termination of Covenants............................................. 21 SECTION 3 MISCELLANEOUS........................................................ 21 3.1 Governing Law........................................................ 21 3.2 Successors and Assigns............................................... 21 3.3 Entire Agreement; Amendment; Waiver.................................. 21 3.4 Notices, etc......................................................... 22 3.5 Delays or Omissions.................................................. 22 3.6 Rights; Separability................................................. 22 3.7 Information Confidential............................................. 22 3.8 Titles and Subtitles................................................. 23 3.9 Counterparts......................................................... 23
3 AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT This Amended and Restated Investors' Rights Agreement (this "Agreement") is made and entered into as of the 15th day of November, 1996 by and among CombiChem, Inc., a California corporation (the "Company"), and the persons identified on Exhibit A attached hereto (the "Investors"). RECITALS WHEREAS, certain of the Investors possess registration rights pursuant to that certain Investors' Rights Agreement dated August 17, 1995, as amended through the date hereof between the Company and such Investors (the "Rights Agreement") and certain of the Investors possess information rights, rights of first refusal and other rights, and the Company is obligated thereunder, pursuant to the Rights Agreement; and WHEREAS, the Rights Agreement may be modified or amended with the written consent of the Company and the holders of a majority of the Registrable Securities (as defined in the Rights Agreement) then outstanding; and WHEREAS, the Investors which are parties thereto, which Investors hold at least a majority of the Registrable Securities, desire to amend and restate the Rights Agreement and to accept the rights created pursuant hereto in lieu of the rights granted to them under the Rights Agreement; and WHEREAS, certain Investors are parties to the Series D Preferred Stock Purchase Agreement dated as of the date hereof among the Company and such Investors (the "Series D Agreement"), certain of the Investors' obligations under which are conditioned upon the execution and delivery by such Investors and the Company of this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the Investors who are parties to the Rights Agreement agree that the Rights Agreement shall be amended and restated in its entirety as set forth herein, and all parties hereto further agree as follows: SECTION 1 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: -1- 4 (a) "Closing" shall mean the date of the initial sale of shares of the Company's Series D Preferred Stock. (b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (c) "Holder" shall mean any Investor who holds Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 1.11 hereof. (d) "Initial Offering" shall mean the Company's first firm commitment underwritten public offering of its Common Stock registered under the Securities Act. (e) "Initiating Holders" shall mean any Holder or Holders who in the aggregate hold not less than fifty percent (50%) of the outstanding Registrable Securities. For purposes of such calculation, Holders of Shares shall be considered to hold the shares of Common Stock then issuable upon conversion of such Shares. (f) "JAFCO Funds" shall mean Japan Associated Finance Co., Ltd. ("JAFCO") and certain Investment Enterprise Partnerships affiliated with JAFCO which are holders of Shares. (g) "Other Shareholders" shall mean persons other than Holders who, by virtue of agreements with the Company, are entitled to include their securities in certain registrations. (h) "Registrable Securities" shall mean (i) shares of Common Stock issued or issuable pursuant to the conversion of the Shares and (ii) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to or in exchange for or in replacement of the shares referenced in (i) above; provided, however, that Registrable Securities shall not include any such securities sold by a person to the public either pursuant to a registration statement or Rule 144 or sold in a private transaction in which the transferor's rights under this Section 1 are not assigned. (i) The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. -2- 5 (j) "Registration Expenses" shall mean all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, fees and disbursements of one counsel for the Holders (solely with respect to registrations pursuant to Sections 1.2 and 1.3 hereof), blue sky fees and expenses, expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). (k) "Rule 144" shall mean Rule 144 as promulgated by the SEC under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the SEC. (l) "Rule 145" shall mean Rule 145 as promulgated by the SEC under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the SEC. (m) "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (n) "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time, corresponding to such act. (o) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel for any Holder (other than the fees and disbursements of the one counsel included in Registration Expenses). (p) "Shares" shall mean shares of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series Z Preferred Stock, Series A-1 Preferred Stock, Series B-1 Preferred Stock, Series C-1 Preferred Stock and Series D-1 Preferred Stock held by the Investors. 1.2 Requested Registration. (a) Request for Registration. If the Company shall receive from Initiating Holders at any time or times not earlier than the earlier of (i) January 1, 1998 or (ii) six (6) months after the effective date of the first registration statement filed by the Company covering an underwritten offering of any of its securities to the general public, a written request specifying that it is made pursuant to this Section 1.2 that the Company effect a registration with respect to all or a part of the Registrable Securities having a reasonably -3- 6 anticipated aggregate offering price, net of underwriting discounts and commissions, that exceeds $12,000,000, the Company will: (i) promptly give written notice of the proposed registration to all other Holders; and (ii) as soon as practicable, use its diligent best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with the Securities Act) as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is effective. The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 1.2: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; or (B) After the Company has effected two such registrations pursuant to this Section 1.2(a) and such registrations have been declared or ordered effective; or (C) During the period starting with the date of filing of and ending on a date one hundred eighty (180) days after the effective date of a registration pursuant to Section 1.3 hereof; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (D) If the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made under Section 1.5 hereof. (b) Subject to the foregoing Section 1.2(a)(ii) (A) through (D), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Initiating Holders; provided, however, that if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be seriously detrimental to the Company and the Board of Directors of the Company concludes, as a result, that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such Holders a -4- 7 certificate signed by the president of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing for the period during which such disclosure would be seriously detrimental, provided, that the Company may not defer the filing for a period of more than ninety (90) days after receipt of the request of the Initiating Holders, and, provided further, that (except as provided in Section 1.2(a)(ii)(C) above) the Company shall not defer its obligation in this manner more than once in any twelve-month period. The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 1.2(b) and 1.14 hereof, include other securities of the Company and may include securities of the Company being sold for the account of the Company. (c) Underwriting. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 1.2 and the Company shall include such information in the written notice referred to in Section 1.2(a)(i) above. The right of any Holder to registration pursuant to Section 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder with respect to such participation and inclusion) to the extent provided herein. A Holder may elect to include in such underwriting all or a part of the Registrable Securities he holds. (d) Procedures. If the Company shall request inclusion in any registration pursuant to Section 1.2 of securities being sold for its own account, or if other persons shall request inclusion in any registration pursuant to Section 1.2, the Initiating Holders shall, on behalf of all Holders, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 1 (including Section 1.13). The Company shall (together with all Holders, and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders, which underwriter(s) are reasonably acceptable to the Company. Notwithstanding any other provision of this Section 1.2, if the representative of the underwriters advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of shares to be included in the underwriting or registration shall be allocated as set forth in Section 1.14 hereof. If the person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the Initiating Holders. The securities so excluded shall also be withdrawn from -5- 8 registration. Any Registrable Securities or other securities excluded shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 1.2(d), then the Company shall offer to all holders who have retained rights to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares withdrawn, with such shares to be allocated among such Holders requesting additional inclusion in accordance with Section 1.14. 1.3 Company Registration. (a) Company Registration. If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights (other than pursuant to Section 1.2 hereof), other than a registration relating solely to employee benefit plans, or a registration relating solely to a Rule 145 transaction, or a registration on any registration form which does not permit secondary sales, or the first registration under the Securities Act filed by the Company for an offering of its securities to the general public, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) use its best efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 1.3(b) below, and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder within twenty (20) days after the written notice from the Company described in Section 1.3(a)(i) above is effective. Such written request may specify all or a part of a Holder's Registrable Securities for inclusion. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 1.3(a)(i). In such event the right of any Holder to registration pursuant to Section 1.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the holders of other securities of the Company distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding any other provision of this Section 1.3, if the representative of the underwriters advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitations set forth below) exclude all Registrable Securities from, or limit the number of Registrable -6- 9 Securities to be included in, the registration and underwriting. The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account and thereafter as set forth in Section 1.14. If any person does not agree to the terms of any such underwriting, he shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration or if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion in accordance with Section 1.14 hereof. 1.4 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Sections 1.3 and 1.5 hereof, and the first two registrations pursuant to Section 1.2 hereof shall be borne by the Company; provided, however, that if the Holders bear the Registration Expenses for any registration proceeding begun pursuant to Section 1.2 and subsequently withdrawn by the Holders registering shares therein, such registration proceeding shall not be counted as a requested registration pursuant to Section 1.2 hereof, except in the event that such withdrawal is based upon material adverse information relating to the Company that is different from the information known or available (upon request from the Company or otherwise) to the Holders requesting registration at the time of their request for registration under Section 1.2, in which event such registration shall not be treated as a counted registration for purposes of Section 1.2 hereof even though the Holders do not bear the Registration Expenses for such registration. All Selling Expenses relating to securities so registered shall be borne by the holders of such securities pro rata on the basis of the number of shares of securities so registered on their behalf. 1.5 Registration on Form S-3. (a) After the Initial Offering, the Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form or forms. After the Company has qualified for the use of Form S-3, in addition to the rights contained in the foregoing provisions of this Section 1, the Holders of Registrable Securities shall have the right to request registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holder or Holders), provided, however, that the Company shall not be obligated to effect any such registration if (i) the Holders, together with the -7- 10 holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) on Form S-3 at an aggregate price to the public of less than $500,000, or (ii) in the event that the Company shall furnish the certification described in paragraph 1.2(a)(ii) (but subject to the limitations set forth therein) or (iii) in a given twelve-month period, after the Company has effected one (1) such registration in any such period. (b) If a request complying with the requirements of Section 1.5(a) hereof is delivered to the Company, the provisions of Sections 1.2(a)(i) and (ii) and Section 1.2(b) hereof shall apply to such registration. If the registration is for an underwritten offering, the provisions of Sections 1.2(c) and 1.2(d) hereof shall apply to such registration. 1.6 Registration Procedures. In the case of each registration effected by the Company pursuant to Section 1, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use its best efforts to: (a) Keep such registration effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that (i) such 120-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment which (I) includes any prospectus required by Section 10(a)(3) of the Securities Act or (II) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (I) and (II) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish such number of prospectuses and other documents incident thereto, including any preliminary prospectus or amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; -8- 11 (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act on the happening of any event as a result of which the prospectus included in such registration statement, 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 not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an 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 or incomplete in the light of the circumstances then existing; (e) Use all reasonable efforts to register and qualify the securities covered by the registration statement under such other securities or Blue Sky laws of such jurisdiction as shall be reasonably requested by the Holders; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such state or jurisdiction; (f) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; (g) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; (h) Otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve (12) months, but not more than eighteen (18) months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section II(a) of the Securities Act; (i) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 1.2 hereof, the Company will enter into an underwriting agreement reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting agreement contains customary underwriting provisions and provided further that if the underwriter so requests the underwriting agreement will contain customary contribution provisions; and (j) Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the -9- 12 underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that such registration statement with respect to such securities becomes effective, (A) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (B) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. 1.7 Indemnification. (a) The Company will indemnify each Holder, each of its officers, directors and partners, legal counsel and accountants and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 1 and each underwriter, if any, and each person who controls within the meaning of Section 15 of the Securities Act any underwriter, against all expenses, claims, losses, damages and liabilities (or actions, proceedings or settlements in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors, partners, legal counsel and accountants and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein. It is agreed that the indemnity agreement contained in this Section 1.7(a) 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 the Company (which consent has not been unreasonably withheld). -10- 13 (b) Each Holder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors, officers, partners, legal counsel and accountants and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, each other such Holder and Other Shareholder and each of their officers, directors and partners, and each person controlling such Holder or Other Shareholder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Holders, Other Shareholders, directors, officers, partners, legal counsel and accountants, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated specifically for use therein, provided, however, that the obligations of such Holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld). (c) Each party entitled to indemnification under this Section 1.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1, to the extent such failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. -11- 14 (d) If the indemnification provided for in this Section 1.7 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. 1.8 Information by Holder. Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 1. 1.9 Limitations on Registration of Issues of Securities. From and after the date of this Agreement, the Company shall not, without the prior written consent of a majority in interest of the Holders, enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are more favorable than the registration rights granted to the Holders hereunder. 1.10 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; -12- 15 (b) File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; (c) So long as a Holder owns any Registrable Securities, furnish to the Holder forthwith upon written request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Holder to sell any such securities without registration. 1.11 Transfer or Assignment of Registration Rights. The rights to cause the Company to register securities granted to a Holder by the Company under Sections 1.2, 1.3 and 1.5 may be transferred or assigned by a Holder only to a transferee or assignee of not less than 25,000 shares of Registrable Securities (as presently constituted and subject to subsequent adjustments for stock splits, stock dividends, reverse stock splits and the like), and only provided that the Company is given written notice at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and provided further that the transferee or assignee of such rights assumes the obligations of such Holder under this Article 1. 1.12 Restrictions on Transfer. (a) Each Holder agrees not to transfer or dispose of all or any portion of the Registrable Securities unless and until the proposed transferee has agreed in writing for the benefit of the Company to be bound by this Section 1.12, provided and to the extent this Section 1.12 is then applicable and: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) Such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (B) if requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, to the effect that such disposition will not require registration of such shares under the Securities Act. -13- 16 Notwithstanding the provisions of subsections (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer (A) by a Holder which is a partnership to its partners or retired partners in accordance with partnership interests, (B) to a Holder's family member or trust for the benefit of an individual Holder, provided that the transferee will be subject to the terms of this Section 1.12 to the same extent as if he were an original Holder hereunder, or (C) pursuant to Rule 144(k); provided, however, that the Company must be satisfied in its reasonable discretion that the proposed sale of securities fully qualifies with all Rule 144 requirements. (b) Each certificate representing Registrable Securities shall (unless otherwise permitted by the provisions of this Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws): "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." 1.13 "Market Stand-Off" Agreement. If requested by the Company and an underwriter of Common Stock (or other securities) of the Company, an Investor shall not sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by such Investor (other than those included in the registration) during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act, provided that all Holders and officers and directors of the Company enter into similar agreements. The obligations described in this Section 1.13 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms which may be promulgated in the future, or a registration relating solely to a Rule 145 transaction on Form S-4, Form S-14 or Form S-15 or similar forms which may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 1.14 Allocation of Registration Opportunities. In any circumstance in which all of the Registrable Securities and other shares of Common Stock of the Company (including shares of Common Stock issued or issuable upon conversion of shares of any currently unissued series of Preferred Stock of the Company) with registration rights (the "Other Shares") requested to be included in a registration on behalf of the Holders or other -14- 17 selling shareholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares which may be so included, the number of shares of Registrable Securities and Other Shares which may be so included shall be allocated among the Holders and other selling shareholders requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling shareholders, assuming conversion; provided, however, that, so that such allocation shall not operate to reduce the aggregate number of Registrable Securities and Other Shares to be included in such registration, if any Holder or other selling shareholder does not request inclusion of the maximum number of shares of Registrable Securities and Other Shares allocated to him pursuant to the above-described procedure, the remaining portion of his allocation shall be reallocated among those requesting Holders and other selling shareholders whose allocations did not satisfy their requests pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling shareholders, assuming conversion, and this procedure shall be repeated until all of the shares of Registrable Securities and Other Shares that may be included in the registration on behalf of the Holders and other selling shareholders have been so allocated. The Company shall not limit the number of Registrable Securities to be included in a registration pursuant to this Agreement in order to include shares held by shareholders with no registration rights or to include Founder's Stock or any other shares of stock issued to employees, officers, directors or consultants pursuant to the Company's stock option plan, or with respect to registrations under Sections 1.2 or 1.5 hereof, in order to include in such registration securities registered for the Company's own account or included at the request of the Company pursuant to Section 1.3 hereof without the prior written consent of seventy percent (70%) of the Holders; provided, further, that in no event will the amount of securities of the selling Holders included in a registration pursuant to Section 1.3 hereof be reduced below twenty percent (20%) of the total amount of securities included in such offering, unless such offering is the Initial Offering of the Company's securities in which case the selling shareholders may be excluded entirely if the underwriters make the determination described above and no other shareholder's securities are included. For purposes of determining allocation hereunder, (a) for any selling shareholder which is a Holder of Registrable Securities and which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons will be deemed to be a single "selling shareholder," and (b) all of the JAFCO Funds together shall be deemed to be a "selling shareholder." Any pro-rata reduction with respect to any such "selling shareholder" will be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "selling shareholder." 1.15 Delay of Registration. No Holder shall have any right to take any, action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 1. -15- 18 1.16 Termination of Registration Rights. The right of any Holder to request registration or inclusion in any registration pursuant to Sections 1.2, 1.3 or 1.5 shall terminate on the closing of the first Company-initiated registered public offering of Common Stock of the Company, provided that all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period, or on such date after the closing of the first Company-initiated registered public offering of Common Stock of the Company as all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period. SECTION 2 COVENANTS OF THE COMPANY The Company hereby covenants and agrees, so long as any Holder owns any Registrable Shares as follows: 2.1 Basic Financial Information. The Company will furnish the following reports to each Holder: (a) As soon as practicable after the end of each fiscal year of the Company, and in any event within ninety (90) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such fiscal year, and consolidated statements of income and sources and applications of funds of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by independent public accountants of recognized national standing selected by the Company. (b) As soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and consolidated statements of income and sources and applications of funds of the Company and its subsidiaries for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year and to the Company's operating plan then in effect and approved by its Board of Directors, subject to changes resulting from normal year-end audit adjustments, all in reasonable detail and certified by the principal financial or accounting officer of the Company, except that such balance sheet need not contain the notes required by generally accepted accounting principles. 2.2 Additional Information and Rights. -16- 19 (a) The Company will permit any Investor, so long as such Investor or its representative (treating all the JAFCO Funds as a single Investor) owns at least 500,000 Shares, or such number of shares of Common Stock issued upon conversion of 500,000 or more Shares, or any combination thereof (as presently constituted and subject to subsequent adjustment for stock splits, stock dividends, reverse stock splits, recapitalizations and the like) (a "Significant Holder") (or a representative of any Significant Holder) to visit and inspect any of the properties of the Company, including its books of account and other records (and make copies thereof and take extracts therefrom), and to discuss its affairs, finances and accounts with the Company's officers and its independent public accountants, all at such reasonable times and as often as any such person may reasonably request. (b) Until the earlier to occur of (i) the date on which the Company is subject to the reporting requirements of Sections 13(a) or 15(d) of the Exchange Act, or (ii) the date on which quotations for the Common Stock of the Company are reported by the automated quotations systems operated by the National Association of Securities Dealers, Inc., or by an equivalent quotations system, the Company will deliver the reports described below in this Section 2.2 to each Significant Holder: (i) As soon as practical after the end of each month and in any event within thirty (30) days thereafter a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such month and consolidated statements of income and of sources and applications of funds of the Company and its subsidiaries, for each month and for the current fiscal year of the Company to date, all subject to normal year-end audit adjustments, prepared in accordance with generally accepted accounting principles consistently applied and certified by the principal financial or accounting officer of the Company, together with a comparison of such statements to the corresponding periods of the prior fiscal year and to the Company's operating plan then in effect and approved by its Board of Directors. (c) The provisions of Section 2.1 and this Section 2.2 shall not be in limitation of any rights which any Holder or Significant Holder may have with respect to the books and records of the Company and its subsidiaries, or to inspect their properties or discuss their affairs, finances and accounts, under the laws of the jurisdictions in which they are incorporated. (d) Anything in Section 2 to the contrary notwithstanding, no Holder or Significant Holder by reason of this Agreement shall have access to any trade secrets or classified information of the Company. Each Significant Holder hereby agrees to hold in confidence and trust and not to misuse or disclose any confidential information provided pursuant to this Section 2.2. (e) Each Holder who represents to the Company that it is a "venture capital operating company" for purposes of Department of Labor Regulation Section 2510.3-101 -17- 20 shall in addition have the right to consult with and advise the officers of the Company as to the management of the Company. 2.3 Right of First Refusal. The Company hereby grants to each Holder and its affiliates who own any shares of Series A, Series B, Series C, Series D, Series A-1, Series B-1, Series C-1 or Series D-1 Preferred Stock (the "Cash Preferred") or any shares of Common Stock issued upon conversion of the Cash Preferred (the "Rights Holder") the right of first refusal to purchase a Pro Rata Share (as defined in this Section 2.3) of New Securities (as defined in this Section 2.3) which the Company may, from time to time, propose to sell and issue. A Rights Holder's Pro Rata Share, for purposes of this right of first refusal, is the ratio of the number of shares of Common Stock owned by such Rights Holder immediately prior to the issuance of New Securities, assuming full conversion of the Shares, to the total number of shares of Common Stock outstanding immediately prior to the issuance of New Securities, assuming full conversion of the Shares and exercise of all outstanding rights, options and warrants to acquire Common Stock of the Company. For purposes of this Section 2.3, each of the JAFCO Funds shall be deemed to have purchased its Pro Rata Share if one or more of the JAFCO Funds shall have purchased an amount of New Securities equal to the Pro Rata Share of the JAFCO Funds in the aggregate. Each Rights Holder shall have a right of over-allotment such that if any Rights Holder fails to exercise its right hereunder to purchase its pro rata share of New Securities, the other Rights Holders may purchase the non-purchasing Rights Holder's portion on a pro rata basis within ten (10) days from the date such non-purchasing Rights Holder fails to exercise its right hereunder to purchase its Pro Rata Share of New Securities. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock (including Common Stock and/or Preferred Stock) of the Company whether now authorized or not, and rights, options or warrants to purchase such capital stock, and securities of any type whatsoever that are, or may become, convertible into capital stock; provided that the term "New Securities" does not include (i) securities purchased under the Series D Agreement; (ii) securities issued upon conversion of the Shares; (iii) securities issued pursuant to the acquisition of another business entity or business segment of any such entity by the Company by merger, purchase of substantially all the assets or other reorganization whereby the Company will own not less than fifty-one percent (51%) of the voting power of such business entity or business segment of any such entity; (iv) any borrowings, direct or indirect, from financial institutions or other persons by the Company, whether or not presently authorized, including any type of loan or payment evidenced by any type of debt instrument, provided such borrowings do not have any equity features including warrants, options or other rights to purchase capital stock and are not convertible into capital stock of the Company; (v) securities issued to employees, consultants, officers or directors of the Company pursuant to any stock option, stock purchase or stock bonus plan, agreement or arrangement approved by the Board of Directors; (vi) securities issued to vendors or customers or to other persons in similar commercial situations with the Company if such issuance is approved by the Board of -18- 21 Directors; (vii) securities issued in connection with obtaining lease financing, whether issued to a lessor, guarantor or other person; (viii) securities issued in a firm commitment underwritten public offering pursuant to a registration under the Securities Act with an aggregate offering price to the public in excess of $5.0 million; (ix) securities issued in connection with any stock split, stock dividend or recapitalization of the Company; and (x) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of New Securities pursuant to subsections (i) through (ix) above. (b) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Rights Holder written notice of its intention, describing the type of New Securities, and their price and the general terms upon which the Company proposes to issue the same. Each Rights Holder shall have twenty (20) days after any such notice is effective to agree to purchase such Rights Holder's Pro Rata Share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) In the event the Rights Holders fail to exercise fully the right of first refusal within said twenty (20)-day period and after the expiration of the ten (10)-day period for the exercise of the over-allotment provisions of this Section 2.3, the Company shall have one hundred twenty (120) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within one hundred twenty (120) days from the date of said agreement) to sell the New Securities respecting which the Rights Holders' right of first refusal option set forth in this Section 2.3 was not exercised, at a price and upon terms no more favorable to the purchasers thereof than specified in the Company's notice to Rights Holders pursuant to Section 2.3(b). In the event the Company has not sold within said one hundred twenty (120)-day period or entered into an agreement to sell the New Securities within said one hundred twenty (120)-day period (or sold and issued New Securities in accordance with the foregoing within one hundred twenty (120) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first again offering such securities to the Rights Holders in the manner provided in Section 2.3(b) above. (d) At any time following the date of this Agreement, if the Company has complied with its notice obligations pursuant to this Section 2.3, or such obligations have been waived, and the Company thereafter proceeds to issue or sell New Securities and a Rights Holder does not acquire his, her or its Pro Rata Share (a "NonParticipating Rights Holder"), then all of such Non-Participating Rights Holder's Cash Preferred shall automatically and without further action on the part of such holder be converted, in accordance with the provisions of Article III(B)(4)(m) of the Company's Amended and Restated Articles of Incorporation. (e) The right of first refusal granted under this Agreement shall expire upon, and shall not be applicable to, the first sale of Common Stock of the Company -19- 22 to the public effected pursuant to a registration statement filed with, and declared effective by, the SEC under the Securities Act, with proceeds of more than $5,000,000. (f) The right of first refusal set forth in this Section 2.3 may not be assigned or transferred, except that (i) such right is assignable by each Rights Holder to any wholly owned subsidiary or parent of, or to any corporation or entity that is, within the meaning of the Securities Act, controlling, controlled by or under common control with, any such Rights Holder, and (ii) such right is assignable between and among any of the Rights Holders. 2.4 Key Person Life Insurance. The Company has as of the date hereof obtained from financially sound and reputable insurers term life insurance on the life of Steve Teig in the amount of [$2,000,000] (the "Teig Insurance"), and shall maintain with financially sound and reputable insurers the Teig Insurance except as otherwise decided in accordance with policies adopted by the Company's Board of Directors. Such policy shall name the Company as loss payee and shall not be cancelable by the Company without prior approval of the Board of Directors. 2.5 Representation on Board of Directors. So long as any Shares remain outstanding, the Company will use its best efforts to cause and maintain the election to the Board of Directors of (a) two people designated by the holders of a majority of the Series C Preferred Stock outstanding, including Common Stock issued upon conversion of such Series C Preferred Stock (each a "Series C Director"), and (b) two people designated by the holders of a majority of the Series A and Series B Preferred Stock outstanding, including Common Stock issued upon conversion of such Series A and B Preferred Stock. One Series C Director shall be designated by The Sprout Group and the other Series C Director shall be designated, subject to the consent of The Sprout Group, by a holder of at least 2,419,355 shares of Series C Preferred Stock in the aggregate. In the event that two or more holders of Series C Preferred Stock, other than The Sprout Group, each hold in excess of 2,419,355 shares of Series C Preferred Stock, then that holder holding the greatest number of shares of Series C Preferred Stock shall have the right to designate the remaining Series C Director. In the event that two or more such holders hold an equal number of Series C Preferred Stock, then The Sprout Group shall determine which of them shall designate the remaining Series C Director. For the purposes of this paragraph, a "holder" shall include the affiliates of any holder. 2.6 Termination of Covenants. The covenants set forth in this Section 2 shall terminate and be of no further force and effect after the time of effectiveness of the Company's first firm commitment underwritten public offering registered under the Securities Act. -20- 23 SECTION 3 MISCELLANEOUS 3.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California, as if entered into by and between California residents exclusively for performance entirely within California. 3.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 3.3 Entire Agreement; Amendment; Waiver. This Agreement (including the Exhibits hereto) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Company and the holders of at least fifty percent (50%) of the Registrable Shares and any such amendment, waiver, discharge or termination shall be binding on all the Holders, but in no event shall the obligation of any Holder hereunder be materially increased, except upon the written consent of such Holder. 3.4 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by United States first-class mail, postage prepaid, or delivered personally addressed by hand or special courier (a) if to a Holder, as indicated on the list of Holders attached hereto as Exhibit A, or at such other address as such Investor or permitted assignee shall have furnished to the Company in writing, or (b) if to the Company, at 9050 Camino Santa Fe, San Diego, California 92121, or at such other address as the Company shall have furnished to each holder in writing. All such notices and other written communications shall be effective (i) if mailed, five (5) days after mailing and (ii) if delivered, upon delivery. 3.5 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Holder, upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement or any waiver on the part of any Holder of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Holder, shall be cumulative and not alternative. -21- 24 3.6 Rights; Separability. Unless otherwise expressly provided herein, a Holder's rights hereunder are several rights, not rights jointly held with any of the other Holders. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 3.7 Information Confidential. Each Holder acknowledges that the information received by them pursuant hereto may be confidential and for its use only, and it will not use such confidential information in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information, and its attorneys), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or such Holder is required to disclose such information by a governmental body. 3.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 3.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. [Remainder of Page Intentionally Left Blank] -22- 25 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: /s/ Pierre Lamond --------------------------------- Title: ------------------------------ HOLDER: ------------------------------------ [Name of Holder] By: --------------------------------- Title: ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 26 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: FORWARD VENTURES II., L.P. ------------------------------------ [Name of Holder] By: /s/ Ivor Royston --------------------------------- Title: Ivor Royston, General Partner ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 27 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: SEQUOIA CAPITAL VI SEQUOIA TECHNOLOGY PARTNERS VI SEQUOIA XXIV SEQUOIA 1995 ------------------------------------ [Name of Holder] By: /s/ Pierre Lamond --------------------------------- Title: General Partner ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 28 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: LYNN CAPORALE ------------------------------------ [Name of Holder] By: /s/ Lynn Caporale --------------------------------- Title: Vice President ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 29 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: SYDNEY BRENNER ------------------------------------ [Name of Holder] By: /s/ Sydney Brenner --------------------------------- Title: ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 30 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: SPROUT CAPITAL VII, L.P. ------------------------------------ [Name of Holder] By: /s/ P. Chambon --------------------------------- Title: Vice President, Sprout Group ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 31 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: DLJ CAPITAL CORPORATION ------------------------------------ [Name of Holder] By: /s/ P. Chambon --------------------------------- Title: ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 32 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: C.V. SOFINNOVA VENTURES PARTNERS III ------------------------------------ [Name of Holder] By: /s/ Alix Marduel -------------------------------- Title: Alix Marduel, M.D. ------------------------------ General Partner Sofinnova Management L.P. [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 33 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: SINGAPORE BIO-INNOVATIONS PTE LTD ------------------------------------ [Name of Holder] By: /s/ Yong-Sea Teoh --------------------------------- Title: Director & General Manager ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 34 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: PAINE WEBBER, CUST, FBO MICHAEL GROSSMAN, IRA R/O ------------------------------------ [Name of Holder] By: /s/ Illegible --------------------------------- Title: Branch Director ------------------------------ By: /s/ Michael Grossman [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 35 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: STEVEN M. LASH ------------------------------------ [Name of Holder] By: /s/ Steven M. Lash --------------------------------- Title: ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 36 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: Byron T. Franzen ------------------------------------ [Name of Holder] By: /s/ Byron T. Franzen --------------------------------- Title: ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 37 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: THE M.L. LAWRENCE TRUST ------------------------------------ [Name of Holder] By: /s/ Rebecca Wood --------------------------------- Title: Trustee ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 38 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: FARLEY INC. ------------------------------------ [Name of Holder] By: /s/ Jeffrey Schroeder --------------------------------- Title: Chief Financial Officer ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 39 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: ------------------------------------------ Title: --------------------------------------- HOLDER: SORRENTO VENTURES II, L.P. ---------------------------------------------- [Name of Holder] By: /s/ Robert M. Jaffe ------------------------------------------ Title: President, Sorrento Associates, Inc. ---------------------------------------- General Partner, Sorrento Equity Partners L.P. General Partner, Sorrento Ventures II L.P. [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 40 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: SORRENTO GROWTH PARTNERS I, L.P. ---------------------------------------------- [Name of Holder] By: /s/ Robert M. Jaffe ------------------------------------------- Title: President, Sorrento Growth, Inc. ----------------------------------------- General Partner, Sorrento Equity Growth Partners I, L.P. General Partner, Sorrento Growth Partners I, L.P. [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 41 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: COMDISCO, INC. ------------------------------------ [Name of Holder] By: /s/ Jill C. Hanses --------------------------------- Title: Assistant Vice President ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 42 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: ------------------------------------ Title: --------------------------------- HOLDER: HOLDER: BRINSON VENTURE CAPITAL FUND III, L.P. BY ITS GENERAL PARTNER, BRINSON PARTNERS , INC. --------------------------------------- [Name of Holder] By: /s/ Terry Gould ----------------------------------- Title: Partner, Brinson Partners, Inc. --------------------------------- [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 43 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: BRINSON TRUST COMPANY AS TRUSTEE OF THE BRINSON MAP VENTURE CAPITAL FUND III ------------------------------------ [Name of Holder] By: /s/ Terry Gould --------------------------------- Title: Assistant Trust Officer ------------------------------ Brinson Trust Company [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 44 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: JAPAN ASSOCIATED FINANCE CO., LTD. ------------------------------------ [Name of Holder] By: /s/ Masaki Yoshida --------------------------------- Title: Masaki Yoshida, President ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 45 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: JAFCO G-5 INVESTMENT ENTERPRISE PARTNERSHIP ------------------------------------ [Name of Holder] By: /s/ Masaki Yoshida --------------------------------------------- Title: Masaki Yoshida, President ------------------------------------------ Japan Associated Finance Co., Ltd. Its Executive Partner [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 46 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: JAFCO R-1 (A) INVESTMENT ENTERPRISE PARTNERSHIP ------------------------------------ [Name of Holder] By: /s/ Masaki Yoshida --------------------------------------------- Title: Masaki Yoshida, President ----------------------------------------- Japan Associated Finance Co., Ltd. Its Executive Partner [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 47 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: JAFCO R-1(B) INVESTEMENT ENTERPRISE PARTNERSHIP ------------------------------------ [Name of Holder] By: /s/ Masaki Yoshida --------------------------------------------- Title: Masaki Yoshida, President ------------------------------------------ Japan Associated Finance Co., Ltd. Its Executive Partner [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 48 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: JAFCO R-2 INVESTMENT ENTERPRISE PARTNERSHIP ------------------------------------ [Name of Holder] By: /s/ Masaki Yoshida --------------------------------------------- Title: Masaki Yoshida, President ------------------------------------------ Japan Associated Finance Co., Ltd. Its Executive Partner [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 49 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: BRENTWOOD ASSOCIATES VII, L.P. BY: BRENTWOOD VII VENTURES ITS GENERAL PARTNER ------------------------------------ [Name of Holder] By: /s/ Ross Jaffe --------------------------------- Title: General Partner ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 50 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: S.R. ONE, LIMITED ------------------------------------ [Name of Holder] By: /s/ Donald F. Parman --------------------------------- Title: Vice President ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 51 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: STEPHEN KANDEL ------------------------------------ [Name of Holder] By: /s/ Stephen Kandel --------------------------------- Title: ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 52 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: TODD SCHMIDT ------------------------------------ [Name of Holder] By: /s/ Todd Schmidt -------------------------------- Title: ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 53 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: VICENTE ANIDO, JR. ------------------------------------ [Name of Holder] By: /s/ Vicente Anido, Jr. --------------------------------- Title: President & CEO ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 54 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: JOHN T. CHAMBERS ------------------------------------ [Name of Holder] By: /s/ John T. Chambers --------------------------------- Title: Anido Designee [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 55 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: THE RUFUS L. MCCRACKEN TRUST, DATED 6/21/91 ------------------------------------ [Name of Holder] By: /s/ Lee McCracken --------------------------------- Title: Trustee ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 56 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: Steven Teig ------------------------------------ [Name of Holder] By: /s/ Steven Teig --------------------------------- Title: ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 57 IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. COMBICHEM, INC. By: --------------------------------- Title: ------------------------------ HOLDER: FAYE HUNTER RUSSELL TRUST U/A DTD 7/11/88 ------------------------------------ [Name of Holder] By: /s/ Faye Hunter Russell --------------------------------- Title: Trustee ------------------------------ [SIGNATURE PAGE TO INVESTORS' RIGHTS AGREEMENT] 58 EXHIBIT A INVESTORS Forward Ventures II, L.P. Sequoia Capital VI Sequoia Technology Partners VI Sequoia XXIV Sequoia 1995 Lynn H. Caporale Sydney Brenner Sprout Capital VII, L.P. DLJ Capital Corporation C. V. Sofinnova Ventures Partners III Singapore Bio-Innovations Pte, Ltd PaineWebber Incorporated as Custodian of the Michael Grossman Rollover IRA Steven M. Lash First Interstate Bank as Trustee for SK International Securities Corp. 401(k)PS em Stephen J. Kandel Byron T. Franzen IRA FBO Byron T. Franzen The M.L. Lawrence Trust Farley Inc. Sorrento Ventures II, L.P. Sorrento Growth Partners I, L.P. Comdisco, Inc. Brinson Venture Capital Fund III, L.P. (The First National Bank of Chicago as Custodian to the Brinson Venture Capital Fund III, L.P.) Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III (The First National Bank of Chicago as Custodian to the Brinson Trust Company as Trustee of the Brinson MAP Venture Capital Fund III) Japan Associated Finance Co., Ltd. JAFCO G-5 Investment Enterprise Partnership JAFCO R-1(A) Investment Enterprise Partnership JAFCO R-1(B) Investment Enterprise Partnership JAFCO R-2 Investment Enterprise Partnership Brentwood Associates VII, L.P. S.R. One Limited Stephen J. Kandel Todd Schmidt Vicente Anido John T. Chambers The Rufus L. McCracken Trust, dated 6/21/91 Steve Teig Faye Hunter Russell Trust U/A Dtd 7/11/88 Exhibit A EX-10.10 16 EXHIBIT 10.10 1 EXHIBIT 10.10 SERIES J PREFERRED STOCK PURCHASE AGREEMENT (122,500 Shares of Series J Preferred Stock) By and Between CombiChem, Inc., a California corporation and STEVEN TEIG 2 TABLE OF CONTENTS
Page ---- 1. Sale of Preferred Shares...................................................................... 1 2. Closing....................................................................................... 1 3. Representations and Warranties of the Company................................................. 1 (a) Organization and Standing; Articles and Bylaws....................................... 2 (b) Authorization........................................................................ 2 (c) Validity of the Shares............................................................... 2 4. Representations and Warranties of the Purchaser............................................... 2 (a) Authorization........................................................................ 2 (b) Investment Intent.................................................................... 2 (c) Reliance Upon the Purchaser's Representations........................................ 2 (d) Restricted Securities................................................................ 3 (e) Receipt of Information............................................................... 3 (f) Investment Experience................................................................ 3 (g) Limitations on Disposition........................................................... 3 (h) Public Sale.......................................................................... 4 (i) Legends.............................................................................. 4 5. Company Right Of First Refusal................................................................ 4 6. Market Stand-off Agreement.................................................................... 4 7. Miscellaneous................................................................................. 5 (a) Further Instruments and Actions...................................................... 5 (b) Notices.............................................................................. 5 (c) Governing Law........................................................................ 5 (d) Successors and Assigns............................................................... 5 (e) Amendments and Waivers............................................................... 5 (f) Counsel to the Company............................................................... 5
EXHIBITS Exhibit A -- Consent of Spouse (i) 3 PREFERRED STOCK PURCHASE AGREEMENT (122,500 Shares of Series J Preferred Stock) THIS SERIES J PREFERRED STOCK PURCHASE AGREEMENT ("Agreement") is made as of June 10, 1997 by and between CombiChem, Inc., a California corporation (the "Company"), and Steven Teig (the "Purchaser," which term includes his heirs, executors, guardians, successors and assigns). WHEREAS, the Company and the Purchaser are parties to that certain Stock Option Agreement dated December 1, 1995 (the "Option Agreement") pursuant to which the Company granted Purchaser an option to purchase up to 245,000 shares of the Company's Series J Preferred Stock at an option price of $0.10 per share; and WHEREAS, the Purchaser desires to purchase shares of the Company's Series J Preferred Stock pursuant to the Option Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchaser hereby agree as follows: 1. Sale of Preferred Shares. Subject to the terms and conditions of this Agreement, the Purchaser hereby purchases, and the Company hereby sells to the Purchaser, One Hundred Twenty Two Thousand Five Hundred shares of the Company's Series J Preferred Stock (the "Shares") at a price of ten cents ($0.10) per share, for an aggregate sum of Twelve Thousand Two Hundred Fifty ($12,250) (the "Purchase Price"). 2. Closing. The purchase and sale of the Shares shall occur at the offices of the Company, on that date the Purchaser has conditionally delivered to the Company (i) Purchaser's signature on the Agreement's signature page offering to purchase the Shares, (ii) an executed Consent of Spouse attached hereto as Exhibit A and incorporated herein by reference and (iii) consideration equal to the Purchase Price in the form of cash (requiring a receipt signed by Company officer), or check and an authorized officer of the Company, after having confirmed that Purchaser has complied with the conditions precedent to execution, executes this Agreement on behalf of the Company (the "Closing"). Within ten business days of the Closing, the Company shall deliver to the Purchaser a share certificate dated the date of the Closing, registered in the name the Purchaser designates, representing the Shares purchased by the Purchaser pursuant to this Agreement. 3. Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchaser as follows: (a) Organization and Standing; Articles and Bylaws. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the 4 State of California, and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as presently conducted. (b) Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all the Company's obligations under this Agreement and for the authorization, issuance, sale and delivery of the Shares and the common stock issuable upon conversion thereof (the "Underlying Common Shares") has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by the Company and the Purchaser shall constitute a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors. (c) Validity of the Shares. The Shares and the Underlying Common Shares will be validly issued, fully paid and nonassessable. 4. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: (a) Authorization. The Purchaser has the requisite legal power and authority to enter into this Agreement and that this Agreement when executed shall constitute a valid and legally binding obligation of the Purchaser. (b) Investment Intent. This Agreement is made with the Purchaser in reliance upon his representation to the Company, which by his execution hereof he confirms, that the Shares have been acquired with his own funds for investment for an indefinite period for his own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that he has no present intention of selling, granting participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that he does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations, to such person or to any third person, with respect to any of the Shares. (c) Reliance Upon the Purchaser's Representations. The Purchaser understands (i) that the Shares are not registered under the Securities Act or qualified under the California Corporate Securities Law of 1968, as amended (the "Law"), and (ii) that the Shares are being issued to the Purchaser on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof and/or Regulation D promulgated thereunder and the exemption from qualification provided by Section 25102(f) of the Law, and (iii) that the Company's reliance on such exemptions is predicated on the Purchaser's representations set forth herein. The Purchaser realizes that the basis for the exemptions may not be present if, notwithstanding such representations, the Purchaser has in mind merely acquiring the Shares for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. The Purchaser does not have any such intention. These exemptions only exempt -2- 5 the issuance of the Shares to the Purchaser and not any sale or other disposition of the Shares or any interest therein by the Purchaser. (d) Restricted Securities. The Purchaser hereby confirms that the Purchaser has been informed that the Shares are restricted securities under the Securities Act and may not be resold or transferred unless the Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. In addition, the Purchaser understands that any resale or transfer must comply with applicable state securities laws. Accordingly, the Purchaser hereby acknowledges that the Purchaser is prepared to hold the Shares for an indefinite period, and that the Purchaser is familiar with the provisions of Rule 144 of the Securities and Exchange Commission issued under the Securities Act, and is aware that Rule 144 is not presently available to exempt the sale of the Shares from the registration requirements of the Securities Act. (e) Receipt of Information. The Purchaser acknowledges that he has received all the information he considers necessary or appropriate for deciding whether to purchase the Shares. The Purchaser further represents that he has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and the business, properties, prospects, and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to Purchaser or to which Purchaser had access. (f) Investment Experience. In connection with representations made herein, the Purchaser represents that he has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of his investment, has the ability to bear the economic risks of his investment and has been furnished with and has had access to all of the information he considers necessary or appropriate to evaluate the risks and merits of an investment in the Shares, and has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. (g) Limitations on Disposition. The Purchaser agrees that in no event will he make a disposition of any of the Shares, unless and until (a) he shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (b) he shall have furnished the Company with an opinion of counsel satisfactory to the Company to the effect that (i) such disposition will not require registration of such Shares under the Securities Act, or (ii) that appropriate action necessary for compliance with the Securities Act has been taken, or (c) the Company shall have waived, expressly and in writing, its rights under clauses (a) and (b) of this subparagraph. The opinion shall also indicate that the disposition is exempt from, in compliance with, or qualified under all applicable state securities laws. -3- 6 (h) Public Sale. The Purchaser agrees not to make, without the prior written consent of the Company, any public offering or sale of the Shares, even if permitted to do so pursuant to Rule 144(k) promulgated under the Securities Act, until the earlier of (i) six months after the date on which the Company effects its initial registered public offering pursuant to the Securities Act or (ii) five years after the date of the Closing of this Agreement. (i) Legends. All certificates representing any shares of the Company subject to the provisions of this Agreement shall have endorsed thereon customary legends regarding: (1) Restrictions on transfer under the Federal Securities Act of 1933. (2) Market Stand-off Agreement pursuant to Section 6 hereof. (3) Right of First Refusal upon any resale of the Shares, pursuant to the Company's Bylaws and Section 5 hereof. (4) Any legend required by state securities laws. 5. Company Right Of First Refusal. Any resale of the Shares shall be subject to the Right of First Refusal provisions set forth in Article VI of the Company's Bylaws. This right terminates upon the Company completing its initial public offering of stock. 6. Market Stand-off Agreement. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, the Purchaser shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to the Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for one hundred eighty (180) days from and after the effective date of such registration statement or such longer time as may be required by the Company's underwriters. (b) In the event any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding common shares is effected without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this Section 6 to the same extent the Shares are at such time covered by such provisions. (c) In order to enforce the limitations of this Section 6, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. -4- 7 (d) The obligation in this Section 6 shall not apply to a registration relating solely to employee benefit plan shares or to a Rule 145 transaction registered on Form S-4. 7. Miscellaneous. (a) Further Instruments and Actions. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (b) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below his signature or at such other address as such party may designate by advance written notice to the other party hereto. (c) Governing Law. This Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Agreement shall be determined in accordance with the laws of the State of California. (d) Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon the Purchaser, his heirs, executors, administrators, guardians, successors and assigns. (e) Amendments and Waivers. This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, written or oral. This Agreement may only be amended with the written consent of the parties hereto, or the successors or assigns of the foregoing, and no oral waiver or amendment shall be effective under any circumstances whatsoever. (f) Counsel to the Company. The Purchaser acknowledges and agrees that this Agreement has been prepared by Brobeck, Phleger & Harrison, counsel to the Company, which counsel has represented the interests of the Company and not those of the Purchaser with respect to the transactions documented by this Agreement. The Purchaser further acknowledges and agrees that the Purchaser has been provided the opportunity and encouraged to consult with counsel of the Purchaser's own choosing with respect to this Agreement. The Purchaser certifies and acknowledges that the Purchaser has carefully read all of the provisions of this Agreement and that the Purchaser fully understands and shall fully and faithfully comply with such provisions. -5- 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMPANY COMBICHEM, INC., a California corporation By: /s/ Vicente Anido ------------------------------------- Vicente Anido, President and CEO Address: CombiChem, Inc. 9050 Camino Santa Fe San Diego, CA 92121 PURCHASER /s/ Steven Teig ----------------------------------------- Address: 904 Ramona Street ----------------------------------------- Palo Alto, CA 94301 ----------------------------------------- ----------------------------------------- [SIGNATURE PAGE TO SERIES J PREFERRED STOCK PURCHASE AGREEMENT] 9 EXHIBIT A CONSENT OF SPOUSE I,___________________________________________________, spouse of_____________________________________, have read and approve the foregoing Agreement. I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: ______________, 1995 ----------------------------------------- (Signature) ________ I hereby represent that I do not currently have a spouse. ----------------------------------------- (Printed Name) A-1 EX-10.11 17 EXHIBIT 10.11 1 EXHIBIT 10.11 SERIES J PREFERRED STOCK PURCHASE AGREEMENT (70,000 Shares of Series J Preferred Stock) By and Between CombiChem, Inc., a California corporation and Jonathon Greene 2 TABLE OF CONTENTS
Page ---- 1. Sale of Preferred Shares...................................................................... 1 2. Closing....................................................................................... 1 3. Representations and Warranties of the Company................................................. 1 (a) Organization and Standing; Articles and Bylaws....................................... 1 (b) Authorization........................................................................ 2 (c) Validity of the Shares............................................................... 2 4. Representations and Warranties of the Purchaser............................................... 2 (a) Authorization........................................................................ 2 (b) Investment Intent.................................................................... 2 (c) Reliance Upon the Purchaser's Representations........................................ 2 (d) Restricted Securities................................................................ 3 (e) Receipt of Information............................................................... 3 (f) Investment Experience................................................................ 3 (g) Limitations on Disposition........................................................... 3 (h) Public Sale.......................................................................... 4 (i) Legends.............................................................................. 4 5. Company Right Of First Refusal................................................................ 4 6. Market Stand-off Agreement.................................................................... 4 7. Miscellaneous................................................................................. 5 (a) Further Instruments and Actions...................................................... 5 (b) Notices.............................................................................. 5 (c) Governing Law........................................................................ 5 (d) Successors and Assigns............................................................... 5 (e) Amendments and Waivers............................................................... 5 (f) Counsel to the Company............................................................... 5
EXHIBITS Exhibit A -- Consent of Spouse (i) 3 PREFERRED STOCK PURCHASE AGREEMENT (70,000 Shares of Series J Preferred Stock) THIS SERIES J PREFERRED STOCK PURCHASE AGREEMENT ("Agreement") is made as of June 11, 1997 by and between CombiChem, Inc., a California corporation (the "Company"), and Jonathon Greene (the "Purchaser," which term includes his heirs, executors, guardians, successors and assigns). WHEREAS, the Company and the Purchaser are parties to that certain Stock Option Agreement dated December 1, 1995 (the "Option Agreement") pursuant to which the Company granted Purchaser an option to purchase up to 140,000 shares of the Company's Series J Preferred Stock at an option price of $0.10 per share; and WHEREAS, the Purchaser desires to purchase shares of the Company's Series J Preferred Stock pursuant to the Option Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchaser hereby agree as follows: 1. Sale of Preferred Shares. Subject to the terms and conditions of this Agreement, the Purchaser hereby purchases, and the Company hereby sells to the Purchaser, Seventy Thousand shares of the Company's Series J Preferred Stock (the "Shares") at a price of ten cents ($0.10) per share, for an aggregate sum of Seven Thousand ($7,000) (the "Purchase Price"). 2. Closing. The purchase and sale of the Shares shall occur at the offices of the Company, on that date the Purchaser has conditionally delivered to the Company (i) Purchaser's signature on the Agreement's signature page offering to purchase the Shares, (ii) an executed Consent of Spouse attached hereto as Exhibit A and incorporated herein by reference and (iii) consideration equal to the Purchase Price in the form of cash (requiring a receipt signed by Company officer), or check and an authorized officer of the Company, after having confirmed that Purchaser has complied with the conditions precedent to execution, executes this Agreement on behalf of the Company (the "Closing"). Within ten business days of the Closing, the Company shall deliver to the Purchaser a share certificate dated the date of the Closing, registered in the name the Purchaser designates, representing the Shares purchased by the Purchaser pursuant to this Agreement. 3. Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchaser as follows: (a) Organization and Standing; Articles and Bylaws. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the 4 State of California, and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as presently conducted. (b) Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all the Company's obligations under this Agreement and for the authorization, issuance, sale and delivery of the Shares and the common stock issuable upon conversion thereof (the "Underlying Common Shares") has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by the Company and the Purchaser shall constitute a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors. (c) Validity of the Shares. The Shares and the Underlying Common Shares will be validly issued, fully paid and nonassessable. 4. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: (a) Authorization. The Purchaser has the requisite legal power and authority to enter into this Agreement and that this Agreement when executed shall constitute a valid and legally binding obligation of the Purchaser. (b) Investment Intent. This Agreement is made with the Purchaser in reliance upon his representation to the Company, which by his execution hereof he confirms, that the Shares have been acquired with his own funds for investment for an indefinite period for his own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that he has no present intention of selling, granting participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that he does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations, to such person or to any third person, with respect to any of the Shares. (c) Reliance Upon the Purchaser's Representations. The Purchaser understands (i) that the Shares are not registered under the Securities Act or qualified under the California Corporate Securities Law of 1968, as amended (the "Law"), and (ii) that the Shares are being issued to the Purchaser on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof and/or Regulation D promulgated thereunder and the exemption from qualification provided by Section 25102(f) of the Law, and (iii) that the Company's reliance on such exemptions is predicated on the Purchaser's representations set forth herein. The Purchaser realizes that the basis for the exemptions may not be present if, notwithstanding such representations, the Purchaser has in mind merely acquiring the Shares for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. The Purchaser does not have any such intention. These exemptions only exempt -2- 5 the issuance of the Shares to the Purchaser and not any sale or other disposition of the Shares or any interest therein by the Purchaser. (d) Restricted Securities. The Purchaser hereby confirms that the Purchaser has been informed that the Shares are restricted securities under the Securities Act and may not be resold or transferred unless the Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. In addition, the Purchaser understands that any resale or transfer must comply with applicable state securities laws. Accordingly, the Purchaser hereby acknowledges that the Purchaser is prepared to hold the Shares for an indefinite period, and that the Purchaser is familiar with the provisions of Rule 144 of the Securities and Exchange Commission issued under the Securities Act, and is aware that Rule 144 is not presently available to exempt the sale of the Shares from the registration requirements of the Securities Act. (e) Receipt of Information. The Purchaser acknowledges that he has received all the information he considers necessary or appropriate for deciding whether to purchase the Shares. The Purchaser further represents that he has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and the business, properties, prospects, and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to Purchaser or to which Purchaser had access. (f) Investment Experience. In connection with representations made herein, the Purchaser represents that he has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of his investment, has the ability to bear the economic risks of his investment and has been furnished with and has had access to all of the information he considers necessary or appropriate to evaluate the risks and merits of an investment in the Shares, and has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. (g) Limitations on Disposition. The Purchaser agrees that in no event will he make a disposition of any of the Shares, unless and until (a) he shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (b) he shall have furnished the Company with an opinion of counsel satisfactory to the Company to the effect that (i) such disposition will not require registration of such Shares under the Securities Act, or (ii) that appropriate action necessary for compliance with the Securities Act has been taken, or (c) the Company shall have waived, expressly and in writing, its rights under clauses (a) and (b) of this subparagraph. The opinion shall also indicate that the disposition is exempt from, in compliance with, or qualified under all applicable state securities laws. -3- 6 (h) Public Sale. The Purchaser agrees not to make, without the prior written consent of the Company, any public offering or sale of the Shares, even if permitted to do so pursuant to Rule 144(k) promulgated under the Securities Act, until the earlier of (i) six months after the date on which the Company effects its initial registered public offering pursuant to the Securities Act or (ii) five years after the date of the Closing of this Agreement. (i) Legends. All certificates representing any shares of the Company subject to the provisions of this Agreement shall have endorsed thereon customary legends regarding: (1) Restrictions on transfer under the Federal Securities Act of 1933. (2) Market Stand-off Agreement pursuant to Section 6 hereof. (3) Right of First Refusal upon any resale of the Shares, pursuant to the Company's Bylaws and Section 5 hereof. (4) Any legend required by state securities laws. 5. Company Right Of First Refusal. Any resale of the Shares shall be subject to the Right of First Refusal provisions set forth in Article VI of the Company's Bylaws. This right terminates upon the Company completing its initial public offering of stock. 6. Market Stand-off Agreement. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, the Purchaser shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to the Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for one hundred eighty (180) days from and after the effective date of such registration statement or such longer time as may be required by the Company's underwriters. (b) In the event any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding common shares is effected without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this Section 6 to the same extent the Shares are at such time covered by such provisions. (c) In order to enforce the limitations of this Section 6, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. -4- 7 (d) The obligation in this Section 6 shall not apply to a registration relating solely to employee benefit plan shares or to a Rule 145 transaction registered on Form S-4. 7. Miscellaneous. (a) Further Instruments and Actions. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (b) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below his signature or at such other address as such party may designate by advance written notice to the other party hereto. (c) Governing Law. This Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Agreement shall be determined in accordance with the laws of the State of California. (d) Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon the Purchaser, his heirs, executors, administrators, guardians, successors and assigns. (e) Amendments and Waivers. This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, written or oral. This Agreement may only be amended with the written consent of the parties hereto, or the successors or assigns of the foregoing, and no oral waiver or amendment shall be effective under any circumstances whatsoever. (f) Counsel to the Company. The Purchaser acknowledges and agrees that this Agreement has been prepared by Brobeck, Phleger & Harrison, counsel to the Company, which counsel has represented the interests of the Company and not those of the Purchaser with respect to the transactions documented by this Agreement. The Purchaser further acknowledges and agrees that the Purchaser has been provided the opportunity and encouraged to consult with counsel of the Purchaser's own choosing with respect to this Agreement. The Purchaser certifies and acknowledges that the Purchaser has carefully read all of the provisions of this Agreement and that the Purchaser fully understands and shall fully and faithfully comply with such provisions. -5- 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMPANY COMBICHEM, INC., a California corporation By: /s/ Vicente Anido ------------------------------------- Vicente Anido, President and CEO Address: 9050 Camino Santa Fe San Diego, CA 92121 PURCHASER /s/ Jonathon Greene ----------------------------------------- Jonathon Greene Address: 1481 Pitman Ave ----------------------------------------- Palo Alto, CA 94301 ----------------------------------------- ----------------------------------------- [SIGNATURE PAGE TO SERIES J PREFERRED STOCK PURCHASE AGREEMENT] 9 EXHIBIT A CONSENT OF SPOUSE I,___________________________________________________, spouse of_____________________________________, have read and approve the foregoing Agreement. I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: ______________, 1995 ----------------------------------------- (Signature) ________ I hereby represent that I do not currently have a spouse. ----------------------------------------- (Printed Name) A-1 EX-10.12 18 EXHIBIT 10.12 1 EXHIBIT 10.12 SERIES J PREFERRED STOCK PURCHASE AGREEMENT (40,000 Shares of Series J Preferred Stock) By and Between CombiChem, Inc., a California corporation and ANDREW SMELLIE 2 TABLE OF CONTENTS
Page ---- 1. Sale of Preferred Shares...................................................................... 1 2. Closing....................................................................................... 1 3. Representations and Warranties of the Company................................................. 1 (a) Organization and Standing; Articles and Bylaws....................................... 2 (b) Authorization........................................................................ 2 (c) Validity of the Shares............................................................... 2 4. Representations and Warranties of the Purchaser............................................... 2 (a) Authorization........................................................................ 2 (b) Investment Intent.................................................................... 2 (c) Reliance Upon the Purchaser's Representations........................................ 2 (d) Restricted Securities................................................................ 3 (e) Receipt of Information............................................................... 3 (f) Investment Experience................................................................ 3 (g) Limitations on Disposition........................................................... 3 (h) Public Sale.......................................................................... 4 (i) Legends.............................................................................. 4 5. Company Right Of First Refusal................................................................ 4 6. Market Stand-off Agreement.................................................................... 4 7. Miscellaneous................................................................................. 5 (a) Further Instruments and Actions...................................................... 5 (b) Notices.............................................................................. 5 (c) Governing Law........................................................................ 5 (d) Successors and Assigns............................................................... 5 (e) Amendments and Waivers............................................................... 5 (f) Counsel to the Company............................................................... 5
EXHIBITS Exhibit A -- Consent of Spouse (i) 3 PREFERRED STOCK PURCHASE AGREEMENT (40,000 Shares of Series J Preferred Stock) THIS SERIES J PREFERRED STOCK PURCHASE AGREEMENT ("Agreement") is made as of June 11, 1997 by and between CombiChem, Inc., a California corporation (the "Company"), and Andrew Smellie (the "Purchaser," which term includes his heirs, executors, guardians, successors and assigns). WHEREAS, the Company and the Purchaser are parties to that certain Stock Option Agreement dated December 1, 1995 (the "Option Agreement") pursuant to which the Company granted Purchaser an option to purchase up to 40,000 shares of the Company's Series J Preferred Stock at an option price of $0.10 per share; and WHEREAS, the Purchaser desires to purchase shares of the Company's Series J Preferred Stock pursuant to the Option Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchaser hereby agree as follows: 1. Sale of Preferred Shares. Subject to the terms and conditions of this Agreement, the Purchaser hereby purchases, and the Company hereby sells to the Purchaser, Forty Thousand shares of the Company's Series J Preferred Stock (the "Shares") at a price of ten cents ($0.10) per share, for an aggregate sum of Four Thousand ($4,000) (the "Purchase Price"). 2. Closing. The purchase and sale of the Shares shall occur at the offices of the Company, on that date the Purchaser has conditionally delivered to the Company (i) Purchaser's signature on the Agreement's signature page offering to purchase the Shares, (ii) an executed Consent of Spouse attached hereto as Exhibit A and incorporated herein by reference and (iii) consideration equal to the Purchase Price in the form of cash (requiring a receipt signed by Company officer), or check and an authorized officer of the Company, after having confirmed that Purchaser has complied with the conditions precedent to execution, executes this Agreement on behalf of the Company (the "Closing"). Within ten business days of the Closing, the Company shall deliver to the Purchaser a share certificate dated the date of the Closing, registered in the name the Purchaser designates, representing the Shares purchased by the Purchaser pursuant to this Agreement. 3. Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchaser as follows: (a) Organization and Standing; Articles and Bylaws. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the 4 State of California, and has all requisite corporate power and authority to own and operate its properties and assets and to carry on its business as presently conducted. (b) Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution and delivery of this Agreement, the performance of all the Company's obligations under this Agreement and for the authorization, issuance, sale and delivery of the Shares and the common stock issuable upon conversion thereof (the "Underlying Common Shares") has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by the Company and the Purchaser shall constitute a valid and legally binding obligation of the Company, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors. (c) Validity of the Shares. The Shares and the Underlying Common Shares will be validly issued, fully paid and nonassessable. 4. Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants to the Company as follows: (a) Authorization. The Purchaser has the requisite legal power and authority to enter into this Agreement and that this Agreement when executed shall constitute a valid and legally binding obligation of the Purchaser. (b) Investment Intent. This Agreement is made with the Purchaser in reliance upon his representation to the Company, which by his execution hereof he confirms, that the Shares have been acquired with his own funds for investment for an indefinite period for his own account, not as a nominee or agent, and not with a view to the sale or distribution of any part thereof, and that he has no present intention of selling, granting participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that he does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations, to such person or to any third person, with respect to any of the Shares. (c) Reliance Upon the Purchaser's Representations. The Purchaser understands (i) that the Shares are not registered under the Securities Act or qualified under the California Corporate Securities Law of 1968, as amended (the "Law"), and (ii) that the Shares are being issued to the Purchaser on the ground that the sale provided for in this Agreement and the issuance of securities hereunder is exempt from registration under the Securities Act pursuant to Section 4(2) thereof and/or Regulation D promulgated thereunder and the exemption from qualification provided by Section 25102(f) of the Law, and (iii) that the Company's reliance on such exemptions is predicated on the Purchaser's representations set forth herein. The Purchaser realizes that the basis for the exemptions may not be present if, notwithstanding such representations, the Purchaser has in mind merely acquiring the Shares for a fixed or determinable period in the future, or for a market rise, or for sale if the market does not rise. The Purchaser does not have any such intention. These exemptions only exempt -2- 5 the issuance of the Shares to the Purchaser and not any sale or other disposition of the Shares or any interest therein by the Purchaser. (d) Restricted Securities. The Purchaser hereby confirms that the Purchaser has been informed that the Shares are restricted securities under the Securities Act and may not be resold or transferred unless the Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. In addition, the Purchaser understands that any resale or transfer must comply with applicable state securities laws. Accordingly, the Purchaser hereby acknowledges that the Purchaser is prepared to hold the Shares for an indefinite period, and that the Purchaser is familiar with the provisions of Rule 144 of the Securities and Exchange Commission issued under the Securities Act, and is aware that Rule 144 is not presently available to exempt the sale of the Shares from the registration requirements of the Securities Act. (e) Receipt of Information. The Purchaser acknowledges that he has received all the information he considers necessary or appropriate for deciding whether to purchase the Shares. The Purchaser further represents that he has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Shares and the business, properties, prospects, and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to Purchaser or to which Purchaser had access. (f) Investment Experience. In connection with representations made herein, the Purchaser represents that he has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of his investment, has the ability to bear the economic risks of his investment and has been furnished with and has had access to all of the information he considers necessary or appropriate to evaluate the risks and merits of an investment in the Shares, and has had an opportunity to discuss the Company's business, management and financial affairs with the Company's management. (g) Limitations on Disposition. The Purchaser agrees that in no event will he make a disposition of any of the Shares, unless and until (a) he shall have notified the Company of the proposed disposition and shall have furnished the Company with a statement of the circumstances surrounding the proposed disposition, and (b) he shall have furnished the Company with an opinion of counsel satisfactory to the Company to the effect that (i) such disposition will not require registration of such Shares under the Securities Act, or (ii) that appropriate action necessary for compliance with the Securities Act has been taken, or (c) the Company shall have waived, expressly and in writing, its rights under clauses (a) and (b) of this subparagraph. The opinion shall also indicate that the disposition is exempt from, in compliance with, or qualified under all applicable state securities laws. -3- 6 (h) Public Sale. The Purchaser agrees not to make, without the prior written consent of the Company, any public offering or sale of the Shares, even if permitted to do so pursuant to Rule 144(k) promulgated under the Securities Act, until the earlier of (i) six months after the date on which the Company effects its initial registered public offering pursuant to the Securities Act or (ii) five years after the date of the Closing of this Agreement. (i) Legends. All certificates representing any shares of the Company subject to the provisions of this Agreement shall have endorsed thereon customary legends regarding: (1) Restrictions on transfer under the Federal Securities Act of 1933. (2) Market Stand-off Agreement pursuant to Section 6 hereof. (3) Right of First Refusal upon any resale of the Shares, pursuant to the Company's Bylaws and Section 5 hereof. (4) Any legend required by state securities laws. 5. Company Right Of First Refusal. Any resale of the Shares shall be subject to the Right of First Refusal provisions set forth in Article VI of the Company's Bylaws. This right terminates upon the Company completing its initial public offering of stock. 6. Market Stand-off Agreement. (a) In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, the Purchaser shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to the Shares without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for one hundred eighty (180) days from and after the effective date of such registration statement or such longer time as may be required by the Company's underwriters. (b) In the event any stock dividend, stock split, recapitalization or other change affecting the Company's outstanding common shares is effected without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this Section 6 to the same extent the Shares are at such time covered by such provisions. (c) In order to enforce the limitations of this Section 6, the Company may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. -4- 7 (d) The obligation in this Section 6 shall not apply to a registration relating solely to employee benefit plan shares or to a Rule 145 transaction registered on Form S-4. 7. Miscellaneous. (a) Further Instruments and Actions. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement. (b) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below his signature or at such other address as such party may designate by advance written notice to the other party hereto. (c) Governing Law. This Agreement has been negotiated, executed and delivered in the State of California. The parties hereto agree that all questions pertaining to the validity and interpretation of this Agreement shall be determined in accordance with the laws of the State of California. (d) Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon the Purchaser, his heirs, executors, administrators, guardians, successors and assigns. (e) Amendments and Waivers. This Agreement represents the entire understanding of the parties with respect to the subject matter hereof and supersedes all previous understandings, written or oral. This Agreement may only be amended with the written consent of the parties hereto, or the successors or assigns of the foregoing, and no oral waiver or amendment shall be effective under any circumstances whatsoever. (f) Counsel to the Company. The Purchaser acknowledges and agrees that this Agreement has been prepared by Brobeck, Phleger & Harrison, counsel to the Company, which counsel has represented the interests of the Company and not those of the Purchaser with respect to the transactions documented by this Agreement. The Purchaser further acknowledges and agrees that the Purchaser has been provided the opportunity and encouraged to consult with counsel of the Purchaser's own choosing with respect to this Agreement. The Purchaser certifies and acknowledges that the Purchaser has carefully read all of the provisions of this Agreement and that the Purchaser fully understands and shall fully and faithfully comply with such provisions. -5- 8 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COMPANY COMBICHEM, INC., a California corporation By: /s/ Vicente Anido ------------------------------------- Vicente Anido, President and CEO Address: 9050 Camino Santa Fe San Diego, CA 92121 PURCHASER /s/ Andrew Smellie ----------------------------------------- Address: 904 Ramona Street ----------------------------------------- Palo Alto, CA 94301 ----------------------------------------- ----------------------------------------- [SIGNATURE PAGE TO SERIES J PREFERRED STOCK PURCHASE AGREEMENT] 9 EXHIBIT A CONSENT OF SPOUSE I,_________________________________________________, spouse of_____________________________________, have read and approve the foregoing Agreement. I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: ______________, 1995 ----------------------------------------- (Signature) ________ I hereby represent that I do not currently have a spouse. ----------------------------------------- (Printed Name) A-1 EX-10.13 19 EXHIBIT 10.13 1 EXHIBIT 10.13 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933. WARRANT AGREEMENT To Purchase Shares of the Series Z Preferred Stock of COMBICHEM, INC. Dated as of December 20, 1994 (the "Effective Date") WHEREAS, COMBICHEM, INC., a California corporation (the "Company") has entered into a Master Lease Agreement dated as of November 16, 1994, Equipment Schedule No. VL-1, and related Schedules (the "Leases") with COMDISCO, INC., a Delaware corporation (the "Warrantholder"); and WHEREAS, the Company desires to grant to Warrantholder, in consideration for such Leases, the right to purchase shares of its Preferred Stock; NOW, THEREFORE, in consideration of the Warrantholder executing and delivering such Leases and in consideration of mutual covenants and agreements contained herein, the Company and Warrantholder agree as follows: 1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK. The Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, to subscribe to and purchase, from the Company, that number of fully paid and assessable shares of the Company's Series Z Preferred Stock ("Preferred Stock") equal to: [(A x B) / C] x [1 - ((C - $.50) / C)] A = 7.5% Warrant Coverage Percentage B = $450,000 Committed Lease Financing Credit Line C = $0.75 [(.075 x $450,000) / $0.75 x [$1.00 - (($0.75 - $0.50) / $0.75)] = 45,000 x [1 - .67] = 30,000 2 The exercise price of the shares of the Series Z Preferred Stock issued hereunder shall be $0.50 (the "Exercise Price"). The number and purchase price of such shares are subject to adjustment as provided for in Section 8 hereof. 2. TERM OF THE WARRANT AGREEMENT. Except as otherwise provided for herein, the term of this Warrant Agreement and the right to purchase Preferred Stock as granted herein shall commence on the Effective Date and shall be exercisable for a period of (i) ten (10) years or (ii) five (5) years from the effective date of the Company's initial public offering, whichever occurs earlier. 3. EXERCISE OF THE PURCHASE RIGHTS. The purchase rights set forth in this Warrant Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2 above, by tendering to the Company at its principal office a notice of exercise in the form attached hereto as Exhibit I (the "Notice of Exercise"), duly completed and executed. Promptly upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, and in no event later than twenty-one (21) days thereafter, the Company shall issue to the Warrantholder a certificate for the number of shares of Preferred Stock purchased and shall execute the Notice of Exercise indicating the number of shares which remain subject to future purchases, if any. The Exercise Price may be paid at the Warrantholder's election either (i) by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as determined below. If the warrantholder elects the Net Issuance method, the Company will issue Preferred Stock in accordance with the following formula: x = Y(A-B) ------ A Where: x = the number of shares of Preferred Stock to be issued to the Warrantholder. y = the number of shares of Preferred Stock requested to be exercised under this Warrant Agreement. A = the fair market value of one (1) share of Common. B = the Exercise Price. -2- 3 As used herein, current fair market value of Common Stock shall mean with respect to each share of Common Stock: (i) if the exercise is in connection with an initial public offering, and if the Company's Registration Statement relating to such public offering has been declared effective by the SEC, then the initial "Price to Public" specified in the final prospectus with respect to the offering; (ii) if this warrant is exercised after, and not in connection with the Company's initial public offering, the Closing Price on the date of Notice of Exercise. (iii) if at any time the Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the current fair market value of Common Stock shall be the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by its Board of Directors, unless the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the fair market value of Common Stock shall be deemed to be the value received by the holders of the Company's Preferred Stock on a common equivalent basis pursuant to such merger or acquisition. Upon partial exercise by either cash or Net Issuance, the Company shall promptly issue an amended Warrant Agreement representing the remaining number of shares purchasable hereunder. All other terms and conditions of such amended Warrant Agreement shall be identical to those contained herein, including, but not limited to the Effective Date hereof. 4. RESERVATION OF SHARES. Authorization and Reservation of Shares. During the term of this Warrant Agreement, the Company will at all times have authorized and reserved a sufficient number of shares of its Preferred Stock to provide for the exercise of the rights to purchase Preferred Stock as provided for herein. 5. REGISTRATION RIGHTS (a) Registration or Listing. The Company shall not have any obligation to register any of the shares of Preferred Stock at any time. If, at any time after the Company's Initial Public Offering, the Company proposes to register its shares of common stock under the Securities Act of 1933, as amended (the "Securities Act") (other than a registration effected solely to implement an employee benefit plan, a transaction to which Rule 145 of the -3- 4 Securities and Exchange Commission, or successor entity, is applicable or any other form or type of registration in which registrable securities cannot be included), the Company shall give written notice to the Warrantholder and permitted assigns of such intention to register shares of common stock. If such registration is proposed to be on a form which permits inclusion of shares of common stock issued upon conversion of the preferred stock issued hereunder (the "Registrable Securities") then held by Warrantholder, upon the written request of the Warrantholder delivered to the Secretary of the Company within twenty (20) days after transmittal of notice by the Company to the Warrantholder, the Company shall, subject to the limits contained in this section and provided warrantholder accepts the terms of such underwriting between the Company and its underwriters, use its best efforts to cause all such Registrable Securities to be registered under the Securities Act and qualified for sale under certain state blue sky laws; provided, however, that if the underwriter managing such registration delivers written notification to the Company that market or economic conditions limit the amount of securities which may reasonably be expected to be sold, the underwriter may limit or exclude any or all Registrable Securities from the registration and underwriting. The Company shall so advise the Warrantholder of any such limit or exclusion. The number of shares that are entitled to be included in the registration shall be allocated as follows: (i) to the Company for all securities being sold for its own account; (ii) to all holders of registrable securities with contractual registration rights for which registration is requested; and finally (iii) to shareholders without contractual registration rights. The number of shares of registrable securities that are included in such registration shall be allocated among all holders with contractual registration rights in proportion to the amount of registrable securities initially offered for registration by each holder. If any person does not agree to the terms of any such underwriting, said person shall be excluded from the underwriting upon written notice from the Company or the underwriter. If any shares are excluded from the registration and if the number of shares of registrable securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include additional securities in the registration, the right to include additional securities in an aggregate amount equal to the number of shares excluded, with such shares to be a located among the persons requesting additional inclusion on a pro rata basis. (b) Termination of Registration Rights. The right of Warrantholder to request registration or inclusion in any registration pursuant to Section 4(b) shall terminate on the closing of the Company's Initial Public Offering, provided that all shares of Registrable Securities held or entitled to be held upon converts on by Warrantholder may immediately be sold under Rule 144 during any 90-day period, or on such date after the closing of the Company's Initial Public Offering as all shares of "Registrable Securities" held or entitled to be held upon conversion by Warrantholder may immediately be sold under Rule 144 during any 90-day period. "Registrable Securities," as used herein, shall mean the shares of common stock issued or issuable upon conversion of the shares of Series Z Preferred Stock issued upon exercise of this Warrant. -4- 5 (c) Registration Rights Agreement. In the event the Company so requests, Warrantholder shall become a signatory to and be bound by the Company's Amended and Restated Stock Registration Rights Agreement dated November 1, 1994, as amended provided, however, that Warrantholder shall not have any registration demand rights set forth in such agreement. 6. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 7. NO RIGHTS AS SHAREHOLDER. This Warrant Agreement does not entitle the Warrantholder to any voting, dividend or other rights as a shareholder of the Company prior to the exercise of the Warrant. 8. WARRANTHOLDER REGISTRY. The Company shall maintain a registry showing the name and address of the registered holder of this Warrant Agreement. 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. (a) Reservation of Preferred Stock. The Preferred Stock issuable upon exercise of the Warrantholder's rights has been duly and validly reserved and, when issued in accordance with the provisions of this Warrant Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever; provided, however, that the Preferred Stock issuable pursuant to this Warrant Agreement may be subject to restrictions on transfer under state and/or federal securities laws. The Company has made available to the warrantholder true, correct and complete copies of its Charter and Bylaws, as amended, and minutes of all Board of Directors (including all committees of the Board of Directors, if any) and Shareholder meetings from August 9, 1994 through November 18, 1994. The issuance of certificates for shares of Preferred Stock upon exercise of the Warrant Agreement shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock. The Company shall not be required to pay any tax which may be payable in respect of any transfer involved and the issuance and delivery of any certificate in a name other than that of the warrantholder. (b) Due Authority. The execution and delivery by the Company of this Warrant Agreement and the performance of all obligations of the Company hereunder, including the issuance to Warrantholder of the right to acquire the shares of Preferred Stock, have been -5- 6 duly authorized by all necessary corporate action on the part of the Company, and the Leases and this Warrant Agreement are not inconsistent with the Company's Charter or Bylaws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Leases and this Warrant Agreement constitute legal, valid and binding agreements of the Company, enforceable in accordance with their respective terms. (c) Consents and Approvals. No consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any state, federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant Agreement, except for the filing of notices pursuant to Regulation D under the 1933 Act and Section 25102(f) of the California Corporate Securities Law, which filings will be effective by the time required thereby. (d) Issued Securities. All issued and outstanding shares of Common Stock, Preferred Stock or any other securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All outstanding shares of Common Stock, Preferred Stock and any other securities were issued in full compliance with all federal and state securities laws. In addition: i. The authorized capital stock of the Company consists of 30,000,000 shares of no par value common Stock and 10,000,000 shares of no par value preferred stock. The first series of preferred stock is comprised of 1,000,000 shares designated "Series A Preferred Stock." The second series of preferred stock is comprised of 1,500,000 shares designated "Series Z Preferred Stock." The third series of preferred stock is comprised of 2,226,667 shares designated "Series B Preferred Stock." There are currently issued and outstanding 1,732,500 shares of the Company's Common Stock, 1,000,000 shares of Series A Preferred Stock, 200,000 shares of Series Z Preferred Stock and 2,200,000 shares of Series B Preferred Stock. All issued and outstanding shares of the Company's capital stock have been duly authorized and validly issued by the Company in compliance with applicable federal and state securities laws, and are fully paid and nonassessable. ii. The Company has reserved no shares of Common Stock for issuance under its Stock Option Plan, under which no options are outstanding. Other than 400,000 shares of Series Z Preferred Stock reserved for issuance to The Scripps Research Institute and 26,667 shares of Series B Preferred Stock offered for sale to Lynn H. Caporale, there are no other options, warrants, conversion privileges or other rights presently outstanding to purchase or otherwise acquire any authorized but unissued shares of the Company's capital stock or other securities of the Company. -6- 7 iii. Holders of Series A and B Preferred Stock have rights to purchase additional issuances of stock by the Company to maintain their pro rata ownership of the Company. No other shareholder of the Company has preemptive rights to purchase new issuances of the Company's capital stock. (e) Insurance. The Company has in full force and effect insurance policies, with extended coverage, insuring the Company and its property and business against such losses and risks, and in such amounts, as are customary for corporations engaged in a similar business and similarly situated and as otherwise may be required pursuant to the terms of any other contract or agreement. (f) Other Commitments to Register Securities. Except as set forth in this Warrant Agreement, that certain Amended and Restated Stock Registration Rights Agreement dated November 1, 1994, as amended, and that certain Series Z Stock Registration Rights Agreement dated October 12, 1994, the Company is not, pursuant to the terms of any other agreement currently in existence, under any obligation to register under the 1933 Act any of its presently outstanding securities or any of its securities which may hereafter be issued. (g) Exempt Transaction. Subject to the accuracy of the Warrantholder's representations in Section 10 hereof, the issuance of the Preferred Stock upon exercise of this Warrant will constitute a transaction exempt from (i) the registration requirements of Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of the California Corporate Securities Law, in reliance upon Section 25102(f) thereof. (h) Compliance With Rule 144. At the written request of the Warrantholder, who proposes to sell Preferred Stock issuable upon the exercise of the Warrant in compliance with Rule 144 promulgated by the Securities and Exchange Commission, the Company shall furnish to the Warrantholder, within ten days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. 10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. This Warrant Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder: (a) Investment Purpose. The right to acquire Preferred Stock or the Preferred Stock issuable upon exercise of the Warrantholder's rights contained herein will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the warrantholder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. -7- 8 (b) Private Issue. The warrantholder understands (i) that the Preferred Stock issuable upon exercise of this Warrant is not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 10. (c) Disposition of Warrantholder's Rights. In no event will the Warrantholder make a disposition of any of its rights to acquire Preferred Stock or Preferred Stock issuable upon exercise of such rights unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Warrantholder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the 1933 Act has been taken, or (B) an exemption from the registration requirements of the 1933 Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Preferred Stock or Preferred Stock issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Preferred Stock when (1) such security shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Warrantholder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the 1933 Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Warrantholder or holder of a share of Preferred Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Preferred Stock not bearing any restrictive legend. (d) Financial Risk. The Warrantholder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, and has the ability to bear the economic risks of its investment. (e) Risk of No Registration. The Warrantholder understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the 1933 Act, or file reports pursuant to Section 15(d), of the Securities Exchange Act of 1934 (the "1934 Act"), or if a registration statement covering the securities under the 1933 Act is not in effect when it desires to sell (i) the rights to purchase Preferred Stock pursuant to this -8- 9 Warrant Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. The warrantholder also understands that any sale of its rights of the Warrantholder to purchase Preferred Stock or Preferred Stock which might be made by it in reliance upon Rule 144 under the 1933 Act may be made only in accordance with the terms and conditions of that Rule. (f) Market Stand-Off Agreement. Warrantholder hereby agrees that, in connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, warrantholder shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to any securities of the Company held by the Warrantholder without the prior written consent of the Company and its underwriters. Such limitations shall be in effect for a period of time as determined by the Company and its managing underwriter(s) provided that such period of time shall not exceed one hundred eighty (180) days from and after the effective date of such registration statement in connection with the Company's initial public offering or ninety (90) days from and after the effective date of any subsequent underwritten public offering (the "Market Stand-Off Period"). The limitations of this Section shall remain in effect for the two-year period immediately following the effective date of the Company's initial public offering and shall thereafter terminate and cease to have any force or effect. In order to enforce the limitations of this Section, the Company may impose stop-transfer instructions with respect to the securities held by Warrantholder until the end of the Market Stand-Off Period. 11. TRANSFERS. Subject to the terms and conditions contained in Section 10 hereof, this Warrant Agreement and all rights hereunder are transferable in whole or in part by the warrantholder and any successor transferee, provided, however, in no event shall the number of transfers of the rights and interests in all of the Warrants exceed three (3) transfers nor shall any transfer be less than fifty thousand (50,000) shares. The transfer shall be recorded on the books of the Company upon receipt by the Company of a notice of transfer in the form attached hereto as Exhibit II (the "Transfer Notice"), at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. 12. MISCELLANEOUS. (a) Effective Date. The provisions of this Warrant Agreement shall be construed and shall be given effect in all respects as if it had been executed and delivered by the Company on the date hereof. This Warrant Agreement shall be binding upon any successors or assigns of the Company. (b) Attorneys' Fees. In any litigation, arbitration or court proceeding between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to -9- 10 attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant Agreement. (c) Governing Law. This Warrant Agreement shall be governed by and construed for all purposes under and in accordance with the laws of the State of California. (d) Counterparts. This Warrant Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, facsimile transmission (provided that the original is sent by personal delivery or mail as hereinafter set forth) or seven (7) days after deposit in the United States mail, by registered or certified mail, addressed (i) to the Warrantholder at 6111 North River Road, Rosemont, Illinois 60018, attention: James Labe, Venture Leasing Director, cc: Legal Department, (and/or, if by facsimile, (708) 518-5465) and (ii) to the Company at 10975 Torreyana Road, #230, San Diego, CA 92121 (and/or if by facsimile, (619) 452-8799 or at such other address as any such party may subsequently designate by written notice to the other party. (f) Remedies. In the event of any default hereunder, the non-defaulting party may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including but not limited to an action for damages as a result of any such default, and/or an action for specific performance for any default where Warrantholder will not have an adequate remedy at law and where damages will not be readily ascertainable. The Company expressly agrees that it shall not oppose an application by the Warrantholder or any other person entitled to the benefit of this Agreement requiring specific performance of any or all provisions hereof or enjoining the Company from continuing to commit any such breach of this Agreement. (g) No Impairment of Rights. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Warrantholder against impairment. (h) Survival. The representations, warranties, covenants and conditions of the respective parties contained herein or made pursuant to this Warrant Agreement shall survive the execution and delivery of this Warrant Agreement. (i) Severability. In the event any one or more of the provisions of this Warrant Agreement shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant Agreement shall be unimpaired, and the invalid, illegal or -10- 11 unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. (j) Amendments. Any provision of this Warrant Agreement may be amended by a written instrument signed by the Company and by the Warrantholder. (k) Additional Documents. The Company, upon execution of this Warrant Agreement, shall provide the Warrantholder with certified resolutions with respect to the representations, warranties and covenants set forth in subparagraphs (a) through (d), (f) and (g) of Section 9 above. If the purchase price for the Leases referenced in the preamble of this Warrant Agreement exceeds $1,000,000, the Company will also provide Warrantholder with an opinion from the Company's counsel with respect to those same representations, warranties and covenants. The Company shall also supply such other documents as the Warrantholder may from time to time reasonably request. -11- 12 IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be executed by its officers thereunto duly authorized as of the Effective Date. Company: COMBICHEM, INC., a California corporation By: /s/ Robert A. Curtis -------------------------------- Robert A. Curtis, Chief Executive Officer Warrantholder: COMDISCO, INC., a Delaware corporation By: /s/James P. Labe -------------------------------- Title: President Venture Lease Division --------------------------------- 13 EXHIBIT I NOTICE OF EXERCISE To: COMBICHEM, INC. (1) The undersigned Warrantholder hereby elects to purchase ______ shares of CombiChem Inc.'s Series Z Preferred Stock pursuant to the terms of the Warrant Agreement dated December 15, 1994 (the "Warrant Agreement") between CombiChem, Inc. (the "Company") and the Warrantholder, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. (2) In exercising its rights to purchase _______ shares of the Company's Series Z Preferred Stock the Warrantholder hereby confirms and acknowledges the investment representations and warranties made in Section 10 of the Warrant Agreement. (3) Please issue a certificate or certificates representing said shares of Series Z Preferred Stock in the name of the Warrantholder or in such other name as is specified below. - ---------------------------------- (Name) - ---------------------------------- (Address) Warrantholder: COMDISCO, INC., a Delaware corporation By: ------------------------------- Title: ---------------------------- Date: ----------------------------- 14 ACKNOWLEDGEMENT OF EXERCISE The undersigned officer of CombiChem, Inc. (the "Company") hereby acknowledges receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase _______ shares of the Company's Series Z Preferred Stock, pursuant to the terms of the Warrant Agreement, and further acknowledges that ______ shares remain subject to purchase under the terms of the Warrant Agreement. Company: COMBICHEM, INC., a California corporation By: -------------------------------- Title: ----------------------------- Date: ------------------------------ 15 EXHIBIT II TRANSFER NOTICE (To transfer or assign the foregoing Warrant Agreement execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights evidenced thereby are hereby transferred and assigned to ---------------------------------- (Please Print) whose address is ---------------------------------- ---------------------------------- ---------------------------------- Dated ----------------------------- Holder's Signature ---------------------------------- Holder's Address ---------------------------------- ---------------------------------- Signature Guaranteed: NOTE: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant Agreement, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant Agreement. 16 AMENDMENT TO THE SERIES Z PREFERRED STOCK WARRANT THIS AMENDMENT to that certain Series Z Preferred Stock Warrant issued to COMDISCO, INC. (the "Warrantholder") by COMBICHEM, INC. (the "Company") dated as of December 20, 1994, by and among the Company and Warrantholder (the "Amendment") RECITALS A. Pursuant to that certain Master Lease Agreement between the Warrantholder and the Company dated as of November 16, 1994 and Equipment Schedule VL-1 dated November 16, 1994, (the "Leases") each Phase I through Phase VI has been made available and has been utilized by Company. B. The Company and the Warrantholder have agreed to amend the Warrant to grant the Warrantholder the right to purchase from the Company, an additional Fifty Three Thousand Six Hundred Fifty Five Thousand (53,655) shares of the Company's Series Z Preferred Stock at a purchase price of $0.50 per share. In consideration of the mutual promises and covenants set forth herein, the parties hereto agree that the Warrant is amended as follows: 1. INCREASE THE NUMBER OF SHARES GRANTED IN WARRANT. 1.1 Section 1 of the Warrant is hereby amended to read as follows: "The Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon terms and subject to the conditions hereinafter set forth, to subscribe to and purchase, from the Company, Eighty Three Thousand Six Hundred and Fifty Five (83,655) fully paid and non-assessable shares of the Company's Series Z Preferred Stock ("Preferred Stock") at a purchase price of $0.50 per share (the "Exercise Price"). The number and purchase price of such shares are subject to adjustment as provided herein." 2. NO OTHER AMENDMENT, ETC. 2.1 Except as set forth herein, all terms of the Warrant shall continue in full force and effect. 2.2 Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Warrant. 17 2.3 This Amendment may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Warrant effective as of the date first above written. THE COMPANY: COMBICHEM, INC. By: /s/ Peter Myers ------------------------------- Title President and CEO ----------------------------- THE WARRANTHOLDER: COMDISCO, INC. By: /s/ James P. Labe ------------------------------- Title: James P. Labe, President ---------------------------- Venture Lease Division EX-10.14 20 EXHIBIT 10.14 1 No. Series CS-1 EXHIBIT 10.14 35,000 Shares COMMON STOCK PURCHASE WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS, THESE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS AND UPON OBTAINING AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY), SATISFACTORY TO THE COMPANY, THAT SUCH DISPOSITION MAY BE MADE WITHOUT REGISTRATION OF THE SECURITIES UNDER SUCH ACT AND SUCH LAWS, OR, WITH RESPECT TO FEDERAL SECURITIES LAWS ONLY, UNLESS SOLD PURSUANT TO RULE 144. COMBICHEM, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF CALIFORNIA THIS CERTIFIES THAT, for value received, LJL BioSystems, Inc., a Delaware corporation ("Holder"), is entitled to purchase, on the terms hereof, Thirty-Five Thousand (35,000) fully paid and nonassessable shares of Common Stock, no par value (the "Common Stock") of CombiChem, Inc., a California corporation (the "Company"). 1. Exercise of Warrant. The terms and conditions upon which this Warrant may be exercised, and the Common Stock covered hereby (the "Warrant Shares") may be purchased, are as follows: 1.1 Term. This Warrant may be exercised in whole or in part at any time at or prior to 5:00 p.m. Pacific time on June 15, 2000, after which time this Warrant shall terminate and shall be void and of no further force or effect. 1.2 Purchase Price. The per share purchase price for the shares of Common Stock to be issued upon exercise of this Warrant (the "Exercise Price") shall be $0.075, subject to adjustment as provided herein. 2 1.3 Method of Exercise. The exercise of the purchase rights evidenced by this Warrant shall be effected by (i) the surrender of the Warrant, together with a duly executed copy of the form of subscription attached hereto, to the Company at its principal offices and (ii) the delivery of the Exercise Price by check or bank draft payable to the Company's order for the number of shares for which the purchase rights hereunder are being exercised or by wire transfer of the Exercise Price to the Company's designated bank account. 1.4 Issuance of Shares. Upon the exercise of the purchase rights evidenced by this Warrant, a certificate or certificates for the purchased shares shall be issued to the Holder as soon as practicable. 2. Certain Adjustments. 2.1 Mergers, Consolidations or Sale of Assets. If at any time there shall be a capital reorganization (other than a combination or subdivision of shares of Common Stock otherwise provided for herein), or a merger or consolidation of the Company with or into another corporation or any sale of all or substantially all of the Company's assets to another entity in which holders of shares of the Company's Common Stock will receive in exchange therefor other securities or assets, then, as a condition to the closing of such reorganization, merger, consolidation or sale, lawful provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified in this Warrant and upon payment of the Exercise Price, in lieu of the Warrant Shares issuable upon exercise of the Warrant, the number of shares of stock or other securities or property of the Company or the successor corporation resulting from such reorganization, merger, consolidation or sale to which Holder would have been entitled under the provisions of the agreement in such reorganization, merger, consolidation or sale if this Warrant had been exercised immediately before that reorganization, merger, consolidation or sale. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the reorganization, merger, consolidation or sale to the end that the provisions of this Warrant (including adjustment of the Exercise Price then in effect and the number of Warrant Shares that may be purchased upon exercise of the Warrant) shall be applicable after that event, as near as reasonably may be practicable, in relation to any shares of stock or other securities or property deliverable after that event upon exercise of this Warrant. The Company shall not effect any such reorganization, merger, consolidation or sale unless prior to the consummation thereof, the successor entity (if other than the Company) resulting from such reorganization, merger or consolidation or the entity purchasing such assets, shall assume by written instrument executed and delivered to the Company the obligation to deliver to Holder such shares of stock or other securities or property as, in accordance with the foregoing provisions, the Holder may be entitled to purchase. 2.2 Splits and Subdivisions. In the event the Company should at any time or from time to time fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or issue by reclassification of its Common Stock any other shares representing common equity of the Company or pay a dividend on its Common -2- 3 Stock in shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as the "Common Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or Common Equivalents, then, as of such record date (or the date of such distribution, split, subdivision or reclassification if no record date is fixed), the applicable Exercise Price shall be appropriately decreased and the number of Warrant Shares issuable upon exercise of the Warrant shall be appropriately increased in proportion to such increase of outstanding shares of Common Stock. 2.3 Combination of Shares. If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a combination or reclassification of the outstanding shares of Common Stock, then from and after the record date for such combination or reclassification the applicable Exercise Price shall be appropriately increased and the number of Warrant Shares issuable upon exercise of the Warrant shall be appropriately decreased in proportion to such decrease in outstanding shares of Common Stock. 2.4 Adjustments for Other Distributions. In the event the Company shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights not referred to in subsection 2.2, then, in each such case for the purpose of this subsection 2.4, upon exercise of this Warrant the Holder shall be entitled to a proportionate share of any such distribution as though such Holder was the holder of the number of shares of Common Stock of the Company into which this Warrant may be exercised as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such distribution. 2.5 Certificate as to Adjustments. In the case of each adjustment or readjustment of the Exercise Price pursuant to this Section 2, the Company will promptly compute such adjustment or readjustment in accordance with the terms hereof and cause a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based to be delivered to the Holder. The Company will, upon the written request at any time of the Holder, furnish or cause to be furnished to such Holder a certificate setting forth: a. Such adjustments and readjustments; b. The Exercise Price at the time in effect; and c. The number of shares of Warrant Shares and the amount, if any, of other property at the time receivable upon the exercise of the Warrant. -3- 4 2.6 Notices of Record Date, etc. In the event of: a. Any taking by the Company of a record of the holders of any class of securities of the Company for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend payable out of earned surplus at the same rate as that of the last such cash dividend theretofore paid) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or b. Any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of assets of the Company to any other person or any consolidation or merger involving the Company; or c. Any voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company will mail to the holder of this Warrant, at least twenty (20) days prior to the earlier of (y) the earliest date specified therein or (z) the record date established for purposes of determining holders of Common Stock entitled to participate therein, a notice specifying: (i) The date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right; and (ii) The date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding-up is expected to become effective and the record date for determining shareholders entitled to vote thereon. 3. Representations, Warranties and Covenants of the Holder. Holder hereby represents, warrants and covenants that: 3.1 Organization, Good Standing and Qualification. Holder is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has all requisite corporate power and authority to carry on its business as now conducted. 3.2 Authorization. All corporate action on the part of Holder, its officers and directors necessary for the authorization, execution and delivery of this Warrant and the performance of all obligations of Holder hereunder has been taken, and this Warrant constitutes a valid and legally binding obligation of Holder enforceable in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. -4- 5 3.3 Purchase Entirely for Own Account. This Warrant is delivered to Holder in reliance upon Holder's representation to the Company, which by Holder's execution of this Warrant Holder hereby confirms, that this Warrant and the Warrant Shares (collectively, the "Securities") are being acquired for investment for Holder's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof. Holder represents that it has full power and authority to enter into this Warrant. 3.4 Investment Experience. Holder acknowledges that it is able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities. Holder also represents it has not been organized for the purpose of acquiring the Securities. 3.5 Accredited Holder. Holder is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D and an "excluded purchaser" within the meaning of Section 25102(f) of the California Corporate Securities Law of 1968, as amended, each as presently in effect. 3.6 Legends. It is understood that the certificates evidencing the Securities, including the Warrant Shares, may bear the following legend: "These securities have not been registered under the Securities Act of 1933, as amended, or applicable state securities laws. In the absence of an effective registration statement under such act and such laws, these securities may not be offered, sold, transferred or otherwise disposed of, except pursuant to an applicable exemption from the registration requirements of said act and such laws and upon obtaining an opinion of counsel (which may be counsel for the company), satisfactory to the company, that such disposition may be made without registration of the securities under such act and such laws, or, with respect to federal securities laws only, unless sold pursuant to Rule 144." 4. California Commissioner of Corporations and Compliance with Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE THE SUBJECT OF THIS WARRANT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS WARRANT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT. 5. Fractional Shares. No fractional shares shall be issued in connection with any exercise of this Warrant. In lieu of the issuance of such fractional share, the Company shall -5- 6 make a cash payment equal to the then Fair Market Value of such fractional share as determined in good faith by the Company's Board of Directors. 6. Reservation of Shares. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the exercise of this Warrant, such number of its shares of Common Stock as shall from time to time be sufficient to effect the exercise in full of this Warrant; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the exercise of the entire Warrant, in addition to such other remedies as shall be available to the Holder, the Company will use its reasonable best efforts to take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. 7. Privileges of Stock Ownership. Prior to the exercise of this Warrant, the Holder shall not be entitled, by virtue of holding this Warrant, to any rights of a shareholder of the Company. 8. Limitation of Liability. Except as otherwise provided herein, in the absence of affirmative action by the Holder to purchase the Warrant Shares, no mere enumeration herein of the rights or privileges of the Holder shall give rise to any liability of such Holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. 9. Transfers and Exchanges. 9.1 Transfer. The Warrant or any interest in it may be transferred or assigned upon written notice to the Company by the Holder, subject to compliance with applicable federal and state securities laws. Any permitted transfer shall be recorded on the books of the Company upon the surrender of this Warrant, properly endorsed, to the Company at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. In the event of a permitted partial transfer, the Company shall issue to the several holders one or more appropriate new warrants. 9.2 Partial Exercise. In the event of a partial exercise of this Warrant, the Company shall issue an appropriate new warrant to the Holder. 9.3 New Warrants. All new warrants issued in connection with transfers, exchanges or partial exercises shall be identical in form and provision to this Warrant except as to the number of shares. 10. Successors and Assigns. The terms and provisions of this Warrant shall be binding upon the Company and the Holder and their respective successors and assigns. 11. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation -6- 7 of this Warrant, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new warrant of like tenor and dated as of such cancellation, in lieu of this Warrant. 12. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday or Sunday or shall be a legal holiday, then such action may be taken or such right may be exercised, except as to payment of the Exercise Price, on the next succeeding day not a legal holiday. 13. Amendments and Waivers; Cancellation. Any term of this Warrant may be amended and the observance of any term of this Warrant may be waived (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the Holder. Dated: June 15, 1995 COMBICHEM, INC. By: /s/ Robert A. Curtis ------------------------------------- Title: President and CEO ---------------------------------- The undersigned Holder agrees and accepts this Warrant and acknowledges that it has read and confirms each of the representations contained in Section 3 of this Warrant. LJL BIOSYSTEMS, INC. By: /s/ illegible ------------------------------------- Title: President and CEO ---------------------------------- [SIGNATURE PAGE TO COMMON STOCK PURCHASE WARRANT] -7- 8 PURCHASE FORM (To be executed by the Warrant Holder if it desires to exercise the Warrant in whole or in part) To: COMBICHEM, INC. The undersigned, whose Social Security or other identifying number is ____________________, hereby irrevocably elects the right of purchase represented by the within Warrant for, and to purchase thereunder, ___________________________ shares of securities provided for therein and tenders payment herewith to the order of COMBICHEM, INC. in the amount of $........................... The undersigned requests that certificates for such shares be issued as follows: Name: ................................. Address: .............................. Deliver to: ........................... Address: .............................. and, if said number of shares shall not be all the shares purchasable hereunder, that a new Warrant for the balance remaining of the shares purchasable under the within Warrant be registered in the name of, and delivered to, the undersigned at the address stated below Address: .............................. Dated: __________________, 19__ Signature................................ (Signature must conform in all respects to the name of the Warrant Holder as specified on the face of the Warrant, without alteration, enlargement or any change whatsoever) -8- EX-10.15 21 EXHIBIT 10.15 1 STOCK PURCHASE WARRANT EXHIBIT 10.15 THIS WARRANT AND THE SHARES OF STOCK WHICH MAY BE PURCHASED PURSUANT TO THE EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE, OFFER OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT. No. C-_ COMBICHEM, INC. WARRANT TO PURCHASE SHARES OF STOCK THIS CERTIFIES THAT, for value received, ________________ (the "Holder") is entitled to subscribe for and purchase _______________________________ (_____) shares (the "Shares") of Series C Preferred Stock of CombiChem, Inc. Subject to the provisions and upon the terms and conditions hereinafter set forth, Shares purchased under this Warrant shall be subject to purchase at $0.62 per share, as adjusted pursuant to Section 3 hereof (the "Exercise Price"). 1. Method of Exercise; Payment. (a) Cash Exercise. The purchase rights represented by this Warrant may be exercised by the Holder in whole or in part, by the surrender of this Warrant (with the Notice of Exercise form attached hereto as Exhibit B-I duly executed) at the principal office of the Company, and by the payment to the Company, by certified, cashier's, or other check acceptable to the Company, of an amount equal to the aggregate Exercise Price of the shares being purchased. (b) Net Issue Exercise. (i) In lieu of exercising this Warrant pursuant to Section l(a) hereof, the Holder may elect to receive a number of Shares equal to the value (as determined below) of this Warrant (or the portion thereof being cancelled) by surrender of this Warrant at the principal office of the Company together with the Notice of Exercise in which 2 alternative No. 1 is initialed by the Holder. In such event, the Company shall issue to the Holder a number of Shares computed using the following formula: X: Y (A-B) ------- A Where X = the number of Shares to be issued to the Holder. Y = the number of Shares subject to this Warrant. A = the fair market value of one Share. B = the Exercise Price (as adjusted to the date of such calculation). (ii) Automatic Exercise. This Warrant shall automatically be exercised pursuant to Section l(b) hereof immediately before its expiration pursuant to Section 10 hereof, unless Holder notifies the Company in writing to the contrary before such termination. (c) Fair Market Value. For purposes of this Warrant, the fair market value of the security issuable upon exercise of the Warrant shall mean: (i) The average of the closing bid and asked prices of the Company's Common Stock quoted in the Over-The-Counter Market Summary or the closing price quoted on any exchange on which the Common Stock is listed, whichever is applicable, as published in the Western Edition of The Wall Street Journal for the ten trading days prior to the date of determination of fair market value; (ii) If the Company's Common Stock is not traded Over-The-Counter or on an exchange, the per share fair market value of the security issuable upon exercise of the Warrant shall be determined in good faith by the Company's Board of Directors. (d) Stock Certificates. In the event of any exercise of the rights represented by this Warrant, certificates for the Shares so purchased shall be delivered to the Holder within five business days and, unless this Warrant has been fully exercised or has expired, a new Warrant representing the shares with respect to which this Warrant shall not have been exercised shall also be issued to the Holder within such time. The holder of this Warrant may make any exercise of this Warrant contingent upon the consummation of a public offering of the Common Stock registered under the Securities Act of 1933, as amended. (e) Exercise into Common Stock. Upon any exercise of this Warrant, at the election of the Holder so exercising, this Warrant may be exercised into the number of shares of Common Stock into which the Shares issuable upon such exercise are then convertible. -2- 3 2. Stock Fully Paid; Reservation of Shares. All of the Shares issuable upon the exercise of the rights represented by this Warrant will, upon issuance and receipt of the Exercise Price therefor, be fully paid and nonassessable, and free from all stock transfer taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company shall at all times have authorized and reserved for issuance sufficient Shares to provide for the exercise of the rights represented by this Warrant and sufficient shares of Common Stock to provide for the conversion of such Shares. 3. Adjustment of Exercise Price and Number of Shares. Subject to the provisions of Section 11 hereof, the number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price therefor shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: (a) Reclassification, Consolidation or Merger. In case of any reclassification or change of the Shares, the Company shall execute a new Warrant, providing that the holder of this Warrant shall have the right to exercise such new Warrant, and procure upon such exercise and payment of the same aggregate Exercise Price, in lieu of the Shares theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money and property receivable upon such reclassification or change by a holder of an equivalent number of shares of Shares. Such new Warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 3. The provisions of this subsection (a), subject to Section 11 hereof, shall similarly apply to successive reclassifications or changes. (b) Stock Splits, Dividends and Combinations. In the event that the Company shall at any time subdivide the outstanding Shares, or shall issue a stock dividend on its outstanding Shares, the number of Shares issuable upon exercise of this Warrant immediately prior to such subdivision or to the issuance of such stock dividend shall be proportionately increased, and the Exercise Price shall be proportionately decreased, and in the event that the Company shall at any time combine the outstanding Shares, the number of Shares issuable upon exercise of this Warrant immediately prior to such combination shall be proportionately decreased, and the Exercise Price shall be proportionately increased, effective at the close of business on the date of such subdivision, stock dividend or combination, as the case may be. 4. Notice of Adjustments. Whenever the number of Shares purchasable hereunder or the Exercise Price thereof shall be adjusted pursuant to Section 3 hereof, the Company shall provide notice by first class mail to the holder of this Warrant setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the number of Shares which may be purchased and the Exercise Price therefor after giving effect to such adjustment. 5. Fractional Shares. No fractional Shares may be issued in connection with any exercise hereunder. In lieu of such fractional shares, the Company shall make a cash payment therefor based upon the fair market value of the Shares. -3- 4 6. Representations and Warranties by the Holder. The Holder represents and warrants to the Company as follows: (a) This Warrant and the Shares issuable upon exercise thereof are being acquired for their own accounts, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act of 1933, as amended (the "Act"). Upon exercise of this Warrant, the Holder shall, if so requested by the Company, confirm in writing, in a form satisfactory to the Company, that the securities issuable upon exercise of this Warrant are being acquired for investment and not with a view toward distribution or resale. (b) The Holder understands that the Warrant and the Shares have not been registered under the Act by reason of their issuance in a transaction exempt from the registration and prospectus delivery requirements of the Act pursuant to Section 4(2) thereof, and that they must be held by the Holder indefinitely, and that the Holder must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Act or is exempted from such registration. The Holder further understands that the Shares have not been qualified under the California Securities Law of 1968 (the "California Law") by reason of their issuance in a transaction exempt from the qualification requirements of the California Law pursuant to Section 25102(f) thereof, which exemption depends upon, among other things, the bona fide nature of the Holder's investment intent expressed above. (c) The Holder has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the purchase of this Warrant and the Shares purchasable pursuant to the terms of this Warrant and of protecting its interests in connection therewith. (d) The Holder is able to bear the economic risk of the purchase of the Shares pursuant to the terms of this Warrant. 7. Restrictive Legend. The Shares issuable upon exercise of this Warrant (unless registered under the Act or transferable under Rule 144(k)) shall be stamped or imprinted with a legend in substantially the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE, OFFER OR TRANSFER IS EXEMPT FROM THE -4- 5 REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION. 8. Restrictions Upon Transfer and Removal of Legend. (a) This Warrant is not transferrable except in compliance with applicable securities law. The Company need not register a transfer of Shares bearing the restrictive legend set forth in Section 7 hereof, unless the conditions specified in such legend are satisfied. The Company may also instruct its transfer agent not to register the transfer of the Shares, unless one of the conditions specified in the legend referred to in Section 7 hereof is satisfied. (b) Notwithstanding the provisions of paragraph (a) above, no opinion of counsel or "no-action" letter shall be necessary for a transfer without consideration by any holder (i) to an affiliate of the holder, (ii) if such holder is a partnership, to a partner or retired partner of such partnership who retires after the date hereof or to the estate of any such partner or retired partner, (iii) if such holder is a corporation, to a shareholder of such corporation, or (iv) by gift, will, or intestate succession of any individual holder to his spouse or siblings, or to the lineal descendants or ancestors of such holder or his spouse, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if such transferee were the original holder hereunder. 9. Rights of Shareholders. No holder of this Warrant shall be entitled, as a Warrant holder, to vote or receive dividends or be deemed the holder of Shares or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. 10. Expiration of Warrant. This Warrant shall expire and shall no longer be exercisable as of 5:00 p.m., California local time, on the fifth anniversary of the date of issuance. -5- 6 11. Amendment. This Warrant and any provision hereof may be amended, waived or terminated only by an instrument in writing signed by the Company and the Holder of this Warrant. 12. Notices, Etc.. All notices and other communications from the Company to the Holder shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by the Holder. 13. Governing Law, Headings. This Warrant is being delivered in the State of California and shall be construed and enforced in accordance with and governed by the laws of such State. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. Issued this ____ day of ______, 19__. COMBICHEM, INC. By: _____________________________________ Title: __________________________________ WARRANT HOLDER: By: ________________________ Title: _____________________ -6- 7 EXHIBIT B-1 NOTICE OF EXERCISE TO: COMBICHEM, INC. Attention: President 1. In lieu of exercising the attached Warrant for cash, check or cancellation of indebtedness, the undersigned hereby elects to effect the net issuance provision of Section l(b) of the attached Warrant and receive _________________ (leave blank if you choose Alternative No. 2 below) Shares of CombiChem, Inc. pursuant to the terms of the attached Warrant. (Initial here if the undersigned elects this alternative) ________________. 2. The undersigned elects to purchase _____________ (leave blank if you choose Alternative No. 1 above) Shares of CombiChem, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such Shares in full, together with all applicable transfer taxes, if any. 3. Please issue a certificate or certificates representing said Shares in the name of the undersigned or in such other name as is specified below: ----------------------------- (Name) ----------------------------- ----------------------------- (Address) 4. The undersigned hereby represents and warrants that the aforesaid are being acquired for the account of the undersigned for investment and not with a view to, or for resale, in connection with the distribution thereof in violation of applicable law, and that the undersigned has no present intention of distributing or reselling such shares in violation of applicable law and all representations and warranties of the undersigned set forth in Section 6 of the attached Warrant are true and correct as of the date hereof. In support thereof, the undersigned agrees to execute an Investment Representation Statement in a form substantially similar to the form attached to the Warrant as Exhibit B-2. -------------------------------- (Signature) Title:___________________________ - ------------------ (Date) -1- 8 EXHIBIT B-2 INVESTMENT REPRESENTATION STATEMENT PURCHASER : _________________________________________________ SELLER : COMBICHEM, INC. COMPANY : COMBICHEM, INC. SECURITY : SHARES OF STOCK, identified in the STOCK PURCHASE WARRANT ISSUED ON ______________, 199__, a copy of which is attached hereto. AMOUNT : ____________________________ SHARES DATE : ________________, 199__ In connection with the purchase of the above-listed Securities, the undersigned represents to the Seller and to the Company the following: (a) The undersigned is aware of the Company's business affairs and financial condition, and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. The undersigned is purchasing these Securities for his/her own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"). (b) The undersigned understands that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of his/her investment intent as expressed herein. In this connection, the undersigned understands that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if this representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) The undersigned further understands that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, the undersigned understands that the Company is under no obligation to register the Securities. In addition, the undersigned understands that the certificate evidencing the Securities will be imprinted with a legend -1- 9 which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company or Rule 144(k) is available. (d) The undersigned is familiar with the provisions of Rule 144, promulgated under the Securities Act, which, in substance, permits limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. The Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the availability of certain public information about the Company, (2) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein, if applicable. (e) The undersigned agrees, in connection with the Company's initial underwritten public offering of the Company's securities, (1) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any Shares of the Company held by the undersigned (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration, and (2) the undersigned further agrees to execute any agreement reflecting (1) above as may be requested by the underwriters at the time of the public offering; provided however that the officers and directors of the Company who own the stock of the Company also agree to such restrictions. (f) The undersigned further understands that in the event all of the applicable requirements of Rule 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. ----------------------------------------- By:______________________________________ Title:___________________________________ Date:_______________________, 19___ -2- 10 SCHEDULE A Warrantholders Sequoia Capital VI Sequoia Technology Partners VI Sequoia XXIV Paine Webber Incorporated as Custodian of the Michael Grossman Rollover IRA North American Trust Company, Trustee FBO SK Int'l SEC E/M Kandel -3- EX-10.16 22 EXHIBIT 10.16 1 EXHIBIT 10.16 THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAWS. WARRANT AGREEMENT To Purchase Shares of the Series C Preferred Stock of COMBICHEM, INC. Dated as of ______________ (the "Effective Date") WHEREAS, CombiChem, Inc., a California corporation (the "Company") has entered into a Master Lease Agreement dated as of November 16, 1994 Equipment Schedule No. VL-2 dated as of April 15, 1996, and related Summary Equipment Schedules (collectively, the "Leases") with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and WHEREAS, the Company desires to grant to Warrantholder, in consideration for such Leases, the right to purchase shares of its Series C Preferred Stock; NOW, THEREFORE, in consideration of the Warrantholder executing and delivering such Leases and in consideration of mutual covenants and agreements contained herein, the Company and Warrantholder agree as follows: 1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK. The Company hereby grants to the Warrantholder, and the Warrantholder is entitled, upon the terms and subject to the conditions hereinafter set forth, to subscribe to and purchase, from the Company, up to _______ fully paid and non-assessable shares of the Company's Series C Preferred Stock ("Preferred Stock") at a purchase price of $.62 per share (the "Exercise Price"), with the aggregate number of shares issuable hereunder determined as set forth below: COMMITMENT AMOUNT UTILIZED AGGREGATE RESULTANT SHARES ISSUABLE HEREUNDER $0.00 - $333,333.00 34,946 $333,333.01 - $666,666.00 69,892 $666,666.01 - $1,000,000.00 104,838 The number and purchase price of such shares are subject to adjustment as provided in Section 8 hereof. 2 2. TERM OF THE WARRANT AGREEMENT. Except as otherwise provided for herein, the term of this Warrant Agreement and the right to purchase Preferred Stock as granted herein shall commence on the Effective Date and shall be exercisable for a period of (i) seven (7) years thereafter or (ii) three (3) years from the effective date of the Company's initial public offering, whichever is longer. 3. EXERCISE OF THE PURCHASE RIGHTS. The purchase rights set forth in this Warrant Agreement are exercisable by the Warrantholder, in whole or in part, at any time, or from time to time, prior to the expiration of the term set forth in Section 2 above, by tendering to the Company at its principal office a notice of exercise in the form attached hereto as Exhibit I (the "Notice of Exercise"), duly completed and executed. Promptly upon receipt of the Notice of Exercise and the payment of the purchase price in accordance with the terms set forth below, and in no event later than twenty-one (21) days thereafter, the Company shall issue to the Warrantholder a certificate for the number of shares of Preferred Stock purchased and shall execute the acknowledgment of exercise in the form attached hereto as Exhibit II (the "Acknowledgment of Exercise") indicating the number of shares which remain subject to future purchases, if any. The Exercise Price may be paid at the Warrantholder's election either (i) by cash or check, or (ii) by surrender of Warrants ("Net Issuance") as determined below. If the Warrantholder elects the Net Issuance method, the Company will issue Preferred Stock in accordance with the following formula: X = Y(A-B) A Where: X = the number of shares of Preferred Stock to be issued to the Warrantholder. Y = the number of shares of Preferred Stock requested to be exercised under this Warrant Agreement. A = the fair market value of one (1) share of Common Stock. B = the Exercise Price. For purposes of the above calculation, current fair market value of Common Stock shall mean with respect to each share of Common Stock: (a) if the exercise is in connection with an initial public offering of the Company's Common Stock, and if the Company's Registration Statement relating to such public offering has been declared effective by the SEC, then the fair market value per share shall be the product of (x) the initial "Price to Public" specified in the final prospectus with respect to the offering and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; (b) if this Warrant is exercised after, and not in connection with the Company's initial public offering, and: 3 (i) if traded on a securities exchange, the fair market value shall be deemed to be the product or (x) the average of the closing prices over a twenty-one (21) day period ending three days before the day the current fair market value of the securities is being determined and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; or (ii) if actively traded over-the-counter, the fair market value shall be deemed to be the product of (x) the average of the closing bid and asked prices quoted on the Nasdaq system (or similar system) over the twenty-one (21) day period ending three days before the day the current fair market value of the securities is being determined and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise; (c) if at any time the Common Stock is not listed on any securities exchange or quoted in the Nasdaq System or the over-the-counter market, the current fair market value of Preferred Stock shall be the product of (x) the highest price per share which the Company could obtain from a willing buyer (not a current employee or director) for shares of Common Stock sold by the Company, from authorized but unissued shares, as determined in good faith by its Board of Directors and (y) the number of shares of Common Stock into which each share of Preferred Stock is convertible at the time of such exercise, unless the Company shall become subject to a merger, acquisition or other consolidation pursuant to which the Company is not the surviving party, in which case the fair market value of Common Stock shall be deemed to be the value received by the holders of the Company's Preferred Stock on a common equivalent basis pursuant to such merger or acquisition. Upon partial exercise by either cash or Net Issuance, the Company shall promptly issue an amended Warrant Agreement representing the remaining number of shares purchasable hereunder. All other terms and conditions of such amended Warrant Agreement shall be identical to those contained herein, including, but not limited to the Effective Date hereof. 4. RESERVATION OF SHARES. (a) Authorization and Reservation of Shares. During the term of this Warrant Agreement, the Company will at all times have authorized and reserved a sufficient number of shares of its Preferred Stock to provide for the exercise of the rights to purchase Preferred Stock as provided for herein. (b) Registration or Listing. If any shares of Preferred Stock required to be reserved hereunder require registration with or approval of any governmental authority under any Federal or State law (other than any registration under the 1933 Act, as then in effect, or any similar Federal statute then enforced, or any state securities law, required by reason of any transfer involved in such conversion), or listing on any domestic securities exchange, before such shares may be issued upon conversion, the Company will, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered, listed or approved for listing on such domestic securities exchange, as the case may be. 5. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor upon the basis of the Exercise Price then in effect. 4 6. NO RIGHTS AS SHAREHOLDER. This Warrant Agreement does not entitle the Warrantholder to any voting rights or other rights as a shareholder of the Company prior to the exercise of the Warrant. 7. WARRANTHOLDER REGISTRY. The Company shall maintain a registry showing the name and address of the registered holder of this Warrant Agreement. 8. ADJUSTMENT RIGHTS. The purchase price per share and the number of shares of Preferred Stock purchasable hereunder are subject to adjustment, as follows: (a) Merger and Sale of Assets. If at any time there shall be a capital reorganization of the shares of the Company's stock (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), or a merger or consolidation of the Company with or into another corporation when the Company is not the surviving corporation, or the sale of all or substantially all of the Company's properties and assets to any other person (hereinafter referred to as a "Merger Event"), then, as a part of such Merger Event, lawful provision shall be made so that the Warrantholder shall thereafter be entitled to receive, upon exercise of the Warrant, the number of shares of preferred stock or other securities of the successor corporation resulting from such Merger Event, equivalent in value to that which would have been issuable if Warrantholder had exercised this Warrant immediately prior to the Merger Event. In any such case, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant Agreement with respect to the rights and interest of the Warrantholder after the Merger Event to the end that the provisions of this Warrant Agreement (including adjustments of the Exercise Price and number of shares of Preferred Stock purchasable) shall be applicable to the greatest extent possible. (b) Reclassification of Shares. If the Company at any time shall, by combination, reclassification, exchange or subdivision of securities or otherwise, change any of the securities as to which purchase rights under this Warrant Agreement exist into the same or a different number of securities of any other class or classes, this Warrant Agreement shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities which were subject to the purchase rights under this Warrant Agreement immediately prior to such combination, reclassification, exchange, subdivision or other change. (c) Subdivision or Combination of Shares. If the Company at any time shall combine or subdivide its Preferred Stock, the Exercise Price shall be proportionately decreased in the case of a subdivision, or proportionately increased in the case of a combination. (d) Stock Dividends. If the Company at any time shall pay a dividend payable in, or make any other distribution (except any distribution specifically provided for in the foregoing subsections (a) or (b)) of the Company's stock, then the Exercise Price shall be adjusted, from and after the record date of such dividend or distribution, to that price determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction (i) the numerator of which shall be the total number of all shares of the Company's stock 5 outstanding immediately prior to such dividend or distribution, and (ii) the denominator of which shall be the total number of all shares of the Company's stock outstanding immediately after such dividend or distribution. The Warrantholder shall thereafter be entitled to purchase, at the Exercise Price resulting from such adjustment, the number of shares of Preferred Stock (calculated to the nearest whole share) obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Preferred Stock issuable upon the exercise hereof immediately prior to such adjustment and dividing the product thereof by the Exercise Price resulting from such adjustment. (e) Antidilution Rights. Additional antidilution rights applicable to the Preferred Stock purchasable hereunder are as set forth in the Company's Articles of Incorporation, as amended through the Effective Date, a true and complete copy of which is attached hereto as Exhibit _ (the "Charter") and the Company shall provide the Warrantholder the same notices provided to the holders of Preferred Stock as set forth therein. (f) Notice of Adjustments and other events. If: (i) the Company shall declare any dividend or distribution upon its stock, whether in cash, property, stock or other securities; (ii) the Company shall offer for subscription prorata (other than pursuant to the Investors' Rights Agreement dated as of August 17, 1995 as amended from time to time ("Investors' Rights Agreement") to the holders of any class of its Preferred or other convertible stock any additional shares of stock of any class or other rights; (iii) there shall be any Merger Event; (iv) there shall be an initial public offering; or (v) there shall be any voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in connection with each such event, the Company shall send to the Warrantholder: (A) at least twenty (20) days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights (specifying the date on which the holders of Preferred Stock shall be entitled thereto) or for determining rights to vote in respect of such Merger Event, dissolution, liquidation or winding up; (B) in the case of any such Merger Event, dissolution, liquidation or winding up, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Preferred Stock shall be entitled to exchange their Preferred Stock for securities or other property deliverable upon such Merger Event, dissolution, liquidation or winding up); and (C) in the case of a public offering, the Company shall give the Warrantholder at least twenty (20) days written notice prior to the effective date hereof. Each such written notice shall set forth, in reasonable detail, (i) the event requiring the adjustment, (ii) the amount of the adjustment, (iii) the method by which such adjustment was calculated, (iv) the Exercise Price, and (v) the number of shares subject to purchase hereunder after giving effect to such adjustment, and shall be given by first class mail, postage prepaid, addressed to the Warrantholder, at the address as shown on the books of the Company. (g) Timely Notice. Failure to timely provide such notice required by subsection (f) above shall entitle Warrantholder to retain the benefit of the applicable notice period notwithstanding anything to the contrary contained in any insufficient notice received by Warrantholder. The notice period shall begin five days after the date such notice is deposited in 1st class mail or the date Warrantholder actually receives a written notice from overnight service . 9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. (a) Reservation of Preferred Stock. The Preferred Stock issuable upon exercise of the Warrantholder's rights has been duly and validly reserved and, when issued in accordance with the provisions 6 of this Warrant Agreement, will be validly issued, fully paid and non-assessable, and will be free of any taxes, liens, charges or encumbrances of any nature whatsoever; provided, however, that the Preferred Stock issuable pursuant to this Warrant Agreement may be subject to restrictions on transfer under state and/or Federal securities laws. The Company has made available to the Warrantholder true, correct and complete copies of its Charter and Bylaws, as amended. The issuance of certificates for shares of Preferred Stock upon exercise of the Warrant Agreement shall be made without charge to the Warrantholder for any issuance tax in respect thereof, or other cost incurred by the Company in connection with such exercise and the related issuance of shares of Preferred Stock. The Company shall not be required to pay any tax which may be payable in respect of any transfer involved and the issuance and delivery of any certificate in a name other than that of the Warrantholder. (b) Due Authority. The execution and delivery by the Company of this Warrant Agreement and the performance of all obligations of the Company hereunder, including the issuance to Warrantholder of the right to acquire the shares of Preferred Stock, have been duly authorized by all necessary corporate action on the part of the Company, and the Leases and this Warrant Agreement are not inconsistent with the Company's Charter or Bylaws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Leases and this Warrant Agreement constitute legal, valid and binding agreements of the Company, enforceable in accordance with their respective terms. (c) Consents and Approvals. No consent or approval of, giving of notice to, registration with, or taking of any other action in respect of any state, Federal or other governmental authority or agency is required with respect to the execution, delivery and performance by the Company of its obligations under this Warrant Agreement, except for the filing of notices pursuant to Regulation D under the 1933 Act, if any and any filing required by applicable state securities law, which filings will be effective by the time required thereby. (d) Issued Securities. All issued and outstanding shares of Common Stock, Preferred Stock or any other securities of the Company have been duly authorized and validly issued and are fully paid and nonassessable. All outstanding shares of Common Stock, Preferred Stock and any other securities were issued in full compliance with all Federal and state securities laws. In addition: (i) The authorized capital of the Company consists of : (a) 50,418,334 shares of Preferred stock, no par value, of which 1,000,000 shares have been designated Series A Preferred Stock, all of which are issued and outstanding, 2,226,667 shares have been designated Series B Preferred Stock, all of which are issued and outstanding, 21,000,000 shares have been designated Series C Preferred Stock 17,158,486 of which are issued and outstanding, 1,500,000 shares have been designated Series Z Preferred Stock, 200,000 of which are issued and outstanding, 465,000 shares have been designated Series J Preferred Stock, none of which are issued and outstanding, 1,000,000 shares have been designated Series A-1 Preferred Stock, none of which are issued and outstanding, 2,226,667 shares have been designated Series B- I Preferred Stock, none of which are issued and outstanding, 21,000,000 shares have been designated Series C-1 Preferred Stock, none of which are issued and outstanding; and (b) 60,000,000 shares of common stock, no par value, of which 2,646,660 shares are issued and outstanding. (ii) Except for (A) the conversion privileges of the preferred stock, (B) the rights provided in paragraph 2.3 of the Investors' Rights Agreement, (C) currently outstanding options to purchase 3,089,920 shares of common stock granted to employees or consultants pursuant to the Company's 1995 7 Stock Option/Stock Issuance Plan ("Plan"), (D) options to purchase 465,000 shares of Series J Preferred Stock granted or to be granted to certain employees in connection with their employment by the Company, (e) 120,968 shares of Series C Preferred Stock issuable upon conversion of the Series C Warrants, (F) up to 83,655 shares of Series Z Preferred Stock issuable upon conversion of warrants issued (or to be issued) in connection with the Company's equipment lease line, (G) 35,000 shares of common stock issuable upon conversion of warrants, (H) up to 325,807 shares of Series Z Preferred Stock issuable in connection with that certain Agreement dated August 4, 1995 among the Company, Molecular Simulations Inc. and Entropix Corporation, and (I) the right of first offer and other rights set forth in the Employment Agreement dated on or about March 14, 1996 between the Company and Vicente Anido, there are not outstanding any options, warrants, rights (including conversion or preemptive rights and rights of first refusal) or agreements for the purchase of or acquisition from the Company of any shares of its capital stock. (e) Insurance. The Company has in full force and effect insurance policies, with extended coverage, insuring the Company and its property and business against such losses and risks, and in such amounts, as are customary for corporations engaged in a similar business and similarly situated and as otherwise may be required pursuant to the terms of any other contract or agreement. (f) Other Commitments to Register Securities. Except as set forth in this Warrant Agreement and the Investors' Rights Agreement, the Company is not, pursuant to the terms of any other agreement currently in existence, under any obligation to register under the 1933 Act any of its presently outstanding securities or any of its securities which may hereafter be issued. (g) Exempt Transaction. Subject to the accuracy of the Warrantholder's representations in Section 10 hereof, the issuance of the Preferred Stock upon exercise of this Warrant will constitute a transaction exempt from (i) the registration requirements of Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the qualification requirements of the applicable state securities laws. (h) Compliance with Rule 144. At the written request of the Warrantholder, who proposes to sell Preferred Stock issuable upon the exercise of the Warrant in compliance with Rule 144 promulgated by the Securities and Exchange Commission, the Company shall furnish to the Warrantholder, within ten days after receipt of such request, a written statement confirming the Company's compliance with the filing requirements of the Securities and Exchange Commission as set forth in such Rule, as such Rule may be amended from time to time. 10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. This Warrant Agreement has been entered into by the Company in reliance upon the following representations and covenants of the Warrantholder: (a) Investment Purpose. The right to acquire Preferred Stock or the Preferred Stock issuable upon exercise of the Warrantholder's rights contained herein will be acquired for investment and not with a view to the sale or distribution of any part thereof, and the Warrantholder has no present intention of selling or engaging in any public distribution of the same except pursuant to a registration or exemption. (b) Private Issue. The Warrantholder understands (i) that the Preferred Stock issuable upon exercise 8 of this Warrant is not registered under the 1933 Act or qualified under applicable state securities laws on the ground that the issuance contemplated by this Warrant Agreement will be exempt from the registration and qualifications requirements thereof, and (ii) that the Company's reliance on such exemption is predicated on the representations set forth in this Section 10. (c) Disposition of Warrantholder's Rights. In no event will the Warrantholder make a disposition of any of its rights to acquire Preferred Stock or Preferred Stock issuable upon exercise of such rights unless and until (i) it shall have notified the Company of the proposed disposition, and (ii) if requested by the Company, it shall have furnished the Company with an opinion of counsel (which counsel may either be inside or outside counsel to the Warrantholder) satisfactory to the Company and its counsel to the effect that (A) appropriate action necessary for compliance with the 1933 Act has been taken, or (B) an exemption from the registration requirements of the 1933 Act is available. Notwithstanding the foregoing, the restrictions imposed upon the transferability of any of its rights to acquire Preferred Stock or Preferred Stock issuable on the exercise of such rights do not apply to transfers from the beneficial owner of any of the aforementioned securities to its nominee or from such nominee to its beneficial owner, and shall terminate as to any particular share of Preferred Stock when (1) such security shall have been effectively registered under the 1933 Act and sold by the holder thereof in accordance with such registration or (2) such security shall have been sold without registration in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the Warrantholder at its request by the staff of the Securities and Exchange Commission or a ruling shall have been issued to the Warrantholder at its request by such Commission stating that no action shall be recommended by such staff or taken by such Commission, as the case may be, if such security is transferred without registration under the 1933 Act in accordance with the conditions set forth in such letter or ruling and such letter or ruling specifies that no subsequent restrictions on transfer are required. Whenever the restrictions imposed hereunder shall terminate, as hereinabove provided, the Warrantholder or holder of a share of Preferred Stock then outstanding as to which such restrictions have terminated shall be entitled to receive from the. Company, without expense to such holder, one or more new certificates for the Warrant or for such shares of Preferred Stock not bearing any restrictive legend. (d) Financial Risk. The Warrantholder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment, and has the ability to bear the economic risks of its investment. (e) Risk of No Registration. The Warrantholder understands that if the Company does not register with the Securities and Exchange Commission pursuant to Section 12 of the 1933 Act, or file reports pursuant to Section 15(d), of the Securities Exchange Act of 1934 (the "1934 Act"), or if a registration statement covering the securities under the 1933 Act is not in effect when it desires to sell (i) the rights to purchase Preferred Stock pursuant to this Warrant Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to purchase, it may be required to hold such securities for an indefinite period. The Warrantholder also understands that any sale of its rights of the Warrantholder to purchase Preferred Stock or Preferred Stock which might be made by it in reliance upon Rule 144 under the 1933 Act may be made only in accordance with the terms and conditions of that Rule. (f) Accredited Investor. Warrantholder is an "accredited investor" within the meaning of the Securities and Exchange Rule 501 of Regulation D, as presently in effect. 11. TRANSFERS. Subject to the terms and conditions contained in Section 10 hereof, this Warrant 9 Agreement and all rights hereunder are transferable in whole or in part by the Warrantholder and any successor transferee (which shall be an accredited investor), provided, however, in no event shall the number of transfers of the rights and interests in all of the Warrants exceed three (3) transfers. The transfer shall be recorded on the books of the Company upon receipt by the Company of a notice of transfer in the form attached hereto as Exhibit III (the "Transfer Notice"), at its principal offices and the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. 12. MISCELLANEOUS. (a) Effective Date. The provisions of this Warrant Agreement shall be construed and shall be given effect in all respects as if it had been executed and delivered by the Company on the date hereof. This Warrant Agreement shall be binding upon any successors or assigns of the Company. (b) Attorney's Fees. In any litigation, arbitration or court proceeding between the Company and the Warrantholder relating hereto, the prevailing party shall be entitled to attorneys' fees and expenses and all costs of proceedings incurred in enforcing this Warrant Agreement. (c) Governing Law. This Warrant Agreement shall be governed by and construed for all purposes under and in accordance with the laws of the State of California. (d) Counterparts. This Warrant Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (e) Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery, facsimile transmission (provided that the original is sent by personal delivery or mail as hereinafter set forth) or seven (7) days after deposit in the United States mail, by registered or certified mail, addressed (i) to the Warrantholder at 6111 North River Road, Rosemont, Illinois 60018, attention: James Labe, Venture Group, cc: Legal Department, attn: General Counsel, (and/or, if by facsimile, (708) 518-5466 and (708)518-5088) and (ii) to the Company at 9050 Camino Santa Fe, San Diego, CA 92121, attention: President(and/or if by facsimile, (619)530-9998) or at such other address as any such party may subsequently designate by written notice to the other party. (f) Remedies. In the event of any default hereunder, the non-defaulting party may proceed to protect and enforce its rights either by suit in equity and/or by action at law, including but not limited to an action for damages as a result of any such default, and/or an action for specific performance for any default where Warrantholder will not have an adequate remedy at law and where damages will not be readily ascertainable. The Company expressly agrees that it shall not oppose an application by the Warrantholder or any other person entitled to the benefit of this Agreement requiring specific performance of any or all provisions hereof or enjoining the Company from continuing to commit any such breach of this Agreement. (g) No Impairment of Rights. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate in order to protect the rights of the Warrantholder against impairment. (h) Survival. The representations, warranties, covenants and conditions of the respective parties 10 contained herein or made pursuant to this Warrant Agreement shall survive the execution and delivery of this Warrant Agreement. (i) Severability. In the event any one or more of the provisions of this Warrant Agreement shall for any reason be held invalid, illegal or unenforceable, the remaining provisions of this Warrant Agreement shall be unimpaired, and the invalid, illegal or unenforceable provision shall be replaced by a mutually acceptable valid, legal and enforceable provision, which comes closest to the intention of the parties underlying the invalid, illegal or unenforceable provision. 0) Amendments. Any provision of this Warrant Agreement may be amended by a written instrument signed by the Company and by the Warrantholder. (k) Additional Documents. The Company, upon execution of this Warrant Agreement, shall provide the Warrantholder with certified resolutions with respect to the representations, warranties and covenants set forth in subparagraphs (a) through (d), and (f) of Section 9 above. The Company shall also supply such other documents as the Warrantholder may from time to time reasonably request. IN WITNESS WHEREOF, the parties hereto have caused this Warrant Agreement to be executed by its officers thereunto duly authorized as of the Effective Date. Company: COMBICHEM, INC. By: -------------------------------- Title: President & CEO Warrantholder: COMDISCO, INC. By: -------------------------------- Title: President, Venture Lease Division 11 EXHIBIT I NOTICE OF EXERCISE To: -------------------------- (1) The undersigned Warrantholder hereby elects to purchase _______ shares of the Series ___ Preferred Stock of ______________________, pursuant to the terms of the Warrant Agreement dated the ______ day of _____________, 19__ (the "Warrant Agreement") between _______________________________________ and the Warrantholder, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any. (2) In exercising its rights to purchase the Series ___ Preferred Stock of ____________________, the undersigned hereby confirms and acknowledges the investment representations and warranties made in Section 10 of the Warrant Agreement. (3) Please issue a certificate or certificates representing said shares of Series _____ Preferred Stock in the name of the undersigned or in such other name as is specified below. - ----------------------------- (Name) - ----------------------------- (Address) Warrantholder: COMDISCO, INC. By: -------------------------- Title: ----------------------- Date: ------------------------ I-1 12 EXHIBIT II ACKNOWLEDGEMENT OF EXERCISE The undersigned , hereby acknowledge receipt of the "Notice of Exercise" from Comdisco, Inc., to purchase ________ shares of the Series ___Preferred Stock of __________________________, pursuant to the terms of the Warrant Agreement, and further acknowledges that ________ shares remain subject to purchase under the terms of the Warrant Agreement. Company: By: -------------------------------- Title: ----------------------------- Date: ------------------------------ II-1 13 EXHIBIT III TRANSFER NOTICE (To transfer or assign the foregoing Warrant Agreement execute this form and supply required information. Do not use this form to purchase shares.) FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights evidenced thereby are hereby transferred and assigned to - --------------------------------------- (Please Print) whose address is ----------------------- - --------------------------------------- Dated ----------------------------- Holder's Signature ---------------- Holder's Address ------------------ ---------------------------------- Signature Guaranteed: ------------------ NOTE: The signature to this Transfer Notice must correspond with the name as it appears on the face of the Warrant Agreement, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant Agreement. III-1 14 SCHEDULE A Date of Warrant Number of Shares - --------------- ---------------- 04/15/96 104,838 04/15/96 36,693 06/27/97 98,790 EX-10.17 23 EXHIBIT 10.17 1 EXHIBIT 10.17 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THIS WARRANT. COMBICHEM, INC. WARRANT TO PURCHASE ______ SHARES OF SERIES Z PREFERRED STOCK THIS CERTIFIES THAT, for value received, ___________________ and its assigns are entitled to subscribe for and purchase ______ shares of the fully paid and nonassessable Series Z Preferred Stock (as adjusted pursuant to Section 4 hereof, the "Shares") of COMBICHEM, INC., a California corporation (the "Company"), at the price of $0.62 per share (such price and such other price as shall result, from time to time, from the adjustments specified in Section 4 hereof is herein referred to as the "Warrant Price"), subject to the provisions and upon the terms and conditions hereinafter set forth; provided, however, that this Warrant shall first become exercisable (i) as to _____ Shares upon the date of the first funding under the Loan Agreement (as defined below); (ii) as to an additional _____ Shares upon the earlier to occur of (A) the date of the second funding under the Loan Agreement or (B) the date of the funding under the Loan Agreement which causes the aggregate amount funded under the Loan Agreement to exceed $250,000; (iii) as to an additional _____ Shares upon the earlier to occur of (A) the date of the third funding under the Loan Agreement or (B) the date of the funding under the Loan Agreement which causes the aggregate amount funded under the Loan Agreement to exceed $500,000; and (iv) as to an additional _____ Shares upon the earlier to occur of (A) the date of the fourth funding under the Loan Agreement or (B) the date of the funding under the Loan Agreement which causes the aggregate amount funded under the Loan Agreement to exceed $750,000; provided, further, that notwithstanding the number of fundings under the Loan Agreement or the amount funded under the Loan Agreement, this Warrant shall be exercisable as to all 27,581 Shares on April 30, 1997. As used herein, (a) the term "Series Preferred" shall mean the Company's presently authorized Series Z Preferred Stock, and any stock into or for which such Series Z Preferred Stock may hereafter be converted or exchanged, (b) the term "Date of Grant" shall mean May 20, 1996, (c) the term "Loan Agreement" shall mean the Loan and Security Agreement, dated as of the Date of Grant, among the Company, MMC/GATX Partnership No. I and Silicon Valley Bank, and (d) the term "Other Warrants" shall mean any other warrants issued by the Company in connection with the transaction with respect to which this Warrant was issued, and any warrant issued upon transfer or partial exercise of this Warrant. The term "Warrant" as used herein shall be deemed to include Other Warrants unless the context clearly requires otherwise. 2 1. Term. The purchase right represented by this Warrant is exercisable, in whole or in part, at any time and from time to time from the Date of Grant through the later of (i) ten (10) years after the Date of Grant or (ii) five (5) years after the closing of the Company's initial public offering of its Common Stock effected pursuant to a Registration Statement on Form S-1 (or its successor) filed under the Securities Act of 1933, as amended (the "Act"). 2. Method of Exercise; Payment; Issuance of New Warrant. Subject to Section 1 hereof, the purchase right represented by this Warrant may be exercised by the holder hereof, in whole or in part and from time to time, by either, at the election of the holder hereof, (a) the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A duly executed) at the principal office of the Company and by the payment to the Company, by check, of an amount equal to the then applicable Warrant Price multiplied by the number of Shares then being purchased, or (b) if in connection with a registered public offering of the Company's securities, the surrender of this Warrant (with the notice of exercise form attached hereto as Exhibit A-1 duly executed) at the principal office of the Company together with notice of arrangements reasonably satisfactory to the Company for payment to the Company either by check or from the proceeds of the sale of shares to be sold by the holder in such public offering of an amount equal to the then applicable Warrant Price per share multiplied by the number of Shares then being purchased. The person or persons in whose name(s) any certificate(s) representing shares of Series Preferred shall be issuable upon exercise of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the shares represented thereby (and such shares shall be deemed to have been issued) immediately prior to the close of business on the date or dates upon which this Warrant is exercised. In the event of any exercise of the rights represented by this Warrant, certificates for the shares of stock so purchased shall be delivered to the holder hereof as soon as possible and in any event within thirty days after such exercise and, unless this Warrant has been fully exercised or expired, a new Warrant representing the portion of the Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the holder hereof as soon as possible and in any event within such thirty-day period. 3. Stock Fully Paid; Reservation of Shares. All Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance pursuant to the terms and conditions herein, be fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issue thereof. During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of the issue upon exercise of the purchase rights evidenced by this Warrant, a sufficient number of shares of its Series Preferred to provide for the exercise of the rights represented by this Warrant and a sufficient number of shares of its Common Stock to provide for the conversion of the Series Preferred into Common Stock. 4. Adjustment of Warrant Price and Number of Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows: 2 3 (a) Reclassification or Merger. In case of any reclassification, change or conversion of securities of the class issuable upon exercise of this Warrant (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), or in case of any merger of the Company with or into another corporation (other than a merger with another corporation in which the Company is the acquiring and the surviving corporation and which does not result in any reclassification or change of outstanding securities issuable upon exercise of this Warrant), or in case of any sale of all or substantially all of the assets of the Company, the Company, or such successor or purchasing corporation, as the case may be, shall duly execute and deliver to the holder of this Warrant a new Warrant (in form and substance satisfactory to the holder of this Warrant), so that the holder of this Warrant shall have the right to receive, at a total purchase price not to exceed that payable upon the exercise of the unexercised portion of this Warrant, and in lieu of the shares of Series Preferred theretofore issuable upon exercise of this Warrant, the kind and amount of shares of stock, other securities, money.and property receivable upon such reclassification, change or merger by a holder of the number of shares of Series Preferred then purchasable under this Warrant. Such new Warrant shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. In addition, in the event that all the authorized shares of Series Preferred are converted into shares of Common Stock or any other series or class of capital stock of the Company or in the case of any amendment or waiver of any of the terms of the antidilution protection of the Series Preferred, then this Warrant shall be deemed to be amended so that the holder of this Warrant shall continue to be entitled to antidilution protection as nearly equivalent as may be practicable to the antidilution protection applicable to the Series Preferred on the Date of Grant, and the Company shall duly execute and deliver to the holder of this Warrant a supplement hereto to such effect, in form and substance reasonably satisfactory to the holder of this Warrant. The provisions of this subparagraph (a) shall similarly apply to successive reclassifications, changes, mergers, consolidations, transfers, amendments and waivers. (b) Subdivision or Combination of Shares. If the Company at any time while this Warrant remains outstanding and unexpired shall subdivide or combine its outstanding shares of Series Preferred, the Warrant Price shall be proportionately decreased in the case of a subdivision or increased in the case of a combination, effective at the close of business on the date the subdivision or combination becomes effective. (c) Stock Dividends and Other Distributions. If the Company at any time while this Warrant is outstanding and unexpired shall (i) pay a dividend with respect to Series Preferred payable in Series Preferred, or (ii) make any other distribution with respect to Series Preferred (except any distribution specifically provided for in the foregoing subparagraphs (a) and (b)) of Series Preferred, then the Warrant Price shall be adjusted, from and after the date of determination of shareholders entitled to receive such dividend or distribution, to that price determined by multiplying the Warrant Price in effect immediately prior to such date of determination by a fraction (i) the numerator of which shall be the total number of shares of Series Preferred outstanding immediately prior to such dividend or distribution, and (ii) the 3 4 denominator of which shall be the total number of shares of Series Preferred outstanding immediately after such dividend or distribution. (d) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price, the number of Shares of Series Preferred purchasable hereunder shall be adjusted, to the nearest whole share, to the product obtained by multiplying the number of Shares purchasable immediately prior to such adjustment in the Warrant Price by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately thereafter. (e) Antidilution Rights. The other antidilution rights applicable to the Shares and the Common Stock of the Company are set forth in Section 4 of Division B of Article III of the Company's Articles of Incorporation, as amended through the Date of Grant (the "Charter"), a true and complete copy of which is attached hereto as Exhibit B. Such antidilution rights shall not be restated, amended, modified or waived in any manner that is adverse to the holder hereof without such holder's prior written consent. The Company shall promptly provide the holder hereof with any restatement, amendment, modification or waiver of the Charter promptly after the same has been made. 5. Notice of Adjustments. Whenever the Warrant Price or the number of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Warrant Price and the number of Shares purchasable hereunder after giving effect to such adjustment, which shall be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. In addition, whenever the conversion price or conversion ratio of the Series Preferred shall be adjusted, the Company shall make a certificate signed by its chief financial officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the conversion price or ratio of the Series Preferred after giving effect to such adjustment, and shall cause copies of such certificate to be mailed (without regard to Section 13 hereof, by first class mail, postage prepaid) to the holder of this Warrant. 6. Fractional Shares. No fractional shares of Series Preferred will be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the fair market value of the Series Preferred on the date of exercise as reasonably determined in good faith by the Company's Board of Directors. 7. Compliance with Securities Act: Disposition of Warrant or Shares of Series Preferred. (a) Compliance with Securities Act. The holder of this Warrant, by acceptance hereof, agrees that this Warrant, and the shares of Series Preferred to be issued upon exercise hereof and any Common Stock issued upon conversion thereof are being acquired for investment 4 5 and that such holder will not offer, sell or otherwise dispose of this Warrant, or any shares of Series Preferred to be issued upon exercise hereof or any Common Stock issued upon conversion thereof except under circumstances which will not result in a violation of the Act. Upon exercise of this Warrant, unless the Shares being acquired are registered under the Act or an exemption from such registration is available, the holder hereof shall confirm in writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that the shares of Series Preferred so purchased (and any shares of Common Stock issued upon conversion thereof) are being acquired for investment and not with a view toward distribution or resale. This Warrant and all shares of Series Preferred issued upon exercise of this Warrant and all shares of Common Stock issued upon conversion thereof (unless registered under the Act) shall be stamped or imprinted with a legend in substantially the following form: "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (i) EFFECTIVE REGISTRATION STATEMENTS RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATIONS ARE NOT REQUIRED, (iii) RECEIPT OF NO-ACTION LETTERS FROM THE APPROPRIATE GOVERNMENTAL AUTHORITIES, OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION 7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED, DIRECTLY OR INDIRECTLY." In addition, in connection with the issuance of this Warrant, the holder specifically represents to the Company by acceptance of this Warrant as follows: (1) The holder is aware of the Company's business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire this Warrant. The holder is acquiring this Warrant for its own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Act. (2) The holder understands that this Warrant has not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the holder's investment intent as expressed herein. In this connection, the holder understands that, in the view of the SEC, the statutory basis for such exemption may be unavailable if the holder's representation was predicated solely upon a present intention to hold the Warrant for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Warrant, or for a period of one year or any other fixed period in the future. (3) The holder further understands that this Warrant must be held indefinitely unless subsequently registered under the Act and any applicable state securities laws, or unless exemptions from registration are otherwise available. Moreover, the holder understands that the 5 6 Company is under no obligation to register this Warrant or the Shares except as provided in Section 9 hereof. (4) The holder is aware of the provisions of Rule 144 and 144A, promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), in a non-public offering subject to the satisfaction of certain conditions, if applicable, including, among other things: The availability of certain public information about the Company, the resale occurring not less than two years after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934, as amended) and the amount of securities being sold during any three-month period not exceeding the specified limitations stated therein. (5) The holder further understands that at the time it wishes to sell this Warrant there may be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirements of Rule 144 and 144A, and that, in such event, the holder may be precluded from selling this Warrant or the Shares under Rule 144 and 144A even if the two-year minimum holding period had been satisfied. (6) The holder further understands that in the event all of the requirements of Rule 144 and 144A are not satisfied, registration under the Act, compliance with Regulation A, or some other registration exemption will be required; and that, not withstanding the fact that Rule 144 and 144A are not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 and 144A will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. (b) Disposition of Warrant or Shares. With respect to any offer, sale or other disposition of this Warrant or any shares of Series Preferred acquired pursuant to the exercise of this Warrant prior to registration of such Warrant or shares, the holder hereof and each subsequent holder of this Warrant agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such holder's counsel, if reasonably requested by the Company, to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of this Warrant or such shares of Series Preferred or Common Stock and indicating whether or not under the Act certificates for this Warrant or such shares of Series Preferred to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company, as promptly as practicable, shall notify such holder that such holder may sell or otherwise dispose of this Warrant or such shares of Series Preferred or Common Stock, all in accordance with the 6 7 terms of the notice delivered to the Company. If a determination has been made pursuant to this subsection (b) that the opinion of counsel for the holder is not reasonably satisfactory to the Company, the Company shall so notify the holder promptly after such determination has been made and shall specify in detail the legal analysis supporting any such conclusion. Notwithstanding the foregoing, this Warrant or such shares of Series Preferred or Common Stock may, as to such federal laws, be offered, sold or otherwise disposed of in accordance with Rule 144 or 144A under the Act, provided that the Company shall have been furnished with such information as the Company may reasonably request to provide a reasonable assurance that the provisions of Rule 144 or 144A have been satisfied. Each certificate representing this Warrant or the shares of Series Preferred thus transferred (except a transfer pursuant to Rule 144 or 144A) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the holder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. (c) Excepted Transfers. Neither any restrictions of any legend described in this Warrant nor the requirements of Section 7(b) above shall apply to any transfer without any additional consideration of, or grant of a security interest in, this Warrant or any part hereof (i) to a partner of the holder if the holder is a partnership, (ii) by the holder to a partnership of which the holder is a general partner, or (iii) to any affiliate of the holder if the holder is a corporation; provided, however, in any such transfer, the transferee shall on the Company's request agree in writing to be bound by the terms of this Warrant as if an original signatory hereto. 8. Rights as Shareholders; Information. No holder of this Warrant, as such, shall be entitled to vote or receive dividends or be deemed the holder of Series Preferred or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Warrant shall have been exercised and the Shares purchasable upon the exercise hereof shall have become deliverable, as provided herein. Notwithstanding the foregoing, the Company will transmit to the holder of this Warrant such information, documents and reports as are generally distributed to the holders of any class or series of the securities of the Company concurrently with the distribution thereof to the shareholders. 9. Registration Rights. The Company covenants and agrees as follows: 9.1 Definitions. For purposes of this Section 9: (a) The term "Registrable Shares" means (i) the Common Stock issuable or issued upon conversion of the Series Preferred issuable or issued upon exercise or conversion of this Warrant or upon exercise or conversion of the Other Warrants, and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right 7 8 or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such Common Stock or Series Preferred; (b) The term "Shareholder" means any person owing or having the right to acquire Registrable Shares or any assignee thereof in accordance with Paragraph 9.3 hereof, and (c) The term "Registration Rights" means the rights set forth in Section 1 (other than Section 1.2) of the Investor Rights Agreement dated as of August 17, 1995, by and among the Company and the investors who are signatories thereto (the "Registration Rights Agreement"). 9.2 Grant of Rights. The Company hereby grants to the Shareholders the Registration Rights. A true and complete copy of the Registration Rights is attached hereto as Exhibit C. The Company represents and warrants to the Shareholders that the Company has obtained all consents of parties to the Registration Rights Agreement and of any other persons that are required in order for the Registrable Shares to be included in the definition of "Registrable Securities" and for the Shareholders to be included in the definition of "Holders," as such terms are used in the Registration Rights Agreement. 9.3 Assignment of Registration Rights. Notwithstanding any provision of the Registration Rights Agreement, the rights to cause the Company to register Registrable Shares pursuant to the Registration Rights and this Section 9 may be assigned by a Shareholder to a transferee or assignee of such securities provided the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; and provided, further, that such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 9.4 No Conflicting Agreements. The Company represents and warrants to the Shareholders that the Company is not a party to any agreement that conflicts in any manner with the Shareholders' rights to cause the Company to register Registrable Shares pursuant to the Registration Rights and this Section 9. The Company covenants and agrees that it shall not, without the prior written consent of the Shareholders holding a majority of the outstanding Registrable Shares, amend, modify or restate the Registration Rights if the rights of the Shareholders would be subordinated, diminished or otherwise adversely affected in a different manner than other "Holders" of "Registrable Securities" (as defined in the Registration Rights Agreement). 9.5 Rights and Obligations Survive Exercise and Expiration of Warrant. The rights and obligations of the Company, of the holder of this Warrant and of the Registrable Shares contained in the Registration Rights and this Section 9 shall survive exercise, conversion and expiration of this Warrant. 8 9 10. Additional Rights. 10.1 Secondary Sales. The Company agrees that it will not interfere with the holder of this Warrant in obtaining liquidity if opportunities to make secondary sales of the Company's securities become available. To this end, the Company will promptly provide the holder of this Warrant with the same notice (if any) as it provides to other holders of the Company's securities of any offer to acquire from the Company's security holders more than five percent (5%) of the total voting power of the Company and will not interfere with the holder in arranging the sale of this Warrant to the person or persons making such offer. 10.2 Mergers. The Company will provide the holder of this Warrant with at least 30 days' notice of the terms and conditions of any proposed (i) sale, lease, exchange, conveyance or other disposition of all or substantially all of its property or business, or (ii) merger into or consolidation with any other corporation (other than a wholly-owned subsidiary of the Company), or any other transaction (including a merger or other reorganization) or series of related transactions, in which more than 50% of the voting power of the Company is disposed of. 10.3 Right to Convert Warrant into Common Stock: Net Issuance. (a) Right to Convert. In addition to and without limiting the rights of the holder under the terms of this Warrant, the holder shall have the right to convert this Warrant or any portion thereof (the "Conversion Right") into shares of Series Preferred (or Common Stock if the Series Preferred has been automatically converted into Common Stock) as provided in this Section 10.3 at any time or from time to time during the term of this Warrant. Upon exercise of the Conversion Right with respect to a particular number of shares subject to this Warrant (the "Converted Warrant Shares"), the Company shall deliver to the holder (without payment by the holder of any exercise price or any cash or other consideration) (X) that number of shares of fully paid and nonassessable Series Preferred (or Common Stock if the Series Preferred has been automatically converted into Common Stock) equal to the quotient obtained by dividing the value of this Warrant (or the specified portion hereof) on the Conversion Date (as defined in subsection (b) hereof), which value shall be determined by subtracting (A) the aggregate Warrant Price of the Converted Warrant Shares immediately prior to the exercise of the Conversion Right from (B) the aggregate fair market value of the Converted Warrant Shares issuable upon exercise of this Warrant (or the specified portion hereof) on the Conversion Date (as herein defined) by (Y) the fair market value of one share of Series Preferred (or Common Stock if the Series Preferred has been automatically converted into Common Stock) on the Conversion Date (as herein defined). Expressed as a formula, such conversion shall be computed as follows: X=B - A ----- Y 9 10 Where: X = the number of shares of Series Preferred (or Common Stock) that may be issued to holder Y = the fair market value (FMV) of one share of Series Preferred (or Common Stock) A = the aggregate Warrant Price (i.e., Converted Warrant Shares x Warrant Price) B = the aggregate FMV (i.e., FMV x Converted Warrant Shares) No fractional shares shall be issuable upon exercise of the Conversion Right, and, if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Company shall pay to the holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as hereinafter defined). (b) Method of Exercise. The Conversion Right may be exercised by the holder by the surrender of this Warrant at the principal office of the Company together with a notice of exercise substantially in the form attached hereto as Exhibit A-2, specifying that the holder thereby intends to exercise the Conversion Right and indicating the number of shares subject to this Warrant that are being surrendered (referred to in subsection (a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right. Such conversion shall be effective upon receipt by the Company of this Warrant together with the aforesaid notice of exercise, or on such later date as is specified therein (the "Conversion Date"), and, at the election of the holder hereof, may be made contingent upon the closing of the sale of the Company's Common Stock to the public in a public offering pursuant to a Registration Statement under the Act (a "Public Offering"). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Conversion Date and shall be delivered to the holder within thirty (30) days following the Conversion Date. Any conversion from Series Preferred to Common Stock shall be in a ratio of one (1) share of Common Stock for each share of Series Preferred (as adjusted herein and in the Charter). On the Date of Grant, the each Share of Series Preferred purchasable under this Warrant is convertible into one share of Common Stock. (c) Determination of Fair Market Value. For purposes of this Section 10.3, "fair market value" of a share of Series Preferred (or Common Stock if the Series Preferred has been automatically converted into Common Stock) as of a particular date (the "Determination Date") shall mean: (i) If the Conversion Right is exercised in connection with and contingent upon a Public Offering, and if the Company's Registration Statement relating to such Public Offering ("Registration Statement") has been declared effective by the SEC, then the initial "Price to Public" specified in the final prospectus with respect to such offering multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible. 10 11 (ii) If the Conversion Right is not exercised in connection with and contingent upon a Public Offering, then as follows: (A) If traded on a securities exchange or the Nasdaq National Market, the fair market value of the Common Stock shall be deemed to be the average of the closing or last reported sale prices of the Common Stock on such exchange or market over the 30-day period ending five business days prior to the Determination Date, and the fair market value of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible; (B) If otherwise traded in an over-the-counter market, the fair market value of the Common Stock shall be deemed to be the average of the closing ask prices of the Common Stock over the 30-day period ending five business days prior to the Determination Date, and the fair market value of the Series Preferred shall be deemed to be such fair market value of the Common Stock multiplied by the number of shares of Common Stock into which each share of Series Preferred is then convertible; and (C) If there is no public market for the Common Stock, then fair market value shall be determined by mutual agreement of the holder of this Warrant and the Company, and if the holder and the Company are unable to so agree, at the Company's sole expense by an investment banker or business appraiser of national reputation selected by the Company and reasonably acceptable to the holder of this Warrant. 11. Representations and Warranties. The Company represents and warrants to the holder of this Warrant as follows: (a) This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and the rules of law or principles at equity governing specific performance, injunctive relief and other equitable remedies; (b) The Shares have been duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable; (c) The rights, preferences, privileges and restrictions granted to or imposed upon the Series Preferred and the holders thereof are as set forth in the Charter, as amended to the Date of the Grant, a true and complete copy of which has been delivered to the original holder of this Warrant and is attached hereto as Exhibit B; 11 12 (d) The shares of Common Stock issuable upon conversion of the Shares have been duly authorized and reserved and, when issued in accordance with the terms of the Charter, as amended, will be validly issued, fully paid and nonassessable; and (e) The execution and delivery of this Warrant are not, and the issuance of the Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company's Charter or by-laws, do not and will not contravene any law, governmental rule or regulation, judgment or order applicable to the Company, and do not and will not conflict with or contravene any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument of which the Company is a party or by which it is bound or require the consent or approval of, the giving of notice to, the registration or filing with or the taking of any action in respect of or by, any Federal, state or local government authority or agency or other person, except for the filing of notices pursuant to federal and state securities laws, which filings will be effected by the time required thereby. (f) There are no actions, suits, audits, investigations or proceedings pending or, to the knowledge of the Company, threatened against the Company in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Company to perform its obligations under this Warrant. 12. Modification and Waiver. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 13. Notices. Any notice, request, communication or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered, or shall be sent by certified or registered mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor on the signature page of this Warrant. 14. Binding Effect on Successors. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets, and all of the obligations of the Company relating to the Series Preferred issuable upon the exercise or conversion of this Warrant shall survive the exercise, conversion and termination of this Warrant and all of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. The Company will, at the time of the exercise or conversion of this Warrant, in whole or in part, upon request of the holder hereof but at the Company's expense, acknowledge in writing its continuing obligation to the holder hereof in respect of any rights (including, without limitation, any right to registration of the shares of Registrable Securities to which the holder hereof shall continue to be entitled after such exercise or conversion in accordance with this Warrant; provided, that the failure of the holder hereof to make any such request shall not affect the continuing obligation of the Company to the holder hereof in respect of such rights. 12 13 15. Lost Warrants or Stock Certificates. The Company covenants to the holder hereof that, upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant or any stock certificate and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant or stock certificate, the Company will make and deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate. 16. Descriptive Headings. The descriptive headings of the several paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. 17. Governing Law. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of California. 18. Survival of Representations Warranties and Agreements. All representations and warranties of the Company and the holder hereof contained herein shall survive the Date of Grant, the exercise or conversion of this Warrant (or any part hereof) or the termination or expiration of rights hereunder. All agreements of the Company and the holder hereof contained herein shall survive indefinitely until, by their respective terms, they are no longer operative. 19. Remedies. In case any one or more of the covenants and agreements contained in this Warrant shall have been breached, the holders hereof (in the case of a breach by the Company), or the Company (in the case of a breach by a holder), may proceed to protect and enforce their or its rights either by suit in equity and/or by action at law, including, but not limited to, an action for damages as a result of any such breach and/or an action for specific performance of any such covenant or agreement contained in this Warrant. 20. Value. The Company and the holder of this Warrant agree that the value of this Warrant and the Other Warrants on the Date of Grant is $100.00. 21. Acceptance. Receipt of this Warrant by the holder hereof shall constitute acceptance of and agreement to the foregoing terms and conditions. 22. No Impairment of Rights. The Company will not, by amendment of its Charter or through any other means, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against impairment. COMBICHEM, INC. By --------------------------------- Title ------------------------------ Address: 9050 Camino Santa Fe San Diego, California 92121 13 14 EXHIBIT A NOTICE OF EXERCISE To: COMBICHEM, INC. 1. The undersigned hereby elects to purchase __________ shares of Series Z Preferred Stock of COMBICHEM, INC. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: --------------------- (Name) --------------------- --------------------- (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. In support thereof, the undersigned has executed an Investment Representation Statement attached hereto as Schedule 1. ----------------------------------- (Signature) - ----------------------------- (Date) 15 EXHIBIT A-1 NOTICE OF EXERCISE To: COMBICHEM, INC. (the "Company") 1. Contingent upon and effective immediately prior to the closing (the "Closing") of the Company's public offering contemplated by the Registration Statement on Form S-_, filed __________, 199_ the undersigned hereby elects to purchase _________ shares of Series Z Preferred Stock of the Company (or such lesser number of shares as may be sold on behalf of the undersigned at the Closing) pursuant to the terms of the attached Warrant. 2. Please deliver to the custodian for the selling shareholders a stock certificate representing such ___________ shares. 3 . The undersigned has instructed the custodian for the selling shareholders to deliver to the Company $______________ or, if less, the net proceeds due the undersigned from the sale of shares in the aforesaid public offering. If such net proceeds are less than the purchase price for such shares, the undersigned agrees to deliver the difference to the Company prior to the Closing. ----------------------------------- (Signature) - ----------------------------- (Date) 16 EXHIBIT A-2 NOTICE OF EXERCISE OF NET ISSUANCE CONVERSION RIGHTS To: COMBICHEM, INC. 1. The undersigned, the registered holder of the Warrant delivered herewith (the "Warrant"), hereby elects to exercise the Conversion Right (as defined in Section 10.3 of the Warrant) as provided herein. ___________ shares subject to the Warrant are being surrendered hereby in exercise of the Conversion Right. The number of shares to be issued pursuant to this exercise shall be determined by reference to the formula in Section 10.3(a) of the Warrant, which requires the use of the "fair market value" of the Company's stock. As of the Determination Date (as defined in the Warrant), the "fair market value" of one share of Series Preferred Stock (or Common Stock if the Series Z Preferred Stock has been automatically converted into Common Stock) shall be determined in the manner provided in Section 10.3(c) of the Warrant, which amount has been determined by the undersigned (or agreed to by the holder of the Warrant and COMBICHEM, INC.) to be $_____________ per share. Therefore, ___________ shares are to be issued to the undersigned pursuant to this exercise. 2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below: --------------------- (Name) --------------------- --------------------- (Address) 3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. In support thereof, the undersigned has executed an Investment Representation Statement attached hereto as Schedule 1. ----------------------------------- (Signature) - ----------------------------- (Date) 17 SCHEDULE A Warrantholder Number of Shares - ------------- ---------------- Silicon Valley Bank 27,581 MMC/GATX Partnership No. 1 85,322 EX-10.18 24 EXHIBIT 10.18 1 Exhibit 10.18 MASTER LEASE AGREEMENT COMDISCO, INC. - LESSOR MASTER LEASE AGREEMENT DATED NOVEMBER 16, 1994, BY AND BETWEEN COMDISCO, INC. ("LESSOR") and COMBICHEM, INC. ("LESSEE"). IN CONSIDERATION OF THE MUTUAL AGREEMENTS DESCRIBED BELOW, THE PARTIES AGREE AS FOLLOWS (ALL CAPITALIZED TERMS ARE DEFINED IN SECTION 14.19): 1. PROPERTY LEASED. Lessor leases to Lessee all of the Equipment described on each Schedule. In the event of a conflict, the terms of a Schedule prevail over this Master Lease. 2. TERM. On the Commencement Date, Lessee will be deemed to accept the Equipment, will be bound to its rental obligations for each item of Equipment and the term of a Schedule will begin and continue through the Initial Term and thereafter until terminated by either party upon prior written notice received during the Notice Period. No termination may be effective prior to the expiration of the Initial Term. 3. RENT AND PAYMENT. Rent is due and payable in advance, in immediately available funds, on the first day of each Rent Interval to the payee and at the location specified in Lessor's invoice. Interim Rent is due and payable when invoiced. If any payment is not made when due, Lessee will pay interest at the Overdue Rate. Upon Lessee's execution of each Schedule, Lessee will pay Lessor the Advance specified on the Schedule. The Advance will be credited towards the final Rent payment if Lessee is not then in default. No interest will be paid on the Advance. 4. SELECTION; WARRANTY AND DISCLAIMER OF WARRANTIES. 4.1 SELECTION. Lessee acknowledges that it has selected the Equipment and disclaims any reliance upon statements made by the Lessor. 4.2 WARRANTY AND DISCLAIMER OF WARRANTIES. Lessor warrants to Lessee that, so long as Lessee is not in default, Lessor will not disturb Lessee's quiet and peaceful possession, and unrestricted use of the Equipment. To the extent permitted by the manufacturer, Lessor assigns to Lessee during the term of the Schedule any manufacturer's warranties for the Equipment. LESSOR MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT OR ITS FITNESS FOR A PARTICULAR PURPOSE. Lessor is not responsible for any liability, claim, loss, damage or expense of any kind (including strict liability in tort) caused by the Equipment except for any loss or damage caused by the negligent acts of Lessor. In no event is Lessor responsible for special, incidental or consequential damages. 5. TITLE; RELOCATION OR SUBLEASE; AND ASSIGNMENT. 5.1 TITLE. Lessee holds the Equipment subject and subordinate to the rights of the Owner, Lessor, any Assignee and any Secured Party. Lessee authorizes Lessor, as Lessee's agent, to prepare, execute and file in Lessee's name precautionary Uniform Commercial Code financing statements showing the interest of the Owner, 2 Lessor, and any Assignee or Secured Party in the Equipment and to insert serial numbers in Schedules as appropriate. Lessee will, at its expense, keep the Equipment free and clear from any liens or encumbrances of any kind (except any caused by Lessor) and will indemnify and hold Lessor, Owner, any Assignee and Secured Party harmless from and against any loss caused by Lessee's failure to do so. 5.2 RELOCATION OR SUBLEASE. Upon prior written consent, Lessee may relocate Equipment to any location within the continental United States provided (i) the Equipment will not be used by an entity exempt from federal income tax, (ii) all additional costs (including any administrative fees, additional taxes and insurance coverage) are reconciled and promptly paid by Lessee. Lessee may sublease the Equipment upon the reasonable consent of the Lessor and the Secured Party. Such consent to sublease will be granted if: (i) Lessee meets the relocation requirements set out above, (ii) the sublease is expressly subject and subordinate to the terms of the Schedule, (iii) Lessee assigns its rights in the sublease to Lessor and the Secured Party as additional collateral and security, (iv) Lessee's obligation to maintain and insure the Equipment is not altered, (v) all financing statements required to continue the Secured Party's prior perfected security interest are filed, and (vi) the sublease is not to a leasing entity affiliated with the manufacturer of the Equipment described on the Schedule. Lessor acknowledges Lessee's right to sublease for a term which extends beyond the expiration of the Initial Term. If Lessee subleases the Equipment for a term extending beyond the expiration of such Initial Term of the applicable Schedule. Lessee will remain obligated upon the expiration of the Initial Term to return such Equipment, or, at Lessor's sole discretion to (i) return Like Equipment or (ii) negotiate a mutually acceptable lease extension or purchase. If the parties cannot mutually agree upon the terms of an extension or purchase, the term of the Schedule will extend upon the original terms and conditions until terminated pursuant to Section 2. No relocation or sublease will relieve Lessee from any of its obligations under this Master Lease and the relevant Schedule. 5.3 ASSIGNMENT BY LESSOR. The terms and conditions of each Schedule have been fixed by Lessor in order to permit Lessor to sell and/or assign or transfer its interest or grant a security interest in each Schedule and/or the Equipment to a Secured Party or Assignee. In that event, the term Lessor will mean the Assignee and any Secured Party. However, any assignment, sale, or other transfer by Lessor will not relieve Lessor of its obligations to Lessee and will not materially change Lessee's duties or materially increase the burdens or risks imposed on Lessee. The Lessee consents to and will acknowledge such assignments in a written notice given to Lessee. Lessee also agrees that: (a) The Secured Party will be entitled to exercise all of Lessor's rights, but will not be obligated to perform any of the obligations of Lessor. The Secured Party will not disturb Lessee's quiet and peaceful possession and unrestricted use of the Equipment so long as Lessee is not in default and the Secured Party continues to receive all Rent payable under the Schedule; and (b) Lessee will pay all Rent and all other amounts payable to the Secured Party, despite any defense or claim which it has against Lessor. Lessee reserves its right to have recourse directly against Lessor for any defense or claim; (c) Subject to and without impairment of Lessee's leasehold rights in the Equipment, Lessee holds the Equipment for the Secured Party to the extent of the Secured Party's rights in that Equipment. 6. NET LEASE; TAXES AND FEES. 6.1 NET LEASE. Each Schedule constitutes a net lease. Lessee's obligation to pay Rent and all other amounts is absolute and unconditional and is not subject to any abatement, reduction, set-off, defense, counterclaim, interruption, deferment or recoupment for any reason whatsoever. -2- 3 6.2 TAXES AND FEES. Lessee will pay when due or reimburse Lessor for all taxes, fees or any other charges (together with any related interest or penalties not arising from the negligence of Lessor) accrued for or arising during the term of each Schedule against Lessor, Lessee or the Equipment by any governmental authority (except only Federal, state and local taxes on the capital or the net income of Lessor). Lessor will file all personal property tax returns for the Equipment and pay all property taxes due. Lessee will reimburse Lessor or property taxes within thirty (30) days of receipt of an invoice. 7. CARE, USE AND MAINTENANCE; ATTACHMENTS AND RECONFIGURATIONS; AND INSPECTION BY LESSOR. 7.1 CARE, USE AND MAINTENANCE. Lessee will maintain the Equipment in good operating order and appearance, protect the Equipment from deterioration, other than normal wear and tear, and will not use the Equipment for any purpose other than that for which it was designed. If commercially available, Lessee will maintain in force a standard maintenance contract with the manufacturer of the Equipment, or another party acceptable to Lessor, and will provide Lessor with a complete copy of that contract. If Lessee has the Equipment maintained by a party other than the manufacturer, Lessee agrees to pay any costs necessary for the manufacturer to bring the Equipment to then current release, revision and engineering change levels, and to re- certify the Equipment as eligible for manufacturer's maintenance at the expiration of the lease term. The lease term will continue upon the same terms and conditions until recertification has been obtained. 7.2 ATTACHMENTS AND RECONFIGURATIONS. Upon receiving the prior written consent of Lessor, Lessee may reconfigure and install Attachments on the Equipment. In the event of such a Reconfiguration or Attachment, Lessee will, upon return of the Equipment, at its expense, restore the Equipment to the original configuration specified on the Schedule in accordance with the manufacturer's specifications and in the same operating order, repair and appearance as when installed (normal wear and tear excluded). If any parts of the Equipment are removed during a Reconfiguration or Attachment, Lessor may require Lessee to provide additional security, satisfactory to the Lessor, in order to ensure performance of Lessee's obligations set forth in this subsection. Neither Attachments nor parts installed on Equipment in the course of Reconfiguration will be accessions to the Equipment. 7.3 INSPECTION BY LESSOR. Upon request, Lessee, during reasonable business hours and subject to Lessee's security requirements, will make the Equipment and its related log and maintenance records available to Lessor for inspection. 8. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee hereby represents, warrants and covenants that with respect to the Master Lease and each Schedule executed hereunder: (a) The Lessee is a corporation duly organized and validly existing in good standing under the laws of the jurisdiction of its incorporation, is duly qualified to do business in each jurisdiction (including the jurisdiction where the Equipment is, or is to be, located) where its ownership or lease of property or the conduct of its business requires such qualification; and has full corporate power and authority to hold property under the Master Lease and each Schedule and to enter into and perform its obligations under such Lease. (b) The execution and delivery by the Lessee of the Master Lease and each Schedule and its performance thereunder have been duly authorized by all necessary corporate action on the part of the Lessee, and the Master Lease and each Schedule are not inconsistent with the Lessee's Certificate of Incorporation or Bylaws, do not contravene any law or governmental rule, regulation or order applicable to it, do not and will not contravene any provision of, or constitute a default under any indenture, mortgage, contract or other instrument to which it is a party or by which it is bound, and the Master Lease and each Schedule constitute legal, valid and binding agreements of the Lessee, enforceable in accordance with their terms. -3- 4 (c) There are no actions, suits, proceedings or patent claims pending or, to the knowledge of the Lessee, threatened against or affecting the Lessee in any court or before any governmental commission, board or authority which, if adversely determined, will have a material adverse effect on the ability of the Lessee to perform its obligations under the Master Lease and each Schedule. (d) The Equipment is personal property and when subjected to use by the Lessee will not be or become fixtures under applicable law. (e) The Lessee has no material liabilities or obligations, absolute or contingent (individually or in the aggregate), except the liabilities and obligations of the Lessee as set forth in the Financial Statements and liabilities and obligations which have occurred in the ordinary course of business, and which have not been, in any case or in the aggregate, materially adverse to Lessee's ongoing business. (f) To the best of the Lessee's knowledge, the Lessee owns, possesses, has access to, or can become licensed on reasonable terms under all patents, patent applications, trademarks, trade names, inventions, franchises, licenses, permits, computer software and copyrights necessary for the operations of its business as now conducted, with no known infringement of, or conflict with, the rights of others. (g) All material contracts, agreements and instruments to which the Lessee is a party are in full force and effect in all material respects, and are valid, binding and enforceable by the Lessee in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally, and rules of law concerning equitable remedies. 9. DELIVERY AND RETURN OF EQUIPMENT. Lessee hereby assumes the full expense of transportation and in-transit insurance to Lessee's premises and installation thereat of the Equipment. Upon termination (by expiration or otherwise) of each Schedule, Lessee shall, pursuant to Lessor's instructions and at Lessee's full expense (including, without limitation, expenses of transportation and in-transit insurance), return the Equipment to Lessor in the same operating order, repair, condition and appearance as when received, less normal depreciation and wear and tear, Lessee shall return the Equipment to Lessor at its address set forth herein or at such other address within the continental United States as directed by Lessor, provided, however, that Lessee's expense shall be limited to the cost of returning the equipment to Lessor's address as set forth herein. During the period subsequent receipt of a notice under Section 2, Lessor may demonstrate the Equipment's operation in place and Lessee will supply any of its personnel as may reasonably be required to assist in the demonstrations. 10. LABELING. Upon request, Lessee will mark the Equipment indicating Lessor's interest. Lessee will keep all Equipment free from any other marking or labeling which might be interpreted as a claim of ownership. 11. INDEMNITY. Lessee will indemnify and hold Lessor, any Assignee and any Secured Party harmless from and against any and all claims, costs, expenses, damages and liabilities, including reasonable Attorneys' fees, arising out of the ownership (for strict liability in tort only), selection, possession, leasing, operation, control, use, maintenance, delivery, return or other disposition of the Equipment. However, Lessee is not responsible to a party indemnified hereunder for any claims, costs, expenses, damages and liabilities occasioned by the negligent acts of such indemnified party. Lessee agrees to carry bodily injury and property damage liability insurance during the term of the Master Lease in amounts and against risks customarily insured against by the Lessee on equipment owned by it. Any amounts received by Lessor under that insurance will be credited against Lessee's obligations under this Section. -4- 5 12. RISK OF LOSS. Effective upon delivery and until the Equipment is returned, Lessee relieves Lessor of responsibility for all risks of physical damage to or loss or destruction of the Equipment. Lessee will carry casualty insurance for each item of Equipment in an amount not less than the Casualty Value. All policies for such insurance will name the Lessor and any Secured Party as additional insured and as loss payee, and will provide for at least thirty (30) days prior written notice to the Lessor of cancellation or expiration, and will insure Lessor's interests regardless of any breach or violation by Lessee of any representation, warranty or condition contained in such policies and will be primary without right of contribution from any insurance effected by Lessor. Upon the execution of any Schedule, the Lessee wilt furnish appropriate evidence of such insurance acceptable to Lessor. Lessee will promptly repair any damaged item of Equipment unless such Equipment has suffered a Casualty Loss. Within fifteen (15) days of a Casualty Loss, Lessee will provide written notice of that loss to Lessor and Lessee will, at Lessor's option, either (a) replace the item of Equipment with Like Equipment and marketable title to the Like Equipment will automatically vest in Lessor or (b) pay the Casualty Value and after that payment and the payment of all other amounts due and owing, Lessee's obligation to pay further Rent for the item of Equipment will cease. 13. DEFAULT, REMEDIES AND MITIGATION. 13.1 DEFAULT. The occurrence of any one or more of the following Events of Default constitutes a default under a Schedule: (a) Lessee's failure to pay Rent or other amounts payable by Lessee when due if that failure continues for five (5) days after written notice: or (b) Lessee's failure to perform any other term or condition of the Schedule or the material inaccuracy of any representation or warranty made by the Lessee in the Schedule or in any document or certificate furnished to the Lessor hereunder if that failure or inaccuracy continues for ten (10) days after written notice; or (c) An assignment by Lessee for the benefit of its creditors, the failure by Lessee to pay its debts when due, the insolvency of Lessee, the filing by Lessee or the filing against Lessee of any petition under any bankruptcy or insolvency law or for the appointment of a trustee or other officer with similar powers, the adjudication of Lessee as insolvent, the liquidation of Lessee, or the taking of any action for the purpose of the foregoing; or (d) The occurrence of an Event of Default under any Schedule or other agreement between Lessee and Lessor or its Assignee or Secured Party. 13.2 REMEDIES. Upon the occurrence of any of the above Events of Default, Lessor, at its option, may: (a) enforce Lessee's performance of the provisions of the applicable Schedule by appropriate court action in law or in equity; (b) recover from Lessee any damages and or expenses, including Default Costs; (c) with notice and demand, recover all sums due and accelerate and recover the present value of the remaining payment stream of all Rent due under the defaulted Schedule (discounted at the same rate of interest at which such defaulted Schedule was discounted with a Secured Party plus any prepayment fees charged to Lessor by the Secured Party or, if there is no Secured Party, then discounted at 6%) together with all Rent and other amounts currently due as liquidated damages and not as a penalty; -5- 6 (d) with notice and process of law and in compliance with Lessee's security requirements, Lessor may enter on Lessee's premises to remove and repossess the Equipment without being liable to Lessee for damages due to the repossession, except those resulting from Lessor's, its assignees', agents' or representatives' negligence; and (e) pursue any other remedy permitted by law or equity. The above remedies, in Lessor's discretion and to the extent permitted by law, are cumulative and may be exercised successively or concurrently. 13.3 MITIGATION. Upon return of the Equipment pursuant to the terms of Section 13.2, Lessor will use its best efforts in accordance with its normal business procedures (and without obligation to give any priority to such Equipment) to mitigate Lessor's damages as described below. EXCEPT AS SET FORTH IN THIS SECTION, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS DAMAGES OR MODIFY ANY OF Lessor's RIGHTS OR REMEDIES STATED HEREIN. Lessor may sell, lease or otherwise dispose of all or any part of the Equipment at a public or private sale for cash or credit with the privilege of purchasing the Equipment. The proceeds from any sale, lease or other disposition of the Equipment are defined as either: (a) if sold or otherwise disposed of, the cash proceeds less the Fair Market Value of the Equipment at the expiration of the Initial Term less the Default Costs; or (b) if leased, the present value (discounted at three points over the prime rate as referenced in the Wall Street Journal at the time of the mitigation) of the rentals for a term not to exceed the Initial Term, less the Default Costs. Any proceeds will be applied against liquidated damages and any other sums due to Lessor from Lessee. However, Lessee is liable to Lessor for, and Lessor may recover, the amount by which the proceeds are less than the liquidated damages and other sums due to Lessor from Lessee. 14. ADDITIONAL PROVISIONS. 14.1 DELETED. 14.2 FINANCIAL STATEMENTS. Lessee will provide to Lessor the financial statements specified in this Section, prepared in accordance with generally accepted accounting principles, consistently applied (the "Financial Statements"); provided, however, after the effective date of the initial registration statement covering a public offering of Lessee's securities, the term "Financial Statements" will be deemed to refer to only those statements required by the Securities and Exchange Commission, to be provided no less frequently than quarterly. Lessee will provide to Lessor (i) as soon as practicable (within thirty (30) days) after the end of each month, the same information which Lessee provides to its Board of Directors, but which will include not less than a monthly income statement, balance sheet and statement of cash flows, certified by Lessee's Chief Executive or Financial Officer to be true and correct, and (ii) as soon as practicable (and in any event within ninety (90) days) after the end of each fiscal year, audited balance sheets as of the end of such year (consolidated if applicable), and related statements of income or loss, retained earnings or deficit and changes in the financial position and capital structure of Lessee for such year, setting forth in comparative form the corresponding figures for the preceding fiscal year, and accompanied by an audit report and opinion of the independent certified public accountants selected by Lessee. Lessee will promptly furnish to Lessor any additional information (including but not limited to tax returns, income statements, balance sheets, and names of principal creditors) as Lessor reasonably believes necessary to evaluate Lessee's continuing ability to meet financial obligations. 14.3 OBLIGATION TO LEASE ADDITIONAL EQUIPMENT. Upon notice to Lessee, Lessor will not be obligated to lease any Equipment which would have a Commencement Date after said notice if: (i) Lessee is in -6- 7 default under this Master Lease or any Schedule; (ii) Lessee is in default under any loan agreement, the result of which would allow the lender or any secured party to demand immediate payment of the indebtedness; (iii) there is a material adverse change in Lessee's credit standing; or (iv) Lessor determines (in reasonable good faith) that Lessee will be unable to perform its obligations under this Master Lease. 14.4 MERGER AND SALE PROVISIONS. Lessee will notify Lessor of any proposed Merger at least twenty (20) days prior to the closing date. Lessor may, in its discretion, either (i) consent to the assignment of the Master Lease and all relevant Schedules to the successor entity, or (ii) terminate the Master Lease and all relevant Schedules. If Lessor elects to consent to the assignment, Lessee and its successor will sign the assignment documentation provided by Lessor. If Lessor elects to terminate the Master Lease and all relevant Schedules, then Lessee will pay Lessor all amounts then due and owing and a termination fee equal to the present value (discounted at 6%) of the remaining Rent for the balance of the Initial Term(s) of all Schedules , and will return the Equipment in accordance with Section 9. 14.5 ENTIRE AGREEMENT. This Master Lease and associated Schedules supersede all other oral or written agreements or understandings between the parties concerning the Equipment including, for example, purchase orders. ANY AMENDMENT OF THIS MASTER LEASE OR A SCHEDULE MAY ONLY BE ACCOMPLISHED BY A WRITING SIGNED BY THE PARTY AGAINST WHOM THE AMENDMENT IS SOUGHT TO BE ENFORCED. 14.6 NO WAIVER. No action taken by Lessor or Lessee will be deemed to constitute a waiver of compliance with any representation, warranty or covenant contained in this Master Lease or a Schedule. The waiver by Lessor or Lessee of a breach of any provision of this Master Lease or a Schedule will not operate or be construed as a waiver of any subsequent breach. 14.7 BINDING NATURE. Each Schedule is binding upon, and inures to the benefit of Lessor and its assigns. LESSEE MAY NOT ASSIGN ITS RIGHTS OR OBLIGATIONS. 14.8 SURVIVAL OF OBLIGATIONS. All agreements, obligations including, but not limited to those arising under Section 6.2, representations and warranties contained in this Master Lease, any Schedule or in any document delivered in connection with those agreements are for the benefit of Lessor and any Assignee or Secured Party and survive the execution, delivery, expiration or termination of this Master Lease. 14.9 NOTICES. Any notice, request or other communication to either party by the other will be given in writing and deemed received upon the earlier of actual receipt or three days after mailing if mailed postage prepaid by regular or airmail to Lessor (to the attention of "Lease Administrator") or Lessee, at the address set out in the Schedule or, one day after it is sent by courier or on the same day as sent via facsimile transmission, provided that the original is sent by personal delivery or mail by the receiving party. 14.10 APPLICABLE LAW. THIS MASTER LEASE HAS BEEN, AND EACH SCHEDULE WILL HAVE BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF ILLINOIS AND WILL BE GOVERNED AND CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS. NO RIGHTS OR REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR A SCHEDULE. 14.11 SEVERABILITY. If any one or more of the provisions of this Master Lease or any Schedule is for any reason held invalid, illegal or unenforceable, the remaining provisions of this Master Lease and any such Schedule will be unimpaired, and the invalid, illegal or unenforceable provision replaced by a mutually acceptable valid, legal and enforceable provision that is closest to the original intention of the parties. -7- 8 14.12 COUNTERPARTS. This Master Lease and any Schedule may be executed in any number of counterparts, each of which will be deemed an original , but all such counterparts together constitute one and the same instrument. If Lessor grants a security interest in all or any part a Schedule, the Equipment or sums payable thereunder, only that counterpart Schedule marked "Secured Party's Original" can transfer Lessor's rights and all other counterparts will be marked "Duplicate". 14.13 NONSPECIFIED FEATURES AND LICENSED PRODUCTS. If the Equipment is supplied from Lessor's inventory and contains any features not specified in the Schedule, Lessee grants Lessor the right to remove any such features. Any removal will be performed by the manufacturer or another party acceptable to Lessee, upon the request of Lessor, at a time convenient to Lessee, provided that Lessee will not unreasonably delay the removal of such features. Lessee will obtain no title to Licensed Products which will at all times remain the property of the owner of the Licensed Products. A license from the owner may be required and it is Lessee's responsibility to obtain any required license before the use of the Licensed Products. Lessee agrees to treat the Licensed Products as confidential information of the owner, to observe all copyright restrictions, and not to reproduce or sell the Licensed Products. 14.14 ADDITIONAL DOCUMENTS. Lessee will, upon execution of this Master Lease and as may be requested thereafter, provide Lessor with a secretary's certificate of incumbency and authority and any other documents reasonably requested by Lessor. Upon the execution of each Schedule with a purchase price in excess of $1,000,000. Lessee will provide Lessor with an opinion from Lessee's counsel in a form acceptable to Lessor regarding the representations and warranties in Section 8. 14.15 ELECTRONIC COMMUNICATIONS. Each of the parties may communicate with the other by electronic means under mutually agreeable terms. 14.16 LESSOR'S RIGHT TO MATCH. Lessee's rights under Section 5.2 and 7.2 are subject to Lessor's right to match any sublease or upgrade proposed by a third party. Lessee will provide Lessor with the terms of the third party offer and Lessor will have three (3) business days to match the offer. Lessee will obtain such upgrade from or sublease the Equipment to Lessor if Lessor has timely matched the third party offer. 14.17 LANDLORD/MORTGAGEE WAIVER. Lessee agrees to provide Lessor with a Landlord/Mortgagee Waiver with respect to the Equipment. Such waiver shall be in a form satisfactory to Lessor. 14.18 EQUIPMENT PROCUREMENT CHARGES/PROGRESS PAYMENTS. Lessee hereby agrees that Lessor shall not, by virtue of its entering into this Lease, be required to remit any payments to any manufacturer or other third party until Lessee accepts the Equipment subject to this Lease. 14.19 DEFINITIONS. Advance - means the amount due to Lessor by Lessee upon Lessee's execution of each Schedule. Assignee - means an entity to whom Lessor has sold or assigned its rights as owner and Lessor of Equipment. Attachment - means any accessory, equipment or device and the installation thereof that does not impair the original unction or use of the Equipment and is capable of being removed without causing material damage to the Equipment and is not an accession to the Equipment. Casualty Loss - means the irreparable loss or destruction of Equipment. -8- 9 Casualty Value - means the greater of the aggregate Rent remaining to be paid for the balance of the lease term or the Fair Market Value of the Equipment immediately prior to the Casualty Loss. However, if a Casualty Value Table is attached to the relevant Schedule its terms will control. Commencement Certificate - means the Lessor provided certificate which must be signed by Lessee within ten (10) days of the Commencement Date as requested by Lessor. Commencement Date - is defined in each Schedule. Default Costs - means reasonable attorney's fees and remarketing costs resulting from a Lessee default or Lessor's enforcement of its remedies. Equipment - means the property described on a Schedule and any replacement for that property required or permitted by this Master Lease or a Schedule but not including any Attachment. Event of Default - means the events described in Subsection 13.1. Fair Market Value - means the aggregate amount which would be obtainable in an arm's-length transaction between an informed and willing buyer/user and an informed and willing seller under no compulsion to Sell. Initial Term - means the period of time beginning on the first day of the first full Rent Interval following the Commencement Date for all items of Equipment and continuing for the number of Rent Intervals indicated on a Schedule. Installation Date - means the day on which Equipment is installed and qualified for a commercially available manufacturer's standard maintenance contract or warranty coverage, if available. Interim Rent - means the pro-rata portion of Rent due for the period from the Commencement Date through but not including the first day of the first full Rent Interval included in the Initial Term. Licensed Products - means any software or other licensed products attached to the Equipment. Like Equipment - means replacement Equipment which is lien free and of the same model, type, configuration and manufacture as Equipment. Like Part - means a substituted part which is lien free and of the same manufacturer and part number as the removed part, and which when installed on the Equipment will be eligible for maintenance coverage with the manufacturer of the Equipment. Merger - means any consolidation or merger of the Lessee with or into any other corporation or entity, any sale or conveyance of all or substantially all of the assets of the Lessee to any other person or entity or any stock acquisition of the Lessee by any other person or entity. Notice Period - means the time period described in a Schedule during which Lessee may give Lessor notice of the termination of the term of that Schedule. Overdue Rate - means the lesser of five percent (5%) of the payment due or the maximum rate permitted by the law or the state where the Equipment is located. Owner - means the owner of Equipment. Reconfiguration - means any change to Equipment that would upgrade or downgrade the performance capabilities or the Equipment in any way. -9- 10 Rent - means the rent, including Interim Rent. Lessee will pay for each item of Equipment expressed in a Schedule either as a specific amount or an amount equal to the amount which Lessor pays for an item of Equipment Multiplied by a lease rate factor plus all other amounts due to Lessor under this Master Lease or a Schedule. Rent Interval - means a full calendar month or quarter as indicated on a Schedule. Schedule - means an Equipment Schedule which incorporates all of the terms and conditions of this Master Lease and, for purposes of Section 14.12, its associated Commencement Certificate(s). Secured Party - means an entity to whom Lessor has granted a security interest in a Schedule and related Equipment for the purpose of securing a loan. IN WITNESS WHEREOF, the parties hereto have executed this Master Lease on or as of the day and year first above written. COMBICHEM, INC. COMDISCO, INC. as Lessee as Lessor By: /s/ Robert A. Curtis By: /s/ Illegible --------------------------- -------------------------------- Title: President & CEO Title: Illegible ------------------------ ----------------------------- -10- 11 EXHIBIT A (MULTIPLE MONTHLY DELIVERY) SCHEDULE NO. VL-1 DATED AS OF November 16, 1994 TO MASTER LEASE AGREEMENT DATED AS OF November 16, 1994 ("MASTER LEASE") LESSEE: CombiChem, Inc. LESSOR: COMDISCO, INC. Admin. Contact/Phone No.: Address for all Notices: Gail Erwin Controller 6111 North River Road (619) 677-6077 Rosemont, Illinois 60018 Fax (619) 452-8799 Attn: Capital Equipment Lease dministration Address for Notices: 10975 Torreyana Road Suite 230 San Diego, CA 92121 Attn.: Central Billing Location: PAYING AGENT: Same as above Comdisco, Inc. P.O. Box 91744 Attn.: Chicago, Illinois 60693 Lessee Reference No.: ___________________ (24 digits maximum) Location of Equipment: Initial Term: 48 months 11025 N. Torrey Pines Road La Jolla, CA 92037 Lease Rate Factor: 2.469% Attn.: EQUIPMENT (as defined below): Advance: Phase I: $5,555.25 Phase II thru V: $1,234.50 Phase VI: $1,851.75 Item Machine Type/ Serial No. Qty. Manufacturer Feature Description Number Rent - ---- ---- ------------ ------------- ----------- ------ ---- Equipment specifically approved by Lessor, which shall be delivered to and accepted by Lessee during the period November 16, 1994 through November 15, 1995, for which Lessor receives vendor invoices approved for payment, up to an aggregate purchase price of $1,000,000 available in the phases provided below: 12 Phase I $450,000 Phase II $100,000 Phase III $100,000 Phase IV $100,000 Phase V $100,000 Phase VI $150,000 Phase I shall be available prior to next round of equity and Phases II-VI shall be available after the next round of equity of at least $1,500,000. Notwithstanding anything to the contrary contained in this Lease, if Lessee closes a preferred equity financing (excluding bridge debt financing) equal to or greater than $1,500,000 ("Next Round") on or before January 31, 1995, then Lessor is firmly committed to make Phases II through VI available for the period described above, provided no Event of Default occurs. If Lessee does not close the Next Round by January 31, 1995, Lessor's commitment to make Phase II - VI funds available will be at Lessor's discretion. Equipment shall not include upgrades thereto and further excludes, leasehold improvements, installation costs and delivery costs, rolling stock, special tooling, custom equipment, "stand-alone" software, application software bundled into computer hardware, hand held items, molds and fungible items. In no event shall any furniture exceed ten percent (10%) of Lessor's aggregate cost hereunder. 1. NOTICE PERIOD: Not less than ninety (90) days nor more than twelve (12) months prior to the expiration of the lease term. 2. EQUIPMENT PURCHASE Lessee acknowledges that it has either received or approved Lessor's purchase documentation for the Equipment. The aggregate purchase price referred to on the face of this Schedule shall include all Equipment purchased by Lessor, consisting of amounts financed under sections (i), (ii) and (iii) below. (i) NEW EQUIPMENT. Lessor will purchase new Equipment which is specifically approved by Lessor. (ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at Lessee's site and to which Lessee has clear title and ownership may be considered by Lessor for inclusion under this Lease (the "Sale-Leaseback Transaction"). Any request for a Sale-Leaseback Transaction must be submitted to Lessor in writing (along with accompanying evidence of Lessee's Equipment ownership satisfactory to Lessor for all Equipment submitted) no Later than December 16, 1994 *. Lessor will not perform a Sale-Leaseback Transaction for any request or accompanying Equipment ownership documents which arrive after the date marked above by an asterisk (*). Further, any sale-leaseback Equipment will be placed on lease subject to: (1) Lessor prior approval of the Equipment; and (2) if approved, at Lessor's actual net appraised Equipment value pursuant to the schedule below:
ORIGINAL EQUIPMENT PERCENT OF ORIGINAL MANUFACTURER'S MANUFACTURER'S SHIP DATE NET EQUIPMENT COST PAID BY LESSOR ------------------------ ---------------------------------- Between 9/17/94 and 12/16/94 100% Between 7/17/94 and 9/16/94 80% Between 4/17/94 and 7/16/94 70% Between 1/17/94 and 4/16/94 65% Between 10/17/93 and 1/16/94 60%
13 (iii) USED EQUIPMENT. Lessor will purchase "used" Equipment which is obtained from a third party by Lessee for its use subject to: (1) Lessor's prior approval of the Equipment; and (2) at Lessor's appraised value for such used Equipment. 3. COMMENCEMENT DATE The Commencement Date for each item of Equipment will be its Installation Date. Lessee agrees to confirm the Commencement Date by providing Lessor with Invoices containing the Equipment location, description, serial number and cost, the Installation Date and Lessee's signature. Lessor will summarize all Invoices and/or IAFs received in the same calendar month provided however that each Commencement Certificate must cover equipment with an equipment cost of at Least $10,000 or Lessor shall include such equipment on the Commencement Certificate for the next succeeding month into a Commencement Certificate in the form attached to this Schedule as Exhibit 1 and the Initial Term will begin the first day of the calendar month thereafter. Each Commencement Certificate will incorporate the terms and conditions of the Master Lease and this Schedule and will constitute a separate Schedule. Notwithstanding the foregoing, if the Equipment pertains to Sale-Leaseback Equipment the Commencement Date will be the date Lessor tenders the purchase price. 4. OPTION TO EXTEND So long as no Event of Default shall have occurred and be continuing, Lessee will have the right to extend the Initial Term of this Schedule for a period of one (1) year by giving Lessor at least ninety days (90) days written notice prior to the expiration of the Initial Term. In such event, the rent to be paid during said extended period shall be mutually agreed upon and if the parties cannot mutually agree, then the Lease shall continue in full force and effect pursuant to the existing terms and conditions until terminated in accordance with its terms. This Schedule will continue in effect following said extended period until terminated by either party upon not less than ninety (90) days prior written notice, which notice shall be effective as of the Rent Interval next following receipt. 5. PURCHASE OPTION So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety days (90) days prior to the expiration of the Initial Term, Lessee will have the option at the expiration of the Initial Term of this Schedule to purchase all, but not less than all, of the Equipment listed herein for a purchase price not to exceed fifteen percent (15%) of the equipment's original cost and upon terms and conditions to be mutually agreed upon by the parties following Lessee's written notice, plus any taxes applicable at time of purchase. Said purchase price shall be paid to Lessor at Least five (5) days before the expiration date of the Initial Term. Title to the Equipment shall automatically pass to Lessee upon payment in full of the purchase price but, in no event, earlier than the expiration of the fixed Initial Term. If the parties are unable to agree on the purchase price or the terms and conditions with respect to said purchase, then the Lease with respect to this Equipment shall remain in full force and effect, unless terminated by either party. It is agreed and understood that Lessor is retaining a purchase money security interest in the Equipment listed herein and this Schedule shall constitute a Security Agreement under the Uniform Commercial Code of the state in which the Equipment is located. Lessor and Lessee agree that for purposes of this paragraph, any licensed software will not be considered part of the Equipment. 6. ENVIRONMENTAL CONDITION a. Indemnification. Lessee shall fully and promptly pay, perform, discharge, defend, indemnify and hold harmless Lessor and its Affiliates (defined below), successors and assigns, directors, officers, employees and agents from and against any Environmental Claim or Environmental Loss (defined below). b. Lessee Cooperation. In the event of an Environmental Claim, Lessee shall, upon request, immediately provide Lessor with copies of all correspondence reports, notices, orders, findings, 14 declarations and other materials pertinent to the Lessee's compliance with and requirements of any Environmental Law (defined below). c. Lessee Insurance. If Lessee is required by law to obtain an environmental liability policy, the Lessee shall name Lessor as an additional insured on its environmental liability insurance policy. d. Adverse Environmental Condition - means (i) the existence or the continuation of the existence, of an Environmental Emission (including, without limitation, a sudden or non-sudden accidental or non- accidental Environmental Emission), of or exposure to, any substance, chemical, material, pollutant, contaminant, odor or audible noise or other release or emission in, into or onto the environment (including without limitation, the air, ground, water or any surface) at, in, by, from or related to any Equipment, (ii) the environmental aspect of the transportation, storage, treatment or disposal of materials in connection with the operation of any Equipment, or (iii) the violation, or alleged violation of any statutes, ordinances, orders, rules, regulations, permits or licenses of, by or from any governmental authority, agency or court relating to environmental matters connected with any Equipment. e. Affiliate - means any entity that is directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with Lessor. f. Environmental Claim - means any accusation, allegation, notice of violation, claim, demand, abatement or other order or direction (conditional or otherwise) by an governmental authority or any Person for personal injury (including sickness, disease, or death), tangible or intangible property damage, damage to the environment or natural resources, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restrictions, resulting from or based upon any Adverse Environmental Condition (defined above). g. Environmental Emission - means any actual or threatened release, spill, omission, leaking, pumping, injection, deposition, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, or into or out of any of the Equipment, including, without limitation, the movement of any Contaminant or other substance through or in the air, soil, surface water, groundwater or property. h. Environmental Law - means any federal, foreign, state or local law, rule or regulation pertaining to the protection of the environment, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") (42 U.S.C. Section 9601 et seq.), the Federal Water Pollution Control Act (33 U.S.C. 1251, et seq.), the Resource Conservation and Recovery Act (42 U.S.C. 6901 et seq.), the Clean Air Act (42 U.S.C. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. 2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. 1361 et seq.), and the Occupational Safety and Health Act (10 U.S.C. 651 et seq.), as these laws have been amended or supplemented, and any analogous foreign, state or local statutes, and the regulations promulgated pursuant thereto. i. Environmental Loss - means any loss, cost, damage, liability, deficiency, fine, penalty or expense (including, without limitation, reasonable attorneys' fees, engineering and other professional or expert fees), investigation, removal, cleanup and remedial costs (voluntarily or involuntarily incurred) and damages to, loss of the use of or decrease in value of the Equipment arising out of or related to any Adverse Environmental Condition. j. Person - means any individual, partnership, corporation, trust, unincorporated organization, government or department or agency thereof and any other entity. 15 7. SPECIAL TERMS The terms and conditions of the Master Lease Agreement as they pertain to this Schedule are hereby modified and amended as follows: A. Section 5.2, "Relocation or Sublease". In the first Line insert "Lessor's" before "prior written consent" and insert "which shall not be unreasonably withheld" before "Lessee may relocate Equipment". B. Section 5.3, "Assignment by Lessor". In paragraph A line 3 after "so long as" insert "there has not been an Event of Default,". C. Section 6.2, "Taxes and Fees". Delete the parenthetical phrase in the second line of the paragraph. D. Section 8, "Representations and Warranties of Lessee". Paragraph (d) insert at the beginning of the sentence "To Lessee's knowledge,". Paragraph (f) add to the end of the paragraph 11", the infringement or conflict of which would have a material adverse effect on the Lessee." E. Section 9, "Delivery and Return of Equipment". Delete this section in its entirety and replace it with the following: Delivery and Return of Equipment. Lessee assumes the full expense of transportation to its initial location, installation, deinstallation, and return to a location within the continental United States (including without limitation, the expense of in-transit insurance) all pursuant to Lessee's instructions and manufacturer's specifications. Regarding deinstallation, Lessee will assure that the Equipment is deinstalled by the manufacturer in accordance with the manufacturer's recommended procedures and any Environmental Law, and returned with a Certificate of Decontamination in the same operating order, repair, condition and appearance as when originally installed (less normal wear and tear and depreciation) meeting all original Equipment manufacturer's specifications for continued manufacturer's maintenance, and accompanied by all associated documents, manuals, maintenance records for the duration of the Initial Term, spare parts and accessories. In connection with deinstallation, any contaminant removed from the Equipment will be removed and transported by licensed waste removal transporter who shall name Lessor as additional insured on its environmental liability policy. During the period subsequent to the receipt of a termination notice under Section 2, Provided Lessor provides Lessee with reasonably adequate notice and Lessee approves the time for any such demonstration, Lessor may, after providing reasonable notice to Lessee demonstrate the Equipment's operation in place and Lessee will supply any of its personnel as may reasonably be required to assist in the demonstrations. F. Section 12, "Risk of Loss". In the second paragraph add the following to the end of the paragraph "If Lessor agrees to accept like equipment as replacement for the loss or destruction of the equipment, Lessee will not be obligated to replace the Equipment for a cost greater than the Casualty Value, and Lessee shall be entitled to retain all of the insurance proceeds received to reimburse Lessee for its cost to replace the Equipment." G. Section 13.1, "Default". 16 Paragraph (a) insert the word "business" before the word "days"; insert "Lessee's receipt of" before "written notice"; add to the end of the sentence "of such non-payment". Paragraph (b) in the first Line insert "material" before the word "term". In the last line, insert "Lessee's receipt of" before "written notice". Paragraph (c) after the phrase "failure by Lessee to pay its debts when due" insert "where such past due amounts exceed $50,000 in the aggregate or any lender has the right to accelerate more than $50,000 of debt", in the third Line after the words "bankruptcy or insolvency law" insert "if such is not removed within sixty days (60)." H. Section 14.3, "Obligations to Lease Additional Equipment". In the first line insert "written" before the word "notice". In Line 3 clause (i) after "master lease or any schedule" insert "and such default is not cured within five (5) days of written notice". Add to the end of the paragraph: "If Lessor's obligations to lease additional Equipment are suspended hereunder, Lessee may request a restoration of such leaseline upon demonstration to Lessor to Lessor's satisfaction that Lessee has cured the defect which gave rise to the suspension of Lessor's lease obligation." I. Section 14.4 "Merger and Sale Provisions". The second sentence of Section 14.4 of the Master Lease shall be deleted in its entirety and replaced with the following; "Lessor shall have the right to consent to the assignment of the Master Lease and all relevant Schedules to the successor entity, which consent shall not be unreasonably withheld. If such consent is reasonably withheld, then Lessor shall have the option to terminate the Master Lease and all relevant Schedules." J. Section 14.7, "Binding Nature". Add the end of the paragraph "without the prior written consent of Lessor which shall not be unreasonably withheld." K. Section 14.8, "Survival of Obligations". In the Last Line, "execution, delivery" shall be revised to read "execution and delivery", delete "expiration or termination". Add to the end of the section: "Sections 7.1, 9, and 11, shall survive expiration or termination of this Master Lease until all duties thereunder have been discharged by the parties." L. Section 14.9, "Notices". In the Last Line delete the word "receiving" and replace with the word "disclosing" before the word "party". M. Section 14.10, "Applicable Law". Delete "Illinois" and replace with "California" wherever it appears. N. Section 14.17, "LandLord/Mortgagee Waiver". After "Lessee agrees to" insert "use reasonable efforts, (which shall not include additional monetary payment to Landlord other than deminimis amounts), to" before "provide Lessor with". O. Section 14.19, "Definitions". 17 Delete Interim Rent definition and replace with: "Interim Rent - means a daily rate of .0278% of Lessor's Cost for each day from the Commencement Date through but not including the first day of the first full Rent Interval included in the Initial Term." Master Lease: This Schedule is issued pursuant to the Master Lease identified on page 1 of this Schedule. All of the terms and conditions of the Master Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Master Lease (including, without Limitation, the representations and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties. COMBICHEM, INC. COMDISCO, INC. as Lessee as Lessor By: /s/ Robert A. Curtis By: /s/ Illegible --------------------------- ------------------------------ Title: President & CEO Title: Illegible ------------------------ --------------------------- Date: Nov. 23, 1994 Date: 12/5/94 ------------------------ ---------------------------- 18 EXHIBIT 1 COMMENCEMENT CERTIFICATE This Certificate dated is executed pursuant to Schedule No. to the Master Lease Agreement dated between Comdisco, Inc. ("Lessor") and ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease and Schedule No. are incorporated herein and made a part hereof and this Commencement Certificate constitutes a Schedule for the Equipment described below. 1. Equipment: Equipment Qty Mfgr Type/Model Serial # Location --- ---- ---------- -------- -------- (See attached Invoices) 2. Installation Date: (See attached Invoices) 3. Initial Term Starts on: 4. Total Equipment Cost: 5. Rent: 6. Representations of Lessee: Each item of Equipment has been delivered to the location indicated above, tested, inspected, found to be in good working order and accepted by the Lessee on its Installation Date. 19 EXHIBIT A (MULTIPLE MONTHLY DELIVERY) SCHEDULE NO. VL-2 DATED AS OF April 15, 1996 ---- TO MASTER LEASE AGREEMENT DATED AS OF November 16, 1994 ("MASTER LEASE") LESSEE: CombiChem, Inc. LESSOR: COMDISCO, INC. Admin. Contact/Phone No.: Address for all Notices: Controller 6111 North River Road Ph. (619) 530-0484 Rosemont, Illinois 60018 Fax (619) 530-9998 Attn: Capital Equipment Lease Administration Address for Notices: 9050 Camino Santa Fe San Diego, CA 92121 Attn.: Central Billing Location: PAYING AGENT: Same as above Comdisco, Inc. P.O. Box 91744 Attn.: Chicago, Illinois 60693 Lessee Reference No.: _______________________ (24 digits maximum) Location of Equipment: Initial Term: 48 months Same as above Lease Rate Factor: 2.425% Attn.: EQUIPMENT (as defined below): Advance: $24,250 Item Machine Type/ Serial No. Qty. Manufacturer Feature Description Number Rent - --- ---- ------------ ------------ ----------- ------ ---- Equipment specifically approved by Lessor, which shall be delivered to and accepted by Lessee during the period April 15, 1996 through December 15, 1996 ("Equipment Delivery Period"), for which Lessor receives vendor invoices approved for payment, up to an aggregate purchase price of $1,000,000 ("Commitment Amount"); excluding custom use equipment, leasehold improvements, installation costs and delivery costs, rolling stock, special tooling, "stand-alone" software, application software bundled into computer hardware, hand held items, molds and fungible items. 1. NOTICE PERIOD. Not less than ninety (90) days nor more than twelve (12) months prior to the expiration of the lease term. 2. EQUIPMENT PURCHASE 20 Lessee acknowledges that it has either received or approved Lessor's purchase documentation for the Equipment. The aggregate purchase price referred to on the face of this Schedule shall include all Equipment purchased by Lessor, consisting of amounts financed under Sections (i), (ii) and (iii) below. (i) NEW EQUIPMENT. Lessor will purchase new Equipment which is specifically approved by Lessor. (ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at Lessee's site and to which Lessee has clear title and ownership may be considered by Lessor for inclusion under this Lease (the "Sale-Leaseback Transaction"). Any request for a Sale-Leaseback Transaction must be submitted to Lessor in writing (along with accompanying evidence of Lessee's Equipment ownership satisfactory to Lessor for all Equipment submitted) no later than May 15,1996*. Lessor will not perform a Sale-Leaseback Transaction for any request or accompanying Equipment ownership documents which arrive after the date marked above by an asterisk (*). Further, any sale-leaseback Equipment will be placed on lease subject to: (1) Lessor prior approval of the Equipment; and (2) if approved, at Lessor's actual net appraised Equipment value pursuant to the schedule below:
ORIGINAL EQUIPMENT INVOICE PERCENT OF ORIGINAL MANUFACTURER'S DATE NET EQUIPMENT COST PAID BY LESSOR -------------------------- --------------------------------- Between 02/15/95 and 05/15/96 100% Between 12/16/95 and 02/14/96 80% Between 09/16/95 and 12/15/95 70%
(iii) USED EQUIPMENT. Lessor will purchase "used" Equipment which is obtained from a third party by Lessee for its use subject to: (1) Lessor's prior approval of the Equipment; and (2) at Lessor's appraised value for such used Equipment. 3. COMMENCEMENT DATE The Commencement Date for each item of Equipment will be its Installation Date. Lessee agrees to confirm the Commencement Date by providing Lessor with Invoices containing the Equipment location, description, serial number and cost, the Installation Date and Lessee's signature. Lessor will summarize all Invoices and/or IAFs received in the same calendar month provided however that each Commencement Certificate must cover equipment with an equipment cost of at least $10,000 or Lessor shall include such equipment on the Commencement Certificate for the next succeeding month into a Commencement Certificate in the form attached to this Schedule as Exhibit 1 and the Initial Term will begin the first day of the calendar month thereafter. Each Commencement Certificate will incorporate the terms and conditions of the Master Lease and this Schedule and will constitute a separate Schedule. Notwithstanding the foregoing, if the Equipment pertains to Sale-Leaseback Equipment the Commencement Date will be the date Lessor tenders the purchase price. 4. OPTION TO EXTEND So long as no Event of Default shall have occurred and be continuing, Lessee will have the right to extend the Initial Term of this Schedule for a period of one (1) year by giving Lessor at least ninety days (90) days written notice prior to the expiration of the Initial Term. In such event, the rent to be paid during said extended period shall be mutually agreed upon and if the parties cannot mutually agree, then the Lease shall continue in full force and effect pursuant to the existing terms and conditions until terminated in accordance with its terms. This Schedule will continue in effect following said extended period until terminated by either party upon not less than ninety (90) days prior written notice, which notice shall be effective as of the Rent Interval next following receipt. 21 5. PURCHASE OPTION So long as no Event of Default has occurred and is continuing hereunder, and upon written notice no earlier than twelve (12) months and no later than ninety days (90) days prior to the expiration of the Initial Term, Lessee will have the option at the expiration of the Initial Term of this Schedule to purchase all, but not less than all, of the Equipment listed herein for a purchase price not to exceed twenty percent (20%) of the equipment's original cost and upon terms and conditions to be mutually agreed upon by the parties following Lessee's written notice, plus any taxes applicable at time of purchase. Said purchase price shall be paid to Lessor at least five (5) days before the expiration date of the Initial Term. Title to the Equipment shall automatically pass to Lessee upon payment in full of the purchase price but, in no event, earlier than the expiration of the fixed Initial Term. If the parties are unable to agree on the purchase price or the terms and conditions with respect to said purchase, then the Lease with respect to this Equipment shall remain in full force and effect, unless terminated by either party. It is agreed and understood that Lessor is retaining a purchase money security interest in the Equipment listed herein and this Schedule shall constitute a Security Agreement under the Uniform Commercial Code of the state in which the Equipment is located. Lessor and Lessee agree that for purposes of this paragraph, any licensed software will not be considered part of the Equipment. 6. ENVIRONMENTAL CONDITION a. Indemnification. Lessee shall fully and promptly pay, perform, discharge, defend, indemnify and hold harmless Lessor and its Affiliates (defined below) , successors and assigns, directors, officers, employees and agents from and against any Environmental Claim or Environmental Loss (defined below). b. Lessee Cooperation. In the event of an Environmental Claim, Lessee shall, upon request, immediately provide Lessor with copies of all correspondence reports, notices, orders, findings, declarations and other materials pertinent to the Lessee's compliance with and requirements of any Environmental Law (defined below) . c. Lessee Insurance. If Lessee is required by law to obtain an environmental liability policy, the Lessee shall name Lessor as an additional insured on its environmental liability insurance policy. d. Adverse Environmental Condition - means (i) the existence or the continuation of the existence, of an Environmental Emission (including, without limitation, a sudden or non-sudden accidental or non- accidental Environmental Emission), of or exposure to, any substance, chemical, material, pollutant, contaminant, odor or audible noise or other release or emission in, into or onto the environment (including without limitation, the air, ground, water or any surface) at, in, by, from or related to any Equipment, (ii) the environmental aspect of the transportation, storage, treatment or disposal of materials in connection with the operation of any Equipment, or (iii) the violation, or alleged violation of any statutes, ordinances, orders, rules, regulations, permits or licenses of, by or from any governmental authority, agency or court relating to environmental matters connected with any Equipment. e. Affiliate - means any entity that is directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with Lessor. f. Environmental Claim - means any accusation, allegation, notice of violation, claim, demand, abatement or other order or direction (conditional or otherwise) by an governmental authority or any Person for personal injury (including sickness, disease, or death), tangible or intangible property damage, damage to the environment or natural resources, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restrictions, resulting from or based upon any Adverse Environmental Condition (defined above). g. Environmental Emission - means any actual or threatened release, spill, omission, leaking, pumping, injection, deposition, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, or into or out of any of the Equipment, including, without limitation, the 22 \ movement of any Contaminant or other substance through or in the air, soil, surface water, groundwater or property. h. Environmental Law - means any federal, foreign, state or local law, rule or regulation pertaining to the protection of the environment, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") (42 U.S.C. Section 9601 et seq.), the Federal Water Pollution Control Act (33 U.S.C. 1251, et seq.), the Resource Conservation and Recovery Act (42 U.S.C. 6901 et seq.), the Clean Air Act (42 U.S.C. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. 2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. 1361 et seq.), and the Occupational Safety and Health Act (10 U.S.C. 651 et seq.), as these laws have been amended or supplemented, and any analogous foreign, state or local statutes, and the regulations promulgated pursuant thereto. i. Environmental Loss - means any loss, cost, damage, liability, deficiency, fine, penalty or expense (including, without limitation, reasonable attorneys' fees, engineering and other professional or expert fees), investigation, removal, cleanup and remedial costs (voluntarily or involuntarily incurred) and damages to, loss of the use of or decrease in value of the Equipment arising out of or related to any Adverse Environmental Condition. j. Person - means any individual, partnership, corporation, trust, unincorporated organization, government or department or agency thereof and any other entity. 7. SPECIAL TERMS The terms and conditions of the Master Lease Agreement as they pertain to this Schedule are hereby modified and amended as follows: A. Section 5.2, "Relocation or Sublease". In the first line insert "Lessor's" before "prior written consent" and insert "which shall not be unreasonably withheld" before "Lessee may relocate Equipment". B. Section 5.3, "Assignment by Lessor". In paragraph A line 3 after "so long as" insert "there has not been an Event of Default,". C. Section 6.2, "Taxes and Fees". Delete the parenthetical phrase in the second line of the paragraph. D. Section 8, "Representations and Warranties of Lessee". Paragraph (d) insert at the beginning of the sentence "To Lessee's knowledge,". Paragraph (f) add to the end of the paragraph", the infringement or conflict of which would have a material adverse effect on the Lessee." E. Section 9, "Delivery and Return of Equipment". Delete this section in its entirety and replace it with the following: DELIVERY AND RETURN OF EQUIPMENT. Lessee assumes the full expense of transportation to its initial location, installation, deinstallation, and return to a location within the continental United States (including without limitation, the expense of intransit insurance) all pursuant to Lessee's instructions and manufacturer's specifications. Regarding deinstallation, Lessee will assure that the Equipment is deinstalled by the manufacturer in accordance with the manufacturer's recommended procedures and any 23 Environmental Law, and returned with a Certificate of Decontamination in the same operating order, repair, condition and appearance as when originally installed (less normal wear and tear and depreciation) meeting all original Equipment manufacturer's specifications for continued manufacturer's maintenance, and accompanied by all associated documents, manuals, maintenance records for the duration of the Initial Term, spare parts and accessories. In connection with deinstallation, any contaminant removed from the Equipment will be removed and transported by licensed waste removal transporter who shall name Lessor as additional insured on its environmental liability policy. During the period subsequent to the receipt of a termination notice under Section 2, Provided Lessor provides Lessee with reasonably adequate notice and Lessee approves the time for any such demonstration, Lessor may, after providing reasonable notice to Lessee demonstrate the Equipment's operation in place and Lessee will supply any of its personnel as may reasonably be required to assist in the demonstrations. F. Section 12, "Risk of Loss". First paragraph, third sentence after the words "as loss payee" insert the following "up to the then current casualty value". In the second paragraph add the following to the end of the paragraph "If Lessor agrees to accept like equipment as replacement for the loss or destruction of the equipment, Lessee will not be obligated to replace the Equipment for a cost greater than the Casualty Value, and Lessee shall be entitled to retain all of the insurance proceeds received to reimburse Lessee for its cost to replace the Equipment." G. Section 13.1, "Default". Paragraph (a) insert the word "business" before the word "days"; insert "Lessee's receipt of" before "written notice"; add to the end of the sentence "of such non-payment". Paragraph (b) in the first line insert "material" before the word "term". In the last line, insert "Lessee's receipt of" before "written notice". Paragraph (c) after the phrase "failure by Lessee to pay its debts when due" insert "where such past due amounts exceed $50,000 in the aggregate or any lender has the right to accelerate more than $50,000 of debt", in the third line after the words "bankruptcy or insolvency law" insert "if such is not removed within sixty days (60)." H. Section 14.3, "Obligations to Lease Additional Equipment". In the first line insert "written" before the word "notice". In line 3 clause (i) after "master lease or any schedule" insert "and such default is not cured within five (5) days of written notice". Add to the end of the paragraph: "If Lessor's obligations to lease additional Equipment are suspended hereunder, Lessee may request a restoration of such leaseline upon demonstration to Lessor to Lessor's satisfaction that Lessee has cured the defect which gave rise to the suspension of Lessor's lease obligation." I. Section 14.4 "Merger and Sale Provisions". The second sentence of Section 14.4 of the Master Lease shall be deleted in its entirety and replaced with the following; "Lessor shall have the right to consent to the assignment of the Master Lease and all relevant Schedules to the successor entity, which consent shall not be unreasonably withheld. If such consent is reasonably withheld, the Lessor shall have the option to terminate the Master Lease and all relevant Schedules. J. Section 14.1, "Binding Nature". 24 Add the end of the paragraph "without the prior written consent of Lessor which shall not be unreasonably withheld." K. Section 14.8, "Survival of Obligations". In the last line, "execution, delivery" shall be revised to read "execution and delivery", delete "expiration or termination". Add to the end of the section: "Sections 7.1, 9, and 11, shall survive expiration or termination of this Master Lease Until all duties thereunder have been discharged by the parties." L. Section 14.9, "Notices". In the last line delete the word "receiving" and replace with the word "disclosing" before the word "party". M. Section 14.10, "Applicable Law". Delete "Illinois" and replace with "California" wherever it appears. N. Section 14.17, "Landlord/Mortgagee Waiver". After "Lessee agrees to" insert "use reasonable efforts, (which shall not include additional monetary payment to Landlord other than deminimis amounts), to" before "provide Lessor with". O. Section 14.19, "Definitions". Delete Interim Rent definition and replace with: "Interim Rent - means a daily rate of .0278% of Lessor's Cost for each day from the Commencement Date through but not including the first day of the first full Rent Interval included in the Initial Term." MASTER LEASE: This Schedule is issued pursuant to the Master Lease identified on page 1 of this Schedule. All of the terms and conditions of the Master Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Master Lease (including, without limitation, the representations and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties. COMBICHEM, INC. COMDISCO, INC. as Lessee as Lessor By: /s/ Illegible By: /s/ James P. Labe --------------------------- ------------------------------ Title: President & CEO Title: President, Venture Lease Division ------------------------ --------------------------- Date: 4-25-96 Date: ------------------------ ---------------------------- 25 18 SLXXXXX-XX EXHIBIT 1 SUMMARY EQUIPMENT SCHEDULE This Summary Equipment Schedule dated XXXX is executed pursuant to Equipment Schedule No. X to the Master Lease Agreement dated XXXX between Comdisco, Inc. ("Lessor") and XXXX ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease Agreement and Equipment Schedule No. X are incorporated herein and made a part hereof, and this Summary Equipment Schedule constitutes a Schedule for the Equipment on the attached invoices. 1. For Period Beginning: And Ending: 2. Initial Term Starts on: Initial Term: (Number of Rent Intervals) 3. Total Summary Equipment Cost: 4. Lease Rate Factor: 5. Rent: 6. Acceptance Doc Type: 26 EXHIBIT A (MULTIPLE MONTHLY DELIVERY) SCHEDULE NO. VL-3 DATED AS OF April 15, 1996 ---- TO MASTER LEASE AGREEMENT DATED AS OF November 16, 1994 ("MASTER LEASE"") LESSEE: CombiChem, Inc. LESSOR: COMDISCO, INC. Admin.Contact/Phone No.: Address for all Notices: Controller 6111 North River Road Ph. (619) 530-0484 Rosemont, Illinois 60018 Fax (619) 530-9998 Attn: Capital Equipment Lease Administration Address for Notices: 9050 Camino Santa Fe San Diego, CA 92121 Attn.: Central Billing Location: PAYING AGENT: Same as above Comdisco, Inc. P.O. Box 91744 Attn.: Chicago, Illinois 60693 Lessee Reference No.: ___________________ (24 digits maximum) Location of Equipment: Initial Term: 36 months Same as above Lease Rate Factor: 3.200% Attn: EQUIPMENT (as defined below): Advance: $38,400 Leasehold improvements (which shall be considered "Equipment") specifically approved by Lessor which shall be accepted by Lessee during the period April 15, 1996 through December 15, 1996 ("Equipment Delivery Period"), for which Lessor receives vendor invoices approved for payment, up to an aggregate purchase price of $325, 000 ("Commitment Amount") ("Phase I"). 1. NOTICE PERIOD. Note less than ninety (90) days nor more than twelve (12) months prior to the expiration of the lease term. 27 2. EQUIPMENT PURCHASE Lessee acknowledges that it has either received or approved Lessor's purchase documentation for the Equipment. The aggregate purchase price referred to on the face of this Schedule shall include all Equipment purchased by Lessor, consisting of amounts financed under Sections (i), (ii) and (iii) below. (i) NEW EQUIPMENT. Lessor will purchase new Equipment which is specifically approved by Lessor. (ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at Lessee's site and to which Lessee has clear title and ownership may be considered by Lessor for inclusion under this Lease (the "Sale-Leaseback Transaction"). Any request for a Sale-Leaseback Transaction must be submitted to Lessor in writing (along with accompanying evidence of Lessee's Equipment ownership satisfactory to Lessor for all Equipment submitted) no later than April 1, 1996*. Lessor will not perform a Sale-Leaseback Transaction for any request or accompanying Equipment ownership documents which arrive after the date marked above by an asterisk (*). Further, any sale-leaseback Equipment will be placed on lease subject to: (1) Lessor prior approval of the Equipment; and (2) if approved, at Lessor's actual net appraised Equipment value. (iii) USED EQUIPMENT. Lessor will purchase "used" Equipment which is obtained from a third party by Lessee for its use subject to: (1) Lessor's prior approval of the Equipment; and (2) at Lessor's appraised value for such used Equipment. 3. COMMENCEMENT DATE The Commencement Date for each item of Equipment will be its Installation Date. Lessee agrees to confirm the Commencement Date by providing Lessor with Invoices containing the Equipment location, description, serial number and cost, the Installation Date and Lessees signature. Lessor will summarize all Invoices and/or IAFs received in the same calendar month provided however that each Commencement Certificate must cover equipment with an equipment cost of at least $10,000 or Lessor shall include such equipment on the Commencement Certificate for the next succeeding month into a Commencement Certificate in the form attached to this Schedule as Exhibit 1 and the Initial Term will begin the first day of the calendar month thereafter. Each Commencement Certificate will incorporate the terms and conditions of the Master Lease and this Schedule and will constitute a separate Schedule. Notwithstanding the foregoing, if the Equipment pertains to Sale-Leaseback Equipment the Commencement Date will be the date Lessor tenders the purchase price. 4. OPTION TO EXTEND So long as no Event of Default shall have occurred and be continuing, Lessee will have the right to extend the Initial Term of this Schedule for a period of one (1) year by giving Lessor at least ninety days (90) days written notice prior to the expiration of the Initial Term. In such event, the rent to be paid during said extended period shall be mutually agreed upon and if the parties cannot mutually agree, then the Lease shall continue in full force and effect pursuant to the existing terms and conditions until terminated in accordance with its terms. This Schedule will continue in effect following said extended period until terminated by either party upon not less than ninety (90) days prior written notice, which notice shall be effective as of the Rent Interval next following receipt. 5. PHASE II FINANCING SO LONG AS NO EVENT OF DEFAULT SHALL HAVE OCCURRED OR IS CONTINUING, AND SUBJECT TO FINAL REVIEW BY LESSOR, LESSOR AGREES TO PROVIDE TO LESSEE AN ADDITIONAL $875,000 OF EQUIPMENT FINANCING UPON WRITTEN REQUEST OF LESSEE. LESSEE WILL DELIVER TO LESSOR A WARRANT AGREEMENT IN FORM AND SUBSTANCE SATISFACTORY TO LESSOR, WHEREBY LESSEE SHALL GRANT LESSOR THE RIGHT TO PURCHASE THAT NUMBER OF SHARES OF SERIES C PREFERRED STOCK EQUAL TO 7% OF $875,000 DIVIDED BY $0.62. 28 6. MISCELLANEOUS In consideration of Lessor financing leasehold improvements hereunder, Lessee hereby agrees in addition to its last Monthly Rent payment to remit to Lessor an amount equal to 12% of Lesser's cost of Leasehold improvements provided hereunder. 7. ENVIRONMENTAL CONDITION a. Indemnification. Lessee shall fully and promptly pay, perform, discharge, defend, indemnify and hold harmless Lessor and its Affiliates (defined below) , successors and assigns, directors, officers, employees and agents from and against any Environmental Claim or Environmental Loss (defined below). b. Lessee Cooperation. In the event of an Environmental Claim, Lessee shall, upon request, immediately provide Lessor with copies of all correspondence reports, notices, orders, findings, declarations and other materials pertinent to the Lessee's compliance with and requirements of any Environmental Law (defined below). c. Lessee Insurance. If Lessee is required by law to obtain an environmental liability policy, the Lessee shall name Lessor as an additional insured on its environmental liability insurance policy. d. Adverse Environmental Condition - means (i) the existence or the continuation of the existence, of an Environmental Emission (including, without limitation, a sudden or non-sudden accidental or non- accidental Environmental Emission), of or exposure to, any substance, chemical, material, pollutant, contaminant, odor or audible noise or other release or emission in, into or onto the environment (including without limitation, the air, ground, water or any surface) at, in, by, from or related to any Equipment, (ii) the environmental aspect of the transportation, storage, treatment or disposal of materials in connection with the operation of any Equipment, or (iii) the violation, or alleged violation of any statutes, ordinances, orders, rules, regulations, permits or licenses of, by or from any governmental authority, agency or court relating to environmental matters connected with any Equipment. e. Affiliate - means any entity that is directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with Lessor. f. Environmental Claim - means any accusation, allegation, notice of violation, claim, demand, abatement or other order or direction (conditional or otherwise) by an governmental authority or any Person for personal injury (including sickness, disease, or death), tangible or intangible property damage, damage to the environment or natural resources, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restrictions, resulting from or based upon any Adverse Environmental Condition (defined above). g. Environmental Emission - means any actual or threatened release, spill, omission, leaking, pumping, injection, deposition, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environment, or into or out of any of the Equipment, including, without limitation, the movement of any Contaminant or other substance through or in the air, soil, surface water, groundwater or property. h. Environmental Law - means any federal, foreign, state or local law, rule or regulation pertaining to the protection of the environment, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") (42 U.S.C. Section 9601 et seq.), the Federal Water Pollution Control Act (33 U.S.C. 1251, et seq.), the Resource Conservation and Recovery Act (42 U.S.C. 6901 et seq.), the Clean Air Act (42 U.S.C. 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. 2601 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. 1361 et seq.), and the Occupational Safety and Health Act (10 U.S.C. 651 et seq.), as these laws have been amended or supplemented, and any analogous foreign, state or local statutes, and the regulations promulgated pursuant thereto. 29 i. Environmental Loss - means any loss, cost, damage, liability, deficiency, fine, penalty or expense (including, without limitation, reasonable attorneys' fees, engineering and other professional or expert fees), investigation, removal, cleanup and remedial costs (voluntarily or involuntarily incurred) and damages to, loss of the use of or decrease in value of the Equipment arising out of or related to any Adverse Environmental Condition. j. Person - means any individual, partnership, corporation, trust, unincorporated organization, government or department or agency thereof and any other entity. 8. SPECIAL TERMS The terms and conditions of the Master Lease Agreement as they pertain to this Schedule are hereby modified and amended as follows: A. Section 5.2, "Relocation or Sublease". In the first line insert "Lessor's" before "prior written consent" and insert "which shall not be unreasonably withheld" before "Lessee may relocate Equipment". B. Section 5.3, "Assignment by Lessor". In paragraph A line 3 after "so long as" insert "there has not been an Event of Default,". C. Section 6.2, "Taxes and Fees". Delete the parenthetical phrase in the second line of the paragraph. D. Section 8, "Representations and Warranties of Lessee". Paragraph (d) insert at the beginning of the sentence "To Lessee's knowledge,". Paragraph (f) add to the end of the paragraph ", the infringement or conflict of which would have a material adverse effect on the Lessee." E. Section 9, "Delivery and Return of Equipment". Delete from "Upon termination" through the end of the paragraph. F. Section 12, "Risk of Loss". First paragraph, third sentence after the words "as loss payee" insert the following "up to the then current casualty value". In the second paragraph add the following to the end of the paragraph "If Lessor agrees to accept like equipment as replacement for the loss or destruction of the equipment, Lessee will not be obligated to replace the Equipment for a cost greater than the Casualty Value, and Lessee shall be entitled to retain all of the insurance proceeds received to reimburse Lessee for its cost to replace the Equipment." G. Section 13.1, "Default". Paragraph (a) insert the word "business" before the word "days"; insert "Lessee's receipt of" before "written notice"; add to the end of the sentence "of such non-payment". Paragraph (b) in the first line insert "material" before the word "term". In the last line, insert "Lessee's receipt of" before "written notice". 30 Paragraph (c) after the phrase "failure by Lessee to pay its debts when due" insert "where such past due amounts exceed $50,000 in the aggregate or any lender has the right to accelerate more than $50,000 of debt", in the third line after the words "bankruptcy or insolvency law" insert "if such is not removed within sixty days (60)." H. Section 14.3, "Obligations to Lease Additional Equipment". In the first line insert "written" before the word "notice". In line 3 clause (i) after "master lease or any schedule" insert "and such default is not cured within five (5) days of written notice". Add to the end of the paragraph: "If Lessor's obligations to lease additional Equipment are suspended hereunder, Lessee may request a restoration of such leaseline upon demonstration to Lessor to Lessor's satisfaction that Lessee has cured the defect which gave rise to the suspension of Lessor's lease obligation." I. Section 14.4 "Merger and Sale Provisions". The second sentence of Section 14.4 of the Master Lease shall be deleted in its entirety and replaced with the following; "Lessor shall have the right to consent to the assignment of the Master Lease and all relevant Schedules to the successor entity, which consent shall not be unreasonably withheld. If such consent is reasonably withheld, then Lessor shall have the option to terminate the Master Lease and all relevant Schedules." J. Section 14.7, "Binding Nature". Add the end of the paragraph "without the prior written consent of Lessor which shall not be unreasonably withheld." K. Section 14.8, "Survival of Obligations". In the last line, "execution, delivery" shall be revised to read "execution and delivery", delete "expiration or termination". Add to the end of the section: "Sections 7.1, 9, and 11, shall survive expiration or termination of this Master Lease until all duties thereunder have been discharged by the parties." L. Section 14.9, "Notices". In the last line delete the word "receiving" and replace with the word "disclosing" before the word "party". M. Section 14.10, "Applicable Law". Delete "Illinois" and replace with "California" wherever it appears. N. Section 14.17, "Landlord/Mortgagee Waiver". After "Lessee agrees to" insert "use reasonable efforts, (which shall not include additional monetary payment to Landlord other than deminimis amounts), to" before "provide Lessor with". O. Section 14.19, "Definitions". P. Delete Interim Rent definition and replace with: "Interim Rent - means a daily rate of .0278% of Lessor's Cost for each day from the Commencement Date through but not including the first day of the first full Rent Interval included in the Initial Term." 31 MASTER LEASE: This Schedule is issued pursuant to the Master Lease identified on page 1 of this Schedule. All of the terms and conditions of the Master Lease are incorporated in and made a part of this Schedule as if they were expressly set forth in this Schedule. The parties hereby reaffirm all of the terms and conditions of the Master Lease (including, without limitation, the representations and warranties set forth in Section 8) except as modified herein by this Schedule. This Schedule may not be amended or rescinded except by a writing signed by both parties. COMBICHEM, INC. COMDISCO, INC. as Lessee as Lessor By: /s/ Illegible By: /s/ James P. Labe --------------------------- ------------------------------ Title: President & CEO Title: President, Venture Lease Division ------------------------ --------------------------- Date: 4-25-96 Date: ------------------------ ---------------------------- 32 18 SLXXXXX-XX EXHIBIT 1 SUMMARY EQUIPMENT SCHEDULE This Summary Equipment Schedule dated XXXX is executed pursuant to Equipment Schedule No. X to the Master Lease Agreement dated XXXX between Comdisco, Inc. ("Lessor") and XXXX ("Lessee"). All of the terms, conditions, representations and warranties of the Master Lease Agreement and Equipment Schedule No. X are incorporated herein and made a part hereof, and this Summary Equipment Schedule constitutes a Schedule for the Equipment on the attached invoices. 1. For Period Beginning: And Ending: 2. Initial Term Starts on: Initial Term: (Number of Rent Intervals) 3. Total Summary Equipment Cost: 4. Lease Rate Factor: 5. Rent: 6. Acceptance Doc Type: EX-10.19 25 EXHIBIT 10.19 1 EXHIBIT 10.19 COLLABORATION AGREEMENT BETWEEN COMBICHEM, INC. AND TEIJIN LIMITED March 29, 1996 2 TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS................................................................................................... 1 ARTICLE 2 COLLABORATION RESEARCH AND SCREENING.......................................................................... 7 2.1 Collaboration Research Activities............................................................................. 8 2.2 Research Plan................................................................................................. 9 2.3 Option to Expand the Research Program or to Extend the Research Program Term.................................................................................................. 9 2.4 Records....................................................................................................... 9 2.5 Permitted Activities.......................................................................................... 9 2.6 Post-Research Program Activities.............................................................................. 10 2.7 Reports....................................................................................................... 10 2.8 Excluded Products............................................................................................. 10 2.9 Retained Rights............................................................................................... 11 2.10 Restricted Activities; Rights Following Termination of Exclusivity............................................ 11 ARTICLE 3 MANAGEMENT.................................................................................................... 12 3.1 Research Committee............................................................................................ 12 3.2 Membership of RC.............................................................................................. 12 3.3 RC Meetings................................................................................................... 12 3.4 Decision Making............................................................................................... 12 ARTICLE 4 ***........................................................................................................... 13 4.1 ***........................................................................................................... 13 *** 4.2 ***........................................................................................................... 13 *** 4.3 ***........................................................................................................... 14 ARTICLE 5 LICENSES...................................................................................................... 14 5.1 Licenses to Teijin............................................................................................ 14 5.2 Licenses to CombiChem......................................................................................... 15 5.3 *** ............................................................................................... 15 5.4 *** ............................................................................................... 15 5.5 No Liability Regarding Third Party Rights..................................................................... 16 5.6 Research License.............................................................................................. 16 5.7 No Other Products............................................................................................. 16 ARTICLE 6 PAYMENTS...................................................................................................... 16 6.1 *** Payment.............................................................................................. 16 6.2 Collaboration Funding......................................................................................... 16 6.3 Milestone Payments............................................................................................ 17
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. ii 3 6.4 Royalties to CombiChem........................................................................................ 18 6.5 ***......................................................................................................... 19 6.6 ***......................................................................................................... 20 ARTICLE 7 PAYMENTS; BOOKS AND RECORDS................................................................................... 20 7.1 Royalty Reports and Payments.................................................................................. 20 7.2 Method for Payments........................................................................................... 20 7.3 Place of Royalty Payment and Currency Conversions............................................................. 20 7.4 Records; Inspection........................................................................................... 21 7.5 Tax Matters................................................................................................... 21 ARTICLE 8 DUE DILIGENCE................................................................................................. 22 8.1 Due Diligence................................................................................................. 22 8.2 License Back.................................................................................................. 22 8.3 Regulatory Filings............................................................................................ 22 ARTICLE 9 INTELLECTUAL PROPERTY......................................................................................... 23 9.1 Ownership of Inventions....................................................................................... 23 9.2 Patent Prosecution............................................................................................ 24 9.3 Enforcement and Defense....................................................................................... 26 ARTICLE 10 CONFIDENTIALITY............................................................................................... 26 10.1 Confidential Information...................................................................................... 27 10.2 Permitted Use and Disclosures................................................................................. 27 10.3 Nondisclosure of Terms........................................................................................ 28 10.4 Publication................................................................................................... 28 ARTICLE 11 REPRESENTATIONS AND WARRANTIES................................................................................ 28 11.1 Teijin........................................................................................................ 28 11.2 CombiChem..................................................................................................... 29 11.3 Disclaimer.................................................................................................... 29 11.4 No Consequential Damages...................................................................................... 29 ARTICLE 12 ***........................................................................................................... 30 12.1 ***......................................................................................................... 30 12.2 ***......................................................................................................... 30 12.3 ***......................................................................................................... 30 ARTICLE 13 DISPUTE RESOLUTION............................................................................................ 31 13.1 General Arbitration........................................................................................... 31 13.2 Arbitration Procedures........................................................................................ 31 13.3 Disqualification.............................................................................................. 32 13.4 Confidentiality............................................................................................... 32 13.5 Equity........................................................................................................ 32
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. iii 4 ARTICLE 14 TERM AND TERMINATION.......................................................................................... 32 14.1 Term.......................................................................................................... 32 14.2 Termination for Cause......................................................................................... 33 14.3 Termination for Insolvency.................................................................................... 33 14.4 Effect of Breach or Termination............................................................................... 33 14.5 Survival...................................................................................................... 34 ARTICLE 15 MISCELLANEOUS................................................................................................. 34 15.1 Governing Laws................................................................................................ 34 15.2 No Implied Licenses........................................................................................... 34 15.3 Waiver........................................................................................................ 34 15.4 Assignment.................................................................................................... 34 15.5 Independent Contractors....................................................................................... 35 15.6 Compliance with Laws.......................................................................................... 35 15.7 Patent Marking................................................................................................ 35 15.8 Notices....................................................................................................... 35 15.9 Severability.................................................................................................. 36 15.10 Force Majeure................................................................................................. 36 15.11 Complete Agreement; Amendment................................................................................. 36 15.12 Headings...................................................................................................... 36 15.13 Counterparts.................................................................................................. 36
Exhibits Exhibit A Research Plan Exhibit B Libraries Exhibit C Initial Representatives on the Research Committee iv 5 COLLABORATION AGREEMENT This COLLABORATION AGREEMENT (the "Agreement"), effective as of March 29, 1996 (the "Effective Date"), is made by and between CombiChem, Inc., a California corporation, having a principal place of business at 9050 Camino Santa Fe, San Diego, California 92121, U.S.A. ("CombiChem"), and Teijin Limited, an entity organized and existing under the laws of Japan, having a principal place of business at 6-7 Minami-hommachi 1-chome, Chuo-ku, Osaka 541, Japan ("Teijin"). BACKGROUND A. Teijin has discovered lead compounds that are *** *** . B. CombiChem has developed novel proprietary methods for the generation of compound libraries. CombiChem believes that its technology, by rapidly producing diverse and targeted compound libraries, will accelerate the drug discovery process and increase productivity of drug discovery programs. C. Teijin and CombiChem desire to collaborate to design, synthesize and screen compound libraries to identify Collaboration Compounds (as defined herein). D. CombiChem desires to *** *** *** *** . NOW, THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between the Parties (as defined below) as follows: ARTICLE 1 DEFINITIONS The following capitalized terms used herein shall have the respective meanings set forth below. Certain other capitalized terms are defined elsewhere in this Agreement. 1.1 "Affiliate" shall mean any corporation or other business entity which during the term of this Agreement controls, is controlled by or is under common control with CombiChem or Teijin, but only for so long as such entity controls, is controlled by or is under common control with CombiChem or Teijin. For this purpose, control means the possession of the power to direct or cause the direction of the management and the policies of *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 6 an entity whether through ownership directly or indirectly of over fifty percent (50%) of the stock entitled to vote, and for non-stock organizations, the right to receive over fifty percent (50%) of the profits by contract or otherwise, or if not meeting the preceding requirement, any company owned or controlled by or owning or controlling CombiChem or Teijin at the maximum control or ownership right permitted in the country where such company exists. 1.2 "Aggregate Annual Research Fee" shall mean the aggregate Annual Research Fee for a contract year as set in Sections 1.3 and 6.2, unless modified by mutual agreement of the Parties. 1.3 "Annual Research Fee" shall mean on a per scientist full-time basis (a) for the first year of the Research Program, *** per CombiChem scientist, (b) for the first year of the Research Program, *** per Teijin scientist sited at CombiChem's facility and (c) for any subsequent year of the Research Program, the Annual Research Fee per scientist for the previous year increased by *** of the percentage increase during the previous year in the CPI. If such index ceases to be published, then such index shall be replaced with the index which most closely resembles the performance of such index, as determined by the mutual agreement of the Parties. 1.4 " *** Active Compound" shall mean a Library Compound screened during the *** Exclusivity Period which has *** Receptor Activity. 1.5 " *** Compound" shall mean any (a) *** Active Compound or (b) Derivative Compound which demonstrates *** Receptor Activity as well as any compositions-of-matter claimed in patent applications filed or patents issued under Article 9 of this Agreement with respect to compounds described in (a) or (b) above. 1.6 " *** Exclusivity Period" shall mean the period of time *** *** . 1.7 " *** Receptor Activity" shall mean *** *** *** . 1.8 "Collaboration" shall comprise the activities described in Article 2 below. 1.9 "Collaboration Compounds" shall mean *** *** . 1.10 *** *** . 1.11 "CPI" means the Consumer Price Index, All Urban Consumers, as published by the U.S. Bureau of Labor Statistics. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 2 7 1.12 "Derivative Compound" shall mean any compound that demonstrates activity against a particular molecular target, which compound is derived from a Library Compound active against that molecular target by CombiChem, or Teijin or its Affiliates, or by a third party under authority from Teijin. A compound shall be deemed to have been "derived from" a Library Compound if it: (i)(A) results from a chemical synthesis program based on a Library Compound or (B) is based on structure-activity data relating to a Library Compound *** , and (ii) is a compound synthesized during the *** Exclusivity Period (with respect to a Library Compound with *** ) or the *** Exclusivity Period (with respect to a Library Compound with *** ). It is understood that "Derivative Compound" shall include compounds derived from a Library Compound or from another Derivative Compound. 1.13 "Due Diligence" shall have the meaning set forth in Section 8.1 of this Agreement. 1.14 "Europe" shall mean the geographic territory encompassed on the date of this Agreement by all of those countries which are the members of the European Free Trade Association or the European Union (formerly the European Community), all countries that were formerly members of COMECON, the independent republics of the former Republic of Yugoslavia, and all of the former republics of the Union of Soviet Socialist Republics, together with any additional nations or states that may be created in such geographical territory after the date of the Agreement. 1.15 "Excluded Product" shall mean any product in the Field with *** *** , which, prior to the Effective Date, Teijin has synthesized and either tested or has expressed an intention to test for *** *** , as shown by contemporaneous documentation, subject to reasonable verification. 1.16 "Existing Patent Rights" shall mean (i) all patents and patent applications existing as of the Effective Date that claim a Collaboration Compound or method of use or process thereof or composition-of-matter thereof, (ii) any divisions, continuations, continuations-in-part, reissues, reexaminations, extensions or other governmental actions which extend any of the subject matter of a patent in subsection (i) above, (iii) all patents and patent applications listed in subsections (i) or (ii) above that are subsequently withdrawn and re-filed, and (iv) any substitutions, confirmations, registrations, revalidations, or additions of any of the foregoing, in each case, which is owned or controlled, in whole or part, by license, assignment or otherwise by CombiChem during the term of this Agreement. 1.17 "Existing Know-How" shall mean all ideas, inventions, data, know-how, instructions, processes, formulas, expert opinion and information, existing as of the Effective Date owned or controlled in whole or part by CombiChem, by license, assignment or otherwise, in each case, which are necessary for the development, manufacture, use, sale or commercialization of a Collaboration Compound or Product, in each case, to the extent CombiChem has the right to license or sublicense the same, and subject to any limitations or *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 3 8 prohibitions of any license or sublicense. Excluded from Existing Know-How are any inventions otherwise included in the definition of any Existing Patent Rights in this Agreement. 1.18 "Field" shall mean the therapeutic or prophylactic treatment or prevention of diseases and conditions in humans and animals. 1.19 "FDA" shall mean the U.S. Food and Drug Administration or any corresponding foreign registration or regulatory authority. 1.20 "Future Patent Rights" shall mean (i) all patents and patent applications that claim a Collaboration Compound or method of use or process thereof conceived and reduced to practice by CombiChem in the period from the Effective Date until the expiration of the Exclusivity Period and (ii) any divisions, continuations, continuations-in-part, reissues, reexaminations, extensions or other governmental actions which extend any of the subject matter of the patent applications or patents in (i) above, and any substitutions, confirmations, registrations, revalidations or additions of any of the foregoing, in each case, which is owned or controlled, in whole or part, by license, assignment or otherwise by CombiChem or its Affiliates during the term of this Agreement. Excluded from Future Patent Rights are patents and patent applications otherwise included in Existing Patent Rights in this Agreement. 1.21 "Future Know-How" shall mean all ideas, inventions, data, know-how, instructions, processes, formulas, expert opinion and information owned or controlled by CombiChem in whole or part by license, assignment or otherwise in the period from the Effective Date until the expiration of the *** *** which are necessary for the development, manufacture, use or sale or commercialization of a Collaboration Compound or Product, in each case, to the extent CombiChem or its Affiliates has the right to license or sublicense the same, and subject to any limitations or prohibitions of any license or sublicense. Excluded from Future Know-How are any inventions otherwise included in the definition of any Future Patent Rights in this Agreement. 1.22 "IND" shall mean an Investigational New Drug application, as defined in the U.S. Food, Drug, and Cosmetic Act and the regulations promulgated thereunder for initiating human clinical trials in the United States, or any corresponding foreign application, registration or certification. 1.23 "In Vitro Activity" shall mean: *** *** *** *** . 1.24 "In Vivo Activity" shall mean *** *** . *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 4 9 1.25 "Library" shall mean a chemical compound library whose design has been approved by the Research Committee (as defined below) containing approximately *** *** molecules prepared by CombiChem specifically for screening in the Collaboration based on proprietary structures (a) with activity disclosed by Teijin to CombiChem or (b) generated by CombiChem on behalf of Teijin, in each case, in connection with the Collaboration. 1.26 "Library Compound" shall mean any compound which is contained in a Library provided by CombiChem to Teijin in connection with the Collaboration. 1.27 "Licensed Technology" shall mean Existing Patent Rights, Future Patent Rights, Existing Know-How and Future Know-How. 1.28 " *** Active Compound" shall mean a Library Compound screened during the *** . 1.29 " *** Activity" shall mean *** *** . 1.30 " *** Compound" shall mean any (a) *** Active Compound or (b) Derivative Compound which demonstrates *** Activity as well as any compositions-of-matter claimed in patent applications filed or patents issued under Article 9 of this Agreement with respect to compounds described in (a) or (b) above. 1.31 " *** Exclusivity Period" shall mean the period of time *** *** . 1.32 "NDA" shall mean a New Drug Application, as defined in the U.S. Food, Drug, and Cosmetic Act and the regulations promulgated thereunder, or any corresponding foreign application, registration or certification. 1.33 "Net Sales" shall mean the invoice price billed by a Party, its Affiliates or Sublicensees to third parties for the sale of Products, after deduction of (i) cash, trade and/or quantity discounts actually allowed; (ii) amounts repaid or credited- by reason of rejections or returns of goods, recalls, chargebacks, defects, or rebates; (iii) freight, postage, and duties paid for and separately identified on the invoice or other documentation maintained in the ordinary course of business; and (iv) excises, sales taxes, value added taxes, and duties paid for and separately identified on the invoice or other documentation maintained in the ordinary course of business. Net Sales shall also include the amount or fair market value of all other consideration received by a Party, its Affiliates or Sublicensees in respect of Products, whether such consideration is in cash, payment in kind, exchange or another form; provided, however, Net Sales shall not include up-front payments, reimbursements or payments in connection with research and development activities or payments for equity or other securities of a Party. A "sale" of an Product is deemed to occur upon the earliest of invoicing, shipment or transfer of title in the Product by a Party to a person other than such Party or its Affiliate or Sublicensee, unless such Affiliate or Sublicensee is an end user of the Product. In *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 5 10 the event that an Product is sold bundled with one or more other products (Products or otherwise) or provided in conjunction with any services, in either case, in connection with a capitation pricing arrangement or any other aggregated payment agreement or program, Net Sales from such bundled sales and/or services for purposes of calculating Net Sales allocated to the Product shall be equal to the bona fide list price of the Product when sold separately in comparable quantities. 1.34 "Other Library Compounds" shall mean Library Compounds other than Collaboration Compounds. 1.35 "Party" shall mean CombiChem or Teijin, and their permitted successors and assigns, as the case may be. 1.36 "Phase I", "Phase II", and "Phase III" shall mean Phase I (or Phase I/II), Phase II (or Phase II/III), and Phase III clinical trials, respectively, in each case as prescribed by applicable FDA IND Regulations, or any corresponding foreign statutes, rules or regulations. 1.37 "Product(s)" shall mean any product containing a Collaboration Compound. Products shall not include Excluded Products or products containing an Other Library Compound. 1.38 "Product Development Candidate" shall mean any *** *** which (a) merits initiation of expanded animal toxicology studies, data of which are required to be submitted to FDA for an IND, including, without limitation: (i) formulation/stability studies; (ii) pharmacokinetic studies; (iii) drug metabolism studies; (iv) dose ranging (prior to toxicology) studies; and (v) one-month toxicology studies in two species; and (b) has satisfied, in Teijin's reasonable judgment, the following criteria (and any other criteria which may seem relevant to Teijin in its reasonable judgment, excluding criteria set forth in (a) above): (i) demonstrated In Vitro Activity; (ii) demonstrated In Vivo Activity; (iii) demonstrated safety pharmacology in two species (e.g., rat and dog) showing satisfactory therapeutic index and efficacy as compared to a central nervous system and cardiovascular profile; (iv) demonstrated an appropriate cellular toxicity profile; (v) demonstrated appropriate mutagenicity results; and (vi) demonstrated appropriate single dose and two-week non-GLP toxicology results in two species (e.g., rat and dog). 1.39 "Research Committee" or "RC" shall mean the oversight committee described in Article 3. 1.40 "Research Plan" shall mean the written overall plan (a copy of which is attached hereto as Exhibit A) for the Research Program the Parties will conduct to optimize Library Compounds with *** during the Research Program Term. The Research Plan may be revised as necessary by agreement of the RC. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 6 11 1.41 "Research Program" shall mean the research to be conducted in accordance with the Research Plan as part of the Collaboration, and shall include the activities and items set forth in Section 2.1 of this Agreement. 1.42 "Research Program Term" shall mean the period commencing on March 29, 1996 and terminating on the *** thereof, unless extended pursuant to Section 2.3. 1.43 "Sublicensee" shall mean, with respect to a particular Product, a third party to whom a Party has granted a license or sublicense under the Licensed Technology or the Teijin Technology and/or the Teijin Know-How, as the case may be, to make, use and/or sell such Product, including, without limitation, a collaborative partner of Teijin or CombiChem. As used in this Agreement, it is understood that "Sublicensee" shall also include a third party to whom a Party has granted the right to distribute such Product, provided that such third party has the primary responsibility for marketing and promotion at its expense of such Product within the field or territory for which such distribution rights are granted, which marketing and promotional activities are not subsidized directly or indirectly by a Party or its Affiliates. 1.44 "Teijin Technology" shall mean any patent application or patent (a) arising in connection with or out of the Research Program or (b) necessary to make, use or sell a Collaboration Compound or Product, and is owned or controlled, in whole or in part, by Teijin or its Affiliates at any time during the term of this Agreement that claims the synthesis, composition-of-matter or method of use of a Library Compound, a Collaboration Compound or a Product. 1.45 "Teijin Know-How" shall mean all ideas, inventions, data, know-how, instructions, processes, formulas, expert opinion and information owned or controlled in whole or in part by Teijin, by license, assignment or otherwise during the term of this Agreement, which are necessary for the development, manufacture, use or sale or commercialization of a Collaboration Compound or Product, to the extent Teijin has the right to license or sublicense the same, and subject to any limitation and prohibitions of any license or sublicense. Excluded from Teijin Know-How are any inventions otherwise included in the definition of Teijin Technology in this Agreement. 1.46 "Territory" shall mean *** *** *** *** *** *** . ARTICLE 2 COLLABORATION RESEARCH AND SCREENING *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 7 12 2.1 Collaboration Research Activities. Subject to the terms and conditions set forth herein, the Parties shall conduct research under the Research Plan with respect to Collaboration Compounds on a collaborative basis with the goal of developing Products. 2.1.1 CombiChem Responsibilities. (a) During the Research Program Term, CombiChem shall *** . Such Libraries shall be provided to Teijin according to the schedule set forth in the Research Plan. The Libraries shall be provided in 96-well plates or Eppendorf tubes, and shall contain the quantities of Library Compounds set forth on Exhibit B; (b) During the Research Program Term, CombiChem shall keep the RC fully informed of its activities performed in connection with the Collaboration, including, without limitation, by providing the RC with data and information regarding Libraries, Collaboration Compounds and structures thereof; (c) During the Research Program Term, CombiChem shall provide an *** *** under the Research Program; and (d) During the Research Program Term, CombiChem shall provide space and resources to accommodate *** *** . 2.1.2 Teijin Responsibilities. (a) Teijin shall use reasonable efforts to provide CombiChem with support and assistance useful or necessary for the conduct of the Research Plan, including, but not limited to, providing chemical intermediates, if available, information concerning assay methods and screening data; (b) During the Research Program Term Teijin shall keep the RC fully informed of its activities performed in connection with the Collaboration, including, without limitation, by providing the RC with data and information regarding Collaboration Compounds, and structures thereof, and *** assays developed and used by Teijin to test Library Compounds; *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 8 13 (c) During the Research Program Term, Teijin shall provide an *** *** at CombiChem's facility under the Research Program; (d) During the Research Program Term and during the *** *** , Teijin shall screen the Libraries for *** *** . Any compound identified as having *** Activity as a result of such screening shall be considered *** *** Compound for all purposes of this Agreement, and any compound identified as having *** Receptor Activity as a result of such screening shall be considered a *** Compound for all purposes of this Agreement; and (e) During and following the Research Program Term, Teijin shall use Due Diligence to optimize Collaboration Compounds into Products, as set forth in Section 8.1 below. 2.2 Research Plan. The Parties hereby agree that the Research Program shall be carried out in accordance with the Research Plan, a copy of which is attached hereto as Exhibit A. The RC shall review the Research Plan on an ongoing basis and may make changes to the Research Plan; provided, however, the Research Plan shall not be modified except as mutually agreed by CombiChem and Teijin. 2.3 Option to Expand the Research Program or to Extend the Research Program Term. Teijin shall have the right to expand or extend the term of the Research Program for up to *** . To expand the Research Program, Teijin shall promptly notify CombiChem of its desire. To extend the Research Program Term, Teijin must notify CombiChem no later than *** prior to the then current expiration date for the Research Program Term. Following such notification, the Parties shall negotiate the terms of any such expansion or extension in good faith. 2.4 Records. CombiChem and Teijin and their respective Affiliates shall maintain records of the Research Program (or cause such records to be maintained) in sufficient detail and in good scientific manner as will properly reflect all work done and results achieved in the performance of the Research Program (including all data in the form required under any applicable governmental regulations and as directed by the RC). Each Party shall allow the other to have reasonable access to all pertinent materials and data generated by or on behalf of such Party with respect to each Collaboration Compound in connection with the Research Program, as set forth in the Research Plan. 2.5 Permitted Activities. Subject in all cases to Section 2.10, each of Teijin and CombiChem may screen the Libraries, both during the Research Program Term and thereafter, for activity other than *** . CombiChem and Teijin may further collaborate with respect to any Other Library Compounds discovered pursuant to *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 9 14 this Section 2.5 and the terms and conditions of any such further collaboration shall be subject to good-faith negotiations. 2.6 Post-Research Program Activities. Except as expressly provided elsewhere under the terms of this Agreement, Teijin shall, at Teijin's or its Affiliates or Sublicensees' expense, be responsible for conducting all development and commercialization of Collaboration Compounds and Products to which Teijin retains rights under this Agreement following the Research Program Term. 2.7 Reports. 2.7.1 Collaboration Compounds. Following the Research Program Term, Teijin shall keep CombiChem fully informed of its activities with respect to Collaboration Compounds. Teijin shall provide CombiChem with *** *** providing at least the following information regarding the status of all Collaboration Compounds: (i) description of the status of the research and development activities conducted with respect to each Collaboration Compound, including decisions made to discontinue development of any Collaboration Compound; and (ii) the status of all patent applications claiming such Collaboration Compounds. Such reports shall contain sufficient information to allow CombiChem to monitor Teijin's obligations under this Agreement, including, without limitation, Teijin's obligations with respect to Due Diligence set forth in Section 8.1 below and the accomplishment of the milestones set forth in Section 6.2 below. Until first commercial introduction of each royalty-bearing Product by or on behalf of Teijin hereunder, Teijin shall keep CombiChem apprised of the status of the pre- clinical, clinical and commercial development of that Product by *** providing CombiChem with a written report detailing such activities with respect to each applicable Product during the term of this Agreement. 2.7.2 Library Compounds. During the Research Program Term, Teijin shall keep CombiChem fully informed of its activities with respect to Library Compounds, including, without limitation, notification by Teijin to CombiChem of its intent to screen such Library Compound against an assay other than an assay designed to determine *** *** prior to performing any such screening. Teijin shall provide CombiChem with *** *** providing such information. 2.7.3 Confidentiality. All reports and information provided under this Section 2.7 shall be deemed Confidential Information of Teijin. 2.8 Excluded Products. Within thirty (30) days of the filing of an IND with respect to each Excluded Product, Teijin shall notify CombiChem of such filing, and provide a detailed description of why such Excluded Product is not an Product hereunder. If a dispute arises between the Parties which the Parties are unable to resolve regarding whether or not a product is an Excluded Product, the dispute shall be settled by binding arbitration pursuant to Article 13 herein. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 10 15 2.9 Retained Rights. CombiChem shall retain ownership of the tangible property embodied in the physical Libraries and in the Library Compounds provided to Teijin hereunder. 2.10 Restricted Activities; Rights Following Termination of Exclusivity. 2.10.1 *** Exclusivity. During the *** Exclusivity Period, CombiChem will not (i) knowingly make compounds or combinatorial libraries for or with any third person or entity specifically for screening for *** Activity, (ii) enter into contract screening for or with any third person or entity with respect to *** Activity or (iii) perform for its own account any screening with respect to *** Activity; *** , *** *** *** *** *** *** 2.10.2 *** Exclusivity. During the *** Exclusivity Period, CombiChem (a) will not enter into contract screening for or with any third person or entity of the Libraries, any Library Compound or any Derivative Compound with respect to *** Receptor Activity and (b) will not perform for its own account any screening of the Libraries, any Library Compound or any Derivative Compound with respect to *** Receptor Activity; *** *** *** *** *** *** *** . 2.10.3 All Other Molecular Targets. During the Research Program Term, *** *** *** *** . 2.10.4 Commercialization Rights. Teijin's rights to develop and commercialize each Collaboration Compound as set forth in and subject to the terms and conditions of this Agreement, shall be *** *** *** . *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 11 16 2.10.5 Rights Following Termination of Exclusivity. After the expiration of the *** Exclusivity Period, the *** Exclusivity Period or the Research Program Term, as the case may be, CombiChem and Teijin shall *** *** *** *** *** . ARTICLE 3 MANAGEMENT 3.1 Research Committee. Teijin and CombiChem will establish a RC to oversee, review and coordinate the conduct of the Research Program, including, without limitation, the design of the Libraries, and provide advice regarding prosecution of patent applications. 3.2 Membership of RC. The RC shall be comprised of representatives from each of Teijin and CombiChem, each Party's members selected by that Party. The initial representatives of each Party are listed on Exhibit C attached hereto. Each Party shall designate the chief representative for its members ("Chief Representative"). CombiChem and Teijin may change its RC representatives at any time, upon written notice to the other Party. The RC shall be chaired as agreed by the Parties. From time to time, the RC may establish subcommittees to oversee particular projects or activities, and such subcommittees will be constituted as the RC agrees. 3.3 RC Meetings. 3.3.1 Research Program Term. During the Research Program Term, the RC shall meet up to four (4) times per year at regular intervals, or more often as agreed by the Parties, at such locations as the Parties agree. At such meetings, the RC will formulate and review the Research Program objectives, monitor the progress of the Research Program toward those objectives, and take such other actions as may be specified under this Agreement or as the Parties deem appropriate. With the consent of the Parties, other representatives of CombiChem or Teijin or their Affiliates or Sublicensees may attend such RC meetings as observers. Each Party shall be responsible for all of its own expenses. The first meeting of the RC shall occur as soon as practicable after the Effective Date, but in no event later than forty-five (45) days after the Effective Date. 3.3.2 After Research Program Term. After the Research Program Term and during the term of this Agreement, the RC shall meet as mutually agreed by the Parties. At such meetings, the RC will take such other actions as may be specified under this Agreement or as the Parties deem appropriate. Each Party shall be responsible for all of its own expenses. 3.4 Decision Making. Decisions of the RC shall be made by agreement between the Teijin Chief Representative and the CombiChem Chief Representative. Certain decisions *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 12 17 must be approved by CombiChem's Chief Executive Officer and Teijin's General Manager of the Planning and Research Division, Medical and Pharmaceutical Group. In the event that agreement is not achieved, the dispute will be referred to CombiChem's Chief Executive Officer (or designee of similar rank) and Teijin's General Manager of the Planning and Research Division, Medical and Pharmaceutical Group (or designee of similar rank), who shall promptly meet and endeavor to resolve the dispute in a timely manner. ARTICLE 4 *** *** *** *** 4.1 *** *** *** *** *** *** *** *** *** *** *** *** *** *** 4.2 *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 13 18 4.3 *** *** *** *** *** *** *** *** *** *** *** *** *** ARTICLE 5 LICENSES 5.1 Licenses to Teijin. 5.1.1 *** Licensed Technology in the Territory. Subject to the terms and conditions of this Agreement, CombiChem agrees to grant, and hereby grants, to Teijin *** *** *** *** *** *** . 5.1.2 *** Relating to Collaboration Compounds and Products in the Territory. Subject to the terms and conditions of this Agreement, CombiChem agrees to grant, and hereby grants, to Teijin *** *** *** *** . 5.1.3 *** Term for Collaboration Compounds. Such licenses shall be *** *** *** . 5.1.4 *** . Subject to the terms and conditions of this Agreement, CombiChem agrees to grant and *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 14 19 hereby grants to Teijin, effective upon the expiration of the *** Exclusivity Period, *** Exclusivity Period or the Research Program Term, as the case may be, *** *** *** *** . 5.2 Licenses to CombiChem. 5.2.1 *** Teijin Technology and Teijin Know-How *** . Subject to the terms and conditions of this Agreement, Teijin agrees to grant, and hereby grants, to CombiChem *** *** *** *** *** *** . 5.2.2 *** *** . Subject to the terms and conditions of this Agreement, Teijin agrees to grant, and hereby grants, to CombiChem *** *** *** *** . 5.2.3 *** *** . Subject to the terms and conditions of this Agreement, Teijin agrees to grant, and hereby grants, to CombiChem, effective upon the expiration of the *** Exclusivity Period, the *** Exclusivity Period or the Research Program Term, as the case may be, *** *** *** . 5.2.4 Physical Transfer. In the event that elements or components of Teijin Technology and/or Teijin Know-How are to be physically transferred to CombiChem, its Affiliates or Sublicensees in connection with the license grants contained herein, CombiChem and Teijin shall negotiate in good faith the terms and conditions for such physical transfer. 5.3 *** *** *** *** 5.4 *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 15 20 *** *** *** 5.5 No Liability Regarding Third Party Rights. It is understood and agreed that even if CombiChem complies with its obligations under this Agreement, that compounds provided to third parties in the course of CombiChem's other business activities may result in third party patent applications and patents, including patent applications and patents owned by such third parties, or owned jointly by CombiChem and such third parties, which could conflict with patent applications and patents owned by Teijin, or jointly owned by Teijin and CombiChem hereunder. CombiChem will use its reasonable efforts to avoid such conflict; provided, that unless Teijin is damaged as a proximate result of a material breach by CombiChem of the terms of Article 2 or any of the representations and warranties in Article 11, then CombiChem shall have no liability under this Agreement with respect to any such conflict. 5.6 Research License. Notwithstanding Section 5.1 above and subject to Section 2.10, CombiChem shall retain the right under the Licensed Technology to make, have made and use Library Compounds for its own research purposes. 5.7 No Other Products. Except as otherwise agreed or specifically provided in the terms of this Agreement, neither Teijin *** shall commercialize any Library Compound or Collaboration Compound, other than as a Product in accordance with this Agreement. ARTICLE 6 PAYMENTS 6.1 *** Payment. In consideration of the licenses contained in this Agreement, Teijin agrees to pay to CombiChem *** *** *** *** *** . 6.2 Collaboration Funding. In consideration for CombiChem's performance of its obligations under the Research Program, within *** of the Effective Date and within *** of the Research Program Term, Teijin shall pay CombiChem an amount equal to *** *** the Aggregate Annual Research Fee set forth below: *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 16 21
Aggregate Contract Year Annual Research Fee ------------- ------------------- *** *** *** *** *** *** *** *** *** ***
6.3 Milestone Payments. 6.3.1 Collaboration Compound Milestones. Teijin agrees to pay to CombiChem the amounts set forth in Table 6.3.1 below upon completion by Teijin, *** *** of each of the milestones set forth in Table 6.3.1 with respect to the first *** Compound to reach such milestone and the first *** Compound to reach such milestone. *** *** with respect to *** Compounds or *** Compounds directed at the same molecular target, regardless of how many applicable Products are commercialized. No milestone payments shall be due to CombiChem in respect of (a) Excluded Products in any event or (b) a *** *** *** *** *** ***. Table 6.3.1 *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 17 22 *** *** *** 6.3.2 Payments. Except as set forth in Section 6.3.1 solely with respect to *** Compounds, all payments made to CombiChem by Teijin pursuant to this Section 6.3 shall be due within thirty (30) days after the occurrence of the corresponding milestone. Except as otherwise specifically set forth in this Agreement, *** *** *** . It is understood that the milestone payments set forth above shall be made with respect to the first *** Compound and *** *** *** *** *** *** *** *** *** *** . 6.4 Royalties to CombiChem. 6.4.1 Base Royalty on Products. Teijin shall pay to CombiChem in respect of Net Sales of Products by Teijin, *** , royalties of *** of Net Sales of each Product within the Territory. 6.4.2 *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 18 23 6.4.3 *** *** *** *** 6.4.4 Royalty Term. Teijin's obligation to pay royalties to CombiChem under this Section 6.4 shall continue for each Product, on a country-by-country basis, until the date which is the later of (i) *** after the first commercial sale of such Product in such country by Teijin, its Affiliates or Sublicensees, (ii) the expiration of the last-to-expire issued patent within the Licensed Technology containing any claim which would be infringed by making, using or selling the applicable Product in the applicable country in the absence of the license grants in this Agreement. 6.4.5 Currency of Payments. All payments made pursuant to this Section 6.4 shall be made in U.S. dollars. 6.5 *** 6.5.1 *** *** *** 6.5.2 *** *** *** *** *** 6.5.3 *** *** *** 6.5.4 *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 19 24 6.5.5 *** *** 6.6 *** *** *** *** *** ARTICLE 7 PAYMENTS; BOOKS AND RECORDS 7.1 Royalty Reports and Payments. After the first commercial sale of a Product on which royalties are payable by *** hereunder, *** shall make quarterly written reports *** *** , stating in each such report the number, description, and aggregate Net Sales of each Product sold during the *** upon which a royalty is payable *** *** . Concurrently with the making of such reports, *** *** shall pay to *** royalties due at the rates specified *** *** . 7.2 Method for Payments. All payments due under this Agreement shall be made by bank wire transfer in immediately available funds to an account designated *** *** . Any payments that are not paid on the date such payments are due under this Agreement shall bear interest to the extent permitted by applicable law at the prime rate as reported by the Chase Manhattan Bank, New York, New York, on the date such payment is due, *** , calculated on the number of days such payment is delinquent. 7.3 Place of Royalty Payment and Currency Conversions. If any currency conversion shall be required in connection with the calculation of royalties hereunder, such conversion shall be made using the selling exchange rate for conversion quoted for current transactions reported in the Western edition of The Wall Street Journal for the last business day of the calendar quarter to which such payment pertains. If at any time legal restrictions prevent the prompt remittance of any royalties owed on Net Sales in any jurisdiction, the payor may make such payments by depositing the amount thereof in local currency in a bank account or other depository in such country in the name of the payee. The payor shall promptly notify the payee of the circumstances leading to such deposit and, at the payee's request, cooperate with the payee to repatriate such amounts. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 20 25 7.4 Records; Inspection. *** shall keep complete, true and accurate books of account and records for the purpose of determining the royalty amounts payable under this Agreement. Such books and records shall be kept at the principal place of business of *** *** *** to which they pertain. Such records will be open for inspection during such *** period by a public accounting firm mutually acceptable to Teijin and CombiChem, solely for the purpose of verifying royalty statements hereunder. Such inspections may be made no more than once each calendar year, at reasonable times and on reasonable notice. Inspections conducted under this Section 7.4 shall be at the expense of the inspecting Party, unless a variation or error producing an increase exceeding *** of the amount stated for any period covered by the inspection is established in the course of any such inspection, whereupon all reasonable costs relating to the inspection for such period and any unpaid amounts that are discovered will be paid promptly by the other Party together with interest thereon from the date such payments were due at the prime rate as reported by the Chase Manhattan Bank, New York, New York, *** . The public accounting firm employees shall sign a customary confidentiality agreement as a condition precedent to their inspection, and shall report to the inspecting Party only that information which would be contained in a properly prepared royalty report by the other Party. 7.5 Tax Matters. 7.5.1 Withholding Taxes Paid by Teijin. All amounts required to be paid by Teijin pursuant to this Agreement shall be paid with deduction for withholding for or on account of any taxes (other than taxes imposed on or measured by net income) or similar governmental charge imposed by a jurisdiction other than the United States (collectively, "Teijin Withholding Taxes") to the extent CombiChem and/or its Affiliates or their successors has the lawful rights to utilize the Teijin Withholding Taxes paid by Teijin as a credit against CombiChem and/or its Affiliates regular U.S. tax liability. Teijin shall provide CombiChem a certificate evidencing payment of any Teijin Withholding Taxes hereunder. 7.5.2 *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 21 26 7.5.3 Sales Taxes. Any sales taxes, use taxes, transfer taxes or similar governmental charges required to be paid in connection with the transfer of the Libraries by CombiChem to Teijin shall be the sole responsibility of Teijin. In the event that CombiChem is required to pay any such amounts, and reasonably documents payment, Teijin shall promptly remit payment to CombiChem of such amounts. ARTICLE 8 DUE DILIGENCE 8.1 Due Diligence. The selection of Collaboration Compounds and Products for development and commercialization in the Territory shall be in the sole discretion of Teijin. Teijin shall, at Teijin's expense, be responsible for conducting all development of Collaboration Compounds and Products in the Territory, and all commercialization of Products in the Territory. Teijin shall use its reasonable efforts, comparable to other internal development candidates of comparable value, to develop and commercialize Products as expeditiously as practicable and take such other actions as are necessary to obtain government approvals to market each Product in the Territory (which shall include, without limitation, the filing of an IND with respect to a Product Development Candidate within *** of designation of such Library Compound as a Product Development Candidate as long as Teijin does not suspend the development of such Product Development Candidate due to a biological profile problem and thereafter to promote each Product and meet the market demand therefor in such markets) ("Due Diligence"). The Parties acknowledge and agree that any requirements necessary to meet Due Diligence may be modified with the mutual written consent of the Parties. 8.2 License Back. If (a) Teijin does not use Due Diligence pursuant to Section 8.1 of this Agreement to actively develop and commercialize a Collaboration Compound or Product or (b) determines that it will not commercialize a Collaboration Compound or Product associated with a specific molecular target and in each case so notifies CombiChem, and in each case *** , then the *** *** to such particular Collaboration Compound or Product associated with such molecular target shall terminate and CombiChem shall have *** *** to such Collaboration Compound or Product associated with such molecular target. CombiChem shall have the *** the Teijin Technology and the Teijin Know-How, *** such particular Collaboration Compound or Product in the Territory. 8.3 Regulatory Filings. If the *** respect to a Collaboration Compound or Product shall terminate under Section 8.2, Teijin shall (i) promptly provide to CombiChem a complete listing and description of all governmental permits and health registrations and other rights pertaining to the Product, (ii) without undue *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 22 27 delay provide CombiChem with access to all regulatory filings made by Teijin *** *** to the extent possible with respect to such Product, together with the underlying pre-clinical and clinical data with respect to such Product, and (iii) (A) agree and assist CombiChem, *** in obtaining government permits and health registrations pertaining to the Product and necessary to practice the *** rights granted to CombiChem by Teijin under Section 8.2 or (B) if CombiChem acquires *** rights under Section 8.2 and if possible, without undue delay *** *** *** *** . The Parties shall negotiate in good faith to reach agreement regarding sharing of costs. No non-clinical or clinical data including those for such Collaboration Compound or Product may be submitted to the regulatory authorities for IND or NDA applications by CombiChem, *** without agreement with Teijin on terms applicable to such submission, including sharing of the cost of the generation of the data; provided, that Teijin, *** will provide free of charge to CombiChem, *** any information or data required by law to be reported to the relevant regulatory authorities outside of any drug approval process. In such event, CombiChem, *** may use and incorporate such filings and data in support of applications for approval of such Product in the Territory, provided that such filings and data are not those of the pivotal studies which CombiChem, *** are required to conduct if such filings and data are not available. ARTICLE 9 INTELLECTUAL PROPERTY 9.1 Ownership of Inventions. Title to all inventions and other intellectual property made solely by employees of Teijin or its Affiliates, but not CombiChem or its Affiliates, in connection with and arising out of the Research Program ("Teijin Inventions") shall be deemed owned by Teijin. Title to all inventions and other intellectual property made solely by employees of CombiChem or its Affiliates, but not Teijin or its Affiliates, in connection with and arising out of with the Research Program ("CombiChem Inventions") shall be deemed owned by CombiChem. Subject to Section 9.2.1(c), title to all inventions and other intellectual property made jointly by employees of Teijin or its Affiliates and employees of CombiChem or its Affiliates in connection with and arising out of the Research Program ("Joint Inventions") shall be deemed jointly owned by CombiChem and Teijin. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 23 28 9.2 Patent Prosecution. 9.2.1 Responsibilities. (a) *** . Subject to Sections 9.2.2 and 9.2.3, *** shall be responsible for (i) preparing, filing, prosecuting and maintaining in such countries designated by the RC patent applications and patents relating to all *** *** included within the Licensed Technology and (ii) conducting any interferences, re- examinations, reissues, oppositions or requests for patent term extension or governmental equivalents thereto relating to such Inventions. (b) *** . Subject to Sections 9.2.2 and 9.2.3, *** shall be responsible for (i) preparing, filing, prosecuting and maintaining in such countries designated by the RC patent applications and patents relating to all *** included within the *** and (ii) conducting any interferences, re-examinations, reissues, oppositions or requests for patent term extension or governmental equivalents thereto relating to such Inventions. (c) Joint Inventions. Subject to Sections 9.2.2 and 9.2.3, each Party shall be responsible for (i) preparing, filing, prosecuting and maintaining *** *** patent applications and patents relating to all Joint Inventions and (ii) conducting any interferences, re-examinations, reissues, oppositions or requests for patent term extension or governmental equivalents thereto relating to such Inventions *** *** . On agreement between CombiChem and Teijin, either Party may, on behalf of the other Party, prepare, file, prosecute and maintain patent applications and patents relating to Joint Inventions *** . In the event of such an agreement, Joint Inventions for which a Party makes filings *** *** *** * shall continue to be jointly owned by CombiChem and Teijin only if the non-filing Party reimburses the filing Party for all of any reasonable costs incurred with respect to such activities, such reimbursement to occur within a reasonable time following receipt of an invoice and verification thereof. CombiChem and Teijin shall keep the RC informed concerning such activities with respect to Joint Inventions *** . 9.2.2 Failure to Prosecute. (a) *** Failure. *** may elect upon *** *** prior notice to discontinue prosecution of any patent applications filed pursuant to *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 24 29 *** above and/or not to file or conduct any further activities with respect to the patent applications or patents subject to such Sections. In the event CombiChem declines to file or having filed fails to further prosecute or maintain any patent applications or patents subject to *** above, or conduct any interferences, re- examinations, reissues, oppositions, then, subject to *** agreements with third parties, *** shall have the right to prepare, file, prosecute and maintain such patent applications and patents *** *** it deems appropriate, and conduct any interferences, re-examinations, reissues or oppositions at its sole expense; *** *** . (b) *** Failure. *** may elect upon *** prior notice to discontinue prosecution of any patent applications filed pursuant to *** *** above and/or not to file or conduct any further activities with respect to the patent applications or patents subject to such Sections. In the event Teijin declines to file or having filed fails to further prosecute or maintain any patent applications or patents subject to *** above, or conduct any interferences, re-examinations, reissues, oppositions, then, subject to *** agreements with third parties, *** shall have the right to prepare, file, prosecute and maintain such patent applications and patents *** *** *** it deems appropriate, and conduct any interferences, re-examinations, reissues or oppositions at its sole expense; *** *** *** . 9.2.3 Cooperation. Each of Teijin and CombiChem shall keep the other fully informed as to the status of patent matters described in this Article 9, including, without limitation, by providing the other the opportunity to fully review and comment on any documents as far in advance of filing dates as practicable which will be filed in any patent office, and providing the other copies of any substantive documents that such Party receives from such patent offices promptly after receipt, including notice of all interferences, reissues, re-examinations, oppositions or requests for patent term extensions. Teijin and CombiChem shall each reasonably cooperate with and assist the other at its own expense in connection with such activities, at the other Party's request. 9.2.4 Costs. Subject to Section 9.2.2, *** shall pay all costs incurred pursuant to Section 9.2.1(a) and *** shall pay all costs incurred pursuant to Section 9.2.1(b). *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 25 30 9.2.5 Copies. Teijin shall promptly provide to CombiChem a copy of any patent applications filed by Teijin and its Affiliates during the term of this Agreement with respect to any Library Compound, Collaboration Compound and/or Product, except with respect to Excluded Products. CombiChem, shall promptly provide to Teijin a copy of any patent applications filed by CombiChem and its Affiliates during the term of this Agreement with respect to any Collaboration Compounds and/or Products. 9.3 Enforcement and Defense. 9.3.1 Enforcement. Each Party shall promptly notify the other of its knowledge of any potential infringement of the Licensed Technology or the Teijin Technology by a third party. Each Party agrees to render such reasonable assistance as the prosecuting Party may request. Costs of maintaining any such action and damages recovered therefrom shall be paid by and belong to the Party bringing the action. (a) *** has the right, but not the obligation, to take reasonable legal action necessary to protect the Licensed Technology against infringements by third parties *** . If within six (6) months following receipt of notice of infringement, Teijin fails to take such action to halt a commercially significant infringement *** , *** shall, in its sole discretion, have the right, at its expense, to take such action as it deems warranted in its own name or in the name of *** or jointly to cease any infringement with respect to the Licensed Technology. (b) *** has the right, but not the obligation, to take reasonable legal action necessary to protect the *** against infringements by third parties *** . If within six (6) months following receipt of notice of infringement, *** fails to take such action to halt a commercially significant infringement *** , *** shall, in its sole discretion, have the right, at its expense, to take such action as it deems warranted in its own name or in the name of *** or jointly to cease any infringement with respect to the *** *** . 9.3.2 Defense. Each Party shall be solely responsible for defending at its own expense any infringement suit brought against itself for infringement of third party intellectual property rights (whether or not covered by patent or other protection) by manufacturing, selling or using any Product. ARTICLE 10 CONFIDENTIALITY *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 26 31 10.1 Confidential Information. Except as otherwise expressly provided herein, the Parties agree that, for the term of this Agreement and for *** thereafter, the receiving Party shall not, except as expressly provided in this Article 10, disclose to any third party or use for any purpose any confidential information furnished to it by the disclosing Party hereto pursuant to this Agreement ("Confidential Information"), except to the extent that it can be established by the receiving Party by competent proof that such information: (a) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (d) was independently developed by the receiving Party as demonstrated by documented evidence prepared contemporaneously with such independent development; or (e) was subsequently lawfully disclosed to the receiving Party by a person other than a Party. 10.2 Permitted Use and Disclosures. Each Party hereto may use or disclose information disclosed to it by the other Party to the extent such information is included in the Licensed Technology, the Teijin Technology or the Teijin Know-How, as the case may be, and to the extent such use or disclosure is reasonably necessary and permitted in the exercise of such rights granted hereunder in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or court order or otherwise submitting information to tax or other governmental authorities, conducting clinical trials, or making a permitted sublicense or otherwise exercising license rights expressly granted by the other Party to it pursuant to the terms of this Agreement, provided that if a Party is required to make any such disclosure of another Party's Confidential Information, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the other Party of such disclosure and, save to the extent inappropriate in the case of patent applications, will use its reasonable best efforts to secure confidential treatment of such information in consultation with the other Party prior to its disclosure (whether through protective orders or otherwise) and disclose only the minimum necessary to comply with such requirements. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 27 32 10.3 Nondisclosure of Terms. Each of the Parties hereto agrees not to disclose the terms of this Agreement to any third party without the prior written consent of the other Party hereto, which consent shall not be unreasonably withheld, except to such Party's attorneys, advisors, investors and others on a need to know basis under circumstances that reasonably ensure the confidentiality thereof, or to the extent required by law. Notwithstanding the foregoing, the Parties shall agree upon a press release to announce the execution of this Agreement, together with a corresponding Q&A outline for use in responding to inquiries about the Agreement; thereafter, CombiChem and Teijin may each disclose to third parties the information contained in such press release and Q&A without the need for further approval by the other. In addition, Teijin and CombiChem may make public statements regarding the progress of the Research Program and the achievement of milestones and fees with respect thereto, following consultation and mutual agreement, the consent of neither Party to be unreasonably withheld. 10.4 Publication. Any manuscript by CombiChem or Teijin or its Affiliates describing the scientific results of the Research Program to be published at any time or within *** after the end of the Research Program Term shall be subject to the prior review of the Parties *** prior to submission. Further, to avoid loss of patent rights as a result of premature public disclosure of patentable information, the receiving Party shall notify the disclosing Party in writing within *** after receipt of any disclosure whether the receiving Party desires to file a patent application on any invention disclosed in such scientific results. In the event that the receiving Party desires to file such a patent application, the disclosing Party shall withhold publication or disclosure of such scientific results until the earlier of (i) a patent application is filed thereon, or (ii) the Parties determine after consultation that no patentable invention exists, or (iii) *** after receipt by the disclosing Party of the receiving Party's written notice of the receiving Party's desire to file such patent application, or such other period as is reasonable for seeking patent protection. Further, if such scientific results contain the information of the receiving Party that is subject to use and nondisclosure restrictions under this Article 10, the disclosing Party agrees to remove such information from the proposed publication or disclosure. Following the filing of any patent application with respect to the Licensed Technology or the Teijin Technology, in the eighteen (18) month period prior to the publication of such a patent application neither Party shall make any public disclosure regarding any invention claimed in such patent application without the prior consent of the other Party. ARTICLE 11 REPRESENTATIONS AND WARRANTIES 11.1 Teijin. Teijin represents and warrants on its own behalf and on behalf of its Affiliates that: (i) it has the legal right and power to extend the rights granted in this Agreement; (ii) it has the legal power, authority and right to enter into this Agreement and to fully perform its obligations hereunder; (iii) it has not previously granted, and during the term of this Agreement will not knowingly make any commitment or grant any rights, which in *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 28 33 any material way conflict with the rights and licenses granted herein; (iv) to the best of its knowledge as of the Effective Date, there are no existing or threatened actions, suits or claims pending against it with respect to the Teijin Technology or the Teijin Know-How; and (v) to the best of its knowledge as of the Effective Date, neither the Teijin Technology nor the Teijin Know-How includes intellectual property licensed from third parties that would require CombiChem to pay to such third parties a royalty *** . 11.2 CombiChem. CombiChem represents and warrants on its own behalf and on behalf of its Affiliates that: (i) it has the legal right and power to extend the rights granted in this Agreement; (ii) it has the legal power, authority and right to enter into this Agreement, and to fully perform its obligations hereunder; (iii) it has not previously granted, and during the term of this Agreement will not knowingly make any commitment or grant any rights, which in any material way conflict with the rights and licenses granted herein; (iv) to the best of its knowledge as of the Effective Date, there are no existing or threatened actions, suits or claims pending against it with respect to the Licensed Technology; and (v) to the best of its knowledge as of the Effective Date, the Licensed Technology does not include intellectual property licensed from third parties that would require Teijin to pay to such third parties a royalty *** . 11.3 Disclaimer. Teijin and CombiChem specifically disclaim any guarantee that the Research Program will be successful, in whole or in part. The failure of the Parties to successfully develop Collaboration Compounds or Products will not constitute a breach of any representation or warranty or other obligation under this Agreement. Neither Teijin nor CombiChem makes any representation or warranty or guaranty that the Research Program will be successful. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, COMBICHEM AND TEIJIN AND THEIR RESPECTIVE AFFILIATES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OR CONDITIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE LICENSED TECHNOLOGY, TEIJIN TECHNOLOGY, TEIJIN KNOW-HOW, LIBRARIES, *** COMPOUNDS, *** COMPOUNDS, INFORMATION DISCLOSED PURSUANT TO ARTICLE 10 OR PRODUCTS INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF ANY LICENSED TECHNOLOGY, TEIJIN TECHNOLOGY OR TEIJIN KNOW-HOW, PATENTED OR UNPATENTED, OR NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. 11.4 No Consequential Damages. In no event shall either Party to this Agreement have any liability to the other for any special, consequential or incidental damages arising under this Agreement under any theory of liability. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 29 34 ARTICLE 12 *** 12.1 *** *** *** *** *** *** *** *** *** 12.2 *** *** *** *** *** *** *** *** *** 12.3 *** *** *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 30 35 ARTICLE 13 DISPUTE RESOLUTION 13.1 General Arbitration. Any and all disputes between the Parties arising in connection with or relating in any way to the validity, construction, meaning, enforceability or performance of this Agreement or any of its provisions, or the intent of the Parties in entering into this Agreement, or (to the extent permitted by applicable law) any dispute relating to patent validity or infringement arising under or in connection with this Agreement, shall be settled by final and binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA"). 13.2 Arbitration Procedures. 13.2.1 Any Party electing to refer a matter to arbitration pursuant to this Article (the "Petitioner") shall promptly notify the other Party in writing that it wishes to commence an arbitration proceeding under this Article 13 (the "Arbitration Notice"). The Arbitration Notice shall set forth: (i) the matter being referred to arbitration, (ii) the applicable Section of this Article 13 and (iii) the name of the individual selected by the Petitioner as one of the arbitrators. 13.2.2 Except as otherwise provided in this Article 13, there shall be three (3) arbitrators. Each Party shall select one (1) arbitrator. The Petitioner having appointed the first arbitrator in the Arbitration Notice, the other Party shall appoint the second arbitrator within twenty (20) days of receipt of the Arbitration Notice and shall notify the Petitioner of such appointment and submit its counter statement, if any, of the matter being referred to arbitration; provided, however, that if the other Party fails to make such appointment within such period, the Petitioner may request the AAA President to appoint a second arbitrator. Within twenty (20) days dafter the appointment of the second arbitrator, the two arbitrators shall appoint the third arbitrator; provided, however, that if the two arbitrators are unable to agree upon the third arbitrator within such period, either Party may request the AAA President to appoint the third arbitrator, who shall have appropriate qualifications in relation to the matter(s) in dispute. 13.2.3 The arbitration proceedings shall be conducted *** *** , unless otherwise agreed by the Parties, in accordance with the AAA Rules then in effect. *** *** . In any arbitration, the award of the arbitrators shall be final and binding upon the Parties and judgement upon the award may be entered in and enforced by any court of competent jurisdiction in accordance with the New York Convention on the Recognition and Enforcement of Arbitral Awards. The successful Party in such arbitration, in addition to all *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 31 36 other relief provided, shall be entitled to an award of all its reasonable costs and expenses including attorney fees and deposits and payments to the AAA. Neither Party shall be required to provide security or post bond in respect of such costs, expenses and fees prior to rendering of an award. 13.3 Disqualification. Notwithstanding anything to the contrary herein, no person may serve as an arbitrator pursuant to this Article 13 if such person has a material interest or relationship (through employment, stock ownership, business dealings or otherwise) in or with a Party involved in the arbitration or any of its Affiliates, directors, officers or employees; provided, however, that serving as an arbitrator hereunder shall not constitute such a material interest or relationship for purposes of future arbitrations. 13.4 Confidentiality. All arbitration proceedings under this Article 13 shall be confidential and the arbitrators may issue appropriate protective orders to safeguard the Parties' Confidential Information (as such capitalized term is defined in Section 10.1 hereof). Except as required by law, neither Party shall make (or instruct any arbitrator to make) any public announcement with respect to the proceedings or decisions of any arbitration without the prior written consent of the other. The existence of any dispute submitted to arbitration pursuant to this Article 13, and the award of the arbitrators, shall be kept in confidence by the Parties and the arbitrators, except as required in connection with the enforcement of such award of implementation of such decisions, as mutually agreed by the Parties or as required by law. 13.5 Equity. This Article 13 shall not limit the rights of any Party to seek in any court of competent jurisdiction equitable relief in the circumstances referred to herein and/or such interim relief, and only such interim relief, as may be needed to maintain the status quo or otherwise protect the subject matter of the arbitration until the arbitrators shall have been appointed and shall have had an opportunity to act. ARTICLE 14 TERM AND TERMINATION 14.1 Term. Except as set forth below, the term of this Agreement shall begin as of the Effective Date, and shall continue in full force and effect *** *** unless terminated as provided in this Article 14 until Teijin or CombiChem, *** , have no remaining royalty payment obligations *** , at which time the Agreement shall expire in its entirety *** *** . *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 32 37 14.2 Termination for Cause. Either Party to this Agreement may terminate this Agreement in the event the other Party shall have materially breached or defaulted in the performance of any of its material obligations hereunder, and such default shall have continued for *** after written notice thereof was provided to the breaching Party by the nonbreaching Party. Any termination shall become effective at the end of such *** *** period unless the breaching Party (or any other party on its behalf) has cured any such breach or default prior to the expiration of the *** ; provided in the case of a failure to pay any amount due hereunder, such default may be the basis of termination *** *** following the date that notice of such default was provided to the breaching Party. 14.3 Termination for Insolvency. If voluntary or involuntary proceedings by or against a Party are instituted in bankruptcy under any insolvency law, or a receiver or custodian is appointed for such Party, or proceedings are instituted by or against such Party for corporate reorganization or the dissolution of such Party, which proceedings, if involuntary, shall not have been dismissed within *** after the date of filing, or if such Party makes an assignment for the benefit of creditors, or substantially all of the assets of such Party are seized or attached and not released within *** thereafter, the other Party may immediately terminate this Agreement effective upon notice of such termination. 14.4 Effect of Breach or Termination. 14.4.1 Accrued Obligations. Termination of this Agreement for any reason shall not release either Party hereto from any liability which, at the time of such termination, has already accrued to the other Party or which is attributable to a period prior to such termination nor preclude either Party from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement. 14.4.2 Return of Materials. Subject to the terms and conditions of this Agreement, upon any termination of this Agreement, Teijin and CombiChem shall promptly return to the other all Confidential Information (including, without limitation, all Licensed Technology (in the case of Teijin) and all Teijin Technology and Teijin Know-How (in the case of CombiChem)), received from the other Party (except one copy of which may be retained for archival purposes); provided, however, in the event licenses remain in effect pursuant to Section 14.4.4 hereunder, the licensee under such license may retain all Confidential Information required to practice under such license. 14.4.3 Post-Termination Product Sales. In the event of the cancellation or termination of any license rights with respect to an Product prior to the expiration of this Agreement, inventory of the Product may be sold for up to *** after date of termination, provided earned royalties are paid thereon. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 33 38 14.4.4 Licenses. The licenses granted to *** herein shall terminate in the event of a termination by *** pursuant to Section 14.2 or 14.3. *** *** *** *** *** *** the terms and conditions of this Agreement. If more than one Product is being commercially developed or exploited by *** hereunder and a breach entitling *** to terminate this Agreement relates solely to a single Product, then *** shall be entitled to terminate this Agreement only with respect to the applicable Product. 14.5 Survival. Articles 6, 7, 8, 9, 10, 11, 12, 13 and 15 of this Agreement, as well as Sections 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, 2.10, 5.3, 14.4 and this Section 14.5 shall survive the expiration or termination of this Agreement for any reason. ARTICLE 15 MISCELLANEOUS 15.1 Governing Laws. This Agreement and any dispute arising from the performance or breach hereof shall be governed by and construed and enforced in accordance with, the laws of the state of California, without reference to conflicts of laws principles. 15.2 No Implied Licenses. Only the licenses granted pursuant to the express terms of this Agreement shall be of any legal force or effect. No other license rights shall be created by implication, estoppel or otherwise. 15.3 Waiver. It is agreed that no waiver by either Party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent and/or similar breach or default. 15.4 Assignment. This Agreement shall not be assignable by either Party to any third party hereto without the written consent of the other Party hereto, *** except either Party may assign this Agreement, without such consent, to an entity that acquires all or substantially all of the business or assets of such Party to which this Agreement pertains, whether by merger, reorganization, acquisition, sale, or otherwise. This Agreement shall be binding upon and accrue to the benefit any permitted assignee, and any such assignee shall agree to perform the obligations of the assignor. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 34 39 15.5 Independent Contractors. The relationship of the Parties hereto is that of independent contractors. The Parties hereto are not deemed to be agents, partners or joint venturers of the others for any purpose as a result of this Agreement or the transactions contemplated hereby. 15.6 Compliance with Laws. In exercising their rights under this Agreement, the Parties shall fully comply in all material respects with the requirements of any and all applicable laws, regulations, rules and orders of any governmental body having jurisdiction over the exercise of rights under this Agreement including, without limitation, those applicable to the discovery, development, manufacture, distribution, import and export and sale of pharmaceutical products pursuant to this Agreement. 15.7 Patent Marking. Each Party agrees to mark *** all Products sold pursuant to this Agreement in accordance with the applicable statute or regulations relating to patent marking in the country or countries of manufacture and sale thereof. 15.8 Notices. All notices, requests and other communications hereunder shall be in writing and shall be personally delivered or by registered or certified mail, return receipt requested, postage prepaid, in each case to the respective address specified below, or such other address as may be specified in writing to the other Parties hereto and shall be deemed to have been given upon receipt: CombiChem: CombiChem, Inc. 9050 Camino Santa Fe San Diego, California 92121 U.S.A. Attn: Chief Executive Officer Teijin: Teijin Limited 1-1, Uchisaiwai-cho 2-chome Chiyoda-ku, Tokyo Japan Attn: General Manager of the Planning Department, Medical and Pharmaceutical Group *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 35 40 15.9 Severability. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision, and the Parties shall amend the Agreement to the extent feasible to lawfully include the substance of the excluded term to as fully as possible realize the intent of the Parties and their commercial bargain. 15.10 Force Majeure. Nonperformance of either Party (except for payment obligations) shall be excused to the extent that performance is rendered impossible by strike, fire, earthquake, flood, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control and not caused by the negligence, intentional conduct or misconduct of the nonperforming Party, provided such Party uses diligent efforts to resume performance as promptly as possible. 15.11 Complete Agreement; Amendment. This Agreement with its Exhibits constitutes the entire agreement between the Parties with respect to the subject matter hereof. No amendment or change hereof or addition hereto shall be effective or binding on either of the Parties hereto unless reduced to writing and executed by the respective duty authorized representatives of CombiChem and Teijin. 15.12 Headings. The captions to the several Sections hereof are not a part of this Agreement, but are included merely for convenience of reference only and shall not affect its meaning or interpretation. 15.13 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same agreement. [Remainder of This Page Intentionally Left Blank] 36 41 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed by their authorized representatives and delivered in duplicate originals as of the Effective Date. TEIJIN LIMITED COMBICHEM, INC. By: /s/ Takeshi Hara By: /s/ Vicente Anido, Jr. -------------------------------- --------------------------------- Name: Takeshi Hara Name: Vicente Anido, Jr. ------------------------------ ------------------------------- Title: Director, Member of the Board Title: President & CEO ----------------------------- ------------------------------ 37 42 EXHIBIT A Research Plan (Outline) *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. A-1 43 EXHIBIT B Library Compounds Each tube will contain a minimum of **** of a Library Compound *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. B-1 44 EXHIBIT C Initial Representatives on the Research Committee CombiChem: *** *** *** Teijin: *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. C-1 45 AMENDMENT TO THE COLLABORATION AGREEMENT This Amendment (the "Amendment"), effective as of the date March 29, 1997 (the "Effective Date"), is made by and between CombiChem, Inc., a California corporation, having a principal place of business at 9050 Camino Santa Fe, San Diego, California 92121, U.S.A. ("CombiChem") and Teijin Limited, an entity organized and existing under the laws of Japan, having a principal place of business at 6-7 Minami-hommachi 1-chome, Chuo-ku, Osaka 541, Japan ("Teijin"). BACKGROUND A. CombiChem and Teijin entered into the COLLABORATION AGREEMENT dated March 29, 1996 relating to *** *** (hereinafter referred to as Original Agreement); and B. CombiChem and Teijin desire to amend the Original Agreement in order to modify the Research Program (as defined in the Original Agreement) and *** *** (as defined in the Original Agreement); NOW THEREFORE, for and in consideration of the covenants, conditions, and undertakings hereinafter set forth, it is agreed by and between CombiChem and Teijin as follows: ARTICLE 1 CombiChem and Teijin hereby agree that the *** *** *** ARTICLE 2 CombiChem and Teijin agree to modify the Original Agreement as follows: 1.25 "Library" shall mean a chemical compound library whose design has been approved by the Research Committee (as defined below) containing: *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 1 46 i) for the *** period beginning *** *** prepared by CombiChem ii) for the *** period beginning *** *** prepared by CombiChem specifically for screening the Collaboration based on proprietary structures (a) with activity disclosed by Teijin to CombiChem or (b) generated by CombiChem on behalf of Teijin, in each case, in connection with the Collaboration. 1.29 Section 1.29 will be amended so reflect the following: *** Activity" shall mean *** *** *** *** 2.1.1 (a) During the Research Program Term, CombiChem shall synthesize libraries as follows: i) for the *** period *** libraries ii) for the *** period *** libraries 6.2 Section 6.2 will be amended to reflect the following:
Contact Year Aggregate Annual Research Fee ------------ ----------------------------- *** *** ***
EXHIBIT A Exhibit A attached to the Original Agreement will be supplemented with the attached Exhibit A-2 for *** period beginning *** . EXHIBIT B Exhibit B attached to the Original Agreement will be supplemented with the attached Exhibit B-2 for *** period beginning *** . *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 2 47 EXHIBIT C Exhibit C attached to the Original Agreement will be supplemented with the attached Exhibit C-2 for *** period beginning *** . ARTICLE 3 This Amendment shall be effective as of the Effective Date. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their authorized representatives and delivered in duplicate originals as of the Effective Date. TEIJIN LIMITED COMBICHEM, INC. By: /s/ Tatsuyuki Naruchi By:/s/ Vicente Anido, Jr. ------------------------------- ----------------------------------- Name: Tatsuyuki Naruchi Name: Vicente Anido, Jr. Title: Managing Director, General Manager Title: President & C.E.O. Planning & Research Division Medical & Pharmaceutical Group *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 3 48 EXHIBIT A-2 Research Plan (Outline)# *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 49 EXHIBIT B-2 LIBRARY COMPOUNDS Each tube will contain a minimum of *** of a Library Compound. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 50 EXHIBIT C-2 Representatives on the Research Committee Teijin: *** *** *** CombiChem: *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-10.20 26 EXHIBIT 10.20 1 EXHIBIT 10.20 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT BETWEEN ROCHE BIOSCIENCE AND COMBICHEM, INC. October 25, 1996 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS............................................................... 1 2. RESEARCH COLLABORATION.................................................... 6 2.1 CCI Responsibilities............................................. 6 2.2 RBS Responsibilities............................................. 6 2.3 Participation by RBS Affiliates.................................. 6 3. RESEARCH PROGRAMS......................................................... 6 3.1 Selection of Approach............................................ 6 3.2 Lead Generation Program.......................................... 6 3.3 Lead Evolution Program........................................... 7 3.4 Lead Optimization Program........................................ 7 3.5 *** .......... 7 3.6 *** ............ 7 3.7 Extension of Programs............................................ 7 4. TARGETS................................................................... 8 4.1 Initial Targets.................................................. 8 4.2 Optional Targets................................................. 8 4.3 ***.............................................................. 8 4.3.1 ***....................................................... 8 4.3.2 ***....................................................... 8 4.4 *** .......................... 9 4.5 Refining Collaboration Targets................................... 9 4.6 Maximum Number of Targets........................................ 9 5. TARGET EXCLUSIVITY........................................................ 9 5.1 Collaboration Target Exclusivity................................. 9 5.2 *** ....................................... 9 6. COLLABORATION COMPOUNDS................................................... 10 6.1 Collaboration Compound Exclusivity............................... 10 6.2 Pre-Existing and Restricted Compounds............................ 10 6.3 Intellectual Property Rights..................................... 10 6.4 Screening Rights................................................. 10 6.5 Active Collaboration Compounds Against Related Targets........... 10 6.6 Supply of Collaboration Compounds................................ 11 7. RESEARCH MANAGEMENT & PLAN................................................ 11 7.1 Research Management Committee.................................... 11
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. (i) 3
7.2 Project Teams.................................................... 12 7.3 Research Plans................................................... 12 8. COLLABORATION TERM AND TERMINATION........................................ 12 8.1 Term............................................................. 12 8.2 *** ............................................... 12 8.3 Termination by RBS or CCI........................................ 12 8.4 Termination of Research Funding.................................. 12 9. PAYMENT OBLIGATIONS....................................................... 13 9.1 Project Initiation Fee........................................... 13 9.2 Research Funding................................................. 13 9.3 Milestone Payments............................................... 13 9.4 Royalties........................................................ 13 9.4.1 Royalty Rates........................................... 13 9.4.2 *** ........................................... 14 9.4.3 *** ..................................... 14 9.5 Option to Purchase Equipment..................................... 14 10. LOGISTICS OF PAYMENT; REPORTS; RECORDS; AUDITS............................ 14 10.1 Payment and Reports.............................................. 14 10.2 Method of Payment................................................ 14 10.3 Roche Exchange Rate.............................................. 15 10.4 CCI Exchange Rate................................................ 15 10.5 Financial Records and Audit Rights............................... 15 10.6 Time Records..................................................... 16 10.7 Taxes............................................................ 16 11. LICENSE GRANT............................................................. 16 11.1 CCI Grant to RBS................................................. 16 11.2 RBS Due Diligence Failure........................................ 16 11.2.1 RBS Grant Back to CCI................................... 16 11.2.2 *** .................................... 16 11.2.3 *** .................................... 17 12. TERM AND TERMINATION OF THE AGREEMENT..................................... 17 12.1 Term............................................................. 17 12.2 Termination...................................................... 17 12.3 Results of Termination........................................... 17 13. CONFIDENTIAL INFORMATION.................................................. 17 13.1 Nondisclosure.................................................... 17 13.2 Exceptions....................................................... 18 14. PUBLICATIONS.............................................................. 18
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. (ii) 4
15. PUBLIC STATEMENTS......................................................... 18 16. *** ........................................................... 19 17. ASSIGNABILITY............................................................. 19 18. DISPUTE RESOLUTION PROCEDURES............................................. 19 18.1 Senior Executives Discussions.................................... 19 18.2 Non-Binding Mediation............................................ 19 18.3 Binding Arbitration.............................................. 20 18.4 Injunctive Relief................................................ 20 19. NOTICES................................................................... 20 20. INDEPENDENT CONTRACTOR.................................................... 21 21. SURVIVAL.................................................................. 22 22. ADDITIONAL TERMS.......................................................... 22 22.1 Entire Agreement................................................. 22 22.2 Amendments; No Waiver............................................ 22 22.3 Validity......................................................... 22 22.4 Headings......................................................... 22 22.5 Counterparts..................................................... 22
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. (iii) 5 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (the "Agreement") is entered into on October 25, 1996 (the "Effective Date"), by and between ROCHE BIOSCIENCE, a division of Syntex (U.S.A.) Inc., a Delaware corporation, having offices at 3401 Hillview Avenue, Palo Alto, California 94304 ("RBS") and COMBICHEM, INC. a California corporation having offices at 9050 Camino Santa Fe, San Diego, California 92121 ("CCI"). RBS and CCI may be referred to herein as a "Party" or, collectively, as "Parties." WHEREAS, CCI has developed and owns certain drug discovery technology and intellectual property rights, including chemical library design software, combinatorial organic synthesis methods, chemical libraries suitable for high throughput biological screening assays and medicinal chemistry; WHEREAS, the Parties wish to collaborate with the objective of accelerating RBS's drug discovery activities using CCI Technology (as defined below) in Research Programs (as defined below) against Collaboration Targets (as defined below) (the "Collaboration"); NOW, THEREFORE, the Parties agree as follows: 1. DEFINITIONS 1.1 "Additional Royalties" has the meaning set forth in Section 9.4.2. 1.2 "ADR" has the meaning set forth in Section 18.2. 1.3 "Affiliate" of a Party means any corporation or other business entity controlled by, controlling or under common control with such Party. For this purpose "control" shall mean direct or indirect beneficial ownership of more than fifty percent (50%) of the voting or income interest in such corporation or other business entity, or if not meeting the preceding requirement, any company owned or controlled by or owning or controlling a Party at the maximum control or ownership right permitted in the country where such company exists; provided, however, Genentech, Inc., with offices located at 460 Point San Bruno Boulevard, South San Francisco, California, 94080, shall not be considered an Affiliate of RBS unless RBS so notifies CCI that Genentech shall be deemed an Affiliate. 1.4 "CCI Net Sales" means the gross sales invoiced by CCI or its Affiliates or sublicensees for Returned Products to non-Affiliated third parties less (i) actual deductions of returns (including withdrawals and recalls), rebates (price reductions, including Medicaid and similar types of rebates e.g. chargebacks), volume (quantity) discounts, discounts granted at the time of invoicing, sales taxes and other taxes (other than income taxes) directly linked to and included in the gross sales amount as computed on a product-by-product basis for the 1 6 countries concerned, whereby the amount of such sales in foreign currencies is converted into United States dollars in accordance with Section 10.4 (the "CCI Adjusted Gross Sales"), and (ii) *** *** sales related deductions which are not accounted for on a product-by-product basis. 1.5 "CCI Technology" means those CCI Patents and know-how related exclusively to the Collaboration Compounds. 1.6 "Collaboration" has the meaning set forth in the preamble. 1.7 "Collaboration Compound Exclusivity Period" for a Collaboration Compound means (a) with respect to a Collaboration Compound with Target Activity, the earlier of (i) the publication of a Patent covering the Collaboration Compound or (ii) *** following the end of the applicable Research Program Period; and (b) with respect to a Collaboration Compound with no Target Activity, the earlier of (i) the publication of a Patent covering the Collaboration Compound or (ii) *** following the end of the applicable Research Program Period. 1.8 "Collaboration Compounds" means Library Compounds and Derivative Compounds synthesized under the direction of the RMC, by either RBS or CCI or their respective Affiliates. 1.9 "Collaboration Library" means a library synthesized under the direction of the RMC, containing compounds designed to provide information regarding activity against a specific Collaboration Target. 1.10 "Collaboration Product(s)" means any product containing a compound which has demonstrated activity against a Collaboration Target and is either (i) a Library Compound or (ii) a Derivative Compound. 1.11 "Collaboration Target" means either an Initial Target or an Optional Target. 1.12 "Collaboration Target Exclusivity Period" for a Collaboration Target means *** *** . 1.13 "Collaboration Term" has the meaning set forth in Section 8. 1. 1.14 *** has the meaning set forth in Section 9.4.3. 1.15 "Confidential Information" includes (i) all information and materials received by either Party from the other Party either prior to execution of or pursuant to this Agreement; (ii) all structure-activity data or structure data relating to a Collaboration Compound; and (iii) the material financial terms of this Agreement. 1.16 "Development Candidate" means a Collaboration Compound that has been selected by RBS for *** studies for an Initial Target, Optional Target or Related Target. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 2 7 1.17 "Derivative Compound" is a compound which meets the following criteria: *** *** *** *** *** *** *** *** *** --- --- *** *** *** *** *** *** *** *** *** *** *** *** --- --- *** *** *** *** --- ---
1.18 "$" or "dollar" means United States currency. 1.19 "Due Diligence" means *** *** *** ***. 1.20 "Field" means *** *** . 1.21 "First Commercial Sale" of a Product shall mean the first sale for use or consumption of such Product in a country after required marketing and pricing approval has been granted by the governing health regulatory authority of such country. Sale to an Affiliate or sublicensee shall not constitute a First Commercial Sale unless the Affiliate or sublicensee is the end user of the Product. 1.22 "Flat Fee" has the meaning set forth in Section 11.2.2. 1.23 "Initial Targets" has the meaning set forth in Section 4. 1. 1.24 "Lead Evolution Program" has the meaning set forth in Section 3.3. 1.25 "Lead Generation Program" has the meaning set forth in Section 3.2. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 3 8 1.26 "Lead Optimization Program" has the meaning set forth in Section 3.4. 1.27 "Library Compound" means a compound contained in a Collaboration Library and which compound is not a Pre-existing Compound or a Restricted Compound *** *** 1.28 "Losses" has the meaning set forth in Section 16. 1.29 "Net Sales" means the gross sales invoiced by RBS or its Affiliates or sublicensees for Products to non-Affiliated third parties less (i) actual deductions of returns (including withdrawals and recalls), rebates (price reductions, including Medicaid and similar types of rebates e.g. chargebacks), volume (quantity) discounts, discounts granted at the time of invoicing, sales taxes and other taxes (other than income taxes) directly linked to and included in the gross sales amount as computed in the central Roche's Swiss Francs Sales Statistics on a product-by-product basis for the countries concerned, whereby the amount of such sales in foreign currencies is converted into Swiss Francs in accordance with Section 10.3 (the "Adjusted Gross Sales"), and (ii) *** of Adjusted Gross Sales for those sales related deductions which are not accounted for on a product-by-product basis. 1.30 "Non-Royalty Bearing Component(s)" has the meaning set forth in Section 9.4.3. 1.31 "Optional Targets" means a Target that is added to the Collaboration in accordance with Section 4.2. 1.32 "Patent" means (i) valid and enforceable Letters Patent, including any extension (including Supplemental Protection Certificate), registration, confirmation, reissue, continuation, divisionals, continuation-in-part, reexamination or renewal thereof, and (ii) pending applications for any of the foregoing. 1.33 "Patent Protected" means that a Product is covered by a Valid Claim of patent rights with respect to such Product in the country where sold. 1.34 "Pre-existing Compound" means any compound that is in existence at the commencement of a Research Program which may be contributed to the Collaboration Library by RBS or CCI and with such contributed compound owned by any of RBS, CCI, their Affiliates or a Third Party. 1.35 *** *** ***. 1.36 "Product(s)" means Collaboration Product(s) and/or Related Product(s). *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 4 9 1.37 "Project Leader" means the person appointed by a Party to supervise and be accountable for that Party's responsibilities with respect to a Research Program. 1.38 "Publications Committee" shall consist of the co-chairs of the RMC. 1.39 *** shall mean any product containing a compound which has demonstrated activity against a *** in accordance with Section 6.5 and is either (i) a Library Compound or (ii) a Derivative Compound. 1.40 *** means a Target which the parties have identified, in accordance with Section 4.3, as *** to a Collaboration Target. 1.41 "*** Exclusivity Period" means *** *** . 1.42 "*** Notice" has the meaning set forth in Section 6.5. 1.43 "Research Program" means any or all of a Lead Evolution Program or a Lead Generation Program or a Lead Optimization Program. 1.44 "Research Program Period" means two years from commencement of a Lead Generation Program and one year from commencement of a Lead Optimization Program or a Lead Evolution Program, unless any such Research Program is terminated early or extended pursuant to the terms of this Agreement. 1.45 "Restricted Compound" means a compound that RBS may synthesize during the course of a Research Program *** against a Target other than a Collaboration Target *** but which RBS screens against a Collaboration Target ***. 1.46 "Returned Product" has the meaning set forth in Section 11.2.l. 1.47 "Roche" means RBS and its Affiliates. 1.48 "Royalty Bearing Component(s)" has the meaning set forth in Section 9.4.3. 1.49 "Royalty Paying Party" has the meaning set forth in Section 10.5. 1.50 "Royalty Receiving Party" has the meaning set forth in Section 10.5. 1.51 "Royalty Term" means, in the case of any Product, in any country, the period of time commencing on the First Commercial Sale and ending upon the later of (a) *** years from the date of First Commercial Sale in such country; or (b) the expiration of the last to expire issued Patent with claims covering that Product in the relevant country. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 5 10 1.52 "Target" means a biomolecular entity that a small molecule is synthesized against demonstrating relevant activity. 1.53 "Target Activity" means having activity that meets *** of the criteria specified for the *** for the appropriate Collaboration Target during the relevant Research Program Period, which criteria are set forth on Appendix A. 1.54 "Territory" means *** . 1.55 "Third Party" means any entity other than CCI or RBS or an Affiliate of CCI or RBS. 1.56 "UIL" means CCI's proprietary Universal Informer Library(TM). 1.57 "Valid Claim" means a claim of an issued Patent which claim has not lapsed, been canceled or become abandoned and has not been declared invalid by an unreversed and unappealable decision or judgment of a court or other appropriate body of competent jurisdiction, and which has not been admitted to be invalid or unenforceable through reissue or disclaimer. 2. RESEARCH COLLABORATION 2.1 CCI RESPONSIBILITIES. CCI will conduct Research Programs against Collaboration Targets in accordance with the terms of this Agreement. 2.2 RBS RESPONSIBILITIES. RBS will provide funding for the Collaboration as outlined in Article 9.2, provide screening, biological, and structural data to CCI with respect to the Collaboration Compounds necessary for CCI to perform its duties under this Agreement, and will assume scientific, financial and administrative responsibility for screening and biological support activities, drug development and regulatory filings during and after the term of Collaboration in accordance with the terms of this Agreement. 2.3 PARTICIPATION BY RBS AFFILIATES. Upon an Affiliate of RBS agreeing in writing to be bound by the terms and conditions of this Agreement, RBS may propose Optional Targets on behalf of such Affiliate. Employees of such Affiliate may become Project Leaders and RBS may designate employees of such Affiliate to be members of the RMC as specified in Article 7 hereof. 3. RESEARCH PROGRAMS 3.1 SELECTION OF APPROACH. The parties shall agree upon one of the approaches set forth below for each Research Program against each Collaboration Target. The start date of each Research Program shall be as decided by the RMC, but at least one of the Research Programs for the Initial Targets shall have commenced by *** , and the final two Research Programs for the Initial Targets shall have commenced *** . *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 6 11 3.2 LEAD GENERATION PROGRAM. In a Lead Generation Program, only the Target is known. There are no robust structural hypotheses available that will facilitate rapid inhibitor, agonist or antagonist design. The Lead Generation Program requires use of the UIL. Potential Development Candidates will be identified through iterative generations of Collaboration Libraries resulting in compounds with increased selectivity/affinity with respect to the Collaboration Target. A Lead Generation Program will last *** unless *** Section 8.3 or extended pursuant to Section 3.7. 3.3 LEAD EVOLUTION PROGRAM. A Lead Evolution Program is a research program in which RBS provides CCI data on a lead series for evolution to a different structural series or there exists a robust structural hypothesis available that will facilitate rapid inhibitor, agonist or antagonist design. Potential Development Candidates will be identified through iterative generations of Collaboration Libraries. A Lead Evolution Program will last *** unless *** extended pursuant to Section 3.7. 3.4 LEAD OPTIMIZATION PROGRAM. A Lead Optimization Program is a research program in which RBS provides CCI with data on a suboptimal lead series for iteration and refinement. A Lead Optimization Program will last *** unless *** extended pursuant to Section 3.7. 3.5 *** *** *** *** *** *** *** *** *** *** ***. 3.6 *** *** *** *** *** *** *** *** *** *** ***. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 7 12 3.7 EXTENSION OF PROGRAMS. The term of any Research Program may be extended up to an additional *** per Research Program upon the recommendation of the RMC, provided, however, that the aggregate amount of extensions for Research Programs shall not exceed an incremental aggregate total of FTEs equal to *** *** over the life of this Agreement for all such Research Program extensions. 4. TARGETS 4.1 INITIAL TARGETS. The Collaboration will initially focus on the following Targets: *** *** *** *** (collectively, the "Initial Targets"). Prior to the proposed commencement date of a Research Program for an Initial Target, RBS may substitute another Target as an Initial Target. Acceptance of a proposed substitute Initial Target shall follow the procedures set forth in Section 4.2 for selection of Optional Targets. 4.2 OPTIONAL TARGETS. During the Collaboration Term, RBS may add up to *** additional Targets to the Collaboration as Optional Targets with the Research Program for such Optional Target to begin with ninety (90) days of notification or as mutually agreed by the parties. If RBS is interested in adding a Target to the Collaboration, RBS shall notify CCI in writing that it wishes to make such Target an Optional Target. *** *** *** *** ***. *** . The RMC will establish the specific scientific achievements for such Target that correspond to (i) the Milestone Structure Schedule in Appendix A and (ii) the commercial terms of Appendix C. Any such scientific achievements must be mutually-agreed between RBS and CCI *** *** , such Target may be added to the Collaboration as an Optional Target. Mutual agreement under this Section 4.2 and under Section 4.3 shall mean the agreement of RBS and CCI without recourse to the dispute resolution mechanism set forth in Section 7. 1. 4.3 *** *** ***. 4.3.1 *** *** . Related Targets for the Initial Targets will be identified and agreed upon by RBS and CCI and will be detailed in a Appendix B. *** for the *** identified and agreed upon by RBS and CCI prior to commencement of the Research Program for such Optional Target, *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 8 13 4.3.2 *** Either Party may identify Targets as being *** throughout the applicable Research Program, *** arguments *** , if any, and set forth in an amendment to *** ; *** *** *** *** . 4.4 *** . If RBS proposes to make a *** *** , the provisions set forth in Section 4.3 relating to the format and approach would supersede the provisions of Section 4.2; provided, however, that the commercial terms of Appendix C rather than Appendix D shall apply to such *** . If there is a dispute, the dispute resolution mechanism set forth in Section 7.1 shall be utilized. 4.5 REFINING COLLABORATION TARGETS. The RMC may refine the definition of a Collaboration Target based upon reasonable scientific judgment. 4.6 MAXIMUM NUMBER OF TARGETS. The Collaboration may be expanded to a total of *** projects subject to the provisions of Section 4.2; provided, however that after the Collaboration initiates *** Collaboration Targets, RBS shall pay an upfront fee of *** *** Optional Targets (Collaboration Target numbers *** ) upon the commencement of the Research Program for each such Optional Target. 5. TARGET EXCLUSIVITY 5.1 COLLABORATION TARGET EXCLUSIVITY. During the Collaboration Target Exclusivity Period, CCI shall not work on such Collaboration Target with any party other than RBS or its Affiliates; provided, however, *** *** *** *** *** *** *** . In addition, following termination of the relevant Collaboration Target Exclusivity Period, CCI shall be free to work with any Third Party on a Collaboration Target. 5.2 *** . During the *** period, CCI will not work on any *** with any party other than RBS or its Affiliates except as set forth herein. *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 9 14 *** *** *** . If the *** is not a business day, the *** shall be deemed to be the next business day following. Upon commencement of the Research Program, such *** becomes an Optional Target and all of the terms and conditions applicable to a Optional Target, including but not limited to, application of the Collaboration Target Exclusivity Period rather than the *** *** apply to such Target. Nothing contained in this Agreement shall imply that *** *** *** . 6. COLLABORATION COMPOUNDS 6.1 COLLABORATION COMPOUND EXCLUSIVITY. Except as set forth in Section 6.2 and 6.4 and subject to Section 11.2, RBS shall have exclusive rights with respect to the Collaboration Compounds during the applicable Collaboration Compound Exclusivity Period. 6.2 PRE-EXISTING AND RESTRICTED COMPOUNDS. CCI shall have no rights to any RBS Pre-existing Compound or to *** *** . RBS shall have no rights to any CCI Pre-existing Compound unless and until such *** *** that CCI shall retain all rights to all compounds in the UIL. 6.3 INTELLECTUAL PROPERTY RIGHTS. Subject to Section 11.2, RBS shall retain exclusive rights to all intellectual property with respect to the Collaboration Compounds during the applicable Collaboration Compound Exclusivity Period. RBS shall not obtain any rights in the UIL as a result of the Collaboration. RBS shall be responsible for filing, maintaining and prosecuting all Patents with claims covering Collaboration Compounds at its sole expense. Immediately prior to filing of a patent application for a Collaboration Compound, CCI shall assign all intellectual property rights it may have in such Collaboration Compound to RBS or its designee. RBS may elect upon *** prior written notice to CCI (given at least *** prior to any relevant deadline to (a) discontinue prosecution or maintenance or (b) not to file or conduct any further activities (including conducting any interferences, re-examinations, reissues, or oppositions) with respect to a Patent. CCI shall have the right to request that RBS or its designee prosecute, maintain, file or conduct further activities. If RBS or its designee elects not to file, maintain, or prosecute a Patent, CCI shall have the right to take over such filing, maintenance or prosecution, at its sole expense. 6.4 SCREENING RIGHTS. *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 10 15 *** *** ***. 6.5 ACTIVE COLLABORATION COMPOUNDS AGAINST RELATED TARGETS. If either Party determines that a Collaboration Compound has in-vitro activity, *** *** (which level of in-vitro activity may be altered for a particular *** at such time as the *** is identified in accordance with Section 4.3), such Party shall provide written notice to the other Party within *** following such determination (the "Related Target Notice"). Within *** of receipt of such *** , the *** *** on terms and conditions as set forth in Appendix C with the specific lead approach to be determined by the RMC and other terms and conditions to be mutually agreed. If RBS and CCI are unable to come to mutually-agreeable terms within an additional *** *** , RBS will notify CCI (a) whether RBS (or Roche or a sublicensee) will pursue independent development of the Collaboration Compound against the Related Target in which case CCI shall receive compensation as set forth in Appendix D or (b) if RBS does not choose such independent development, CCI may pursue independent development of the Collaboration Compound *** in which case RBS shall receive compensation as set forth in Appendix D; or (c) that CCI and RBS may each pursue independent development of the Collaboration Compound against the *** in which case *** . *** . 6.6 SUPPLY OF COLLABORATION COMPOUNDS. Aliquots of at least *** of any Collaboration Compound that has been synthesized and characterized will be prepared and given to RBS within *** of such synthesis and characterization. CCI shall replenish that amount within *** of RBS's reasonable request. CCI shall keep aliquots of any Collaboration Compound that has been synthesized at CCI. RBS will have primary responsibility for synthesizing large amounts of Collaboration Compounds, but CCI will assist RBS as agreed to by CCI's Vice President of Chemistry at the time of such request. 7. RESEARCH MANAGEMENT & PLAN 7.1 RESEARCH MANAGEMENT COMMITTEE. The design, review and conduct of the Research Program for each Collaboration Target will be coordinated by a Research Management Committee ("RMC"), which will meet quarterly. The RMC will consist of an equal number of members from RBS (or Roche if RBS so elects) and CCI, will include the Project Leaders and other appropriate representatives from RBS and CCI as mutually agreed, and will be co-chaired by scientists from each of RBS and CCI. Decisions of the RMC shall be by consensus. If a decision is not reached by the RMC with respect to management of the applicable Research Program during the term of such Research Program, the dispute will be referred to the co-chairs of the RMC. The co-chairs of the RMC will initially be the *** *** and subsequently may change as mutually-agreed upon by the Parties. If the co-chairs of the RMC are unable to resolve the dispute, the dispute will be referred to *** and to a *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 11 16 *** . If they are unable to reach an agreement, such dispute will be referred to CCI's *** and the *** , *** of the Inflammatory Disease Unit of RBS. If such officers are unable to reach an agreement, CCI's *** *** will have the option to present the issues/circumstances surrounding the dispute to RBS' *** . However, such dispute shall be *** . 7.2 PROJECT TEAMS. Project Teams, comprised of an equal number of representatives from RBS and CCI, will be established to coordinate individual programs, and will meet monthly. Each Project Team will be co-chaired by two Project Leaders, one from RBS and one from CCI, who will also serve on the RMC. The Project Team may be expanded to include additional members upon the mutual agreement of the Parties. 7.3 RESEARCH PLANS. The RMC shall prepare a Research Plan at the beginning of each Research Program which may be refined and amended by the RMC as appropriate. 8. COLLABORATION TERM AND TERMINATION 8.1 TERM. The initial term of the Collaboration shall be *** from the date of the first meeting of the RMC (the "Collaboration Term"). The parties may extend the term of the Collaboration upon mutual agreement. In addition, the term of any Research Program initiated on a Collaboration Target will last for that length of time set forth in Article 3 for each type of Research Program. A Research Program may begin any time during the Collaboration Term and may extend beyond the term of the Collaboration Term, i.e. a Lead Generation Program that begins at the end of the Collaboration Term may terminate *** later. 8.2 *** . *** *** *** ; provided, however, that if the RMC *** *** *** *** *** . 8.3 TERMINATION BY RBS OR CCI. A Research Program may be terminated by RBS or CCI upon *** to the other party if (a) *** *** by the RMC or (b) *** , whether by RBS, CCI or otherwise. Either Party may terminate a Research Program if there is a material breach which remains uncured for *** following notice of such material breach by the other Party with respect to the relevant Research Program. 8.4 TERMINATION OF RESEARCH FUNDING. All Research Funding for a given Research Program shall terminate upon termination of such Research Program except as set forth in *** . Following termination of a Research Program pursuant to Section 8.2 or Section 8.3, RBS and CCI shall be free to pursue independent opportunities with respect to the relevant Collaboration Target, unless the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 12 17 termination of the Research Program *** *** *** *** . Following termination of a Research Program pursuant to Section 8.3 or pursuant to Section 8.2 if no milestone payments have been made, the Collaboration Compounds shall be deemed to have *** *** of the relevant Collaboration Compound Exclusivity Period, provided, however, that if the termination of the Research Program is due to CCI's material uncured breach (subject to the cure provisions of Section 8.3), then CCI shall be prevented from pursuing any such opportunities for the longer of (i) the relevant Collaboration Compound Exclusivity Period or (ii) *** after any such termination. 9. PAYMENT OBLIGATIONS 9.1 PROJECT INITIATION FEE. RBS shall pay CCI a one-time only, non-refundable, non-contingent project initiation fee of *** upon execution of this Agreement. 9.2 RESEARCH FUNDING. Research Programs will be generally staffed by CCI senior scientific management and approximately *** *** *** *** *** *** *** *** ***. 9.3 MILESTONE PAYMENTS. The milestone payments set forth in Appendix C (as further specified in the applicable Research Program set forth in Appendix A) shall be made by RBS within *** of (i) notice to RBS by CCI of the achievement of or (ii) achievement by RBS of each such milestone. The milestone payments set forth in Appendix D shall be made by the applicable Party within *** of the achievement of each such milestone. 9.4 ROYALTIES. 9.4.1 ROYALTY RATES. During the Royalty Term, RBS will pay CCI royalties *** as follows: *** *** *** *** *** --- --- --- --- --- *** *** *** *** *** --- --- --- --- ---
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 13 18 *** *** *** *** *** --- --- --- --- --- *** *** *** *** *** --- --- --- --- ---
(1) Royalties *** on the portion of *** of up to and including *** on the portion of *** above ***. (2) Royalties *** on the portion of *** of up to and including *** on the portion of *** above ***. 9.4.2 *** . *** *** *** *** *** *** *** *** 9.4.3 *** . If a Product includes *** for *** *** and a component which is diagnostically useable or therapeutically active alone or in a combination which does not require a *** *** , then Net Sales shall be the amount which is normally received by RBS, its Affiliates or sublicensees from a sale of the Royalty Bearing Component(s) in an arm's length transaction with a Third Party. If the *** *** sold separately, then Net Sales upon which a royalty is paid shall be the Net Sales of the Combination Product *** *** *** *** . 9.5 OPTION TO PURCHASE EQUIPMENT. CCI is developing automation instrumentation for internal purposes and is currently evaluating its options for making such instrumentation available to its collaborators or for commercial sale, either directly or through a Third Party. An automation summary has been provided in Appendix E to serve as a guideline with respect to the potential availability of such equipment and its potential pricing. 10. LOGISTICS OF PAYMENT; REPORTS; RECORDS; AUDITS 10.1 PAYMENT AND REPORTS. All royalty payments due to either Party under this Agreement shall be paid in U.S. dollars within *** *** unless otherwise specifically provided herein. Each payment of royalties shall be accompanied by a report of Net Sales or CCI Net Sales, as appropriate, in sufficient detail to permit confirmation of the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 14 19 accuracy of the royalty payment made. 10.2 METHOD OF PAYMENT. All payments, including royalties, to CCI under this Agreement will be made according to the wire transfer instructions set forth in Appendix F, which may be amended from time to time by CCI upon submission of a new Appendix F to RBS. Any payments to RBS under this Agreement shall be made by wire transfer as instructed by RBS prior to such payment being made. 10.3 ROCHE EXCHANGE RATE. For countries other than the United States, the conversion to U.S. dollars from any foreign currency shall be made as follow: (a) For Roche: (i) when calculating the Adjusted Gross Sales, the amount of such sales in foreign currencies shall be converted into Swiss Francs as computed in the central Roche's Swiss Francs Sales Statistics for the countries concerned, using the average monthly rate of exchange at the time for such currencies as retrieved from the Reuters System; (ii) when calculating the royalties on Net Sales, such conversion shall be at the average rate of the Swiss Franc to the United States dollars as retrieved from the Reuters System for the applicable calendar quarter. (b) for a sublicensee in a country: when calculating the Adjusted Gross Sales, the amount of such sales shall be reported by the sublicensee to Roche within thirty (30) days from the end of a calendar quarter, after having converted each applicable monthly sales in foreign currency into United States dollars using the average monthly rate of exchange published in the Wall Street Journal (or some other source agreed upon in writing by the parties for a particular country) of the applicable calendar quarter. 10.4 CCI EXCHANGE RATE. Royalty payments and reports of CCI Net Sales shall be calculated and reported for each calendar quarter. With respect to each quarter, for countries other than the United States, whenever for the purpose of calculating royalties conversion from any foreign currency to United States dollars shall be required, such conversion shall be made as follows: when calculating the Adjusted Gross Sales, the amount of such sales in foreign currencies shall be converted into United States dollars for the countries concerned, using the average monthly rate of exchange at the time for such currencies as retrieved from the Reuters System. 10.5 FINANCIAL RECORDS AND AUDIT RIGHTS. During the term of this Agreement and for a period of *** thereafter, any Party paying royalties (the "Royalty Paying Party") shall keep complete and accurate records pertaining to the sale or other disposition of Products in sufficient detail to permit the other Party (the "Royalty Receiving Party") to confirm the accuracy of all payments due hereunder. The Royalty Receiving Party shall have the right to cause an independent, major (big six) certified public accountant firm reasonably *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 15 20 acceptable to Roche to audit such records to confirm the Net Sales or CCI Net Sales, as appropriate, for the preceding year. Any information obtained during such audit shall be treated as Confidential Information. Such audits may be exercised during normal business hours once a year upon at least thirty (30) working days' prior written notice to the Royalty Paying Party. The Royalty Receiving Party shall bear the full cost of such audit unless such audit discloses a variance of more than *** from the amount of the Net Sales or CCI Net Sales, as appropriate, reported by the Royalty Paying Party for such audited period. In such case, the Royalty Paying Party shall bear the full cost of such audit. 10.6 TIME RECORDS. During the term of this Collaboration and for a period of *** *** thereafter, CCI shall keep complete and accurate records documenting the time spent by CCI employees in direct support of the Collaboration. RBS shall have the right to audit such records to confirm CCI time records and research costs for the preceding year upon *** *** prior written notice. Such audits may be exercised during normal business hours once a year upon notice to CCI. 10.7 TAXES. All turnover and other taxes levied on account of the royalties and other payments accruing to each Party under this Agreement shall be paid by the Party receiving such royalty or other payment for its own account, including taxes levied thereon as income to the receiving Party. If provision is made in law or regulation for withholding, such tax shall be deducted from the royalty or other payment made by the Party making such payment to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to the Party entitled to the royalty. Each Party agrees to assist the other Party in claiming exemption from such deductions or withholdings under any double taxation or similar agreement or treaty from time to time in force. 11. LICENSE GRANT 11.1 CCI GRANT TO RBS. Subject to the terms and conditions of this Agreement, CCI hereby grants to RBS *** *** *** *** *** *** ***. 11.2 RBS DUE DILIGENCE FAILURE. 11.2.1 RBS GRANT BACK TO CCI. Upon termination of the relevant Collaboration Compound Exclusivity Period and subject to the terms and conditions of this Agreement, if Roche has failed to develop and commercialize with Due Diligence a Development Candidate or a Product, as the case may be (a "Returned Product"), RBS will grant to CCI *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 16 21 ***. 11.2.2 *** *** *** *** *** *** ***. 11.2.3 *** *** *** *** *** *** ***. 12. TERM AND TERMINATION OF THE AGREEMENT 12.1 TERM. This Agreement shall terminate at *** ***. 12.2 TERMINATION. This Agreement may be terminated (a) by either Party upon a material breach which remains uncured for *** following notice to the breaching Party; *** *** *** *** ***. 12.3 RESULTS OF TERMINATION. All Research Support shall terminate upon termination of this Agreement. Royalties and milestone payments shall survive any such termination; provided however that if such termination is by RBS due to a material breach by CCI of this Agreement, RBS will only owe CCI royalties and milestones payments for any Product resulting from those Collaboration Compounds generated for the Research Program prior to CCI's uncured material breach. In addition, the provisions of Section 8.4 with respect to CCI's rights to work with the Collaboration Targets and the Collaboration Compounds shall apply; provided, however, that if the relevant Collaboration Target Exclusivity Period and/or the Collaboration Compound Exclusivity Period has expired, CCI shall have no such constraints on their actions. 13. CONFIDENTIAL INFORMATION 13.1 NONDISCLOSURE. During the term of the Collaboration and for a period of *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 17 22 *** after termination thereof, each Party will maintain all Confidential Information in trust and confidence and will not disclose any Confidential Information to any Third Party or use any Confidential Information for any purpose except (i) as expressly authorized by this Agreement, (ii) as required by law or court order, (iii) to its consultants, sublicensees, subcontractors or agents who need to know to accomplish the purposes of this Agreement. Each Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that its Affiliates, employees, agents, consultants, sublicensees, and other representatives do not disclose or make any unauthorized use of the Confidential Information. Each Party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. 13.2 EXCEPTIONS. Confidential Information shall not include any information which the receiving Party can prove by competent evidence: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its records; (c) is hereafter furnished to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving Party without the aid, application or use of Confidential Information; or (e) is the subject of a written permission to disclose provided by the disclosing Party. 14. PUBLICATIONS Neither Party shall publish any information with respect to Collaboration Compounds without the prior written permission of the Publications Committee (i) for the relevant Collaboration Target Exclusivity Period plus *** for Collaboration Compounds with Target Activity and (ii) for the Collaboration Target Exclusivity Period for Collaboration Compounds without Target Activity. Should a Collaboration Compound be designated by a Party as a Development Candidate, the other Party shall not publish any information with respect to that Collaboration Compound or structurally similar Collaboration Compounds without the prior written consent of the other Party. 15. PUBLIC STATEMENTS Neither Party shall use the name of the other Party in any prospectus, annual report, press release or other public statement without the prior written approval of the other Party, which may not be unreasonably withheld or delayed; provided, however, that both Parties *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 18 23 shall endeavor in good faith to give the other Party a minimum of *** to review such prospectus, annual report, press release, or other public statement; and provided, further, that if a Party does not approve such public statement, either Party may still use the name of the other Party in any prospectus, annual report, press release or other public statement without the prior written approval of the other Party, if such Party is advised by counsel that such disclosure is required to comply with applicable law. 16. *** *** *** *** *** *** *** *** *** *** *** ***. 17. ASSIGNABILITY This Agreement may *** *** ; provided, however, that either Party may assign this Agreement, in whole or in part, to an Affiliate or to a successor of a Party in connection with the merger, consolidation, or sale of all or substantially of such Party's assets or that portion of its business pertaining to the subject matter of this Agreement. *** *** . 18. DISPUTE RESOLUTION PROCEDURES 18.1 SENIOR EXECUTIVES DISCUSSIONS. If a decision is not reached by the RMC, the dispute will be resolved as set forth in Section 7.1 above. If a dispute arises between RBS and CCI with respect to matters other than the management of a Research Program, either during or after the Research Period, such dispute will be referred to the appropriate senior management in the area of the dispute. If such senior management are unable to resolve such dispute, such dispute will be referred to CCI's Chief Executive Officer and RBS's President (or equivalent senior Roche officer). If such officers are unable to reach an agreement within *** following the initiation of discussions between CCI's Chief Executive Officer and RBS's President (or equivalent senior Roche officer), such dispute shall be settled first by non-binding mediation and thereafter by arbitration as described in Sections 18.2 and 18.3 below. 18.2 NON-BINDING MEDIATION. Any dispute which is not resolved by the parties within the time period described in Section 18.1 shall be submitted to an alternative dispute resolution process ("ADR"). Within *** after the expiration of the *** period *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 19 24 set forth in Section 18. 1, each Party shall select for itself a representative with the authority to bind such Party and shall notify the other Party in writing of the name and title of such representative. Within *** after the date of delivery of such notice, the representatives shall schedule a date for engaging in non-binding ADR with a neutral mediator or dispute resolution firm mutually acceptable to both representatives. Any such mediation shall be held in a mutually agreeable location; provided, however that if the parties cannot so agree, such mediation shall occur in San Diego, California if brought by RBS or in Palo Alto, California, if brought by CCI. Thereafter, the representatives of the parties shall engage in good faith in an ADR process under the auspices of such individual or firm. If the representatives of the parties have not been able to resolve the dispute within *** *** after the conclusion of the ADR process, or if the representatives of the parties fail to schedule a date for engaging in non-binding ADR within the *** period set forth above, the dispute shall be settled by binding arbitration as set forth in Section 18.3 below. If the representatives of the parties resolve the dispute within the *** period set forth above, then such resolution shall be binding upon the parties. If either Party fails to abide by such resolution, the other Party can immediately refer the matter to arbitration under Section 18.3. 18.3 BINDING ARBITRATION. If the parties have not been able to resolve the dispute as provided in Sections 18.1 and 18.2 above, the dispute shall be finally settled by binding arbitration. Any arbitration hereunder shall be conducted under rules of the American Arbitration Association. The arbitration shall be conducted before three arbitrators chosen according to the following procedure: each of the parties shall appoint one arbitrator and the two so nominated shall choose the third. If the arbitrators chosen by the parties cannot agree on the choice of the third arbitrator within a period of *** after their appointment, then the third arbitrator shall be appointed by the Court of Arbitration of the American Arbitration Association. Any such arbitration shall be held in a mutually agreeable location; provided, however that if the parties cannot so agree, such arbitration shall occur in San Diego, California if brought by RBS or in Palo Alto, California, if brought by CCI. The arbitrators shall have the authority to grant specific performance, and to allocate between the parties the costs of arbitration in such equitable manner as they determine. The arbitral award (i) shall be final and binding upon the parties; and (ii) may be entered in any court of competent jurisdiction. 18.4 INJUNCTIVE RELIEF. Nothing contained in this Section or any other provisions of this Agreement shall be construed to limit or preclude a Party from bringing any action in any court of competent jurisdiction for injunctive or other provisional relief to compel the other Party to comply with its obligations hereunder before or during the pendency of mediation or arbitration proceedings. 19. NOTICES Any notice required or permitted to be given hereunder shall be deemed sufficient if sent by facsimile letter or overnight courier, or if delivered by hand to a Party at the respective addresses and facsimile numbers as set forth below or at such other address and facsimile number as such Party may designate. If sent by facsimile letter, notice shall be deemed given when the transmission is completed if the sender has a confirmed transmission report. If a confirmed *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 20 25 transmission report does not exist, then the notice will be deemed given when the notice is actually received by the person to whom it is sent. If delivered by overnight courier, notice shall be deemed given when it has been signed for. If delivered by hand, notice shall be deemed given when received. if to CCI, to: CombiChem, Inc. 9050 Camino Santa Fe San Diego, California 92121 Attention: President Fax number: 619/530-9998 with a copy to: Brobeck, Phleger & Harrison LLP 550 West C Street, Suite 1300 San Diego, California 92101 Attention: Faye H. Russell, Esq. Fax number: (619) 234-3848 if to RBS, to: Roche Bioscience, a division of Syntex (U.S.A.) Inc. 3401 Hillview Avenue Palo Alto, California 94304 Attn: President Fax number: 415-852-2595 with a copy to Roche Bioscience, a division of Syntex (U.S.A.) Inc. 3401 Hillview Avenue Palo Alto, California 94304 Attn: Legal Department Fax number: 415-852-1338 20. INDEPENDENT CONTRACTOR Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, employer-employee or joint venture relationship between the parties. No Party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided for herein. 21 26 21. SURVIVAL The provisions of Sections 9, 10, 13, 14, 15, 16, 18, 19, and 22.3 shall survive termination of this Agreement. 22. ADDITIONAL TERMS 22.1 ENTIRE AGREEMENT. This Agreement (including the Exhibits and Appendices) constitutes the entire understanding between the parties with respect to the subject matter hereto and supersedes and replaces all previous negotiations, understandings, representations, writings, and contract provisions and rights relating hereof. The parties agree that all services provided hereunder shall be subject to and governed by the terms and provisions set forth herein, and none of the terms and conditions contained on any proposal, purchase order, invoice, or other writing, shall have any effect or change the provisions of this Agreement. 22.2 AMENDMENTS; NO WAIVER. No provision of this Agreement may be amended, revoked or waived except by a writing signed and delivered by an authorized officer of each Party. Any waiver on the part of either Party of any breach or any right or interest hereunder shall not imply the waiver of any subsequent breach or waiver of any other right or interest. 22.3 VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect. 22.4 HEADINGS. The descriptive headings are inserted for convenience of reference only and are not intended to be part of or to affect the meaning of or interpretation of this Agreement. 22.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 22 27 IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the Effective Date. COMBICHEM, INC. SYNTEX (U.S.A.) INC. By: /s/ Vicente Anido /s/ James N. Woody ------------------------------- ------------------------------ Vicente Anido, Ph.D. James N. Woody, M.D., Ph.D. President and Chief Executive Officer President Appendix A - Description of Research Programs Appendix B - *** Appendix C - Collaboration Financial Summary Appendix D - *** Appendix E - CombiSyn Automation Instruments Appendix F - Wire Transfer Instructions
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 23 28 *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Appendix A Page A-1 29 *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Appendix A Page A-2 30 *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Appendix A Page A-3 31 *** *** *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. Appendix A Page A-4 32 APPENDIX B *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 33 APPENDIX C COLLABORATION FINANCIAL SUMMARY ($ in millions)
*** Lead Lead Lead Optimization Evolution Generation(1) ------------ --------- ------------- *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** ***
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 34 APPENDIX D MILESTONES FOR RELATED PRODUCTS SUMMARY ($ in millions)
Lead *** Optimization ------------ *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** ***
*** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 35 APPENDIX E COMBISYN AUTOMATION SUMMARY 1. CombiSyn SP40 Synthesizers SP40 synthesizers are currently project to be priced at *** per unit, if made available to collaborators or for commercial sale. This instrument is in its beta stage and, if commercialized, would potentially become available in 1998 (subject to the extent of modifications resulting from beta test). 2. CombiSyn PWS-20 PWS-20 purification/work-up stations are currently expected to be priced at *** per unit, if made available to collaborators or for commercial sale. This unit is in the development stage and, if commercialized, would potentially become available in 1998 (subject to the extent of modifications resulting from beta test). 3. PE-SCIEX MS-LC PE-SCIEX API-100LC Mass Spectrometer systems may be purchased from PE- SCIEX directly. This unit is currently available. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 36 APPENDIX F COMBICHEM, INC. INCOMING WIRE TRANSFER INSTRUCTIONS (into *** ) Transfer Funds to: *** New York, NY Routing Transit/ABA Number: *** For Account of: *** Account Number: *** For Further Credit to: *** CombiChem, Inc. Funds must be received by NFSC by 11:00 a.m. PST for same day credit. Please call to advise regarding funds transferred: At CombiChem, Inc.: *** (619) 530-0484, ext. 113 - Telephone (619) 530-9998 - Fax *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-10.21 27 EXHIBIT 10.21 1 EXHIBIT 10.21 RESEARCH AND TECHNOLOGY DEVELOPMENT AGREEMENT BETWEEN COMBICHEM, INC. AND SUMITOMO PHARMACEUTICALS CO., LTD. AUGUST 18, 1997 2 RESEARCH AND TECHNOLOGY DEVELOPMENT AGREEMENT THIS RESEARCH AND TECHNOLOGY DEVELOPMENT AGREEMENT (the "Agreement") is entered into on August 18, 1997 (the "Effective Date"), by and between COMBICHEM, INC., a corporation having its principal offices at 9050 Camino Santa Fe, San Diego, California ("CombiChem"), and SUMITOMO PHARMACEUTICALS CO., LTD., a corporation having its principal offices located at 2-8, Doshomachi 2-chome, Chuo-Ku, Osaka, 541, Japan ("Sumitomo"). WHEREAS, CombiChem has developed and owns certain drug discovery technology and intellectual property rights, including chemical library design software, multi-parallel synthesis and purification methods, chemical libraries suitable for high throughput biological screening assays and medicinal chemistry (collectively, "CombiChem Technology"); WHEREAS, Sumitomo desires to utilize CombiChem Technology for its drug discovery activities under Sumitomo Know-how concerning *** ("Objective"); WHEREAS, the parties wish to collaborate on the Objective in a Research Program against a Collaboration Target ("Collaboration"); NOW, THEREFORE, the Parties agree as follows: 1. DEFINITIONS 1.1 "Active Compound(s)" means a compound ( or compounds ) which (a)(i) is selected by either Party under the Research Program from Collaboration Compounds, or (ii) is derived from a Collaboration Compound *** *** ; and (b) shows in vitro activity of at least *** *** . 1.2 "Affiliate" of a Party means any corporation or other business entity controlled by, controlling or under common control with, such Party. For this purpose "control" shall mean direct or indirect beneficial ownership of more than fifty percent (50%) of the voting securities or income interest in such corporation or other business, or if not meeting the preceding requirements, any company owned or controlled by or owning or controlling such Party at the maximum control or ownership right permitted in the country where such company exists. 1.3 "Collaboration" has the meaning set forth in the preamble. 1.4 "Collaboration Compound(s)" means a compound (or compounds) which (a) is synthesized following the Effective Date for screening against the Collaboration Target, under *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 1 3 the Research Program, or (b) is a pre-existing CombiChem compound which CombiChem desires to designate as a Collaboration Compound. 1.5 "Collaboration Target(s)" means *** *** . 1.6 "CombiChem Technology" has the meaning set forth in the preamble. 1.7 "Confidential Information" includes, but is not limited to, (a) all information and materials received by either Party from the other Party pursuant to this Agreement; (b) all information and materials developed in the course of the Collaboration; and (c) the material financial terms of this Agreement. 1.8 "Development Compound(s)" means a compound ( or compounds ) which (a)(i) is a Lead Compound or (ii) is derived from a Lead Compound and *** *** ; and (b) are determined by Sumitomo to be appropriate for preclinical studies for the purpose of IND filing by Sumitomo. 1.9 "Exclusivity Period" means the Research Period *** . 1.10 "Field" means all therapeutic and diagnostic indications of human disease for the Collaboration Target. 1.11 "First Commercial Sale" of a Product shall mean the first sale for use or consumption of such Product in a country after required marketing and pricing approval has been granted by the governing health regulatory authority of such country. Sale to an Affiliate or sublicensee shall not constitute a First Commercial Sale unless the Affiliate or sublicensee is the end user of the Product. 1.12 "Inactive Compound(s)" means a Collaboration Compound(s) *** *** it does not have the in vitro activity required for an Active Compound. 1.13 "Lead Compound(s)" means a compound (or compounds ) which (a)(i) is selected from an Active Compound(s) by either Party under the Research Program, or (ii) is derived from Active Compound(s); (b) *** ; and (c) shows in vitro activity with *** *** . 1.14 "Net Sales" means the gross sales invoiced by Sumitomo or its Affiliates or licensees for Products to non-Affiliated third parties less actual deductions of returns (including withdrawals and recalls), rebates (price reductions, including Medicaid and similar types of rebates e.g. chargebacks), volume (quantity) discounts, discounts granted at the time of invoicing, the cost of transport, insurance, delivery, sales taxes and other taxes (other than income taxes) directly linked to and included in the gross sales amount as computed on a *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 2 4 product-by-product basis for the countries concerned, whereby the amount of such sales in foreign currencies is converted into United States dollars at the exchange rate of the last business day for each calendar quarter as reported by Sumitomo Bank (Tokyo). 1.15 "Other *** " means *** *** . 1.16 "Patent" means, (a) valid and enforceable Letters Patent, including any extension (including Supplemental Protection Certificate), registration, confirmation, reissue, continuation, divisionals, continuation-in-part, reexamination or renewal thereof, or (b) pending applications for any of the foregoing. 1.17 "Party" means CombiChem or Sumitomo, as the case may be; and including their respective Affiliates and their permitted successors and assigns. 1.18 "Product(s)" means any product containing a Development Compound with such compound as the active ingredient and which is granted regulatory approval by the governing health regulatory authority of the applicable country for marketing in the Field. 1.19 "Research Management Committee" or "RMC" has the meaning set forth in Article 5 below. 1.20 "Research Period" means the initial *** term of the Collaboration, which can be extended in accordance with Section 6.1 below. 1.21 "Research Program" means the research to be conducted as part of the Collaboration under the mutually-agreed research plan, and shall include, without limitation, the activities and items set forth in Sections 2.1 and 2.2 of this Agreement. 1.22 "Royalty Term" means, in the case of any Product, in any country, the period of time commencing on the First Commercial Sale and ending upon the later of (a) *** *** from the date of First Commercial Sale in such country; or (b) the expiration of the last-to-expire Patent resulting from the Research Program filed in the Field during the Exclusivity Period with claims covering that Product in the relevant country. 1.23 "Territory" means *** . 2. RESEARCH COLLABORATION 2.1 CombiChem Responsibilities. CombiChem shall conduct the following activities under the Research Program in accordance with the terms of this Agreement and as more fully described in the Research Plan: (a) During the Research Period, CombiChem shall (i) review data and information regarding the Collaboration Targets provided by Sumitomo ; (ii) based on those data and information and using the CombiChem Technology , design compound libraries; and (iii) synthesize compounds as provided in Section 4.4 below. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 3 5 (b) During the Research Period, CombiChem shall keep Sumitomo fully informed of its activities performed in connection with the Collaboration, including, without limitation, by providing Sumitomo with data and information regarding Collaboration Compounds prior to the meetings of the Research Management Committee. (c) During the Research Period, CombiChem shall provide space and resources to accommodate the Sumitomo scientists described in Section 2.2 below. (d) During the Research Period , CombiChem shall provide a minimum of *** . (e) During the Research Period and while *** *** , CombiChem shall provide Sumitomo with reasonable technical support to facilitate Sumitomo's establishment of an *** *** *** *** *** *** . 2.2 Sumitomo Responsibilities. Sumitomo shall provide CombiChem, with the following resources under the Research Program as more fully described in the Research Plan: (a) Sumitomo shall provide CombiChem with support and assistance useful or necessary for the conduct of the Research Program, including providing data input from in-house lead series and screening hits, chemical intermediates, information concerning assay methods and screening data. (b) During the Research Period, Sumitomo shall provide CombiChem with data and information regarding Collaboration Compounds and the Collaboration Target assays developed by Sumitomo under the Research Program prior to the meetings of the Research Management Committee. (c) During the Research Period and in connection with CombiChem providing the services in Section 2.1(e) above , Sumitomo may send *** *** *** *** *** . (d) During the Exclusivity Period, Sumitomo shall screen Collaboration Compounds for in vitro and, where appropriate, in vivo activity against the Collaboration Target, devoting the same degree of attention, resources and diligence to these screening activities as it devotes to other compounds in its own discovery activities. 2.3 Research Plan. The Parties hereby agree that the Research Program shall be carried out in accordance with the Research Plan which is attached hereto as Exhibit A. The Research Management Committee shall review the Research Plan on an ongoing basis and may make changes to the Research Plan so long as such changes are mutually agreed to by CombiChem and Sumitomo. 2.4 Sumitomo Due Diligence. Sumitomo shall screen Lead Compounds and endeavor to determine Development Compounds. Sumitomo shall devote the same degree of attention, resources and diligence to its obligations above and the development of Development Compounds as it devotes to other compounds of its own development ("Due *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 4 6 Diligence"). Timelines associated with Due Diligence for the first IND filing are outlined in Exhibit A which timelines may be extended upon the mutual agreement of Sumitomo and CombiChem. 2.5 Annual Reports. Following the first IND filing through First Commercial Sale, Sumitomo shall provide CombiChem with an annual report summarizing Sumitomo's activities in developing Development Compounds. 2.6 Third Party Licenses. Each party shall be solely responsible for any third party license fees required to perform its obligations under this Agreement. 3. EXCLUSIVITY 3.1 Collaboration Target Exclusivity. *** *** . 3.2 *** . An *** shall be available to both Parties for direct or indirect use against *** following the *** . 3.3 *** . An *** shall be available to both Parties for direct or indirect use against targets other than a Collaboration Target or *** following the *** . 3.4 Inactive Compounds. An Inactive Compound shall be available to both Parties for any purpose following the designation of a Collaboration Compound as an Inactive Compound. 4. COLLABORATION COMPOUNDS 4.1 Pre-Existing Compounds. Sumitomo shall have no rights to any pre-existing CombiChem compound unless and until such compound is designated as a Collaboration Compound by CombiChem. CombiChem shall have no rights to any pre-existing Sumitomo compound which is not utilized in the Research Program. 4.2 Intellectual Property Rights. Subject to Article 8, Sumitomo shall retain all exclusive rights to all intellectual property relating solely to the Active Compounds and resulting from the Research Program during the Exclusivity Period and thereafter so long as Sumitomo continues to show Due Diligence. With respect to Active Compounds , Lead Compounds , and Development Compounds , Sumitomo shall be responsible for filing, maintaining and prosecuting all Patents at its sole expense . Sumitomo shall have ownership of such Patents. Prior to the filing of any such related Patent applications , CombiChem shall assign all intellectual property rights it may have in the Active Compound which is necessary for development and commercialization by Sumitomo or its designee. If Sumitomo fails to so file, maintain or prosecute such Patent or related Patent applications, CombiChem shall have the right to request Sumitomo to do so. If Sumitomo elects not to file, maintain or prosecute such Patent or related Patent applications , CombiChem shall have the right to take over such filing, maintenance or prosecution of such Patent or related Patent applications, at its sole *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 5 7 expense, and Sumitomo shall assign all intellectual property rights it may have in the Compound which is necessary for development and commercialization by CombiChem or its designee. 4.3 Structural Information. Neither Party shall disclose the structure of any Active Compound to any Third Party without the other Party's written permission, unless required to do so by law. 4.4 Supply of Collaboration Compounds. Aliquots of at least *** of any Collaboration Compound that has been synthesized will be prepared and given to Sumitomo. Aliquots of at least *** of *** Lead Compounds will be prepared and given to Sumitomo upon their reasonable request. In addition, aliquots of at least *** of *** Lead Compounds will be prepared and given to Sumitomo upon their reasonable request. For additional requirements of samples, CombiChem shall provide *** . 5. RESEARCH MANAGEMENT & PLAN The design, review and conduct of the Research Program will be coordinated by the Research Management Committee, which will meet regularly on a mutually-agreeable schedule. The Research Management Committee may establish and amend or revise the research plan as necessary to reflect the scientific progress and work performed under the Research Program, such amendments to be mutually agreed to by Sumitomo and CombiChem. The Research Management Committee will consist of an equal number of members from Sumitomo and CombiChem and will include appropriate representatives from Sumitomo and CombiChem as mutually agreed. The co-chairs of the Research Management Committee will initially be the Vice President, Chemistry of CombiChem and a Research Manager of Sumitomo and subsequently may change as mutually-agreed upon by the Parties. Decisions of the Research Management Committee shall be by consensus. At the end of Research Period, the Research Management Committee shall define Lead Compounds. 6. RESEARCH PERIOD, EXTENSION AND TERMINATION OF RESEARCH PROGRAM 6.1 Research Period : Option to extend the Research Period. The initial term of the Collaboration shall be the Research Period. Sumitomo shall have the right to extend the Research Period for up *** periods upon mutual agreement . To extend the Research Period , Sumitomo must notify CombiChem no later than *** prior to the then-current expiration date and the Parties shall negotiate in good faith the terms and conditions of any such extension. 6.2 Termination of Research Program. The Research Program may be terminated by a Party *** days following the uncured material breach of obligations under the Research Program of the other Party. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 6 8 7. PAYMENT OBLIGATIONS 7.1 Program Funding. Sumitomo shall support CombiChem's efforts in conducting the Research Program by making payments in the following amounts at the following times: *** *** *** *** *** ***
7.2 Milestone Payments. Within thirty (30) days of the occurrence of a development milestone shown in Exhibit B , whether such milestone is triggered by the activities of Sumitomo or those of its sublicensee , Sumitomo shall pay CombiChem the related milestone payment in United States dollars. The schedule for such payments is set forth in Exhibit B of this Agreement. 7.3 Royalties. During the Royalty Term, Sumitomo will pay CombiChem a running royalty of *** of Net Sales in all countries in the Territory *** . *** *** With respect to sales in *** , during the Royalty Term , Sumitomo will pay CombiChem a running royalty of *** of Net Sales. All Royalty payments due to CombiChem under this Agreement shall be paid in United States dollars within *** of the end of each calendar quarter, in case Products are sold by Sumitomo *** *** *** . Each payment of royalties shall be accompanied by a report of Net Sales of Products in sufficient detail to permit confirmation of the accuracy of the royalty payment made. 7.4 Manner and Place of Payment. Royalty payments and reports for Net Sales of Products shall be calculated in local currencies and reported for each calendar quarter. All payments owed under this Agreement shall be made by wire transfer to the bank account to be designated by CombiChem separately with at least fifteen (15) business days prior written notice to Sumitomo. 7.5 Records and Audit. During the term of this Agreement and for a period of *** *** , Sumitomo shall keep complete and accurate records pertaining to the sale or other disposition of Products in sufficient detail to permit CombiChem to confirm the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 7 9 accuracy of all payments due hereunder. CombiChem shall have the right to cause an independent certified public accounting firm reasonably acceptable to Sumitomo to audit such records to confirm Sumitomo's Net Sales for the preceding year, Any information obtained during such audit shall be treated as Confidential Information. Such audits may be exercised during normal business hours of Sumitomo no more than once each year. CombiChem shall bear the full cost of such audit unless such audit discloses a variance of more than *** from the amount of the Net Sales reported by Sumitomo for such audited period. In such case, Sumitomo shall bear the full cost of such audit. 7.6 Taxes. All income and other taxes levied on account of the royalties and other payments accruing to CombiChem under this Agreement shall be paid by CombiChem, including taxes levied thereon as income to CombiChem. If provision is made in law or regulation for withholding, such tax shall be deducted from the royalty or other payment made by Sumitomo to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to CombiChem. Each Party agrees to assist the other Party in claiming exemption from such deductions or withholdings under any double taxation or similar agreement or treaty from time to time in force. 8. LICENSE GRANT *** 8.1 CombiChem License Grant to Sumitomo. Subject to the terms and conditions of this Agreement, CombiChem hereby grants to Sumitomo *** , *** *** *** . 8.2 *** . *** *** *** *** *** *** *** . 8.3 Sumitomo License Grant to CombiChem. Subject to the terms and conditions of this Agreement and following the failure of Sumitomo to develop and commercialize with Due Diligence a Lead Compound, a Development Compound or Product, as the case may be, ( "Returned Compound"), Sumitomo shall grant to CombiChem *** *** under those Sumitomo Patents and know-how which are resulting from the Research Program and related exclusively to the Returned Compound *** *** . 8.4 Rights Outside the Field. Each of Sumitomo and CombiChem shall have rights to *** outside the Field. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 8 10 9. TERM AND TERMINATION OF THE AGREEMENT 9.1 Term. The term of this Agreement shall commence upon the Effective Date of this Agreement, and shall expire on the expiration of the last royalty obligation under this Agreement, except as provided hereunder. 9.2 Termination by Sumitomo or CombiChem. If either Party materially breaches this Agreement and fails to remedy that breach within *** of receiving written notice thereof from the other Party, or enters into any arrangement of composition with its creditors or goes into liquidation, insolvency, bankruptcy, receivership or reorganization proceedings, whether voluntarily or compulsorily which is not dismissed within *** , then the other Party may at any time, by notice in writing or by telefax, terminate this Agreement. 9.3 *** . *** *** *** *** . 9.4 After Termination. Any termination of this Agreement or the Research Program shall be without prejudice to the accrued rights of either Party prior to the termination. In case of termination of this Agreement or the Research Program by CombiChem according to the Article 9.2 above, all royalty and milestone obligations for any Collaboration Compound shall survive any such termination. 10. CONFIDENTIAL INFORMATION 10.1 Nondisclosure. During the term of the Collaboration and for a period of *** *** after termination thereof, each Party will maintain all Confidential Information in trust and confidence and will not disclose any Confidential Information to any third party or use any Confidential Information for any purpose except (i) as expressly authorized by this Agreement, (ii) as required by law or court order, (iii) to its consultants, subcontractors or agents who need to know to accomplish the purposes of this Agreement. Each Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each Party will use at least the same standard of care as it uses to protect proprietary or confidential information of its own to ensure that its Affiliates, employees, agents, consultants and other representatives do not disclose or make any unauthorized use of the Confidential Information. Each Party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. 10.2 Exceptions. Confidential Information shall not include any information which the receiving Party can prove by competent evidence: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its records; (c) is hereafter disclosed to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 9 11 receiving Party without the aid, application or use of Confidential Information; or (e) is the subject of a written permission to disclose provided by the disclosing Party. 11 PUBLICATIONS AND PUBLIC STATEMENTS 11.1 Publications. Neither Party shall publish any information with respect to Collaboration Compounds or Development Compound without the prior written permission of the other party during the Exclusivity Period. Such permission shall be approved or disapproved within *** of written request for permission. Such permission shall not be unreasonably withheld. 11.2 Public Statements. Neither Party shall use the name of the other Party in any public statement , prospectus , annual report or press release without the prior written approval of the other Party , which may not be unreasonably withheld or delayed ; provided, however, that both Parties shall endeavor in good faith to give the other Party a minimum of *** to review such public statement , prospectus , annual report or press release ; and provided , further , that if a Party does not approve such public statement , either Party may still use the name of the other Party in any public statement , prospectus , annual report or press release without the prior written approval of the other Party , if such Party is advised by counsel that such disclosure is required to comply with applicable law. 12. *** 12.1 *** *** *** *** *** *** *** *** *** *** *** 12.2 *** *** *** *** *** *** *** (i) *** *** (ii) *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 10 12 *** (iii) *** *** 12.3 *** *** *** *** *** *** 13. ASSIGNABILITY This Agreement may not be assigned by either Party without the prior written consent of the other Party; provided, however, that either Party may assign this Agreement, in whole or in part, to an Affiliate or to a successor of a Party in connection with the merger, consolidation or sale of all or substantially all of such Party's assets or that portion of its business pertaining to the subject matter of this Agreement. 14. DISPUTE RESOLUTION PROCEDURES 14.1 Arbitration. All disputes arising in connection with this Agreement shall be finally settled by arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce in force at the time of such dispute. The arbitration shall take place in the United States by three arbitrators appointed in accordance with such Rules. 14.2 Injunctive Relief. Nothing contained in this Section or any other provisions of this Agreement shall be construed to limit or preclude a Party from bringing any action in any court of competent jurisdiction for injunctive or other provisional relief to compel the other Party to comply with its obligations hereunder before or during the pendency of arbitration proceedings. 15. NOTICES Any notice required or permitted to be given hereunder shall be deemed sufficient if sent by facsimile letter or overnight courier , or delivered by hand to Sumitomo or CombiChem at the respective addresses and facsimile numbers as set forth below or at such other address and facsimile number as either Party hereto may designate. if to CombiChem, to:CombiChem, Inc. 9050 Camino Santa Fe San Diego, California 92121 Attention: President Fax number: (619) 530-9998 with a copy to: Brobeck, Phleger & Harrison LLP 550 West C Street, Suite 1300 San Diego, California 92101 Attention: Faye H. Russell, Esq. Fax number: (619) 234-3848 *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 11 13 if to Sumitomo, to: Research Coordination & Planning Department 1-98, Kasugadenaka 3 -choume , Konohana-ku Osaka 554 Japan Sumitomo Pharmaceuticals Co., Ltd. Attn.: Dr. Kei-ichi Ono Fax number: 06-466-1890 16. SURVIVAL The provisions of Sections 8.4 and 17.6, and Article 12 shall survive termination of this Agreement in addition to those provisions which by their terms survive. 17. ADDITIONAL TERMS 17.1 Entire Agreement. This Agreement and that certain Confidentiality Agreement between CombiChem and Sumitomo dated February 5, 1997 constitutes the entire understanding between the Parties with respect to the subject matter hereto and supersedes and replaces all previous negotiations, understandings, representations, writings and contract provisions and rights relating hereof. The Parties agree that all services provided hereunder shall be subject to and governed by the terms and provisions set forth herein, and none of the terms and conditions contained on any proposal, purchase order, invoice or other writing shall have any effect or change the provisions of this Agreement. 17.2 Amendment; No Waiver. No provision of this Agreement may be amended, revoked or waived except by a writing signed and delivered by an authorized officer of each Party. Any waiver on the part of either Party of any breach or any right or interest hereunder shall not imply the waiver of any subsequent breach or waiver of any other right or interest. 17.3 Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect . 17.4 Headings. The descriptive headings are inserted for convenience of reference only and are not intended to be part of or to affect the meaning of or interpretation of this Agreement. 17.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 17.6 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California, without reference to conflicts of laws principles. 12 14 IN WITNESS WHEREOF, the parties have executed this Agreement to be effective as of the Effective Date. COMBICHEM, INC. SUMITOMO PHARMACEUTICALS CO., LTD. By: /s/ Vicente Anido, Jr. By: /s/ M. Takeuchi ------------------------------- ------------------------------- Its: President and CEO Its: M. Takeuchi ------------------------------- ------------------------------- President ------------------------------- 13 15 EXHIBIT A I. Research Plan *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 16 *** *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 17 *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 18 II. CRITERIA FOR ACTIVE COMPOUNDS, LEAD COMPOUNDS AND DEVELOPMENT COMPOUNDS *** *** III. DUE DILIGENCE Sumitomo will find the IND after a selection of a Development compound within *** which may be extended upon Mutual Agreement of Sumitomo and CombiChem. *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 19 EXHIBIT B FINANCIAL SUMMARY ($ IN USD MILLIONS) *** *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. 20 EXHIBIT C *** *** *** *** Portions of this page have been omitted pursuant to a request for Confidential Treatment and filed separately with the Commission. EX-10.24 28 EXHIBIT 10.24 1 EXHIBIT 10.24 FULL RECOURSE SECURED PROMISSORY NOTE $150,000.00 September 5, 1995 La Jolla, California FOR VALUE RECEIVED, the undersigned ("Maker"), promises to pay to COMBICHEM, INC., a California corporation ("Holder"), or order, at 9050 Camino Santa Fe, San Diego, California 92121, or at such other place as Holder may from time to time designate, the principal sum of One Hundred Fifty Thousand Dollars ($150,000.00)(the "Loan"), in the following amounts and on the terms set forth below. 1. Interest. Unpaid principal of this Promissory Note shall accrue interest at a rate equal to the applicable minimum Federal rate on the date of the Note per annum, compounded annually, and shall be computed on the basis of a 365 day year for the actual number of days elapsed. 2. Payment. 2.1 Payment of Principal and Interest. The Loan and all accrued interest owing under this Promissory Note shall become due and payable in full on the Maturity Date set forth in Section 3 below; provided, however, that if any payment of principal or interest on this Promissory Note shall become due on a Saturday, Sunday or a public holiday under the laws of the State of California, such payment shall be due on the next succeeding business day. Except as otherwise provided herein or by applicable law, all payments shall be applied first to any unpaid enforcement or collection costs, then to accrued but unpaid interest, and the remainder shall be applied to principal. This Promissory Note may be prepaid, in whole or in part, at any time without premium or penalty. Partial prepayments shall not postpone or delay the date of any subsequent payment. 2.2 Form of Payment. All amounts payable under this Promissory Note are payable in lawful money of the United States. Any payment shall be deemed made upon receipt by Payee. Checks will constitute payment when collected. All payments of principal and interest made hereunder shall be evidenced by the internal records of Holder, which shall be prima facie evidence of such matters. 3. Maturity Date. The outstanding principal balance of this Promissory Note and all unpaid interest accrued hereunder shall be due and payable no later than the "Maturity Date." The Maturity Date shall be the earlier to occur of: (a) September 5, 2000; (b) the expiration of the 30-day period following the date the Maker ceases for any reason to remain in the employment on a regular and full-time basis by CombiChem, Inc., a California corporation ("Corporation"); (c) the expiration of the 180-day period following the date on which Corporation completes a successful public offering of its shares of its common stock; or (d) the date on which Corporation completes the consummation of any corporate transaction in which (i) more than fifty percent (50%) of the outstanding shares of the common stock of Holder are acquired by a single purchaser or by a group of purchasers acting in concert; (ii) all or substantially all of the assets of Holder are acquired by a single purchaser or a group of purchasers acting in concert; (e) that date on which Corporation merges with or into another organization; or (f) the expiration of the 10-day period following the date on which Maker sells, transfers, or suffers or permits the sale or transfer of Maker's real property located at 3 Los Altos Road, Orinda, California (the "Real Property"). Maker hereby covenants that Maker shall provide Holder with written notice of any sale or transfer of the Real Property at least ten (10) days prior to the date Maker transfers title to the Real Property. Upon payment in full of all principal and accrued interest payable hereunder, this Promissory Note shall be surrendered to Maker for cancellation. 4. Security. The performance of the Maker's obligations under this Promissory Note are secured by the pledge of shares of the common stock of Holder held by Maker as of the date of this 2 Promissory Note (the "Pledged Shares") pursuant to the terms of that certain Stock Pledge Agreement ("Pledge Agreement") dated the same date as this Promissory Note between Maker and Holder, and any and all shares of Holder's capital stock hereafter acquired by Maker pursuant to any option agreements, stock pledge agreements, warrants or other instruments regarding the shares of capital stock of Holder, entered into by and between the Maker and the Holder at any time before the repayment of the Loan. This Promissory Note is secured as set forth in the Pledge Agreement. 5. Late Payment. Maker agrees that if for any reason it fails to make any of the payments required herein, including the amount due at the Maturity Date, within five (5) days after the due date for the payment, Holder shall be entitled to damages for the detriment caused by such failure. Maker recognizes that as a result of any payment required herein becoming overdue, Holder will incur additional expenses in servicing the Loan not otherwise contemplated hereunder, including, but not limited to, processing and accounting charges, the loss to Holder of the use of money due and frustration to Holder in meeting its other financial commitments. Maker further recognizes that the exact amount of these additional expenses will be extremely difficult and impractical to ascertain and agrees to pay an amount equal to five percent (5%) of such overdue amounts ("Late Charge"). In order to compensate Holder for its additional expenses resulting from Maker's continued failure to repay overdue amounts, one (1) additional Late Charge shall be incurred by Maker every three (3) months, if the overdue amount remains unpaid to Holder. Maker agrees to pay Holder such additional Late Charge on the aggregate of all unpaid and overdue amounts, including all previously incurred Late Charges. Acceptance of any Late Charge by Holder shall in no event constitute a waiver of Maker's default with respect to such overdue amount nor prevent Holder from exercising any other rights and remedies granted under this Promissory Note or the Pledge Agreement. 6. Default. 6.1 Events of Default. At the election of the Holder, in its sole discretion, the entire unpaid principal balance of this Note, together with all accrued and unpaid interest, shall become immediately due and payable prior to the specified due date of this Note upon the occurrence of one or more of the following events: (a) Maker dies; or (b) Maker shall default in the performance of any of its obligations hereunder, including, without limitation, payment of the balance due at the Maturity Date, when due; or (c) a default occurs under the Pledge Agreement or under any obligation secured thereby; (d) or any transfer (except as contemplated by the Pledge Agreement), conveyance, hypothecation, assignment or encumbrance, whether voluntarily or involuntarily or by operation of law or otherwise, of any beneficial interest in the Pledged Shares or any portion thereof, other than as expressly permitted by Holder in writing; or (e) the making by the Maker of any assignment for the benefit of creditors or the voluntary appointment (at the request or with the consent of the Maker) of a receiver, custodian, liquidator or trustee in bankruptcy of any of the Maker's property, or the filing by the Maker of a petition in bankruptcy or other similar proceeding under any law for relief of debtors; or (f) the filing by or against the Maker of any petition in bankruptcy or any petition for relief under the provisions of the Federal bankruptcy act or any other state or Federal law for the relief of debtors and the continuation of such petition without dismissal for a period of sixty (60) days or more, the appointment of a receiver or trustee to take possession of any property or assets of the Maker or the attachment of or execution against any property or assets of the Maker (each of the foregoing is sometimes referred to hereinafter as an "Event of Default"). Upon any of the foregoing Events of Default, the Holder of this Promissory Note, at its election, may declare immediately due and payable the entire balance of principal and interest thereon together with all cost of collection, including, but not limited to, reasonable attorneys' fees and costs and all expenses incurred in connection with the protection of or realization on any security for this Promissory Note. At the option of Holder and upon five (5) days written notice of or demand and in the event of any default or acceleration under this Promissory Note, interest thereafter on the unpaid principal balance, accrued Late Charges and additional costs incurred shall be payable at the lesser of ten percent (10%) per annum, compounded quarterly, or the maximum rate permitted by law. The Maker further understands that this is a full recourse promissory note. 2 3 6.2 No Waiver. In the event of any default or acceleration under this Promissory Note, Maker agrees that the acceptance by Holder of any performance which does not strictly comply with the terms of this Promissory Note shall not be deemed to be a waiver of Holder's rights. No previous waiver and no failure or delay by Holder in acting with respect to the terms of this Promissory Note or the Pledge Agreement shall constitute a waiver of any breach, default or failure of condition under this Promissory Note or the Pledge Agreement or the obligations secured thereby. A waiver of any term of this Promissory Note or the Pledge Agreement or of any of the obligations secured thereby must be made in writing and shall be limited to the express written terms of such waiver. 7. Employment. For purposes of applying the provisions of this Note under Section 6.1(b) above, the Maker shall be considered to remain in the Corporation's employment for so long as the Maker renders services as a director or full-time employee of the Corporation, any successor entity or one or more of the Corporation's fifty percent (50%)-or-more owned (directly or indirectly) subsidiaries. HOWEVER, NOTHING IN THIS PROMISSORY NOTE SHALL CONFER UPON THE MAKER ANY RIGHT TO CONTINUE IN THE EMPLOYMENT OF THE CORPORATION (OR ITS SUCCESSORS OR SUBSIDIARIES) FOR ANY PERIOD OF SPECIFIC DURATION OR INTERFERE WITH OR OTHERWISE RESTRICT IN ANY WAY THE RIGHTS OF THE CORPORATION OR THE MAKER, WHICH RIGHTS ARE HEREBY EXPRESSLY RESERVED BY EACH, TO TERMINATE MAKER'S EMPLOYMENT AT ANY TIME FOR ANY REASON WHATSOEVER, WITH OR WITHOUT CAUSE. 8. General Provisions. 8.1 Attorneys' Fees. If any attorney is engaged by Holder to enforce or construe any provision of this Promissory Note or the Pledge Agreement, or as a consequence of any default or Event of Default, with or without the filing of any legal action or proceeding, then Maker shall immediately pay on demand all attorneys' fees and all other costs and expenses incurred by Holder, including, without limitation, post-judgment attorneys' fees and costs, together with interest thereon from the date of such demand until paid at the rate of interest applicable to the principal owing hereunder as if such unpaid attorneys' fees and costs had been added to the principal. Maker shall also reimburse Holder for all attorneys' fees and all other costs and expenses reasonably incurred in the representation of Holder in any bankruptcy, insolvency, reorganization or other debtor-relief proceeding of or relating to Maker or any security for this Promissory Note. 8.2 Binding on Successors. The terms of this Promissory Note shall apply to, inure to the benefit of and bind all parties hereto, their heirs, legatees, devisees, administrators, executors, personal representatives, successors and assigns. The term "Holder" shall include the Holder as well as any other person or entity to whom this Promissory Note or any interest in this Promissory Note is conveyed, transferred or assigned. 8.3 No Modifications. This Promissory Note shall not be changed or modified orally, but in each instance only by an instrument in writing signed by the party against which enforcement of such change, modification or waiver is sought. 8.4 Severability. Every provision hereof is intended to be severable. If any provision of this Promissory Note is determined by a court of competent jurisdiction to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall not affect the other provisions hereof, which shall remain binding and enforceable. 8.5 Time is of Essence. It is agreed that time is of the essence as to every term, condition and provision of this Promissory Note. 8.6 Waiver of Presentment, Protest and Demand. No person or entity shall be a mere accommodation maker, but each shall be primarily and directly liable hereunder. Maker and any endorsers or guarantors hereof severally waive: presentment; demand; notice of dishonor; notice of default or delinquency; notice of acceleration; notice of protest, demand and nonpayment; notice of costs, expenses 3 4 or losses and interest thereon; notice of Late Charges; and diligence in taking any action to collect any sums owing under this Promissory Note or in proceeding against any of the rights or interests in or to properties securing payment of this Promissory Note. Maker and any endorsers or guarantors hereof further expressly agree that this Promissory Note, or any payment hereunder may be extended from time to time, and consent to the acceptance of security or the release of any security from this Promissory Note, including any real property or other types of security, all without in any way affecting the liability of Maker and any endorsers of guarantors hereof. All payments made under this Promissory Note shall be made without any right of offset by the Maker. 8.7 Applicable Usury Laws. All agreements between Maker and Holder, now existing or hereafter arising, are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration of maturity of the unpaid principal balance hereof, or otherwise, shall the amount paid or agreed to be paid to Holder for the use, forbearance or detention of the money to be loaned hereunder or otherwise, or for the performance or payment of any covenant or obligation contained herein, exceed the highest lawful rate permissible under the applicable usury law. If, from any circumstances whatsoever, fulfillment of any provision hereof or any other agreement relating to this Promissory Note, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if from any circumstance, Holder shall ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance due hereunder as of the date such amount is received or deemed to be received by Holder and not to the payment of interest, or if such amount exceeds the unpaid balance of principal, such excess shall be refunded to the Maker hereof. This provision is material to both Maker and Holder and shall control every other provision of all agreements between the Maker and Holder. 8.8 Governing Law. This Promissory Note shall be construed and enforced in accordance with the laws of the State of California, except to the extent that Federal laws preempt the laws of the State of California, and all persons and entities in any manner obligated under this Promissory Note consent to the jurisdiction of any Federal or State Court within the State of California having proper venue and also consent to service of process by any means authorized by California or Federal law. This Promissory Note shall be deemed made and entered into in San Diego County. 8.9 Captions. The captions used herein are for convenience only and do not in any way limit or amplify the terms and provisions hereof. [Remainder of This Page Intentionally Left Blank] 4 5 IN WITNESS WHEREOF, Maker has caused this Promissory Note to be duly executed and acknowledged as of the day and year first above written. MAKER PLEASE NOTE: UPON THE OCCURRENCE OF A DEFAULT OR ACCELERATION UNDER THIS PROMISSORY NOTE, THE PLEDGE AGREEMENT AND CALIFORNIA PROCEDURE PERMIT THE PLEDGEE UNDER THE PLEDGE AGREEMENT TO SELL THE PLEDGED SHARES AT A SALE HELD WITHOUT SUPERVISION BY ANY COURT AFTER EXPIRATION OF A PERIOD PRESCRIBED BY LAW. UNLESS YOU PROVIDE AN ADDRESS FOR THE GIVING OF NOTICE, YOU MAY NOT BE ENTITLED TO NOTICE OF THE COMMENCEMENT OF SALE PROCEEDINGS. HOLDER URGES YOU TO GIVE PROMPT NOTICE OF ANY CHANGE IN YOUR ADDRESS SO THAT YOU MAY RECEIVE PROMPTLY ANY NOTICE GIVEN PURSUANT TO THIS PROMISSORY NOTE AND THE PLEDGE AGREEMENT. MAKER: By: /s/ Peter Myers ------------------------------------- Peter Myers Address: 5350 Toscana Way, Apt. 402E San Diego, California 92122 ACKNOWLEDGED AND AGREED: COMBICHEM, INC. By: /s/ Gail Erwin ---------------------------------- Name: Gail Erwin -------------------------------- Its: Controller --------------------------------- DO NOT DESTROY THIS ORIGINAL PROMISSORY NOTE: When paid, said original Promissory Note, together with the Pledge Agreement and similar security securing same, must be surrendered to Maker for cancellation and retention. 5 6 STOCK PLEDGE AGREEMENT In consideration of the loan which CombiChem, Inc., a Delaware corporation ("Company") having its principal offices in San Diego, California, has on this day extended to the undersigned Peter Myers, a married man, and as security for the payment of that certain promissory note ("Note") in the principal sum of One Hundred Fifty Thousand Dollars ($150,000) payable to the Company on order which the undersigned has on this day executed to evidence such loan, the undersigned hereby grants the Company a security interest in, and assigns, transfers to and pledges with the Company, the following securities and other property: (i) 350,000 shares of the Company's voting Class A Common Stock which were acquired April 25, 1995, and which have on this day been delivered to and deposited with the Company, accompanied by a properly endorsed Assignment Separate from Certificate in the form attached hereto as Exhibit A; (ii) any and all new, additional or different securities of the Company which are acquired by the undersigned pursuant to the undersigned's employment by the Company, by or through bonuses, warrants, options or otherwise from the date of this agreement until such time as all of the undersigned obligations under the Note are fulfilled; (iii) any and all new, additional or different securities subsequently distributed with respect to the shares identified in (i) and (ii) above which are to be delivered to and deposited with the Company pursuant to the requirements of Paragraph 3 of this Stock Pledge Agreement; (iv) any and all other property and money which is delivered to or comes into the possession of the Company pursuant to the terms and provisions of this Stock Pledge Agreement; and (v) the proceeds of any sale, exchange or disposition of the property and securities described in (i), (ii), (iii) or (iv) above. All securities, property and money so assigned, transferred to and pledged with the Company shall be herein referred to as the "Collateral." The Company shall hold the Collateral in accordance with the following terms and provisions: 1. Warranties. The undersigned hereby warrants that the undersigned is the owner of the Collateral and has the right to pledge the Collateral and that the Collateral is free from liens, adverse claims and other security interests. 2. Rights and Powers. The Company may, without obligation to do so, exercise at any time and from time to time one or more of the following rights and powers with respect to any or all of the Collateral: (a) accept in its discretion, but subject to the limitations of Paragraph 7(d) of this Stock Pledge Agreement, other property of the undersigned in exchange for all or part of the Collateral and release Collateral to the undersigned to the extent necessary to effect such exchange, and in such event the money, property or securities received in the exchange shall be held by the Company as substitute security for the Note and all other indebtedness secured hereunder; 1 7 (b) perform such acts as are necessary to preserve and protect the Collateral and the rights, powers and remedies granted with respect to such Collateral by this Stock Pledge Agreement; and (c) transfer record ownership of the Collateral to the Company or its nominee and receive, endorse and give receipt for, or collect by legal proceedings or otherwise, dividends or other distributions made or paid with respect to the Collateral, provided and only if there exists at the time an outstanding event of default under Paragraph 8 of this Stock Pledge Agreement. Expenses reasonably incurred in the exercise of such rights and powers shall be payable by the undersigned and form part of the indebtedness secured hereunder as provided in Paragraph 10. So long as there exists no event of default under Paragraph 8 of this Stock Pledge Agreement, the undersigned may exercise all shareholder voting rights and be entitled to receive any cash distribution with respect to the Collateral. Accordingly, until such time as an event of default occurs under this Stock Pledge Agreement, all proxy statements and other stockholder materials which the Company receives with respect to the Collateral shall be delivered to the undersigned at the address indicated below. 3. Duty to Deliver. Any new, additional or different securities which may now or hereafter become distributable with respect to the Collateral by reason of a stock dividend, stock split or reclassification of the capital stock of the Company or by reason of a merger, consolidation or other reorganization affecting the capital structure of the Company shall, upon receipt by the undersigned, be promptly delivered to and deposited with the Company as part of the Collateral hereunder. Such securities shall be accompanied by one or more properly endorsed stock power assignments. 4. Care of Collateral. The Company shall exercise reasonable care in the custody and preservation of the Collateral, but shall have no obligation to initiate any action with respect to, or otherwise inform the undersigned of, any conversion, call, exchange right, preemption right, subscription right, purchase offer or other right or privilege relating to or affecting the Collateral. The Company shall have no duty to preserve the rights of the undersigned against adverse claims or to protect the Collateral against the possibility of a decline in market value. The Company shall not be obligated to take any action with respect to the Collateral requested by the undersigned unless the request is made in writing and the Company determines that the requested action will not unreasonably jeopardize the value of the Collateral as security for the Note and other indebtedness secured hereunder. The Company may at any time deliver all or part of the Collateral to the undersigned, and the receipt thereof by the undersigned shall constitute a complete and full acquittance for the Collateral so delivered. The Company shall accordingly be discharged from any further liability or responsibility for the delivered Collateral. 5. Payment of Taxes and Other Charges. The undersigned shall pay, prior to the delinquency date, all taxes, liens, assessments and other charges against the Collateral, and in the event of the undersigned's failure to do so, the Company may at its election pay any or all of such taxes and charges without contesting the validity or legality thereof. The payments so made shall become part of the indebtedness secured hereunder and shall bear interest at the same rate as provided for in the Note. 6. Transfer of Collateral. In connection with the transfer or assignment of the Note (whether by negotiation, discount or otherwise), the Company may transfer all or any part of the Collateral, and the transferee shall thereupon succeed to all the rights, powers and remedies granted the 2 8 Company hereunder with respect to the Collateral so transferred. Upon such transfer, the Company shall be fully discharged from all liability and responsibility for the transferred Collateral. 7. Release of Collateral. (a) Upon the payment in full of all indebtedness secured hereunder, the shares of the Company's common stock which have on this date been pledged and deposited hereunder shall be released from pledge and returned to the undersigned. (b) There shall also be released at the same time as any Collateral is released pursuant to subpart (a) of this Section 7, any additional Collateral which may hereafter be pledged and deposited with the Company, pursuant to the requirements of Paragraph 3, with respect to the shares of the Company's common stock to be released. (c) Within thirty (30) days after prepayment by the undersigned (or payment upon acceleration) of the entire unpaid principal balance and all accrued interest and other amounts due under the Note, the Company shall release and return to the undersigned all shares of the Company's Common Stock and other Collateral at the time held hereunder. (d) In the event the Collateral becomes in whole or in part comprised of "margin security" within the meaning of Section 207.2(d) of Regulation G of the Federal Reserve Board, then no Collateral shall thereafter be released or substituted under this Agreement unless: (i) the amount of indebtedness at the time secured hereunder is not in excess of the maximum loan value (as determined pursuant to the provisions of Regulation G) of the Collateral remaining after the release or substitution is effected; or (ii) the amount of indebtedness secured hereunder is reduced by at least the amount by which the maximum loan value of the new Collateral (if any) deposited hereunder is less than the maximum loan value of the Collateral to be released or otherwise withdrawn. 8. Events of Default. The occurrence of one or more of the following events shall constitute an event of default under this Agreement: (a) failure of the undersigned to pay principal and/or interest when due under the Note, or any other default under the Note; (b) the occurrence of any Event of Acceleration specified in the Note; (c) the failure of the undersigned to perform any obligation imposed upon the undersigned by reason of this Stock Pledge Agreement; or (d) the breach of any warranty of the undersigned contained in this Stock Pledge Agreement. Upon the occurrence of any such event of default, the Company may, at its election, declare the Note and all other indebtedness secured hereunder to become immediately due and payable and may exercise any or all of the rights and remedies granted to a secured party under the provisions of the California Uniform Commercial Code (as now or hereafter in effect), including (without limitation) the power to dispose of the Collateral by public or private sale or to accept the Collateral in full payment of the Note and all other indebtedness secured hereunder. Any proceeds 3 9 realized from the disposition of the Collateral pursuant to the power of sale hereby granted to the Company shall first be applied to the payment of expenses incurred by the Company in connection with the disposition, and the balance shall be applied to the payment of the Note and any other indebtedness secured hereunder in such order of application as the Company shall deem appropriate. Any surplus proceeds shall be paid over to the undersigned. In the event such proceeds prove insufficient to satisfy all indebtedness secured hereunder, then the undersigned shall be personally liable for the deficiency. 9. Other Remedies. The rights, powers and remedies granted to the Company pursuant to the provisions of this Stock Pledge Agreement shall be in addition to all rights, powers and remedies granted to the Company under any statute or rule of law. Any forbearance, failure or delay by the Company in exercising any right, power or remedy under this Stock Pledge Agreement shall not be deemed to be waiver of such right, power or remedy. Any single or partial exercise of any right, power or remedy under this Stock Pledge Agreement shall not preclude the further exercise thereof, and every right, power and remedy of the Company under this Stock Pledge Agreement shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument executed by the Company. 10. Costs and Expenses. All costs and expenses (including reasonable attorneys' fees) incurred by the Company in the exercise or enforcement of any right, power or remedy granted it under this Stock Pledge Agreement shall become part of the indebtedness secured hereunder and shall be payable immediately by the undersigned, without demand, and until paid shall bear interest at the rate provided for in the Note. 11. Applicable Law. This Stock Pledge Agreement shall be governed by and construed in accordance with the laws of the State of California and shall be binding upon the executors, administrators, heirs, successors and assigns of the undersigned. 12. Severability. If any provision of this Stock Pledge Agreement is held to be invalid under applicable law, then such provision shall be ineffective only to the extent of such invalidity, and neither the remainder of such provision nor any other provisions of this Agreement shall be affected thereby. 13. Joint and Several Obligations. The obligations of the undersigned in this Stock Pledge Agreement shall be joint and several obligations. 14. Time is of Essence. It is agreed that time is of the essence as to every term, condition and provision of this Stock Pledge Agreement. 15. Deposits and Notice. Any deposits from the undersigned to the Company or from the Company to the undersigned ("Deposits") shall be given by personal delivery to the other party or by United States certified or registered mail, postage prepaid, return receipt requested, addressed to the party for whom it is intended at its address as set forth below. Any notice, request, demand, consent, approval or other communication ("Notice") provided or permitted under this Stock Pledge Agreement, or any other instrument contemplated hereby, shall be in writing, signed by the party giving such Notice, and shall be given by personal delivery to the other party or by United States certified or registered mail, postage prepaid, return receipt requested, addressed to the party for whom it is intended at its address as set forth below. Unless otherwise specified, Deposits and Notice shall be deemed given when received, but if delivery is not accepted, on the earlier of the date delivery is refused or the third day after same is deposited in any official United States Postal Depository. Any party from time to time, by Notice to the other parties given as above set forth, may change its address for purposes of receipt of any such deposits or communication. 4 10 IN WITNESS WHEREOF, this Agreement has been executed by the undersigned, effective as of the 5th day of September, 1995. /s/ Peter Myers ----------------------------------------- Peter Myers Address: 5350 Toscana Way, Apt. 402E San Diego, California 92122 Agreed to and Accepted by: CombiChem, Inc., a Delaware corporation, By: /s/ Gail Erwin -------------------------------- Printed Name: Gail Erwin ---------------------- Title: Controller ----------------------------- Address: 9050 Camino Santa Fe San Diego, California 92127 5 11 EXHIBIT A ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, I, Peter Myers, a married man, hereby sell, assign and transfer unto CombiChem, Inc., a California corporation (the "Company"), 350,000 shares of the Capital Stock of the Company, standing in my name on the books of said Company represented by Certificate(s) No. 29 herewith and do hereby irrevocably constitute and appoint Gail Erwin, Controller of the Company, to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. Dated: September 5, 1995 Signature: /s/ Peter Myers ---------------------------------------- Peter Myers This Assignment Separate from Certificate was executed in conjunction with the terms of a Stock Pledge Agreement between the above assignor and CombiChem, Inc., dated September 5, 1995, and shall not be used in any manner except as provided therein. 12 EXHIBIT B CONSENT OF SPOUSE I, Judith Myers, spouse of Peter Myers, have read approved and agreed to the terms the foregoing Stock Pledge Agreement ("Agreement"). In consideration of the Company's loan of funds as set forth in the Note, I hereby appoint my spouse as my attorney-in-fact with respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares is sued pursuant thereto under the community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement or thereafter. Dated: September 5, 1995 /s/ Judith Myers ---------------------------------------- Judith Myers EX-10.25 29 EXHIBIT 10.25 1 EXHIBIT 10.25 PROMISSORY NOTE SECURED BY DEED OF TRUST $66,125.00 August 30, 1996 San Diego, California FOR VALUE RECEIVED, the undersigned ("Maker"), promises to pay to COMBICHEM, INC., a California corporation ("Holder"), or order, at 9050 Camino Santa Fe, San Diego, California 92127, or at such other place as Holder may from time to time designate, the principal sum of Sixty-Six Thousand One Hundred Twenty-Five Dollars ($66,125.00) (the "Loan"), in the following amounts and on the terms set forth below. 1. Payment. Principal and interest, if any, shall be due and payable as follows: 1.1 Payment of Principal. Principal payments of Twenty-Two Thousand Dollars ($22,000.00) each shall be made on or before each anniversary of the date of this Note set forth above. The entire remaining balance of principal and interest on delinquent payments, if any, shall be due and payable in full on the Maturity Date set forth in Section 3 below; provided, however, that if any payment of principal or interest on this Promissory Note shall become due on a Saturday, Sunday or a public holiday under the laws of the State of California, such payment shall be due on the next succeeding business day. Except as otherwise provided herein or by applicable law, all payments shall be applied first to any unpaid enforcement or collection costs, then to accrued but unpaid interest, and the remainder shall be applied to principal. This Promissory Note may be prepaid, in whole or in part, at any time without premium or penalty. Partial prepayments shall not postpone or delay the date of any subsequent payment. 1.2 Form of Payment. All amounts payable under this Promissory Note are payable in lawful money of the United States. Any payment shall be deemed made upon receipt by Payee. Checks will constitute payment when collected. All payments of principal and interest made hereunder shall be evidenced by the internal records of Holder, which shall be prima facie evidence of such matters. 2. Maturity Date. The outstanding principal balance of this Promissory Note and all unpaid interest accrued hereunder shall be due and payable no later than the "Maturity Date." The Maturity Date shall be the earlier to occur of: (a) August 28, 1999; (b) the expiration of the 30-day period following the date the Maker ceases for any reason to remain in the employment on a regular and full-time basis by CombiChem, Inc., a California corporation ("Corporation"); (c) the date on which Corporation completes the consummation of any corporate transaction in which (i) more than fifty percent (50%) of the outstanding shares of the common stock of Holder are acquired by a single purchaser or by a group of purchasers acting in concert; (ii) all or substantially all of the assets of Holder are acquired by a single purchaser or a group of purchasers acting in concert; (d) that date on which Corporation merges with or into another organization; or (e) the date of transfer or further encumbrance by Borrower of (or any other person holding fee title to) that certain real property described in Exhibit A to that certain Deed of Trust securing this Note (the "Real Property"). Maker hereby covenants that Maker shall provide Holder with written notice of any sale or transfer of the Real Property at least ten (10) days prior to the date Maker transfers title to the Real Property. Upon payment in full of all principal and accrued interest payable hereunder, this Promissory Note shall be surrendered to Maker for cancellation. 3. Security. This Promissory Note is secured by a deed of trust ("Deed of Trust") encumbering certain real property located at 5440 Caminito Exquisito in the City of San Diego, State of California. 4. Late Payment. Maker agrees that if for any reason it fails to make any of the payments required herein, including the amount due at the Maturity Date, within five (5) days after the due date for the payment, Holder shall be 2 entitled to damages for the detriment caused by such failure. Maker recognizes that as a result of any payment required herein becoming overdue, Holder will incur additional expenses in servicing the Loan not otherwise contemplated hereunder, including, but not limited to, processing and accounting charges, the loss to Holder of the use of money due and frustration to Holder in meeting its other financial commitments. Maker further recognizes that the exact amount of these additional expenses will be extremely difficult and impractical to ascertain and agrees to pay an amount equal to five percent (5%) of such overdue amounts ("Late Charge"). In order to compensate Holder for its additional expenses resulting from Maker's continued failure to repay overdue amounts, one (1) additional Late Charge shall be incurred by Maker every three (3) months, if the overdue amount remains unpaid to Holder. Maker agrees to pay Holder such additional Late Charge on the aggregate of all unpaid and overdue amounts, including all previously incurred Late Charges. Acceptance of any Late Charge by Holder shall in no event constitute a waiver of Maker's default with respect to such overdue amount nor prevent Holder from exercising any other rights and remedies granted under this Promissory Note or the Deed of Trust. 5. Default. 5.1 Events of Default. At the election of the Holder, in its sole discretion, the entire unpaid principal balance of this Note, together with all accrued and unpaid interest, shall become immediately due and payable prior to the specified due date of this Note upon the occurrence of one or more of the following events: (a) Maker dies; or (b) Maker shall default in the performance of any of its obligations hereunder, including, without limitation, payment of the balance due at the Maturity Date, when due; or (c) a default occurs under the Deed of Trust or under any obligation secured thereby; (d) or any transfer (except as contemplated by the Deed of Trust), conveyance, hypothecation, assignment or encumbrance, whether voluntarily or involuntarily or by operation of law or otherwise, of any beneficial interest in the Real Property or any portion thereof, other than as expressly permitted by Holder in writing; or (e) the making by the Maker of any assignment for the benefit of creditors or the voluntary appointment (at the request or with the consent of the Maker) of a receiver, custodian, liquidator or trustee in bankruptcy of any of the Maker's property, or the filing by the Maker of a petition in bankruptcy or other similar proceeding under any law for relief of debtors; or (f) the filing by or against the Maker of any petition in bankruptcy or any petition for relief under the provisions of the Federal bankruptcy act or any other state or Federal law for the relief of debtors and the continuation of such petition without dismissal for a period of sixty (60) days or more, the appointment of a receiver or trustee to take possession of any property or assets of the Maker or the attachment of or execution against any property or assets of the Maker (each of the foregoing is sometimes referred to hereinafter as an "Event of Default"). Upon any of the foregoing Events of Default, the Holder of this Promissory Note, at its election, may declare immediately due and payable the entire balance of principal and interest thereon together with all cost of collection, including, but not limited to, reasonable attorneys' fees and costs and all expenses incurred in connection with the protection of or realization on any security for this Promissory Note. At the option of Holder and upon five (5) days written notice of or demand and in the event of any default or acceleration under this Promissory Note, interest thereafter on the unpaid principal balance, accrued Late Charges and additional costs incurred shall be payable at the lesser of ten percent (10%) per annum, compounded quarterly, or the maximum rate permitted by law. The Maker further understands that this is a full recourse promissory note. 5.2 No Waiver. In the event of any default or acceleration under this Promissory Note, Maker agrees that the acceptance by Holder of any performance which does not strictly comply with the terms of this Promissory Note shall not be deemed to be a waiver of Holder's rights. No previous waiver and no failure or delay by Holder in acting with respect to the terms of this Promissory Note or the Deed of Trust shall constitute a waiver of any breach, default or failure of condition under this Promissory Note or the Deed of Trust or the obligations secured thereby. A waiver of any term of this Promissory Note or the Deed of Trust or of any of the obligations secured thereby must be made in writing and shall be limited to the express written terms of such waiver. 2 3 6. Employment. For purposes of applying the provisions of this Note under Section 6.1(b) above, the Maker shall be considered to remain in the Corporation's employment for so long as the Maker renders services as a director or full-time employee of the Corporation, any successor entity or one or more of the Corporation's fifty percent (50%)-or-more owned (directly or indirectly) subsidiaries. HOWEVER, NOTHING IN THIS PROMISSORY NOTE SHALL CONFER UPON THE MAKER ANY RIGHT TO CONTINUE IN THE EMPLOYMENT OF THE CORPORATION (OR ITS SUCCESSORS OR SUBSIDIARIES) FOR ANY PERIOD OF SPECIFIC DURATION OR INTERFERE WITH OR OTHERWISE RESTRICT IN ANY WAY THE RIGHTS OF THE CORPORATION OR THE MAKER, WHICH RIGHTS ARE HEREBY EXPRESSLY RESERVED BY EACH, TO TERMINATE MAKER'S EMPLOYMENT AT ANY TIME FOR ANY REASON WHATSOEVER, WITH OR WITHOUT CAUSE. 7. General Provisions. 7.1 Attorneys' Fees. If any attorney is engaged by Holder to enforce or construe any provision of this Promissory Note or the Deed of Trust, or as a consequence of any default or Event of Default, with or without the filing of any legal action or proceeding, then Maker shall immediately pay on demand all attorneys' fees and all other costs and expenses incurred by Holder, including, without limitation, post-judgment attorneys' fees and costs, together with interest thereon from the date of such demand until paid at the rate of interest applicable to the principal owing hereunder as if such unpaid attorneys' fees and costs had been added to the principal. Maker shall also reimburse Holder for all attorneys' fees and all other costs and expenses reasonably incurred in the representation of Holder in any bankruptcy, insolvency, reorganization or other debtor-relief proceeding of or relating to Maker or any security for this Promissory Note. 7.2 Binding on Successors. The terms of this Promissory Note shall apply to, inure to the benefit of and bind all parties hereto, their heirs, legatees, devisees, administrators, executors, personal representatives, successors and assigns. The term "Holder" shall include the Holder as well as any other person or entity to whom this Promissory Note or any interest in this Promissory Note is conveyed, transferred or assigned. 7.3 No Modifications. This Promissory Note shall not be changed or modified orally, but in each instance only by an instrument in writing signed by the party against which enforcement of such change, modification or waiver is sought. 7.4 Severability. Every provision hereof is intended to be severable. If any provision of this Promissory Note is determined by a court of competent jurisdiction to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall not affect the other provisions hereof, which shall remain binding and enforceable. 7.5 Time is of Essence. It is agreed that time is of the essence as to every term, condition and provision of this Promissory Note. 7.6 Waiver of Presentment, Protest and Demand. No person or entity shall be a mere accommodation maker, but each shall be primarily and directly liable hereunder. Maker and any endorsers or guarantors hereof severally waive: presentment; demand; notice of dishonor; notice of default or delinquency; notice of acceleration; notice of protest, demand and nonpayment; notice of costs, expenses or losses and interest thereon; notice of Late Charges; and diligence in taking any action to collect any sums owing under this Promissory Note or in proceeding against any of the rights or interests in or to properties securing payment of this Promissory Note. Maker and any endorsers or guarantors hereof further expressly agree that this Promissory Note, or any payment hereunder may be extended from time to time, and consent to the acceptance of security or the release of any security from this Promissory Note, including any real property or other types of security, all without in any way affecting the liability of Maker and any endorsers of guarantors hereof. All payments made under this Promissory Note shall be made without any right of offset by the Maker. 3 4 7.7 Applicable Usury Laws. All agreements between Maker and Holder, now existing or hereafter arising, are expressly limited so that in no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof, acceleration of maturity of the unpaid principal balance hereof, or otherwise, shall the amount paid or agreed to be paid to Holder for the use, forbearance or detention of the money to be loaned hereunder or otherwise, or for the performance or payment of any covenant or obligation contained herein, exceed the highest lawful rate permissible under the applicable usury law. If, from any circumstances whatsoever, fulfillment of any provision hereof or any other agreement relating to this Promissory Note, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity, and if from any circumstance, Holder shall ever receive as interest an amount which would exceed the highest lawful rate, such amount which would be excessive interest shall be applied to the reduction of the unpaid principal balance due hereunder as of the date such amount is received or deemed to be received by Holder and not to the payment of interest, or if such amount exceeds the unpaid balance of principal, such excess shall be refunded to the Maker hereof. This provision is material to both Maker and Holder and shall control every other provision of all agreements between the Maker and Holder. 7.8 Governing Law. This Promissory Note shall be construed and enforced in accordance with the laws of the State of California, except to the extent that Federal laws preempt the laws of the State of California, and all persons and entities in any manner obligated under this Promissory Note consent to the jurisdiction of any Federal or State Court within the State of California having proper venue and also consent to service of process by any means authorized by California or Federal law. This Promissory Note shall be deemed made and entered into in San Diego County. 7.9 Captions. The captions used herein are for convenience only and do not in any way limit or amplify the terms and provisions hereof. [Remainder of This Page Intentionally Left Blank] 4 5 IN WITNESS WHEREOF, Maker has caused this Promissory Note to be duly executed and acknowledged as of the day and year first above written. MAKER PLEASE NOTE: UPON THE OCCURRENCE OF A DEFAULT OR ACCELERATION UNDER THIS PROMISSORY NOTE, THE DEED OF TRUST AND CALIFORNIA PROCEDURE PERMIT THE TRUSTEE UNDER THE DEED OF TRUST TO SELL THE REAL PROPERTY AT A SALE HELD WITHOUT SUPERVISION BY ANY COURT AFTER EXPIRATION OF A PERIOD PRESCRIBED BY LAW. UNLESS YOU PROVIDE AN ADDRESS FOR THE GIVING OF NOTICE, YOU MAY NOT BE ENTITLED TO NOTICE OF THE COMMENCEMENT OF SALE PROCEEDINGS. HOLDER URGES YOU TO GIVE PROMPT NOTICE OF ANY CHANGE IN YOUR ADDRESS SO THAT YOU MAY RECEIVE PROMPTLY ANY NOTICE GIVEN PURSUANT TO THIS PROMISSORY NOTE AND THE DEED OF TRUST. MAKER: By: /s/ John Saunders ------------------------------------- John Saunders Address: 5440 Caminito Exquisito San Diego, California 92130 DO NOT DESTROY THIS ORIGINAL PROMISSORY NOTE: When paid, said original Promissory Note, together with the Deed of Trust and similar security securing same, must be surrendered to Maker for cancellation and retention. 5 EX-10.26 30 EXHIBIT 10.26 1 EXHIBIT 10.26 PROMISSORY NOTE $96,000.00 February 24, 1997 San Diego, California VICENTE ANIDO, JR., an individual resident of the State of California ("Obligor"), for value received, hereby promises to pay to the order of COMBICHEM, INC., a California corporation, or holder ("Payee"), in lawful money of the United States at 9050 Camino Santa Fe, San Diego, California 92121, the principal sum of Ninety-Six Thousand Dollars ($96,000.00). Unpaid principal of this Note shall bear no interest. All unpaid principal under this Note shall be due and payable on the earlier of (a) February 23, 2002; (b) the expiration of the 60-day period following the date the Obligor ceases for any reason to remain in the Service of Payee; (c) the expiration of the 190-day period following the date on which Payee completes an initial public offering of shares of its common stock; or (d) the date on which Payee completes the consummation of any corporate transaction in which (i) more than fifty percent (50%) of the outstanding shares of common stock of Payee are acquired by a single purchaser or by a group of purchasers acting in concert in a merger or any other transaction and Obligor receives cash or publicly traded securities in connection therewith; or (ii) all or substantially all of the assets of Payee are acquired by a single purchaser or a group of purchasers acting in concert and Obligor receives cash or publicly traded securities in connection therewith. Nothing in this Note shall confer upon the Obligor any right to continue in the Service of Payee (or its successors or subsidiaries) for any period of specific duration. Upon payment in full of all principal payable hereunder, this Note shall be surrendered to Obligor for cancellation. This Note may be transferred only upon surrender of the original Note for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form satisfactory to Obligor. Thereupon, a new note for like principal amount and interest will be issued to, and registered in the name of, the transferee. Principal is payable only to the registered holder of this Note. Obligor waives presentment, demand for performance, notice of nonperformance, protest, notice of protest, and notice of dishonor. No delay on the part of Payee in exercising any right hereunder shall operate as a waiver of such right under this Note. 2 This Note is being delivered in and shall be construed in accordance with the laws of the State of California. If the indebtedness represented by this Note or any part thereof is collected at law or in equity or in bankruptcy, receivership or other judicial proceedings or if this Note is placed in the hands of attorneys for collection after default, Obligor agrees to pay, in addition to the principal and interest payable hereon, reasonable attorneys' fees and costs incurred by Payee. Any payment shall be deemed made upon receipt by Payee. This Note is the Note referred to in that certain Pledge Agreement ("Pledge Agreement") dated the same date as this Note between Obligor and Payee, and is subject to the terms thereof. The Pledge Agreement, among other things, contains provisions for acceleration of the maturity of this Note upon the happening of any one or more of the stated "Events of Default" set forth therein. OBLIGOR UNDERSTANDS THAT THIS IS A FULL RECOURSE PROMISSORY NOTE AND THAT PAYEE MAY, AT ITS OPTION, PROCEED AGAINST ASSETS OF THE UNDERSIGNED OTHER THAN ANY COLLATERAL UNDER THE PLEDGE AGREEMENT IN THE EVENT OF DEFAULT. OBLIGOR ACKNOWLEDGES AND UNDERSTANDS THAT THE RULE 144 HOLDING PERIOD MAY BE TOLLED WITH RESPECT TO ANY COMMON STOCK PLEDGED PURSUANT TO THE PLEDGE AGREEMENT. Obligor acknowledges and agrees that he has been provided the opportunity and encouraged to consult with counsel of Obligor's own choosing with respect to this Agreement and that Brobeck, Phleger & Harrison LLP solely represents the interests of the Payee. IN WITNESS WHEREOF, Obligor has duly executed this Note, as of the date first above written. /s/ Vicente Anido ---------------------------------------- Vicente Anido, Jr. -2- EX-10.27 31 EXHIBIT 10.27 1 EXHIBIT 10.27 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT ("Agreement"), dated as of February 24, 1997, is made between CombiChem, Inc., a California corporation ("Secured Party"), and Vicente Anido, Jr., an individual resident of the State of California ("Pledgor"). Pledgor and Secured Party hereby agree as follows: SECTION 1. Definitions; Interpretation. (a) As used in this Agreement, the following terms shall have the following meanings: "Event of Default" has the meaning set forth in Section 6. "Lien" means any mortgage, deed of trust, pledge, security interest, assignment, deposit arrangement, charge or encumbrance, lien, or other type of preferential arrangement. "Note" means that certain Promissory Note of even date herewith made by Pledgor in favor of Secured Party, as amended, modified, renewed, extended or replaced from time to time. "Obligations" means the indebtedness, liabilities and other obligations of Pledgor to Secured Party under or in connection with this Agreement and the Note, including, without limitation, all unpaid principal of the Note, and all other amounts payable by Pledgor to Secured Party thereunder or in connection therewith, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined. "Person" means an individual, corporation, partnership, joint venture, trust, unincorporated organization, governmental agency or authority, or any other entity of whatever nature. "Pledged Collateral" has the meaning set forth in Section 2(a). "Pledged Shares" means the Shares of the Secured Party's Common Stock described in Schedule 1. "Service" shall have the meaning set forth in Section 5.1 of that certain Restricted Stock Purchase Agreement dated the date of this Agreement between Secured Party and Pledgor. 2 "UCC" means the Uniform Commercial Code as the same may, from time to time, be in effect in the State of California; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the security interest in any Pledged Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of California, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection or priority and for purposes of definitions related to such provisions. (b) All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Note. (c) Where applicable and except as otherwise defined herein or in the Note, terms used in this Agreement shall have the meanings assigned to them in the UCC. (d) In this Agreement, (i) the meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined; and (ii) the captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. SECTION 2. Security Interest. (a) As security for the payment and performance of the Obligations, Pledgor hereby pledges, assigns, transfers, hypothecates and sets over to Secured Party, and hereby grants to Secured Party a security interest in, all of Pledgor's right, title and interest in, to and under (i) the Pledged Shares, (ii) all rights, interests and claims with respect to the Pledged Shares, (iii) any securities, property, interest and other payments and distributions issued as an addition to, in redemption of, in renewal or exchange for, in substitution or upon conversion of, or otherwise on account of, the Pledged Shares, and (iv) all cash and non-cash proceeds of the Pledged Shares and any of the foregoing, in each case from time to time received or receivable by, or otherwise paid or distributed to, the Pledgor, and whether presently existing or owned or hereafter arising or acquired and wherever located (collectively, the "Pledged Collateral"). (b) Pledgor hereby agrees to deliver to or for the account of Secured Party, at the address and to the Person or Persons to be designated by Secured Party, the Pledged Shares, which shall be accompanied by duly executed assignments in blank, in form attached hereto as Exhibit A. (c) If Pledgor shall become entitled to receive or shall receive any securities or other instruments or obligations as an addition to, in redemption of, in renewal or exchange for, in substitution or upon conversion of, or otherwise on account of, the Pledged Shares, Pledgor shall accept the foregoing as Secured Party's agent. Upon accepting any of the foregoing, Pledgor shall promptly send a notification to Secured Party with a description thereof, which notification shall be deemed to be a Schedule to this Agreement and may be attached hereto. 2. 3 (d) Pledgor shall execute and deliver to Secured Party concurrently with the execution of this Agreement, and at any time and from time to time thereafter, all financing statements, assignments, continuation financing statements, termination statements, endorsements, and other documents and instruments, in a form reasonably satisfactory to Secured Party, and take all other action, as Secured Party may reasonably request, to effect a transfer of a perfected first priority security interest in and pledge of the Pledged Collateral to Secured Party pursuant to the UCC and to continue perfected, maintain the priority of or provide notice of the security interest of Secured Party in the Pledged Collateral and to accomplish the purposes of this Agreement. (e) Pledgor agrees that this Agreement shall create a continuing security interest in and pledge of the Pledged Collateral which shall remain in effect until terminated in accordance with Section 16. (f) Pledgor hereby consents to any assignment of the Pledged Collateral and the security interests related thereto. After any such assignment, such assignee shall be the Secured Party hereunder and shall possess all the rights of Secured Party hereunder. SECTION 3. Representations and Warranties. Pledgor represents and warrants to Secured Party that: (a) Pledgor has all requisite power and authority to execute, deliver and perform its obligations under this Agreement. (b) This Agreement constitutes the legal, valid and binding obligation of Pledgor, enforceable against Pledgor in accordance with its terms. (c) No authorization, consent, approval, license, exemption of, or filing or registration with, any governmental authority or agency, or approval or consent of any other Person, is required for the due execution, delivery or performance by Pledgor of this Agreement. (d) Pledgor is the legal and beneficial owner of the Pledged Shares subject to no Lien except for the pledge and security interest created by this Agreement. (e) Pledgor's residence is located at the address set forth on the signature pages hereof. SECTION 4. Covenants. So long as any of the Obligations remain unsatisfied, Pledgor agrees that: (a) Pledgor will, at its own expense, appear in and defend any action, suit or proceeding which purports to affect its title to, or right or interest in, the Pledged Collateral or the security interest of Secured Party therein and the pledge to Secured Party thereof. 3. 4 (b) Pledgor will not surrender or lose possession of (other than to Secured Party), exchange, sell, convey, transfer, assign or otherwise dispose of or transfer the Pledged Collateral or any right, title or interest therein. (c) Pledgor will not create, incur or permit to exist any Liens upon or with respect to the Pledged Collateral, other than the security interest of and pledge to Secured Party created by this Agreement. SECTION 5. Payments on the Pledged Collateral. (a) Unless an Event of Default shall have occurred, Pledgor shall be entitled to receive and retain for its own account any dividends in respect of the Pledged Collateral; provided that Secured Party shall receive, and Pledgor shall not be entitled to receive, any cash paid, payable or otherwise distributed, and any other property, instruments, securities or obligations, in redemption of, or in exchange for or in substitution of, any Pledged Collateral. Upon and after the occurrence and during the continuance of any Event of Default, Secured Party shall be entitled to receive all distributions and payments of any nature with respect to the Pledged Collateral, to be held by Secured Party as part of the Pledged Collateral. (b) Distributions and other payments and property which are received by Pledgor but which it is not entitled to retain as a result of the operation of subsection (a) shall be held in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor, and be forthwith paid over or delivered to Secured Party in the same form as so received. SECTION 6. Events of Default. Any of the following events which shall occur and be continuing shall constitute an "Event of Default": (a) Pledgor shall fail to pay when due any amount payable hereunder or under the Note and such failure shall continue for five (5) days. (b) Any representation or warranty by Pledgor under or in connection with this Agreement or the Note shall prove to have been incorrect in any material respect when made or deemed made. (c) Pledgor shall fail to perform or observe in any material respect any other term, covenant or agreement contained in this Agreement or the Note on its part to be performed or observed and any such failure shall remain unremedied for a period of fifteen (15) days from the occurrence thereof. (d) Any impairment in the priority of Secured Party's Lien hereunder. (e) Any levy upon, seizure or attachment of any of the Pledged Collateral. (f) Pledgor's Service with Secured Party shall be terminated for any reason. 4. 5 SECTION 7. Remedies. (a) Upon the occurrence and during the continuance of any Event of Default, Secured Party may declare any of the Obligations to be immediately due and payable and shall have, in addition to all other rights and remedies granted to it in this Agreement or the Note, all rights and remedies of a secured party under the UCC and other applicable laws. Without limiting the generality of the foregoing, Pledgor agrees that any item of the Pledged Collateral may be sold for cash or on credit or for future delivery without assumption of any credit risk, in any number of lots at the same or different times, at any exchange, brokers' board or elsewhere, by public or private sale, and at such times and on such terms, as Secured Party shall determine; provided, however, that Pledgor shall be credited with the net proceeds of sale only when such proceeds are finally collected by Secured Party in cash. Pledgor hereby agrees that the sending of notice by ordinary mail, postage prepaid, to the address of Pledgor set forth herein, of the place and time of any public sale or of the time after which any private sale or other intended disposition is to be made, shall be deemed reasonable notice thereof if such notice is sent ten (10) days prior to the date of such sale or other disposition or the date on or after which such sale or other disposition may occur; provided that Secured Party may provide Pledgor shorter notice or no notice, to the extent permitted by the UCC or other applicable law. The Pledgor and the Secured Party agree that such notice constitutes "notice" within the meaning of Section 9504(3) of the UCC. Pledgor recognizes that Secured Party may be unable to make a public sale of any or all of the Pledged Collateral, by reason of prohibitions contained in applicable securities laws or otherwise, and expressly agrees that a private sale to a restricted group of purchasers for investment and not with a view to any distribution thereof shall be considered a commercially reasonable sale. Secured Party shall have the right upon any such public sale, and, to the extent permitted by law, upon any such private sale, to purchase the whole or any part of the Pledged Collateral so sold, free of any right or equity of redemption, which right or equity of redemption Pledgor hereby releases to the extent permitted by law. (b) For the purpose of enabling Secured Party to exercise its rights under this Section 7 or otherwise in connection with this Agreement, Pledgor hereby constitutes and appoints Secured Party its true and lawful attorney, with full power of substitution, in the name of the Pledgor, the Secured Party or otherwise, for the sole use and benefit of the Secured Party, but at the expense of the Pledgor, to the extent permitted by law to exercise, at any time and from time to time while an Event of Default has occurred and is continuing, all or any of the following powers with respect to all or any of the Pledged Collateral: (i) to demand, sue for, collect, receive and give acquittance for any and all monies due or to become due upon or by virtue thereof; (ii) to settle, compromise, compound, prosecute or defend any action or proceeding with respect thereto; (iii) to sell, transfer, assign or otherwise deal in or with the same or the proceeds or avails thereof, as fully and effectually as if the Secured Party were the absolute owner thereof; and (iv) to extend the time of payment of any or all thereof and to make any allowance and other adjustments with reference thereto. 5. 6 (c) The cash proceeds actually received from the sale or other disposition or collection of Pledged Collateral, and any other amounts received in respect of the Pledged Collateral the application of which is not otherwise provided for herein, shall be applied first, to the payment of the reasonable costs and expenses of Secured Party in exercising or enforcing its rights hereunder and in collecting or attempting to collect any of the Pledged Collateral, and to the payment of all other amounts payable to Secured Party pursuant to Section 10; and second, to the payment of the Obligations. Any surplus thereof which exists after payment and performance in full of the Obligations shall be promptly paid over to Pledgor or otherwise disposed of in accordance with the UCC or other applicable law. Pledgor shall remain liable to Secured Party for any deficiency which exists after any sale or other disposition or collection of Pledged Collateral. SECTION 8. Notices. All notices or other communications hereunder shall be in writing and mailed, sent or delivered (including by facsimile transmission) to the respective parties hereto at or to their respective addresses or facsimile numbers set forth below their names on the signature pages hereof, or at or to such other address or facsimile number as shall be designated by any party in a written notice to the other parties hereto. All such notices and other communications shall be effective: (i) if delivered by hand, when delivered; (ii) if sent by mail, upon the earlier of the date of receipt or five business days after deposit in the mail, first class; and (iii) if sent by facsimile transmission, when sent. SECTION 9. No Waiver; Cumulative Remedies. No failure on the part of Secured Party to exercise, and no delay in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights and remedies under this Agreement are cumulative and not exclusive of any rights, remedies, powers and privileges that may otherwise be available to Secured Party. SECTION 10. Costs and Expenses. Pledgor agrees to pay on demand all costs and expenses of Secured Party, including reasonable attorneys' fees, in connection with the enforcement of this agreement, and the sale or collection of, or other realization upon, any of the Pledged Collateral. SECTION 11. Binding Effect. Subject to the restrictions on assignment contained in the Note, this Agreement shall be binding upon, inure to the benefit of and be enforceable by Pledgor, Secured Party and their respective successors and assigns. SECTION 12. Governing Law. This Agreement shall be governed by, and construed in accordance with, the law of the State of California, except as required by mandatory provisions of law and to the extent the validity or perfection of the security interests hereunder, or the remedies hereunder, in respect of any Pledged Collateral are governed by the law of a jurisdiction other than California. 6. 7 SECTION 13. Entire Agreement; Amendment. This Agreement contains the entire agreement of the parties with respect to the subject matter hereof and shall not be amended except by the written agreement of the parties. SECTION 14. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Agreement shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of this Agreement, or the validity or effectiveness of such provision in any other jurisdiction. SECTION 15. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. SECTION 16. Termination. Upon payment and performance in full of all Obligations, this Agreement shall terminate and Secured Party shall promptly redeliver to Pledgor any of the Pledged Collateral in Secured Party's possession and shall execute and deliver to Pledgor such documents and instruments reasonably requested by Pledgor as shall be necessary to evidence termination of all security interests given by Pledgor to Secured Party hereunder; provided, however, that the obligations of Pledgor under Section 10 shall survive such termination. SECTION 17. Conflicts. In the event of any conflict or inconsistency between this Agreement and the Note, the terms of this Agreement shall control. SECTION 18. Separate Counsel. Pledgor acknowledges and agrees that he has been provided the opportunity and encouraged to consult with counsel of Pledgor's own choosing with respect to this Agreement and that Brobeck, Phleger & Harrison LLP solely represents the interests of the Secured Party. SECTION 19. No Employment or Service Contract. Nothing in this Agreement shall confer upon Pledgor any right to continue to serve as an employee of Secured Party for any period of specific duration. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 7. 8 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. SECURED PARTY COMBICHEM, INC. By: /s/ Peter Myers ------------------------------------- Title: C.O.O. C.S.O. ---------------------------------- 9050 Camino Santa Fe San Diego, CA 92121 Fax: (619) 530-9998 PLEDGOR /s/ Vicente Anido ----------------------------------------- Vicente Anido, Jr. 1621 Bayside Drive Corona Del Mar, CA 92625 Fax: (714) 759-8116 [SIGNATURE PAGE TO PLEDGE AGREEMENT] 9 SCHEDULE 1 PLEDGED SHARES Shares of CombiChem, Inc.
Name and Address Common Stock Date of Issuance ---------------- ------------ ---------------- Vicente Anido, Jr. 1,280,000 February 24, 1997 1621 Bayside Drive Corona Del Mar, CA 92625
S-1 10 EXHIBIT A ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, I, Vicente Anido, Jr., hereby sell, assign and transfer unto _______________________ ___________________________ (_______) shares of the Common Stock of CombiChem, Inc., standing in my name on the books of said corporation represented by Certificate No. 36 herewith and do hereby irrevocably constitute and appoint attorney to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. Dated: ______________________ Signature: /s/ Vicente Anido This Assignment Separate from Certificate was executed in conjunction with the terms of a Pledge Agreement between the above assignor and CombiChem, Inc., dated as of February 24, 1997. A-1 11 EXHIBIT B CONSENT OF SPOUSE I, Patricia A. Anido, the spouse of Vicente Anido, Jr., the Pledgor in the foregoing Pledge Agreement between my husband and CombiChem, Inc. (the "Company"), acknowledge that I have reviewed the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I have any rights in the Agreement or any shares of the Company. Effective: February 24, 1997 /s/ Patricia A. Anido ----------------------------------------- [Signature] Patricia A. Anido ----------------------------------------- [Print Name] B-1 EX-10.28 32 EXHIBIT 10.28 1 EXHIBIT 10.28 PROMISSORY NOTE SECURED BY STOCK PLEDGE AGREEMENT $23,043.77 San Diego, California June 6, 1997 For value received, the undersigned ("Maker") hereby promises to pay to CombiChem, Inc., a California corporation ("Holder"), at 9050 Camino Santa Fe, San Diego, California, the principal amount of Twenty Three Thousand Forty Three and 77/100 Dollars ($23,043.77), together with interest thereon from the date hereof. Interest shall accrue at the rate of 6.14% per annum, compounded semi-annually, provided that in no event shall the rate of interest be less than the minimum rate required to avoid the imputation of interest under the Internal Revenue Code. The performance of the Maker's obligations under this Promissory Note are secured by the pledge of shares of the common stock of Holder (the "Pledged Shares") pursuant to the terms of that certain Stock Pledge Agreement entered into by and between the Maker and the Holder of even date herewith (the "Stock Pledge Agreement"). All principal shall be due and payable in equal annual installments on the first, second, third and fourth anniversaries of the date of this Promissory Note, upon which fourth anniversary all then unpaid principal and accrued interest shall be due and payable in full. Payment shall be made in lawful tender of the United States. Except as otherwise provided herein or by applicable law, all payments shall be applied first to any unpaid enforcement or collection costs, then to accrued interest but unpaid interest, and the remainder shall be applied to principal. This Promissory Note may be prepaid in whole or in part at any time without premium or penalty. Partial prepayments shall not postpone or delay the date of any subsequent payment. Each of the following events shall constitute a default ("Default") under this Promissory Note: (a) The Maker's failure to pay when due any payment of principal or interest due under this Note; (b) The Maker's failure to perform or observe any of the terms or conditions of the Stock Pledge Agreement; 2 (c) The Maker's failure to perform or observe any of the terms or conditions of the Stock Purchase Agreement between Maker and Holder of even date herewith; (d) The making by the Maker of any assignment for the benefit of creditors or the voluntary appointment (at the request or with the consent of the Maker) of a receiver, custodian, liquidator or trustee in bankruptcy of any of the Maker's property, or the filing by the Maker of a petition in bankruptcy or other similar proceeding under any law for relief of debtors; or (e) The filing against the Maker of a petition in bankruptcy or other similar proceeding under any law for relief of debtors, or the involuntary appointment of a receiver, custodian, liquidator or trustee in bankruptcy of the property of the Maker, if such petition or appointment is not vacated or discharged within sixty (60) calendar days after the filing or making thereof. Upon the occurrence of any Default, the Holder may, at its option, declare the entire unpaid principal balance and accrued interest to be immediately due and payable, without notice to the Maker. The Maker further understands that this is a full recourse promissory note and that the Holder may, at its option, proceed against assets of the undersigned other than the Pledged Stock (as defined in the Stock Pledge Agreement) under the Stock Pledge Agreement in the event of a Default. The Maker promises to pay all costs and expenses (including reasonable attorneys' fees) incurred by the Holder in the exercise or enforcement of any right under this Promissory Note. The acceptance by Holder of any payment hereunder which is less than the payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to accelerate at that time or any subsequent time or nullify any prior acceleration without the express written consent of Holder except as and to the extent otherwise provided by law. The Maker waives diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Promissory Note, and expressly agrees that this Promissory Note, or any payment hereunder, may be extended from time to time and consents to the acceptance of security, if any, or the release of security, if any, from this Promissory Note, all without in any way affecting the liability of the Maker. The right to plead any and all statutes of limitations as a defense to any demand on this Promissory Note or any agreement to the same, or any instrument securing this Promissory Note, or any and all obligations or liabilities arising out of or in connection with this Promissory Note, is expressly waived by the Maker to the fullest extent permitted by law. 3 No extension of the time for the payment of this Promissory Note, or any installment hereof, made by agreement by the Holder hereof with any person now or hereafter liable for the payment of this Promissory Note shall affect the original liability under the terms of this Promissory Note by the Maker even if it is not a party to such agreement. If Holder should institute collection efforts, of any nature whatsoever, to attempt to collect any and all amounts due hereunder upon the default of the Maker, the Maker shall be liable to pay to Holder immediately and without demand all reasonable costs and expenses of collection incurred by Holder, including, without limitation, reasonable attorneys' fees, whether suit or other action or proceeding be instituted and specifically including, without limitation, collection efforts that may be made through a bankruptcy court, and all such sums shall be fully secured by the Pledged Stock pursuant to the Stock Pledge Agreement. The provisions of this Promissory Note are intended by the Maker to be severable and divisible and the invalidity or unenforceability of a provision or term herein shall not invalidate or render unenforceable the remainder of this Promissory Note or any part thereof. This Promissory Note shall be governed by and construed and interpreted in accordance with the internal laws of the State of California. THE "MAKER" /s/ Vicente Anido ----------------------------------------- [INSERT NAME OF MAKER] -3- EX-10.29 33 EXHIBIT 10.29 1 EXHIBIT 10.29 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT ("Agreement") is entered into as of June 6, 1997, by and between CombiChem, Inc., a California corporation ("Secured Party"), and Vicente Anido ("Pledgor"), with reference to the following facts: A. Contemporaneously with the execution of this Agreement and pursuant to a certain Stock Purchase Agreement, dated the date hereof, by and between Pledgor and Secured Party (the "Stock Purchase Agreement"), Pledgor is delivering a Promissory Note Secured by Stock Pledge Agreement to Secured Party in the original principal amount of Twenty Three Thousand Forty Three and 77/100 Dollars ($23,043.77) (the "Promissory Note"), in order to evidence a loan which Secured Party has agreed to make to Pledgor in connection with Pledgor's purchase of shares of Secured Party's Common Stock pursuant to the Stock Purchase Agreement. B. Pledgor desires to secure its obligations under the Promissory Note by granting Secured Party a first priority security interest in the shares of Common Stock of Secured Party being acquired by Pledgor under the Stock Purchase Agreement, and any and all new or additional securities of Secured Party subsequently acquired by or distributed to Pledgor. NOW, THEREFORE, in consideration of the mutual terms, covenants and conditions contained herein, the parties hereby agree as follows: 1. Security. The term "Pledged Stock" shall mean Four Hundred Nine Thousand Six Hundred Sixty Seven (409,667) shares of Common Stock of Secured Party registered in the name of Pledgor, together with all certificates, options, rights or other securities of Secured Party acquired by Pledgor including any distributions issued as an addition to, in substitution or in exchange for, or on account of, any such shares, and all proceeds of the foregoing, as further described in and subject to the provisions of Section 4 below, now or hereafter owned or acquired by Pledgor, and any and all new or additional securities subsequently distributed to Pledgor by Secured Party. 2. Grant of Security Interest. As security for full and timely payment, performance and satisfaction of the Obligations (as defined in Section 3 below), Pledgor hereby grants to Secured Party a first priority security interest in the Pledged Stock. Upon the execution hereof, the Pledged Stock and any related stock powers shall be deposited with Secured Party. 3. Obligations of Pledgor. As used herein, the term "Obligations" shall mean: (a) all of Pledgor's obligations, covenants and agreements under the Promissory Note and (b) all of Pledgor's obligations, covenants and agreements under this Agreement. 2 4. Pledged Stock. In the event Pledgor shall become entitled to receive or shall receive, in connection with any of the Pledged Stock, (a) any stock certificate, including any certificate representing a stock dividend or any certificate in connection with any increase or reduction of capital, reclassification, merger, consolidation, sale of assets, combination of shares, stock split or spin-off, (b) any option, warrant or right, whether as an addition to or in substitution of any of the Pledged Stock, or otherwise, (c) any dividend or distribution payable in property, including securities issued as a dividend on the Pledged Stock, or (d) any other distributions of any kind whatsoever, Pledgor shall accept same as encumbered by the security interest created hereby, and shall deliver same forthwith to Secured Party in the exact form received, including as appropriate, Pledgor's endorsement or appropriate stock powers duly executed in blank, to be held by Secured Party, as a part of the Pledged Stock, subject to the terms hereof. 5. Representations and Warranties of Pledgor. Pledgor warrants and represents to Secured Party that (a) Pledgor is the legal and beneficial owner of all of the Pledged Stock, (b) all of the shares of the Pledged Stock are owned by Pledgor free of any pledge, mortgage, lien or security interest of any kind, except as created hereby, or under the Stock Purchase Agreement, and (c) upon execution and delivery by Pledgor of this Agreement and upon delivery of the Pledged Stock to Secured Party, this Agreement shall create a valid and perfected first priority security interest in the Pledged Stock, and the proceeds thereof, subject to no prior security interest. 6. Transfer of Interests. Pledgor hereby covenants that, until such time as the Obligations have been fully paid, performed and satisfied, Pledgor will not sell, convey or otherwise dispose of any of the Pledged Stock or any interest therein, or create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever in or with respect to any of the Pledged Stock, or the proceeds thereof, other than the security interest created hereby. 7. Default. As used herein, the term "Default" shall mean the failure of full and timely payment or performance and satisfaction of any of the Obligations. 8. Rights of Secured Party. Upon the occurrence of a Default, Secured Party may, at its option, do any one or more of the following: (a) declare all indebtedness of Pledgor to Secured Party to be immediately due and payable, whereupon all unpaid principal and interest on the Promissory Note shall become and be immediately due and payable; (b) exercise any and all of the rights and remedies of a secured party as provided for by the California Commercial Code; (c) proceed by an action or actions at law or in equity to recover the indebtedness secured hereby or to foreclose this Agreement and sell the collateral, or any portion thereof, pursuant to a judgment or decree of a court or courts of competent jurisdiction; (d) proceed immediately to have any or all of the Pledged Stock registered in Secured Party's name or in the name of a nominee; (e) exercise all voting rights with respect to the Pledged Stock and all other corporate rights, including any rights of conversion, exchange, subscription or other rights, privileges or options pertaining thereto as if Secured Party were the absolute owner thereof, including, without limitation, the right to exchange any or all of the 3 Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other readjustment of Pledgor; (f) enforce one or more remedies hereunder, successively or concurrently; and (g) proceed immediately to dispose of and realize upon the Pledged Stock, or any part thereof, and in connection therewith, sell or otherwise dispose of and deliver the Pledged Stock, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of Secured Party's offices or elsewhere, at such prices and on such terms as Secured Party may deem best, for cash or on credit, or for future delivery without assumption of any credit risk, with the right of Secured Party or any purchaser to purchase at any such sale either the whole or any part of the Pledged Stock (in connection with any such sale or disposition, Secured Party need not give more than thirty (30) calendar days notice of the time and place of any public sale or of the time after which a private sale may take place, which notice Pledgor hereby acknowledges to be reasonable). 9. Proceeds. The proceeds of any disposition of all or any part of the Pledged Stock, as provided in Section 8 above, shall be applied as follows: (a) first, to the costs and expenses incurred in connection therewith or incidental thereto, including reasonable attorneys' fees and legal expenses; (b) second, to the satisfaction of the Obligations; (c) third, to the payment of any other amounts required by applicable law; and (d) fourth, to Pledgor to the extent of any surplus remaining. 10. Private Sale. Pledgor recognizes and acknowledges that Secured Party may be unable to effect a public sale of all or a part of the Pledged Stock and may elect to resort to one or more private sales to purchasers who will be obligated to agree, among other things, to acquire the Pledged Stock for their own account, for investment, and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those of public sales, and agrees that such private sales shall be deemed to have been made in a commercially reasonable manner and that Secured Party has no obligation to delay sale of any Pledged Stock to permit Pledgor to register it for public sale under the Securities Act of 1933, as amended. 11. Release of Pledged Stock. Upon the execution hereof, Pledgor shall deliver to Secured Party, the stock certificate or certificates representing the Pledged Stock, including Pledgor's endorsement thereon or appropriate stock powers duly executed in blank, to be held in accordance with the terms of this Agreement. Provided all indebtedness secured hereunder shall at the time have been paid in full, the Pledged Stock shall be released from pledge and returned to Pledgor upon the full and final satisfaction of Pledgor's obligations under the Promissory Note and this Agreement, subject to any continuing escrow requirements under the Stock Purchase Agreement. 12. Partial Release of Pledged Stock. Provided that there are no unpaid enforcement or collection costs due and payable under the terms of the Promissory Note, and provided further that Pledgor executes such documents, agreements and certificates as may reasonably be required by Holder in order to effectuate the partial release contemplated herein, a portion of the shares of Pledged Stock shall be released from 4 pledge and returned to Pledgor upon receipt of a prepayment under the Promissory Note, subject to any continuing escrow requirements under the Stock Purchase Agreement. In the event such release is permitted pursuant to any such escrow, the number of shares of Pledged Stock to be released from pledge and returned to Pledgor shall be that number of shares of Pledged Stock which bears the same ratio to the total number of shares of Pledged Stock as the amount of prepayment under the Promissory Note bears to the total of the principal and accrued interest then payable under the Promissory Note, provided that no fractional shares shall be released from pledge under this paragraph 12. 13. Irrevocable Proxy and Power of Attorney. To further secure Obligations hereunder, Pledgor grants the irrevocable proxy and power of attorney set forth in this Section 13 to Secured Party for the purposes set forth below. Pledgor hereby irrevocably constitutes and appoints Secured Party, any person or entity who becomes the successor to Secured Party, or any officer of Secured Party or such successor (the "Attorneys"), and each of the foregoing acting singly, in each case with full power of substitution and resubstitution, the true and lawful agent and attorney-in-fact of such Purchaser, with full power and authority in such Purchaser's name, place and stead, to vote the shares of Pledged Stock in favor of any corporate transaction which has otherwise been approved by the shareholders of Secured Party and in which (i) more than fifty percent (50%) of the outstanding shares of the common stock of Secured Party will be acquired by a single purchaser or a group of purchasers acting in concert, (ii) all or substantially all of the assets of Holder are acquired by a single purchaser or group of purchasers, and (iii) Holder merges with or into another organization; and to do and perform each and every other act and thing whatsoever requisite, necessary or appropriate to be done to carry out the purposes of this paragraph 13 as fully to all intents and purposes as Pledgor might or could do if personally present, Pledgor hereby ratifying all that such attorney-in-fact shall do or cause to be done by these presents. It is expressly understood and intended by Pledgor that the irrevocable proxy and power of attorney granted in this paragraph 13 is coupled with an interest, is irrevocable and may be delegated by said Attorneys. The irrevocable proxy and power of attorney shall survive the death or incapacity of such Pledgor and shall continue until all Pledged Shares have been released from pledge hereunder. 14. Voting Rights. Except as set forth in Paragraph 13 hereof, so long as no Default shall have occurred or exist under this Agreement, Secured Party shall have no voting rights with respect to the Pledged Stock. 15. Written Notices. Pledgor agrees to promptly deliver to Secured Party a copy of all written notices received by Pledgor with respect to the Pledged Stock. 16. Performance by Pledgor. Upon full payment and performance of all of the Obligations by Pledgor and upon payment of all additional costs and expenses provided herein, this Agreement shall terminate and Secured Party shall deliver or caused to be delivered to Pledgor (except as set forth in the Stock Purchase Agreement or otherwise), 5 such of the Pledged Stock as shall not have been sold or otherwise disposed of pursuant to this Agreement. 17. Remedies. The rights and remedies provided herein are cumulative and are in addition to, and not exclusive of, any rights or remedies provided in other instruments and agreements between Secured Party and Pledgor, or as provided by law, including, without limitation, the rights and remedies of a secured party under the California Commercial Code. 18. Successors and Assigns. This Agreement is binding upon and shall inure to the benefit of the parties hereto, and their successors and assigns. 19. Governing Law. This Agreement has been accepted and is performable within San Diego County, California. This Agreement shall be governed and construed in accordance with the internal laws of the State of California. 20. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be deemed to have been given on the third business day after mailing within the United States, postage prepaid, by registered or certified mail, return receipt requested, addressed as follows: If to Pledgor: Vicente Anido, Jr. c/o CombiChem, Inc. 9050 Camino Santa Fe San Diego, CA 92121 If to Secured Party: CombiChem, Inc. 9050 Camino Santa Fe San Diego, CA 92121 Each of the parties hereto shall be entitled to specify a different address by giving written notice to the other parties hereto in accordance with this Section 20. 21. Entire Agreement. This Agreement and any other agreement expressly referred to herein supersedes any and all other agreements, either oral or in writing, among the parties hereto, with respect to the subject matter hereof and contains all of the covenants and agreements among the parties with respect to the subject matter hereof. 22. Waiver; Modification. No term or condition of this Agreement shall be deemed to have been waived nor shall there be any estoppel to enforce any provision of this Agreement except by written instrument of the party charged with such waiver or estoppel. No amendment or modification of this Agreement shall be deemed effective unless and until executed in writing by all of the parties hereto. 6 23. Severability. All agreements and covenants contained herein are severable and in the event that any of them shall be held to be invalid by any court of competent jurisdiction, this Pledge Agreement shall be interpreted as if such invalid agreements or covenants were not contained herein. 24. Delay; Time of Essence. No failure or delay by a party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, and no single or partial exercise thereof shall preclude any other or further exercise or the exercise of any other right, power, or privilege. Time is of the essence of each and every provision of this Agreement of which time is an element. 25. Attorneys' Fees. In any action or proceeding brought to enforce or interpret any provision of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. PLEDGOR: SECURED PARTY: CombiChem, Inc. /s/ Vicente Anido By: Peter L. Myer - ------------------------------- ------------------------------------- [Name of Pledgor] Its: C.S.O./C.O.O. ------------------------------------ 7 SECTION 83(b) TAX ELECTION This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2. (1) The taxpayer who will perform services is: Name: Address: c/o CombiChem, Inc. 9050 Camino Santa Fe San Diego, California 92121 Social Security No.: (2) The property with respect to which the election is being made is shares of the Common Stock of CombiChem, Inc. (the "Company"). (3) The property was issued on _________________, 199_. (4) The taxable year in which the election is being made is the calendar year 199_. (5) The property is subject to a repurchase right pursuant to which the Company has the right to acquire the property at the original purchase price if for any reason taxpayer's service with the issuer is terminated. The repurchase right will lapse with respect to the shares in _____________, _______. (6) The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $____ per share. (7) The amount paid for such property is $____ per share. (8) A copy of this statement was furnished to the Company for whom taxpayer will render the services underlying the transfer of property. (9) This statement is executed as of: _____________________, 199_. - ---------------------------------- ---------------------------------- Taxpayer Spouse (if any) THIS FORM MUST BE FILED AT THE INTERNAL REVENUE SERVICE CENTER WHERE TAXPAYER FILES HIS/HER FEDERAL INCOME TAX RETURNS. FILING MUST BE MADE WITHIN 30 DAYS AFTER THE EXECUTION DATE OF THE SHAREHOLDER AGREEMENT. EX-10.30 34 EXHIBIT 10.30 1 EXHIBIT 10.30 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of March 1, 1995, by and between CombiChem, Inc., a California corporation ("Employer") and Peter Myers, Ph.D. NOW, THEREFORE, the parties agree as follows: 1. Employment. Employer hereby engages Employee, and Employee hereby accepts such engagement, upon the terms and conditions set forth herein. 2. Duties. During the term of this Agreement, Employee shall be employed as the Employer's Executive Vice President of Research and Chief Scientific Officer reporting to the President and Chief Executive Officer. Employee shall faithfully and diligently perform the duties customarily performed by persons in the position or positions for which Employee is engaged together with such other reasonable and appropriate duties as Employer shall designate from time to time. Employee shall devote Employee's full business time and effort to the rendition of such services and to the performance of such duties. As a full-time employee of Employer, Employee shall not be entitled to provide consulting services or other businesses or scientific services to any other party, without the prior written consent of Employer. Employee shall be elected to Employer's Board of Directors (the "Board") prior to its next regularly scheduled meeting. 3. Compensation. 3.1 Base Salary. During the term of this Agreement, as compensation for the proper and satisfactory performance of all duties to be performed by Employee hereunder, Employer shall pay to Employee err annual salary of two hundred and ten thousand dollars ($210,000) payable in accordance with Employee's standard payroll practices, less required deductions for state and federal withholding tax, Social Security and all other employee taxes and payroll deductions. Employee's base salary shall be reviewed annually by the President & Chief Executive Officer and may be increased or decreased in the sole discretion of the President & Chief Executive Officer. 3.2 Bonuses. 3.2.1 Signing Bonus. Employee shall receive a signing bonus of $26,250 towards the purchase of CombiChem stock plus gross up for taxes as described in Section 5.5. 2 3.2.2 Performance Bonus. At the beginning of each fiscal year Employer and Employee shall reach mutually agreed upon scientific and business objectives for Employer for its upcoming fiscal year which shall be set forth in writing and approved by the Board. At the end of each such fiscal year, the Board shall determine, in its reasonable discretion, the size and amount of Employee's performance bonus, if any, up to a maximum of twenty-five percent (25%) of Employee's base salary during the prior fiscal year (the "Annual Performance Bonus"). The Annual Performance Bonus shall be paid to Employee within sixty (60) days following Employer's fiscal year end. The first Annual Performance Bonus shall be (i) based on Employer's 1995 fiscal year achievements; (ii) paid to Employee by March 1, 1996; (iii) guaranteed to be not less than twenty-six thousand, two hundred and fifty dollars ($26,250); provided that employee's employment has continued through the end of 1995. No other Annual Performance bonus shall have any guaranteed minimum payment. 4. Term of Employment. 4.1 Period of Employment. The Employee's period of employment by Employer pursuant to this Agreement shall commence on March 1, 1995 ("Commencement Date") and end upon the date the employment relationship is terminated pursuant to Section 4.2 or 4.3 (the "Period of Employment"). 4.2 Termination at Will. Although Employer and Employee anticipate a long and mutually rewarding employment relationship, either party may terminate this Agreement, without cause, upon 14 days prior written notice delivered to the other party. It is expressly understood and agreed that the employment for any specified term, and without any agreement for employment for so long as Employee performs satisfactorily. 4.3 Termination for Cause. Employer may immediately terminate this employment relationship "for cause" upon written notice to Employee. the purposes herein, "for cause" shall be limited to the following; (i) Employee's intentional violation of any rule or policy of Employer or its subsidiaries (a "Violation") which, after written notice of a Violation, Employee fails to correct within twenty (20) days of receipt of such notice from the Board; (ii) any material failure by Employee to comply with any reasonable directive of the Board which, after receiving written notice to do so, Employee fails to comply within twenty (20) days of receipt of such notice from the Board; (iii) Employee's willful misconduct concerning any material responsibility reasonably assigned to Employee; (iv) without obtaining the prior consent of the Board, Employee's active and intentional performance of services for any other cooperation or person which competes with Employer or its subsidiaries while he is employed by Employer or its subsidiaries; (v) the Board reasonably determines that Employee has stolen or embezzled wither funds or property of Employer; (vi) Employee's conviction by a court of competent jurisdiction of a felony (other than a traffic or moving violation) involving moral turpitude or dishonesty; (vii) Employee's intentional or grossly negligent conduct or violation of law which results in either an improper personal benefit to Employee for a material injury to Employer; (viii) employees's failure to 2 3 perform a material duty given to him by the company's Chief Executive Officer or under this agreement if such failure was continued for thirty (30) days after employee has been notified in writing by the company of his failure to perform; or (ix) the death or disability of Employee. 4.4 Obligations Upon Termination. 4.4.1 Survival of Obligations. The parties' obligations under Section 4.4.2, 4.5, 6, 7, 9.7 and 9.8, shall survive the termination of this Agreement. 4.4.2 Return of Materials at Termination. Upon termination of the Period of Employment, the Employee will promptly deliver to Employer all materials, property, documents, data, and other information belonging to Employer or containing Employer's Trade Secrets or other Protected Information. The Employee shall not take any materials, property, documents or other information, or any reproduction or excerpt thereof, belonging to Employer or containing any Trade Secrets or other Protected information of Employer. 4.4.3 Resignation. Upon termination of the Period of Employment, the Employee shall be deemed to have resigned from any and all offices then held with the Employer. 4.5 Compensation to Employee on Termination by Employer. In the event that Employer terminates Employee pursuant to Paragraph 4.2, Employee shall be entitled to (1) receive an aggregate severance benefit of nine months of Employee's then current base salary (Section 3.1) and benefits (Section 5) which shall be paid by Employer to employee in nine (9) equal monthly installments until fully paid or until Employee has secured full-time employment and (2) a nine (9) month credit towards any vesting schedule or vesting requirements contained in any stock option or stock purchase agreements then existing between the Employee and Employer. In the event the Employee elects to receive and does receive any of the benefits set for in this Section 4.5, Employee agrees that such payments shall constitute Employee's sole and exclusive rights and entitlements in connection with Employee's employment by Employer, the termination of such employment and any and all matters related to or arising in connection with such employment, and agrees that his acceptance of any such payments shall release Employee and any and all affiliated persons and entities (including all directors, officers, employees and agents) from any claims that Employee may otherwise have or assert in connection with such matters. If Employee desires to pursue or enforce any such rights, entitlements or remedies that would otherwise be waived and released, then Employee shall refuse any payments provided for pursuant to this Section 4.5. if Employee accepts any such severance payment or payments, he shall be deemed to have agreed to the foregoing exclusivity of rights and waiver of claims. 3 4 5. Benefits 5.1 Health Insurance Vacation and Sick Leave. Employee shall be entitled to Employer's standard benefits package for its executive employees including, but not limited to, family health care insurance, officer and director liability insurance (when obtained for Employer's other officers and directors), vacation and sick leave (the "Fringe Benefits"). Employer agrees to pay Employee's monthly COBRA continuation policy premiums until Employer's own health care program is instituted for Employer's employees. Employer reserves the right to change such benefits from time to time. 5.2 Life Insurance. Provided that Employee is insurable at commercially reasonable rates, Employer shall obtain and maintain, during the term of this Agreement and any extension thereof, a term life insurance policy on the Employee's life in an amount no less than one million five hundred thousand dollars ($1,500,000) (the "Life Insurance Policy"). Employer shall pay the premiums and Employee shall designate the beneficiary of the Life Insurance Policy. 5.3 Accumulation. Employee shall not earn and accumulate unused vacation and sick leave, or other Fringe Benefits, in excess of an unused amount equal to the amount earned for one year. Furthermore, Employee shall not be entitled to receive payments in lieu of said Fringe Benefits, other than for unused vacation earned and accumulated at the time the employment relationship terminates. All unused sick leave and other Fringe Benefits earned during the preceding twelve (12) month period ending on each anniversary of the date of this Agreement shall be forfeited if not used within ninety (90) days following such anniversary date. Notwithstanding the forgoing, if Employer adopts a more favorable accumulation policy for its executives, Employee shall be entitled to the benefits of such more favorable accumulation policy. 5.4 Personal Leave. Employee shall accrue fifteen days of personal leave during each year of his employment. Upon accrual of fifteen days of unused personal leave, no additional personal leave time will accrue until Employee has used some of his accrued personal leave time and has reduced the amount of accrued time below fifteen days. Once Employee has taken personal leave and his accrued personal leave time has dropped below fifteen days, Employee shall begin to accrue personal leave time again (at the rate of fifteen days per year), up to the maximum of fifteen days. Notwithstanding the foregoing, if Employer adopts a more favorable personal leave policy for its executives, Employee shall be entitled to the benefits of such more favorable personal leave policy. 5.5 Housing and Automobile. For the first six (6) months of this Agreement, Employer shall reimburse Employee each month for the first two thousand ($2,000) of Employee's housing and automobile expenses. Any allowance paid pursuant to this Section shall be "grossed up" to cover Employee's local, state and federal income tax liability at Employee's then current marginal tax rate if deemed necessary by the Employer's 4 5 accountants. The tax gross-up payment(s) shall initially be calculated at an assumed effective rate of forty percent (40%) and paid to Employee no later than (I) April 15 of the calendar year following any year Employee has expenses reimbursed pursuant to this Section; and (ii) any date Employee is required to make increased quarterly estimated payments due to Employee's receipt of the allowance payments pursuant to this Section. Once Employee has finalized Employee's federal and state income tax returns, Employee's effective marginal rate shall be calculated and any shortfall or overpayment will be corrected. 5.6 Relocation Expenses. Employer shall reimburse Employee for the following expenses: (1) selling expenses related to sale of Employee's current residence in California including Realtor commissions and closing expenses typically paid by sellers; (2) reasonable moving expenses incurred in the move to San Diego, California; (3) the cost of up to two round trip coach airline tickets from San Francisco to San Diego, California for Employee's spouse for the purpose of looking at houses in the San Diego area during the first six (6) months of this Agreement; and (4) a tax gross-up payment calculated at an assumed effective marginal rate of forty percent (40%) to cover Employee's income tax liability for expenses reimbursed pursuant to subsections (1), (2) and (3) of this Section. Expenses related to subsections (1), (2) and (3) shall be reimbursed within thirty (30) days after Employee submits adequate verification of incurred expenses. The tax gross-up bonus related to subsection (4) shall be paid to Employee no later than (i) April 15 of the calendar year following any year Employee has expenses reimbursed pursuant to this Section; and (ii) any date Employee is required to make increased quarterly estimated payments due to Employee' receipt of reimbursed expenses pursuant to subsection (1), (2) or (3) of this Section. Once Employee has finalized Employee's federal and state income tax returns, Employee's effective marginal rate shall be calculated and any shortfall or overpayment will be corrected. Notwithstanding the foregoing, Employer's maximum aggregate obligations to Employee pursuant to this Section shall not under any circumstances exceed ninety-five thousand dollars ($95,000). 5.7 Home Loan. In the event Employee purchases a residence in San Diego prior to November 15, 1996 and the equity remaining after the sale of Employee's current California residence is less than the down payment for Employee's first San Diego area residential purchase, then Employer shall provide a second mortgage loan to Employee in an amount equal to such shortfall on an interest free basis (the "Home Loan"); provided, however, that the Home Loan shall (i) not be granted to Employee until Employer has obtained additional cash infusions (in the form of equity investment or research and development assistance, but not including any debt instrument financings) totaling a minimum of five million dollars ($5,000,000); (ii) be utilized to purchase the residence, (iii) not exceed one hundred fifty thousand dollars ($150,000), (iv) be repaid in twenty equal quarterly payments (over five (5) years), (v) remain secured by a second trust deed which is recorded at the time the Home Loan is made and (vi) shall remain secured by all of Employer's capital stock then owned or thereafter acquired by Employee until the Home Loan is repaid in full. 5 6 6. Inventions, Trade Secrets and Confidentiality. 6.1 Definitions. 6.1.1 Invention Defined. As used herein "Invention' mean inventions, discoveries, concepts, and ideas, whether patentable or copyrightable or not, including but not limited to processes, methods, formulas, techniques, devices, designs, programs (including computer programs), computer graphics, apparatus, products as well as improvements thereof or know-how related thereto, relating to any present or anticipated business or activities of Employer. 6.1.2 Trade Secrets Defined. As used herein "Trade Secret" means, without limitation, any document or information relating to Employer's products, processes or services, including documents and information relating to Inventions, and to the research, development, engineering or manufacture of Inventions, and to Employer's purchasing, customer or supplier lists and pricing policies, which documents or information have been disclosed to Employee or known to Employee as a consequence of or through Employee's employment by Employer (including documents, information or Inventions conceived, originated, discovered or developed by Employee), which is not generally known in the relevant trade or industry. 6.1.3 Protected Information. As used in this Agreement, the term "Protected Information" shall mean, without limitation, all trade secrets, confidential or proprietary information, and all other knowledge, data, know-how, processes, information, document or materials, owned, developed or possessed by Employer, whether in tangible or intangible form, the confidentiality of which Employer takes reasonable measures to protect, and which pertains in any manner to subjects which include, but are not limited to, Employer's research operations, customers, identities of individual contacts at business entities which are customers or prospective customers, preferences, businesses or habits), business relationships, engineering data or results, specifications, concepts, methods, processes, rates or schedules, customer or vendor information, products (including prices, costs, sales or content), financial information or measures, business methods, future business plans, data bases, computer programs, designs, models, operating procedures, and knowledge of the organization. 6.2 Inventions. 6.2.1 Disclosure. Employee shall disclose promptly to Employer each Invention, whether or not reduced to practice, which is conceived or learned by Employee (either alone or jointly with others) during the term of his employment with Employer. Employee shall disclose in confidence to Employer all patent applications filed by or on behalf of Employee during the term of his employment and for a period of one year thereafter. Any disclosure of and Invention, or any patent application, made within one year 6 7 after termination of employment shall be presumed to relate to an Invention made during Employee's term of employment with Employer, unless Employee clearly proves otherwise. 6.2.2 Employer Property; Assignment. Except as otherwise provided in Section 6.2.3, Employee acknowledges and agrees that all Inventions which are discovered, conceived, developed, made, produced or prepared by Employee (alone or in conjunction with others) during the Duration of Employee's employment with Employer shall be the sole property of Employer. Said property rights of Employer include without limitation all domestic and foreign patent rights, rights of registration or other protection under the patent and copyright laws, and all other rights pertaining to the Inventions. Employee further agrees that all services, products and Inventions that directly or indirectly result from engagement with Employer shall be deemed "works for hire" as that term is defined in Title 17 of the United States Codes and accordingly all rights associated therewith shall vest in Employer. Notwithstanding the foregoing, Employee hereby assigns to Employer all of Employee's right, title and interest in any such services, products and Inventions, in the event any such services, products and Inventions shall be determined not to constitute "works for hire." 6.2.3 Exclusion Notice. The assignment by Employee of Inventions under this Agreement does not apply to any Inventions which are owned or controlled by Employee prior to the commencement of employment of Employee by Employer (all of which are set forth Exhibit "A" hereto). Additionally, Employee is not required to assign an idea or invention where the invention or idea meets all of the following criteria, namely in the invention or idea: (I) was created or conceived without the use of any of Employer's equipment, supplies, facilities, or trade secret information, and (ii) was developed entirely on Employee's own time, and (iii) does not relate to the business of Employer, and (iv) does not relate to Employer's actual or demonstrably anticipated research or development, and (v) does not result from any work performed by Employee for Employer. Employee has reviewed the notification in this Section 6.2.3 and in Exhibit B ("Limited Exclusion Notification") and agrees that Employee's signature on the Limited Exclusion Notification acknowledges receipt of the notification. 6.2.4 Patents and Copyrights: Attorney-in-Fact. Both before and after termination of this Agreement (and with reasonable compensation paid by Employer to Employee after termination), Employee agrees to assist the Employer to apply for, obtain and enforce copyright protection and registration of, the Inventions described in Section 6.2.2 in any and all countries. To that end, Employee shall (at Employer's request) without limitation, testify in any proceeding, and execute any documents and assignments determined to be necessary or convenient for use in applying for, obtaining, registering and enforcing patent or copyright protection involving any of the Inventions. Employee hereby irrevocably appoints Employer, and its duly authorized officers and agents, as Employee's agent and attorney-in-fact to act for and in behalf of Employee in filing all patent applications, 7 8 application for copyright protection and registration, amendments, renewals, and all other appropriate documents in any way related to the Inventions described in Section 6.2.2. 6.3 Trade Secrets. 6.3.1 Acknowledgment of Proprietary Interest. Employee recognizes the proprietary interest of Employer in any Trade Secrets of Employer. Employee acknowledges and agrees that any and all Trade Secrets of Employer, whether developed by Employee alone or in conjunction with others or otherwise, shall be and are the property of Employer. 6.3.2 Covenant Not to Divulge Trade Secrets. Employee acknowledges and agrees that Employer is entitled to prevent the disclosure of Employer's Trade Secrets of Protected Information. As a portion of the consideration for the employment of Employee and for the compensation being paid to Employee by employer, Employee agrees at all times during the term of the employment by Employer and thereafter to hold in strictest confidence, and not to use, disclose or allow to be disclosed to any person, form, or corporation, Employer's Trade Secrets or Protected Information, including Trade Secrets developed by Employee, other than disclosures to persons who have entered into confidentiality agreements with Employer without Employer's express prior written consent. 6.3.3 Confidential Information of Others. Employee represents and warrants that if Employee has any confidential information belonging to others, employee will not use or disclose to Employer any such information or documents. Employee represents that his employment with Employer will not require him to violate any obligation to or confidence with any other party. 6.4 No Adverse Use. Employee will not at any time during the term of employment or thereafter use Employer's Trade Secrets, Protected Information or Inventions in any manner which nay directly or indirectly have an adverse effect upon Employer's business, nor will Employee perform any acts which would tend to reduce Employer's proprietary value in Employer's Trade Secrets, Protected Information or Inventions. 6.5 Remedies Upon Breach. In the event of any breach by Employee of the provision in this Section 6, Employer shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to enjoin Employee form violating any of the terms of this Section 6, to enforce the specific performance by Employee of any of the terms of this Section 6, and to obtain damages, or any of them, but nothing herein contained shall be construed to prevent such remedy or combination of remedies as Employer may elect to invoke. The failure of Employer to promptly institute legal action upon any breach of this Section 6 shall not constitute a waiver of that or any other breach hereof. 8 9 7. Covenant Not to Compete. Employee agrees that, during Employee's employment, Employee will not directly or indirectly compete with Employer in any way, and that Employee will not act as an officer, director, employee, consultant, shareholder, lender, or agent of any other entity which engaged in any business of the same nature as, or in competition with, the business in which Employer is now engaged or in which Employer becomes engaged during the term of Employee's employment, or which is involved in science or technology which is similar to Employer's science or technology. During Employee's employment, and for a period of one (1) year thereafter, Employee shall not directly or indirectly through another entity (i) induce or attempt to induce any employee of Employer or any subsidiary of Employer to leave the employ of Employer or such subsidiary, or in any way interfere with the relationship between the Employer or any subsidiary at any time; (iii) induce or attempt to induce any customer, supplier, licensee, licenser or other party which has a contractual relationship with Employer or its subsidiaries or affiliates to cease doing business with Employer or any such subsidiary (including, without limitation, making any negative statements or communications about Employer or its affiliates). 8. Stock Purchase Rights 8.1 Stock Purchase Agreement. Simultaneous with the execution of this Agreement, Employee and Employer shall enter into a written stock purchase agreement substantially in the form attached hereto as Exhibit C. 9. General Provisions. 9.1 Amendments. No amendment or modification of the terms or conditions of this Agreement shall be valid unless in writing and signed by both parties hereto. There shall be no implied-in-fact contracts modifying the terms of this Agreement. 9.2 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the employment of Employee. This Agreement supersedes all prior agreements, understandings, negotiations and representation with respect to the employment relationship including, but not limited to the Memorandum dated February 23, 1995, containing proposed terms and conditions for hiring Employee. 9.3 Successors and Assigns. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. Employee shall not be entitled to assign any of Employee's rights or obligations under this Agreement. 9.4 Waiver. Either party's failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement. 9 10 9.5 Severable Provisions. The provisions of this Agreement are severable, and if any one or more provisions may be determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 9.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 9.7 Choice of Law. This Agreement shall be governed and construed in accordance with the laws of California. 9.8 Jurisdiction and Venue. In the event that any legal proceedings are commenced in any court with respect to any matter arising under this Agreement, Employer and Employee specifically consent and agree that: a. the courts of the State of California and/or the United States Federal Courts located in the State of California shall have exclusive jurisdiction over each of the parties and such proceedings; and b. the venue of any such action shall be in San Diego County, California and/or the United States District Court for the Southern District of California 10. Employee's Representations. Employee represents and warrants that Employee (i) is free to enter into this Agreement and to perform each of the terms and covenants contained herein, (ii) is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and (iii) will not be in violation or breach of any other agreement by reason of Employee's execution and performance of this Agreement. 10 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates first set forth above. EMPLOYER: COMBICHEM, INC., a California corporation By: /s/ Robert A. Curtis ------------------------------------- Robert A. Curtis, President and CEO EMPLOYEE: PETER MEYERS /s/ Peter L. Myers - ----------------------------------------- (Signature) Address: 3 Los Altos Road ------------------------- Orinda ------------------------- CA 94563 ------------------------- 11 12 EXHIBIT A LIST OF PRIOR INVENTIONS (SECTION 6.2.3) None, other than the following:_________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 12 13 EXHIBIT B LIMITED EXCLUSION NOTIFICATION THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between you and Employer does not require you to assign of offer to assign to Employer invention that you developed entirely on your own time without using Employer's equipment, supplies, facilities or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to Employer's business, or Employer's actual or demonstrably anticipated research or development. (2) Result from any work performed by you for Employer. To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between Employer and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I ACKNOWLEDGE RECEIPT of a copy of this notifications. By: /s/ Peter Myers ------------------------- ------------------------- Dated: 1st March 1995 ------------------------- Witnessed by: /s/ Bobbie J. Bosley - --------------------------------- Bobbie J. Bosley - --------------------------------- (Printed Name of Representative) Dated: 3-1-95 -------------------------- 13 14 EXHIBIT C STOCK PURCHASE AGREEMENT 14 15 IMMEDIATELY EXERCISABLE REPURCHASE RIGHT RIGHT OF FIRST REFUSAL COMBICHEM, INC. STOCK PURCHASE AGREEMENT AGREEMENT made as of this ____ day of ________, 19__, by and among CombiChem, Inc. (the "Corporation"), ______________________, the holder of a stock option (the "Optionee") under the Corporation's 1995 Stock Option/Stock Issuance Plan and _________________, the Optionee's spouse. I. EXERCISE OF OPTION 1.1 EXERCISE. Optionee hereby purchases _________ shares ("Purchased Shares") of the Corporation's common stock ("Common Stock") pursuant to that certain option ("Option") granted Optionee on ______________ ("Grant Dates") to purchase up to _________ shares of the Common Stock ("Total Purchasable Shares") under the Corporation's 1995 Stock Option/Stock Issuance Plan (the "Plan") at an option price of $_____ per share ("Option Price"). 1.2 PAYMENT. Concurrently with the delivery of this Agreement to the Corporate Secretary of the Corporation, Optionee shall pay the Option Price for the Purchased Shares in accordance with the provisions of the agreement between the Corporation and Optionee evidencing the Option (the "Option Agreement") and shall deliver whatever additional documents may be required by the Option Agreement as a condition for exercise, together with a duly-executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares. 1.3 DELIVERY OF CERTIFICATES. The certificates representing the Purchased Shares hereunder shall be held in escrow by the Corporate Secretary of the Corporation in accordance with the provisions of Article VII. 1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation actually exercises its repurchase right, rights of first refusal or special purchase right under this Agreement, Optionee (or any successor in interest) shall have all the rights of a shareholder (including voting and dividend rights) with respect to the Purchased Shares, including the Purchased Shares 16 held in escrow under Article VII, subject, however, to the transfer restrictions of Article IV. II. SECURITIES LAW COMPLIANCE 2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and are accordingly being issued to Optionee in reliance upon the exemption from such registration provided by Rule 701 of the Securities and Exchange Commission for stock issuances under compensatory benefit plans such as the Plan. Optionee hereby acknowledges previous receipt of a copy of the documentation for such Plan in the form of Exhibit C to the Notice of Grant of Stock Option (the "Grant Notice") accompanying the Option Agreement. 2.2 RESTRICTED SECURITIES. A. Optionee hereby confirms that Optionee has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. Accordingly, Optionee hereby acknowledges that Optionee is prepared to hold the Purchased Shares for an indefinite period and that Optionee is aware that Rule 144 of the Securities and Exchange Commission issued under the 1933 Act is not presently available to exempt the sale of the Purchased Shares from the registration requirements of the 1933 Act. B. Upon the expiration of the ninety (90)-day period immediately following the date on which the Corporation first becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Purchased Shares, to the extent vested under Article V, may be sold (without registration) pursuant to the applicable requirements of Rule 144. If Optionee is at the time of such sale an affiliate of the Corporation for purposes of Rule 144 or was such an affiliate during the preceding three (3) months, then the sale must comply with all the requirements of Rule 144 (including the volume limitation on the number of shares sold, the broker/market-maker sale requirement and the requisite notice to the Securities and Exchange Commission); however, the two (2)-year holding period requirement of the Rule will not be applicable. If Optionee is not at the time of the sale an affiliate of the Corporation nor was such an affiliate during the preceding three (3) months, then none of the requirements of Rule 144 (other than the broker/market-maker sale requirement for Purchased Shares held for less than three (3) years following payment in cash of the Option Price therefor) will be applicable to the sale. -2- 17 C. Should the Corporation not become subject to the reporting requirements of the Exchange Act, then Optionee may, provided he/she is not at the time an affiliate of the Corporation (nor was such an affiliate during the preceding three (3) months), sell the Purchased Shares (without registration) pursuant to paragraph (k) of Rule 144 after the Purchased Shares have been held for a period of three (3) years following the payment in cash of the Option Price for such shares. 2.3 DISPOSITION OF SHARES. Optionee hereby agrees that Optionee shall make no disposition of the Purchased Shares (other than a permitted transfer under paragraph 4.1) unless and until there is compliance with all of the following requirements: (a) Optionee shall have notified the Corporation of the proposed disposition and provided a written summary of the terms and conditions of the proposed disposition. (b) Optionee shall have complied with all requirements of this Agreement applicable to the disposition of the Purchased Shares. (c) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that (i) the proposed disposition does not require registration of the Purchased Shares under the 1933 Act or (ii) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or of any exemption from registration available under the 1933 Act (including Rule 144) has been taken. (d) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Purchased Shares pursuant to the provisions of the Commissioner Rules identified in paragraph 2.5. The Corporation shall not be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in violation of the provisions of this Article II nor (ii) to treat as the owner of the Purchased Shares, or otherwise to accord voting or dividend rights to, any transferee to whom the Purchased Shares have been transferred in contravention of this Agreement. 2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions on disposition of the Purchased Shares, the stock -3- 18 certificates for the Purchased Shares will be endorsed with restrictive legends, including one or more of the following legends: (i) "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a 'no action' letter of the Securities and Exchange Commission with respect to such sale or offer, or (c) satisfactory assurances to the Corporation that registration under such Act is not required with respect to such sale or offer." (ii) "The shares represented by this certificate are unvested and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated February 24, 1997 between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). Such agreement grants certain repurchase rights and rights of first refusal to the Corporation (or its assignees) upon the sale, assignment, transfer, encumbrance or other disposition of the Corporation's shares or upon termination of service with the Corporation. The Corporation will upon written request furnish a copy of such agreement to the holder hereof without charge." III. SPECIAL TAX ELECTION 3.1 SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE OF A NON-STATUTORY STOCK OPTION. If the Purchased Shares are acquired hereunder pursuant to the exercise of a non-statutory stock option, as specified in the Grant Notice, then the Optionee understands that under Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), the excess of the fair market value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Option Price paid for such shares will be reportable as ordinary income on such lapse date. For this purpose, the term "forfeiture restrictions" includes the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right provided under Article V of this Agreement. Optionee understands that he/she may elect under Section 83(b) of the Code to be taxed at the time the Purchased Shares are acquired hereunder, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of this Agreement. Even if the fair market value of the Purchased Shares at the date of this Agreement equals the Option Price paid (and thus no tax is payable), the election must be -4- 19 made to avoid adverse tax consequences in the future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II HERETO. OPTIONEE UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY THE OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE. 3.2 CONDITIONAL SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE OF AN INCENTIVE STOCK OPTION. If the Purchased Shares are acquired hereunder pursuant to the exercise of an incentive stock option under the Federal tax laws, as specified in the Grant Notice, then the following tax principles shall be applicable to the Purchased Shares: A. For regular tax purposes, no taxable income will be recognized at the time the Option is exercised. B. The excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (ii) the Option Price paid for the Purchased Shares will be includible in the Optionee's taxable income for alternative minimum tax purposes. C. If the Optionee makes a disqualifying disposition of the Purchased Shares, then the Optionee will recognize ordinary income in the year of such disposition equal in amount to the excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (ii) the Option Price paid for the Purchased Shares. Any additional gain recognized upon the disqualifying disposition will be either short-term or long-term capital gain depending upon the period for which the Purchased Shares are held prior to the disposition. D. For purposes of the foregoing, the term "forfeiture restrictions" will include the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right provided under Article V of this Agreement. The term "disqualifying disposition" means any sale or other disposition(1) of the - ---------- (1) Generally, a disposition of shares purchased under an incentive stock option includes any transfer of legal title, including a transfer by sale, exchange or gift, but does not include a transfer to the Optionee's spouse, a transfer into -5- 20 Purchased Shares within two (2) years after the Grant Date or within one (1) year after the execution date of this Agreement. E. In the absence of final Treasury Regulations relating to incentive stock options, it is not certain whether the Optionee may, in connection with the exercise of the Option for any Purchased Shares at the time subject to forfeiture restrictions, file a protective election under Section 83(b) of the Code which would limit (I) the Optionee's alternative minimum taxable income upon exercise and (II) the Optionee's ordinary income upon a disqualifying disposition, to the excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised over (ii) the Option Price paid for the Purchased Shares. THE APPROPRIATE FORM FOR MAKING SUCH A PROTECTIVE ELECTION IS ATTACHED AS EXHIBIT II TO THIS AGREEMENT AND MUST BE FILED WITH THE INTERNAL REVENUE SERVICE WITHIN THIRTY (30) DAYS AFTER THE DATE OF THIS AGREEMENT. HOWEVER, SUCH ELECTION IF PROPERLY FILED WILL ONLY BE ALLOWED TO THE EXTENT THE FINAL TREASURY REGULATIONS PERMIT SUCH A PROTECTIVE ELECTION. 3.3 OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER SECTION 83(B), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. This filing should be made by registered or certified mail, return receipt requested, and Optionee must retain two (2) copies of the completed form for filing with his or her State and Federal tax returns for the current tax year and an additional copy for his or her records. IV. TRANSFER RESTRICTIONS 4.1 RESTRICTION ON TRANSFER. Optionee shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to the Corporation's Repurchase Right under Article V. In addition, Purchased Shares which are released from the Repurchase Right shall not be transferred, assigned, encumbered or otherwise made the subject of disposition in contravention of the Corporation's First Refusal Right under Article VI. Such restrictions on transfer, however, shall not be - ---------- joint ownership with right of survivorship if Optionee remains one of the joint owners, a pledge, a transfer by bequest or inheritance or certain tax free exchanges permitted under the Code. -6- 21 applicable to (i) a gratuitous transfer of the Purchased Shares made to the Optionee's spouse or issue, including adopted children, or to a trust for the exclusive benefit of the Optionee or the Optionee's spouse or issue, provided and only if the Optionee obtains the Corporation's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to the Optionee's will or the laws of intestate succession or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by the Optionee in connection with the acquisition of the Purchased Shares. 4.2 TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of one of the permitted transfers specified in paragraph 4.1 must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) both the Corporation's Repurchase Right and the Corporation's First Refusal Right granted hereunder and (ii) the market stand-off provisions of paragraph 4.4, to the same extent such shares would be so subject if retained by the Optionee. 4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and VII of this Agreement, the term "Owner" shall include the Optionee and all subsequent holders of the Purchased Shares who derive their chain of ownership through a permitted transfer from the Optionee in accordance with paragraph 4.1. 4.4 MARKET STAND-OFF PROVISIONS. A. In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Corporation's initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the prior written consent of the Corporation or its underwriters. Such limitations shall be in effect for such period of time from and after the effective date of such registration statement as may be requested by the Corporation or such underwriters; provided, however, that in no event shall such period exceed one hundred-eighty (180) days. The limitations of this paragraph 4.4 shall remain in effect for the two-year period immediately following the effective date of the Corporation's initial public offering and shall thereafter terminate and cease to have any force or effect. -7- 22 B. Owner shall be subject to the market stand-off provisions of this paragraph 4.4 provided and only if the officers and directors of the Corporation are also subject to similar arrangements. C. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock effected as a class without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Purchased Shares shall be immediately subject to the provisions of this paragraph 4.4, to the same extent the Purchased Shares are at such time covered by such provisions. D. In order to enforce the limitations of this paragraph 4.4, the Corporation may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable stand-off period. V. REPURCHASE RIGHT 5.1 GRANT. The Corporation is hereby granted the right (the "Repurchase Right"), exercisable at any time during the sixty (60)-day period following the date the Optionee ceases for any reason to remain in Service or (if later) during the sixty (60)-day period following the execution date of this Agreement, to repurchase at the Option Price all or (at the discretion of the Corporation and with the consent of the Optionee) any portion of the Purchased Shares in which the Optionee has not acquired a vested interest in accordance with the vesting provisions of paragraph 5.3 (such shares to be hereinafter called the "Unvested Shares"). For purposes of this Agreement, the Optionee shall be deemed to remain in Service for so long as the Optionee continues to render periodic services to the Corporation or any parent or subsidiary corporation, whether as an employee, a non-employee member of the board of directors, or an independent contractor or consultant. 5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to the Owner of the Unvested Shares prior to the expiration of the applicable sixty (60)-day period specified in paragraph 5.1. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of notice. To the extent one or more certificates representing Unvested Shares may have been previously delivered out of escrow to the Owner, then Owner shall, prior to the close of business on the date specified for the repurchase, deliver to the Secretary of the Corporation the certificates representing the Unvested Shares to be repurchased, each certificate to be -8- 23 properly endorsed for transfer. The Corporation shall, concurrently with the receipt of such stock certificates (either from escrow in accordance with paragraph 7.3 or from Owner as herein provided), pay to Owner in cash or cash equivalents (including the cancellation of any purchase-money indebtedness), an amount equal to the Option Price previously paid for the Unvested Shares which are to be repurchased. 5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under paragraph 5.2. In addition, the Repurchase Right shall terminate, and cease to be exercisable, with respect to any and all Purchased Shares in which the Optionee vests in accordance with the vesting schedule specified in the Grant Notice. All Purchased Shares as to which the Repurchase Right lapses shall, however, continue to be subject to (i) the First Refusal Right of the Corporation and its assignees under Article VI, (ii) the market stand-off provisions of paragraph 4.4 and (iii) the Special Purchase Right under Article VIII. 5.4 AGGREGATE VESTING LIMITATION. If the Option is exercised in more than one increment so that the Optionee is a party to one or more other Stock Purchase Agreements ("Prior Purchase Agreements") which are executed prior to the date of this Agreement, then the total number of Purchased Shares as to which the Optionee shall be deemed to have a fully-vested interest under this Agreement and all Prior Purchase Agreements shall not exceed in the aggregate the number of Purchased Shares in which the Optionee would otherwise at the time be vested, in accordance with the vesting provisions of paragraph 5.3, had all the Purchased Shares been acquired exclusively under this Agreement. 5.5 FRACTIONAL SHARES. No fractional shares shall be repurchased by the Corporation. Accordingly, should the Repurchase Right extend to a fractional share (in accordance with the vesting provisions of paragraph 5.3) at the time the Optionee ceases Service, then such fractional share shall be added to any fractional share in which the Optionee is at such time vested in order to make one whole vested share no longer subject to the Repurchase Right. 5.6 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration, then any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which is by reason of any such transaction distributed with respect to the Purchased Shares shall be immediately subject to -9- 24 the Repurchase Right, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number of Purchased Shares and Total Purchasable Shares hereunder and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such transaction upon the Corporation's capital structure; provided, however, that the aggregate purchase price shall remain the same. 5.7 CORPORATE TRANSACTION. A. Except to the extent the Repurchase Right is to be assigned to the successor corporation (or its parent company), immediately prior to the consummation of any of the following shareholder-approved transactions (a "Corporate Transaction"): (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets, or (iii) any transaction (other than an issuance of shares by the Corporation for cash) in or by means of which one or more persons acting in concert acquire, in the aggregate, more than 50% of the outstanding shares of the stock of the Corporation, the Corporation may exercise the Repurchase Right with respect to the then Unvested Shares. The Repurchase Right shall automatically lapse with respect to all Unvested Shares not repurchased hereunder. B. To the extent the Repurchase Right remains in effect following such Corporate Transaction, it shall apply to the new capital stock or other property (including cash) received in exchange for the Shares in consummation of the Corporate Transaction, but only to the extent the Shares are at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Corporate Transaction upon the Corporation's capital structure; provided, however, that the aggregate Purchase Price shall remain the same. -10- 25 VI. RIGHT OF FIRST REFUSAL 6.1 GRANT. The Corporation is hereby granted rights of first refusal (the "First Refusal Right"), exercisable in connection with any proposed transfer of the Purchased Shares in which the Optionee has vested in accordance with the vesting provisions of Article V. For purposes of this Article VI, the term "transfer" shall include any sale, assignment, pledge, encumbrance or other disposition for value of the Purchased Shares intended to be made by the Owner, but shall not include any of the permitted transfers under paragraph 4.1. 6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner desires to accept a bona fide third-party offer for the transfer of any or all of the Purchased Shares (the shares subject to such offer to be hereinafter called the "Target Shares"), Owner shall promptly (i) deliver to the Corporate Secretary of the Corporation written notice (the "Disposition Notice") of the terms and conditions of the offer, including the purchase price and the identity of the third-party offeror, and (ii) provide satisfactory proof that the disposition of the Target Shares to such third-party offeror would not be in contravention of the provisions set forth in Articles II and IV of this Agreement. 6.3 EXERCISE OF RIGHT. The Corporation shall, for a period of forty-five (45) days following receipt of the Disposition Notice, have the right to repurchase any or all of the Target Shares specified in the Disposition Notice upon the same terms and conditions specified therein or upon terms and conditions which do not materially vary from those specified therein. Such right shall be exercisable by delivery of written notice (the "Exercise Notice") to Owner prior to the expiration of the forty-five (45)-day exercise period. If such right is exercised with respect to all the Target Shares specified in the Disposition Notice, then the Corporation (or its assignees) shall effect the repurchase of the Target Shares, including payment of the purchase price, not more than ten (10) business days after delivery of the Exercise Notice; and at such time Owner shall deliver to the Corporation the certificates representing the Target Shares to be repurchased, each certificate to be properly endorsed for transfer. To the extent any of the Target Shares are at the time held in escrow under Article VII, the certificates for such shares shall automatically be released from escrow and delivered to the Corporation for purchase. Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the Corporation (or its assignees) shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property. If the Owner and the Corporation (or its assignees) cannot agree on such cash value within ten (10) days -11- 26 after the Corporation's receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by the Owner and the Corporation (or its assignees) or, if they cannot agree on an appraiser within twenty (20) days after the Corporation's receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The cost of such appraisal shall be shared equally by the Owner and the Corporation. The closing shall then be held on the later of (i) the tenth business day following delivery of the Exercise Notice or (ii) the tenth business day after such cash valuation shall have been made. 6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is not given to Owner within forty-five (45) days following the date of the Corporation's receipt of the Disposition Notice, Owner shall have a period of thirty (30) days thereafter in which to sell or otherwise dispose of the Target Shares to the third-party offeror identified in the Disposition Notice upon terms and conditions (including the purchase price) no more favorable to such third-party offeror than those specified in the Disposition Notice; provided, however, that any such sale or disposition must not be effected in contravention of the provisions of Article II of this Agreement. To the extent any of the Target Shares are at the time held in escrow under Article VII, the certificates for such shares shall automatically be released from escrow and surrendered to the Owner. The third-party offeror shall acquire the Target Shares free and clear of the Corporation's Repurchase Right under Article V and the Corporation's First Refusal Right hereunder, but the acquired shares shall remain subject to (i) the securities law restrictions of paragraph 2.2(a) and (ii) the market stand-off provisions of paragraph 4.4. In the event Owner does not effect such sale or disposition of the Target Shares within the specified thirty (30)-day period, the Corporation's First Refusal Right shall continue to be applicable to any subsequent disposition of the Target Shares by Owner until such right lapses in accordance with paragraph 6.7. 6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or its assignees) makes a timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written notice to the Corporation delivered within thirty (30) days after the date of the Disposition Notice, to effect the sale of the Target Shares pursuant to one of the following alternatives: (i) sale or other disposition of all the Target Shares to the third-party offeror identified in -12- 27 the Disposition Notice, but in full compliance with the requirements of paragraph 6.4, as if the Corporation did not exercise the First Refusal Right hereunder; or (ii) sale to the Corporation (or its assignees) of the portion of the Target Shares which the Corporation (or its assignees) has elected to purchase, such sale to be effected in substantial conformity with the provisions of paragraph 6.3. Failure of Owner to deliver timely notification to the Corporation under this paragraph 6.5 shall be deemed to be an election by Owner to sell the Target Shares pursuant to alternative (i) above. 6.6 RECAPITALIZATION/MERGER. (a) In the event of any stock dividend, stock split, recapitalization or other transaction affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Purchased Shares shall be immediately subject to the Corporation's First Refusal Right hereunder, but only to the extent the Purchased Shares are at the time covered by such right. (b) In the event of any of the following transactions: (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) a sale, transfer or other disposition of all or substantially all of the Corporation's assets, (iii) a reverse merger in which the Corporation is the surviving entity but in which the Corporation's outstanding voting securities are transferred in whole or in part to person or persons other than those who held such securities immediately prior to the merger, or (iv) any transaction effected primarily to change the State in which the Corporation is incorporated, or to create a holding company structure, the Corporation's First Refusal Right shall remain in full force and effect and shall apply to the new capital stock or other property received in exchange for the Purchased Shares -13- 28 in consummation of the transaction but only to the extent the Purchased Shares are at the time covered by such right. 6.7 LAPSE. The First Refusal Right under this Article VI shall lapse and cease to have effect upon the earliest to occur of (i) the first date on which shares of the Corporation's Common Stock are held of record by more than five hundred (500) persons, (ii) a determination is made by the Corporation's Board of Directors that a public market exists for the outstanding shares of the Corporation's Common Stock, or (iii) a firm commitment underwritten public offering pursuant to an effective registration statement under the 1933 Act, covering the offer and sale of the Corporation's Common Stock in the aggregate amount of at least $5,000,000. However, the market stand-off provisions of paragraph 4.4 shall continue to remain in full force and effect following the lapse of the First Refusal Right hereunder. VII. ESCROW 7.1 DEPOSIT. Upon issuance, the certificates for any Unvested Shares purchased hereunder shall be deposited in escrow with the Corporate Secretary of the Corporation to be held in accordance with the provisions of this Article VII. Each deposited certificate shall be accompanied by a duly-executed Assignment Separate from Certificate in the form of Exhibit I. The deposited certificates, together with any other assets or securities from time to time deposited with the Corporate Secretary pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with paragraph 7.3. Upon delivery of the certificates (or other assets and securities) to the Corporate Secretary of the Corporation, the Owner shall be issued an instrument of deposit acknowledging the number of Unvested Shares (or other assets and securities) delivered in escrow. 7.2 RECAPITALIZATION. All regular cash dividends on the Unvested Shares (or other securities at the time held in escrow) shall be paid directly to the Owner and shall not be held in escrow. However, in the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration or in the event of a Corporate Transaction, any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Unvested Shares shall be immediately delivered to the Corporate Secretary to be held in escrow under this Article VII, but only to the extent the Unvested Shares are at the time subject to the escrow requirements of paragraph 7.1. -14- 29 7.3 RELEASE/SURRENDER. The Unvested Shares, together with any other assets or securities held in escrow hereunder, shall be subject to the following terms and conditions relating to their release from escrow or their surrender to the Corporation for repurchase and cancellation: (i) Should the Corporation (or its assignees) elect to exercise the Repurchase Right under Article V with respect to any Unvested Shares, then the escrowed certificates for such Unvested Shares (together with any other assets or securities issued with respect thereto) shall be delivered to the Corporation concurrently with the payment to the Owner, in cash or cash equivalent (including the cancellation of any purchase-money indebtedness), of an amount equal to the aggregate Option Price for such Unvested Shares, and the Owner shall cease to have any further rights or claims with respect to such Unvested Shares (or other assets or securities attributable to such Unvested Shares). (ii) Should the Corporation (or its assignees) elect to exercise its First Refusal Right under Article VI with respect to any vested Target Shares held at the time in escrow hereunder, then the escrowed certificates for such Target Shares (together with any other assets or securities attributable thereto) shall, concurrently with the payment of the paragraph 6.3 purchase price for such Target Shares to the Owner, be surrendered to the Corporation, and the Owner shall cease to have any further rights or claims with respect to such Target Shares (or other assets or securities). (iii) Should the Corporation (or its assignees) elect not to exercise its First Refusal Right under Article VI with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for such Target Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Owner for disposition in accordance with provisions of paragraph 6.4. (iv) As the interest of the Optionee in the Unvested Shares (or any other assets or securities attributable thereto) vests in accordance with the provisions of Article V, the certificates for such vested shares (as well as all other vested assets and securities) shall be released from escrow and delivered to the Owner in accordance with the following schedule: -15- 30 a. The initial release of vested shares (or other vested assets and securities) from escrow shall be effected within thirty (30) days following the expiration of the initial twelve (12)-month period measured from the Grant Date. b. Subsequent releases of vested shares (or other vested assets and securities) from escrow shall be effected at semi-annual intervals thereafter, with the first such semi-annual release to occur eighteen (18) months after the Grant Date. c. Upon the Optionee's cessation of Service, any escrowed Purchased Shares (or other assets or securities) in which the Optionee is at the time vested shall be promptly released from escrow. d. Upon any earlier termination of the Corporation's Repurchase Right in accordance with the applicable provisions of Article V, any Purchased Shares (or other assets or securities) at the time held in escrow hereunder shall promptly be released to the Owner as fully-vested shares or other property. (v) All Purchased Shares (or other assets or securities) released from escrow in accordance with the provisions of subparagraph (iv) above shall nevertheless remain subject to (I) the Corporation's First Refusal Right under Article VI until such right lapses pursuant to paragraph 6.7, (II) the market stand-off provisions of paragraph 4.4 until such provisions terminate in accordance therewith and (III) the Special Purchase Right under Article VIII. VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION 8.1 GRANT. In connection with the dissolution of the Optionee's marriage or the legal separation of the Optionee and the Optionee's spouse, the Corporation shall have the right (the "Special Purchase Right"), exercisable at any time during the thirty (30)-day period following the Corporation's receipt of the required Dissolution Notice under paragraph 8.2, to purchase from the Optionee's spouse, in accordance with the provisions of paragraph 8.3, all or any portion of the Purchased Shares which would otherwise be awarded to such spouse in settlement of any -16- 31 community property or other marital property rights such spouse may have in such shares. 8.2 NOTICE OF DECREE OR AGREEMENT. The Optionee shall promptly provide the Secretary of the Corporation with written notice (the "Dissolution Notice") of (i) the entry of any judicial decree or order resolving the property rights of the Optionee and the Optionee's spouse in connection with their marital dissolution or legal separation or (ii) the execution of any contract or agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree of dissolution or settlement agreement between the Optionee and the Optionee's spouse which provides for the award to the spouse of one or more Purchased Shares in settlement of any community property or other marital property rights such spouse may have in such shares. 8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase Right shall be exercisable by delivery of written notice (the "Purchase Notice") to the Optionee and the Optionee's spouse within thirty (30) days after the Corporation's receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of shares to be purchased by the Corporation, the date such purchase is to be effected (such date to be not less than five (5) business days, nor more than ten (10) business days, after the date of the Purchase Notice), and the fair market value to be paid for such Purchased Shares. The Optionee (or the Optionee's spouse, to the extent such spouse has physical possession of the Purchased Shares) shall, prior to the close of business on the date specified for the purchase, deliver to the Corporate Secretary of the Corporation the certificates representing the shares to be purchased, each certificate to be properly endorsed for transfer. To the extent any of the shares to be purchased by the Corporation are at the time held in escrow under Article VII, the certificates for such shares shall be promptly delivered out of escrow to the Corporation. The Corporation shall, concurrently with the receipt of the stock certificates, pay to the Optionee's spouse (in cash or cash equivalents) an amount equal to the fair market value specified for such shares in the Purchase Notice. If the Optionee's spouse does not agree with the fair market value specified for the shares in the Purchase Notice, then the spouse shall promptly notify the Corporation in writing of such disagreement and the fair market value of such shares shall thereupon be determined by an appraiser of recognized standing selected by the Corporation and the spouse. If they cannot agree on an appraiser within twenty (20) days after the date of the Purchase Notice, each shall select an appraiser of recognized standing, and the two appraisers shall designate a third appraiser of recognized standing whose appraisal shall be -17- 32 determinative of such value. The cost of the appraisal shall be shared equally by the Corporation and the Optionee's spouse. The closing shall then be held on the fifth business day following the completion of such appraisal; provided, however, that if the appraised value is more than fifteen percent (15%) greater than the fair market value specified for the shares in the Purchase Notice, the Corporation shall have the right, exercisable prior to the expiration of such five (5)-business-day period, to rescind the exercise of the Special Purchase Right and thereby revoke its election to purchase the shares awarded to the spouse. 8.4 LAPSE. The Special Purchase Right under this Article VIII shall lapse and cease to have effect upon the earlier to occur of (i) the first date on which the First Refusal Right under Article VI lapses or (ii) the expiration of the thirty (30)-day exercise period specified in paragraph 8.3, to the extent the Special Purchase Right is not timely exercised in accordance with such paragraph. IX. GENERAL PROVISIONS 9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right under Article V, its First Refusal Right under Article VI and/or its Special Purchase Right under Article VIII to any person or entity selected by the Corporation's Board of Directors, including (without limitation) one or more shareholders of the Corporation. If the assignee of the Repurchase Right is other than a one hundred percent (100%) owned subsidiary corporation of the Corporation or the parent corporation owning one hundred percent (100%) of the Corporation, then such assignee must make a cash payment to the Corporation, upon the assignment of the Repurchase Right, in an amount equal to the excess (if any) of (i) the fair market value of the Unvested Shares at the time subject to the assigned Repurchase Right over (ii) the aggregate repurchase price payable for the Unvested Shares thereunder. 9.2 DEFINITIONS. For purposes of this Agreement, the following provisions shall be applicable in determining the parent and subsidiary corporations of the Corporation: (i) Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a parent corporation of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. -18- 33 (ii) Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a subsidiary of the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 9.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the Service of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining Optionee) for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining Optionee) or the Optionee, which rights are hereby expressly reserved by each, to terminate the Optionee's Service at any time for any reason whatsoever, with or without cause. 9.4 NOTICES. Any notice required in connection with (i) the Repurchase Right, the Special Purchase Right or the First Refusal Right or (ii) the disposition of any Purchased Shares covered thereby shall be given in writing and shall be deemed effective upon personal delivery or upon deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph 9.4 to all other parties to this Agreement. 9.5 NO WAIVER. The failure of the Corporation (or its assignees) in any instance to exercise the Repurchase Right granted under Article V, or the failure of the Corporation (or its assignees) in any instance to exercise the First Refusal Right granted under Article VI, or the failure of the Corporation (or its assignees) in any instance to exercise the Special Purchase Right granted under Article VIII shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and the Optionee or the Optionee's spouse. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 9.6 CANCELLATION OF SHARES. If the Corporation (or its assignees) shall make available, at the time and place and in -19- 34 the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement), and such shares shall be deemed purchased in accordance with the applicable provisions hereof and the Corporation (or its assignees) shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. X. MISCELLANEOUS PROVISIONS 10.1 OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may in its judgment deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either the Optionee or the Purchased Shares pursuant to the express provisions of this Agreement. 10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the express terms and provisions of the Plan. 10.3 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State without resort to that State's conflict-of-laws rules. 10.4 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and the Optionee and the Optionee's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof. 10.6 POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee his or her true and lawful attorney in fact, -20- 35 for him or her and in his or her name, place and stead, and for his or her use and benefit, to agree to any amendment or modification of this Agreement and to execute such further instruments and take such further actions as may reasonably be necessary to carry out the intent of this Agreement. Optionee's spouse further gives and grants unto Optionee as his or her attorney in fact full power and authority to do and perform every act necessary and proper to be done in the exercise of any of the foregoing powers as fully as he or she might or could do if personally present, with full power of substitution and revocation, hereby ratifying and confirming all that Optionee shall lawfully do and cause to be done by virtue of this power of attorney. -21- 36 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above. CombiChem, Inc. By: _____________________________________ Title: __________________________________ Address: _________________________________________ _________________________________________ _________________________________________ Optionee * Address: _________________________________________ _________________________________________ The undersigned spouse of Optionee has read and hereby approves the foregoing Stock Purchase Agreement. In consideration of the Corporation's granting the Optionee the right to acquire the Purchased Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms and provisions of such Agreement, including (specifically) the right of the Corporation (or its assignees) to purchase any and all interest or right the undersigned may otherwise have in such shares pursuant to community property laws or other marital property rights. ----------------------------------------- Optionee's Spouse Address: _________________________________________ _________________________________________ - ---------- * I have executed the Section 83(b) election that was attached hereto as an Exhibit. As set forth in Article III, I understand that I, and not the Corporation, will be responsible for completing the form and filing the election with the appropriate office of the Federal and State tax authorities and that if such filing is not completed within thirty (30) days after the date of this Agreement, I will not be entitled to the tax benefits provided by Section 83(b). -22- 37 EXHIBIT I ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED __________________________________ hereby sell(s), assign(s) and transfer(s) unto CombiChem, Inc. (the "Corporation"),__________________________________ (_________) shares of the Common Stock of the Corporation standing in his\her name on the books of the Corporation represented by Certificate No. ______________ and do hereby irrevocably constitute and appoint ___________________________________ as Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: ______________ Signature _______________________________ INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Corporation to exercise its Repurchase Right set forth in the Agreement without requiring additional signatures on the part of the Optionee. 38 REPURCHASE RIGHTS EXHIBIT II SECTION 83(b) TAX ELECTION This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2. (1) The taxpayer who performed the services is: Name: Address: Taxpayer Ident. No.: (2) The property with respect to which the election is being made is ___________ shares of the common stock of CombiChem, Inc. (3) The property was issued on __________________, 19___. (4) The taxable year in which the election is being made is the calendar year 19___. (5) The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason taxpayer's employment with the issuer is terminated. The issuer's repurchase right lapses in a series of annual and monthly installments over a four year period ending on ____________, 19___. (6) The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $___________ per share. (7) The amount paid for such property is $____________ per share. (8) A copy of this statement was furnished to CombiChem, Inc. for whom taxpayer rendered the services underlying the transfer of property. (9) This statement is executed as of: _______________________. - -------------------------------- -------------------------------------- Spouse (if any) Taxpayer This form must be filed with the Internal Revenue Service Center with which taxpayer files his/her Federal income tax returns. The filing must be made within 30 days after the execution date of the Stock Purchase Agreement. EXHIBIT II-1 39 SPECIAL PROTECTIVE ELECTION PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE WITH RESPECT TO PROPERTY ACQUIRED UPON EXERCISE OF AN INCENTIVE STOCK OPTION The property described in the above Section 83(b) election is comprised of shares of common stock acquired pursuant to the exercise of an incentive stock option under Section 422 of the Code. Accordingly, it is the intent of the Taxpayer to utilize this election to achieve the following tax results: 1. The purpose of this election is to have the alternative minimum taxable income attributable to the purchased shares measured by the amount by which the fair market value of such shares at the time of their transfer to the Taxpayer exceeds the purchase price paid for the shares. In the absence of this election, such alternative minimum taxable income would be measured by the spread between the fair market value of the purchased shares and the purchase price which exists on the various lapse dates in effect for the forfeiture restrictions applicable to such shares. The election is to be effective to the full extent permitted under the Internal Revenue Code. 2. Section 421(a)(1) of the Code expressly excludes from income any excess of the fair market value of the purchased shares over the amount paid for such shares. Accordingly, this election is also intended to be effective in the event there is a "disqualifying disposition" of the shares, within the meaning of Section 421(b) of the Code, which would otherwise render the provisions of Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer hereby elects to have the amount of disqualifying disposition income measured by the excess of the fair market value of the purchased shares on the date of transfer to the Taxpayer over the amount paid for such shares. Since Section 421(a) presently applies to the shares which are the subject of this Section 83(b) election, no taxable income is actually recognized for regular tax purposes at this time, and no income taxes are payable, by the Taxpayer as a result of this election. This form should be filed with the Internal Revenue Service Center with which taxpayer files his/her Federal income tax returns. The filing must be made within 30 days after the execution date of the Stock Purchase Agreement. NOTE: PAGE 2 SHOULD BE ATTACHED ONLY IF YOU ARE EXERCISING AN INCENTIVE STOCK OPTION. EX-10.31 35 EXHIBIT 10.31 1 EXHIBIT 10.31 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of January 1, 1996, by and between CombiChem, Inc., a California corporation ("Employer") and John Saunders, Ph.D. ("Employee"). NOW, THEREFORE, the parties agree as follows: 1. Employment. Employer hereby engages Employee, and Employee hereby accepts such engagement, upon the terms and conditions set forth herein. 2. Duties. During the term of this Agreement, Employee shall be employed as the Employer's Vice President of Chemistry reporting to Employer's Chief Operating Officer. Employee shall faithfully and diligently perform the duties customarily performed by persons in the position or positions for which Employee is engaged together with such other reasonable and appropriate duties as Employer shall designate from time to time. Employee shall devote Employee's full business time and effort to the rendition of such services and to the performance of such duties. As a full-time employee of Employer, Employee shall not be entitled to provide consulting services or other businesses or scientific services to any other party, without the prior written consent of Employer. 3. Compensation. 3.1 Base Salary. During the term of this Agreement, as compensation for the proper and satisfactory performance of all duties to be performed by Employee hereunder, Employer shall pay to Employee an annual salary of One Hundred and Forty-Five Thousand Dollars ($145,000) payable in accordance with Employee's standard payroll practices, less required deductions for state and federal withholding tax, Social Security and all other employee taxes and payroll deductions. Employee's base salary shall be reviewed annually by the President & Chief Executive Officer and the Chief Operating Officer and may be increased or decreased in the sole discretion of such individuals. 3.2 Bonus. At the beginning of each fiscal year, Employer and Employee shall reach mutually agreed upon scientific and business objectives for Employer for its upcoming fiscal year which shall be set forth in writing and approved by the Board. At the end of each such fiscal year, the Board shall determine, in its reasonable discretion, the size and amount of Employee's performance bonus, if any, up to a maximum of twenty percent (20%) of Employee's base salary during the prior fiscal year (the "Annual Performance Bonus"). The Annual Performance Bonus shall be paid to Employee within sixty (60) days following Employer's fiscal year end. The first Annual Performance Bonus shall be (i) based on Employer's 1996 fiscal 2 year achievements; (ii) paid to Employee by March 1, 1997; (iii) guaranteed to be not less than Fourteen Thousand Five Hundred Dollars ($14,500); provided that employee's employment has continued through the end of 1996. No other Annual Performance bonus shall have any guaranteed minimum payment. 4. Term of Employment. 4.1 Period of Employment. The Employee's period of employment by Employer pursuant to this Agreement shall commence on January 1, 1996 ("Commencement Date") and end upon the date the employment relationship is terminated pursuant to Sections 4.2 or 4.3 hereunder (the "Period of Employment"). 4.2 Termination at Will. Although Employer and Employee anticipate a long and mutually rewarding employment relationship, either party may terminate this Agreement, without cause, upon fourteen (14) days prior written notice delivered to the other party. It is expressly understood and agreed that the employment is not for any specified term, and without any agreement for employment, for so long as Employee performs satisfactorily. 4.3 Termination for Cause. Employer may immediately terminate this employment relationship "for cause" upon written notice to Employee. For the purposes herein, "for cause" shall be limited to the following: (i) Employee's intentional violation of any rule or policy of Employer or its subsidiaries (a "Violation") which, after written notice of a Violation, Employee fails to correct within twenty (20) days of receipt of such notice from the Board; (ii) any material failure by Employee to comply with any reasonable directive of the Board which, after receiving written notice to do so, Employee fails to comply within twenty (20) days of receipt of such notice from the Board; (iii) Employee's willful misconduct concerning any material responsibility reasonably assigned to Employee; (iv) without obtaining the prior consent of the Board, Employee's active and intentional performance of services for any other corporation or person which competes with Employer or its subsidiaries while he is employed by Employer or its subsidiaries; (v) the Board reasonably determines that Employee has stolen or embezzled either funds or property of Employer; (vi) Employee's conviction by a court of competent jurisdiction of a felony (other than a traffic or moving violation) involving moral turpitude or dishonesty; (vii) Employee's intentional or grossly negligent conduct or violation of law which results in either an improper personal benefit to Employee or a material injury to Employer; (viii) Employee's failure to perform a material duty given to him by the company's Chief Operating Officer or under this Agreement if such failure was continued for thirty (30) days after Employee has been notified in writing by the Company of his failure to perform; or (ix) the death or disability of Employee. 4.4 Obligations Upon Termination. 4.4.1 Survival of Obligations. The parties' obligations under Section 4.4.2, 6, 7, 9.7 and 9.8, shall survive the termination of this Agreement. -2- 3 4.4.2 Return of Materials at Termination. Upon termination of the Period of Employment, the Employee will promptly deliver to Employer all materials, property, documents, data and other information belonging to Employer or containing Employer's Trade Secrets or other Protected Information (each as defined herein). The Employee shall not take any materials, property, documents or other information, or any reproduction or excerpt thereof, belonging to Employer or containing any Trade Secrets or other Protected Information of Employer. 4.4.3 Resignation. Upon termination of the Period of Employment, the Employee shall be deemed to have resigned from any and all offices then held with the Employer. 4.5 Compensation to Employee On Termination by Employer. In the event that Employer terminates Employee pursuant to Paragraph 4.2, Employee shall be entitled to (1) receive an aggregate severance benefit of nine months of Employee's then current base salary (Section 3.1) and benefits (Section 5) which shall be paid by Employer to employee in nine (9) equal monthly installments until fully paid or until Employee has secured full-time employment and (2) a nine (9) month credit towards any vesting schedule or vesting requirements contained in any stock option or stock purchase agreements then existing between the Employee and Employer. In the event the Employee elects to receive and does receive any of the benefits set for in this Section 4.5, Employee agrees that such payments shall constitute Employee's sole and exclusive rights and entitlements in connection with Employee's employment by Employer, the termination of such employment and any and all matters related to or arising in connection with such employment, and agrees that his acceptance of any such payments shall release Employee and any and all affiliated persons and entities (including all directors, officers, employees and agents) from any claims that Employee may otherwise have or assert in connection with such matters. If Employee desires to pursue or enforce any such rights, entitlements or remedies that would otherwise be waived and released, then Employee shall refuse any payments provided for pursuant to this Section 4.5. If Employee accepts any such severance payment or payments, he shall be deemed to have agreed to the foregoing exclusivity of rights and waiver of claims. 5. Benefits 5.1 Health Insurance, Vacation and Sick Leave. Employee shall be entitled to Employer's standard benefits package for its executive employees including, but not limited to, family health care insurance, officer and director liability insurance (when obtained for Employer's other officers), long-term disability (when obtained for Employer's other officers), vacation and sick leave (the "Fringe Benefits"). Employer reserves the right to change such benefits from time to time. 5.2 Accumulation. Employee shall not earn and accumulate unused vacation and sick leave, or other Fringe Benefits, in excess of an unused amount equal to the amount earned for one year. Furthermore, Employee shall not be entitled to receive payments in lieu of said Fringe Benefits, other than for unused vacation earned and -3- 4 accumulated at the time the employment relationship terminates. All unused sick leave and other Fringe Benefits earned during the preceding twelve (12) month period ending on each anniversary of the date of this Agreement shall be forfeited if not used within ninety (90) days following such anniversary date. Notwithstanding the forgoing, if Employer adopts a more favorable accumulation policy for its executives, Employee shall be entitled to the benefits of such more favorable accumulation policy. 5.3 Personal Leave. Employee shall accrue fifteen (15) days of personal leave during each year of his employment. Upon accrual of fifteen (15) days of unused personal leave, no additional personal leave time will accrue until Employee has used some of his accrued personal leave time and has reduced the amount of accrued time below fifteen (15) days. Once Employee has taken personal leave and his accrued personal leave time has dropped below fifteen (15) days, Employee shall begin to accrue personal leave time again (at the rate of fifteen (15) days per year), up to the maximum of fifteen (15) days. Notwithstanding the foregoing, if Employer adopts a more favorable personal leave policy for its executives, Employee shall be entitled to the benefits of such more favorable personal leave policy. 5.4 Housing and Automobile. For the first three (3) months of this Agreement, Employer shall reimburse Employee each month for the first Two Thousand Dollars ($2,000) of Employee's housing and automobile expenses. Any allowance paid pursuant to this Section 5.4 shall be "grossed up" to cover Employee's local, state and federal income tax liability at Employee's then current marginal tax rate if deemed necessary by Employer's accountants. The tax gross-up payment(s) shall initially be calculated at an assumed effective marginal rate of forty percent (40%) and paid to Employee no later than (i) April 15 of the calendar year following any year Employee has expenses reimbursed pursuant to this Section; and (ii) any date Employee is required to make increased quarterly estimated payments due to Employee's receipt of the allowance payments pursuant to this Section. Once Employee has finalized Employee's federal and state income tax returns, Employee's effective marginal rate shall be calculated and any shortfall or overpayment will be corrected. 5.5 Relocation Expenses. Employer shall reimburse Employee the following expenses: (a) selling expenses related to sale of Employee's current residence in England including realtor commissions and closing expenses typically paid by sellers; (b) reasonable moving expenses incurred in the move to San Diego, California; (c) the cost of up to two round trip coach airline tickets from London, England to San Diego, California for Employee's spouse for the purpose of looking at houses in the San Diego area during the first six (6) months of this Agreement; and (d) a tax gross-up payment calculated at an assumed effective marginal rate of forty percent (40%) to cover Employee's income tax liability for expenses reimbursed pursuant to subsections (a), (b) and (c) of this Section. Expenses related to subsections (a), (b) and (c) shall be reimbursed within thirty (30) days after Employee submits adequate verification of incurred expenses. The tax gross-up bonus related to subsection (d) shall be paid to Employee no later than (i) April 15 of the calendar year following any year Employee has expenses reimbursed pursuant to this Section; and (ii) any date Employee is required -4- 5 to make increased quarterly estimated payments due to Employee's receipt of reimbursed expenses pursuant to subsections (a), (b) or (c) of this Section. Once Employee has finalized Employee's federal and state income tax returns, Employee's effective marginal rate shall be calculated and any shortfall or overpayment will be corrected. Notwithstanding the foregoing, Employer's maximum aggregate obligations to Employee pursuant to this Section shall not under any circumstances exceed Fifty Thousand Dollars ($50,000). 5.6 Home Loan. In the event Employee purchases a residence in the San Diego area prior to November 1, 1996, then Employer shall provide a second mortgage loan to Employee in an amount no greater than Seventy Thousand Dollars ($70,000) at the then- lowest available interest rate (the "Home Loan"); provided, however, that the Home Loan shall (i) be utilized to purchase the Employee's first San Diego area residential purchase; (ii) remain secured by a second trust deed which is recorded at the time the Home Loan is made; and (iii) not confer upon Employee any right to continued employment by Employer as a result of Employee's repayment obligations under the Note evidencing the Home Loan. Notwithstanding the foregoing, upon the earlier of (a) the effectiveness of Employer's registration statement filed with the Securities and Exchange Commission for Employer's initial public offering of its common stock or (b) the termination of Employee's employment with Employer (for whatever reason), the Home Loan shall be accelerated and shall automatically become due and payable without any action by Employer. 5.7 Support in Immigration Proceedings. Throughout the Period of Employment, Employer shall use its commercially reasonable efforts to support Employee's application for a green card. 6. Inventions, Trade Secrets and Confidentiality. 6.1 Definitions. 6.1.1 Invention Defined. As used herein "Invention" means inventions, discoveries, concepts and ideas, whether patentable or copyrightable or not, including, but not limited to, processes, methods, formulas, techniques, devices, designs, programs (including computer programs), computer graphics, apparatus, products as well as improvements thereof or know-how related thereto, relating to any present or anticipated business or activities of Employer. 6.1.2 Trade Secrets Defined. As used herein "Trade Secret" means, without limitation, any document or information relating to Employer's products, processes or services, including documents and information relating to Inventions, and to the research, development, engineering or manufacture of Inventions, and to Employer's purchasing, customer or supplier lists and pricing policies, which documents or information have been disclosed to Employee or known to Employee as a consequence of or through Employee's employment by Employer (including documents, information -5- 6 or Inventions conceived, originated, discovered or developed by Employee), which is not generally known in the relevant trade or industry. 6.1.3 Protected Information. As used in this Agreement, the term "Protected Information" shall mean, without limitation, all trade secrets, confidential or proprietary information, and all other knowledge, data, know-how, processes, information, document or materials, owned, developed or possessed by Employer, whether in tangible or intangible form, the confidentiality of which Employer takes reasonable measures to protect, and which pertains in any manner to subjects which include, but are not limited to, Employer's research operations, customers, identities of individual contacts at business entities which are customers or prospective customers, preferences, businesses or habits, business relationships, engineering data or results, specifications, concepts, methods, processes, rates or schedules, customer or vendor information, products (including, but not limited to, prices, costs, sales or content), financial information or measures, business methods, future business plans, databases, computer programs, designs, models, operating procedures and knowledge of the organization. 6.2 Inventions. 6.2.1 Disclosure. Employee shall disclose promptly to Employer each Invention, whether or not reduced to practice, which is conceived or learned by Employee (either alone or jointly with others) during the Period of Employment. Employee shall disclose in confidence to Employer all patent applications filed by or on behalf of Employee during the Period of Employment and for a period of one (1) year thereafter. Any disclosure of any Invention, or any patent application, made within one (1) year after termination of employment shall be presumed to relate to an Invention made during Employee's Period of Employment, unless Employee clearly proves otherwise. 6.2.2 Employer Property; Assignment. Except as otherwise provided in Section 6.2.3, Employee acknowledges and agrees that all Inventions which are discovered, conceived, developed, made, produced or prepared by Employee (alone or in conjunction with others) during the Period of Employment shall be the sole property of Employer. Said property rights of Employer include without limitation all domestic and foreign patent rights, rights of registration or other protection under the patent and copyright laws, and all other rights pertaining to the Inventions. Employee further agrees that all services, products and Inventions that directly or indirectly result from engagement with Employer shall be deemed "works for hire" as that term is defined in Title 17 of the United States Code and accordingly all rights associated therewith shall vest in Employer. Notwithstanding the foregoing, Employee hereby assigns to Employer all of Employee's right, title and interest in any such services, products and Inventions, in the event any such services, products and Inventions shall be determined not to constitute "works for hire." -6- 7 6.2.3 Exclusion Notice. The assignment by Employee of Inventions under this Agreement does not apply to any Inventions which are owned or controlled by Employee prior to the commencement of employment of Employee by Employer (all of which are set forth on Exhibit "A" attached hereto). Additionally, Employee is not required to assign an idea or invention where the idea or invention meets all of the following criteria, namely if the invention or idea: (i) was created or conceived without the use of any of Employer's equipment, supplies, facilities or trade secret information, and (ii) was developed entirely on Employee's own time, and (iii) does not relate to the business of Employer, and (iv) does not relate to Employer's actual or demonstrably anticipated research or development, and (v) does not result from any work performed by Employee for Employer. Employee has reviewed the notification in this Section 6.2.3 and in Exhibit "B" ("Limited Exclusion Notification") and agrees that Employee's signature on the Limited Exclusion Notification acknowledges receipt of the notification. 6.2.4 Patents and Copyrights; Attorney-in-Fact. Both before and after termination of this Agreement (and with reasonable compensation paid by Employer to Employee after termination), Employee agrees to assist the Employer to apply for, obtain and enforce patent and/or copyright protection and registration of, the Inventions described in Section 6.2.2 in any and all countries. To that end, Employee shall (at Employer's request), without limitation, testify in any proceeding, and execute any documents and assignments determined to be necessary or convenient for use in applying for, obtaining, registering and enforcing patent or copyright protection involving any of the Inventions. Employee hereby irrevocably appoints Employer, and its duly authorized officers and agents, as Employee's agent and attorney-in-fact to act for and on behalf of Employee in filing all patent applications, applications for copyright protection and registration, amendments, renewals and all other appropriate documents in any way related to the Inventions described in Section 6.2.2. 6.3 Trade Secrets. 6.3.1 Acknowledgment of Proprietary Interest. Employee recognizes the proprietary interest of Employer in any Trade Secrets of Employer. Employee acknowledges and agrees that any and all Trade Secrets of Employer, whether developed by Employee alone or in conjunction with others or otherwise, shall be and are the property of Employer. 6.3.2 Covenant Not to Divulge Trade Secrets. Employee acknowledges and agrees that Employer is entitled to prevent the disclosure of Employer's Trade Secrets or Protected Information. As a portion of the consideration for the employment of Employee and for the compensation being paid to Employee by Employer, Employee agrees at all times during the Period of Employment by Employer and thereafter to hold in strictest confidence, and not to use, disclose or allow to be disclosed to any person, form or corporation, Employer's Trade Secrets or Protected Information, including Trade Secrets developed by Employee, other than disclosures, with Employer's express prior written consent, to persons who have entered into confidentiality agreements with Employer. -7- 8 6.3.3 Confidential Information of Others. Employee represents and warrants that if Employee has any confidential information belonging to others, Employee will not use or disclose to Employer any such information or documents. Employee represents that his employment with Employer will not require him to violate any obligation to or confidence with any other party. 6.4 No Adverse Use. Employee will not at any time during the Period of Employment or thereafter use Employer's Trade Secrets, Protected Information or Inventions in any manner which may directly or indirectly have an adverse effect upon Employer's business, nor will Employee perform any acts which would tend to reduce Employer's proprietary value in Employer's Trade Secrets, Protected Information or Inventions. 6.5 Remedies Upon Breach. In the event of any breach by Employee of the provisions in this Section 6, Employer shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to enjoin Employee from violating any of the terms of this Section 6, to enforce the specific performance by Employee of any of the terms of this Section 6, and to obtain damages, or any of them, but nothing herein contained shall be construed to prevent such remedy or combination of remedies as Employer may elect to invoke. The failure of Employer to promptly institute legal action upon any breach of this Section 6 shall not constitute a waiver of that breach or any other breach hereof. 7. Covenant Not to Compete. Employee agrees that, during Employee's employment, Employee will not directly or indirectly compete with Employer in any way, and that Employee will not act as an officer, director, employee, consultant, shareholder, lender or agent of any other entity which is engaged in any business of the same nature as, or in competition with, the business in which Employer is now engaged or in which Employer becomes engaged during the term of Employee's employment, or which is involved in science or technology which is similar to Employer's science or technology. During Employee's employment, and for a period of one (1) year thereafter, Employee shall not directly or indirectly through another entity (i) induce or attempt to induce any employee of Employer or any subsidiary of Employer to leave the employ of Employer or such subsidiary, or in any way interfere with the relationship between the Employer or any subsidiary at any time; or (ii) induce or attempt to induce any customer, supplier, licensee, licensor or other party which has a contractual relationship with Employer or its subsidiaries or affiliates to cease doing business with Employer or any such subsidiary (including, without limitation, making any negative statements or communications about Employer or its affiliates). 8. Stock Options. Simultaneous with the execution of this Agreement, Employer and Employee will enter into a written stock option agreement substantially in the form attached hereto as Exhibit C, pursuant to which Employee will be granted an incentive stock option for 335,300 shares of the Company's Common Stock, exercisable at $0.062 per share and vesting twenty-five percent (25%) as of October __, 1996 and 1/48th each month thereafter. -8- 9 9. General Provisions. 9.1 Amendments. No amendment or modification of the terms or conditions of this Agreement shall be valid unless in writing and signed by both parties hereto. There shall be no implied-in-fact contracts modifying the terms of this Agreement. 9.2 Entire Agreement. This Agreement, and the Exhibits attached hereto, constitutes the entire agreement between the parties with respect to the employment of Employee. This Agreement supersedes all prior agreements, understandings, negotiations and representation with respect to the employment relationship including, but not limited to the Memorandum dated August 28, 1995, containing proposed terms and conditions for hiring Employee. 9.3 Successors and Assigns. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. Employee shall not be entitled to assign any of Employee's rights or obligations under this Agreement. 9.4 Waiver. Either party's failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement. 9.5 Severable Provisions. The provisions of this Agreement are severable, and if any one or more provisions may be determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 9.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 9.7 Choice of Law. This Agreement shall be governed and construed in accordance with the laws of California. 9.8 Jurisdiction and Venue. In the event that any legal proceedings are commenced in any court with respect to any matter arising under this Agreement, Employer and Employee specifically consent and agree that: (a) the courts of the State of California and/or the United States Federal Courts located in the State of California shall have exclusive jurisdiction over each of the parties and such proceedings; and -9- 10 (b) the venue of any such action shall be in San Diego County, California and/or the United States District Court for the Southern District of California. 10. Employee's Representations. Employee represents and warrants that Employee (i) is free to enter into this Agreement and to perform each of the terms and covenants contained herein, (ii) is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and (iii) will not be in violation or breach of any other agreement by reason of Employee's execution and performance of this Agreement. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -10- 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates first set forth above. EMPLOYER: COMBICHEM, INC., a California corporation By: /s/ Peter Myers ------------------------------------- Its: Chief Operating Officer ------------------------------------ EMPLOYEE: JOHN SAUNDERS /s/ John Saunders ----------------------------------------- (Signature) Address: 190 Del Mar Shores #59 -------------------------------- Solana Beach, CA 92075 ----------------------------------------- ----------------------------------------- [SIGNATURE PAGE TO EMPLOYMENT AGREEMENT] 12 EXHIBIT A LIST OF PRIOR INVENTIONS (SECTION 6.2.3) None, other than the following: ________________________________________________ ________________________________________________________________________________ A-1 13 EXHIBIT B LIMITED EXCLUSION NOTIFICATION THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between you and Employer does not require you to assign or offer to assign to Employer inventions that you developed entirely on your own time without using Employer's equipment, supplies, facilities or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to Employer's business, or Employer's actual or demonstrably anticipated research or development. (2) Result from any work performed by you for Employer. To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between Employer and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I ACKNOWLEDGE RECEIPT of a copy of this notification. By: /s/ John Saunders ------------------------------------- ------------------------------------- Dated: 18th July 96 ---------------------------------- Witnessed by: /s/ Bobbie J. Bosley - --------------------------------- Bobbie J. Bosley - --------------------------------- (Printed Name of Representative) Dated: 7/18/96 -------------------------- B-1 14 EXHIBIT C STOCK OPTION AGREEMENT C-1 15 COMBICHEM, INC. STOCK OPTION AGREEMENT RECITALS A. The Board of Directors of the Corporation has adopted the CombiChem, Inc. 1995 Stock Option/Stock Issuance Plan (the "Plan") for the purpose of attracting and retaining the services of persons who contribute to the growth and financial success of the Corporation. B. Optionee is a person who the Plan Administrator believes has and will contribute to the growth and financial success of the Corporation and this Agreement is executed pursuant to and is intended to carry out the purposes of the Plan. AGREEMENT NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth in this Agreement, the Corporation hereby grants to Optionee, as of the grant date (the "Grant Date") specified in the accompanying Notice of Grant of Stock Option (the "Grant Notice"), a stock option to purchase up to that number of shares of the Corporation's Common Stock (the "Option Shares") as is specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term at the option price per share (the "Option Price") specified in the Grant Notice. 2. OPTION TERM. This option shall have a maximum term of ten (10) years measured from the Grant Date and shall expire at the close of business on the expiration date (the "Expiration Date") specified in the Grant Notice, unless sooner terminated in accordance with Paragraph 5, 6 or 17. 3. LIMITED TRANSFERABILITY. This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee's death and may be exercised, during Optionee's lifetime, only by Optionee. 4. DATES OF EXERCISE. This option may not be exercised in whole or in part at any time prior to the time the Plan is approved by the Corporation's shareholders in accordance with Paragraph 17. Provided such shareholder approval is obtained, this option shall thereupon become exercisable for the Option Shares in one or more installments as is specified in the Grant Notice. As the option becomes exercisable in one or more installments, the installments shall accumulate and the option shall remain 16 exercisable for such installments until the Expiration Date or the sooner termination of the option term under Paragraph 5 or Paragraph 6 of this Agreement. 5. ACCELERATED TERMINATION OF OPTION TERM. Unless extended by the Plan Administrator in its sole discretion, the option term specified in Paragraph 2 shall terminate (and this option shall cease to be exercisable) prior to the Expiration Date should any of the following provisions become applicable: (i) Except as otherwise provided in subparagraph (ii) or (iii) below, should Optionee cease to remain in Service while this option is outstanding, then the period for exercising this option shall be reduced to a three (3)-month period commencing with the date of such cessation of Service, but in no event shall this option be exercisable at any time after the Expiration Date. Upon the expiration of such three (3)-month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (ii) Should Optionee die while this option is outstanding, then the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the law of descent and distribution shall have the right to exercise this option. Such right shall lapse and this option shall cease to be exercisable upon the earlier of (A) the expiration of the twelve (12) month period measured from the date of Optionee's death or (B) the Expiration Date. Upon the expiration of such twelve (12) month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (iii) Should Optionee become permanently disabled and cease by reason thereof to remain in Service while this option is outstanding, then the Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. Optionee shall be deemed to be permanently disabled if Optionee is unable to engage in any substantial gainful activity for the Corporation or the parent or subsidiary corporation retaining his/her services by reason of any medically determinable physical or mental impairment, which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. Upon the expiration of such limited period of exercisability or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (iv) During the limited period of exercisability applicable under subparagraph (i), (ii) or (iii) above, this option may be exercised for any or all of the Option Shares for which this option is, at the time of the -2- 17 Optionee's cessation of Service, exercisable in accordance with the exercise schedule specified in the Grant Notice and the provisions of Paragraph 6 of this Agreement. (v) For purposes of this Paragraph 5 and for all other purposes under this Agreement: A. The Optionee shall be deemed to remain in SERVICE for so long as the Optionee continues to render periodic services to the Corporation or any parent or subsidiary corporation, whether as an Employee, a non-employee member of the board of directors, or an independent contractor or consultant. B. The Optionee shall be deemed to be an EMPLOYEE of the Corporation and to continue in the Corporation's employ for so long as the Optionee remains in the employ of the Corporation or one or more of its parent or subsidiary corporations, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. C. A corporation shall be considered to be a SUBSIDIARY corporation of the Corporation if it is a member of an unbroken chain of corporations beginning with the Corporation, provided each such corporation in the chain (other than the last corporation) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. D. A corporation shall be considered to be a PARENT corporation of the Corporation if it is a member of an unbroken chain ending with the Corporation, provided each such corporation in the chain (other than the Corporation) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 6. SPECIAL TERMINATION OF OPTION. A. This Option, to the extent not previously exercised, shall terminate and cease to be exercisable upon the consummation of one or more of the following shareholder-approved transactions (a "Corporate Transaction") unless this Option is expressly assumed by the successor corporation or parent thereof: (i) a merger or consolidation in which the Corporation is not the surviving entity, -3- 18 (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets, or (iii) any transaction (other than an issuance of shares by the Corporation for cash) in or by means of which one or more persons acting in concert acquire, in the aggregate, more than 50% of the outstanding shares of the stock of the Corporation. B. This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 7. ADJUSTMENT IN OPTION SHARES. A. In the event any change is made to the Corporation's outstanding Common Stock by reason of any stock split, stock dividend, combination of shares, exchange of shares, or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the total number of Option Shares subject to this option, (ii) the number of Option Shares for which this option is to be exercisable from and after each installment date specified in the Grant Notice and (iii) the Option Price payable per share in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. B. If this option is to be assumed in connection with a Corporate Transaction described in Paragraph 6 or is otherwise to remain outstanding, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issuable to the Optionee in the consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Option Price payable per share, provided the aggregate Option Price payable hereunder shall remain the same. 8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not have any of the rights of a shareholder with respect to the Option Shares until such individual shall have exercised the option and paid the Option Price. 9. MANNER OF EXERCISING OPTION. A. In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or in the case of exercise after Optionee's death, the Optionee's executor, administrator, heir or legatee, as the case may be) must take the following actions: -4- 19 (i) Execute and deliver to the Secretary of the Corporation a stock purchase agreement (the "Purchase Agreement") in substantially the form of Exhibit B to the Grant Notice. (ii) Pay the aggregate Option Price for the purchased shares in one or more forms approved under the Plan. (iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option, if other than Optionee, have the right to exercise this option. B. Should the Corporation's outstanding Common Stock be registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act") at the time the option is exercised, then the Option Price may also be paid as follows: (i) in shares of Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at fair market value on the Exercise Date; or (ii) through a special sale and remittance procedure pursuant to which the Optionee is to provide irrevocable written instructions (a) to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Option Price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation by reason of such purchase and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to effect the sale transaction. C. For purposes of this Agreement, the Exercise Date shall be the date on which the executed Purchase Agreement shall have been delivered to the Corporation, and the fair market value of a share of Common Stock on any relevant date shall be determined in accordance with subparagraphs (i) through (iii) below: (i) If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded on the NASDAQ National Market System, the fair market value shall be the closing selling price of one share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers through its NASDAQ system or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of fair market value. -5- 20 (ii) If the Common Stock is at the time listed or admitted to trading on any stock exchange, then the fair market value shall be the closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the fair market value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. (iii) If the Common Stock at the time is neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, or if the Plan Administrator determines that the value determined pursuant to subparagraphs (i) and (ii) above does not accurately reflect the fair market value of the Common Stock, then such fair market value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. D. As soon after the Exercise Date as practical, the Corporation shall mail or deliver to Optionee or to the other person or persons exercising this option a certificate or certificates representing the shares so purchased and paid for, with the appropriate legends affixed thereto. E. In no event may this option be exercised for any fractional shares. 10. COMPLIANCE WITH LAWS AND REGULATIONS. A. The exercise of this option and the issuance of Option Shares upon such exercise shall be subject to compliance by the Corporation and the Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Corporation's Common Stock may be listed at the time of such exercise and issuance. B. In connection with the exercise of this option, Optionee shall execute and deliver to the Corporation such representations in writing as may be requested by the Corporation in order for it to comply with the applicable requirements of Federal and State securities laws. 11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of Optionee and the successors and assigns of the Corporation. 12. LIABILITY OF CORPORATION. -6- 21 A. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without shareholder approval be issued under the Plan, then this option shall be void with respect to such excess shares, unless shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of Article IV, Section 3, of the Plan. B. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals. 13. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation in care of the Corporate Secretary at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 14. LOANS. The Plan Administrator may, in its absolute discretion and without any obligation to do so, assist the Optionee in the exercise of this option by (i) authorizing the extension of a loan to the Optionee from the Corporation or (ii) permitting the Optionee to pay the option price for the purchased Common Stock in installments over a period of years. The terms of any such loan or installment method of payment (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. 15. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option. 16. GOVERNING LAW. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 17. SHAREHOLDER APPROVAL. The grant of this option is subject to approval of the Plan by the Corporation's shareholders within twelve (12) months after the adoption of the Plan by the Board of Directors. Notwithstanding any provision of this Agreement to the contrary, this option may not be exercised in whole or in part until such shareholder approval is obtained. In the event that such shareholder approval is -7- 22 not obtained, then this option shall thereupon terminate in its entirety and the Optionee shall have no further rights to acquire any Option Shares hereunder. 18. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the event this option is designated an incentive stock option in the Grant Notice, the following terms and conditions shall also apply to the grant: A. This option shall cease to qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3) months after the date the Optionee ceases to be an Employee for any reason other than death or permanent disability (as defined in Paragraph 5) or (ii) more than one (1) year after the date the Optionee ceases to be an Employee by reason of permanent disability. -8- 23 B. Should this option be designated as immediately exercisable in the Grant Notice, then this option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate fair market value (determined at the Grant Date) of the Corporation's Common Stock for which this option would otherwise first become exercisable in such calendar year would, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Corporation's Common Stock for which this option or one or more other incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or its parent or subsidiary corporations) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion will first become exercisable in the first calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18.B would not be contravened. C. Should this option be designated as exercisable in installments in the Grant Notice, then no installment under this option (whether annual or monthly) shall qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) the aggregate fair market value (determined at the Grant Date) of the Corporation's Common Stock for which such installment first becomes exercisable hereunder will, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Corporation's Common Stock for which one or more other incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any parent or subsidiary corporation) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. 19. WITHHOLDING. Optionee hereby agrees to make appropriate arrangements with the Corporation or parent or subsidiary corporation employing Optionee for the satisfaction of all Federal, State or local income tax withholding requirements and Federal social security employee tax requirements applicable to the exercise of this option. -9- EX-10.32 36 EXHIBIT 10.32 1 EXHIBIT 10.32 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of July 1, 1995, by and between CombiChem(TM), Inc., a California corporation ("Employer"), and Steven Teig ("Employee"). NOW, THEREFORE, the parties agree as follows: 1. Employment. Employer hereby engages Employee, and Employee hereby accepts such engagement, upon the terms and conditions set forth herein. 2. Duties. During the term of this Agreement, Employee shall be employed as the Employer's Vice President. Employee shall faithfully and diligently perform the duties customarily performed by persons in the position or positions for which Employee is engaged together with such other reasonable and appropriate duties as Employer shall designate from time to time. Employee shall devote Employee's full business time and effort to the rendition of such services and to the performance of such duties. As a full-time employee of Employer, Employee shall not be entitled to provide consulting services or other business or scientific services to any other party, without prior written consent of Employer's Board of Directors (the "Board"). 3. Compensation. 3.1 Base Salary. During the term of this Agreement, as compensation for the proper and satisfactory performance of all duties to be performed by Employee hereunder, Employer shall pay to Employee a salary at the annual rate of One Hundred & Thirty-Five Thousand dollars ($135,000) payable in accordance with Employee's standard payroll practices, less required deductions for state and federal withholding tax, Social Security and all other employee taxes and payroll deductions. Employee's base salary shall be reviewed annually by the Board and may be increased or decreased in the sole discretion of the Board. 3.2 Bonuses. 3.2.1 Signing Bonus. Employee shall be entitled to receive a signing bonus in the amount of $20,000 (plus an amount which equals the federal and state taxes on $15,000) which shall be paid by Employer within ten business days after execution of this Agreement. 3.2.2 Performance Bonus. At the beginning of each fiscal year of Employer, Employer and Employee shall reach mutually agreed upon financing and business objectives for employer for its upcoming fiscal year which shall be set forth in writing and approved by the Board. At the end of each such fiscal year, the Board shall determine, in its reasonable discretion, the size and amount of Employee's performance bonus, if any, up to a maximum of twenty percent (20%) of Employee's base salary during the prior fiscal year (the "Annual Performance Bonus"). The Annual Performance Bonus shall be paid to Employee within sixty (60) days following Employer's fiscal year end. Employee is not eligible for an Annual 2 Performance Bonus for events occurring prior to the date of this Agreement. The first Annual Performance Bonus shall be (i) no greater than an amount equal to the amount of the maximum Annual Performance Bonus Employee is entitled to receive multiplied by the quotient of (x) the number of calendar days during Employer's 1995 fiscal year on which Employee is an employee of Employer divided by (y) three hundred sixty-five (365); (ii) based on Employer's 1995 fiscal year achievements; (iii) paid to Employee by March 1, 1996; and (iv) guaranteed to be not less than one-half (1/2) of the maximum amount which Employee is entitled to receive pursuant to paragraph (i) above; provided, however, that no other Annual Performance Bonus shall have any guaranteed minimum payment. 4. Term of Employment. 4.1 Period of Employment. The Employee's period of employment by Employer pursuant to this Agreement shall commence on the date of this Agreement ("Commencement Date") and end upon the date the employment relationship is terminated pursuant to Section 4.2 or 4.3 (the "Period of Employment"). 4.2 Termination at Will. Although Employer and Employee anticipate a long and mutually rewarding employment relationship, either party may terminate this Agreement, without cause, upon 14 days prior written notice delivered to the other party. It is expressly understood and agreed that the employment relationship is "at will," without any agreement for employment for any specified term, and without any agreement for employment for so long as Employee performs satisfactorily. 4.3 Termination for Cause. Employer may immediately terminate this employment relationship "for cause" upon written notice to Employee. For purposes of this Agreement, "for cause" shall be limited to the following; (i) Employee's intentional violation of any written rule or policy of Employer or its subsidiaries (a "Violation") which, after written notice of a Violation, Employee fails to correct within twenty (20) days of receipt of such notice from the Board; (ii) any material failure by Employee to comply with any reasonable directive of the Board which, after receiving written notice to do so, Employee fails to comply within twenty (20) days of receipt of such notice from the Board; (iii) Employee's willful misconduct concerning any material responsibility reasonably assigned to Employee; (iv) without obtaining the prior consent of the Board, Employee's active and intentional performance of services for any other corporation or person which competes with Employer or its subsidiaries while Employee is employed by Employer or its subsidiaries; (v) the Board reasonably determines that Employee has stolen or embezzled either funds or property of Employer; (vi) Employee's conviction by a court of competent jurisdiction of a felony (other than a traffic or moving violation) involving moral turpitude or dishonesty; (vii) Employee's intentional or grossly negligent conduct or violation of law which results in either an unlawful personal benefit to Employee or a material injury to Employer; (viii) the death or disability of Employee; or (ix) any breach by Employee of any confidentiality or non-disclosure agreement executed by Employee and Employer. -2- 3 4.4 Obligations Upon Termination. 4.4.1 Survival of Obligations. The parties' obligations under Sections 4.4.2, 6, 7, 10.7 and 10.8, shall survive the termination of this Agreement. 4.4.2 Return of Materials at Termination. Upon termination of the Period of Employment, Employee will promptly deliver to Employer all materials, property, documents, data, and other information belonging to Employer or containing Employer's Trade Secrets. Employee shall not take any materials, property, documents or other information, or any reproduction or excerpt thereof, belonging to Employer or containing any Trade Secrets. 4.4.3 Resignation. Upon termination of the Period of Employment, Employee shall be deemed to have resigned from any and all offices then held with Employer. 5. Benefits. 5.1 Health Insurance. Employee shall be entitled to Employer's standard benefits package for its employees including, but not limited to family health care insurance (the "Fringe Benefits"). Employer agrees to pay Employee's monthly COBRA continuation policy premiums until Employer's own health care program is instituted for Employer's employees. Employer makes no warranties as to insurance coverage of pre-existing conditions and shall not be obligated to provide any coverage to Employee not included in Employer's standard health care program. If Employee cannot be covered by such program, then Employer shall apply its mean per employee insurance premium payment towards Employee's independently obtained insurance policy and premium. Employer reserves the right to change such benefits from time to time in its sole discretion. 5.2 Life Insurance. In addition to Employee's standard Employer provided life insurance policy, provided that Employee is insurable at commercially reasonable rates, Employer shall obtain and maintain, during the term of this Agreement and any extension thereof, a term life insurance policy on the Employee's life in an amount no less than five hundred thousand dollars ($500,000) (the "Life Insurance Policy"). Employer shall pay the premiums and Employee shall designate the beneficiary of the Life Insurance Policy. 5.3 Personal Leave. Employee shall accrue fifteen days of paid personal leave during each year of Employee's employment. Upon accrual of fifteen days of unused personal leave, no additional personal leave time will accrue until Employee has used some of the accrued personal leave time and has reduced the amount of accrued time below fifteen days. Once Employee has taken personal leave and his accrued time has dropped below fifteen days, Employee shall begin to accrue personal leave time again (at the rate of fifteen days per year), up to the maximum of fifteen days. Notwithstanding the foregoing, if Employer adopts a personal leave policy for its executives permitting them to accrue more than fifteen days personal leave, Employee shall be entitled to the benefits of such policy. -3- 4 6. Inventions Trade Secrets and Confidentiality. 6.1 Definitions. 6.1.1 Invention Defined. As used herein "Inventions" means inventions, discoveries, concepts, and ideas, whether patentable or copyrightable or not, including but not limited to processes, methods, formulas, techniques, devices, designs, programs (including computer programs), computer graphics, apparatus, products, as well as improvements thereof or know-how related thereto, relating to any present or anticipated business or activities of Employer. 6.1.2 Trade Secret Defined. As used herein "Trade Secret" means, without limitation, any document or information relating to Employer's products, processes or services, including documents and information relating to Inventions, and to the research, development, engineering or manufacture of Inventions, and to Employer's purchasing, customer or supplier lists and pricing policies, which documents or information have been disclosed to Employee or known to Employee as a consequence of or through Employee's employment by Employer (including documents, information or Inventions conceived, originated, discovered or developed by Employee), which is not generally known in the relevant trade or industry. Nothing in this Agreement shall be construed to alter or enlarge the definition of "trade secret" as set forth in Civil Code Section 3426.1(d). 6.2 Inventions. 6.2.1 Disclosure. Employee shall disclose promptly to Employer each Invention, whether or not reduced to practice, which is conceived or learned by Employee (either alone or jointly with others) during the term of his employment or engagement as a consultant with Employer. Employee shall disclose in confidence to Employer all patent applications filed by or on behalf of Employee during the term of his employment or engagement as a consultant and will disclose in confidence to Employer's outside patent counsel all patent applications filed by or on behalf of Employee for a period of one year thereafter. 6.2.2 Employer Property; Assignment. Except as otherwise provided in Section 6.2.3, Employee acknowledges and agrees that all Inventions which are discovered, conceived, developed, made, produced or prepared by Employee (alone or in conjunction with others) during the duration of Employee's employment or engagement as a consultant with Employer shall be the sole property of Employer. Said property rights of Employer include without limitation all domestic and foreign patent rights, rights of registration or other protection under the patent and copyright laws, and all other rights pertaining to the Inventions. Employee further agrees that all Inventions which are generated by Employee within the scope of his employment with Employer shall be deemed "works for hire" as that term is defined in Title 17 of the United States Code and accordingly all rights associated therewith shall vest in Employer. To effectuate Employer's ownership as set forth in the first sentence, Employee hereby assigns to Employer all of Employee's right, title and interest in all such Inventions, regardless of whether such Inventions are deemed to be "works for hire." -4- 5 6.2.3 Exclusion Notice. The assignment by Employee of Inventions under this Agreement does not apply to any Inventions which are owned or controlled by Employee prior to the commencement of employment of Employee by Employer (all of which are set forth on Exhibit "A" hereto). Additionally, Employee is not required to assign an idea or invention where the invention or idea meets all of the following criteria, namely the invention or idea: (i) was created or conceived without the use of any of Employer's equipment, supplies, facilities, or trade secret information, and (ii) was developed entirely on Employee's own time, and (iii) does not relate to the business of Employer, and (iv) does not relate to Employer's actual or demonstrably anticipated research or development, and (v) does not result from any work performed by Employee for Employer. Employee has reviewed the notification in this Section 6.2.3 and in Exhibit B ("Limited Exclusion Notification") and agrees that Employee's signature on the Limited Exclusion Notification acknowledges receipt of the notification. 6.2.4 Patents and Copyrights; Attorney-in-Fact. Both before and after termination of this Agreement (and with reasonable compensation paid by Employer to Employee after termination), Employee agrees to assist Employer to apply for, obtain and enforce patents on, and to apply for, obtain and enforce copyright protection and registration of, the Inventions described in Section 6.2.2 in any and all countries. To that end, Employee shall (as reasonably requested by Employer), testify in any proceeding and execute any documents and assignments determined to be necessary or convenient for use in applying for, obtaining, registering and enforcing patent or copyright protection involving any of the Inventions. Employee hereby irrevocably appoints Employer, and its duly authorized officers and agents, as Employee's agent, and attorney-in-fact to act for and in behalf of Employee in filing all patent applications, applications for copyright protection and registration, amendments, renewals, and all other appropriate documents in any way related to the Inventions described in Section 6.2.2. 6.3 Trade Secrets. 6.3.1 Acknowledgement of Proprietary Interest. Employee recognizes the proprietary interest of Employer in any Trade Secrets of Employer. Employee acknowledges and agrees that any and all Trade Secrets of Employer, whether developed by Employee alone or in conjunction with others or otherwise, shall be and are the property of Employer. 6.3.2 Covenant not to Divulge Trade Secrets. Employee acknowledges and agrees that Employer is entitled to prevent the disclosure of Employer's Trade Secrets. As a portion of the consideration for the employment of Employee and for the compensation being paid to Employee by Employer, Employee agrees at all times during the term of the employment by the Employer and thereafter to hold in strictest confidence, and not to use, disclose or allow to be disclosed to any person, firm, or corporation, without Employer's express prior written consent, Employer's Trade Secrets, including Trade Secrets developed by Employee, other than disclosures to persons who have entered into confidentiality agreements with Employer. 6.3.3 Confidential Information of Others. Employee represents and warrants that if Employee has any confidential information belonging to others, Employee will not use or disclose to Employer any such information or documents. Employee represents that -5- 6 his employment with Employer will not require him to violate any obligation to or confidence with any other party. 6.4 No Adverse Use. Employee will not at any time during the term of employment or thereafter use Employer's Trade Secrets or Inventions in any manner which may directly or indirectly have an adverse effect upon Employer's business, nor will Employee perform any acts which would tend to reduce Employer's proprietary value in Employer's Trade Secrets or Inventions. 6.5 Remedies Upon Breach. In the event of any breach by Employee of the provision in this Section 6, Employer shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to enjoin Employee from violating any of the terms of this Section 6, to enforce the specific performance by Employee of any of the terms of this Section 6, and to obtain damages, or any of them, but nothing herein contained shall be construed to prevent such remedy or combination of remedies as Employer may elect to invoke. The failure of Employer to promptly institute legal action upon any breach of this Section 6 shall not constitute a waiver of that or any other breach hereof. 7. Non-Solicitation and Other Covenants. In further consideration of the compensation to be paid to Employee hereunder, Employee agrees that, during Employee's employment, Employee will not directly or indirectly compete with Employer in any way, and that Employee will not act as an officer, director, employee, consultant, lender, agent or owner of any interest in any other entity which is engaged in any business which is of the same nature as, which is in competition with, or which is involved in science or technology which is similar to the businesses in which Employer or its subsidiaries (i) are now engaged, (ii) become engaged in during the term of Employee's employment or (iii) plan to become engaged in prior to the date of Employee's termination; provided, however, that nothing in this Section 7 shall prohibit Employee from being a passive owner of not more than one percent (1%) of the outstanding stock of any class of a corporation which is publicly traded on the NYSE, NASDAQ or ASE stock exchanges, so long as Employee has no active participation in the business of such corporation. During Employee's employment, the term of any consulting engagement of Employee pursuant to Section 4.4.3, and for a period of one (1) year thereafter, Employee shall not directly or indirectly through another entity induce or attempt to induce any employee of Employer or any subsidiary of Employer to leave the employ of Employer or such subsidiary, or in any way interfere with the relationship between the Employer or any subsidiary and the employee thereof. After the end of Employee's employment, Employee agrees not to use or disclose any trade secret of Employer for any reason and not to make any negative statements or communications about Employer or its affiliates to any customer, supplier, licensee, licensor or other party which has a contractual relationship with Employer or its subsidiaries, employees or affiliates. 8. Additional Rights. 8.1 Common Stock Purchase Agreement. Simultaneous with the execution of this Agreement, Employee and Employer shall enter into a written restricted stock purchase agreement for Employee to purchase Two Hundred Thousand (200,000) shares of Employer's -6- 7 common stock at seven and one-half cents ($0.075) per share (the "Shares") in the form of agreement previously reviewed and approved by Employee. The Shares shall be subject to a four year right of repurchase in favor of the Company under which the Company may repurchase any "unvested shares." None of the Shares shall vest during the first twelve (12) months of employment pursuant to this Agreement. On the first anniversary of the Commencement Date, thirty-five percent (35%) of the Shares shall vest. Thereafter, one-thirty-sixth (1/36) of the remaining Shares shall vest in a series of thirty-six successive monthly installments at the end of each month for so long as Employee is employed by Employer. Employee shall be solely responsible for the filing of an 83(b) election with the Internal Revenue Service ("IRS") concerning the purchase of the Shares. 8.2 Option to Purchase Preferred Stock. At the first Board meeting after execution of this Agreement, Employer shall grant to Employee options to purchase Two Hundred & Forty-Five Thousand (245,000) restricted shares of Employer's Series J Preferred Stock at ten cents ($0.10) per share, on the following terms: An option for 60,000 of such shares will be exercisable only if and when a mutually defined project deliverable is delivered to Employer by Employee within the mutually agreed time frame. A second option for 60,000 of such shares will be exercisable only if and when a second mutually defined project deliverable is delivered to Employer by Employee within the mutually agreed time frame. A third option for 125,000 of such shares will be exercisable only if and when a third mutually defined project deliverable is delivered to Employer by Employee within the mutually agreed time frame. 9. Employee's Representations. Employer acknowledges that Employee has made Employer aware of Employee's previous agreement with MSI. Except for such agreement (and without making any representation as to the effect of that agreement), Employee represents and warrants that Employee (i) is free to enter into this Agreement and to perform each of the terms and covenants contained herein, (ii) is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and (iii) will not be in violation or breach of any other agreement by reason of Employee's execution and performance of this Agreement. 10. General Provisions. 10.1 Amendments. No amendment or modification of the terms or conditions of this Agreement shall be valid unless in writing and signed by both parties hereto. There shall be no implied-in-fact contracts modifying the terms of this Agreement. 10.2 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the employment of Employee. This Agreement supersedes all prior agreements, understandings, negotiations and representation with respect to the employment relationship between Employer and Employee including, but not limited to, the offer letter dated May 12, 1995 which contained proposed terms and conditions for hiring Employee; provided, however, this Agreement shall not supersede any (I) confidentiality or non-disclosure agreement or (ii) restricted stock purchase or option agreement previously or contemporaneously executed by Employee and Employer. -7- 8 10.3 Successors and Assigns. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. Employee shall not be entitled to assign any of Employee's rights or obligations under this Agreement. 10.4 Waiver. Either party's failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement. 10.5 Severable Provisions. The provisions of this Agreement are severable, and if any one or more provisions may be determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 10.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. 10.7 Choice of Law. This Agreement shall be governed and construed in accordance with the internal laws of California without regard to its conflicts of laws principles. 10.8 Jurisdiction and Venue. In the event that any legal proceedings are commenced in any court with respect to any matter arising under this Agreement, Employer and Employee specifically consent and agree that: (i) the courts of the State of California and/or the United States Federal Courts located in the State of California shall have exclusive jurisdiction over each of the Parties and such proceedings; and (ii) the venue of any such action shall be in San Diego County, California and/or the United States District Court for the Southern District of California. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -8- 9 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. EMPLOYER: COMBICHEM(TM), INC., a California corporation By: /s/ Robert Curtis ------------------------------------------ Robert A. Curtis, Chief Executive Officer EMPLOYEE: STEVEN TEIG /s/ Steven Teig ---------------------------------------------- (Signature) Address: 904 Ramona Street Palo Alto, CA 94301 [SIGNATURE PAGE TO TEIG EMPLOYMENT AGREEMENT] -9- 10 EXHIBIT A LIST OF PRIOR INVENTIONS (Section 6.2.3) None, other than the following: ______________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 11 EXHIBIT B LIMITED EXCLUSION NOTIFICATION THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between you and Employer does not require you to assign or offer to assign to Employer any invention that you developed entirely on your own time without using Employer's equipment, supplies, facilities or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to Employer's business, or Employer's actual or demonstrably anticipated research or development; or (2) Result from any work performed by you for Employer. To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between Employer and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I ACKNOWLEDGE RECEIPT of a copy of this notification. By: _____________________________________ Steven Teig Date: ___________________________________ Witnessed by: - ------------------------------------- - ------------------------------------- (Printed Name of Witness) Dated:_________________________ EX-10.33 37 EXHIBIT 10.33 1 EXHIBIT 10.33 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of March 14, 1996, by and between CombiChem, Inc., a California corporation ("Employer"), and Vicente Anido, Jr. ("Employee"). NOW, THEREFORE, the parties agree as follows: 1. Employment. Employer hereby engages Employee, and Employee hereby accepts such engagement, upon the terms and conditions set forth herein. 2. Duties. During the term of this Agreement, Employee shall be employed as the Employer's President and Chief Executive Officer. Employee shall faithfully and diligently perform the duties customarily performed by persons in the position or positions for which Employee is engaged together with such other reasonable and appropriate duties as Employer shall designate from time to time. Employee shall devote Employee's full business time and effort to the rendition of such services and to the performance of such duties. As a full-time employee of Employer, Employee shall not be entitled to provide consulting services or other business or scientific services to any other party, without prior written consent of Employer's Board of Directors (the "Board"). Employee shall be elected to the Board prior to its next regularly scheduled meeting following the date of this Agreement. 3. Compensation. 3.1 Base Salary. During the term of this Agreement, as compensation for the proper and satisfactory performance of all duties to be performed by Employee hereunder, Employer shall pay to Employee a salary at the annual rate of Two Hundred Sixty Thousand Dollars ($260,000.00), payable in accordance with Employee's standard payroll practices, less required deductions for state and federal withholding tax, Social Security and all other employee taxes and payroll deductions. Employee's base salary shall be reviewed annually by the Board and may be increased or decreased in the sole discretion of the Board. 3.2 Performance Bonuses. At the beginning of each fiscal year of Employer, Employer and Employee shall reach mutually agreed upon financing and business objectives for Employer for its upcoming fiscal year which shall be set forth in writing and approved by the Board. At the end of each such fiscal year, the Board shall determine, in its reasonable discretion, the size and amount of Employee's performance bonus, if any, up to a maximum of twenty-five percent (25%) of Employee's base salary during the prior fiscal year (the "Annual Performance Bonus"). The Annual Performance Bonus shall be paid to Employee within sixty (60) days following 2 Employer's fiscal year end. The first Annual Performance Bonus shall be (i) no greater than an amount equal to the amount of the maximum Annual Performance Bonus Employee is entitled to receive multiplied by the quotient of (x) the number of calendar days during Employer's 1996 fiscal year on which Employee is an employee of Employer divided by (y) three hundred sixty-five (365); (ii) based on Employer's 1996 fiscal year achievements; and (iii) paid to Employee by March 1, 1997. 4. Term of Employment. 4.1 Period of Employment. The Employee's period of employment by Employer pursuant to this Agreement shall commence on March 25, 1996 ("Commencement Date") and end upon the date the employment relationship is terminated pursuant to Sections 4.2 or 4.3 hereunder (the "Period of Employment"). 4.2 Termination at Will. Although Employer and Employee anticipate a long and mutually rewarding employment relationship, either party may terminate this Agreement, without cause, upon fourteen (14) days prior written notice delivered to the other party. It is expressly understood and agreed that the employment relationship is "at will," without any agreement for employment for any specified term, and without any agreement for employment for so long as Employee performs satisfactorily. 4.3 Termination for Cause. Employer may immediately terminate this employment relationship "for cause" upon written notice to Employee. For purposes of this Agreement, "for cause" shall be limited to the following; (i) Employee's willful misconduct concerning any material responsibility reasonably assigned to Employee; (ii) without obtaining the prior consent of the Board, Employee's active and intentional performance of services for any other corporation or person which competes with Employer or its subsidiaries while Employee is employed by Employer or its subsidiaries; (iii) the Board reasonably determines that Employee has stolen or embezzled either funds or property of Employer; (iv) Employee's conviction by a court of competent jurisdiction of a felony (other than a traffic or moving violation) involving moral turpitude or dishonesty; (v) Employee's intentional or grossly negligent conduct or violation of law which results in either an improper personal benefit to Employee or a material injury to Employer; or (vi) the death or total disability of Employee. 4.4 Obligations Upon Termination. 4.4.1 Survival of Obligations. The parties' obligations under Sections 4.4.2, 6, 7, 9.7 and 9.8, shall survive the termination of this Agreement. 4.4.2 Return of Materials at Termination. Upon termination of the Period of Employment, Employee will promptly deliver to Employer -2- 3 all materials, property, documents, data and other information belonging to Employer or containing Employer's Trade Secrets or other Protected Information (each as defined below). Employee shall not take any materials, property, documents or other information, or any reproduction or excerpt thereof, belonging to Employer or containing any Trade Secrets or other Protected Information of Employer. 4.4.3 Resignation. Upon termination of the Period of Employment, Employee shall be deemed to have resigned from any and all offices then held with Employer. 4.5 Compensation to Employee on Termination by Employer. In the event that Employer terminates Employee pursuant to Section 4.2, Employee shall be entitled to receive an aggregate severance benefit of twelve (12) months of Employee's then current base salary (as determined pursuant to Section 3.1) and benefits (as determined pursuant to Section 5) which shall be paid by Employer to Employee in twelve (12) equal monthly installments until fully paid or until Employee has secured full-time employment; provided, if Employee secures full-time employment in which he is paid less per month than the monthly severance installments payable hereunder or if Employee secures consulting assignments, Employee shall be entitled to reduced severance benefits from Employer equal to the difference between the monthly severance payments and the monthly compensation obtained by Employee pursuant to such full-time employment or consulting assignments. In the event that Employee elects to receive and does receive any of the benefits set forth in this Section 4.5, Employee agrees that such payments shall constitute Employee's sole and exclusive rights and entitlements in connection with Employee's employment by Employer, the termination of such employment and any and all matters related to or arising in connection with such employment, and agrees that his acceptance of any such payments shall release Employer and any and all affiliated persons and entities (including all directors, officers, employees and agents) from any claims that Employee may otherwise have or assert in connection with such matters. If Employee desires to pursue or enforce any rights, entitlements or remedies that would otherwise be waived and released, then Employee shall refuse any payments provided for pursuant to this Section 4.5. If Employee accepts any such severance payment or payments, he shall be deemed to have agreed to the foregoing exclusivity of rights and waiver of claims. 5. Benefits. 5.1 Health Insurance, Vacation and Sick Leave. Employee shall be entitled to Employer's standard benefits package for its executive employees including, but not limited to, family health care insurance, officer and director liability insurance (when obtained for Employer's other officers and/or directors), vacation and sick leave (the "Fringe Benefits"). Employer agrees to pay Employee's monthly COBRA continuation policy premiums until Employer's own health care program is instituted for -3- 4 Employer's employees. Employer reserves the right to change such benefits from time to time in its sole discretion. 5.2 Life Insurance. In addition to Employee's standard Employer provided life insurance policy, provided that Employee is insurable at commercially reasonable rates, Employer shall obtain and maintain, during the term of this Agreement and any extension thereof, a term life insurance policy on the Employee's life in an amount no less than One Million Dollars ($1,000,000) (the "Life Insurance Policy"). Employer shall pay the premiums and Employee shall designate the beneficiary of the Life Insurance Policy. 5.3 Accumulation. Employee shall not earn and accumulate unused vacation and sick leave, or other Fringe Benefits, in excess of an unused amount equal to the amount earned for one (1) year. Furthermore, Employee shall not be entitled to receive payments in lieu of said Fringe Benefits, other than for unused vacation earned and accumulated at the time the employment relationship terminates. All unused sick leave and other Fringe Benefits earned during the preceding twelve (12) month period ending on each anniversary of the date of this Agreement shall be forfeited if not used within ninety (90) days following such anniversary date. Notwithstanding the foregoing, if Employer adopts a more favorable accumulation policy for its executives, Employee shall be entitled to the benefits of such more favorable accumulation policy. 5.4 Disability Benefits. Employer shall use its commercially reasonable efforts to help Employee secure long-term disability insurance. Employee shall pay the premiums associated with any such insurance. 6. Inventions, Trade Secrets and Confidentiality. 6.1 Definitions. 6.1.1 Invention Defined. As used herein "Inventor" means inventions, discoveries, concepts, and ideas, whether patentable or copyrightable or not, including but not limited to processes, methods, formulas, techniques, devices, designs, programs (including computer programs), computer graphics, apparatus, products, as well as improvements thereof or know-how related thereto, relating to any present or anticipated business or activities of Employer. 6.1.2 Trade Secret Defined. As used herein "Trade Secret" means, without limitation, any document or information relating to Employer's products, processes or services, including documents and information relating to Inventions, and to the research, development, engineering or manufacture of Inventions, and to Employer's purchasing, customer or supplier lists and pricing policies, which documents or -4- 5 information have been disclosed to Employee or known to Employee as a consequence of or through Employee's employment by Employer (including documents, information or Inventions conceived, originated, discovered or developed by Employee), which is not generally known in the relevant trade or industry. 6.1.3 Protected Information Defined. As used herein "Protected Information" means, without limitation, all trade secrets, confidential or proprietary information, and all other knowledge, data, know-how, processes, information, documents or materials, owned, developed or possessed by Employer, whether in tangible or intangible form, the confidentiality of which Employer takes reasonable measures to protect, and which pertains in any manner to subjects which include, but are not limited to, Employer's research operations, customers (including identities of customers and prospective customers, identifies of individual contacts at business entities which are customers or prospective customers, preferences, businesses or habits), business relationships, engineering data or results, specifications, concepts, methods, processes, rates or schedules, customer or vendor information, products (including prices, costs, sales or content), financial information or measures, business methods, future business plans, data bases, computer programs, designs, models, operating procedures, and knowledge of the organization. 6.2 Inventions. 6.2.1 Disclosure. Employee shall disclose promptly to Employer each Invention, whether or not reduced to practice, which is conceived or learned by Employee (either alone or jointly with others) during the Period of Employment. Employee shall disclose in confidence to Employer all patent applications filed by or on behalf of Employee during the Period of Employment and for a period of one (1) year thereafter. Any disclosure of any Invention, or any patent application, made within one (1) year after termination of employment shall be presumed to relate to an Invention made during Employee's Period of Employment, unless Employee clearly proves otherwise. 6.2.2 Employer Property; Assignment. Except as otherwise provided in Section 6.2.3, Employee acknowledges and agrees that all Inventions which are discovered, conceived, developed, made, produced or prepared by Employee (alone or in conjunction with others) during the Period of Employment shall be the sole property of Employer. Said property rights of Employer include without limitation all domestic and foreign patent rights, rights of registration or other protection under the patent and copyright laws, and all other rights pertaining to the Inventions. Employee further agrees that all services, products and Inventions that directly or indirectly result from engagement with Employer shall be deemed "works for hire" as that term is defined in Title 17 of the United States Code and accordingly all rights associated therewith shall vest in Employer. Notwithstanding the foregoing, Employee hereby assigns to Employer -5- 6 all of Employee's right, title and interest in any such services, products and Inventions, in the event any such services, products and Inventions shall be determined not to constitute "works for hire." 6.2.3 Exclusion Notice. The assignment by Employee of Inventions under this Agreement does not apply to any Inventions which are owned or controlled by Employee prior to the commencement of employment of Employee by Employer (all of which are set forth on Exhibit "A" hereto). Additionally, Employee is not required to assign an idea or invention where the idea or invention meets all of the following criteria, namely the invention or idea: (i) was created or conceived without the use of any of Employer's equipment, supplies, facilities, or trade secret information, and (ii) was developed entirely on Employee's own time, and (iii) does not relate to the business of Employer, and (iv) does not relate to Employer's actual or demonstrably anticipated research or development, and (v) does not result from any work performed by Employee for Employer. Employee has reviewed the notification in this Section 6.2.3 and in Exhibit B ("Limited Exclusion Notification") and agrees that Employee's signature on the Limited Exclusion Notification acknowledges receipt of the notification. 6.2.4 Patents and Copyrights; Attorney-in-Fact. Both before and after termination of this Agreement (and with reasonable compensation paid by Employer to Employee after termination), Employee agrees to assist Employer to apply for, obtain and enforce patents on, and to apply for, obtain and enforce copyright protection and registration of, the Inventions described in Section 6.2.2 in any and all countries. To that end, Employee shall (at Employer's request) without limitation, testify in any proceeding and execute any documents and assignments determined to be necessary or convenient for use in applying for, obtaining, registering and enforcing patent or copyright protection involving any of the Inventions. Employee hereby irrevocably appoints Employer, and its duly authorized officers and agents, as Employee's agent, and attorney-in-fact to act for and in behalf of Employee in filing all patent applications, applications for copyright protection and registration, amendments, renewals, and all other appropriate documents in any way related to the Inventions described in Section 6.2.2. 6.3 Trade Secrets. 6.3.1 Acknowledgement of Proprietary Interest. Employee recognizes the proprietary interest of Employer in any Trade Secrets of Employer. Employee acknowledges and agrees that any and all Trade Secrets of Employer, whether developed by Employee alone or in conjunction with others or otherwise, shall be and are the property of Employer. 6.3.2 Covenant not to Divulge Trade Secrets. Employee acknowledges and agrees that Employer is entitled to prevent the disclosure of -6- 7 Employer's Trade Secrets or Protected Information. As a portion of the consideration for the employment of Employee and for the compensation being paid to Employee by Employer, Employee agrees at all times during the Period of Employment and thereafter to hold in strictest confidence, and not to use, disclose or allow to be disclosed to any person, firm, or corporation, without Employer's express prior written consent, Employer's Trade Secrets or Protected Information, including Trade Secrets developed by Employee, other than disclosures to persons who have entered into confidentiality agreements with Employer. 6.3.3 Confidential Information of Others. Employee represents and warrants that if Employee has any confidential information belonging to others, Employee will not use or disclose to Employer any such information or documents. Employee represents that his employment with Employer will not require him to violate any obligation to or confidence with any other party. 6.4 No Adverse Use. Employee will not at any time during Period of Employment or thereafter use Employer's Trade Secrets, Protected Information or Inventions in any manner which may directly or indirectly have an adverse effect upon Employer's business, nor will Employee perform any acts which would tend to reduce Employer's proprietary value in Employer's Trade Secrets, Protected Information or Inventions. 6.5 Remedies Upon Breach. In the event of any breach by Employee of this Section 6, Employer shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to enjoin Employee from violating any of the terms of this Section 6, to enforce the specific performance by Employee of any of the terms of this Section 6, and to obtain damages, or any of them, but nothing herein contained shall be construed to prevent such remedy or combination of remedies as Employer may elect to invoke. The failure of Employer to promptly institute legal action upon any breach of this Section 6 shall not constitute a waiver of that breach or any other breach hereof. 7. Non-Compete and Non-Solicitation Covenants. In further consideration of the compensation to be paid to Employee hereunder, Employee agrees that, during Employee's employment, Employee will not directly or indirectly compete with Employer in any way, and that Employee will not act as an officer, director, employee, consultant, lender, agent or owner of any interest in any other entity which is engaged in any business which is of the same nature as, which is in competition with, or which is involved in science or technology which is similar to the businesses in which Employer or its subsidiaries (i) are now engaged, (ii) become engaged in during the term of Employee's employment or (iii) plan to become engaged in prior to the date of Employee's termination. During Employee's employment and for a period of one (1) year thereafter, Employee shall not directly or indirectly through another entity (x) -7- 8 induce or attempt to induce any employee of Employer or any subsidiary of Employer to leave the employ of Employer or such subsidiary, or in any way interfere with the relationship between the Employer or any subsidiary and the employee thereof; (y) hire any person who is an employee of Employer or any subsidiary at any time, provided, however, that Employee may hire those employees who were directly and actively recruited by Employee, on Employer's behalf, to become employees of Employer; or (z) induce or attempt to induce any customer, supplier, licensee, licensor or other party which as a contractual relationship with Employer or its subsidiaries or affiliates to cease doing business with Employer or any such subsidiary (including, without limitation, making any negative statements or communications about Employer or its affiliates). 8. Additional Rights. 8.1 Option to Purchase Common Stock. At the first meeting of the Board to occur after the execution of this Agreement, Employer shall grant to Employee an option to purchase up to One Million Six Hundred Eighty Thousand (1,680,000) restricted shares of Employer's Common Stock at seven and one-half cents ($0.075) per share (the "Common Shares"). Such number of shares of Common Stock shall constitute six percent (6%) of the fully-diluted shares of capital stock of Employer taking into account the proposed issuance and sale of additional shares of Series C Preferred Stock scheduled to occur no later than June 1996 (the "Second Closing"). The Common Shares shall be vested under the option as follows: (i) ten percent (10%) shall vest as of the Commencement Date; (ii) an additional fifteen percent (15%) shall vest as of the first anniversary of the Commencement Date provided Employee is employed by Employer on such anniversary; and (iii) one-thirty-sixth (1/36) of the remaining unvested Common Shares shall thereafter vest in a series of successive monthly installments at the end of each month for so long as Employee is employed by Employer. On the fourth (4th) anniversary of the Commencement Date, the Common Shares shall all be vested. The option agreement (the "Option Agreement") shall also provide that in the event of (A) any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) in which more than fifty percent (50%) of Employer's outstanding voting stock is transferred to a person or persons different from those who held the stock immediately prior to such transaction, or (B) the sale, transfer or other disposition of all or substantially all of Employer's assets ("Change in Control"), Employee shall be entitled to exercise the option for that number of Common Shares equal to the sum of (y) that number of Common Shares which are vested as of the date of the Change in Control and (z) that number of Common Shares equal to forty percent (40%) of the unvested Common Shares as of the date of the Change of Control. 8.2 Right of First Offer to Maintain Pro-Rata Interest. Employee shall have the assignable right, during the term of this Agreement, to purchase a pro rata share of New Securities (as defined below) which Employer may, from time to time, propose to sell and issue on the same terms and conditions which such New -8- 9 Securities are offered. Employee's pro rata share, for purposes of this right, is the ratio of the number of shares of Common Stock owned by Employee immediately prior to the issuance of New Securities, assuming conversion and/or exercise of any convertible or exercisable securities into shares of Employer's Common Stock, to the total number of shares of Common Stock outstanding immediately prior to the issuance of New Securities, assuming conversion and/or exercise of all outstanding rights, options and warrants to acquire Common Stock of Employer. "New Securities" shall mean any capital stock (including Common Stock and/or Preferred Stock) of Employer whether now authorized or not, and rights, options or warrants to purchase such capital stock, and securities of any type whatsoever that are, or may become, convertible into capital stock issued or sold in a financing of Employer, the principal purpose of which is raise equity capital for Employer; provided that the term "New Securities" does not include (i) any borrowings, direct or indirect, from financial institutions or other persons by Employer, whether or not presently authorized, including any type of loan or payment evidenced by any type of debt instrument, provided such borrowings do not have any equity features including warrants, options or other rights to purchase capital stock and are not convertible into capital stock of Employer; (ii) securities issued to employees, consultants, officers or directors of Employer pursuant to any stock option, stock purchase or stock bonus plan, agreement or arrangement approved by the Board of Directors; (iii) securities issued pursuant to transactions involving technology licensing, research or development activities or the distribution or manufacture of Employer's products, provided that each of the foregoing transactions is primarily for non-equity financing purposes and the aggregate value of securities issued in each such transaction is less than $5.0 million; (iv) securities issued in connection with obtaining lease financing, whether issued to a lessor, guarantor or other person; (v) securities issued in a firm commitment underwritten public offering pursuant to a registration under the Securities Act; and (vi) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of New Securities pursuant to subsections (i) through (v) above. 8.3 Purchase Following Next Preferred Stock Financing. Employee (or Employee's designee) shall have the right, but not the obligation, to purchase that number of fully paid (subject to the financing arrangements discussed below) and nonassessable shares of Employer's Common Stock ("Common Shares") as is equal to: (a) Ninety-Six Thousand Dollars ($96,000.00) divided by (b) the per share price at which the next preferred equity security of Employer sold after the Second Closing (the "New Preferred") is sold to third party investors; provided, however, that in the event the Company has not closed the issuance and sale of any shares of the New Preferred prior to September 15, 1996, (b) shall be deemed to be $1.50 and the number of Common Shares to be issued hereunder shall be 64,000. Notwithstanding the foregoing, if the issuance and sale of the New Preferred occurs in connection with a transaction described in (i) or (ii) below, and Employer and the third party entering into such transaction mutually so determine, such issuance and sale of a preferred equity -9- 10 security shall not be deemed an issuance and sale of New Preferred: (i) any arrangement between Employer and any third party for any research or development involving Employer (including, without limitation, any arrangement that includes provision for research support, product development and/or testing support) or (ii) any rights to commercialize any products resulting from the research or development programs of Employer (including, without limitation, rights to develop, make, use and/or sell any such products). Employee shall have no right to negotiate any of the terms or conditions upon which the New Preferred will be issued (other than on behalf of Employer), which negotiation shall be conducted solely among Employer and the other purchasers of the New Preferred. The issuance of the Common Shares by Employer pursuant to this Section 8.3 shall be effected as follows, in Employee's discretion: (i) issuance of the Common Shares with the aggregate purchase price paid through a forgivable loan by Employer to Employee in the amount of the aggregate purchase price of the Common Shares calculated using the then-current fair market value for Employer's Common Stock (provided the Common Shares issued pursuant to such a loan shall not be fully-paid unless and until such loan is forgiven in whole), (ii) through the one-time bonus of the Common Shares to Employee or (iii) through the one-time bonus of the aggregate amount of the purchase price necessary to purchase the Common Shares calculated using the then-current fair market value for Employer's Common Stock. 9. General Provisions. 9.1 Amendments. No amendment or modification of the terms or conditions of this Agreement shall be valid unless in writing and signed by both parties hereto. There shall be no implied-in-fact contracts modifying the terms of this Agreement. 9.2 Entire Agreement. This Agreement, and the exhibits attached hereto, constitutes the entire agreement between the parties with respect to the employment of Employee. This Agreement supersedes all prior agreements, understandings, negotiations and representation with respect to the employment relationship between Employer and Employee. 9.3 Successors and Assigns. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. Employee shall not be entitled to assign any of Employee's rights or obligations under this Agreement. 9.4 Waiver. Either party's failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement. -10- 11 9.5 Severable Provisions. The provisions of this Agreement are severable, and if any one or more provisions may be determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 9.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party. 9.7 Choice of Law. This Agreement shall be governed and construed in accordance with the internal laws of California without regard to its conflicts of laws principles. 9.8 Jurisdiction and Venue. In the event that any legal proceedings are commenced in any court with respect to any matter arising under this Agreement, Employer and Employee specifically consent and agree that the courts of the State of California and/or the United States Federal Courts located in the State of California shall have exclusive jurisdiction over each of the Parties and such proceedings. 9.9 Drafting Party. The provisions of this Agreement, and the documents and instruments referred to herein, have been examined, negotiated, drafted and revised by counsel for each party hereto and no implication shall be drawn nor made against any party hereto by virtue of the drafting of this Agreement. 10. Employee's Representations. Employee represents and warrants that Employee (i) is free to enter into this Agreement and to perform each of the terms and covenants contained herein, (ii) is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and (iii) will not be in violation or breach of any other agreement by reason of Employee's execution and performance of this Agreement. 11. REPRESENTATION. BY EXECUTING THIS AGREEMENT, EMPLOYEE ACKNOWLEDGES AND AGREES THAT BROBECK, PHLEGER & HARRISON LLP REPRESENTS EMPLOYER SOLELY AND THAT EMPLOYEE HAS HAD AN OPPORTUNITY TO CONSULT WITH HIS OWN ATTORNEY AND TAX ADVISOR IN CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREIN. NEITHER EMPLOYER NOR ITS COUNSEL EXPRESSES ANY OPINION AS TO THE ENFORCEABILITY OF THE TERMS AND CONDITIONS OF THIS AGREEMENT. [Remainder of This Page Intentionally Left Blank] -11- 12 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. EMPLOYER: COMBICHEM, INC., a California corporation By: /s/ Pierre R. Lamond ------------------------------------- Pierre R. Lamond Chairman of the Board EMPLOYEE: VICENTE ANIDO, JR. /s/ Vicente Anido ----------------------------------------- (Signature) Address: 1621 Bayside Dr. ----------------------------------------- Corona del Mar, CA 92625 ----------------------------------------- [SIGNATURE PAGE TO EMPLOYMENT AGREEMENT] -12- 13 EXHIBIT A LIST OF PRIOR INVENTIONS (Section 6.2.3) None, other than the following: __________________________________________ ________________________________________________________________________________ ___________________________________________________________________________. A-1 14 EXHIBIT B LIMITED EXCLUSION NOTIFICATION THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between you and Employer does not require you to assign or offer to assign to Employer any invention that you developed entirely on your own time without using Employer's equipment, supplies, facilities or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to Employer's business, or Employer's actual or demonstrably anticipated research or development; or (2) Result from any work performed by you for Employer. To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between Employer and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I ACKNOWLEDGE RECEIPT of a copy of this notification. By:/s/ Vicente Anido -------------------------------------- Vicente Anido, Jr. Dated:3-14-96 Witnessed by: /s/ Pierre Chambon - ------------------------------------ P. Chambon - ------------------------------------ (Printed Name of Witness) Dated: 3-14-96 ----------------------------- B-1 EX-10.34 38 EXHIBIT 10.34 1 EXHIBIT 10.34 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is entered into as of May 13th, 1996, by and between CombiChem, Inc., a California corporation ("Employer") and Lee R. MCCracken ("Employee"). NOW, THEREFORE, the parties agree as follows: 1. Employment. Employer hereby engages Employee, and Employee hereby accepts such engagement, upon the terms and conditions set forth herein. 2. Duties. During the term of this Agreement, Employee shall be employed as the Employer's Vice President, Business Development reporting to Employer's Chief Executive Officer. Employee shall faithfully and diligently perform the duties customarily performed by persons in the position or positions for which Employee is engaged together with such other reasonable and appropriate duties as Employer shall designate from time to time. Employee shall devote Employee's full business time and effort to the rendition of such services and to the performance of such duties. As a full-time employee of Employer, Employee shall not be entitled to provide consulting services or other businesses or scientific services to any other party, without the prior written consent of Employer. 3. Compensation. 3.1 Base Salary. During the term of this Agreement, as compensation for the proper and satisfactory performance of all duties to be performed by Employee hereunder, Employer shall pay to Employee an annual salary of One Hundred and Forty-Five Thousand Dollars ($145,000) payable in accordance with Employee's standard payroll practices, less required deductions for state and federal withholding tax, Social Security and all other employee taxes and payroll deductions. Employee's base salary shall be reviewed annually by the Compensation Committee and any increase or decrease in Employee's base salary will be based on recommendations from the President and Chief Executive Officer. 3.2 Signing Bonus. In order to induce Employee to enter into this Agreement, Employer shall pay to Employee a signing bonus in the amount of Ten Thousand Dollars ($10,000), payable on or before May 31, 1996, less required deductions for state and federal withholding tax, Social Security and all other employee taxes and payroll deductions. 3.3 Annual Bonus. At the beginning of each fiscal year, Employer and Employee shall reach mutually agreed upon objectives for Employee for its upcoming fiscal year which shall be set forth in writing and approved by the Board. At the end of each such fiscal year, the Board shall determine, in its reasonable discretion, the size and amount of Employee's performance bonus, if any, up to a maximum of twenty percent (20%) of 2 Employee's base salary during the prior fiscal year (the "Annual Performance Bonus"). The Annual Performance Bonus shall be paid to Employee within sixty (60) days following Employer's fiscal year end. The first Annual Performance Bonus shall be (i) based on Employee's 1996 fiscal year achievements; (ii) paid to Employee by March 1, 1997; and (iii) pro-rated in accordance with the months for which Employee is engaged by Employer; provided that employee's employment has continued through the end of 1996. 4. Term of Employment. 4.1 Period of Employment. The Employee's period of employment by Employer pursuant to this Agreement shall commence on May 13, 1996 ("Commencement Date") and end upon the date the employment relationship is terminated pursuant to Sections 4.2 or 4.3 hereunder (the "Period of Employment"). 4.2 Termination at Will. Although Employer and Employee anticipate a long and mutually rewarding employment relationship, either party may terminate this Agreement, without cause, upon fourteen (14) days prior written notice delivered to the other party. It is expressly understood and agreed that the employment relationship is "at will" without any agreement for employment for any specified term, and without any agreement for employment for so long as Employee performs satisfactorily, subject to Employers obligations in the following paragraph. In the event that Employee's employment ceases pursuant to this Section of this Agreement, Employer shall continue to pay Employee his monthly salary then in effect and Employee shall be entitled to the benefits contained in Section 5 of this Agreement, in both cases, for a period of nine (9) months following such cessation of employment. 4.3 Termination for Cause. Employer may immediately terminate this employment relationship "for cause" upon written notice to Employee. For the purposes herein, "for cause" shall be limited to the following: (i) Employee's willful misconduct concerning any material responsibility reasonably assigned to Employee; (ii) without obtaining the prior consent of the CEO and/or the Board, Employee's active and intentional performance of services for any other corporation or person which competes with Employer or its subsidiaries while Employee is employed by Employer or its subsidiaries; (iii) the Board and/or CEO reasonably determines that Employee has stolen or embezzled either funds or property of Employer; (iv) Employee's conviction by a court of competent jurisdiction of a felony (other than a traffic or moving violation) involving moral turpitude or dishonesty; (v) Employee's intentional or grossly negligent conduct or violation of law which results in either an improper personal benefit to Employee or a material injury to Employer; or (vi) the death or total disability of Employee. For the purposes of this agreement, total disability shall mean any physical or mental illness or disability which continues for a period of 180 consecutive days and which any time after such 180 day period the President & CEO shall - 2 - 3 determine renders Employee incapable of performing managerial and executive services required by this agreement. Such determination shall be made by the President & CEO after consultation by a licensed physician. 4.4 Obligations Upon Termination. 4.4.1 Survival of Obligations. The parties' obligations under Section 4.2, 4.4.2, 6, 7, 9.7 and 9.8, shall survive the termination of this Agreement. 4.4.2 Return of Materials at Termination. Upon termination of the Period of Employment, the Employee will promptly deliver to Employer all materials, property, documents, data and other information belonging to Employer or containing Employer's Trade Secrets or other Protected Information (each as defined herein). The Employee shall not take any materials, property, documents or other information, or any reproduction or excerpt thereof, belonging to Employer or containing any Trade Secrets or other Protected Information of Employer. 4.4.3 Resignation. Upon termination of the Period of Employment, the Employee shall be deemed to have resigned from any and all offices then held with the Employer. 5. Benefits 5.1 Health Insurance, Vacation and Sick Leave. Employee shall be entitled to Employer's standard benefits package for its executive employees including, but not limited to, family health care insurance, key-person life insurance in an amount equal to twice the amount of Employee's base salary, officer and director liability insurance (when obtained for Employer's other officers), long-term disability (when obtained for Employer's other officers), vacation and sick leave (the "Fringe Benefits"). Employer reserves the right to change such benefits from time to time. 5.2 Accumulation. Employee shall not earn and accumulate unused vacation and sick leave, or other Fringe Benefits, in excess of an unused amount equal to the amount earned for one year. Furthermore, Employee shall not be entitled to receive payments in lieu of said Fringe Benefits, other than for unused vacation earned and accumulated at the time the employment relationship terminates. All unused sick leave and other Fringe Benefits earned during the preceding twelve (12) month period ending on each anniversary of the date of this Agreement shall be forfeited if not used within ninety (90) days following such anniversary date. Notwithstanding the forgoing, if Employer adopts a more favorable accumulation policy for its executives, Employee shall be entitled to the benefits of such more favorable accumulation policy. - 3 - 4 5.3 Personal Leave. Employee shall accrue fifteen (15) days of personal leave during each year of his employment. Upon accrual of fifteen (15) days of unused personal leave, no additional personal leave time will accrue until Employee has used some of his accrued personal leave time and has reduced the amount of accrued time below fifteen (15) days. Once Employee has taken personal leave and his accrued personal leave time has dropped below fifteen (15) days, Employee shall begin to accrue personal leave time again (at the rate of fifteen (15) days per year), up to the maximum of fifteen (15) days. Notwithstanding the foregoing, if Employer adopts a more favorable personal leave policy for its executives, Employee shall be entitled to the benefits of such more favorable personal leave policy. 5.4 Transitional Expenses. From the Commencement Date through the earlier of (a) the one year anniversary of the Commencement Date or as extended with prior approval of the President & CEO or (b) the date Employee relocates Employee's principal residence to San Diego County or the Southern Orange County area, Employer shall reimburse Employee for the first One Thousand Two Hundred Dollars ($1,200) ("Monthly Transitional Budget") reasonably incurred by Employee in establishing a secondary residence in San Diego County in any given month. In any given month that the Monthly Transitional Budget is not fully expended, the unused portion may be carried over to a following month with the prior approval of the President & CEO. The Employee hereby acknowledges that the Radisson Hotel is Employer's preferred choice for lodging for two nights per week at a current negotiated rate of Seventy-Five Dollars ($75.00) per night. Any allowance paid pursuant to this Section 5.4 shall be "grossed up" to cover Employee's local, state and federal income tax liability at Employee's then current marginal tax rate if deemed necessary by Employer's accountants. The tax gross-up payment(s) shall initially be calculated at an assumed effective marginal rate of forty percent (40%) and paid to Employee no later than (i) April 15 of the calendar year following any year Employee has expenses reimbursed pursuant to this Section; and (ii) any date Employee is required to make increased quarterly estimated payments due to Employee's receipt of the allowance payments pursuant to this Section. Once Employee has finalized Employee's federal and state income tax returns, Employee's effective marginal rate shall be calculated and any shortfall or overpayment will be corrected. 5.5 Relocation Expenses. Employer shall reimburse Employee the following expenses: (a) selling expenses related to sale of Employee's current residence in Long Beach, California, including realtor commissions and closing expenses typically paid by sellers; (b) reasonable relocation/moving expenses incurred in the move to San Diego County or Southern Orange County; and (c) a tax gross-up payment calculated at an assumed effective marginal rate of forty percent (40%) to cover Employee's income tax liability for expenses reimbursed pursuant to subsections (a) and (b) of this Section. Expenses related to subsections (a) and (b) shall be reimbursed within thirty (30) days after Employee submits adequate verification of incurred expenses. The tax gross-up bonus related to subsection (c) - 4 - 5 shall be paid to Employee no later than (i) April 15 of the calendar year following any year Employee has expenses reimbursed pursuant to this Section; and (ii) any date Employee is required to make increased quarterly estimated payments due to Employee's receipt of reimbursed expenses pursuant to subsections (a) or (b) of this Section. Once Employee has finalized Employee's federal and state income tax returns, Employee's effective marginal rate shall be calculated and any shortfall or overpayment will be corrected. Employer estimates that its obligations pursuant to this Section 5.5 prior to the tax gross-up bonus related to (c) shall be approximately Fifty Thousand Dollars ($50,000). Notwithstanding the foregoing, in the event that Employee is not employed by Employer for a period of time lasting at least twelve (12) months following the date on which Employee moves to San Diego County or Southern Orange County, excluding change of control, Employee shall upon termination of employment (whether for cause or otherwise) reimburse Employer, over a 24-month period, for any and all amounts paid to Employee pursuant to this Section 5.5. 6. Inventions, Trade Secrets and Confidentiality. 6.1 Definitions. 6.1.1 Invention Defined. As used herein "Invention" means inventions, discoveries, concepts and ideas, whether patentable or copyrightable or not, including, but not limited to, processes, methods, formulas, techniques, devices, designs, programs (including computer programs), computer graphics, apparatus, products as well as improvements thereof or know-how related thereto, relating to any present or anticipated business or activities of Employer. 6.1.2 Trade Secrets Defined. As used herein "Trade Secret" means, without limitation, any document or information relating to Employer's products, processes or services, including documents and information relating to Inventions, and to the research, development, engineering or manufacture of Inventions, and to Employer's purchasing, customer or supplier lists and pricing policies, which documents or information have been disclosed to Employee or known to Employee as a consequence of or through Employee's employment by Employer (including documents, information or Inventions conceived, originated, discovered or developed by Employee), which is not generally known in the relevant trade or industry. 6.1.3 Protected Information. As used in this Agreement, the term "Protected Information" shall mean, without limitation, all trade secrets, confidential or proprietary information, and all other knowledge, data, know-how, processes, information, document or materials, owned, developed or possessed by Employer, whether in tangible or intangible form, the confidentiality of which Employer takes reasonable measures to protect, and which pertains in any manner to subjects which include, but are not limited to, Employer's research operations, customers, identities of individual contacts at business entities - 5 - 6 which are customers or prospective customers, preferences, businesses or habits, business relationships, engineering data or results, specifications, concepts, methods, processes, rates or schedules, customer or vendor information, products (including, but not limited to, prices, costs, sales or content), financial information or measures, business methods, future business plans, databases, computer programs, designs, models, operating procedures and knowledge of the organization. 6.2 Inventions. 6.2.1 Disclosure. Employee shall disclose promptly to Employer each Invention, whether or not reduced to practice, which is conceived or learned by Employee (either alone or jointly with others) during the Period of Employment. Employee shall disclose in confidence to Employer all patent applications filed by or on behalf of Employee during the Period of Employment and for a period of one (1) year thereafter. Any disclosure of any Invention, or any patent application, made within one (1) year after termination of employment shall be presumed to relate to an Invention made during Employee's Period of Employment, unless Employee clearly proves otherwise. 6.2.2 Employer Property; Assignment. Except as otherwise provided in Section 6.2.3, Employee acknowledges and agrees that all Inventions which are discovered, conceived, developed, made, produced or prepared by Employee (alone or in conjunction with others) during the Period of Employment shall be the sole property of Employer. Said property rights of Employer include without limitation all domestic and foreign patent rights, rights of registration or other protection under the patent and copyright laws, and all other rights pertaining to the Inventions. Employee further agrees that all services, products and Inventions that directly or indirectly result from engagement with Employer shall be deemed "works for hire" as that term is defined in Title 17 of the United States Code and accordingly all rights associated therewith shall vest in Employer. Notwithstanding the foregoing, Employee hereby assigns to Employer all of Employee's right, title and interest in any such services, products and Inventions, in the event any such services, products and Inventions shall be determined not to constitute "works for hire." 6.2.3 Exclusion Notice. The assignment by Employee of Inventions under this Agreement does not apply to any Inventions which are owned or controlled by Employee prior to the commencement of employment of Employee by Employer (all of which are set forth on Exhibit "A" attached hereto). Additionally, Employee is not required to assign an idea or invention where the idea or invention meets all of the following criteria, namely if the invention or idea: (i) was created or conceived without the use of any of Employer's equipment, supplies, facilities or trade secret information, and (ii) was developed entirely on Employee's own time, and (iii) does not relate to the business of Employer, and (iv) does not relate to Employer's actual or demonstrably anticipated research or development, and (v) does not result from any work performed by Employee for Employer. Employee has - 6 - 7 reviewed the notification in this Section 6.2.3 and in Exhibit "B" ("Limited Exclusion Notification") and agrees that Employee's signature on the Limited Exclusion Notification acknowledges receipt of the notification. 6.2.4 Patents and Copyrights; Attorney-in-Fact. Both before and after termination of this Agreement (and with reasonable compensation paid by Employer to Employee after termination), Employee agrees to assist the Employer to apply for, obtain and enforce patent and/or copyright protection and registration of, the Inventions described in Section 6.2.2 in any and all countries. To that end, Employee shall (at Employer's request), without limitation, testify in any proceeding, and execute any documents and assignments determined to be necessary or convenient for use in applying for, obtaining, registering and enforcing patent or copyright protection involving any of the Inventions. Employee hereby irrevocably appoints Employer, and its duly authorized officers and agents, as Employee's agent and attorney-in-fact to act for and on behalf of Employee in filing all patent applications, applications for copyright protection and registration, amendments, renewals and all other appropriate documents in any way related to the Inventions described in Section 6.2.2. 6.3 Trade Secrets. 6.3.1 Acknowledgment of Proprietary Interest. Employee recognizes the proprietary interest of Employer in any Trade Secrets of Employer. Employee acknowledges and agrees that any and all Trade Secrets of Employer, whether developed by Employee alone or in conjunction with others or otherwise, shall be and are the property of Employer. 6.3.2 Covenant Not to Divulge Trade Secrets. Employee acknowledges and agrees that Employer is entitled to prevent the disclosure of Employer's Trade Secrets or Protected Information. As a portion of the consideration for the employment of Employee and for the compensation being paid to Employee by Employer, Employee agrees at all times during the Period of Employment by Employer and thereafter to hold in strictest confidence, and not to use, disclose or allow to be disclosed to any person, form or corporation, Employer's Trade Secrets or Protected Information, including Trade Secrets developed by Employee, other than disclosures, with Employer's express prior written consent, to persons who have entered into confidentiality agreements with Employer. 6.3.3 Confidential Information of Others. Employee represents and warrants that if Employee has any confidential information belonging to others, Employee will not use or disclose to Employer any such information or documents. Employee represents that his employment with Employer will not require him to violate any obligation to or confidence with any other party. - 7 - 8 6.4 No Adverse Use. Employee will not at any time during the Period of Employment or thereafter use Employer's Trade Secrets, Protected Information or Inventions in any manner which may directly or indirectly have an adverse effect upon Employer's business, nor will Employee perform any acts which would tend to reduce Employer's proprietary value in Employer's Trade Secrets, Protected Information or Inventions. 6.5 Remedies Upon Breach. In the event of any breach by Employee of the provisions in this Section 6, Employer shall be entitled, if it so elects, to institute and prosecute proceedings in any court of competent jurisdiction, either in law or in equity, to enjoin Employee from violating any of the terms of this Section 6, to enforce the specific performance by Employee of any of the terms of this Section 6, and to obtain damages, or any of them, but nothing herein contained shall be construed to prevent such remedy or combination of remedies as Employer may elect to invoke. The failure of Employer to promptly institute legal action upon any breach of this Section 6 shall not constitute a waiver of that breach or any other breach hereof. 7. Covenant Not to Compete. Employee agrees that, during Employee's employment, Employee will not directly or indirectly compete with Employer in any way, and that Employee will not act as an officer, director, employee, consultant, shareholder, lender or agent of any other entity which is engaged in any business of the same nature as, or in competition with, the business in which Employer is now engaged or in which Employer becomes engaged during the term of Employee's employment, or which is involved in science or technology which is similar to Employer's science or technology. During Employee's employment, and for a period of one (1) year thereafter, Employee shall not directly or indirectly through another entity (i) induce or attempt to induce any employee of Employer or any subsidiary of Employer to leave the employ of Employer or such subsidiary, or in any way interfere with the relationship between the Employer or any subsidiary at any time; or (ii) induce or attempt to induce any customer, supplier, licensee, licensor or other party which has a contractual relationship with Employer or its subsidiaries or affiliates to cease doing business with Employer or any such subsidiary (including, without limitation, making any negative statements or communications about Employer or its affiliates). 8. Stock Options. Simultaneous with the execution of this Agreement, Employer and Employee will enter into a written stock option agreement substantially in the form attached hereto as Exhibit C, pursuant to which Employee will be granted an incentive stock option for 290,000 shares of the Company's Common Stock, exercisable at $0.075 per share and vesting twenty-five percent (25%) as of the first anniversary of the Commencement Date and in equal monthly installments thereafter. 9. General Provisions. - 8 - 9 9.1 Amendments. No amendment or modification of the terms or conditions of this Agreement shall be valid unless in writing and signed by both parties hereto. There shall be no implied-in-fact contracts modifying the terms of this Agreement. 9.2 Entire Agreement. This Agreement and the Exhibits attached hereto constitute the entire agreement between the parties with respect to the employment of Employee. This Agreement supersedes all prior agreements, understandings, negotiations and representation with respect to the employment relationship including, but not limited to the Memorandum dated April 26, 1996, containing proposed terms and conditions for hiring Employee. 9.3 Successors and Assigns. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. Employee shall not be entitled to assign any of Employee's rights or obligations under this Agreement. 9.4 Waiver. Either party's failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement. 9.5 Severable Provisions. The provisions of this Agreement are severable, and if any one or more provisions may be determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 9.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be considered one and the same Agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties. 9.7 Choice of Law. This Agreement shall be governed and construed in accordance with the laws of California. 9.8 Jurisdiction and Venue. In the event that any legal proceedings are commenced in any court with respect to any matter arising under this Agreement, Employer and Employee specifically consent and agree that: (a) the courts of the State of California and/or the United States Federal Courts located in the State of California shall have exclusive jurisdiction over each of the parties and such proceedings; and - 9 - 10 (b) the venue of any such action shall be in San Diego County, California and/or the United States District Court for the Southern District of California. 10. Employee's Representations. Employee represents and warrants that Employee (i) is free to enter into this Agreement and to perform each of the terms and covenants contained herein, (ii) is not restricted or prohibited, contractually or otherwise, from entering into and performing this Agreement, and (iii) will not be in violation or breach of any other agreement by reason of Employee's execution and performance of this Agreement. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] - 10 - 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates first set forth above. EMPLOYER: COMBICHEM, INC., a California corporation By: /s/ Peter Myers ------------------------------------- Its: President and CEO ------------------------------------ EMPLOYEE: LEE R. MCCRACKEN /s/ Lee R. McCracken ----------------------------------------- (Signature) Address: 410 Flint Avenue ----------------------------------------- Long Beach, CA 90814 ----------------------------------------- [SIGNATURE PAGE TO EMPLOYMENT AGREEMENT] - 11 - 12 EXHIBIT A LIST OF PRIOR INVENTIONS (SECTION 6.2.3) None, other than the following: N/A ------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - 12 - 13 EXHIBIT B LIMITED EXCLUSION NOTIFICATION THIS IS TO NOTIFY you in accordance with Section 2872 of the California Labor Code that the foregoing Agreement between you and Employer does not require you to assign or offer to assign to Employer inventions that you developed entirely on your own time without using Employer's equipment, supplies, facilities or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to Employer's business, or Employer's actual or demonstrably anticipated research or development. (2) Result from any work performed by you for Employer. To the extent a provision in the foregoing Agreement purports to require you to assign an invention otherwise excluded from the preceding paragraph, the provision is against the public policy of this state and is unenforceable. This limited exclusion does not apply to any patent or invention covered by a contract between Employer and the United States or any of its agencies requiring full title to such patent or invention to be in the United States. I ACKNOWLEDGE RECEIPT of a copy of this notification. By: /s/ Lee R. MCCracken ------------------------------------ ----------------------------------------- Dated: 5/13/96 ---------------------------------- Witnessed by: /s/ Bobbie J. Bosley - ---------------------------------- Bobbie J. Bosley - ---------------------------------- (Printed Name of Representative) Dated: 5/13/96 --------------------------- - 13 - 14 EXHIBIT C STOCK OPTION AGREEMENT - 14 - 15 COMBICHEM, INC. STOCK OPTION AGREEMENT RECITALS A. The Board of Directors of the Corporation has adopted the CombiChem, Inc. 1995 Stock Option/Stock Issuance Plan (the "Plan") for the purpose of attracting and retaining the services of persons who contribute to the growth and financial success of the Corporation. B. Optionee is a person who the Plan Administrator believes has and will contribute to the growth and financial success of the Corporation and this Agreement is executed pursuant to and is intended to carry out the purposes of the Plan. AGREEMENT NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth in this Agreement, the Corporation hereby grants to Optionee, as of the grant date (the "Grant Date") specified in the accompanying Notice of Grant of Stock Option (the "Grant Notice"), a stock option to purchase up to that number of shares of the Corporation's Common Stock (the "Option Shares") as is specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term at the option price per share (the "Option Price") specified in the Grant Notice. 2. OPTION TERM. This option shall have a maximum term of ten (10) years measured from the Grant Date and shall expire at the close of business on the expiration date (the "Expiration Date") specified in the Grant Notice, unless sooner terminated in accordance with Paragraph 5, 6 or 17. 3. LIMITED TRANSFERABILITY. This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee's death and may be exercised, during Optionee's lifetime, only by Optionee. 4. DATES OF EXERCISE. This option may not be exercised in whole or in part at any time prior to the time the Plan is approved by the Corporation's shareholders in accordance with Paragraph 17. Provided such shareholder approval is obtained, this option shall thereupon become exercisable for the Option Shares in one or more installments as is specified in the Grant Notice. As the option becomes exercisable in one or more installments, 16 the installments shall accumulate and the option shall remain exercisable for such installments until the Expiration Date or the sooner termination of the option term under Paragraph 5 or Paragraph 6 of this Agreement. 5. ACCELERATED TERMINATION OF OPTION TERM. Unless extended by the Plan Administrator in its sole discretion, the option term specified in Paragraph 2 shall terminate (and this option shall cease to be exercisable) prior to the Expiration Date should any of the following provisions become applicable: (i) Except as otherwise provided in subparagraph (ii) or (iii) below, should Optionee cease to remain in Service while this option is outstanding, then the period for exercising this option shall be reduced to a three (3)-month period commencing with the date of such cessation of Service, but in no event shall this option be exercisable at any time after the Expiration Date. Upon the expiration of such three (3)-month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (ii) Should Optionee die while this option is outstanding, then the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the law of descent and distribution shall have the right to exercise this option. Such right shall lapse and this option shall cease to be exercisable upon the earlier of (A) the expiration of the twelve (12) month period measured from the date of Optionee's death or (B) the Expiration Date. Upon the expiration of such twelve (12) month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (iii) Should Optionee become permanently disabled and cease by reason thereof to remain in Service while this option is outstanding, then the Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. Optionee shall be deemed to be permanently disabled if Optionee is unable to engage in any substantial gainful activity for the Corporation or the parent or subsidiary corporation retaining his/her services by reason of any medically determinable physical or mental impairment, which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. Upon the expiration of such limited period of exercisability or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. -2- 17 (iv) During the limited period of exercisability applicable under subparagraph (i), (ii) or (iii) above, this option may be exercised for any or all of the Option Shares for which this option is, at the time of the Optionee's cessation of Service, exercisable in accordance with the exercise schedule specified in the Grant Notice and the provisions of Paragraph 6 of this Agreement. (v) For purposes of this Paragraph 5 and for all other purposes under this Agreement: A. The Optionee shall be deemed to remain in SERVICE for so long as the Optionee continues to render periodic services to the Corporation or any parent or subsidiary corporation, whether as an Employee, a non-employee member of the board of directors, or an independent contractor or consultant. B. The Optionee shall be deemed to be an EMPLOYEE of the Corporation and to continue in the Corporation's employ for so long as the Optionee remains in the employ of the Corporation or one or more of its parent or subsidiary corporations, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. C. A corporation shall be considered to be a SUBSIDIARY corporation of the Corporation if it is a member of an unbroken chain of corporations beginning with the Corporation, provided each such corporation in the chain (other than the last corporation) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. D. A corporation shall be considered to be a PARENT corporation of the Corporation if it is a member of an unbroken chain ending with the Corporation, provided each such corporation in the chain (other than the Corporation) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 6. SPECIAL TERMINATION OF OPTION. A. This Option, to the extent not previously exercised, shall terminate and cease to be exercisable upon the consummation of one or more of the following shareholder- approved transactions (a "Corporate Transaction") unless this Option is expressly assumed by the successor corporation or parent thereof: -3- 18 (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets, or (iii) any transaction (other than an issuance of shares by the Corporation for cash) in or by means of which one or more persons acting in concert acquire, in the aggregate, more than 50% of the outstanding shares of the stock of the Corporation. B. This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 7. ADJUSTMENT IN OPTION SHARES. A. In the event any change is made to the Corporation's outstanding Common Stock by reason of any stock split, stock dividend, combination of shares, exchange of shares, or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the total number of Option Shares subject to this option, (ii) the number of Option Shares for which this option is to be exercisable from and after each installment date specified in the Grant Notice and (iii) the Option Price payable per share in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. B. If this option is to be assumed in connection with a Corporate Transaction described in Paragraph 6 or is otherwise to remain outstanding, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issuable to the Optionee in the consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Option Price payable per share, provided the aggregate Option Price payable hereunder shall remain the same. 8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not have any of the rights of a shareholder with respect to the Option Shares until such individual shall have exercised the option and paid the Option Price. 9. MANNER OF EXERCISING OPTION. -4- 19 A. In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or in the case of exercise after Optionee's death, the Optionee's executor, administrator, heir or legatee, as the case may be) must take the following actions: (i) Execute and deliver to the Secretary of the Corporation a stock purchase agreement (the "Purchase Agreement") in substantially the form of Exhibit B to the Grant Notice. (ii) Pay the aggregate Option Price for the purchased shares in one or more forms approved under the Plan. (iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option, if other than Optionee, have the right to exercise this option. B. Should the Corporation's outstanding Common Stock be registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act") at the time the option is exercised, then the Option Price may also be paid as follows: (i) in shares of Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at fair market value on the Exercise Date; or (ii) through a special sale and remittance procedure pursuant to which the Optionee is to provide irrevocable written instructions (a) to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Option Price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation by reason of such purchase and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to effect the sale transaction. C. For purposes of this Agreement, the Exercise Date shall be the date on which the executed Purchase Agreement shall have been delivered to the Corporation, and the fair market value of a share of Common Stock on any relevant date shall be determined in accordance with subparagraphs (i) through (iii) below: (i) If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded on the NASDAQ National -5- 20 Market System, the fair market value shall be the closing selling price of one share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers through its NASDAQ system or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of fair market value. (ii) If the Common Stock is at the time listed or admitted to trading on any stock exchange, then the fair market value shall be the closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the fair market value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. (iii) If the Common Stock at the time is neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, or if the Plan Administrator determines that the value determined pursuant to subparagraphs (i) and (ii) above does not accurately reflect the fair market value of the Common Stock, then such fair market value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. D. As soon after the Exercise Date as practical, the Corporation shall mail or deliver to Optionee or to the other person or persons exercising this option a certificate or certificates representing the shares so purchased and paid for, with the appropriate legends affixed thereto. E. In no event may this option be exercised for any fractional shares. 10. COMPLIANCE WITH LAWS AND REGULATIONS. A. The exercise of this option and the issuance of Option Shares upon such exercise shall be subject to compliance by the Corporation and the Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Corporation's Common Stock may be listed at the time of such exercise and issuance. -6- 21 B. In connection with the exercise of this option, Optionee shall execute and deliver to the Corporation such representations in writing as may be requested by the Corporation in order for it to comply with the applicable requirements of Federal and State securities laws. 11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of Optionee and the successors and assigns of the Corporation. 12. LIABILITY OF CORPORATION. A. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without shareholder approval be issued under the Plan, then this option shall be void with respect to such excess shares, unless shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of Article IV, Section 3, of the Plan. B. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals. 13. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation in care of the Corporate Secretary at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 14. LOANS. The Plan Administrator may, in its absolute discretion and without any obligation to do so, assist the Optionee in the exercise of this option by (i) authorizing the extension of a loan to the Optionee from the Corporation or (ii) permitting the Optionee to pay the option price for the purchased Common Stock in installments over a period of years. The terms of any such loan or installment method of payment (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. -7- 22 15. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option. 16. GOVERNING LAW. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 17. SHAREHOLDER APPROVAL. The grant of this option is subject to approval of the Plan by the Corporation's shareholders within twelve (12) months after the adoption of the Plan by the Board of Directors. Notwithstanding any provision of this Agreement to the contrary, this option may not be exercised in whole or in part until such shareholder approval is obtained. In the event that such shareholder approval is not obtained, then this option shall thereupon terminate in its entirety and the Optionee shall have no further rights to acquire any Option Shares hereunder. 18. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the event this option is designated an incentive stock option in the Grant Notice, the following terms and conditions shall also apply to the grant: A. This option shall cease to qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3) months after the date the Optionee ceases to be an Employee for any reason other than death or permanent disability (as defined in Paragraph 5) or (ii) more than one (1) year after the date the Optionee ceases to be an Employee by reason of permanent disability. B. Should this option be designated as immediately exercisable in the Grant Notice, then this option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate fair market value (determined at the Grant Date) of the Corporation's Common Stock for which this option would otherwise first become exercisable in such calendar year would, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Corporation's Common Stock for which this option or one or more other incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or its parent or subsidiary corporations) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion will first become exercisable in the first calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18.B would not be contravened. -8- 23 C. Should this option be designated as exercisable in installments in the Grant Notice, then no installment under this option (whether annual or monthly) shall qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) the aggregate fair market value (determined at the Grant Date) of the Corporation's Common Stock for which such installment first becomes exercisable hereunder will, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Corporation's Common Stock for which one or more other incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any parent or subsidiary corporation) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. 19. WITHHOLDING. Optionee hereby agrees to make appropriate arrangements with the Corporation or parent or subsidiary corporation employing Optionee for the satisfaction of all Federal, State or local income tax withholding requirements and Federal social security employee tax requirements applicable to the exercise of this option. -9- EX-10.35 39 EXHIBIT 10.35 1 EXHIBIT 10.35 March 14, 1997 Ms. Karin Eastham 4965 Gunston Court San Diego,CA 92130 Dear Karin: We are pleased to offer you the position of Vice President, Finance and Administration and Chief Financial Officer with CombiChem, Inc. at a starting salary of $15,500.00 per month. The preferred starting date of the position is to be April 14th, 1997. If you accept this offer, you would begin work as an exempt employee. So long as you are otherwise eligible, you will be provided coverage under the terms and conditions of CombiChem's various standard benefits programs including health care for yourself and your dependents and four weeks personal leave each year. In addition, CombiChem will provide you with the following compensation items: At the end of each fiscal year, the CEO and Board of Directors shall determine, in its reasonable discretion, the size and amount of Employee's performance bonus, if any, up to a maximum of twenty percent (20%) of Employee's base salary during the prior fiscal year. The Annual Performance Bonus shall be paid to Employee within sixty (60) days following Employer's fiscal year end. The first year bonus is not guaranteed and will be pro-rated to your start date. You will be granted an option to purchase 350,000 shares of common stock at the current per share price of $0.10 with standard vesting provisions over four years. Per our discussion, we will be flexible on structuring your start date so that you can take advantage of the current price of the options. As an employee of CombiChem you will be eligible to participate in CombiChem's standard employee benefit package as set forth in the Employee's Handbook which may be amended from time to time. Although Employer and Employee anticipate a long and mutually rewarding employment relationship, either party may terminate this Agreement, without cause, upon fourteen (14) days prior written notice delivered to the other party. It is expressly understood and agreed that the employment is not for any specified term, and without any agreement for employment, for so long as Employee performs satisfactorily. In the event that Employer terminates Employee pursuant to the above condition, Employee shall be entitled to receive an aggregate severance benefit of six months of Employee's then current base salary and benefits which shall be paid by Employer in six (6) equal monthly installments until fully paid or until Employee has secured 2 full-time employment. This agreement expires two years after the date of hire and does not apply if the Employer/Employee relationship is terminated "for cause." Employer may immediately terminate this employment relationship "for cause" upon written notice to the Employee. Your employment is contingent on your providing CombiChem with the legally required proof of your identity and authorization to work in the United States. As a condition of your employment, you will be required to sign CombiChem's standard Employee Confidentiality and Invention Assignment Agreement. We understand that you will have satisfied your obligations to your former employer before you become an employee of CombiChem, Inc. The above terms and conditions have been established to reflect the importance of your position with CombiChem. Karin, if you agree with and accept the terms of this offer of employment, please sign below and return this letter to our office. A confidentiality agreement is enclosed for your perusal. Please take time to read the enclosed agreement, sign it and return it to my attention or bring it with you on your first day of work if you decide to accept our offer of employment. If you have questions, please do not hesitate to call on me. We are confident that your employment with CombiChem will prove mutually beneficial, and we look forward to having you join us. Sincerely, /s/ Vicente Anido, Jr. Vicente Anido, Jr. President & CEO Accepted by: /s/ Karin Eastham 3-17-97 - ------------------------------------ -------------------------------------- Karin Eastham Date EX-10.36 40 EXHIBIT 10.36 1 EXHIBIT 10.36 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET (DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY) 1. BASIC PROVISIONS ("BASIC PROVISIONS") 1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only, December 22, 1995, is made by and between Campson Corporation, a California corporation ("LESSOR") and CombiChem, Inc., a California corporation ("LESSEE"), (collectively the "PARTIES," or individually A "PARTY"). 1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 9050 Camino Santa Fe, San Diego located in the County of San Diego, State of California and generally described as (describe briefly the nature of the property) an approximately 34,244 sq. ft. industrial building together with adjoining parking areas, outside storage facility and all landscaped areas (at no extra cost), including office space on two (2) floors, and as legally described on attached Exhibit "A" ("PREMISES"). (See Paragraph 2 for further provisions) 1.3 TERM: ten (10) years and 0 months ("ORIGINAL TERM") commencing June 1, 1996 ("COMMENCEMENT DATE") and ending May 31, 2006 ("EXPIRATION DATE"). (See Paragraph 3 for further provisions.) 1.4 EARLY POSSESSION: See Addendum "A" ("EARLY POSSESSION DATE"). (See Paragraphs 3.2 and 3.3 for further provisions.) 1.5 BASE RENT: $See Addendum "A" per month ("BASE RENT"), payable on the first day of each month commencing July 1, 1996. (See Paragraph 4 for further provisions.) If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 BASE RENT DEPOSIT: $32,532 paid upon Lessor's receipt of Funding Commitment (per Addendum "A") as Base Rent for the period of June 1-30, 1996. 1.7 SECURITY DEPOSIT: $See Addendum "A" ("SECURITY DEPOSIT"). (See Paragraph 5 for further provisions.) 1.8 PERMITTED USE: General office use, all R&D/Chemistry research associated with Lessee's business and all other lawful uses permitted under applicable zoning laws. (See Paragraph 6 for further provisions.) 1.9 INSURING PARTY: Lessor is the "Insuring Party" unless otherwise stated herein. (See Paragraph 8 for further provisions.) 1.10 REAL ESTATE BROKERS: The following real estate brokers (collectively, the "BROKERS") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): See Addendum "A" represents [ ] Lessor exclusively ("LESSOR'S BROKER"); both Lessor and Lessee, and ____________________________________________________ represents [ ] Lessee exclusively ("LESSEE'S BROKER"); both Lessee and Lessor. (See Paragraph 15 for further provisions.) 1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be guaranteed by _________________________ ("GUARANTOR"). (See Paragraph 37 for further provisions.) 1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 through 18 and Exhibits "A" -- "D" all of which constitute a part of the Lease. 2. PREMISES. 2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental, is an approximation which Lessor and Lessee agree is reasonable and the rental based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 CONDITION. Lessor shall deliver the Premises to Lessee in a good and sanitary condition clean and free of debris and Hazardous Substance Conditions on the Commencement Date and warrants to Lessee that the existing plumbing (including, without limitation, sewer and drain lines), fire sprinkler system, lighting, air conditioning, heating, and loading doors, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date. Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty by December 31, 199_ correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor warrants to Lessee that the Improvements on the Premises comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances and any other applicable laws in effect on the Commencement Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of non-compliance with this warranty by December 31, 19__ correction or that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. 2.5 DELETED PAGE 1 2 3. TERM. 3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. 3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession as set forth in Addendum "A". All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 DELAY IN POSSESSION. If possession of the Premises is not delivered to Lessee, Lessee may, at its option *1 by notice in writing to Lessor within ten (10) days thereafter, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder; provided, however, that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. RENT. 4.1 BASED RENT. Subject to the terms and conditions of Addendum "A" Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at is address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. *2 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. *3 6. USE. 6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, or any other use which is comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premiss in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties. Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee. Lessees assignees or subtenants, and by prospective assignees and subtenants of the Lessee, its assignees and subtenants, for a modification of said permitted purpose for which the premises may be used or occupied, so long as the same will not impair the structural integrity of the improvements on the Premises, the mechanical or electrical systems therein, is not significantly more burdensome to the Premises and the Improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days give a written notification of same, which notice shall include an explanation of Lessor's reasonable objections to the change in use. *4 6.2 HAZARDOUS SUBSTANCES. (a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in, on or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances and shall comply in a timely manner (at Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority. Reportable Use shall also include Lessee's being responsible for the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Law requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Law, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of Lessee's business permitted on the Premises, so long as such use does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. (b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any PAGE 2 3 governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises in violation of applicable laws. (c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement. *5 6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law reasonably specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law. 6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) on at least 24 hours prior notice (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, and a certified copy of such report shall be provided to Lessee. 7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS. 7.1 LESSEE'S OBLIGATIONS. (a) Subject to the provisions of Paragraph 2.2 (Lessor's warranty as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.), 7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and expense and at all times *6 7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3 (relating to compliance with covenants, restrictions and building code), 9 (relating to destruction of the Premises) and 14 (relating to condemnation of the Premises), *7 7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. (a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent, which shall not be unreasonably withheld. Lessee may, however, may non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during the term of this Lease as extended does not exceed $70,000. (b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. (c) INDEMNIFICATION. lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or ny interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before PAGE 3 4 the enforcement thereof against the Lessor or the Premises. If Lessor shall require, lessee shall furnish to Lessor a surety bond satisfactory to lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessors' reasonable attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION. (a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Additions made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of the Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises. (b) REMOVAL. Unless otherwise agreed in writing, Lessor may *8 require that any or all Lessee Owned alternations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor. (c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted and subject to Paragraph 9. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good service practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. *9 8. INSURANCE; INDEMNITY. 8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor in excess of $1,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice from the company providing such insurance for any amount due. 8.2 LIABILITY INSURANCE. (a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of his Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor (as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relive Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) CARRIED BY LESSOR. In the event lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.*10 8.3 PROPERTY INSURANCE--BUILDING, IMPROVEMENTS AND RENTAL VALUE. (a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDERS(S)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reasons of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c). PAGE 4 5 (b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full rental and other charges payable by Lessee to Lessor under this Lease for one (1) year (including all real estate taxes, insurance costs, and any scheduled rental increases). Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, property taxes, insurance premium costs and other expenses, if any, otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss. (c) DELETED. (d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations. 8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property. Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $10,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force. 8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may but shall not be required to, procure and maintain the same, but at Lessee's expense. 8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waiver their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto.*11 8.7 INDEMNITY. Except for Lessor's negligence willful misconduct and/or breach of this Lease, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney's and consultant's fees, expenses and/or liabilities arising out of, involving, or in dealing with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters. Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 EXEMPTION OF LESSOR FROM LIABILITY. Except for Lessor's negligence, willful misconduct and/or breach of this Lease, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee. Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the PAGE 5 6 Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations. (c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved. (d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 PARTIAL DAMAGE--INSURED LOSS. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make the insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's responsibility) as and when required to complete said repairs. In the event, however, the shortage in proceeds was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. if Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonable possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If in such case Lessor does not so elect, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 PARTIAL DAMAGE--UNINSURED LOSS. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either : (i) repair such damage of knowledge of such damage at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the giving of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date of the occurrence of such damage. 9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate as of the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages, from Lessee except as released and waived in Paragraph 8.6. 9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease (as extended by Lessee pursuant to any of Lessee's renewal options), there is damage for which the cost to repair exceeds four (4) months' Base Rent, whether or not an Insured Loss, either party may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to the other party of its election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event of damage described in Paragraph 9.2 (Partial Damage--Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, PAGE 6 7 if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration.*12 (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "COMMENCE" as used in this Paragraph shall mean either the unconditional authorization of the preparation of required plans, or the beginning of the actual work on the Premises, whichever first occurs.*13 9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition occurs, unless Lessee is legally responsible therefore (in which case Lessee shall make the investigation and remediation thereof required by Applicable Law and this Lease shall continue in full force and effect; but subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to investigate and remediate such condition exceeds twenty (20) times the then monthly Base Rent, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor's desire to terminate this Lease as of the date one hundred eighty (180) days following the giving of such notice.*14 In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the investigation and remediation of such Hazardous Substance Condition totally at Lessee's expense and without reimbursement from Lessor except to the extent of an amount equal to twenty (20) times the then monthly Base Rent. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following Lessee's said commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible and the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. If a Hazardous Substance Condition occurs for which Lessee is not legally responsible, there shall be abatement of Lessee's obligations under this Lease to the same extent as provided in Paragraph 9.6(a) for a period of not to exceed twelve (12) months. 9.8 TERMINATION--ADVANCED PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of his Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith. 10. REAL PROPERTY TAXES. 10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand. (b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right, at Lessor's option, to estimate the current Real Estate Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date. 10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form or real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties.*15 10.3 DELETED. 10.4 PERSONAL PROPERTY TAXES. Subject to Lessee's legal right to contest the amount or applicability of such taxes, Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations. Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee PAGE 7 8 within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b). 11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises. 12. ASSIGNMENT AND SUBLETTING. 12.1 LESSOR'S CONSENT REQUIRED. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36; and subject to Addendum "A". (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of the execution by Lessor of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee established under generally accepted accounting principles consistently applied. (d) Subject to paragraph 9 of Addendum "A", an assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c) or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unconsented to assignment or subletting as a noncurable Breach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of Base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and market value adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition), or one hundred ten percent (110%) of the price previously in effect, whichever is greater, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall be increased in the same ratio as the new market rental bears to the Base Rent in effect immediately prior to the market value adjustment. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief. 12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING. (a) Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (iii) release Lessee of any obligations hereunder, or (iii) after the primary liability of Lessee for the payment of Base Rent and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease. (d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublease, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with reimbursement of Lessor's legal fees and costs, which shall not exceed $1,000. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such PAGE 8 9 obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) Deleted. (h) Deleted. 12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of this or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublease, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon an uncured Breach in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublease shall pay such rents and other charges to Lessor notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against said sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior Defaults or Breaches of such sublessor under such sublease. (c) Deleted. (d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor's and Lessee's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. DEFAULT; BREACH; REMEDIES. 13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $500.00 is a reasonable maximum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH" is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without a lessor-authorized assignee or sublessee, or without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent or any other monetary payment required to be made by Lessee hereunder, whether to Lessor to a third party, as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of seven (7) days, following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable of (i) compliance with Applicable Law per Paragraph 6.3, (iii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of twenty-one (21) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) The making by lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. ss. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within one hundred twenty (120) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; PAGE 9 10 provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. (f) The discovery of Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false, without a reasonable explanation from Lessee for such error. (g) Deleted. 13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require future payments for a period of one (1) calendar year to be made under this Lease by Lessee to be made only by cashier's check *16 in the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event, Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises *17 reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve therein the right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statue. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereunder available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease at to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of an uncured Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such inducement Provisions shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable to Lessee to Lessor, and recoverable by Lessor as additional rent due under this Lease if such Breach remains uncured after the applicable period available for its cure. 13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to five percent (5%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less PAGE 10 11 than thirty (30) days after receipt by Lessor, and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purposes, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If materially affected, or if more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area are not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession.*18 If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under the threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair. 15. BROKER'S FEE. 15.1 The Broker's named in Paragraph 1.10 are the procuring causes of this Lease. 15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers for brokerage services rendered by said Brokers to Lessor in this transaction. 15.3 Deleted. 15.4 Deleted. 15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessor hereby agrees to indemnify, protect, defend and hold Lessee harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of Lessor, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10. 16. TENANCY STATEMENT. 16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a party, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. *20 All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. *21 18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. PAGE 11 12 19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4. 20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease *22 are deemed to be rent. 22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. 23. NOTICES. 23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by had or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may be written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to either party hereunder shall be concurrently transmitted to such party or parties at such addresses as such party may from time to time hereafter designate by written notice. 23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given seventy-two (72) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If any notice is transmitted by facsimile transmission or similar means, the same shall be deemed served or delivered upon telephone confirmation of receipt of the transmission thereof, provided a copy is also delivered via delivery or mail. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day. 24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. RECORDING. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. 27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. BINDING EFFECT; CHOICE OF LAW. This lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE. 30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real PAGE 12 13 property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month's rent. 30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance *23 (a "non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) or Broker in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of any emergency, and otherwise at reasonable times upon twenty-four (24) hours prior notice for the purpose of showing the same to prospective purchasers, lenders, or lessees (during the last eight (8) months of the Lease term) and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (120) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. *24 33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. SIGNS. Lessee shall not place any sign upon the Premises, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installation, Trade Fixtures and Alterations). *25 35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. CONSENTS. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an PAGE 13 14 assignment, a subletting or the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion to said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgement that no Default or Beach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 37. DELETED. 38. QUITE POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. OPTIONS. 39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Premises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee are not assignable, either as a part of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner, by reservation or otherwise; provided, however, that the Options may be assigned to and exercised by any assignee of the Lease as to which Lessor's consent is not required. 39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or review this Lease have been validly exercised. 39.4 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not the Defaults are cured, during the twelve (12) month period immediately preceding the exercise of the Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason by Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of Default under Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee will pay its fair share of common expenses incurred in connection therewith. 41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. PAGE 14 15 42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease, together with reasonable fees incurred in the recovery of such costs. 44. AUTHORITY. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is not intended to be binding until executed by all Parties hereto. 47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures. Executed at San Diego, CA Executed at San Diego, CA ------------------------------- ------------------------------- on December 27, 1995 on 12/27/95 ---------------------------------------- ---------------------------------------- by LESSOR: by LESSEE: Campson corporation, a California CombiChem, Inc., a California corporation - ------------------------------------------ ------------------------------------------ By /s/ Lee M. Chesnut By /s/ Gail Erwin ---------------------------------------- ---------------------------------------- Name Printed: Lee M. Chestnut Name Printed: Gail Erwin ----------------------------- ----------------------------- Title: President Title: Controller ------------------------------------ ------------------------------------
PAGE 15 16 By By ---------------------------------------- ---------------------------------------- Name Printed: Name Printed: ----------------------------- ----------------------------- Title: Title: ------------------------------------ ------------------------------------ Address: 9627 Grossmont Summit Drive Address: 9050 Camino Santa Fe ------------------------------------ ------------------------------------ La Mesa, CA 91941 San Diego, CA 92127 ------------------------------------ ------------------------------------ Tel. No. (619)697-7777 Fax No. (619) 697-7846 Tel. No. (619)530-0484 Fax No. (619) 530-9998 -------------- --------------- -------------- ---------------
NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, CA 90071 (213) 687-8777. Fax No. (213) 687-8616. PAGE 16 17 ADDENDUM "A" TO STANDARD INDUSTRIAL LEASE -- SINGLE-TENANT BETWEEN CAMPSON CORPORATION, A CALIFORNIA CORPORATION AND COMBICHEM, INC., A CALIFORNIA CORPORATION This Addendum "A" to Lease ("Lease Addendum") is attached to and made a part of that certain STANDARD INDUSTRIAL/COMMERCIAL SINGLE TENANT LEASE - -- NET, dated December 22, 1995, made by and between CAMPSON CORPORATION, a California corporation, as "Lessor," and COMBICHEM, INC., a California corporation, as "Lessee" (the "Lease"), and constitutes additional covenants and agreements thereto as set forth in the Lease, with the covenants agreements contained herein to prevail in the event of any conflicts between the covenants and agreements contained herein and those in the Lease. I. THE FOLLOWING INSERTS ARE HEREBY INCORPORATED INTO THE LEASE WHERE INDICATED BY STARRED NUMERALS IN THE LEASE: A. Insert *1 Paragraph 3.3 - Delay in Possession. Add the following in line 7 of Paragraph 3.3 after "hereunder": and any base rent prepared by Lessee, any costs paid to Lessor pursuant to Addendum "A" (including, without limitation, the security deposit, Lessee's deposits into the Tenant Improvement Account, the costs of these services to space planning, engineering, and architectural work incurred by Lessee in connection with the improvements that Lessee intends to make to the Premises) shall be refunded to Lessee and the Letter of Credit shall be terminated. B. Insert *2 Article 4. Rent. Add the following paragraphs to Article 4: 4.2 Additional Rent. All charges payable by Lessee under the terms of this Lease in addition to Base Rent shall constitute additional rent ("Additional Rent") to Lessor. All remedies available to Lessor for nonpayment of rent shall be available for nonpayment of any Additional Rent. The term "rent" means Base Rent and Additional Rent. Unless this Lease provides otherwise, all Additional Rent shall be paid by Lessee within fifteen (15) days after Lessee's receipt of a statement from Lessor. This Lease is a "triple net" lease, and it is intended that the Base Rent payable hereunder shall be an absolutely net return to Lessor and that Lessee shall pay all costs and expenses relating 18 to the Premises, unless otherwise expressly provided in this Lease. Additional Rent includes without limitation: (a) Operating Expenses [see Paragraph 4.3]; (b) Maintenance and Repairs [see Article 7]; (c) Insurance [see Article 8]; (d) Real Property Taxes [see Article 10]; and (e) Utilities [see Article 11]. 4.3 Operating Expenses. (a) "OPERATING EXPENSES" shall include all expenses and costs of every kind and nature which Lessor shall pay or become obligated to pay because of or in connection with the ownership and operation of the Premises, including, but not limited to, the Premises, parking areas and surrounding property and supporting facilities, including, without limitation: (i) premiums for insurance maintained by Lessor pursuant to Article 8; (ii) all structural and non-structural maintenance and repair (subject, however, to Lessor's warranties provided in Section 2.3 of the Lease), waste disposal, janitorial and service costs associated with Lessor's management of the parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, driveways, landscaped areas, striping, irrigation systems, outdoor lighting systems, exterior fire hydrants, fences and gates, and roof of the Premises; (iii) a property management fee equal to 4% of the Base Rent ("Property Management Fee"); (iv) outside legal and accounting expenses; (v) all interior and exterior repairs, replacements and maintenance (excluding those paid for by proceeds of insurance or by Lessee directly); (vi) any capital improvement, replacement or repair which does not exceed an aggregate cost of $5,000 per item; (vii) subject to the limitations of Paragraph 18 of Addendum "A", the amortization of capital improvements, replacements or repairs which exceed an aggregate cost of $5,000 per item; (vii) all charges for utilities and similar services not separately metered by Lessee and used or consumed in the Premises; and (viii) utilities surcharges and any other costs, levies or assessments resulting from statutes or regulations promulgated by any governmental authority in connection with the use or occupancy of the Premises. Operating Expenses do not include separately-metered utilities and services delivered to the Premises which costs are Lessee's sole responsibility as further defined in Article 11. (b) In any year after the first full year of the Term, the amount of Operating Expenses (excluding insurance, taxes, the Property Management Fee and capital improvements, repairs and replacements) shall not increase by more than five percent (5%) in any calendar year over the amount of Operating Expenses for the previous calendar year; provided, however, that in the event such Operating Expenses increase by more than five percent (5%) in any calendar year over the amount of Operating Expenses for the previous calendar year, Lessor may require Lessee to independently obtain a bid for the cost of comparable services for the Premises which is less than the five percent (5%) limit on Operating Expenses increases and, if Lessee is unable to obtain comparable services for the Premises at a cost which is less than the five percent (5%) limit on Operating Expenses increases, Lessee agrees to pay the amount by which the lowest bid for such comparable services exceeds the five percent (5%) limit on Operating Expenses increases. For example, if the cost of an item of Operating Expenses increases by 10% over the cost of such A-2 19 services for the previous calendar year, and Lessee is able to obtain a contract for comparable services at a cost equal to an 8% increase over the cost of such services for the previous calendar year, regardless of whether Lessor elects to contract for the comparable services, Lessee shall pay an 8% increase for such services as part of the Operating Expenses. (c) The cost of any capital improvements, replacements and repairs reimbursed as Operating Expenses pursuant to the foregoing obligations shall be amortized on a straight-line basis (together with interest at the interest rate of ten percent (10%) per annum on the unamortized balance of such costs) over a period equal to the useful life of the item (as determined by reference to the vendor's or manufacturer's suggested useful life for such capital item or, where such reference does not exist, by reference to generally accepted accounting principals, consistently applied). (d) Lessor, at Lessor's sole cost and expense, shall make an initial investment in general improvements to landscaping in an amount not less than One Thousand Dollars ($1,000) ("Initial Renovation Cost"). (e) Notwithstanding the provisions of this Paragraph 4.3, the following shall not be included within Operating Expenses: (i) any depreciation on the Premises; (ii) costs incurred due to Lessor's violation of any terms or conditions of this Lease or any other lease relating to the Premises; (iii) the Initial Renovation Cost; (iv) damage and repairs attributable to fire or other casualty; (v) damage and repairs covered under any insurance policy carried by Lessor in connection with the Premises; (vi) damage and repairs necessitated by the negligence or willful misconduct of Lessor or Lessor's employees, agents or contractors; (vii) reserves for the repair, replacement or improvement of the Premises; (viii) all principal, interest, loan fees, and other carrying costs related to any mortgage or deed of trust and all rental and other payable due under any ground or underlying lease, unless such costs are directly attributable to Lessee's, its agents' or employees' activities in the Premises, or as a result of a Lessee's breach or default under this Lease; (ix) costs, including permit, license and inspection costs, incurred with respect to the installation of other tenants or other occupants in the Premises, improvements made for other tenants or other occupants of the Premises or incurred in improving, decorating, painting or redecorating vacant space for other tenants or other occupants of the Premises; (x) any costs, fines, or penalties incurred due to violations by Lessor or by any other tenant of the Premises (other than Lessee) of any governmental rule or authority, this Lease or any other lease of the Premises, or due to Lessor's negligence or willful misconduct; (xi) Landlord's costs of conforming the Premises to the requirements of the American with Disabilities Act and all regulations issued by the U.S. Attorney General or other authorized agencies under the authorization of the Americans with Disabilities Act (unless necessitated by Lessee's improvements or alterations to the Premises); (xii) costs of acquisition of sculpture or other objects of art for the Premises; (xiii) Lessor's wages, salaries or other compensation, general corporate overhead and administrative expenses (all of which shall be paid through the Property Management Fee); (xiv) the cost of repairing any structural defects in the Premises and repairing any material defects in the design, materials or workmanship of the Premises, including, without limitation, the Building, which are disclosed to Lessor prior to December 31, 1996, in accordance with Section 2.2 of the Lease); (xv) any A-3 20 other expense, which under generally accepted accounting principles and practices, would not be considered a normal maintenance and operating expense. Lessor agrees to exercise care that there be no duplication of submittals of items of expense for which Lessee is obligated to pay Lessor under this Lease. (f) Lessee shall have the option, upon reasonable advance written notice to Lessor, to separately contract at Lessee's sole cost and expense for any services applicable to all or any part of the Premises which can be conveniently done, without prejudice to Lessor, and which results in a cost savings to Lessee compared to the cost of Lessor's contract for similar services, and in such event, Lessee shall not be assessed for the cost of comparable services obtained directly by Lessee for the Premises. Notwithstanding the foregoing, Lessor shall be responsible for the management of services performed by Lessee's contractors pursuant to the foregoing right as consideration for the Property Management Fee. (g) Any Operating Expenses attributable to a period which falls only partially within the Lease term shall be prorated between Lessor and Lessee so that Lessee shall pay only that proportion thereof which the part of such period within the Lease term bears to the entire period. C. Insert *3 Paragraph 5 - Security Deposit. Add the following at the end of Paragraph 5: From and after the tenth (10th) day following the expiration or earlier termination of this Lease, the Security Deposit shall accrue interest at the rate set forth in Paragraph 19 of this Lease. D. Insert *4 Paragraph 6.1 - Use. Add the following at the end of Paragraph 6.1: In the event of any zoning change or change in any other land use law or ordinance (not procured or consented to by Lessee), which prevents Lessee from using the Premises for scientific research and development, Lessee shall have the right to terminate this Lease upon not less than one hundred twenty (120) days prior written notice to Lessor; provided, however, that if, before the expiration of said period, Lessor is able to cure the situation such that the Premises may be legally used for scientific research and development, this Lease shall remain in full force and effect. Lessee agrees to act in good faith to assist Lessor's efforts to cure the situation, as Lessor may reasonably request. A-4 21 E. Insert *5 Subparagraph 6.2(c) - Indemnification. Add the following at the end of Subparagraph 6.2(c): Notwithstanding any other provision of this Lease, Lessor represents to the best of Lessor's actual knowledge that there are no Hazardous Substances, including but not limited to any solvents, metals, petroleum, lead-based paint, PCBs, or asbestos in, on, under or about the Premises. Notwithstanding this representation, Lessor shall indemnify and hold Lessee harmless against and from all liability and claims of any kind for loss or damage to Lessee, its employees or agents, and for expenses and fees of Lessee (including but not limited to costs, expenses and attorneys' fees), incurred, directly or indirectly, as a result of (1) the negligence, willful misconduct or breach of this Lease by any of Lessor, its agents, employees or contractors; (2) the existence of Hazardous Substances in, on, under or about the Premises as of the commencement of this Lease; (3) any acts or omissions of Lessor, or other lessees (past or future), or their officers, employees, agents or subcontractors; and (4) any and all latent and patent defects in the materials, design and workmanship of the Premises of which Lessor receives actual knowledge on or before December 31, 1996. F. Insert *6 Paragraph 7.1 - Lessee's Obligations. In Paragraph 7.1, delete the remainder of the paragraph starting at the beginning of the third line, and replace with the following: . . . keep the Premises in good order, condition and repair during the term of the Lease, subject to ordinary wear and tear and Paragraph 9 of the Lease, including without limitation: interior surfaces of walls and ceilings; wall and floor coverings; interior and exterior windows and plate glass; window coverings; doors; locks on closing devices; window casements and frames; all heating, ventilation and air conditioning systems and equipment, including leaks around ducts, pipes, vents and other parts of the system; all partitions, doors and door fixtures and hardware; periodic interior painting, as determined by Lessee; all fixtures and appurtenances including electrical, lighting, all plumbing and plumbing fixtures; all signs, awnings and canopies. Lessee shall maintain, at Lessee's expense, a preventive maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system (including leaks around ducts, pipes, vents, and other parts of the air conditioning) by a licensed heating and air conditioning contractor. It is the intention of Lessor and Lessee that Lessee shall maintain the interior of the Premises, at all times during the term of this Lease, in an attractive and fully operative condition, at Lessee's expense. G. Insert *7 Paragraph 7.2 - Lessor's Obligations. In Paragraph 7.2, delete the remainder of the paragraph following "Premises)" in line 3, and replace with the following: A-5 22 and subject to Lessee's obligation to reimburse Lessor for the Operating Expenses pursuant to Article 4, Lessor shall repair and maintain the roof (excluding interior ceilings), the foundations, the structural and exterior portions of the Premises and any building in which the Premises are located, without limitation all of the following: exterior walls; loading docks; exterior sidewalks and walkways; landscaped areas and irrigation facilities; driveways and parking areas, including resurfacing, restriping and other repairs; periodic exterior painting, as determined by Lessor; and exterior lighting fixtures and appurtenances; provided, however, Lessee shall pay as Additional Rent any maintenance and repairs necessitated by active negligence, willful misconduct or breach of this Lease by Lessee, its agents, servants, employees or invitees, or caused by alterations, additions or improvements made by Tenant to the Premises. Except as hereinafter specifically provided, there shall be no abatement of rent, and no liability of Lessor, by reason of any injury to or interference with Lessee's business arising from the making of any repairs, alterations, or improvements to any portion of the building or the Premises. Lessor shall not be liable for any failure to make such repairs or to perform any maintenance unless such failure shall persist for more than five (5) consecutive business days after written notice of the need therefor has been given to Lessor by Lessee. If Lessor fails to perform Lessor's obligations under this paragraph 7.2, and such failure materially interferes with Lessee's use of the Premises and continues for more than five (5) consecutive business days after Lessee provides Lessor with notice of such failure (or such shorter period as may be reasonable due to the nature of such failure), Lessee may perform such obligations on Lessor's behalf, and if Lessee so elects, Lessor shall reimburse Lessee, upon demand, for the costs thereof (and any reasonable costs and fees associated with Lessee's collection of such costs). With the exception of the foregoing sentence, Tenant waives the right to make repairs at Lessor's expense under Section 1942 of the California Civil Code, or under any other law, statute, ordinance now or hereafter in effect. H. Insert *8 Subparagraph 7.4(b) - Removal. In the first line of subparagraph 7.4(b), insert between "may" and "require" the following: (at the time Lessor gives its consent to the installation of such Lessee-Owned Alterations or Utility Installations) I. Insert *9 Subparagraph 7.4(c) - Surrender/Restoration. Add the following at the end of subparagraph 7.4.(c): Any Trade Fixtures and Equipment purchased by Lessee and installed in the Premises, which Lessee intends to remove from the Premises upon the expiration or earlier termination of this Lease, shall be separately identified on a list ("Equipment List") to be compiled by Lessee and acknowledged by Lessor. The Lease shall be amended to incorporate the Equipment List upon its completion. The Trade Fixtures and Equipment on the Equipment List A-6 23 shall be and remain the sole property of Lessee. Said Fixtures and Equipment may be removed from the Premises by Lessee at any time during the term of this Lease. J. Insert *10 Subparagraph 8.2(b) - Carried By Lessor. Add the following at the end of subparagraph 8.2(b): Within ten (10) days after the date of this Lease, Lessor shall provide Lessee with a certificate evidencing the existence in an amount of Lessor's liability insurance for the Premises. No such policy shall be cancelable or subject to modification except after thirty (30) days prior written notice to Lessee. Lessor and Lessee agree that Lessor shall initially act as the Insuring Party; provided, however, that Lessee may, in its reasonable discretion and at any time, elect to become the Insuring Party upon ninety (90) days advance written notice to Lessor. K. Insert *11 Paragraph 8.6 - Waiver of Subrogation. Add the following at the end of paragraph 8.6: Lessor and Lessee agree to have their respective insurance companies issuing insurance pursuant to this Lease, waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. L. Insert *12 Subparagraph 9.6(a) - Abatement of Rent; Lessee's Remedies. Add the following at the end of subparagraph 9.6(a): . . . , except for damages connected with Lessor's negligence, willful misconduct, or breach of this Lease. M. Insert *13 Subparagraph 9.6(b) - Abatement of Rent; Lessee's Remedies. Add the following at the end of subparagraph 9.6(b): If Lessor reasonably determines that repairs will require more than one hundred eighty (180) days to complete, or if repairs are not substantially completed within one hundred eighty (180) days following the commencement thereof, Lessee may, at its option, terminate this Lease by giving at least thirty (30) days prior written notice to Lessor specifying the termination date. If, prior to the end of the initial term of the Lease, this Lease shall terminate because of Lessor's failure to repair or restore the Premises or because of event of condemnation under paragraph 14, then Lessor shall provide Lessee with funds equal to the unamortized portion of Lessee's contribution to the cost of the initial improvements (paid from the Tenant Improvement Account described in Addendum paragraph 7), which contribution shall be amortized on a straight-line basis at an interest rate of 10% over the initial term of the Lease. A-7 24 N. Insert *14 Paragraph 9.7 - Hazardous Substance Conditions. Add the following in line 7 of paragraph 9.7, at the end of the first sentence: . . . In which event Lessor shall reimburse Lessee for Lessee's actual cost of moving Lessee's equipment and furnishings to Lessee's replacement Premises and Lessor waives the terms and conditions of Subparagraph 7.4(c). O. Insert *15 Paragraph 10.2 - Definition of "Real Property Taxes". Add the following at the end of paragraph 10.2: Notwithstanding the foregoing, Real Property Taxes shall not include (a) inheritance, estate or franchise taxes imposed upon or assessed against the Premises, (b) taxes on the net income of the Lessor, and (c) taxes attributable to the first change in the ownership of the Premises during the term of the Lease. P. Insert *16 Paragraph 13.2 - Remedies. Add the following in line 6 of paragraph 13.2 after "cashier's check": . . . ; provided, however, that Lessee shall not be required to make future payments by cashier's check if, no more than once in any calendar year, Lessee cures such Breach by providing Lessor with funds in the amount of the full payment due Lessor within twenty-four (24) hours following Lessee's receipt of Lessor's notice that a check given by Lessee has not been honored by the bank upon which it is drawn. Q. Insert *17 Paragraph 13.2(a) - Remedies. Add the following in line 9 of paragraph 13.2(a) after "Premises": . . . to the condition required by subparagraph 7.4(c), . . . R. Insert *18 Paragraph 14 - Condemnation. Add the following in line 6 of paragraph 14 after "possession": . . . or Lessee may elect to continue this Lease with Base Rent abated in proportion to the adverse effect of the condemnation on Lessee's business in the Premises, as reasonably determined by Lessee. A-8 25 S. Insert *19 Paragraph 14 - Condemnation. Add the following in line 12 after "Lessee's Trade Fixtures": . . . and any Lessee-Owned Alterations and/or Utility Installations which Lessee would be entitled to remove on expiration or earlier termination of this Lease. T. Insert *20 Paragraph 16 - Tenancy Statements. Add the following in line 4 of subparagraph 16.2 after "three (3) years": . . . ; provided that Lessor acknowledges that Lessee's financial statements received prior to the date of this Lease are in such reasonably acceptable form. U. Insert *21 Paragraph 17 - Lessor's Liability. Add the following at the end of paragraph 17: Notwithstanding the foregoing, a Lessor whose interest in this Lease or the Premises is foreclosed by a foreclosure or execution sale shall not be relieved of liability unless the party who acquires the Lessor's interest agrees to recognize Lessee's interest and rights in and under this Lease and not to disturb Lessee's possession hereunder so long as Lessee is not in default hereunder. V. Insert *22 Paragraph 21 - Rent Defined. Add the following in Paragraph 21 after "this Lease": . . . (with the exception of unused portions of the Security Deposit and the Letter of Credit) . . . W. Insert *23 Paragraph 30.3 - Non-Disturbance. Add the following in line 2, after "assurance": . . . in a form reasonably acceptable to Lessee . . . X. Insert *24 Paragraph 32 - Lessor's Access. Add the following at the end of paragraph 32: Lessor shall not permit such activities to interfere with Lessee's (or any sublessee's) use of the Premises. A-9 26 Y. Insert *25 Paragraph 34 - Signs. Add the following at the end of paragraph 34: Lessee shall be entitled to install building and monument signs for the Premises as part of the proceeds of the Tenant Improvement Account and such signs shall be installed in conformance with all sign ordinances and regulations. All such signage shall be reviewed and approved by Lessor prior to manufacture and installation. Lessor's approval of signage shall not be unreasonably withheld. II. THE FOLLOWING ADDENDA PARAGRAPHS 1 THROUGH 20 ARE HEREBY INCORPORATED INTO THE LEASE. 1. BASE RENT SCHEDULE (EXCLUSIVE OF T.I. ALLOWANCE): Lessee shall pay Base Rent for the rentable square footage of the Premises according to the schedule outlined below: Year 1: $0.70/sq ft/month/NNN Year 2: $0.70/sq ft/month/NNN Year 3: $0.75/sq ft/month/NNN Year 4: $0.80/sq ft/month/NNN Year 5: $0.83/sq ft/month/NNN Year 6: $0.86/sq ft/month/NNN Year 7: $0.90/sq ft/month/NNN Year 8: $0.94/sq ft/month/NNN Year 9: $0.98/sq ft/month/NNN Year 10: $1.02/sq ft/month/NNN
The Premises contain an interior space area of Thirty-Four Thousand Two Hundred Forty-Four (34,244) rentable square feet as shown on Exhibit "B" attached to the Lease and by this reference incorporated herein. Lessee may confirm the measurements of the rentable square footage of the Premises by measuring the Premises in accordance with BOMA standards ANSIZ65.1 - 1980 and, if Lessee disputes the Lessor's measurements, Lessee shall submit Lessee's measurements and dispute to Lessor within thirty (30) days after the Commencement Date. If Lessor and Lessee fail to agree on the measurement of the Premises within ten (10) days, Lessor and Lessee shall resolve the dispute by submitting the dispute to a third party acceptable to Lessor and Lessee and familiar with BOMA standards, who shall measure the Premises and submit its calculation to Lessor and Lessee within ten (10) days. Any changes in square footage to the Premises shall be incorporated into this Lease by an amendment hereto entered into by the parties. 2. SECURITY DEPOSIT & PREPAID RENT: Upon the execution of the Lease, Lessee shall deposit with Lessor a security deposit in an amount equal to Sixty Five Thousand Dollars ($65,000.00)("Security Deposit"). During such portion of the Term as the Letter of Credit (as defined in Section 3 below) is available to the Lessor to cover Lessee's obligations under the Lease, the Security Deposit shall be held by Lessor in addition to Lessor's security deposit in the form of the Letter of Credit made by Lessee in favor of Lessor (as set forth below) and, collectively, the Security Deposit and the amount secured by the Letter of Credit shall constitute the "Security Deposit." Upon the expiration or earlier termination of the Letter of Credit (pursuant to the terms set forth below), such portion of the Security Deposit in excess of Thirty Two Thousand Five Hundred Dollars ($32,500.00) which has not been applied by Lessor to unpaid rent or other Lessee obligations under the Lease shall be refunded to Lessee. Commencing with the date of this Lease, A-10 27 that portion of the Security Deposit held by Lessor in the amount of Thirty Two Thousand Five Hundred Dollars ($32,500.00) shall be held in Lessor's deposit account with a financial institution acceptable to Lessee and shall accrue interest at the rate of five percent (5%) per annum, and all interest accrued on the Security Deposit shall be paid over to Lessee by Lessor within five (5) business days of the last day of each calendar year. So long as Lessor is a single asset entity with the Premises as its sole asset, Lessor may commingle the Security Deposit in its general deposit accounts. Upon sale or transfer of the Premises by Lessor, Lessor shall remain liable for the return of the unused portion of the Security Deposit unless Lessor transfers the Security Deposit to the transferee of the Premises and the transferee assumes, in writing, Lessor's Lease obligations. Lessor may, but shall not be required to, apply all or part of the Security Deposit and/or the Letter of Credit (by drawing upon the Letter of Credit and/or by using the amounts held by Lessor as the Security Deposit) to any unpaid rent or other charges due from Lessee or to cure any other defaults of Lessee. If Lessor uses any part of the cash portion of the Security Deposit for such purposes, Lessee shall deposit additional funds to restore the Security Deposit to its then-current amount within ten (10) days after Lessor's written request. 3. LETTER OF CREDIT. On or before the date on which Lessor funds its portion of the Tenant Improvement Account (as set forth below), Lessee shall provide Lessor with one or more letter(s) of credit (individually and, if more than one, collectively, the "Letter of Credit") in a form reasonably satisfactory to Lessor and in the aggregate amount of Three Hundred Twenty-Five Thousand Dollars ($325,000.00), payable pursuant to the terms and conditions set forth herein and issued by a California bank previously approved by Lessor. Lessor shall pay for the costs of the establishment and maintenance of the Letter of Credit, provided that such costs do not exceed one percent (1%) per annum of the then current value of the Letter of Credit. The Letter of Credit shall have an initial term of not less than twelve (12) months and shall be renewable for up to two (2) successive twelve (12) month periods; provided, however, that the aggregate amount of the Letter of Credit may be reduced to the following amounts on the following dates: First Lease Year $325,000.00 Second Lease Year $216,666.67 Third Lease Year $108,333.33 Fourth Lease Year $ 0.00
With the exception of the conditions for early termination of the Letter of Credit set forth below, the Letter of Credit shall be irrevocable, unconditional and payable upon demand upon presentation of Lessor's draft, accompanied by the original Letter of Credit together with a notarized statement, signed by an authorized trustee or officer of Lessor, stating that Lessor has the right to draw under the Letter of Credit. Partial draws shall be permitted. Lessor shall have the right to draw on the Letter of Credit in the event that: (a) Lessor applies all or part of the Security Deposit to any unpaid rent or other charges due from Lessee or to cure any other defaults of Lessee as set forth above; (b) Lessee is in default under the Lease after expiration of any grace period; or (b) Lessee fails to renew the Letter of Credit, if required for the Letter of Credit to conform to the aggregate amount requirements set forth above, at least one (1) month prior to its expiration date. (a) Effect of Lessee Breach. Notwithstanding the foregoing schedule for reduction of the amount Letter of Credit, in the event of a Lessee Breach of this Lease which remains uncured for the applicable cure period set forth in the Lease, the amount secured by the Letter of Credit on the date of such uncured Breach shall not be reduced in accordance with the foregoing schedule, but shall continue as part of Lessee's Security Deposit until Lessee cures such Breach and the earlier of: (a) the expiration of the initial term of the Lease; or (b) Lessee achieves any of the Lessee financing criteria set forth in subparagraph 3(b) below. A-11 28 (b) Lessee Financing Milestones. Notwithstanding anything to the contrary in this Lease, the Letter of Credit shall be terminated by Lessor and Lessee, by written notice to the issuer of the Letter of Credit, and the original Letter of Credit shall returned to Lessee upon presentation of reasonable proof to Lessor, in writing and certified by Lessee's chief financial officer (or an officer of Lessee in similar capacity), of Lessee's satisfaction any of the following criteria for early termination of the Letter of Credit: (i) Lessee demonstrates a tangible net worth of $15 million or greater; (ii) Lessee demonstrates aggregate revenue of $3 million or greater for any twelve (12) consecutive months; or (iii) Lessee receives additional capital financing in an amount not less than Ten Million Dollars ($10,000,000.00), through venture capital sources, or other financing sources (but not including the "callable" portion of the capital funding which Lessee received in August 1995). 4. EARLY OCCUPANCY: Lessee may occupy that approximately 10,000 rentable square foot portion of the Premises designated by Lessee as the "Early Occupancy Space" on Exhibit "C" attached hereto, for the purpose of making improvements to the Premises and utilizing office space until the Commencement Date, immediately upon the later of (i) Lease execution and (ii) close of escrow for Lessor's purchase of the Premises from Campson Corp. All of the terms and conditions of the Lease shall apply during the term of such early occupancy, except that Lessee shall pay Base Rent (and reimburse Lessor's NNN expenses) for the Early Occupancy Space only commencing on the later of (i) the date of Lessee's actual occupancy of the Early Occupancy Space and (ii) January 1, 1996. 5. ENVIRONMENTAL ASSESSMENT. Prior to Lessee's occupancy of the Premises, Lessor shall conduct an "Entrance Assessment," consisting of a Phase I Environmental Assessment and such other tests as are listed on the "Assessment Criteria" attached hereto as Addendum B, by an environmental consultant reasonably acceptable to Lessee. Lessee shall receive a copy of the report(s) of the Lessee's Entrance Assessment, and said report(s) shall be deemed to be the baseline physical condition of the Premises upon Lessee's occupancy. The cost of the Lessee's Entrance Assessment shall be paid by Lessor. Prior to Lessee's surrender of the Premises, Lessee shall conduct an "Exit Assessment," consisting of a Phase I Environmental Assessment and such other tests as are listed on the Assessment Criteria attached hereto as Addendum B, by an environmental consultant reasonably acceptable to Lessor. Lessor shall receive a copy of the report(s) of the Lessee's Exit Assessment, and said report(s) shall be deemed the physical condition of the Premises upon Lessee's surrender of the Premises. The cost of the Lessee's Exit Assessment shall be paid by Lessee. Lessee's Entrance and Exit Assessments shall be performed by an independent environmental consultant with expertise in performing environmental analyses of biotechnology laboratory and manufacturing facilities. In the event that the Exit Assessment indicates contamination of the Premises resulting from Lessee's occupancy and/or use of the Premises, Lessee shall take such action as may be reasonable under the circumstances to restore the Premises to the condition evidenced by the Entrance Assessment. 6. TENANT IMPROVEMENT ACCOUNT: On or before January 15, 1996, Lessor shall provide Lessee with written proof, reasonably acceptable to Lessee, of a funding commitment from a lender reasonably acceptable to Lessee for a loan in the amount of Lessor's deposit into the Tenant Improvement Account ("Funding Commitment"). On or before February 20, 1996, Lessor and Lessee shall each deposit cash in the amount of Six Hundred Fifty Thousand and no/100 Dollars ($650,000) into one or more escrow accounts totalling $1,300,000 (collectively, the "Tenant Improvement Account") with one or more escrow holders reasonably acceptable to both parties (collectively, the "Escrow Holder"). The Tenant Improvement Account shall be held by the Escrow Holder for distribution pursuant to the terms of this Lease, including, without limitation, the Work Letter. The Tenant Improvement Account shall be used to pay for Lessee's improvements to the Premises ("Tenant Improvements") in accordance with that certain Work Letter Agreement attached hereto as A-12 29 Exhibit "D". Any unused portion of the Tenant Improvement Account shall be returned equally to both Lessor and Lessee and interest accruing on such deposited funds will accrue to the benefit of both Lessor and Lessee. Lessee shall submit plans and specifications to Lessor for such improvements and shall complete such improvements in accordance with the Work Letter Agreement. All of the funds provided by Lessor which are utilized by Lessee shall be repaid by Lessee over the entire term of the Lease, amortized on a straight-line basis at an interest rate of 10% per annum, payable monthly ("Lessor Reimbursement"). Base Rent, according to the terms of the Lease, shall mean the rent schedule outlined in Section 1 above, together with the monthly payment of the amortized Lessor Reimbursement. For example, if 100% of the $650,000 contributed by Lessor is utilized by Lessee, the Base Rent shall be equal to the Base Rent amount set forth in Section 1 above, plus $0.25/sq. ft./month. 7. EXISTING IMPROVEMENTS: The Premises will include the existing improvements, furnishings and equipment left in the Building by the prior lessee (Quidel) ("Existing Improvements"). Lessor agrees, at Lessor's cost and expense, to pay any costs associated with acquiring such Existing Improvements from Quidel, up to a maximum of $30,000.00. If the cost of such Existing Improvements exceeds $30,000, the overage shall be paid from the Tenant Improvement Account, provided that Lessor first obtains Lessee's written approval of such additional expense. In no event shall the amount paid from the Tenant Improvement Account for the Existing Improvements exceed $20,000.00. Any costs of the Existing Improvements exceeding $50,000 shall be Lessor's sole expense. 8. TRANSFER TO AFFILIATE PERMITTED. Any provision in this Lease to the contrary notwithstanding, Lessor's consent shall not be required for a Transfer to any person or entity who controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee or to any person or legal entity which acquires all the assets of Lessee as a going concern of the business being conducted on the Premises (each of the foregoing is hereinafter referred to as a "Lessee Affiliate"); provided that before such assignment shall be effective, (a) said Lessee Affiliate shall assume, in full, the obligations of Lessee under this Lease, (b) Lessor shall be given written notice of such assignment and assumption and (c) the use of the Premises by the Lessee Affiliate shall be as set forth in Paragraph 1.8. For purposes of this paragraph, the term "control" means possession, directly or indirectly, of the power to direct or cause the direction of the management, affairs and policies of anyone, whether through the ownership of voting securities, by contract or otherwise. Lessor's entitlements to profits resulting from a sublease of the premises set forth in Section 11 below shall not apply to a sublease by Lessee to a Lessee Affiliate. 9. SUBLETTING: Lessee may sublease a portion or all of the Premises throughout the initial term of the lease with Lessor's prior written approval, which approval shall not be unreasonably withheld. Any net profits resulting from such sublease shall be shared equally by Lessor and Lessee (profits shall be the net cash benefit of the sublease, taking into account all costs that may apply including leasing commissions, improvements, rental abatements, etc.). Lessee may not, without obtaining Lessor's written approval which may be withheld in Lessor's sole discretion, sublease the Premises for a duration beyond the termination date of the initial term of the lease. 10. OPTION TO EXTEND. Lessee shall have three (3) consecutive options to extend the Term of this Lease for one (1) additional period of five (5) years each (each of such options are referred to herein individually as a "Premises Option"). The period of each of the Premises Options is referred to herein individually as an "Option Term". Lessee shall have no right or interest to exercise the Premises Option unless, not later than two hundred seventy (270) days prior to the end of the then-current Term or Option Term, Lessee provides Lessor with (a) written notice of its exercise of A-13 30 the Premises Option (the "Extension Notice"). Base Rent payable during the first year of each Option Term shall be an amount equal to ninety-five percent (95%) of "Market Rent" (as defined in subparagraph (a) below), on the date of the Extension Notice. All of the terms, covenants, conditions, provisions and agreements of the Lease shall apply to the Option Term. Annual Base Rent after the first year of each Option Term shall be as set forth in subparagraph (c) below. Time is of the essence with respect to Lessee's exercise of each of the Premises Options. (a) MARKET RENT. As used herein, "Market Rent" shall mean the price that a ready and willing tenant would pay, at commencement of the Option Term, as monthly base rent to a ready and willing landlord if such office space were offered for lease on the open market for a reasonable period of time and be the sum of the fair market monthly rental rate per rentable square foot multiplied by the Rentable Area of the Premises determined as follows: (a) as mutually agreed by Lessor and Lessee within ten (10) days of Lessor's delivery to Lessee of Lessor's opinion of the Market Rent for the first year of the Option Term ("Lessor Rent Notice")(which shall be delivered to Lessee within ten (10) days of receipt of Lessee's written Extension Notice); or (b) in the event that Lessor and Lessee are unable to so agree within such ten (10) day period, the Market Rent shall be determined by concurrent appraisals pursuant to subparagraph (b) below. The Market Rent shall be determined by considering (i) the highest and best use of the Premises, (ii) the duration of the Option Term, (iii) the quality and prestige of the Premises (as then improved and maintained as required by the terms and conditions of this Lease), (iv) recent monthly rental rates for buildings of similar size and location, (v) anticipated CPI Index changes from the date of the Market Rent determination to the date of the actual Option Term Commencement; (vi) all other relevant terms and conditions of this Lease. (b) MARKET RENT APPRAISAL PROCEDURE. (i) If Lessee rejects the Market Rent proposed by Lessor in Lessor's Rent Notice, Lessor and Lessee shall attempt to agree in good faith upon a single appraiser not later than five (5) days after the Lessor receives notice of Lessee's rejection of Lessor's proposed Market Rent ("Lessee's Rejection Notice"), which date of receipt shall be within ten (10) days of Lessor's delivery of Lessor's Rent Notice. If Lessor and Lessee are unable to agree upon a single appraiser within such time period, then Lessor and Lessee shall each appoint one appraiser not later than ten (10) days after Lessor's receipt of Lessee's Rejection Notice. Within five (5) days thereafter, the two appointed appraisers shall appoint a third appraiser. Lessor and Lessee shall instruct the appraiser(s) to complete the determination of the Market Rent not later than fifteen (15) days after all appraisers have been appointed. (ii) If either Lessor or Lessee fails to appoint its appraiser within the prescribed time period, the single appraiser appointed shall determine the Market Rent of the Premises for the first year of the Option Term. If both parties fail to appoint appraisers within the prescribed time periods, then the first appraiser thereafter selected by a party shall determine the Market Rent of the Premises for the first year of the Option Term. (iii) Lessor and Lessee shall each bear the cost of its own appraiser and the parties shall share equally the cost of the single or third appraiser, if applicable. All appraisers so designated herein shall have at least five (5) years' experience in the appraisal of similar office buildings in the San Diego area and shall be members of professional organizations such as MAI or equivalent. (iv) If a single appraiser is chosen, then such appraiser shall determine the Market Rent of A-14 31 the Premises for the first year of the Option Term. Otherwise, the Market Rent of the Premises for the first year of the Option Term shall be the arithmetic average of (2) of the three (3) appraisals which are closest in amount, and the third appraisal shall be disregarded. 11. OPTION TERM ESCALATION. During the Option Term, Base Rent shall be subject to an annual increase, effective as of each anniversary of the Term Commencement Date ("Adjustment Date"), to reflect any increase in the cost of living, in accordance with the "Index" (as hereinafter defined), using as the "Base Month" (Base Index) the month ninety (90) days prior to the date which is one year prior to the applicable Adjustment Date, and using as the "Comparison Month" (Comparison Index) the month ninety (90) days prior to the applicable Adjustment Date. As of each Adjustment Date, the Base Rent payable during the ensuing twelve (12) month period shall be determined by increasing the initial Base Rent by a percentage equal to the percentage increase, if any, in the Comparison Index over the Base Index; provided, however, that in no event shall the Base Rent payable in any year of an Option Term be less than Base rent for the immediately preceding year of the Option Term. When the Base Rent payable as of each Adjustment Date is determined, Lessor shall promptly give Lessee written notice of such adjusted Base Rent and the manner in which it was computed. The Base Rent as so adjusted from time to time shall be the "Base Rent" for all purposes under this Lease. As used herein, the term "Index" means the Consumer Price Index for all Urban Consumers (Los Angeles-Anaheim-Riverside Area; base reference period 1982-84 = 100), as published by the United States Department of Labor, Bureau of Labor Statistics (or, in the event the Index is not issued by the Bureau of Labor Statistics, such replacement Consumer Price Index as Lessor may reasonably determine). 12. RIGHT OF FIRST OFFER. If, at some time during the term of this Lease, Landlord shall desire to sell all or any part of the Premises, Landlord shall deliver to Tenant written notice of Landlord's intention to sell and, for a period of sixty (60) days following delivery of the notice, Landlord shall negotiate in good faith solely with Tenant for the sale of the Premises. If, at the expiration of the sixty (60) day period, Landlord and Tenant have not executed a mutually acceptable written agreement pertaining to the sale of the Premises, then Landlord shall thereafter be free to negotiate with any other person or entity for the sale or exchange of the Premises on whatever terms and conditions Landlord may choose. If Landlord shall fail to provide to Tenant the notice of intention to sell the Premises prior to the date Landlord executes an irrevocable purchase agreement with another person or entity for the sale of the Premises, Tenant shall not have any right, claim or action against the buyer and/or the Premises. The right of first offer shall only be effective one (1) time and, following the expiration of the sixty (60) day period without a contract being signed by Landlord and Tenant, the right of first offer shall expire and be of no further force or effect. 13. EARLY TERMINATION. Lessee shall have a one time right to terminate this Lease as of the first day of the seventy-second (72nd) month of the Lease Term if Lessee wishes to exercises its right to terminate this Lease pursuant to this Section, Lessee shall provide written notice to Lessor at least nine (9) months prior to the effective date of the termination. If Lessee fails to deliver to Lessor its notice of exercise of its right of termination within the prescribed time period, such right of termination shall lapse, and there shall be no further right to terminate the Lease Term. 14. DISCLOSURE: Lee M. Chesnut, Co-Trustee of The Chesnut Family Trust, which is the sole shareholder of Lessor, is a licensed real estate broker in the state of California, acting in the capacity of a principal in this transaction. 15. BROKERS: CombiChem, Inc., herein described as Lessee is not currently represented by a real estate brokerage company but was earlier represented by Mr. Jeff Abramson of Business Real Estate. However, the relationship with Mr. Abramson was terminated by written notice. Campson Corporation, herein described as Lessor is exclusively represented by David Odmark of Business Real A-15 32 Estate Brokerage Company and no other parties. Commissions shall be paid by Lessor according to separate agreement. 16. AMERICANS WITH DISABILITIES ACT: Subject to the limitations on the time for delivery of notice of non-compliance of the Premises with applicable laws as set forth in Section 2.3 of the Lease, Lessor warrants that the offices rooms buildings, structures, and adjacent property owned by lessor, including all parking lots, walkways, entrances, hallways and other public spaces, elevators, and other devices or pathways for ingress and exit to the leased property, that might be used by customers, clients, invitees of Lessee and the general public, conform to all the requirements of the American with Disabilities Act and all regulations issued by the U.S. Attorney General or other authorized agencies under the authorization of the Americans with Disabilities Act. The Lessor promises to reimburse and indemnify and defend the Lessee for any expenses incurred because of the failure of the leased premises and adjacently owned property to conform with the above cited law and regulations, including the costs of making any alterations, renovations, or accommodations required by the American with Disabilities Act, or any governmental enforcement agency, or any court, any and all fines, civil penalties, and damages awarded against the Lessee resulting from violations of the above cited law and regulations, and all reasonable legal expenses incurred in defending claims made under the above cited law and regulations, including reasonable attorney's fees. 17. CAPITAL REPAIRS/RENOVATION EXPENSES: Lessor shall seek the concurrence/approval of Lessee (such concurrence/approval shall not be unreasonably withheld) prior to incurring large capital repair/renovation costs (i.e. re-roofing, parking lot resurfacing, painting) which would be reimbursable by Lessee according to the provisions of the Lease. For purposes of this paragraph, it shall not be unreasonable for Lessee to disapprove any capital repair/renovation costs that: (a) do not result in a reduction of Lessee's costs of maintaining the Premises; (b) are not required to keep the Premises, and every part thereof, in good order, condition and repair; (c) are not required due to equipment failure or expiration of the useful life of a capital item (as determined by reference to the vendor's or manufacturer's suggested useful life for such capital item or, where such reference does not exist, by reference to generally accepted accounting principals, consistently applied); or (d) are capital costs not normally payable by tenants of as tenant costs under leases of comparable premises in the San Diego metropolitan area. All work requiring Lessee's approval shall be performed only by contractors and subcontractors approved by Lessee in its reasonable discretion in a process by which the Lessor shall solicit bids from at least three (3) sources and will select the lowest-bid vendor/contractor unless in Lessor's reasonable discretion, such lowest-bidder vendor/contractor does not meet reasonable standards established by Lessor as to reputation, responsiveness, directly relevant experience, knowledge and/or personnel qualifications. 18. LESSEE'S AUDIT RIGHTS. At any time within twelve (12) months of Lessee's receipt of any statement from Lessor relating to Lessor's reimbursable expenses, Lessor shall furnish Lessee following Lessee's written request therefor, but no more than twice in any calendar year, including invoices and other source documents relating to such reimbursable expenses. The audit shall be conducted by a certified public accountant selected by Lessee. Such audit shall be limited to the items necessary to a determination of the applicable reimbursable expenses. In any event, if it is determined that Lessee was overcharged by more than two percent (2%), such overcharge shall entitle Lessee to credit against its next payment of Lessor's reimbursable expenses the amount of the overcharge and the costs associated with the audit (and, if such credit occurs following the expiration of the Term, Lessor shall promptly pay the amount of such credit to Lessee). If the audit determines that the Lessee was overcharged less than two percent (2%), such overcharge shall entitle Lessee to credit against its next payment of Lessor's reimbursable expenses the amount of the overcharge and Lessee shall pay for all costs associated with the audit. If the audit shall determine that Lessee was A-16 33 undercharged for the Lessor's reimbursable expenses, Lessee shall promptly pay the amount of such undercharge to Lessor and Lessee shall pay for all costs associated with the audit. [Remainder of This Page Intentionally Left Blank] A-17 34 [SIGNATURE PAGE TO ADDENDUM A] AGREED AND ACCEPTED
LESSOR: LESSEE: CAMPSON CORPORATION, a California COMBICHEM, INC., a California corporation corporation /s/ Lee M. Chestnut /s/ Gail Erwin - ------------------------------------------ ------------------------------------------ By: Lee M. Chestnut By: Gail Erwin ---------------------------------------- ---------------------------------------- Title: President Title: Controller ------------------------------------- ------------------------------------- Date Signed: 12-27-95 Date Signed: 12/27/95 ------------------------------- -------------------------------
A-18 35 ADDENDUM "B" ENTRANCE/EXIT ASSESSMENT CRITERIA I. The Phase I Environmental Site Assessment prepared by SEACOR, and dated August 30, 1994, shall be updated by Lessor as part of the "Entrance Assessment," which shall be prepared by a consultant other than SEACOR. The updated Phase I Assessment shall be consistent with the American Society for Testing Materials (ASTM) Standard E-1527 and shall, by its terms, allow the following parties to rely upon its conclusions: Campson Corporation and CombiChem, Inc. II. For purposes of compliance with the requirements of Section 6 of the Addendum "A" to the Lease, the term "Assessment Criteria" with respect to the Premises shall refer to, and include, the following studies and assessments: A. The following additional assessments, inspections and monitoring plans: 1. Interior Site Assessment consisting of a visual inspection of all surfaces (floors, walls, ceiling tiles, benches, interior of cabinets and fume hoods) for signs of contamination and deterioration. Visual inspection of all bench and hood sinks and readily accessible drain lines for signs of deterioration, loss of integrity and leakage. The Interior Site Assessment shall include detailed written documentation of all observations and dated photos to document the existing condition thereof. 2. Wastewater Collection System Assessment consisting of a flush and clean-out of all discharge piping and traps with observation of effluent during the clean-out. Videotaping of the Wastewater Collection System shall be required along with a written report for each ten foot (10') piping segment. 3. In order to verify that there is no contamination of the laboratory hoods and exhaust system, an inspection shall be made consisting of an inspection of the laboratory hoods and exhaust system with detailed documentation of all observances, including without limitation, observed solids, liquids, odors or Hazardous Materials entrapment. Such inspection shall include inspection of the roof area to determine the existence of any deterioration from condensation of hazardous materials in the exhaust system. 36 EXHIBIT "A" LEGAL DESCRIPTION OF PREMISES PARCEL 1: LOT 4 OF MIRAMAR POINT INDUSTRIAL PARK UNIT NO. 2, IN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, ACCORDING TO MAP THEREOF NO. 10055, FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, ON APRIL 8, 1981. PARCEL 2: AN EASEMENT FOR THE JOINT PURPOSES OF INGRESS AND EGRESS OVER AND ACROSS THE EASTERLY 75 FEET OF THE SOUTHERLY 20 FEET OF LOT 3 OF MIRAMAR POINT INDUSTRIAL PARK UNIT NO. 2, AS FILED IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, ON APRIL 8, 1981. SAID EASEMENT IS APPURTENANT TO AND FOR THE BENEFIT OF LOT 4 OF MIRAMAR POINT INDUSTRIAL PARK UNIT NO. 2, ON SAID MAP 10055. 37 EXHIBIT "B" PREMISES FLOOR PLAN Floor Plan Diagram 38 EXHIBIT "C" EARLY OCCUPANCY SPACE Diagram 39 EXHIBIT "D" WORK LETTER AGREEMENT This Work Letter Agreement ("Work Letter") supplements that certain STANDARD INDUSTRIAL/COMMERCIAL SINGLE TENANT LEASE -- NET, dated December 22, 1995, made by and between CAMPSON CORPORATION, a California corporation, as "Lessor," and COMBICHEM, INC., a California corporation, as "Lessee" (the "Lease"), covering certain premises described in the Lease (the "Premises"). All terms not defined herein shall have the same meaning as set forth in the Lease. All notices required to be given hereunder shall be delivered in accordance with the requirements for notice set forth in the Lease. 1. Construction of Improvements. Lessee shall furnish and install within the Premises those items shown on the plans, drawings and specifications finally approved by Lessor and Lessee pursuant to Paragraph 2 below (the "Improvements") in compliance with all applicable codes, laws and regulations. In making or allowing to be made the work of the Improvements, Lessee shall comply with all of the insurance requirements of the Lease. 2. Construction Plans for Premises. Final plans and drawings required by this Work Letter shall be prepared by Lessee subject to Lessor's review and approval, which approval shall not be unreasonably withheld. 2.1 Cost of Planning Services. The cost of the space planning, architectural and engineering services (including "value engineering" services) relating to the preparation of the Preliminary Plans and "Final Plans" (as defined below), which shall be prepared by a "Space Planner" selected by Lessee, shall be included in the cost the Improvements to be incurred by Lessee subject to reimbursement by Lessor up to the amount of the Tenant Improvement Account (as defined below). 2.2 Preparation of Final Plans. Lessee shall have prepared complete architectural plans, drawings and specifications and complete engineering, mechanical, structural and electrical working drawings for all of the Improvements for the Premises (collectively, the "Final Plans"), showing: (a) the subdivision (including partitions and walls), layout, lighting, finish and decoration work (including carpeting and other floor coverings) for the Premises; (b) all internal and external communications and utility facilities which will require conduiting or other improvements from the Building shell, existing systems or equipment and/or within common areas; and (c) all other specifications for the Improvements. Lessor and Lessee shall make all reasonable efforts to reduce the costs of the Improvements to less than the Tenant Improvement Account described in Subparagraph 3.1, below. Lessee may select different materials of equal or greater value in place of Lessor's standard building materials provided such selection is indicated on the Final Plans. The Final Plans shall be submitted to Lessor for Lessor's reasonable approval. The cost of preparing or revising the Final Plans, after Lessor's approval of such Final Plans, shall be included in the cost of Improvements. Within two (2) business days after delivery of the Final Plans, Lessor shall deliver notice to Lessee of approval or reasonable disapproval of the Final Plans. The failure of Lessor to deliver notice of disapproval within two (2) business days shall be deemed to be a Lessor Delay. The failure of Lessor to deliver notice of disapproval within five (5) business days shall be deemed to be Lessor's approval. If Lessor reasonably disapproves of any portion of such Final Plans, Lessor shall specify the reason for its disapproval, and the parties shall meet within two (2) business days of Lessor's delivery of notice of Lessor's disapproval in order to reach agreement on the Final Plans. The failure of Lessor to meet with Lessee within two (2) business days shall be deemed to be a Lessor Delay. The failure of Lessor to meet with Lessee within five (5) business days shall be deemed to be Lessor's approval. Based upon such agreement, Lessee shall cause the Space Planner to redesign the Final Plans, incorporating those reasonable revisions required by Lessor. 2.3 Changes or Additions to Final Plans. Lessee shall have the right from time to time to submit requests to Lessor for changes or additions to the Final Plans ("Change Order"), the cost of which shall be calculated by Lessee's Contractor (as defined below). If Lessor approves any such Change Order, the Final Plans shall be revised and, to the extent that such Change Order results in a cost to Lessee in excess of the Improvement Account set forth in Subparagraph 3.1 below, Lessee shall pay for the cost of such Change Order. Any Change Order which results in a cost savings to Lessee shall be credited to the Tenant Improvement Account set forth in Subparagraph 3.1 below. 40 3. Allowance for Improvements. 3.1 Tenant Improvement Account. Lessor and Lessee agree to pay for the "Work Costs" of the Improvements (as defined in Paragraph 5) up to the sum of One Million Three Hundred Thousand Dollars ($1,300,000.00) ("Tenant Improvement Account"). The Work Costs shall be paid directly to Lessee by the escrow holder(s) of the Tenant Improvement Account ("Escrow Holder"), upon Escrow Holder's receipt from Lessee of a certified invoice from the relevant contractor(s) for the Work Costs attributable to the Tenant Improvement Account as follows: one-half (1/2) of each invoice amount shall be paid from Lessee's deposit into the Tenant Improvement Account; and one-half (1/2) of each invoice amount shall be paid from Lessor's deposit into the Tenant Improvement Account; provided, however, if, for any reason funds are not available from either Lessor's or Lessee's portion of the Tenant Improvement Account at the time an invoice is received, Escrow Holder shall pay one-half (1/2) of the invoice amount from the Tenant Improvement Account and one-half (1/2) of the invoice amount shall be paid directly by the party who has not deposited sufficient funds into the Tenant Improvement Account. Lessee shall be solely responsible for the cost of any Improvements in excess of the amount of the Tenant Improvement Account. All items of Improvements, whether or not the cost thereof is covered by the Tenant Improvement Account, shall become the property of Lessor upon expiration or earlier termination of the Lease and shall remain on the Premises at all times during the Term of this Lease, except as otherwise provided in the Lease. 3.2 Preparation of Work Cost Estimate. After Lessor's approval of the Final Plans, Lessee shall submit to Lessor a detailed written estimate of the total Work Costs (as defined in Paragraph 5) covered by the final Plans ("Work Cost Estimate"). Within two (2) business days after delivery of the Work Cost Estimate, Lessor shall deliver notice of approval or reasonable disapproval of the Work Cost Estimate. The failure of Lessor to deliver notice of disapproval within two (2) business days shall be deemed to be a Lessor Delay. The failure of Lessor to deliver notice of disapproval within five (5) business days shall be deemed to be Lessor's approval of the Work Cost Estimate. If Lessor reasonably disapproves the Work Cost Estimate, Lessor shall notify Lessee of such disapproval within such 5-day period and the parties shall immediately meet in order to revise the Work Cost Estimate to an amount which is acceptable to Lessor. 4. Construction of Improvements. Following Lessor's approval of the Final Plans and the Work Cost Estimate as provided herein, Lessee shall commence and diligently proceed to have constructed the Improvements in a good and workmanlike manner, subject only to Lessor Delays. 5. Work Costs. "Work Costs" means: (a) the reasonable cost of space planning, architectural and engineering (including "value engineering") services, including, but not limited to reimbursable costs; (b) costs of permits, fees and taxes (exclusive of real property taxes); (c) testing and inspecting costs; (d) the actual costs and charges for material and labor, including, without limitation, reasonable overtime; (e) Lessee's Contractor's fee for profit, overhead and general conditions (including elevators, parking, utilities, insurance, construction supervision, trash removal and clean-up) which shall in no event exceed ten percent (10%) of the hard costs of construction and (f) the cost of Lessee's signs on the Building and monument signs on the Premises, in the event Lessee elects to erect such signs. 6. Commencement Date and Substantial Completion. 6.1 Substantial Completion; Punch-List. Lessee shall select a contractor to construct the Improvements ("Lessee's Contractor"), subject to Lessor's approval, which shall not be unreasonably withheld. Lessee's Contractor shall be responsible for the construction of the Improvements substantially in accordance with the approved Final Plans. The Improvements shall be deemed to be "Substantially Completed", and "Substantial Completion" shall be deemed to occur when Lessee's Contractor certifies in writing to Lessor and Lessee that (a) Lessee has reasonable access to the Premises; (b) Lessee's Contractor has substantially performed all of the Improvements work required to be performed under this Work Letter, other than decoration and minor "punch list" items and adjustments which do not materially interfere with Lessee's access to or use of the Premises; and (c) Lessee's Contractor or Lessee has obtained a temporary certificate of occupancy or other required approval from the local governmental authority permitting occupancy of the Premises. Lessee's Contractor shall guaranty all work and Improvements for one (1) year from the earlier of the Term Commencement Date or the commencement of the warranty for those items covered by manufacturer's or vendor's warranties and, to the extent possible, shall assign all warranties to Lessee. 6.2 Commencement Date. The Term of the Lease shall commence as provided in Section 3.1 of the Lease. The Commencement Date shall only be extended for Lessor Delays (as defined in Paragraph 8). D-2 41 If there are Lessor Delays, the Term Commencement Date shall be the Term Commencement Date set forth in the Lease extended for a period equal to the period of any delays encountered by Lessee affecting Lessee's construction of the Improvements because of any Lessor Delays. In no event, however, shall the Term commence prior to June 1, 1996, unless otherwise agreed to in writing by Lessor and Lessee. 7. Lessor Delays. For purposes of this Work Letter, "Lessor Delays" shall mean any delay in substantial completion of the Improvements resulting from any or all of the following: (a) Lessor's failure to timely approve or disapprove the Final Plans as set forth in Subparagraph 2.2 of this Work Letter; (b) Lessor's failure to timely meet with Lessee to approve the Final Plans as set forth in Subparagraph 2.2 of this Work Letter; (c) Lessor's failure to timely approve or disapprove the Work Cost Estimate as set forth in Subparagraph 3.2 of this Work Letter; and (d) Delays caused by failure of the Premises and the adjacent property owned by Lessor, including all parking lots, walkways, entrances, hallways and other public spaces, elevators, and other devices or pathways for ingress and exit to the Premises, that might be used by customers, clients, invitees of Lessee and the general public, to conform to all the requirements of the American with Disabilities Act and all regulations issued by the U.S. Attorney General or other authorized agencies under the authorization of the Americans with Disabilities Act, as of the date of the Lease. With respect to the Lessor Delays described above, no Lessor Delay shall be deemed to have occurred unless Lessee has given notice to Lessor by personal hand delivery, by overnight delivery service such as Federal Express, or by facsimile (confirmed by mail) of the event, act or occurrence constituting such a Lessor Delay. 8. Arbitration. 8.1 Dispute Resolution. If any dispute arises in connection with this Work Letter, such dispute shall be resolved in accordance with this Article. Such dispute shall be determined by a panel consisting of one representative of Lessor, one of Lessee's construction representatives (or another party designated by Lessee), and a third party with extensive development and construction experience in the construction of commercial office space in the San Diego County area selected in accordance with Subparagraph 8.3 of this Work Letter ("Construction Panel"). 8.2 Notice. All disputes to be determined in accordance with this Paragraph 8 shall be raised by notice to the other party, which notice shall state with particularity the nature of the dispute and the demand for relief, making specific reference by paragraph number and title to the provision of this Work Letter alleged to give rise to the dispute. Such notice shall also refer to this Paragraph 8. 8.3 Selection of Third Party/Costs. Lessor and Lessee shall mutually and promptly select a third party who meets the qualifications set forth in Subparagraph 8.1 of this Work Letter. In the event a selection is not made within two (2) days after demand for resolution is made, the third party shall, upon the request of either party, be appointed by the then-president of the Association of General Contractors of San Diego County. All proceedings contemplated by this Paragraph 8 shall take place at the locations for all job- site meetings, unless the Construction Panel mutually agrees to another location. The cost for the third party's services shall be paid by the non-prevailing party, unless the Construction Panel determines otherwise. 8.4 Interpretation and Resolution. In determining any dispute, the Construction Panel shall apply the pertinent provisions of this Work Letter (and the Lease, if applicable) without departure therefrom in any respect. The Construction Panel shall not have the power to add to, modify or change any of the provisions of this Work Letter, but this provision shall not prevent in any appropriate case the interpretation, construction and determination by the Construction Panel of the applicable provisions of this Work Letter to the extent necessary in applying the same to the matters to be determined by the Construction Panel. As part of resolving a dispute, the Construction Panel shall determine the days of delay in completing Improvements which directly result from the dispute being considered by the Construction Panel, if any. The days of delay D-3 42 shall be designated as either Lessee Delays, Lessor Delays or Unavoidable Delays or any combination of these three delays, as determined by the Constructions Panel. 8.5 Continued Performance. During any proceedings pursuant to this Paragraph 8, Lessor and Lessee shall, to the extent possible, continue to perform and discharge all of their respective obligations under this Work Letter and the Lease. 8.6 Binding Resolution. The Construction Panel shall meet within two (2) days of the third party being selected as a member of the Construction Panel and the Construction Panel shall thereafter resolve the issue in dispute within two (2) business days, unless it is mutually agreed among the Construction Panel members that additional times is necessary to resolve the dispute, but in no event shall such additional time exceed five (5) business days. Lessor and Lessee agree that time and strict punctual performance are of the essence with respect to each provision of this Work Letter and that any and all decisions of the Construction Panel as to the matter in dispute shall be binding upon both Lessor and Lessee. 9. Liens. Lessee shall indemnify and hold Lessor harmless from any mechanic's, materialmen's or other liens filed against all or any part of the Premises, by reason of or in connection with the construction of the Improvements or other work contracted for or undertaken by Lessee pursuant to this Work Letter. Lessee shall at Lessor's request, provide Lessor with enforceable, conditional and final lien releases (and other evidence reasonably requested by Lessor to demonstrate protection from liens) from all persons furnishing labor and/or materials with respect to the Premises. Lessor shall have the right at all reasonable times to post on the Premises and record any notices of nonresponsibility which it deems necessary for protection from such liens. If any such liens are filed, Lessee shall, at its sole cost, promptly cause such lien to be released of record or bonded so that it no longer affects title to the Project or the Premises. If Lessee fails to cause such lien to be so released or bonded within ten (10) days after Lessee's receipt of notice thereof, such failure shall be deemed an Event of Default by Lessee under the Lease, and Lessor may, without waiving its rights and remedies based on such default, and without releasing Lessee from any of its obligations under the Lease, cause such lien to be released by any means it shall deem proper, including payment in satisfaction of the claim giving rise to such lien. Lessee shall pay to Lessor within five (5) days after receipt of invoice from Lessor, any sum paid by Lessor to remove such liens, together with interest at the rate set forth in paragraph 19 of the Lease from the date of such payment by Lessor. [SIGNATURES CONTINUED ON NEXT PAGE] D-4 43 [SIGNATURE PAGE TO WORK LETTER AGREEMENT]
LESSOR: LESSEE: CAMPSON CORPORATION, a California COMBICHEM, INC., a California corporation corporation - ------------------------------ ----------------------------- By:___________________________ By:__________________________ Title:_______________________ Title:_______________________ Date Signed: ______________ Date Signed:_________________
D-5 EX-10.37 41 EXHIBIT 10.37 1 EXHIBIT 10.37 STANDARD OFFICE LEASE--FULL SERVICE 1. BASIC LEASE PROVISIONS ("Basic Lease Provisions"). 1.1 DATE AND EFFECTIVE DATE. This Lease is dated OCTOBER 29, 1996, for reference purposes only. The Effective Date shall be the date inserted below by Lessor and shall be the date this Lease is executed by Lessor. PRIOR TO THE EFFECTIVE DATE THE TERMS OF THIS LEASE SHALL NOT BE BINDING ON LESSOR AND, UNTIL SIGNED BY LESSOR, THIS DOCUMENT SHALL BE CONSTRUED ONLY AS AN OFFER BY LESSEE TO LEASE THE PREMISES. PRIOR TO THE EFFECTIVE DATE, THE TERMS OF THIS LEASE SHALL NOT BE BINDING ON EITHER PARTY. UNTIL SIGNED BY BOTH PARTIES, NEITHER LESSEE NOR LESSOR SHALL HAVE ANY OBLIGATION OF ANY KIND TO ANY OF THE PARTIES INVOLVED IN MAKING THIS OFFER TO LEASE THE PREMISES. 1.2 PARTIES. This Lease is made by and between NEARON ENTERPRISES, LLC (herein called "Lessor") and COMBICHEM, INC., a California Corporation (herein called "Lessee"). 1.3 PREMISES. Suite "A," consisting of approximately 4,617 square feet, more or less, as defined in paragraph 2 hereunder and as shown on Exhibit "A" attached hereto (the "Premises"). The rentable area of the Premises as stated in the preceding sentence is based on (i) the area of the Premises measured to the lease line for street elevations (which shall extend to the property line and/or to the public area boundary line with respect to the interior frontage, if any, of the Premises) and to the center line of interior walls, (without deduction for level changes or openings in the floor, or for stairs and stair openings which connect levels within the Premises), and shall include structural elements, stairs, elevators, escalators, display areas and other interior construction or equipment (the "usable area"), plus (ii) amounts equal to portions of the area of the receiving and trash areas, elevators and elevator lobbies, vestibules, restrooms, exit and access corridors, parking areas, loading areas, electrical, mechanical and telephone rooms and other areas designated by Lessor as necessary to the Building. The Base Rent may have been calculated based on this square footage, however, the square footage figure used in this lease is a rough approximation. Lessor and Lessee agree that the Base Rent is derived from the beneficial use of the Premises as described and not from any mathematical calculation involving square footage. Neither Lessor nor Lessee shall be entitled to have the Base Rent adjusted, recalculated, raised or lowered as a result of any discrepancy between the square footage approximation contained in this Lease and any measurement that may be determined to be the actual square footage of the premises. 1.4 BUILDING. Commonly described as being located at 470 SAN ANTONIO ROAD in the city of PALO ALTO, County of Santa Clara, State of California, 94306. 1.5 USE. Business Office and Research and Development, and any other activities usual and customary with the day-to-day operations of Lessee's existing business subject to paragraph 6. 1.6 TERM. TWENTY-FOUR MONTHS, COMMENCING NOVEMBER 1, 1996, ("Commencement Date") and ending October 31, 1998, as defined in paragraph 3. As a material consideration in this Lease, Lessor grants to Lessee an option to extend the term of this Lease for two (2) years. To exercise this option Lessee must give written notice to Lessor of Lessee's intent to exercise this option one hundred twenty (120) days prior to the end of the term of this Lease and must not be in default of any of the terms of this Lease. Beginning rental rate for said option period shall be 95% of the then market rate, with a 5% increase beginning the thirteenth month of said option. 1.7 BASE RENT. $5,217.00 PER MONTH, payable on or before the first (1st) day of each month, per paragraph 4.1. 1.8 BASE RENT INCREASE. $5,771.00 EFFECTIVE NOVEMBER 1, 1997. 1.9 RENT PAID UPON EXECUTION. $5,217.00 for the month of November, 1996. 1.10 SECURITY DEPOSIT. $5,217.00. 2. PREMISES, PARKING AND COMMON AREAS. 2.1 PREMISES. The Premises are a portion of a building herein sometimes referred to as the "Building" identified in paragraph 1.4 of the Basic Lease Provisions. "Building" shall include adjacent parking areas used in connection therewith. The Premises, the Building, the Common Areas, the land upon which the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to as the "Office Building Project". Lessor hereby leases to Lessee and Lessee leases from Lessor for the term, at the rental, and upon all of the conditions set forth herein, the real property referred to in the Basic Lease Provisions, paragraph 1.3, as the "Premises", including rights to the Common Areas as hereinafter specified. 2.2 VEHICLE PARKING: Subject to the rules and regulations attached hereto and as reasonably established by Lessor from time to time, Lessee shall be entitled to non-exclusive use of available parking at the Office Building Project, proportionate to Lessee's pro-rata share of total building space, not less than one (1) space per one thousand (1,000) square feet of Premises, subject to Lessor's right to utilize or exclude Lessee from such parking areas pursuant to other provisions of this Lease. 2.2.1 If Lessee commits, permits or allows any of the prohibited activities described in the Lease or the rules then in effect, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.3 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Office Building Project that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and of other lessees of the Office Building Project and their respective employees, suppliers, shippers, customers and invitees, including but not limited to common entrances, lobbies, corridors, stairways and stairwells, public rest rooms, elevators, escalators, parking areas to the extent not otherwise prohibited by this Lease, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways, landscaped areas and decorative walls. 2.4 COMMON AREAS - RULES AND REGULATIONS. Lessee agrees to abide by and conform to the rules and regulations attached hereto as Exhibit B with respect to the Office Building Project and Common Areas and to cause its employees, suppliers, shippers, customers, and invitees to so abide and conform. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time to modify, amend and enforce said rules and regulations, provided such modifications and amendments shall be reasonable and equitably enforced and in the event of a conflict with this Lease, this Lease shall control. Lessor shall not be responsible to Lessee for the noncompliance with said rules and regulations by other Lessees, their agents, employees and invitees of the Office Building Project. 2.5 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole discretion, from time to time, so long as Lessee's use and enjoyment of the Premises is not materially impaired (after reasonable notice to Lessor granting Lessor a reasonable opportunity to cure): (a) To make changes in the Building interior and exterior and Common Areas, including, without limitation changes in the location, size, shape number and appearance thereof, including but not limited to the lobbies, windows, stairways, air shafts, elevators escalators, rest rooms, driveways entrances, parking spaces, parking areas loading and unloading areas, ingress, egress, direction of traffic, decorative walls, landscaped areas and walkways; provided, however, Lessor shall at all times provide the parking facilities required by applicable law; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land and improvements outside the boundaries of the Office Building Project to be a part of the Common Areas, provided that such other land and improvements have a reasonable and functional relationship to the Office Building Project; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Office Building Project, or any portion thereof; (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Office Building Project as Lessor may, in the exercise of sound business judgment deem to be appropriate. FULL-SERVICE Page 1 of 10 2 3. TERM. 3.1 TERM. The term and Commencement Date of this Lease shall be as specified in paragraph 1.6 of the Basic Lease Provisions. 3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date and subject to paragraph 3.2.2, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof; but, in such case, Lessee shall not be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease, except as may be otherwise provided in this Lease, until possession of the Premises is tendered to Lessee, as hereinafter defined, provided, however, that if Lessor shall not have delivered possession of the Premises on or before November 1, 1996, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter and possession not tendered, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided, however, that, as to Lessee's obligations, Lessee first reimburses Lessor for all costs incurred for and, as to Lessor's obligations, Lessor shall return any money previously deposited by Lessee (less any offsets due Lessor for any improvements made by Lessor for Lessee in performance of the terms of this Lease that are not ordinarily a part of the Building), and provided further that if such written notice by Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Lessor shall indemnify Lessee for any and all claims that may be asserted by the previous Lessee of the Premises. 3.2.1 POSSESSION TENDERED - DEFINED. Possession of the Premises shall be deemed tendered to Lessee ("Tender of Possession") when (1) the improvements to be provided by Lessor under this Lease are substantially completed, (2) the Building utilities are ready for use in the Premises, (3) Lessee has reasonable access to the Premises, and (4) all prior tenants have vacated the Premises. 3.2.2 DELAYS CAUSED BY LESSEE. There shall be no abatement of rent, and the ninety (90) day period following the Commencement Date before which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall be deemed extended to the extent of any delays caused by acts or omissions of Lessee, Lessee's agents, employees and contractors. 3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said Commencement Date, such occupancy shall be subject to all provisions of this Lease, such occupancy shall not change the termination date, and Lessee shall pay rent for such occupancy. 3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease term is defined as the completion of the improvements, Lessee and Lessor shall execute an amendment to this Lease establishing the date of Tender of Possession (as defined in paragraph 3.2.1) or the actual taking of possession by Lessee, whichever first occurs, as the Commencement Date. 4. RENT. 4.1 BASE RENT. Subject to adjustment as hereinafter provided in paragraph 4.2, and except as may be otherwise expressly provided in this Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in paragraph 1.7 of the Basic Lease Provisions without offset or deduction. Lessee shall pay Lessor upon execution hereof the advance Base Rent described in paragraph 1.9 of the Basic Lease Provisions. Rent for any period during the term hereof which is for less than one month shall be prorated based upon the actual number of days of the calendar month involved. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 4.2 RENT INCREASE. N/A 5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the security deposit set forth in paragraph 1.10 of the Basic Lease Provisions as security for Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default, or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount then required of Lessee. If the monthly Base Rent shall, from time to time, increase during the term of this Lease, Lessee shall, at the time of such increase, deposit with Lessor additional money as a security deposit so that the total amount of the security deposit held by Lessor shall at all times bear the same proportion to the then current Base Rent as the initial security deposit bears to the initial Base Rent set forth in paragraph 1.7 of the Basic Lease Provisions. Lessor shall not be required to keep said security deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not heretofore been applied by Lessor, shall be returned, without payment of interest or other increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest hereunder) at the expiration of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. USE. 6.1 USE. The Premises shall be used and occupied only for the purpose set forth in paragraph 1.5 of the Basic Lease Provisions and for no other purpose. 6.2 COMPLIANCE WITH LAW. (a) Lessor warrants to Lessee that the Premises, in the state existing on the date that the Lease term commences, but without regard to alterations or improvements made by Lessee or the use for which Lessee will occupy the Premises, does not violate any covenants or restrictions of record or any applicable building code, regulation or ordinance in effect on such Lease term Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. Lessor has no current actual knowledge of any violations of the Americans With Disabilities Act, however, the Office Building Project is not newly constructed, has no elevators, and could be the subject of regulatory action in the future. (b) Except as provided in paragraph 6.2(a) Lessee shall, at Lessee's expense, fully, diligently, and in a timely manner, comply with all applicable laws, rules, regulations, ordinances, directives, covenants, assessments, and restrictions of record, permits, and the requirements of fire insurance underwriters or rating bureau, relating in any manner to Lessee's use and occupancy of the Premises, now in effect or which may hereafter come into effect, whether or not they reflect a change in policy from that now existing, during the term or any part of the term hereof, relating in any manner to the Premises and the occupation and use by Lessee of the Premises. Without limiting the generality of the foregoing and as it relates to the Premises, Lessee agrees to comply with all laws, orders and regulations relating to the rights of individuals with disabilities, including without limitation the Americans with Disabilities Act. Lessee shall conduct its business in a lawful manner and shall not use or permit the use of the Premises or the Common Areas in any manner that will tend to create waste or a nuisance or shall tend to disturb other occupants of the Office Building Project. 6.3 CONDITION OF PREMISES. (a) Lessor shall deliver the Premises to Lessee in a clean condition on the Lease Commencement Date (unless Lessee is already in possession) and Lessor warrants to Lessee that the plumbing, lighting, air conditioning, heating, ventilation, mechanical, electrical, and safety systems in the Premises shall be in good operating condition. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises and the Office Building Project in their condition existing as of the Lease Commencement Date or the date that Lessee takes possession of the Premises, whichever is earlier, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any easements, covenants or restrictions of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that it has satisfied itself by its own independent investigation that the Premises are suitable for its intended use and that neither Lessor nor Lessor's agent or agents has made any representation or warranty as to the present or future suitability of the Premises, Common Areas, or Office Building Project for the conduct of Lessee's business. 7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES. 7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building Project, including the Premises, interior and exterior FULL-SERVICE Page 2 of 10 3 walls, roof, and common areas, and the equipment whether used exclusively for the Premises or in common with other premises, in good condition and repair; provided, however, Lessor shall not be obligated to paint, repair or replace wall coverings, or to repair or replace any improvements that are not ordinarily a part of the Building or are above then Building standards. Except as provided in paragraph 9.5, there shall be no abatement of rent or liability of Lessee as a result of any injury or interference with Lessee's business with respect to any improvements, alterations or repairs made by Lessor to the Office Building Project or any part thereof. Lessee expressly waives the benefits of any statute now or hereafter in effect that would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. Lessee hereby waives and releases its rights under California Civil Code Sections 1932(1) and 1942. 7.2 LESSEE'S OBLIGATIONS. (a) Notwithstanding Lessor's obligation to keep the Premises in good condition and repair, Lessee shall be responsible for payment of the cost thereof as additional rent for that portion of the cost of any maintenance and repair of the Premises, or any equipment (wherever located) that serves only Lessee or the Premises, to the extent such cost is attributable to causes beyond normal wear and tear. Lessee shall be responsible for the cost of painting, repairing or replacing wall coverings, and to repair or replace any Premises improvements that re not ordinarily a part of the Building or that are above then Building standards. Lessor may, at its option, upon reasonable notice, elect to have Lessee perform any particular such maintenance or repairs the cost of which is otherwise Lessee's responsibility hereunder. (b) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received, ordinary wear and tear excepted, clean and free of debris. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Lessee. Lessee shall repair any damage to the Premises occasioned by the installation or removal of Lessee's trade fixtures, alterations, furnishings and equipment. Except as otherwise stated in this Lease, Lessee shall lave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning, window coverings, wall coverings, carpets, wall paneling, ceilings and plumbing on the Premises and in good operating condition. 7.3 ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions, Utility Installation or repairs in, on or about the Premises or the Office Building Project. As used in this paragraph 7.3 the term "Utility Installation" shall mean carpeting, window and wall coverings, power panels, electrical distribution systems, lighting fixtures, air conditioning, plumbing, security systems, and telephone and telecommunication wiring and equipment. At the expiration of the term, Lessor may require the removal of any or all of said alterations, improvements, additions or Utility Installations, and the restoration of the Premises and the Office Building Project to their prior condition, at Lessee's expense. Should Lessor permit Lessee to make its own alterations, improvements additions or Utility Installations, Lessee shall use only such contractor as has been expressly approved by Lessor, and Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and material men's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, or use a contractor not expressly approved by Lessor, Lessor may, at any time during the term of this Lease, require that Lessee remove any part or all of the same. (b) Any alterations, improvements, additions or Utility Installations in or about the Premises or the Office Building Project that Lessee shall desire to make shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent to Lessee's making such alteration, improvement, addition or Utility Installation, the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from the applicable governmental agencies, furnishing a copy thereof to Lessor prior to the commencement of the work, and compliance by Lessee with all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanic's or material men's lien against the Premises, the Building or the Office Building Project, or any interest therein. (d) Lessee shall give Lessor not less than ten (10) days notice prior to the commencement of any work in the Premises by Lessee, and Lessor shall have the right to post notices of non responsibility in or on the Premises or the Building as provided by law. If Lessee shall in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises the Building or the Office Building Project, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises, the Building and the Office Building Project free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action if Lessor shall decide it is to Lessor's best interest so to do. (e) All alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made to the Premises by Lessee, including but not limited to, floor coverings, paneling, doors, drapes, built-ins, moldings, sound attenuation, and lighting and telephone or communication systems, conduit, wiring and outlets, shall be made and done in a good and workmanlike manner and of good and sufficient quality and materials and shall be the property of Lessor and remain upon and be surrendered with the Premises at the expiration of the Lease term, unless Lessor requires their removal pursuant to paragraph 7.3(a). Provided Lessee is not in default, notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal property and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises or the Building, and other than Utility Installations, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2. (f) Lessee shall provide Lessor with as-built plans and specifications for any alterations, improvements, additions or Utility Installations. 7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or additional utility facilities throughout the Office Building Project for the benefit of Lessor or Lessee, or any other lessee of the Office Building Project, including, but not by way of limitation, such utilities as plumbing, electrical systems, communication systems, and fire protection and detection systems, so long as such installations do not unreasonably interfere with Lessee's use of the Premises. 8. INSURANCE; INDEMNITY. 8.1 LIABILITY INSURANCE--LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Commercial General Liability insurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (CL00011188), or equivalent, in an amount not less than $1,000,000 per occurrence of bodily injury and property damage combined or in greater amount as reasonably determined by Lessor and shall insure Lessee with Lessor as an additional insured against liability arising out of the use, occupancy or maintenance of the Premises. Lessee to provide Lessor with evidence of required coverage, in the form of a Certificate of Insurance or other evidence as may be required by Lessor. Compliance with the above requirement shall not, however, limit the liability of Lessee hereunder. 8.2 LIABILITY INSURANCE--LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Broad Form Property Damage Insurance, plus coverage against such other risks Lessor deems advisable from time to time, insuring Lessor, but not Lessee, against liability arising out of the ownership, use, occupancy or maintenance of the Office Building Project in an amount not less than $1,000,000.00 per occurrence. 8.3 PROPERTY INSURANCE--LESSEE. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease for the benefit of Lessee, replacement cost fire and extended coverage insurance, with vandalism and malicious mischief, sprinkler leakage and earthquake sprinkler leakage endorsements, if applicable, in an amount sufficient to cover not less than 100% of the full replacement cost, as the same may exist from time to time, of all of Lessee's personal property, fixtures, equipment and tenant FULL-SERVICE Page 3 of 10 4 improvements. 8.4 PROPERTY INSURANCE--LESSOR. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Office Building Project improvements, but not Lessees personal property, fixtures, equipment or tenant improvements, in the amount of the full replacement cost thereof, as the same may exist from time to time, utilizing Insurance Services Office standard form or equivalent providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, plate glass, and such other perils as Lessor deems advisable or may be required by a lender having a lien on the Office Building Project. In addition, Lessor shall obtain and keep in force, during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all Operating Expenses for said period. Lessee will not be named in any such policies carried by Lessor and shall have no right to any proceeds therefrom. The policies required by these paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the aforesaid lender may determine. In the event that the Premises shall suffer an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts under the applicable insurance policies shall be deemed an Operating Expense. Lessee shall not do or permit to be done anything that shall invalidate the insurance policies carried by Lessor. Lessee shall pay the entirety of any increase in the property insurance premium for the Office Building Project over what it was immediately prior to the commencement of the term of this Lease if the increase is specified by Lessor's insurance carrier as being caused by the nature of Lessee's occupancy or any act or omission of Lessee. 8.5 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its agents, partners and lenders, from and against any and all claims for damage to the person or property of anyone or any entity arising from the following: (a) Lessee's use of the Office Building Project, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere. (b) Any breach or default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease. (c) Any act or omission of Lessee, or any of Lessee's agents, contractors, employees, or invitees, and from and against all costs, attorney's fees, expenses and liabilities incurred by Lessor as the result of any such use, conduct, activity, work, things done, permitted or suffered, breach, default or negligence and in dealing reasonably therewith, including but not limited to the defense or pursuit of any claim or any action or proceeding involved therein. In case any action or proceeding be brought against Lessor by reason of any such matter, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. Lessee, as a material part of the consideration to Lessor, hereby assumes all risk of damage to property of Lessee or injury to persons, in, upon or about the Office Building Project arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. For the purposes of this paragraph 8.5 "claims" means claims, demands, losses, damages, liability, costs, and expenses, including without limitation attorney's fees, court costs, expenses and other costs of investigation and preparation, including attorney's fees and costs and expenses incurred in connection with any appeal. The foregoing indemnification obligations shall not apply to any claims arising from the sole negligence or wilful misconduct of the party seeking indemnification. The foregoing indemnification obligations shall survive the expiration or earlier termination of this Lease to and until the last date permitted by law for the bringing of any claim with respect to which indemnification may be claimed under this paragraph. 8.6 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for loss of or damage to the goods, wares, merchandise or other property of Lessee, Lessee's employees, invitees, customers, or any other person in or about the Premises or the Office Building Project, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees agents or contractors, whether such damage or injury is caused by or results from theft, fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said damage or injury results from conditions arising upon the Premises or upon other portions of the Office Building Project, or from other sources or places, or from new construction or the repair, alteration or improvement of any part of the Office Building Project, or of the equipment, fixtures or appurtenances applicable thereto, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible, Lessor shall not be liable for any damages arising from any act or neglect of any other lessee, occupant or user of the Office Building Project, nor from the failure of Lessor to enforce the provisions of any other lease of any other lessee of the Office Building Project. The exemption of Lessor from liability shall not apply if loss arises form Lessor's negligence in fulfilling his obligations as stated in 7.1. 8.7 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no representation that the limits or forms of coverage of insurance specified in this paragraph 8 are adequate to cover Lessee's property or obligation under this Lease. 8.8 PROOF OF INSURANCE. Lessee shall provide to Lessor proof of insurance as required herein in a form acceptable to Lessor. 9. DAMAGE OR DESTRUCTION. 9.1 DEFINITIONS. (a) "Premises Damage" shall mean if the Premises are damaged or destroyed to any extent. (b) "Premises Building Partial Damage" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is less than fifty percent (50%) of the then Replacement Cost of the building. (c) "Premises Building Total Destruction" shall mean if the Building of which the Premises are a part is damaged or destroyed to the extent that the cost to repair is fifty percent (50%) or more of the then Replacement Cost of the Building. (d) "Office Building Project Buildings" shall mean all of the buildings on the Office Building Project site. (e) "Office Building Project Buildings Total Destruction" shall mean if the Office Building Project Buildings are damaged or destroyed to the extent that the cost of repair is fifty percent (50%) or more of the then Replacement Cost of the Office Building Project Buildings. (f) "Insured Loss" shall mean damage or destruction that was caused by an event required to be covered by the insurance described in paragraph 8. The fact that an Insured Loss has a deductible amount shall not make the loss an uninsured loss. (g) "Replacement Cost" shall mean the amount of money necessary to be spent in order to repair or rebuild the damaged area to the condition that existed immediately prior to the damage occurring, excluding all improvements made by lessees, other than those installed by Lessor at Lessee's expense. 9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE. (a) Insured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is an Insured Loss and which falls into the classification of either Premises Damage or then Lessor shall, as soon as reasonably possible and to the extent the required materials and labor are readily available through usual commercial channels, at Lessor's expense, repair such damage (but not Lessee's fixtures, equipment or tenant improvements originally paid for by Lessee) to its condition existing at the time of the damage, and this Lease shall continue in full force and effect. (b) Uninsured Loss: Subject to the provisions of paragraphs 9.4 and 9.5, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classification of Premises Damage or Premises Building Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), which damage prevents Lessee from making any substantial use of the Premises, Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) given written notice to Lessee within thirty (30) days FULL-SERVICE Page 4 of 10 5 after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.5 if at any time during the term of this Lease there is damage, whether or not it is an Insured Loss, which falls into the classifications of either (i) Premises Building Total Destruction, or (ii) Office Building Project Total Destruction, then Lessor may at Lessor's option either (i) repair such damage or destruction as soon as reasonably possible at Lessor's expense (to the extent the required materials are readily available through usual commercial channels) to its condition existing at the time of the damage, but not Lessee's fixtures equipment or tenant improvements, and this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease, in which case this Lease shall terminate as of the date of the occurrence of such damage. 9.4 DAMAGE NEAR END OF TERM. (a) Subject to paragraph 9.4(b), if at any time during the last twelve (12) months of the term of this Lease there is substantial damage to the Premises, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.4(a), in the event that Lessee has an option to extent or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than twenty (20) days after the occurrence of an Insured Loss falling within the classification of Premises Damage during the last twelve (12) months of the term of this Lease. If Lessee duly exercises such option during said twenty (20) day period, Lessor shall, at Lessor's expense, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said twenty (20) day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said twenty (20) day period by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of said twenty (20) day period, notwithstanding any term or provision in the grant of option to the contrary 9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES. (a) In the event Lessor repairs or restores the Building or Premises pursuant to the provision of this paragraph 9, and any part of the Premises are not usable (including loss of use due to loss of access or essential services), the rent payable hereunder (including Lessee's Share of Operating Expense Increase) for the period during which such damage, repair or restoration continues shall be abated, provided such abatement shall only be to the extent the operation and profitability of Lessee's business as operated from the Premises is adversely affected. Except for said abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises or the Building under the provisions of this Paragraph 9 and shall not commence such repair or restoration within ninety (90) days after such occurrence or if Lessor shall not complete the restoration and repair within six (6) months after such occurrence Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's election to do so at any time prior to the commencement or completion, respectively, of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. (c) Lessee agrees to cooperate with Lessor in connection with any such restoration and repair, including but not limited to the approval and/or execution of plans and specifications required. 9.6 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not therefore been applied by Lessor. 9.7 WAIVER. Lessor and Lessee waive the provisions of any statute that relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. Any statute or regulation of the State of California or any other governmental authority or body, including, without limitation, California Civil Code Sections 1932(2) and 1933(4) with respect to any rights or obligations concerning any damage or destruction to the Premises or the Office Building Project in the absence of an express agreement between the parties, and any other statute or regulation relating to damage or destruction of leased premises, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises or any other portion of the Office Building Project. 10. UTILITIES. 10.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating, ventilation, air conditioning, and janitorial service as reasonably required, reasonable amounts of electricity for normal lighting and office machines, water for reasonable and normal drinking and lavatory use, and replacement light bulbs and/or fluorescent tubes and ballasts for standard overhead fixtures. 10.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services specially or exclusively supplied and/or metered exclusively to the Premises or to Lessee, together with any taxes thereon. If any such services are not separately metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's Share or a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises in the Building. 10.3 HOURS OF SERVICE. Said services and utilities shall be provided during generally accepted business days and hours or such other days or hours as may hereafter be set forth. Heating, ventilation and air conditioning service will be available to Lessee at other times through the use of a timer system. Utilities and services required at other times shall be subject to advance request and reimbursement by Lessee to Lessor of the cost thereof. 10.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the utilities except by or through existing outlets and shall not install or use machinery or equipment in or about the Premises that uses excess water, lighting or power, or suffer or permit any act that causes extra burden upon the utilities or services, including but not limited to security services, over standard office usage for the Office Building Project. Lessor shall require Lessee to reimburse Lessor for any excess expenses or costs that may arise out of a breach of this subparagraph by Lessee. Charges for additional use shall be billed quarterly according to the following method: the monthly utility charge will be compared to the charge for the same month of the prior year; any increase will be paid by Lessee in an amount not to exceed Six Hundred and Fifty Dollars ($650.00) per month. Lessor may, in its sole discretion, install at Lessee's expense supplemental equipment and/or separate metering applicable to Lessee's excess usage or loading. 10.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor's reasonable control or in cooperation with governmental request or directions. 11. ASSIGNMENT AND SUBLETTING. LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in the Lease or in the Premises, without Lessor's prior written consent. 12. DEFAULT; REMEDIES. 12.1 DEFAULT. The occurrence of any one or more of the following events shall constitute a material default of this Lease by Lessee: (a) The vacation or abandonment of the Premises by Lessee. Vacation of the Premises shall include the failure to occupy the Premises for a continuous period of sixty (60) days or more, whether or not the rent is paid: (b) The breach by Lessee of any of the covenants, conditions or provisions of paragraphs 7.3(a), (b) or (d) (alterations), 11 (assignment or subletting), 12.1(a) (vacation or abandonment), 12.1(e) (insolvency), 12(f) (false statement), 14(a) (estoppel certificate), 27.2 (subordination), 30 (auctions), or 38.I (easements), all of which are hereby deemed to be material, non-curable defaults without the necessity of any notice by Lessor to Lessee thereof. (c) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Lessor to FULL-SERVICE Page 5 of 10 6 Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (d) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee other than those referenced in subparagraphs (b) and (c), above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's noncompliance is such that more than thirty (30) days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said thirty (30) day period and thereafter diligently pursues such cure to completion. To the extent permitted by law, such thirty (30) day notice shall constitute the sole and exclusive notice required to be given to Lessee under applicable Unlawful Detainer statutes. (e) (i) The making by Lessee of any general arrangement or general assignment for the benefit of creditors; (ii) Lessee becoming a "debtor" as defined in 11 U.S.C. ss.101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee s assets located at the Premises or of Lessee's interest in this Lease where possession is not restored to Lessee within thirty (30) days, or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days. In the event that any provision of this paragraph 12.1(e) is contrary to any applicable law, such provision shall be of no force or effect. (f) The discovery by Lessor that any financial statement given to Lessor by Lessee, or its successor in interest or by any guarantor of Lessee's obligation hereunder, was materially false. 12.2 REMEDIES. In the event of any material default or breach of this Lease by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises; expense of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and any real estate commission actually paid; the worth of the time of award by the court having jurisdiction thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have vacated or abandoned the Premises. In such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. (d) In addition to the remedies set forth in paragraph 12.2(a) through (c) and in addition to all other rights and remedies available to Lessor at law or in equity, Lessor shall have the following rights and remedies: (i) the rights and remedies provided by California Civil Code Section 1951.2, including, but not limited to, the right to terminate Lessee's right to possession of the Premises and to recover (i) "the worth at the time of award" (as defined in Section 12.2(d)(vi) below) of the unpaid Base Rent which shall have been earned at the time of termination; plus (ii) the worth at the time of award of the amount by which the unpaid Base Rent which would have been earned after termination until the time of award shall exceed the amount of loss of such Base Rent that Lessee proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid Base Rent for the balance of the Term after the time of award shall exceed the amount of loss of such Base Rent that Lessee proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee's failure to perform its obligations under this Lease or which would be likely to result therefrom (including without limitation attorneys' and accountants' fees, costs of alterations of the Premises, interest costs and brokers' fees incurred upon any reletting of the Premises); (ii) the rights and remedies described in California Civil Code Section 1951.4 (Lessor may continue the Lease in effect after Lessee's breach and abandonment and recover Base Rent and Operating Expenses as they become due, since Lessee, pursuant to the provisions of paragraph 11 may sublet or assign, subject only to reasonable limitations). Acts of maintenance or preservation, efforts to relet the Premises or the appointment of a receiver upon Lessor's initiative to protect its interest under this Lease shall not of themselves constitute a termination of Lessee's right to possession; (iii) the right to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Lessee, and to sell such property and apply the proceeds therefrom pursuant to applicable California law and subject to the prior rights of third party owners with respect to consigned property or secured creditors having a claim prior in right. In such event lessor may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the Term) and at such rent and such other terms as Lessor in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each such subletting, rents received from such subletting shall be applied by Lessor, first, to payment of any indebtedness other than Base Rent due hereunder from Lessee to Lessor; second, to the payment of any costs of such subletting (including without limitation attorneys' and accountants' fees, costs of alterations of the Premises, interest costs, and brokers' fees) and of any such alterations and repairs; third, to payment of Base Rent due and unpaid hereunder; and the residue, if any, shall be held by Lessor and applied in payment of future Base Rent as it becomes due hereunder. If any rental or other charges due under such sublease shall not be promptly paid to Lessor by the sublessee(s), or if such rentals received from such subletting during any month are less than Base Rent to be paid during that month by Lessee hereunder, Lessee shall pay any such deficiency to Lessor, as well as any unpaid indebtedness other than Base Rent due hereunder from Lessee to Lessor and the costs of such subletting (including without limitation attorneys' and accountants' fees, costs of alterations of the Premises, interest costs, and brokers' fees), and any other amounts due Lessor under this Section 12.2. Such deficiency shall be calculated and paid monthly. No taking possession of the Premises by Lessor shall be construed as an election on its part to terminate this Lease unless a written notice of such intention is given to Lessee. Lessor's subletting the Premises without termination shall not constitute a waiver of Lessor's right to elect to terminate this Lease for such previous breach; (iv) The right to have a receiver appointed for Lessee, upon application by Lessor, to take possession of the Premises, to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Lessor pursuant to paragraph 12.2(d)(iii); and (v) the right to specific performance of any or all of Lessee's obligations hereunder, and to damages for delay in or failure of such performance. (e) For purposes of paragraph 12.2(d) the "worth at the time of award" of the amounts referred to in subparagraphs (i) and (ii) shall be computed with interest at the lesser of the maximum rate then allowed by law or a rate which is five percent (5%) per annum plus the rate from time to time, established by the Federal Reserve Bank of San Francisco on advances to member banks under Sections 13 and 13(a) of the Federal Reserve Act as now in effect or hereafter from time to time amended; the "worth at the time of award" of the amount referred to in subparagraph (iii) shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 12.2.1 REMEDIES CUMULATIVE. The exercise of any remedy provided by law or the provisions of this Lease shall not exclude any other remedies unless they are expressly excluded by this Lease. Any notice of default given or required to be given by Lessor to Lessee hereunder may be combined with, serve as or include any statutory notice required in connection with the exercise by Lessor of any of its remedies. Lessee hereby waives any right of redemption or relief from forfeiture following termination of, or exercise of FULL-SERVICE Page 6 of 10 7 any remedy by Lessor with respect to, this Lease. 12.2.2 RECOVERY AGAINST LESSOR. Lessee shall look solely to Lessor's interest in the Office Building Project for the recovery of any judgment against Lessor. Lessor, or if Lessor is a partnership, its partners whether general or limited, or if Lessor is a corporation, its directors, officers and shareholders, shall never be personally liable for any such judgment. 12.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligation provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then Lessor shall not be in default if Lessor commences performance within such 30 day period and thereafter diligently pursues the same to completion. 12.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee to Lessor of Base Rent, or other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges that may be imposed on Lessor by the terms of any mortgage or trust deed covering the Office Building Project. Accordingly, if any installment of Base Rent, Operating Expense Increase, or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee and shall be paid as Additional Rent. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 12.5 RETURNED CHECKS. If any check for payment by Lessee to Lessor of Base Rent or other sums due hereunder shall be returned to Lessor by Lessee's bank for any reason, all payments made by Lessee, for the period of six (6) months following, shall be made with certified funds or upon demonstration of good credit at Lessor's sole discretion. A returned check charge in the amount of $20.00 in addition to any sums due hereunder including late charges. 13. CONDEMNATION. If the Premises or any portion thereof or the Office Building Project are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs; provided that if so much of the Premises or the Office Building Project are taken by such condemnation as would substantially and adversely affect the operation or profitability of Lessee's business conducted from the Premises. Lessee shall have the option, to be exercised only in writing within thirty (30) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within thirty (30) days after the condemning authority shall have taken possession), to terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the rent and Lessee's Share of Operating Expense Increase shall be reduced in the proportion that the floor area of the Premises taken bears to the total floor area of the Premises. Common Areas taken shall be excluded from the Common Areas usable by Lessee and no reduction of rent shall occur with respect thereto or by reason thereof. Lessor shall have the option in its sole discretion to terminate this Lease as of the taking of possession by the condemning authority by giving written notice to Lessee of such election within thirty (30) days after receipt of notice of a taking by condemnation of any part of the Premises or the Office Building Project. Any award for the taking of all or any part of the Premises or the Office Building Project under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any separate award for loss of or damage to Lessee's trade fixtures, removable personal property and unamortized tenant improvements that have been paid for by Lessee. For that purpose the cost of such improvements shall be amortized over the original term of this Lease excluding any options. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation, repair any damage to the Premises caused by such condemnation except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 14. ESTOPPEL CERTIFICATE. 14.1 Each party (as "responding party") shall at any time upon not less than ten (10) days prior written notice from the other party ("requesting party") execute, acknowledge and deliver to the requesting party a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to the responding party's knowledge, any uncured defaults on the part of the requesting party, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Office Building Project or of the business of Lessee. 14.2 At the requesting party's option, the failure to deliver such statement within such time shall be a material default of this Lease by the party who is to respond, without any further notice to such party, or it shall be conclusive upon such party that (i) this Lease is in full force and effect, without modification except as may be represented by the requesting party, (ii) there are no uncured defaults in the requesting party's performance, and (iii) if Lessor is the requesting party, not more than one month's rent has been paid in advance. 15. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the owner or owners, at the time in question, of the fee title or a lessee's interest in a ground lease of the Office Building Project, in the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 16. SEVERABILITY. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof. 17. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law or judgments from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease; provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 18. TIME OF ESSENCE. Time is of the essence with respect to the obligations to be performed under this Lease. 19. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the terms of this Lease, including but not limited to Late Charges, Lessee's Share of Operating Expense Increase and any other expenses payable by Lessee hereunder shall be deemed to be rent. 20. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all agreements of the parties which respect to any matter mentioned herein. No prior or contemporaneous agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that Lessor or any employee or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of the Premises or the Office Building Project and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of this Lease. 21. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified or registered mail, and shall be deemed sufficiently given if delivered or addressed to Lessee or to Lessor at the address noted below or adjacent to the signature of the respective parties, as the case may be. Mailed notices shall be deemed given upon actual receipt at the FULL-SERVICE Page 7 of 10 8 address required, or forty-eight hours following deposit in the mail, postage prepaid, whichever first occurs. Either party may be notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by notice to Lessee. Lessee acknowledges that service of any notice on one Lessee constitutes service on all Parties herein called Lessee. 22. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof. 23. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, except that the rent payable shall be one hundred twenty percent (120%) of the rent payable immediately preceding the termination date of this Lease, and all Options, if any, granted under the terms of this Lease shall be deemed terminated and be of no further effect during said month to month tenancy. 24. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 25. COVENANTS AND CONDITIONS. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 26. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of paragraph 11, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State where the Office Building Project is located and any litigation concerning this Lease between the parties hereto shall be initiated in the county in which the Office Building Project is located. 27. SUBORDINATION. 27.1 This Lease, and any Option or right of first refusal granted hereby, at Lessor's option, shall be subordinate to any ground lease, mortgage deed of trust, or any other hypothecation or security now or hereafter placed upon the Office Building Project and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease and any Options granted hereby prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease or such Options are dated prior or subsequent to the date of said mortgage, deed of trust or ground lease or the date of recording thereof. 27.2 Lessee agrees to execute any documents required to effectuate an attornment, a subordination, or to make this Lease or any Option granted herein prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within ten (10) days after written demand shall constitute a material default by Lessee hereunder without further notice to Lessee or, at Lessor's option Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney in fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 27.2. 28. ATTORNEYS' FEES. 28.1 If either party bring an action to enforce the terms hereof or declare rights hereunder, the prevailing party in such any action, trial or appeal thereon, shall be entitled to his reasonable attorneys' fees to be paid by the losing party as fixed by the court in the same or a separate suit, and whether or not such action is pursued to decision or judgment. 28.2 The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 28.3 Lessor shall be entitled to reasonable attorneys' fees and all other costs and expenses incurred in the preparation and service of notice of default and consultations in connection therewith, whether or not a legal transaction is subsequently commenced in connection with such default. 29. LESSOR'S ACCESS. 29.1 Lessor, Lessor's agents, employees, contractors, and designated representatives shall have the right to enter the Premises at reasonable times, with not less than twelve hours advance notice, except in the event of an emergency, for the purpose of inspecting the same, performing any services required of Lessor, showing the same to prospective purchasers, lenders or lessees, taking such safety measures, erecting such scaffolding or other necessary structures, making such alterations, repairs, improvements or additions to the Premises or to the Office Building Project as Lessor may reasonably deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect to Lessee's use of the Premises. Lessor may at any time place on or about the Premises or the Building any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs. 29.2 All activities of Lessor pursuant to this paragraph shall be without abatement of rent, nor shall Lessor have any liability to Lessee for the same. 29.3 Lessor shall have the right to retain keys to the Premises and to unlock all doors in or upon the Premises other than to files, vaults and safes, and in the case of emergency to enter the Premises by any reasonably appropriate means, and any such entry shall not be deemed a forcible or unlawful entry or detainer of the Premises or an eviction. Lessee waives any charges for damages or injuries or interference with Lessee's property or business in connection therewith. 30. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises or the Common Areas without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. The holding of any auction on the Premises or Common Areas in violation of this paragraph shall constitute a material default of this Lease. 31. SIGNS. Lessee shall not place any sign upon the Premises or the Office Building Project without Lessor's prior written consent. Under no circumstances shall Lessee place a sign on any roof of the Office Building Project. 32. MERGER. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 33. CONSENTS. Except for paragraphs 30 (auctions) and 31 (signs) hereof, wherever in this Lease the consent of one party is required to an act of the other party such consent shall not be unreasonably withheld or delayed. 34. GUARANTOR. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 35. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized and legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Office Building Project. 36. OPTIONS. 36.1 DEFINITION. As used in this paragraph the word "Option" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option of first refusal to the lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other space within the FULL-SERVICE Page 8 of 10 9 Office Building Project or other property of Lessor or the right of first offer to lease other space within the Office Building Project or other property of Lessor; (3) the right or option to purchase the Premises or the Office Building Project, or the right of first refusal to purchase the Premises or the Office Building Project or the right of first offer to purchase the Premises or the Office Building Project, or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 36.2 Leases shall have no options whatsoever unless expressly granted in paragraph 1.6 of this Lease. 36.3 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is personal to the original Lessee and may be exercised only by the original Lessee while occupying the Premises who does so without the intent of thereafter assigning this Lease or subletting the Premises or any portion thereof, and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee. The Options, if any, herein granted to Lessee are not assignable separate and apart from this Lease, nor may any Option be separated from this Lease in any manner, either by reservation or otherwise. 36.4 MULTIPLE OPTIONS. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 36.5 EFFECT OF DEFAULT ON OPTIONS. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (i) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 12.1(c) or 12.1(d) and continuing until the noncompliance alleged in said notice of default is cured, or (ii) during the period of time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) and continuing until the obligation is paid, or (iii) in the event that Lessor has given to Lessee three or more notices of default under paragraph 12.1(c), or paragraph 12.1(d), whether or not the defaults are cured during the 12 month period of time immediately prior to the time that Lessee attempts to exercise the subject Option, (iv) if Lessee has committed any non-curable breach, including without limitation those described in paragraph 12.1(b), or is otherwise in default of any of the terms, covenants or conditions of this Lease. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 36.5(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 12.1(d) within thirty (30) days after the date that Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to diligently prosecute said cure to completion or (iii) Lessor gives to Lessee three or more notices of default under paragraph 12.1(c), or paragraph 12.1(d) whether or not the defaults are cured, or (iv) if Lessee has committed any non-curable breach including without limitation those described in paragraph 12.1(b), or is otherwise in default of any of the terms, covenants and conditions of this Lease. 37. SECURITY MEASURES-LESSOR'S RESERVATIONS. 37.1 Lessee hereby acknowledges that Lessor shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Office Building Project. Lessee assumes all responsibility for the protection of Lessee, its agents, and invitees and the property of Lessee and of Lessee's agents, contractors, employees and invitees from acts of third parties. Nothing herein contained shall prevent Lessor, at Lessor's sole option, from providing security protection for the Office Building Project or any part thereof, in which event the cost thereof shall be paid for by Lessee, proportionate to lessee's share of the total square footage of the Building. 37.2 Lessor shall have the following rights: (a) To change the name, address or title of the Office Building Project or building in which the Premises are located upon not less than 90 days prior written notice; (b) To, at Lessee's expense, provide and install Building standard graphics on the door of the premises and such portions of the Common Areas as Lessor shall reasonably deem appropriate; (c) To permit any lessee the exclusive right to conduct any business as long as such exclusive does not conflict with any rights expressly given herein; (d) To place such signs, notices or displays as Lessor reasonably deems necessary or advisable upon the roof, exterior of the buildings or the Office Building Project or on post signs in the Common Areas; 37.3 Lessee shall not: (a) Use a representation (photographic or otherwise) of the Building or the Office Building Project or their name(s) in connection with Lessee's business; (b) Suffer or permit anyone, except in emergency, to go upon the roof of the Building. 38. EASEMENTS. 38.1 Lessor reserves to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably or materially interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material default of this Lease by Lessee without the need for further notice to Lessee. 38.2 The obstruction of Lessee's view, air, or light by any structure erected in the vicinity of the Building, whether by Lessor or third parties, shall in no way affect this Lease or impose any liability upon Lessor. 39. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 40. AUTHORITY. If Lessee is a corporation, trust, or general or limited partnership, Lessee, and each individual executing this Lease on behalf of such entity represent and warrant that such individual is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 41. CONFLICT. Any conflict between the printed provisions, Exhibits or Addenda of this Lease and the typewritten or handwritten provisions, if any, shall be controlled by the typewritten or handwritten provisions. 42. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to Lessee to lease. This Lease shall become binding upon Lessor and Lessee only when fully executed by both parties. 43. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications to this Lease as may be reasonably required by an institutional lender in connection with the obtaining of normal financing or refinancing of the Office Building Project. 44. MULTIPLE PARTIES. If more than one person or entity is named as either Lessor or Lessee herein, except as otherwise expressly provided herein the obligations of the Lessor or Lessee herein shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, respectively. 45. ACCEPTANCE. Upon occupancy of the Premises by Lessee, Lessee formally accepts the Premises "as is". Unless and to the extent specified by both parties in writing, Lessor has no obligation to perform any work or improvement to the Premises. 46. ATTACHMENTS. Attached hereto are the following documents that constitute a part of this Lease: FULL-SERVICE Page 9 of 10 10 EXHIBIT A (Rules and Regulations for Standard Office Lease) EXHIBIT B (Tenant Improvements) EXHIBIT C (Floor Plan of Office Building Project) LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. THIS LEASE HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE LESSOR OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.
LESSOR NEARON ENTERPRISES, LLC LESSEE COMBICHEM, INC. By Nearon Enterprises, a California Corp. By /s/ illegible ---------------------------------------- ---------------------------------------- Its Designated Manager Its /s/ President and CEO --------------------------------------- ------------------------------------- By /s/ David S. Christensen By ---------------------------------------- ------------------------------------ DAVID S. CHRISTENSEN Its EVP and COO Its --------------------------------------- ------------------------------------- Executed at Danville, California Executed at San Diego, CA ------------------------------- ----------------------------- on (date) 12-2-96 on (date) 11-5-96 --------------------------------- ------------------------------- Address 30 Oak Court Address 9050 Camino Santa Fe --------------------------------- -------------------------------- Danville, CA 94526 San Diego, CA 92121 --------------------------------- --------------------------------
FULL-SERVICE Page 10 of 10 11 EXHIBIT A GENERAL RULES 1. Lessee shall not suffer or permit the obstruction of any Common Areas, including driveways, walkways and stairways. 2. Lessor reserves the right to refuse access to any persons Lessor in good faith judges to be a threat to the safety, reputation, or property of the Office Building Project and its occupants. 3. Lessee shall not make or permit any noise or odors that annoy or interfere with other lessees or persons having business within the Office Building Project. 4. Lessee shall not keep animals or birds within the Office Building Project, and shall not bring bicycles, motorcycles or other vehicles into areas not designated as authorized for same. 5. Lessee shall not make, suffer or permit litter except in appropriate receptacles for that purpose. 6. Lessee shall not alter any lock or install new or additional locks or bolts. 7. Lessee shall be responsible for the inappropriate use of any toilet rooms, plumbing or other utilities. No foreign substances of any kind are to be inserted therein. 8. Lessee shall not deface the walls, partitions or other surfaces of the premises or Office Building Project. 9. Lessee shall not suffer or permit anything in or around the Premises or Building that causes excessive vibration or floor loading in any part of the Office Building Project. 10. Furniture, significant freight and equipment shall be moved into or out of the building only with the Lessor's knowledge and consent, and subject to such reasonable limitations, techniques and timing, as may be designated by Lessor. Lessee shall be responsible for any damage to the Office Building Project arising from any such activity. 11. Lessee shall not employ any service or contractor for services or work to be performed in the Building, except as approved by Lessor. 12. Lessor reserves the right to close and lock the Building on Saturdays, Sundays and legal holidays, and on other days between the hours of 5:00 p.m. and 8:00 a.m. It is Lessee's responsibility to keep the Building locked at all times other than ordinary business hours. If Lessee uses the Premises during such periods, Lessee shall be responsible for securely locking any doors it may have opened for entry or exit. 13. Lessee shall be provided with two sets of keys upon occupancy. Lessee shall return all keys at the termination of its tenancy and shall be responsible for the cost of replacing any lost keys. 14. No window coverings, shades or awnings shall be installed or used by Lessee. 15. No Lessee, employee or invitee shall go upon the roof of the Building. 16. Lessee shall not suffer or permit smoking or carrying of lighted cigars or cigarettes anywhere inside the Building. 17. Lessee shall not use any method of heating or air conditioning other than as provided by Lessor. 18. Lessee shall not install, maintain or operate any vending machines upon the Premises without Lessor's written consent. 19. The Premises shall not be used for lodging or manufacturing, cooking or food preparation. 20. Lessee shall comply with all safety, fire protection and evacuation regulations established by Lessor any applicable governmental agency. 21. Lessor reserves the right to waive any one of the these rules or regulations, and/or as to any particular Lessee, and any such waiver shall not constitute a waiver of any other rule or regulation or any subsequent application thereof to such Lessee. 22. Lessee assumes all risks from theft or vandalism and agrees to keep its Premises locked as may be required. 23. Lessor reserves the right to make such other reasonable rules and regulations as it may from time to time deem necessary for the appropriate operation and safety of the Office Building Project and its occupants. Lessee agrees to abide by these and such rules and regulations. PARKING RULES 1. Parking Areas shall be used only for parking by vehicles no longer than full size, passenger automobiles herein called "Permitted Size Vehicles". Vehicles other than Permitted Size Vehicles are herein referred to as "Oversized Vehicles". 2. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. 3. Lessor reserves the right to relocate all or a part of parking spaces from floor to floor, within one floor, and/or to reasonably adjacent off site location(s), and to reasonably allocate them between compact and standard size spaces, as long as the same complies with applicable laws, ordinances and regulations. 4. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking. 5. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Lessor will not be responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using the parking area. 6. The maintenance, washing, waxing or cleaning of vehicles in the parking structure or Common Area is prohibited. 7. Lessee shall be responsible for seeing that all of its employees, agents and invitees comply with the applicable parking rules, regulations laws and agreements. 8. Lessor reserves the right to modify these rules and/or adopt such other reasonable and nondiscriminatory rules and regulations as it may deem necessary for the proper operation of the parking area. 9. Such parking used as herein provided is intended merely as a license only and no bailment is intended or shall be created hereby. FULL-SERVICE 12 EXHIBIT B TENANT IMPROVEMENTS The Premises shall be constructed in accordance with Lessor's Standard Improvements, as follows: 1. PARTITIONS -- As existing. 2. WALL SURFACES -- Painted Kelly-Moore "Frost". 3. WINDOW COVERINGS -- As existing. 4. FLOORING -- Shampoo carpeting. 5. DOORS -- As existing. 6. ELECTRICAL AND TELEPHONE OUTLETS -- As existing. 7. CEILINGS -- As existing. 8. LIGHTING -- Repair and/or replace as necessary. 9. HEATING AND AIR CONDITIONING DUCTS -- As existing. 10. PLUMBING -- As existing. FULL-SERVICE 13 STANDARD OFFICE LEASE FLOOR PLAN [DIAGRAM] EXHIBIT C EX-10.38 42 EXHIBIT 10.38 1 EXHIBIT 10.38 LEASE AGREEMENT BY AND BETWEEN HARBOR INVESTMENT PARTNERS, A CALIFORNIA GENERAL PARTNERSHIP AS LANDLORD AND COMBICHEM, INC., a California corporation AS TENANT DATED OCTOBER 6, 1997 2 TABLE OF CONTENTS
Page ---- Basic Lease Information..............................................................iv 1. Demise.............................................................................1 2. Premises...........................................................................1 3. Term...............................................................................2 4. Rent...............................................................................2 5. Utilities And Services.............................................................9 6. Late Charge.......................................................................10 7. Letter of Credit..................................................................11 8. Possession........................................................................13 9. Use Of Premises...................................................................13 10. Acceptance Of Premises...........................................................15 11. Surrender........................................................................16 12. Alterations And Additions........................................................17 13. Maintenance and Repairs Of Premises..............................................19 14. Landlord's Insurance.............................................................20 15. Tenant's Insurance...............................................................20 16. Indemnification..................................................................22 17. Subrogation......................................................................23 18. Signs............................................................................23 19. Free From Liens..................................................................23 20. Entry By Landlord................................................................24 21. Destruction And Damage...........................................................24 22. Condemnation.....................................................................27 23. Assignment And Subletting........................................................28 24. Tenant's Default.................................................................31
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Page ---- 25. Landlord's Remedies..............................................................33 26. Landlord's Right to Perform Tenant's Obligations.................................36 27. Attorney's Fees..................................................................37 28. Taxes............................................................................37 29. Effect Of Conveyance.............................................................37 30. Tenant's Estoppel Certificate....................................................38 31. Subordination....................................................................38 32. Environmental Covenants..........................................................39 33. Notices..........................................................................42 34. Waiver...........................................................................43 35. Holding Over.....................................................................43 36. Successors And Assigns...........................................................44 37. Time.............................................................................44 38. Brokers..........................................................................44 39. Limitation Of Liability..........................................................44 40. Financial Statements.............................................................44 41. Rules And Regulations............................................................45 42. Mortgagee Protection.............................................................45 43. Entire Agreement.................................................................46 44. Substituted Premises.............................................................46 45. Interest.........................................................................46 46. Construction.....................................................................46 47. Representations And Warranties Of Tenant.........................................47 48. Security.........................................................................47 49. Jury Trial Waiver................................................................48
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Exhibit ------- A Diagram of the Premises B Commencement and Expiration Date Memorandum C Rules and Regulations D Hazardous Materials Disclosure Certificate
iii 5 LEASE AGREEMENT BASIC LEASE INFORMATION Lease Date: October 6, 1997 Landlord: HARBOR INVESTMENT PARTNERS, a California general partnership Landlord's Address: c/o Allegis Realty Investors LLC 455 Market Street, Suite 1540 San Francisco, California 94105 All notices sent to Landlord under this Lease shall be sent to the above address, with copies to: Insignia Commercial Group, Inc. 160 West Santa Clara Street, Suite 1350 San Jose, California 95113 Tenant: CombiChem, Inc., a California corporation Tenant's Contact Person: Karin Eastham Chief Financial Officer/ Vice President, Finance and Administration Tenant's Address and 9050 Camino Santa Fe Telephone Number: San Diego, California 92121 (619) 530-0484 Premises Square Footage: Approximately Five Thousand Nine Hundred Eighty-Five (5,985) rentable square feet Premises Address: 1804 Embarcadero Road Suite 201 Palo Alto, California 94303 Project: The Harbor Business Park, 1800-1858 Embarcadero Road and 2445-2465 Faber Place, Palo Alto, California, consisting of approximately two hundred fifty-nine thousand, two hundred thirty-seven (259,237) rentable square feet, together with the land on which the Project is situated and all Common Areas
iv 6 Building (if not the same 1804 Embarcadero Road, Palo Alto, California 94303, consisting as the Project): of approximately forty thousand (40,000) rentable square feet Tenant's Proportionate 2.31% Share of Project: Tenant's Proportionate 14.96% Share of Building: Length of Term: Sixty (60) months Estimated Commencement Date: November 1, 1997 Estimated Expiration Date: October 31, 2002
Monthly Base Rent:
Monthly Base Monthly Base Months Sq. Ft. Rate Rent ------ ------- ---- ---- 1-12 5,985 x $ 3.65 = $ 21,845.25 13-60 Monthly Base Rent to be increased in accordance with the Consumer Price Index Price (see Paragraph 4(a) of the Lease)
Prepaid Rent: Twenty-One Thousand Eight Hundred Forty-Five and 25/100 Dollars ($21,845.25) Month to which Prepaid Base First (1st) full month of the Term Rent will be Applied: Base Year: 1997 Letter of Credit: Two Hundred Sixty-Two Thousand One Hundred Forty-Three Dollars ($262,143) Permitted Use: General office, research and development of computer software and software engineering and design Unreserved Parking Spaces: Nineteen (19) nonexclusive and undesignated parking spaces
v 7 Broker(s): Cornish & Carey Commercial and BT Commercial (Landlord's Broker) CPS (Tenant's Broker)
vi 8 LEASE AGREEMENT THIS LEASE AGREEMENT is made and entered into by and between Landlord and Tenant on the Lease Date. The defined terms used in this Lease which are defined in the Basic Lease Information attached to this Lease Agreement ("BASIC LEASE INFORMATION") shall have the meaning and definition given them in the Basic Lease Information. The Basic Lease Information, the exhibits, the addendum or addenda described in the Basic Lease Information, and this Lease Agreement are and shall be construed as a single instrument and are referred to herein as the "LEASE". 1. DEMISE In consideration for the rents and all other charges and payments payable by Tenant, and for the agreements, terms and conditions to be performed by Tenant in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES HEREBY HIRE AND TAKE FROM LANDLORD, the Premises described below (the "PREMISES"), upon the agreements, terms and conditions of this Lease for the Term hereinafter stated. 2. PREMISES The Premises demised by this Lease is located in that certain building (the "BUILDING") specified in the Basic Lease Information, which Building is located in that certain real estate development (the "PROJECT") specified in the Basic Lease Information. The Premises and the Project have the address and contain the square footage specified in the Basic Lease Information. The location and dimensions of the Premises are depicted on EXHIBIT A, which is attached hereto and incorporated herein by this reference. Tenant shall have the non-exclusive right (in common with the other tenants, Landlord and any other person granted use by Landlord) to use the Common Areas (as hereinafter defined), except that, with respect to parking, Tenant shall have only an irrevocable license (subject to the terms and conditions of this Lease) for the entire Term to use the number of non-exclusive and undesignated parking spaces set forth in the Basic Lease Information in the Project's parking areas (the "PARKING AREAS") at no additional cost to Tenant; provided, however, that Landlord shall not be required to enforce Tenant's right to use such parking spaces; and, provided further, that the number of parking spaces allocated to Tenant hereunder shall be reduced on a proportionate basis in the event any of the parking spaces in the Parking Areas are taken or otherwise eliminated as a result of any Condemnation (as hereinafter defined) or casualty event affecting such Parking Areas. No easement for light or air is incorporated in the Premises. For purposes of this Lease, the term "COMMON AREAS" shall mean all areas and facilities outside the Premises and within the exterior boundary line of the Project that are provided and designated by Landlord for the non-exclusive use of 1 9 Landlord, Tenant and other tenants of the Project and their respective employees, guests and invitees. Landlord has the right, in its sole discretion, from time to time, to: (a) make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, ingress, egress, direction of driveways, entrances, corridors and walkways; (b) close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) add additional buildings and improvements to the Common Areas or remove existing buildings or improvements therefrom; (d) use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project or any portion thereof; and (e) do and perform any other acts or make any other changes in, to or with respect to the Common Areas and the Project as Landlord may, in its sole discretion, deem to be appropriate; provided, however, that none of the foregoing actions by Landlord shall materially and substantially interfere with Tenant's business in the Premises, except to the extent that such actions are undertaken by Landlord in emergency situations or in connection with the performance of Landlord's obligations under this Lease. 3. TERM The term of this Lease (the "TERM") shall be for the period of months specified in the Basic Lease Information, commencing on the date Landlord delivers possession of the Premises to Tenant (the "COMMENCEMENT DATE"), but not earlier than the Estimated Commencement Date specified in the Basic Lease Information. In the event the actual Commencement Date is a date other than the Estimated Commencement Date specified in the Basic Lease Information, then Landlord and Tenant shall promptly execute a Commencement and Expiration Date Memorandum in the form attached hereto as EXHIBIT B, wherein the parties shall specify the Commencement Date and the date on which the Term expires (the "EXPIRATION DATE"). 4. RENT (a) BASE RENT. Tenant shall pay to Landlord, in advance on the first day of each month, without further notice or demand and without offset or deduction, the monthly installments of rent specified in the Basic Lease Information (the "BASE RENT"). If the Term begins on a day other than the first day of a month, the Tenant shall pay, in advance, the prorated Base Rent for such partial month and the Prepaid Base Rent shall be applied to the Base Rent payable on the first day of the following month. If the Term ends on a day other than the last day of a month, Base Rent shall be prorated based upon the actual number of days in such month. The Base Rent under this Paragraph 4(a) shall be adjusted, as stated below, on November 1 of each year during the Term commencing on November 1, 2 10 1998 to reflect percentage increases in the cost of living. The Consumer Price Index (U.S. Department of Labor Consumer Price Index (all items) for Urban Wage Earners and Clerical Workers, San Francisco Bay Area (1982-1984=100), hereinafter referred to as the "INDEX") published for the month immediately preceding each such adjustment date (each, an "ADJUSTMENT INDEX") and the Index published for the month immediately preceding the Commencement Date of this Lease ("BASE INDEX") shall be compared and the percentage difference between the Adjustment Index and the Base Index shall be determined. The initial Base Rent specified in the Basic Lease Information shall be increased by adding to said initial Base Rent the percentage amount of said initial Base Rent equal to the percentage difference between the Base Index and the applicable Adjustment Index; provided, however, in no event shall the initial Base Rent hereunder be increased by less than five percent (5%) or more than eight percent (8%) for any one year. When the adjusted Base Rent is determined after each adjustment date, Landlord shall give Tenant written notice indicating the amount thereof and the method of computation. If the Consumer Price Index is changed or discontinued, Landlord shall substitute an official index published by the Bureau of Labor Statistics or its successor or similar governmental agency as may then be in existence and shall be most nearly equivalent thereto. Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Base Rent specified in the Basic Lease Information to be applied toward Base Rent for the month of the Term specified in the Basic Lease Information. (b) ADDITIONAL RENT. During the term, in addition to the Base Rent, Tenant shall pay to Landlord as additional rent (the "ADDITIONAL RENT"), in accordance with this Paragraph 4, Tenant's Proportionate Share(s) of the total dollar increase, if any, in Expenses (as defined below) each calendar year over Expenses in the Base Year (as specified in the Basic Lease Information). Following the Base Year, any Expenses attributable to a period which falls outside the Term shall be prorated between Tenant and Landlord so that Tenant shall pay only that portion thereof which is attributable to the period within the Term. As used in this Lease, "EXPENSES" means all costs and expenses paid or incurred by Landlord in connection with the ownership, operation, maintenance, management and repair of the Premises, the Building and/or the Project or any part thereof, including, without limitation, all the following items: (1) Taxes and Assessments. All real estate taxes and assessments, which shall include any form of tax, assessment, fee, license fee, business license fee, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is (i) determined by the area of the Premises, the Building and/or the Project or any part thereof, or the Rent and other sums payable hereunder by Tenant or by other tenants, including, but not limited to, any gross income or 3 11 excise tax levied by any of the foregoing authorities with respect to receipt of Rent and/or other sums due under this Lease; (ii) upon any legal or equitable interest of Landlord in the Premises, the Building and/or the Project or any part thereof; (iii) upon this transaction or any document to which Tenant is a party creating or transferring any interest in the Premises, the Building and/or the Project; (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Premises, the Building and/or the Project, whether or not now customary or within the contemplation of the parties; or (v) surcharged against the parking area. Tenant and Landlord acknowledge that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges due to any cause whatsoever are to be included within the definition of real property taxes for purposes of this Lease. "TAXES AND ASSESSMENTS" shall also include legal and consultants' fees, costs and disbursements incurred in connection with proceedings to contest, determine or reduce taxes, Landlord specifically reserving the right, but not the obligation, to contest by appropriate legal proceedings the amount or validity of any taxes. Notwithstanding the foregoing, "TAXES AND ASSESSMENTS" shall not include (i) any special assessment levied by any governmental authority to pay the costs of the removal of any Hazardous Materials disposed of by Landlord on the Property, (ii) any item to the extent otherwise included within another category of "Expenses," (iii) costs of building permits or development fees (including fees for transit, housing, schools, open space, child care, arts programs, traffic mitigation measures, environmental impact reports, traffic studies and transportation system management plans) payable to public authorities in connection with any tenant improvement work performed by Landlord for another tenant of the Project, (iv) reserves for taxes and assessments payable in future real property tax fiscal years, and (v) any documentary transfer taxes arising out of a voluntary transfer or sale by Landlord of all or a portion of the Project. In the case of any assessment which may be evidenced by improvement or other bonds and which may be paid in annual or other periodic installments, Landlord shall elect to cause such assessment to be paid in installments over the maximum period permitted by law. If a reduction in Taxes and Assessments is obtained for any year of the Term during which Tenant paid Tenant's Proportionate Share of such Taxes and Assessments, then Expenses for such year shall be retroactively adjusted and Landlord shall provide Tenant with a credit against Tenant's next due obligations for Additional Rent or, if none, refund such amount to Tenant within thirty (30) days based on such adjustment, provided that if Tenant has vacated the Premises, Landlord shall provide such refund only if Tenant has furnished Landlord with a current forwarding address. (2) Insurance. All insurance premiums for the Building and/or the Project or any part thereof, including premiums for "all risk" fire and extended 4 12 coverage insurance, commercial general liability insurance, rent loss or abatement insurance, earthquake insurance, flood or surface water coverage, and other insurance as Landlord deems necessary in its sole discretion, and any deductibles paid under policies of any such insurance. (3) Utilities. The cost of all electricity, water, gas, sewers, oil and other utilities (collectively, "UTILITIES"), including any surcharges imposed, serving the Premises, the Building and the Project that are not separately metered to Tenant or any other tenant, any assessments or charges for Utilities or similar purposes included within any tax bill for the Building or the Project, including without limitation, entitlement fees, allocation unit fees, and/or any similar fees or charges and any penalties (if a result of Tenant's delinquency) related thereto, and any amounts, taxes, charges, surcharges, assessments or impositions levied, assessed or imposed upon the Premises, the Building or the Project or any part thereof, or upon Tenant's use and occupancy thereof, as a result of any rationing of Utility services or restriction on Utility use affecting the Premises, the Building and/or the Project, as contemplated in Paragraph 5 below (collectively, "UTILITY EXPENSES"). (4) Common Area Expenses. All costs to operate, maintain, repair, replace, supervise, insure and administer the Common Areas, including supplies, materials, labor and equipment used in or related to the operation and maintenance of the Common Areas, including parking areas (including, without limitation, all costs of resurfacing and restriping parking areas), signs and directories on the Building and/or the Project, landscaping (including maintenance contracts and fees payable to landscaping consultants), amenities, sprinkler systems, sidewalks, walkways, driveways, curbs, lighting systems and security services, if any, provided by Landlord for the Common Areas, and any charges, assessments, costs or fees levied by any association or entity of which the Project or any part thereof is a member or to which the Project or any part thereof is subject. (5) Parking Charges. Any parking charges or other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated by any governmental authority or insurer in connection with the use or occupancy of the Building or the Project. (6) Maintenance and Repair Costs. Except for costs which are the responsibility of Landlord pursuant to Paragraph 13(b) below, all costs to maintain, repair, and replace the Premises, the Building and/or the Project or any part thereof, including without limitation, (i) all costs paid under maintenance and service agreements such as contracts for janitorial, security and refuse removal, (ii) all costs to maintain, repair and replace the roof coverings of the Building or the Project or any part thereof, (iii) all costs to maintain, repair and replace the heating, ventilating, air conditioning, plumbing, sewer, drainage, electrical, fire protection, life safety and security systems and other mechanical and electrical systems and equipment serving the Premises, the Building and/or the Project or any 5 13 part thereof (collectively, the "SYSTEMS"), (iv) the cost of all cleaning and janitorial services and supplies, and (v) the cost of window glass replacement and repair. (7) Life Safety Costs. All costs to install, maintain, repair and replace all life safety systems, including, without limitation, all fire alarm systems, serving the Premises, the Building and/or the Project or any part thereof (including all maintenance contracts and fees payable to life safety consultants) whether such systems are or shall be required by Landlord's insurance carriers, Laws (as hereinafter defined) or otherwise. (8) Management and Administration. All costs for management and administration of the Premises, the Building and/or the Project or any part thereof, including, without limitation, a property management fee, accounting, auditing, billing, postage, salaries and benefits for clerical and supervisory employees, whether located on the Project or off-site, payroll taxes and legal and accounting costs and fees for licenses and permits related to the ownership and operation of the Project. Notwithstanding anything in this Paragraph 4(b) to the contrary, with respect to all sums payable as Additional Rent under this Paragraph 4(b) for the repair or replacement of any item or the construction, installation or acquisition of any new item in connection with the physical operation of the Premises, the Building or the Project (i.e., HVAC, roof membrane or coverings and parking area) which is a capital item the repair or replacement of which properly would be capitalized under generally accepted accounting principles, Tenant shall be required to pay only its Percentage Share of the prorata share of the cost of the item falling due within the Term (including any Renewal Term) based upon the amortization of the same over the useful life of such item, as reasonably determined by Landlord. (c) EXCLUSIONS FROM ADDITIONAL RENT. Notwithstanding anything to the contrary contained in Paragraph 4(b) above, the following items shall be specifically excluded from the definition of "Expenses": (1) Principal and interest payments and loan fees on mortgages or deeds of trust encumbering the Building, and all rental and other sums payable under any ground lease affecting the Building, unless such costs are attributable to the activities of Tenant or Tenant's Agents on the Project, or as a result of Tenant's breach or default under this Lease; (2) Salaries of executive officers of Landlord above the level of asset manager or its equivalent; (3) Reserves for Expenses payable or projected to be incurred by Landlord in future years, except as provided in Paragraph 4(b)(1) above with respect to Taxes and Assessments; 6 14 (4) Deductions for depreciation and other non-cash expenditures; (5) Leasing commissions and attorneys' fees in connection with the preparation and negotiation of letters of intent, leases, subleases and/or assignments with other tenants of the Building; (6) The cost (including permit, license and inspection costs) of performing tenant improvements and alterations for other tenants of the Building, and the cost of services that Landlord provides selectively to one or more tenants of the Building, the cost of which services is separately charged to and reimbursed by such tenant or tenants; (7) Excess costs, fines or penalties incurred because Landlord intentionally and willfully violated any governmental rule or authority; for purposes of this clause (7), "EXCESS COSTS" shall mean the excess costs resulting from such violation and shall exclude the ordinary costs which would have been incurred in complying with such governmental rule or authority absent such violation; (8) Excess costs, fines or penalties incurred because Landlord intentionally and willfully violated any terms or conditions of this Lease or any other lease relating to the Project; for purposes of this clause (8), "EXCESS COSTS" shall mean the excess costs resulting from such violation and shall exclude the ordinary costs which would have been incurred in complying with such terms and conditions absent such violation; and (9) the cost of repairing and maintaining the structural portions of the roof (specifically excluding the roof coverings), the foundation, the footings, the floor slab, and the load bearing walls and exterior walls of the Building (excluding any glass and any routine maintenance, including, without limitation, any painting, sealing, patching and waterproofing of such walls). Notwithstanding the specific itemization elsewhere in this Lease as to certain components of Expenses, Landlord shall not be entitled to recover from all tenants of the Project more than one hundred percent (100%) of Expenses. (d) PAYMENT OF ADDITIONAL RENT. (1) During the last month of the Base Year and each calendar year thereafter, or as soon thereafter as practicable, Landlord shall submit to Tenant an estimate of monthly Additional Rent for the following calendar year, and Tenant shall pay such estimated Additional Rent on a monthly basis, in advance, on the first day of each month. Tenant shall continue to make said monthly payments until notified by Landlord of a change therein. By April 1 of each calendar year, Landlord shall endeavor to provide to Tenant a statement ("EXPENSE STATEMENT") showing the actual Additional Rent due to Landlord for the prior calendar year. If the total of the monthly payments of Additional Rent that Tenant has made for the 7 15 prior calendar year is less than the actual Additional Rent chargeable to Tenant for such prior calendar year, then Tenant shall pay the difference in a lump sum within fifteen (15) days after receipt of such Expense Statement from Landlord. Any overpayment by Tenant of Additional Rent for the prior calendar year shall be credited towards the Additional Rent next due. (2) Landlord's then-current annual operating and capital budgets for the Building and the Project or the pertinent part thereof shall be used for purposes of calculating Tenant's monthly payment of estimated Additional Rent for the current year, subject to adjustment as provided above. Landlord shall make the final determination of Additional Rent for the portion of the year in which this Lease terminates as soon as possible after termination of such year. Even though the Term has expired and Tenant has vacated the Premises, Tenant shall remain liable for payment of any amount due to Landlord in excess of the estimated Additional Rent previously paid by Tenant, and, conversely, Landlord shall promptly return to Tenant any overpayment. Failure of Landlord to submit Expense Statements as called for herein shall not be deemed a waiver of Tenant's obligation to pay Additional Rent as herein provided. (3) With respect to Expenses which Landlord allocates to the Building, Tenant's "PROPORTIONATE Share" shall be the percentage set forth in the Basic Lease Information as Tenant's Proportionate Share of the Building, as adjusted by Landlord from time to time for a remeasurement of or changes in the physical size of the Premises or the Building, whether such changes in size are due to an addition to or a sale or conveyance of a portion of the Building or otherwise. With respect to Expenses which Landlord allocates to the Project as a whole or to only a portion of the Project, Tenant's "PROPORTIONATE SHARE" shall be, with respect to Expenses which Landlord allocates to the Project as a whole, the percentage set forth in the Basic Lease Information as Tenant's Proportionate Share of the Project and, with respect to Expenses which Landlord allocates to only a portion of the Project, a percentage calculated by Landlord from time to time in its sole discretion and furnished to Tenant in writing, in either case as adjusted by Landlord from time to time for a remeasurement of or changes in the physical size of the Premises or the Project, whether such changes in size are due to an addition to or a sale or conveyance of a portion of the Project or otherwise. Notwithstanding the foregoing, Landlord may equitably adjust Tenant's Proportionate Share(s) for all or part of any item of expense or cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only the Premises or only a portion of the Building and/or the Project or that varies with the occupancy of the Building and/or the Project. Without limiting the generality of the foregoing, Tenant understands and agrees that Landlord shall have the right to adjust Tenant's Proportionate Share(s) of any Utility Expenses based upon Tenant's use of the Utilities or similar services as reasonably estimated and determined by Landlord based upon factors such as size of the Premises and intensity of use of such Utilities by Tenant such that Tenant shall pay the portion of such charges reasonably consistent with Tenant's use of such Utilities and similar services. 8 16 (4) In the event the average occupancy level of the Building or the Project for the Base Year and/or any subsequent Comparison Year is not ninety percent (90%) or more of full occupancy, then the Expenses for such year shall be apportioned among the tenants by the Landlord to reflect those costs which would have occurred had the Building or the Project, as applicable, been ninety percent (90%) occupied during such year. (e) GENERAL PAYMENT TERMS. The Base Rent, Additional Rent and all other sums payable by Tenant to Landlord hereunder, including, without limitation, any late charges assessed pursuant to Paragraph 6 below and any interest assessed pursuant to Paragraph 45 below, are referred to as the "RENT". All Rent shall be paid without deduction, offset or abatement in lawful money of the United States of America. Checks are to be made payable to Harbor Investment Partners and shall be mailed to: Dept. No. 66218, El Monte, California 91735-6128, or to such other person or place as Landlord may, from time to time, designate to Tenant in writing. The Rent for any fractional part of a calendar month at the commencement or termination of the Lease term shall be a prorated amount of the Rent for a full calendar month based upon a thirty (30) day month. (f) AUDIT RIGHTS. Provided Tenant is not in Default under the terms of this Lease (nor is any event occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder), Tenant, at its sole expense subject to the last sentence of this Paragraph 4(f), shall have the right within ninety (90) days after the delivery of each Expense Statement to review and audit Landlord's books and records regarding such Expense Statement for the sole purpose of determining the accuracy of such Expense Statement. Such review or audit shall be performed by a nationally recognized accounting firm that calculates its fees with respect to hours actually worked and that does not discount its time or rate (as opposed to a calculation based upon percentage of recoveries or other incentive arrangement), shall take place during normal business hours in the office of Landlord or Landlord's property manager and shall be completed within three (3) business days after the commencement thereof. If Tenant does not so review or audit Landlord's books and records, Landlord's Expense Statement shall be final and binding upon Tenant. In the event that Tenant determines on the basis of its review of Landlord's books and records that the amount of Expenses paid by Tenant pursuant to this Paragraph 4 for the period covered by such Expense Statement is less than or greater than the actual amount properly payable by Tenant under the terms of this Lease, Tenant shall promptly pay any deficiency to Landlord or, if Landlord concurs with the results of such audit, Landlord shall promptly refund any excess payment to Tenant, as the case may be. 5. UTILITIES AND SERVICES (a) From 7:00 a.m. to 6:00 p.m. on weekdays ("NORMAL BUSINESS HOURS") (excluding legal holidays), Landlord shall furnish to the Premises electricity for lighting and operation of low-power usage office machines, water, heat and air conditioning, and elevator service. During all other hours, Landlord shall furnish such service except for heat and air 9 17 conditioning. Landlord shall provide janitorial services for the Premises on weekdays (excluding legal holidays) as determined necessary by Landlord. Landlord shall cause such janitorial services to generally be provided after Normal Business Hours. (b) If requested by Tenant, Landlord shall furnish heat and air conditioning at times other than Normal Business Hours and the cost of such services, based upon actual usage (as reflected on a meter installed in or around the Premises by Landord at the cost of Tenant) or Landlord's reasonable estimate of the actual cost thereof, shall be paid by Tenant as Additional Rent, payable concurrently with the next installment of Base Rent. (c) Tenant acknowledges that the Premises, the Building and/or the Project may become subject to the rationing of Utility services or restrictions on Utility use as required by a public utility company, governmental agency or other similar entity having jurisdiction thereof. Tenant acknowledges and agrees that its tenancy and occupancy hereunder shall be subject to such rationing or restrictions as may be imposed upon Landlord, Tenant, the Premises, the Building and/or the Project, and Tenant shall in no event be excused or relieved from any covenant or obligation to be kept or performed by Tenant by reason of any such rationing or restrictions. Tenant agrees to comply with energy conservation programs implemented by Landlord by reason of rationing, restrictions or Laws. (d) Landlord shall not be liable for any loss, injury or damage to property caused by or resulting from any variation, interruption, or failure of Utilities due to any cause whatsoever, or from failure to make any repairs or perform any maintenance. No temporary interruption or failure of such services incident to the making of repairs, alterations, improvements, or due to accident, strike, or conditions or other events shall be deemed an eviction of Tenant or relieve Tenant from any of its obligations hereunder. In no event shall Landlord be liable to Tenant for any damage to the Premises or for any loss, damage or injury to any property therein or thereon occasioned by bursting, rupture, leakage or overflow of any plumbing or other pipes (including, without limitation, water, steam, and/or refrigerant lines), sprinklers, tanks, drains, drinking fountains or washstands, or other similar cause in, above, upon or about the Premises, the Building, or the Project. 6. LATE CHARGE Notwithstanding any other provision of this Lease, Tenant hereby acknowledges that late payment to Landlord of Rent, or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. If any Rent or other sums due from Tenant are not received by Landlord or by Landlord's designated agent within five (5) days after their due date, then Tenant shall pay to Landlord a 10 18 late charge equal to ten percent (10%) of such overdue amount, plus any costs and attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. Landlord and Tenant hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of Tenant's late payment and shall not be construed as a penalty. Landlord's acceptance of such late charges shall not constitute a waiver of Tenant's default with respect to such overdue amount or estop Landlord from exercising any of the other rights and remedies granted under this Lease. Initials: Landlord _______ Tenant _______ 7. LETTER OF CREDIT (a) Upon execution of this Lease, Tenant shall deliver to Landlord, at Tenant's sole cost and expense, the Letter of Credit described below in the amount specified in the Basic Lease Information (the "LC FACE AMOUNT") as security for Tenant's performance of all of Tenant's covenants and obligations under this Lease; provided, however, that neither the Letter of Credit nor any Letter of Credit Proceeds (as defined below) shall be deemed an advance rent deposit or an advance payment of any other kind, or a measure of Landlord's damages upon Tenant's Default. The Letter of Credit shall be maintained in effect from the date hereof through the date that is sixty (60) days after the Expiration Date (the "LC TERMINATION DATE"). On the LC Termination Date, Landlord shall return to Tenant the Letter of Credit and any Letter of Credit Proceeds then held by Landlord (other than those Letter of Credit Proceeds Landlord is entitled to retain under the terms of this Paragraph 7(a)); provided, however, that in no event shall any such return be construed as an admission by Landlord that Tenant has performed all of its obligations hereunder. Landlord shall not be required to segregate the Letter of Credit Proceeds from its other funds and no interest shall accrue or be payable to Tenant with respect thereto. Landlord may (but shall not be required to) draw upon the Letter of Credit and use the proceeds therefrom (the "LETTER OF CREDIT PROCEEDS") or any portion thereof to (i) cure any Default under this Lease and to compensate Landlord for any loss or damage Landlord incurs as a result of such Default, (ii) repair damage to the Premises caused by Tenant, (iii) restore the Premises upon termination of this Lease to the condition required by Paragraph 11 below, and (iv) reimburse Landlord for the payment of any amount which Landlord may reasonably spend or be required to spend by reason of Tenant's Default, it being understood that any use of the Letter of Credit Proceeds shall not constitute a bar or defense to any of Landlord's remedies set forth in Paragraph 25 below. In such event and upon written notice from Landlord to Tenant specifying the amount of the Letter of Credit Proceeds so utilized by Landlord and the particular purpose for which such amount was applied, Tenant shall immediately deliver to Landlord an amendment to the Letter of Credit or a replacement Letter of Credit in an amount equal to the full LC Face Amount. Tenant's failure to deliver such replacement Letter of Credit to Landlord within ten (10) days of Landlord's notice shall constitute a Default hereunder. 11 19 (b) On or about the date that is six (6) months after the Commencement Date and every six (6) months thereafter, Landlord shall, at Tenant's written request, review Tenant's financial statements and other information requested by Landlord regarding the prospects for Tenant's continued business operations throughout the remainder of the Term (collectively, "TENANT'S FINANCIALS"). In the event Tenant's Financials are acceptable to Landlord in its sole and absolute discretion, then Landlord shall permit Tenant to reduce the LC Face Amount to an amount equal to four (4) months of Base Rent at the time of such reduction. (c) As used herein, Letter of Credit shall mean an unconditional, stand-by irrevocable letter of credit (herein referred to as the "LETTER OF CREDIT") issued by a Silicon Valley office of Silicon Valley Bank or the San Francisco office of a major national bank insured by the Federal Deposit Insurance Corporation and otherwise satisfactory to Landlord (the "BANK"), naming Landlord as beneficiary, in the amount of the LC Face Amount, and otherwise in form and substance satisfactory to Landlord. The Letter of Credit shall be for a one-year term and shall provide: (i) that Landlord may make partial and multiple draws thereunder, up to the face amount thereof, (ii) that Landlord may draw upon the Letter of Credit up to the full amount thereof and the Bank will pay to Landlord the amount of such draw upon receipt by the Bank of a sight draft signed by Landlord and accompanied by a written certification from Landlord to the Bank stating either that: (A) a Default has occurred and is continuing under this Lease and any applicable grace period has expired, or (B) Landlord has not received notice from the Bank at least thirty (30) days prior to the then current expiry date of the Letter of Credit that the Letter of Credit will be renewed by the Bank for at least one (1) year beyond the relevant annual expiration date or, in the case of the last year of the Term, sixty (60) days after the Expiration Date, together with a replacement Letter of Credit or a modification to the existing Letter of Credit effectuating such renewal, and Tenant has not otherwise furnished Landlord with a replacement Letter of Credit as hereinafter provided; and (iii) that, in the event of Landlord's assignment or other transfer of its interest in this Lease, the Letter of Credit shall be freely transferable by Landlord, without recourse and without the payment of any fee or consideration, to the assignee or transferee of such interest and the Bank shall confirm the same to Landlord and such assignee or transferee. In the event that the Bank shall fail to (y) notify Landlord that the Letter of Credit will be renewed for at least one (1) year beyond the then applicable expiration date, and (z) deliver to Landlord a replacement Letter of Credit or a modification to the existing Letter of Credit effectuating such renewal, and Tenant shall not have otherwise delivered to Landlord, at least thirty (30) days prior to the relevant annual expiration date, a replacement Letter of Credit in the amount required hereunder and otherwise meeting the requirements set forth above, then Landlord shall be entitled to draw on the Letter of Credit as provided above, and shall hold the proceeds of such draw as Letter of Credit Proceeds pursuant to Paragraph 7(a) above. 12 20 8. POSSESSION (a) TENANT'S RIGHT OF POSSESSION. Subject to Paragraph 8(b), Tenant shall be entitled to possession of the Premises upon commencement of the Term. (b) DELAY IN DELIVERING POSSESSION. If for any reason whatsoever, Landlord cannot deliver possession of the Premises to Tenant on or before the Estimated Commencement Date, this Lease shall not be void or voidable, nor shall Landlord, or Landlord's agents, advisors, employees, partners, shareholders, directors, invitees or independent contractors (collectively, "LANDLORD'S AGENTS"), be liable to Tenant for any loss or damage resulting therefrom. Tenant shall not be liable for Rent until Landlord delivers possession of the Premises to Tenant. The Expiration Date shall be extended by the same number of days that Tenant's possession of the Premises was delayed beyond the Estimated Commencement Date. (c) EARLY OCCUPANCY. Subject to the vacancy of the Premises by the prior tenant thereof, Tenant shall be permitted to move its furniture, trade fixtures, equipment, machinery, goods and supplies into the Premises from and after October 15, 1997 and prior to the Estimated Commencement Date specified in the Basic Lease Information. Such entry upon the Premises shall be subject to all of the provisions of this Lease, except that Tenant shall not be required to pay Base Rent or Additional Rent as long as Tenant is not operating its business in the Premises during such early possession period; provided, however, that Tenant shall have previously provided Landlord with proof of Tenant's insurance as set forth in Paragraph 15 of this Lease. All materials, work, installations, equipment and decorations of any nature brought upon or installed by Tenant in the Premises prior to the Commencement Date shall be at Tenant's sole risk. (d) RIGHT TO TERMINATE LEASE. Notwithstanding the terms of Paragraph 8(b) above, if possession of the Premises is not delivered to Tenant on or before December 31, 1997 ("TERMINATION OPTION DATE"), Tenant's sole remedy shall be the option to terminate this Lease by the delivery to Landlord of written notice within ten (10) days after the Termination Option Date. If Tenant fails to deliver such notice to Landlord in a timely manner as provided herein, Tenant's right to terminate this Lease shall be null and void and of no further force or effect. Tenant shall not be entitled to terminate or cancel this Lease for any delay in delivery of the Premises prior to the Termination Option Date. 9. USE OF PREMISES (a) PERMITTED USE. The use of the Premises by Tenant and Tenant's agents, advisors, employees, partners, shareholders, directors, invitees and independent contractors (collectively, "TENANT'S AGENTS") shall be solely for the Permitted Use specified in the Basic Lease Information and for no other use. Tenant shall not permit any objectionable or unpleasant odor, smoke, dust, gas, noise or vibration to emanate from or near the Premises. The Premises shall not be used to create any 13 21 nuisance or trespass, for any illegal purpose, for any purpose not permitted by Laws, for any purpose that would invalidate the insurance or increase the premiums for insurance on the Premises, the Building or the Project or for any purpose or in any manner that would interfere with other tenants' use or occupancy of the Project. If any of Tenant's office machines or equipment disturb any other tenant in the Building, then Tenant shall provide adequate insulation or take such other action as may be necessary to eliminate the noise or disturbance. Tenant agrees to pay to Landlord, as Additional Rent, any increases in premiums on policies resulting from Tenant's Permitted Use or any other use or action by Tenant or Tenant's Agents which increases Landlord's premiums or requires additional coverage by Landlord to insure the Premises. Tenant agrees not to overload the floor(s) of the Building. (b) COMPLIANCE WITH GOVERNMENTAL REGULATIONS AND PRIVATE RESTRICTIONS. Tenant and Tenant's Agents shall, at Tenant's expense, faithfully observe and comply with (1) all municipal, state and federal laws, statutes, codes, rules, regulations, ordinances, requirements, and orders (collectively, "LAWS"), now in force or which may hereafter be in force pertaining to the Premises or Tenant's use of the Premises, the Building or the Project; (2) all recorded covenants, conditions and restrictions affecting the Project ("PRIVATE RESTRICTIONS") now in force or which may hereafter be in force; and (3) any and all rules and regulations set forth in EXHIBIT C and any other rules and regulations now or hereafter promulgated by Landlord related to parking or the operation of the Premises, the Building and/or the Project (collectively, the "RULES AND REGULATIONS"). The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such Laws or Private Restrictions, shall be conclusive of that fact as between Landlord and Tenant. (c) COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT. Landlord and Tenant hereby agree and acknowledge that the Premises, the Building and/or the Project may be subject to, among other Laws, the requirements of the Americans with Disabilities Act, a federal law codified at 42 U.S.C. 12101 et seq., including, but not limited to Title III thereof, and all regulations and guidelines related thereto, together with any and all laws, rules, regulations, ordinances, codes and statutes now or hereafter enacted by local or state agencies having jurisdiction thereof, including all requirements of Title 24 of the State of California, as the same may be in effect on the date of this Lease and may be hereafter modified, amended or supplemented (collectively, the "ADA"). Any Tenant Improvements to be constructed hereunder shall be in compliance with the requirements of the ADA, and all costs incurred for purposes of compliance therewith shall be a part of and included in the costs of the Tenant Improvements. Tenant shall be solely responsible for conducting its own independent investigation of this matter and for ensuring that the design of all Tenant Improvements strictly complies with all requirements of the ADA. Subject to reimbursement pursuant to Paragraph 4 above, if any barrier removal work or other work is required to the Building, the 14 22 Common Areas or the Project under the ADA, then such work shall be the responsibility of Landlord; provided, if such work is required under the ADA as a result of Tenant's use of the Premises or any work or Alteration (as hereinafter defined) made to the Premises by or on behalf of Tenant, then such work shall be performed by Landlord at the sole cost and expense of Tenant. Except as otherwise expressly provided in this provision, Tenant shall be responsible at its sole cost and expense for fully and faithfully complying with all applicable requirements of the ADA relating to Tenant's use and occupancy of the Premises and the operation of its business therein, including without limitation, not discriminating against any disabled persons in the operation of Tenant's business in or about the Premises, and offering or otherwise providing auxiliary aids and services as, and when, required by the ADA. Within ten (10) days after receipt, Tenant shall advise Landlord in writing, and provide Landlord with copies of (as applicable), any notices alleging violation of the ADA relating to any portion of the Premises, the Building or the Project; any claims made or threatened orally or in writing regarding noncompliance with the ADA and relating to any portion of the Premises, the Building, or the Project; or any governmental or regulatory actions or investigations instituted or threatened regarding noncompliance with the ADA and relating to any portion of the Premises, the Building or the Project. Tenant shall and hereby agrees to protect, defend (with counsel acceptable to Landlord) and hold Landlord and Landlord's Agents harmless and indemnify Landlord and Landlord's Agents from and against all liabilities, damages, claims, losses, penalties, judgments, charges and expenses (including attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation including the enforcement of this provision) arising from or in any way related to, directly or indirectly, Tenant's or Tenant's Agents' violation or alleged violation of the ADA. Tenant agrees that the obligations of Tenant herein shall survive the expiration or earlier termination of this Lease 10. ACCEPTANCE OF PREMISES (a) By entry hereunder, Tenant accepts the Premises as suitable for Tenant's intended use and as being in good and sanitary operating order, condition and repair, AS IS, and without representation or warranty by Landlord as to the condition, use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. (b) Notwithstanding the terms of Paragraph 10(a) above, Landlord shall cause the HVAC, electrical and plumbing systems serving the Premises to be in good working order and the roof on the Building to be in good condition on the Possession Date. Any claims by Tenant under the preceding sentence shall be made in writing not later than the fifteenth (15th) day after the Commencement Date. In the event Tenant fails to deliver a written claim to Landlord on or before such fifteenth (15th) day, then Landlord shall be conclusively deemed to have satisfied its obligations under this Paragraph 10. 15 23 (c) Prior to the Commencement Date, Landlord shall clean the carpet, touch up the paint where required, replace all stained and/or damaged ceiling tiles and replace any burned-out light bulbs in the Premises. Except for the foregoing, Landlord shall have no obligation to remodel, improve or otherwise alter the Premises prior to or after the Commencement Date. 11. SURRENDER Tenant agrees that on the last day of the Term, or on the sooner termination of this Lease, Tenant shall surrender the Premises to Landlord (a) in good condition and repair (damage by acts of God, fire, and normal wear and tear excepted), but with all interior walls painted or cleaned so they appear painted, any carpets cleaned, all floors cleaned and waxed and all non-working light bulbs and ballasts replaced, and (b) otherwise in accordance with Paragraph 32(h). Normal wear and tear shall not include any damage or deterioration to the floors of the Premises arising from the use of forklifts in, on or about the Premises (including, without limitation, any marks or stains on any portion of the floors) any damage or deterioration that would have been prevented by proper maintenance by Tenant, or Tenant otherwise performing all of its obligations under this Lease. On or before the expiration or sooner termination of this Lease, (i) Tenant shall remove all of Tenant's Property (as hereinafter defined) and Tenant's signage from the Premises, the Building and the Project and repair any damage caused by such removal, and (ii) Landlord may, by notice to Tenant given not later than ninety (90) days prior to the Expiration Date (except in the event of a termination of this Lease prior to the scheduled Expiration Date, in which event no advance notice shall be required), require Tenant at Tenant's expense to remove any or all Alterations and to repair any damage caused by such removal. Any of Tenant's Property not so removed by Tenant as required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord's retention and disposition of such property; provided, however, that Tenant shall remain liable to Landlord for all costs incurred in storing and disposing of such abandoned property of Tenant. All Tenant Improvements and Alterations except those which Landlord requires Tenant to remove shall remain in the Premises as the property of Landlord. If the Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in accordance with the provisions of this Paragraph 11 and Paragraph 32(h) below, Tenant shall continue to be responsible for the payment of Rent (as the same may be increased pursuant to Paragraph 35 below) until the Premises are so surrendered in accordance with said Paragraphs, and Tenant shall indemnify, defend and hold Landlord harmless from and against any and all loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant or prospective tenant founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of 16 24 the Premises to any such succeeding tenant or prospective tenant, together with, in each case, actual attorneys' fees and costs. 12. ALTERATIONS AND ADDITIONS (a) Tenant shall not make, or permit to be made, any alteration, addition or improvement (hereinafter referred to individually as an "ALTERATION" and collectively as the "ALTERATIONS") to the Premises or any part thereof without the prior written consent of Landlord, which consent shall not be unreasonably withheld; provided, however, that Landlord shall have the right in its sole and absolute discretion to consent or to withhold its consent to any Alteration which affects the interior or exterior walls of the Premises, the roof system, the structural portions of the Premises, the Building or the Project or the Systems serving the Premises, the Building and/or the Project or any portion thereof. Landlord shall use commercially reasonable efforts to approve or deny Tenant's request to proceed with the installation of Alterations within thirty (30) days after Landlord's receipt of such request in writing, together with plans and specifications for such Alterations and such other documentation as Landlord may require in connection therewith. Notwithstanding the foregoing, Tenant shall have the right without the consent of Landlord, but subject to full compliance with the other terms of this Paragraph 12, to make nonstructural and nonmechanical Alterations not exceeding Two Thousand Five Hundred Dollars ($2,500) in cost on an individual basis or Ten Thousand Dollars ($10,000) in the aggregate over the Term (collectively, "PERMITTED ALTERATIONS"), provided that (A) Tenant shall not move or alter any walls in the Premises in connection with the making of such Permitted Alterations, (B) such Permitted Alterations shall not affect the HVAC, plumbing, electrical, fire protection, life safety, security and other mechanical, electrical and communications systems of the Building, and (C) such Permitted Alterations shall not be visible from the exterior of the Premises. (b) Any Alteration to the Premises shall be at Tenant's sole cost and expense, in compliance with all applicable Laws and all requirements requested by Landlord, including, without limitation, the requirements of any insurer providing coverage for the Premises or the Project or any part thereof, and in accordance with plans and specifications approved in writing by Landlord, and shall be constructed and installed by a contractor approved in writing by Landlord. As a further condition to giving consent, Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, a payment and performance bond in form acceptable to Landlord, in a principal amount not less than one and one-half times the estimated costs of such Alterations, to ensure Landlord against any liability for mechanic's and materialmen's liens and to ensure completion of work. Before Alterations may begin, valid building permits or other permits or licenses required must be furnished to Landlord, and, once the Alterations begin, Tenant will diligently and continuously pursue their completion. Landlord may monitor construction of the Alterations and Tenant shall reimburse Landlord for its costs (including, without limitation, the costs of any construction manager retained by 17 25 Landlord) in reviewing plans and documents and in monitoring construction. Tenant shall maintain during the course of construction, at its sole cost and expense, builders' risk insurance for the amount of the completed value of the Alterations on an all-risk non-reporting form covering all improvements under construction, including building materials, and other insurance in amounts and against such risks as Landlord shall reasonably require in connection with the Alterations. In addition to and without limitation on the generality of the foregoing, Tenant shall ensure that its contractor(s) procure and maintain in full force and effect during the course of construction a "broad form" commercial general liability and property damage policy of insurance naming Landlord, Tenant and Landlord's lenders as additional insureds. The minimum limit of coverage of the aforesaid policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one accident or occurrence, and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least One Million Dollars ($1,000,000.00). (c) All Alterations, including, but not limited to, heating, lighting, electrical, air conditioning, fixed partitioning, drapery, wall covering and paneling, built-in cabinet work and carpeting installations made by Tenant, together with all property that has become an integral part of the Premises or the Building (but not including any temporary cubicles or similar temporary partitions), shall at once be and become the property of Landlord, and shall not be deemed trade fixtures or Tenant's Property. If requested by Landlord, Tenant will pay, prior to the commencement of construction, an amount determined by Landlord necessary to cover the costs of demolishing such Alterations and/or the cost of returning the Premises and the Building to its condition prior to such Alterations. (d) No private telephone systems and/or other related computer or telecommunications equipment or lines may be installed without Landlord's prior written consent, which consent may be given or withheld by Landlord in accordance with the standards for consent set forth in Paragraph 12(a) above. If Landlord gives such consent, all equipment must be installed within the Premises and, at the request of Landlord made at any time prior to the expiration of the Term, removed upon the expiration or sooner termination of this Lease and the Premises restored to the same condition as before such installation. (e) Notwithstanding anything herein to the contrary, before installing any equipment or lights which generate an undue amount of heat in the Premises, or if Tenant plans to use any high-power usage equipment in the Premises, Tenant shall obtain the written permission of Landlord. Landlord may refuse to grant such permission unless Tenant agrees to pay the costs to Landlord for installation of supplementary air conditioning capacity or electrical systems necessitated by such equipment. 18 26 (f) Tenant agrees not to proceed to make any Alterations, notwithstanding consent from Landlord to do so, until Tenant notifies Landlord in writing of the date Tenant desires to commence construction or installation of such Alterations and Landlord has approved such date in writing, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. 13. MAINTENANCE AND REPAIRS OF PREMISES (a) MAINTENANCE BY TENANT. Throughout the Term, Tenant shall, at its sole expense, subject to Paragraphs 5(a) and 13(b) hereof, (1) keep and maintain in good order and condition the Premises and Tenant's Property, and (2) keep and maintain in good order and condition, repair and replace all of Tenant's security systems in or about or serving the Premises. Tenant shall not do nor shall Tenant allow Tenant's Agents to do anything to cause any damage, deterioration or unsightliness to the Premises, the Building or the Project. (b) MAINTENANCE BY LANDLORD. Subject to the provisions of Paragraphs 12(a), 21 and 22, and further subject to Tenant's obligation under Paragraph 4 to reimburse Landlord, in the form of Additional Rent, for Tenant's Proportionate Share(s) of the cost and expense of the following items, Landlord agrees to repair and maintain the following items: the roof coverings (provided that Tenant installs no additional air conditioning or other equipment on the roof that damages the roof coverings, in which event Tenant shall pay all costs resulting from the presence of such additional equipment); the Systems serving the Premises and the Building; and the Parking Areas, pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs, and lighting systems in the Common Areas. Subject to the provisions of Paragraphs 13(a), 21 and 22, Landlord, at its own cost and expense, agrees to repair and maintain the following items: the structural portions of the roof (specifically excluding the roof coverings), the foundation, the footings, the floor slab, and the load bearing walls and exterior walls of the Building (excluding any glass and any routine maintenance, including, without limitation, any painting, sealing, patching and waterproofing of such walls). Notwithstanding anything in this Paragraph 13 to the contrary, Landlord shall have the right to either repair or to require Tenant to repair any damage to any portion of the Premises, the Building and/or the Project caused by or created due to any act, omission, negligence or willful misconduct of Tenant or Tenant's Agents and to restore the Premises, the Building and/or the Project, as applicable, to the condition existing prior to the occurrence of such damage; provided, however, that in the event Landlord elects to perform such repair and restoration work, Tenant shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in connection therewith; provided, further that if any of said costs are covered by any policy of insurance maintained by Landlord pursuant to Paragraph 14 below, then Landlord shall submit a claim under the applicable policy and shall, solely to the extent of proceeds actually received by Landlord under such policy, reimburse Tenant for the 19 27 actual costs so paid by Tenant to Landlord. Landlord's obligation hereunder to repair and maintain is subject to the condition precedent that Landlord shall have received written notice of the need for such repairs and maintenance and a reasonable time to perform such repair and maintenance. Tenant shall promptly report in writing to Landlord any defect or other condition which Landlord is required to repair, and failure to so report such defects shall make Tenant responsible to Landlord for the costs and expenses of repairing any additional damage or deterioration occurring after the date Tenant obtains knowledge of such defective condition and any liability incurred by Landlord by reason of Tenant's failure to notify Landlord of such defective condition in a timely manner as provided herein. (c) TENANT'S WAIVER OF RIGHTS. Tenant hereby expressly waives all rights to make repairs at the expense of Landlord or to terminate this Lease, as provided for in California Civil Code Sections 1941 and 1942, and 1932(1), respectively, and any similar or successor statute or law in effect or any amendment thereof during the Term. 14. LANDLORD'S INSURANCE Landlord shall purchase and keep in force fire, extended coverage and "all risk" insurance covering the Building and the Project and commercial general liability insurance covering the Project, insuring Landlord against any liability arising out of the ownership, use, occupancy or maintenance of the Common Areas ("LANDLORD'S LIABILITY POLICY"). Tenant shall, at its sole cost and expense, comply with any and all reasonable requirements pertaining to the Premises, the Building and the Project of any insurer necessary for the maintenance of reasonable fire and commercial general liability insurance, covering the Building and the Project. Landlord, at Tenant's cost, may maintain "Loss of Rents" insurance, insuring that the Rent will be paid in a timely manner to Landlord for a period of at least twelve (12) months if the Premises, the Building or the Project or any portion thereof are destroyed or rendered unusable or inaccessible by any cause insured against under this Lease. 15. TENANT'S INSURANCE (a) COMMERCIAL GENERAL LIABILITY INSURANCE. Tenant shall, at Tenant's expense, secure and keep in force a commercial general liability insurance, umbrella liability policy and property damage policy covering the Premises, insuring Tenant, and naming Landlord and its lenders as additional insureds, against any liability arising out of the ownership, use, occupancy or maintenance of the Premises. The minimum limit of coverage of such policy shall be in the amount of not less than Two Million Dollars ($2,000,000.00) for injury or death of one person in any one accident or occurrence and in the amount of not less than Two Million Dollars ($2,000,000.00) for injury or death of more than one person in any one accident or occurrence, shall include an extended liability endorsement 20 28 providing contractual liability coverage (which shall include coverage for Tenant's indemnification obligations in this Lease), and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least Two Million Dollars ($2,000,000.00). Landlord may from time to time require commercially reasonable increases in any such limits if Landlord believes that additional coverage is necessary or desirable. The limit of any insurance shall not limit the liability of Tenant hereunder. No policy maintained by Tenant under this Paragraph 15(a) shall contain a deductible greater than ten thousand dollars ($10,000.00). No policy shall be cancelable or subject to reduction of coverage without thirty (30) days prior written notice to Landlord, and loss payable clauses shall be subject to Landlord's approval, provided that Tenant may add additional loss payees without Landlord's prior consent. Such policies of insurance shall be issued as primary policies and not contributing with or in excess of coverage that Landlord may carry (except that Landlord's Liability Policy shall be primary with respect to losses occurring in the Common Areas, other than losses resulting from the acts, negligence or willful misconduct of Tenant or Tenant's Agents), by an insurance company authorized to do business in the State of California for the issuance of such type of insurance coverage and rated A-:VIII or better in Best's Key Rating Guide. (b) PERSONAL PROPERTY INSURANCE. Tenant shall maintain in full force and effect on all of its personal property, furniture, furnishings, trade or business fixtures and equipment (collectively, "TENANT'S PROPERTY") on the Premises, a policy or policies of fire and extended coverage insurance with standard coverage endorsement to the extent of the full replacement cost thereof. No such policy shall contain a deductible greater than two thousand five hundred dollars ($2,500.00). During the term of this Lease the proceeds from any such policy or policies of insurance shall be used for the repair or replacement of the fixtures and equipment so insured to the extent necessary for the ordinary conduct of Tenant's business. Landlord shall have no interest in Tenant's Property or in the insurance upon Tenant's Property and will sign all documents reasonably necessary in connection with the settlement of any claim or loss by Tenant. Landlord will not carry insurance on Tenant's possessions. (c) WORKER'S COMPENSATION INSURANCE; EMPLOYER'S LIABILITY INSURANCE. Tenant shall, at Tenant's expense, maintain in full force and effect worker's compensation insurance with not less than the minimum limits required by law, and employer's liability insurance with a minimum limit of coverage of One Million Dollars ($1,000,000). (d) EVIDENCE OF COVERAGE. Tenant shall deliver to Landlord certificates of insurance and true and complete copies of any and all endorsements required herein for all insurance required to be maintained by Tenant hereunder at the time of execution of this Lease by Tenant. Tenant shall, at least thirty (30) days prior to expiration of each policy, furnish Landlord with certificates of renewal or 21 29 "binders" thereof. Each certificate shall expressly provide that such policies shall not be cancellable or otherwise subject to material modification except after thirty (30) days prior written notice to Landlord and the other parties named as additional insureds as required in this Lease (except for cancellation for nonpayment of premium, in which event cancellation shall not take effect until at least ten (10) days notice has been given to Landlord). 16. INDEMNIFICATION (a) OF LANDLORD. Except to the extent of damage caused by the gross negligence or willful misconduct of Landlord or Landlord's Agents, Tenant shall indemnify and hold harmless Landlord and Landlord's Agents against and from any and all claims, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorneys' fees) to the extent arising from (1) the use of the Premises, the Building or the Project by Tenant or Tenant's Agents, or from any activity done, permitted or suffered by Tenant or Tenant's Agents in or about the Premises, the Building or the Project, and (2) any act, neglect, fault, willful misconduct or omission of Tenant or Tenant's Agents, or from any breach or default in the terms of this Lease by Tenant or Tenant's Agents, and (3) any action or proceeding brought on account of any matter in items (1) or (2). If any action or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord, Tenant shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. As a material part of the consideration to Landlord, Tenant hereby releases Landlord and Landlord's Agents from responsibility for, waives its entire claim of recovery for and assumes all risk of (i) damage to property or injury to persons in or about the Premises, the Building or the Project from any cause whatsoever (except to the extent caused by the sole active gross negligence or willful misconduct of Landlord or Landlord's Agents or by the failure of Landlord to observe any of the terms and conditions of this Lease, if such failure has persisted for an unreasonable period of time after written notice of such failure), or (ii) loss resulting from business interruption or loss of income at the Premises. The obligations of Tenant under this Paragraph 16 shall survive any termination of this Lease. (b) OF TENANT. Landlord shall indemnify and hold harmless Tenant and its Agents against and from any and all claims, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorneys' fees) arising from the gross negligence or willful misconduct of Landlord. If any action or proceeding is brought against Tenant by reason of any such claim, upon notice from Tenant, Landlord shall defend the same at Landlord's expense by counsel reasonably satisfactory to Tenant. The obligations of Landlord under this Paragraph 16(b) shall survive any termination of this Lease. (c) NO IMPAIRMENT OF INSURANCE. The foregoing indemnity shall not relieve any insurance carrier of its obligations under any policies required to be carried by 22 30 either party pursuant to this Lease, to the extent that such policies cover the peril or occurrence that results in the claim that is subject to the foregoing indemnity. 17. SUBROGATION Landlord and Tenant hereby mutually waive any claim against the other and its Agents for any loss or damage to any of their property located on or about the Premises, the Building or the Project that is caused by or results from perils covered by property insurance carried by the respective parties, to the extent of the proceeds of such insurance actually received with respect to such loss or damage, whether or not due to the negligence of the other party or its Agents. Because the foregoing waivers will preclude the assignment of any claim by way of subrogation to an insurance company or any other person, each party now agrees to immediately give to its insurer written notice of the terms of these mutual waivers and shall have their insurance policies endorsed to prevent the invalidation of the insurance coverage because of these waivers. Nothing in this Paragraph 17 shall relieve a party of liability to the other for failure to carry insurance required by this Lease. 18. SIGNS Tenant shall not place or permit to be placed in, upon, or about the Premises, the Building or the Project any exterior lights, decorations, balloons, flags, pennants, banners, advertisements or notices, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior the Premises without obtaining Landlord's prior written consent (which shall not be unreasonably withheld or delayed beyond thirty (30) days following Tenant's written request therefor and Tenant's delivery to Landlord of drawings and specifications and other information requested by Landlord) or without complying with Landlord's signage criteria, as the same may be modified by Landlord from time to time, and with all applicable Laws, and will not conduct, or permit to be conducted, any sale by auction on the Premises or otherwise on the Project. Tenant shall remove any sign, advertisement or notice placed on the Premises, the Building or the Project by Tenant upon the expiration of the Term or sooner termination of this Lease, and Tenant shall repair any damage or injury to the Premises, the Building or the Project caused thereby, all at Tenant's expense. If any signs are not removed, or necessary repairs not made, Landlord shall have the right to remove the signs and repair any damage or injury to the Premises, the Building or the Project at Tenant's sole cost and expense. 19. FREE FROM LIENS Tenant shall keep the Premises, the Building and the Project free from any liens arising out of any work performed, material furnished or obligations incurred by or for Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of any such lien, cause the lien to be released of record by payment 23 31 or posting of a proper bond, Landlord shall have in addition to all other remedies provided herein and by law the right but not the obligation to cause same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith (including, without limitation, attorneys' fees) shall be payable to Landlord by Tenant upon demand. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law or that Landlord shall deem proper for the protection of Landlord, the Premises, the Building and the Project, from mechanics' and materialmen's liens. Tenant shall give to Landlord at least five (5) business days' prior written notice of commencement of any repair or construction on the Premises. 20. ENTRY BY LANDLORD Tenant shall permit Landlord and Landlord's Agents to enter into and upon the Premises at all reasonable times, upon reasonable notice (except in the case of an emergency, for which no notice shall be required), and subject to Tenant's reasonable security arrangements, for the purpose of inspecting the same or showing the Premises to prospective purchasers, lenders or, during the last twelve (12) months of the Term, tenants, or to alter, improve, maintain and repair the Premises or the Building as required or permitted of Landlord under the terms hereof, or for any other business purpose, without any rebate of Rent and without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned (except for actual damages resulting from the sole active gross negligence or willful misconduct of Landlord); and Tenant shall permit Landlord to post notices of non-responsibility and ordinary "for sale" or, during the last twelve (12) months of the Term, "for lease," signs. No such entry shall be construed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises. Landlord may temporarily close entrances, doors, corridors, elevators or other facilities without liability to Tenant by reason of such closure in the case of an emergency and when Landlord otherwise deems such closure necessary. 21. DESTRUCTION AND DAMAGE (a) If the Premises are damaged by fire or other perils covered by extended coverage insurance, Landlord shall, at Landlord's option: (1) In the event of total destruction (which shall mean destruction or damage in excess of twenty-five percent (25%) of the full insurable value thereof) of the Premises, elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the date (the "CASUALTY DISCOVERY DATE") Landlord obtains actual knowledge of such destruction. If Landlord elects not to 24 32 restore the Premises, this Lease shall be deemed to have terminated as of the date of such total destruction. (2) In the event of a partial destruction (which shall mean destruction or damage to an extent not exceeding twenty-five percent (25%) of the full insurable value thereof) of the Premises for which Landlord will receive insurance proceeds sufficient to cover the cost to repair and restore such partial destruction and, if the damage thereto is such that the Premises may be substantially repaired or restored to its condition existing immediately prior to such damage or destruction within one hundred eighty (180) days from the Casualty Discovery Date, Landlord shall commence and proceed diligently with the work of repair and restoration, in which event the Lease shall continue in full force and effect. If such repair and restoration requires longer than one hundred eighty (180) days or if the insurance proceeds therefor (plus any amounts Tenant may elect or is obligated to contribute) are not sufficient to cover the cost of such repair and restoration, Landlord may elect either to so repair and restore, in which event the Lease shall continue in full force and effect, or not to repair or restore, in which event the Lease shall terminate. In either case, Landlord shall give written notice to Tenant of its intention within sixty (60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such partial destruction. (3) Notwithstanding anything to the contrary contained in this Paragraph, in the event of damage to the Premises occurring during the last twelve (12) months of the Term, Landlord and Tenant may each elect to terminate this Lease by written notice of such election given to the other within thirty (30) days after the Casualty Discovery Date; provided, however, that Tenant shall have the right to terminate this Lease under this Paragraph 21(a)(3) only if its use of the Premises is materially disrupted as a result of such damage. (b) If the Premises are damaged by any peril not covered by extended coverage insurance, and the cost to repair such damage exceeds any amount Tenant may agree to contribute, Landlord may elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date on which Tenant surrenders possession of the Premises to Landlord, except that if the damage to the Premises materially impairs Tenant's ability to continue its business operations in the Premises, then this Lease shall be deemed to have terminated as of the date such damage occurred. (c) Notwithstanding anything to the contrary in this Paragraph 21, Landlord shall have the option to terminate this Lease, exercisable by notice to Tenant within 25 33 sixty (60) days after the Casualty Discovery Date, in each of the following instances: (1) If more than twenty-five percent (25%) of the full insurable value of the Building or the Project is damaged or destroyed, regardless of whether or not the Premises are destroyed. (2) If the Building or the Project or any portion thereof is damaged or destroyed and the repair and restoration of such damage requires longer than one hundred eighty (180) days from the Casualty Discovery Date. (3) If the Building or the Project or any portion thereof is damaged or destroyed and the insurance proceeds therefor are not sufficient to cover the costs of repair and restoration. (4) If the Building or the Project or any portion thereof is damaged or destroyed during the last twelve (12) months of the Term. (d) If the Premises is damaged or destroyed to the extent that the Premises cannot be fully repaired or restored by Landlord within two hundred seventy (270) days after the Casualty Discovery Date, Tenant may terminate this Lease immediately upon notice thereof to Landlord, which notice shall be given, if at all, not later than ten (10) days after Landlord notifies Tenant of Landlord's estimate of the period of time required to repair such damage or destruction. (e) In the event of repair and restoration as herein provided, the monthly installments of Base Rent shall be abated proportionately in the ratio which Tenant's use of the Premises is impaired during the period of such repair or restoration, but only to the extent of rental abatement insurance proceeds received by Landlord; provided, however, that Tenant shall not be entitled to such abatement to the extent that such damage or destruction resulted from the acts or inaction of Tenant or Tenant's Agents. Except as expressly provided in the immediately preceding sentence with respect to abatement of Base Rent, Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlord's Agents from responsibility for and waives its entire claim of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any damage to or destruction of the Premises, the Building or the Project or the repair or restoration thereof, including, without limitation, any cost, loss or expense resulting from any loss of use of the whole or any part of the Premises, the Building or the Project and/or any inconvenience or annoyance occasioned by such damage, repair or restoration. (f) If Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall repair or restore only the initial tenant improvements, if any, constructed by Landlord in the Premises pursuant to the terms of this Lease, substantially to their condition existing immediately prior to the occurrence of the damage or destruction; and Tenant shall promptly repair and restore, at Tenant's 26 34 expense, Tenant's Alterations (to the extent required for the ordinary course of Tenant's business) which were not constructed by Landlord. (g) Tenant hereby waives the provisions of California Civil Code Section 1932(2) and Section 1933(4) which permit termination of a lease upon destruction of the leased premises, and the provisions of any similar law now or hereinafter in effect, and the provisions of this Paragraph 21 shall govern exclusively in case of such destruction. 22. CONDEMNATION (a) If twenty-five percent (25%) or more of either the Premises, the Building or the Project or the parking areas for the Building or the Project is taken for any public or quasi-public purpose by any lawful governmental power or authority, by exercise of the right of appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such taking (each such event being referred to as a "CONDEMNATION"), Landlord may, at its option, terminate this Lease as of the date title vests in the condemning party. If twenty-five percent (25%) or more of the Premises are taken and if the Premises remaining after such Condemnation and any repairs by Landlord would be untenantable for the conduct of Tenant's business operations, Tenant shall have the right to terminate this Lease as of the date title vests in the condemning party. In addition to the foregoing, if a sufficient number of parking spaces in the Parking Areas are taken by Condemnation such that Landlord is compelled to reduce Tenant's allocation of parking spaces under Paragraph 2 above to fewer than fourteen (14) spaces (the "MINIMUM PARKING ALLOCATION"), and if as a result of such reduction it would no longer be practical for Tenant to conduct its business operations in the Premises, then Tenant shall have the right to terminate this Lease by written notice to Landlord given not later than thirty (30) days after Landlord notifies Tenant of such reduction in parking spaces; provided, however, that Tenant shall have no right to terminate this Lease under the aforesaid clause if Landlord is able to provide Tenant with a sufficient number of parking spaces in a location reasonably proximate to the Project (the "ALTERNATE PARKING SPACES") such that the sum of the parking spaces allocated to Tenant in the Project's Parking Areas and the Alternate Parking Spaces equal or exceed the Minimum Parking Allocation. Except as provided in the immediately preceding sentence, if either party elects to terminate this Lease as provided herein, such election shall be made by written notice to the other party given within thirty (30) days after the nature and extent of such Condemnation have been finally determined. If neither Landlord nor Tenant elects to terminate this Lease to the extent permitted above, Landlord shall promptly proceed to restore the Premises, to the extent of any Condemnation award received by Landlord, to substantially the same condition as existed prior to such Condemnation, allowing for the reasonable effects of such Condemnation, and a proportionate abatement shall be made to the Base Rent corresponding to the time during which, and to the portion of the floor area of the Premises (adjusted for any increase thereto resulting from any reconstruction) of which, Tenant is deprived on 27 35 account of such Condemnation and restoration, as reasonably determined by Landlord. Except as expressly provided in the immediately preceding sentence with respect to abatement of Base Rent, Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlord's Agents from responsibility for and waives its entire claim of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any Condemnation or the repair or restoration of the Premises, the Building or the Project or the parking areas for the Building or the Project following such Condemnation, including, without limitation, any cost, loss or expense resulting from any loss of use of the whole or any part of the Premises, the Building, the Project or the parking areas and/or any inconvenience or annoyance occasioned by such Condemnation, repair or restoration. The provisions of California Code of Civil Procedure Section 1265.130, which allows either party to petition the Superior Court to terminate the Lease in the event of a partial taking of the Premises, the Building or the Project or the parking areas for the Building or the Project, and any other applicable law now or hereafter enacted, are hereby waived by Tenant. (b) Landlord shall be entitled to any and all compensation, damages, income, rent, awards, or any interest therein whatsoever which may be paid or made in connection with any Condemnation, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease or otherwise; provided, however, that Tenant shall be entitled to receive any award separately allocated by the condemning authority to Tenant for Tenant's relocation expenses or the value of Tenant's Property (specifically excluding fixtures, Alterations and other components of the Premises which under this Lease or by law are or at the expiration of the Term will become the property of Landlord), provided that such award does not reduce any award otherwise allocable or payable to Landlord. 23. ASSIGNMENT AND SUBLETTING (a) Tenant shall not voluntarily or by operation of law, (1) mortgage, pledge, hypothecate or encumber this Lease or any interest herein, (2) assign or transfer this Lease or any interest herein, sublease the Premises or any part thereof, or any right or privilege appurtenant thereto, or allow any other person (the employees and invitees of Tenant excepted) to occupy or use the Premises, or any portion thereof, without first obtaining the written consent of Landlord, which consent shall not be withheld unreasonably provided that (i) Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder, and (ii) Tenant has not previously assigned or transferred this Lease or any interest herein or subleased the Premises or any part thereof. When Tenant desires Landlord's consent to such assignment or subletting, it shall notify Landlord of such request in writing (a "REQUEST NOTICE") and shall provide to Landlord in the Request Notice the name and address of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant and shall provide current and prior financial statements for the proposed assignee or subtenant prepared in accordance 28 36 with generally accepted accounting principles. Tenant shall also provide Landlord with a copy of the proposed sublease or assignment agreement, including all material terms and conditions thereof. Landlord shall have the option, to be exercised within thirty (30) days of receipt of the foregoing, to (1) terminate this Lease as of the commencement date stated in the proposed sublease or assignment, (2) sublease or take an assignment, as the case may be, from Tenant of the interest, or any portion thereof, in this Lease and/or the Premises that Tenant proposes to assign or sublease, on the same terms and conditions as stated in the proposed sublet or assignment agreement, (3) consent to the proposed assignment or sublease, or (4) refuse its consent to the proposed assignment or sublease, providing that such consent shall not be unreasonably withheld so long as Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder. Notwithstanding the foregoing, in the event Landlord elects to terminate this Lease or enter into a sublease or assignment with Tenant as provided in the foregoing clauses (1) and (2), respectively, then Tenant shall have ten (10) days to rescind its Request Notice by delivery to Landlord of a notice of rescission (a "RESCISSION NOTICE"). If Tenant fails to deliver a Rescission Notice to Landlord in a timely manner as provided herein, then in addition to terminating this Lease or entering into a sublease or assignment with Tenant, as the case may be, Landlord shall have the additional right to negotiate directly with Tenant's proposed assignee or subtenant and to enter into a direct lease or occupancy agreement with such party on such terms as shall be acceptable to Landlord in its sole and absolute discretion, and Tenant hereby waives any claims against Landlord related thereto, including, without limitation, any claims for any compensation or profit related to such lease or occupancy agreement. (b) Without otherwise limiting the criteria upon which Landlord may withhold its consent, Landlord shall be entitled to consider all reasonable criteria including, but not limited to, the following: (1) whether or not the proposed subtenant or assignee is engaged in a business which, and the use of the Premises will be in an manner which, is in keeping with the then character and nature of all other tenancies in the Project, (2) whether the use to be made of the Premises by the proposed subtenant or assignee will conflict with any so-called "exclusive" use then in favor of any other tenant of the Building or the Project, and whether such use would be prohibited by any other portion of this Lease, including, but not limited to, any rules and regulations then in effect, or under applicable Laws, and whether such use imposes a greater load upon the Premises and the Building and Project services then imposed by Tenant, (3) the business reputation of the proposed individuals who will be managing and operating the business operations of the assignee or subtenant, and the long-term financial and competitive business prospects of the proposed assignee or subtenant, and (4) the creditworthiness and financial stability of the proposed assignee or subtenant in light of the responsibilities involved. In any event, Landlord may withhold its consent to any assignment or sublease, if (i) the actual use proposed to be conducted in the Premises or portion thereof conflicts with the provisions of Paragraph 9(a) or (b) 29 37 above or with any other lease which restricts the use to which any space in the Building or the Project may be put, or (ii) the proposed assignment or sublease requires alterations, improvements or additions to the Premises or portions thereof. (c) If Landlord approves an assignment or subletting as herein provided, Tenant shall pay to Landlord, as Additional Rent, the difference, if any, between (1) the Base Rent plus Additional Rent allocable to that part of the Premises affected by such assignment or sublease pursuant to the provisions of this Lease, and (2) the rent and any additional rent payable by the assignee or sublessee to Tenant, less reasonable and customary market-based leasing commissions and reasonable attorneys' fees, if any, incurred by Tenant in connection with such assignment or sublease. The assignment or sublease agreement, as the case may be, after approval by Landlord, shall not be amended without Landlord's prior written consent, and shall contain a provision directing the assignee or subtenant to pay the rent and other sums due thereunder directly to Landlord upon receiving written notice from Landlord that Tenant is in default under this Lease with respect to the payment of Rent. In the event that, notwithstanding the giving of such notice, Tenant collects any rent or other sums from the assignee or subtenant, then Tenant shall hold such sums in trust for the benefit of Landlord and shall immediately forward the same to Landlord. Landlord's collection of such rent and other sums shall not constitute an acceptance by Landlord of attornment by such assignee or subtenant. A consent to one assignment, subletting, occupation or use shall not be deemed to be a consent to any other or subsequent assignment, subletting, occupation or use, and consent to any assignment or subletting shall in no way relieve Tenant of any liability under this Lease. Any assignment or subletting without Landlord's consent shall be void, and shall, at the option of Landlord, constitute a Default under this Lease. (d) Notwithstanding any assignment or subletting, Tenant shall at all times remain fully responsible and liable for the payment of the Rent and for compliance with all of Tenant's other obligations under this Lease (regardless of whether Landlord's approval has been obtained for any such assignment or subletting). (e) Tenant shall pay Landlord's reasonable fees (including, without limitation, the fees of Landlord's counsel, not to exceed $1,500.00), incurred in connection with Landlord's review and processing of documents regarding any proposed assignment or sublease. (f) Notwithstanding anything in this Lease to the contrary, in the event Landlord consents to an assignment or subletting by Tenant in accordance with the terms of this Paragraph 23, Tenant's assignee or subtenant shall have no right to further assign this Lease or any interest therein or thereunder or to further sublease all or any portion of the Premises. In furtherance of the foregoing, Tenant acknowledges and agrees on behalf of itself and any assignee or subtenant claiming under it (and any such assignee or subtenant by accepting such assignment or 30 38 sublease shall be deemed to acknowledge and agree) that no sub-subleases or further assignments of this Lease shall be permitted at any time. (g) Tenant acknowledges and agrees that the restrictions, conditions and limitations imposed by this Paragraph 23 on Tenant's ability to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof, are, for the purposes of California Civil Code Section 1951.4, as amended from time to time, and for all other purposes, reasonable at the time that the Lease was entered into, and shall be deemed to be reasonable at the time that Tenant seeks to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof. 24. TENANT'S DEFAULT The occurrence of any one of the following events shall constitute an event of default on the part of Tenant ("DEFAULT"): (a) The vacation or abandonment of the Premises by Tenant for a period of ten (10) consecutive days or any vacation or abandonment of the Premises by Tenant which would cause any insurance policy to be invalidated or otherwise lapse, or the failure of Tenant to continuously operate Tenant's business in the Premises, in each of the foregoing cases irrespective of whether or not Tenant is then in monetary default under this Lease. Tenant agrees to notice and service of notice as provided for in this Lease and waives any right to any other or further notice or service of notice which Tenant may have under any statute or law now or hereafter in effect; (b) Failure to pay any installment of Rent or any other monies due and payable hereunder, said failure continuing for a period of five (5) days after the same is due; (c) A general assignment by Tenant or any guarantor or surety of Tenant's obligations hereunder (collectively, "GUARANTOR") for the benefit of creditors; (d) The filing of a voluntary petition in bankruptcy by Tenant or any Guarantor, the filing by Tenant or any Guarantor of a voluntary petition for an arrangement, the filing by or against Tenant or any Guarantor of a petition, voluntary or involuntary, for reorganization, or the filing of an involuntary petition by the creditors of Tenant or any Guarantor, said involuntary petition remaining undischarged for a period of sixty (60) days; 31 39 (e) Receivership, attachment, or other judicial seizure of substantially all of Tenant's assets on the Premises, such attachment or other seizure remaining undismissed or undischarged for a period of sixty (60) days after the levy thereof; (f) Death or disability of Tenant or any Guarantor, if Tenant or such Guarantor is a natural person, or the failure by Tenant or any Guarantor to maintain its legal existence, if Tenant or such Guarantor is a corporation, partnership, limited liability company, trust or other legal entity; (g) Failure of Tenant to execute and deliver to Landlord any estoppel certificate, subordination agreement, or lease amendment within the time periods and in the manner required by Paragraphs 30 or 31 or 42; (h) An assignment or sublease, or attempted assignment or sublease, of this Lease or the Premises by Tenant contrary to the provision of Paragraph 23, unless such assignment or sublease is expressly conditioned upon Tenant having received Landlord's consent thereto; (i) Failure of Tenant to restore the Letter of Credit to the amount and within the time period provided in Paragraph 7, above; (j) Failure in the performance of any of Tenant's covenants, agreements or obligations hereunder (except those failures specified as events of Default in subparagraphs (b), (l) or (m) above or any other subparagraphs of this Paragraph 24, which shall be governed by such other Paragraphs), which failure continues for ten (10) days after written notice thereof from Landlord to Tenant, provided that, if Tenant has exercised reasonable diligence to cure such failure and such failure cannot be cured within such ten (10) day period despite reasonable diligence, Tenant shall not be in default under this subparagraph so long as Tenant thereafter diligently and continuously prosecutes the cure to completion and actually completes such cure within thirty (30) days after the giving of the aforesaid written notice; (k) Chronic delinquency by Tenant in the payment of Rent, or any other periodic payments required to be paid by Tenant under this Lease. "CHRONIC DELINQUENCY" shall mean failure by Tenant to pay Rent, or any other payments required to be paid by Tenant under this Lease within five (5) days after written notice thereof for any three (3) months (consecutive or nonconsecutive) during any period of twelve (12) months. In the event of a Chronic Delinquency, in addition to Landlord's other remedies for Default provided in this Lease, at Landlord's option, Landlord shall have the right to require that Rent be paid by Tenant quarterly, in advance; (l) Chronic overuse by Tenant or Tenant's Agents of the number of undesignated parking spaces set forth in the Basic Lease Information. "CHRONIC OVERUSE" shall mean use by Tenant or Tenant's Agents of a number of parking 32 40 spaces greater than the number of parking spaces set forth in the Basic Lease Information more than three (3) times during the Term after written notice by Landlord; (m) Any insurance required to be maintained by Tenant pursuant to this Lease shall be canceled or terminated or shall expire or be reduced or materially changed, except as permitted in this Lease; and (n) Any failure by Tenant to discharge any lien or encumbrance placed on the Project or any part thereof in violation of this Lease within ten (10) days after the date such lien or encumbrance is filed or recorded against the Project or any part thereof. Tenant agrees that any notice given by Landlord pursuant to Paragraph 24(j), (k) or (l) above shall satisfy the requirements for notice under California Code of Civil Procedure Section 1161, and Landlord shall not be required to give any additional notice in order to be entitled to commence an unlawful detainer proceeding. 25. LANDLORD'S REMEDIES (a) TERMINATION. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: (1) the worth at the time of award of any unpaid Rent and any other sums due and payable which have been earned at the time of such termination; plus (2) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus (3) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (4) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course would be likely to result therefrom, including, without limitation, (A) any costs or expenses incurred by Landlord (1) in retaking possession of the Premises; (2) in maintaining, repairing, preserving, 33 41 restoring, replacing, cleaning, altering, remodeling or rehabilitating the Premises or any affected portions of the Building or the Project, including such actions undertaken in connection with the reletting or attempted reletting of the Premises to a new tenant or tenants; (3) for leasing commissions, advertising costs and other expenses of reletting the Premises; or (4) in carrying the Premises, including taxes, insurance premiums, utilities and security precautions; (B) any unearned brokerage commissions paid in connection with this Lease; (C) reimbursement of any previously waived or abated Base Rent or Additional Rent or any free rent or reduced rental rate granted hereunder; and (D) any concession made or paid by Landlord to the benefit of Tenant in consideration of this Lease including, but not limited to, any moving allowances, contributions, payments or loans by Landlord for tenant improvements or build-out allowances (including without limitation, any unamortized portion of the Tenant Improvement Allowance (such Tenant Improvement Allowance to be amortized over the Term in the manner reasonably determined by Landlord), if any, and any outstanding balance (principal and accrued interest) of the Tenant Improvement Loan, if any), or assumptions by Landlord of any of Tenant's previous lease obligations; plus (5) such reasonable attorneys' fees incurred by Landlord as a result of a Default, and costs in the event suit is filed by Landlord to enforce such remedy; and plus (6) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. As used in subparagraphs (1) and (2) above, the "worth at the time of award" is computed by allowing interest at an annual rate equal to twelve percent (12%) per annum or the maximum rate permitted by law, whichever is less. As used in subparagraph (3) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other pertinent present or future Law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any Default of Tenant hereunder. (b) CONTINUATION OF LEASE. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's Default and abandonment and recover Rent as it becomes due, provided Tenant has the right to sublet or assign, subject only to reasonable limitations). In addition, Landlord shall not be liable in any way whatsoever for its failure or refusal to relet the Premises. For purposes of this Paragraph 25(b), the following acts by Landlord will not constitute the termination of Tenant's right to possession of the Premises: 34 42 (1) Acts of maintenance or preservation or efforts to relet the Premises, including, but not limited to, alterations, remodeling, redecorating, repairs, replacements and/or painting as Landlord shall consider advisable for the purpose of reletting the Premises or any part thereof; or (2) The appointment of a receiver upon the initiative of Landlord to protect Landlord's interest under this Lease or in the Premises. (c) RE-ENTRY. In the event of any Default by Tenant, Landlord shall also have the right, with or without terminating this Lease, in compliance with applicable law, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. (d) RELETTING. In the event of the abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in Paragraph 25(c) or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in Paragraph 25(a), Landlord may from time to time, without terminating this Lease, relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises in Landlord's sole discretion. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied in the following order: (1) to reasonable attorneys' fees incurred by Landlord as a result of a Default and costs in the event suit is filed by Landlord to enforce such remedies; (2) to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; (3) to the payment of any costs of such reletting; (4) to the payment of the costs of any alterations and repairs to the Premises; (5) to the payment of Rent due and unpaid hereunder; and (6) the residue, if any, shall be held by Landlord and applied in payment of future Rent and other sums payable by Tenant hereunder as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied to the payment of Rent hereunder, be less than the Rent payable during the month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. (e) TERMINATION. No re-entry or taking of possession of the Premises by Landlord pursuant to this Paragraph 25 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any 35 43 Default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such Default. (f) CUMULATIVE REMEDIES. The remedies herein provided are not exclusive and Landlord shall have any and all other remedies provided herein or by law or in equity. (g) NO SURRENDER. No act or conduct of Landlord, whether consisting of the acceptance of the keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by Landlord of surrender by Tenant shall only flow from and must be evidenced by a written acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that such merger take place, but shall operate as an assignment to Landlord of any and all existing subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger terminating Tenant's estate under this Lease, and thereupon Landlord may terminate any or all such subleases by notifying the sublessee of its election so to do within five (5) days after such surrender. 26. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS (a) Without limiting the rights and remedies of Landlord contained in Paragraph 25 above, if Tenant shall be in Default in the performance of any of the terms, provisions, covenants or conditions to be performed or complied with by Tenant pursuant to this Lease, then Landlord may at Landlord's option, without any obligation to do so, and without notice to Tenant perform any such term, provision, covenant, or condition, or make any such payment and Landlord by reason of so doing shall not be liable or responsible for any loss or damage thereby sustained by Tenant or anyone holding under or through Tenant or any of Tenant's Agents. (b) Without limiting the rights of Landlord under Paragraph 26(a) above, Landlord shall have the right at Landlord's option, without any obligation to do so, to perform any of Tenant's covenants or obligations under this Lease without notice to Tenant in the case of an emergency, as determined by Landlord in its sole and absolute judgment, or if Landlord otherwise determines in its sole discretion that such performance is necessary or desirable for the proper management and operation of the Building or the Project or for the preservation of the rights and interests or safety of other tenants of the Building or the Project. (c) If Landlord performs any of Tenant's obligations hereunder in accordance with this Paragraph 26, the full amount of the cost and expense incurred or the payment so made or the amount of the loss so sustained shall immediately be owing by Tenant to Landlord, and Tenant shall promptly pay to Landlord upon demand, as Additional Rent, the full amount thereof with interest thereon from the 36 44 date of payment by Landlord at the lower of (1) ten percent (10%) per annum, or (2) the highest rate permitted by applicable law. 27. ATTORNEY'S FEES (a) If either party hereto fails to perform any of its obligations under this Lease or if any dispute arises between the parties hereto concerning the meaning or interpretation of any provision of this Lease, then the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party on account of such default and/or in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable attorneys' fees and disbursements. Any such attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Lease shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Lease and to survive and not be merged into any such judgment. (b) Without limiting the generality of Paragraph 26(a) above, if Landlord utilizes the services of an attorney for the purpose of collecting any Rent due and unpaid by Tenant or in connection with any other breach of this Lease by Tenant, Tenant agrees to pay Landlord actual attorneys' fees as determined by Landlord for such services, regardless of the fact that no legal action may be commenced or filed by Landlord. 28. TAXES Tenant shall be liable for and shall pay, prior to delinquency, all taxes levied against Tenant's Property. If any Alteration installed by Tenant pursuant to Paragraph 12 or any of Tenant's Property is assessed and taxed with the Project or Building, Tenant shall pay such taxes to Landlord within ten (10) days after delivery to Tenant of a statement therefor. 29. EFFECT OF CONVEYANCE The term "LANDLORD" as used in this Lease means, from time to time, the then current owner of the Building or the Project containing the Premises, so that, in the event of any sale of the Building or the Project, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder arising from and after the date of such sale, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, that the purchaser of the Building or the Project has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. 37 45 30. TENANT'S ESTOPPEL CERTIFICATE From time to time, upon written request of Landlord, Tenant shall execute, acknowledge and deliver to Landlord or its designee, a written certificate stating (a) the date this Lease was executed, the Commencement Date of the Term and the date the Term expires; (b) the date Tenant entered into occupancy of the Premises; (c) the amount of Rent and the date to which such Rent has been paid; (d) that this Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (or, if assigned, modified, supplemented or amended, specifying the date and terms of any agreement so affecting this Lease); (e) that this Lease represents the entire agreement between the parties with respect to Tenant's right to use and occupy the Premises (or specifying such other agreements, if any); (f) that all obligations under this Lease to be performed by Landlord as of the date of such certificate have been satisfied (or specifying those as to which Tenant claims that Landlord has yet to perform); (g) that all required contributions by Landlord to Tenant on account of Tenant's improvements have been received (or stating exceptions thereto); (h) that on such date there exist no defenses or offsets that Tenant has against the enforcement of this Lease by Landlord (or stating exceptions thereto); (i) that no Rent or other sum payable by Tenant hereunder has been paid more than one (1) month in advance (or stating exceptions thereto); (j) that security has been deposited with Landlord, stating the original amount thereof and any increases thereto; and (k) any other factual matters evidencing the status of this Lease that may be required either by a lender making a loan to Landlord to be secured by a deed of trust covering the Building or the Project or by a purchaser of the Building or the Project. Any such certificate delivered pursuant to this Paragraph 30 may be relied upon by a prospective purchaser of Landlord's interest or a mortgagee of Landlord's interest or assignee of any mortgage upon Landlord's interest in the Premises. If Tenant shall fail to provide such certificate within fifteen (15) days of receipt by Tenant of a written request by Landlord as herein provided, such failure shall, at Landlord's election, constitute a Default under this Lease, and Tenant shall be deemed to have given such certificate as above provided without modification and shall be deemed to have admitted the accuracy of any information supplied by Landlord to a prospective purchaser or mortgagee. 31. SUBORDINATION Landlord shall have the right to cause this Lease to be and remain subject and subordinate to any and all mortgages, deeds of trust and ground leases, if any ("ENCUMBRANCES") that are now or may hereafter be executed covering the Premises, or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof; provided only, that in the event of termination of any such ground lease or upon the foreclosure of any such mortgage or deed of trust, so long as Tenant is not in default, the holder thereof ("HOLDER") 38 46 shall agree to recognize Tenant's rights under this Lease as long as Tenant shall pay the Rent and observe and perform all the provisions of this Lease to be observed and performed by Tenant. Within ten (10) days after Landlord's written request, Tenant shall execute, acknowledge and deliver any and all reasonable documents required by Landlord or the Holder to effectuate such subordination, provided that such documents provide for the nondisturbance of Tenant's rights as set forth in the preceding sentence. If Tenant fails to do so, such failure shall constitute a Default by Tenant under this Lease. Notwithstanding anything to the contrary set forth in this Paragraph 31, Tenant hereby attorns and agrees to attorn to any person or entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such Encumbrance. 32. ENVIRONMENTAL COVENANTS (a) Prior to executing this Lease, Tenant has completed, executed and delivered to Landlord a Hazardous Materials Disclosure Certificate ("INITIAL DISCLOSURE CERTIFICATE"), a fully completed copy of which is attached hereto as EXHIBIT D and incorporated herein by this reference. Tenant covenants, represents and warrants to Landlord that the information on the Initial Disclosure Certificate is true and correct and accurately describes the Hazardous Materials which will be manufactured, treated, used or stored on or about the Premises by Tenant or Tenant's Agents. Tenant shall, on each anniversary of the Commencement Date and at such other times as Tenant desires to manufacture, treat, use or store on or about the Premises new or additional Hazardous Materials which were not listed on the Initial Disclosure Certificate, complete, execute and deliver to Landlord an updated Disclosure Certificate (each, an "UPDATED DISCLOSURE CERTIFICATE") describing Tenant's then current and proposed future uses of Hazardous Materials on or about the Premises, which Updated Disclosure Certificates shall be in the same format as that which is set forth in EXHIBIT D or in such updated format as Landlord may require from time to time. Tenant shall deliver an Updated Disclosure Certificate to Landlord not less than thirty (30) days prior to the date Tenant intends to commence the manufacture, treatment, use or storage of new or additional Hazardous Materials on or about the Premises, and Landlord shall have the right to approve or disapprove such new or additional Hazardous Materials in its sole and absolute discretion. Tenant shall make no use of Hazardous Materials on or about the Premises except as described in the Initial Disclosure Certificate or as otherwise approved by Landlord in writing in accordance with this Paragraph 32(a). (b) As used in this Lease, the term "HAZARDOUS MATERIALS" shall mean and include any substance that is or contains (1) any "hazardous substance" as now or hereafter defined in Section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. Section 9601 et seq.) or any regulations promulgated under CERCLA; (2) any "hazardous waste" as now or hereafter defined in the Resource Conservation and Recovery Act, as amended ("RCRA") (42 U.S.C. Section 6901 et seq.) or any regulations 39 47 promulgated under RCRA; (3) any substance now or hereafter regulated by the Toxic Substances Control Act, as amended ("TSCA") (15 U.S.C. Section 2601 et seq.) or any regulations promulgated under TSCA; (4) petroleum, petroleum by-products, gasoline, diesel fuel, or other petroleum hydrocarbons; (5) asbestos and asbestos-containing material, in any form, whether friable or non-friable; (6) polychlorinated biphenyls; (7) lead and lead-containing materials; or (8) any additional substance, material or waste (A) the presence of which on or about the Premises (i) requires reporting, investigation or remediation under any Environmental Laws (as hereinafter defined), (ii) causes or threatens to cause a nuisance on the Premises or any adjacent area or property or poses or threatens to pose a hazard to the health or safety of persons on the Premises or any adjacent area or property, or (iii) which, if it emanated or migrated from the Premises, could constitute a trespass, or (B) which is now or is hereafter classified or considered to be hazardous or toxic under any Environmental Laws. (c) As used in this Lease, the term "ENVIRONMENTAL LAWS" shall mean and include (1) CERCLA, RCRA and TSCA; and (2) any other federal, state or local laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or hereinafter in effect relating to (A) pollution, (B) the protection or regulation of human health, natural resources or the environment, (C) the treatment, storage or disposal of Hazardous Materials, or (D) the emission, discharge, release or threatened release of Hazardous Materials into the environment. (d) Tenant agrees that during its use and occupancy of the Premises it will (1) not (A) permit Hazardous Materials to be present on or about the Premises except in a manner and quantity necessary for the ordinary performance of Tenant's business or (B) release, discharge or dispose of any Hazardous Materials on, in, at, under, or emanating from, the Premises, the Building or the Project; provided, however, that Tenant shall have the right to use and dispose of de minimis amounts of cleaning materials, toner fluids and other office and janitorial supplies, provided that the same are necessary for the conduct of Tenant's business operations in the Premises and are used and disposed of at all times in full compliance with all Environmental Laws; (2) comply with all Environmental Laws relating to the Premises and the use of Hazardous Materials on or about the Premises and not engage in or permit others to engage in any activity at the Premises in violation of any Environmental Laws; and (3) immediately notify Landlord of (A) any inquiry, test, investigation or enforcement proceeding by any governmental agency or authority against Tenant, Landlord or the Premises, Building or Project relating to any Hazardous Materials or under any Environmental Laws or (B) the occurrence of any event or existence of any condition that would cause a breach of any of the covenants set forth in this Paragraph 32. (e) If Tenant's use of Hazardous Materials on or about the Premises results in a release, discharge or disposal of Hazardous Materials on, in, at, under, or emanating from, the Premises, the Building or the Project, Tenant agrees to investigate, clean up, remove or remediate such Hazardous Materials in full 40 48 compliance with (1) the requirements of (A) all Environmental Laws and (B) any governmental agency or authority responsible for the enforcement of any Environmental Laws; and (2) any additional requirements of Landlord that are reasonably necessary to protect the value of the Premises, the Building or the Project. (f) Upon reasonable notice to Tenant, Landlord may inspect the Premises and surrounding areas for the purpose of determining whether there exists on or about the Premises any Hazardous Material or other condition or activity that is in violation of the requirements of this Lease or of any Environmental Laws. Such inspections may include, but are not limited to, entering the Premises or adjacent property with drill rigs or other machinery for the purpose of obtaining laboratory samples. Landlord shall not be limited in the number of such inspections during the Term of this Lease. In the event (1) such inspections reveal the presence of any such Hazardous Material or other condition or activity in violation of the requirements of this Lease or of any Environmental Laws, or (2) Tenant or its Agents contribute or knowingly consent to the presence of any Hazardous Materials in, on, under, through or about the Premises, the Building or the Project or exacerbate the condition of or the conditions caused by any Hazardous Materials in, on, under, through or about the Premises, the Building or the Project, Tenant shall reimburse Landlord for the cost of such inspections within ten (10) days of receipt of a written statement therefor. Tenant will supply to Landlord such historical and operational information regarding the Premises and surrounding areas as may be reasonably requested to facilitate any such inspection and will make available for meetings appropriate personnel having knowledge of such matters. Tenant agrees to give Landlord at least sixty (60) days' prior notice of its intention to vacate the Premises so that Landlord will have an opportunity to perform such an inspection prior to such vacation. The right granted to Landlord herein to perform inspections shall not create a duty on Landlord's part to inspect the Premises, or liability on the part of Landlord for Tenant's use, storage, treatment or disposal of Hazardous Materials, it being understood that Tenant shall be solely responsible for all liability in connection therewith. (g) Landlord shall have the right, but not the obligation, prior or subsequent to a Default, without in any way limiting Landlord's other rights and remedies under this Lease, to enter upon the Premises, or to take such other actions as it deems necessary or advisable, to investigate, clean up, remove or remediate any Hazardous Materials or contamination by Hazardous Materials present on, in, at, under, or emanating from, the Premises, the Building or the Project in violation of Tenant's obligations under this Lease or under any Environmental Laws. Notwithstanding any other provision of this Lease, Landlord shall also have the right, at its election, in its own name or as Tenant's agent, to negotiate, defend, approve and appeal, at Tenant's expense, any action taken or order issued by any governmental agency or authority with regard to any such Hazardous Materials or contamination by Hazardous Materials. All costs and expenses paid or incurred by 41 49 Landlord in the exercise of the rights set forth in this Paragraph 32 shall be payable by Tenant upon demand. (h) Tenant shall surrender the Premises to Landlord upon the expiration or earlier termination of this Lease free of debris, waste or Hazardous Materials placed on, about or near the Premises by Tenant or Tenant's Agents and in a condition which complies with all Environmental Laws and any additional requirements of Landlord that are reasonably necessary to protect the value of the Premises, the Building or the Project, including, without limitation, the obtaining of any closure permits or other governmental permits or approvals related to Tenant's use of Hazardous Materials in or about the Premises. Tenant's obligations and liabilities pursuant to the provisions of this Paragraph 32 shall survive the expiration or earlier termination of this Lease. If it is determined by Landlord that the condition of all or any portion of the Premises, the Building, and/or the Project is not in compliance with the provisions of this Lease with respect to Hazardous Materials, including, without limitation, all Environmental Laws, at the expiration or earlier termination of this Lease, then at Landlord's sole option, Landlord may require Tenant to hold over possession of the Premises until Tenant can surrender the Premises to Landlord in the condition in which the Premises existed as of the Commencement Date and prior to the appearance of such Hazardous Materials except for normal wear and tear, including, without limitation, the conduct or performance of any closures as required by any Environmental Laws. The burden of proof hereunder shall be upon Tenant. For purposes hereof, the term "normal wear and tear" shall not include any deterioration in the condition or diminution of the value of any portion of the Premises, the Building, and/or the Project in any manner whatsoever related to directly, or indirectly, Hazardous Materials. Any such holdover by Tenant will be with Landlord's consent, will not be terminable by Tenant in any event or circumstance and will otherwise be subject to the provisions of Paragraph 35 of this Lease. (i) Tenant agrees to indemnify and hold harmless Landlord from and against any and all claims, losses (including, without limitation, loss in value of the Premises, the Building or the Project, liabilities and expenses (including attorney's fees)) sustained by Landlord attributable to (1) any Hazardous Materials placed on or about the Premises, the Building or the Project by Tenant or Tenant's Agents, or (2) Tenant's breach of any provision of this Paragraph 32. (j) The provisions of this Paragraph 32 shall survive the expiration or earlier termination of this Lease. 33. NOTICES All notices and demands which are required or may be permitted to be given to either party by the other hereunder shall be in writing and shall be sent by United States mail, postage prepaid, certified, or by personal delivery or overnight courier, addressed to the addressee at Tenant's Address or Landlord's Address as specified 42 50 in the Basic Lease Information, or to such other place as either party may from time to time designate in a notice to the other party given as provided herein. Copies of all notices and demands given to Landlord shall additionally be sent to Landlord's property manager at the address specified in the Basic Lease Information or at such other address as Landlord may specify in writing from time to time. Notice shall be deemed given upon actual receipt (or attempted delivery if delivery is refused ), if personally delivered, or one (1) business day following deposit with a reputable overnight courier that provides a receipt, or on the third (3rd) day following deposit in the United States mail in the manner described above. 34. WAIVER The waiver of any breach of any term, covenant or condition of this Lease shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No delay or omission in the exercise of any right or remedy of Landlord in regard to any Default by Tenant shall impair such a right or remedy or be construed as a waiver. Any waiver by Landlord of any Default must be in writing and shall not be a waiver of any other Default concerning the same or any other provisions of this Lease. 35. HOLDING OVER Any holding over after the expiration of the Term, without the express written consent of Landlord, shall constitute a Default and, without limiting Landlord's remedies provided in this Lease, such holding over shall be construed to be a tenancy at sufferance, at a rental rate of one hundred fifty percent (150%) of the Base Rent last due in this Lease, plus Additional Rent, and shall otherwise be on the terms and conditions herein specified, so far as applicable; provided, however, in no event shall any renewal or expansion option or other similar right or option contained in this Lease be deemed applicable to any such tenancy at sufferance. If the Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in accordance with the provisions of Paragraphs 11 and 32(h), Tenant shall indemnify, defend and hold Landlord harmless from and against any and all loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant or prospective tenant founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of the Premises to any such succeeding tenant or prospective tenant, together with, in each case, actual attorneys' fees and costs. 43 51 36. SUCCESSORS AND ASSIGNS The terms, covenants and conditions of this Lease shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all of the parties hereto. If Tenant shall consist of more than one entity or person, the obligations of Tenant under this Lease shall be joint and several. 37. TIME Time is of the essence of this Lease and each and every term, condition and provision herein. 38. BROKERS Landlord and Tenant each represents and warrants to the other that neither it nor its officers or agents nor anyone acting on its behalf has dealt with any real estate broker except the Broker(s) specified in the Basic Lease Information in the negotiating or making of this Lease, and each party agrees to indemnify and hold harmless the other from any claim or claims, and costs and expenses, including attorneys' fees, incurred by the indemnified party in conjunction with any such claim or claims of any other broker or brokers to a commission in connection with this Lease as a result of the actions of the indemnifying party. 39. LIMITATION OF LIABILITY Tenant agrees that, in the event of any default or breach by Landlord with respect to any of the terms of the Lease to be observed and performed by Landlord (1) Tenant shall look solely to the then-current landlord's interest in the Building for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord; (2) no other property or assets of Landlord, its partners, shareholders, officers, directors, employees, investment advisors, or any successor in interest of any of them (collectively, the "LANDLORD PARTIES") shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies; (3) no personal liability shall at any time be asserted or enforceable against the Landlord Parties; and (4) no judgment will be taken against the Landlord Parties. The provisions of this section shall apply only to the Landlord and the parties herein described, and shall not be for the benefit of any insurer nor any other third party. 40. FINANCIAL STATEMENTS Within fifteen (15) days after Landlord's request, Tenant shall deliver to Landlord the then current financial statements of Tenant (including interim periods following the end of the last fiscal year for which annual statements are available), prepared or compiled by a certified public accountant, including a balance sheet 44 52 and profit and loss statement for the most recent prior year, all prepared in accordance with generally accepted accounting principles consistently applied. Landlord shall keep Tenant's financial statements confidential, except that Landlord shall have the right to disclose such statements to prospective purchasers and lenders and to Landlord's partners, property managers, consultants and advisors, including accountants and attorneys, and otherwise as required by law or legal process. 41. RULES AND REGULATIONS Tenant agrees to comply with such reasonable rules and regulations as Landlord may adopt from time to time for the orderly and proper operation of the Building and the Project. Such rules may include, but shall not be limited, to restrictions on the location of employee parking. The then current rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the failure of any other person to observe and abide by any of said rules and regulations. Landlord's current rules and regulations are attached to this Lease as EXHIBIT C. 42. MORTGAGEE PROTECTION (a) MODIFICATIONS FOR LENDER. If, in connection with obtaining financing for the Project or any portion thereof, Landlord's lender shall request reasonable modifications to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or defer its consent to such modifications, provided such modifications do not materially adversely affect Tenant's rights or increase Tenant's obligations under this Lease. (b) RIGHTS TO CURE. Tenant agrees to give to any trust deed or mortgage holder ("HOLDER") of whom Tenant has received notice from Landlord, by registered mail, at the same time as it is given to Landlord, a copy of any notice of default given to Landlord, provided that prior to such notice Tenant has been notified, in writing, (by way of notice of assignment of rents and leases, or otherwise) of the address of such Holder. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Holder shall have an additional twenty (20) days after expiration of such period, or after receipt of such notice from Tenant (if such notice to the Holder is required by this Paragraph 42(b)), whichever shall last occur within which to cure such default or if such default cannot be cured within that time, then such additional time as may be necessary if within such twenty (20) days, any Holder has commenced and is diligently pursuing the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated. 45 53 43. ENTIRE AGREEMENT This Lease, including the Exhibits and any Addenda attached hereto, which are hereby incorporated herein by this reference, contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein or therein, shall be of any force and effect. 44. SUBSTITUTED PREMISES Landlord shall have the right at any time, upon giving Tenant not less than thirty (30) days' notice in writing, to provide and furnish Tenant with space elsewhere in the Project of approximately the same size as the Premises and to place Tenant in such space, without any increase in Tenant's Base Rent or Proportionate Share(s) hereunder. In the event of any such relocation of Tenant, Landlord shall pay for Tenant's reasonable moving costs and the cost of replacing Tenant's Alterations. Should Tenant refuse to permit Landlord to move Tenant to such new space by the end of such thirty (30) day period, Tenant shall be in Default hereunder without further notice or opportunity to cure and Landlord in such event shall have all rights and remedies provided herein, at law and in equity, including, without limitation, the right to forthwith cancel and terminate this Lease. If Landlord moves Tenant to such new space, this Lease and each and all of its terms, covenants and conditions shall remain in full force and effect and be deemed applicable to such new space, and such new space shall thereafter be deemed to be the "PREMISES". 45. INTEREST Any installment of Rent and any other sum due from Tenant under this Lease which is not received by Landlord within ten (10) days from when the same is due shall bear interest from the date such payment was originally due under this Lease until paid at an annual rate equal to the maximum rate of interest permitted by law. Payment of such interest shall not excuse or cure any Default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred by Landlord in collection of such amounts. 46. CONSTRUCTION This Lease shall be construed and interpreted in accordance with the laws of the State of California. The parties acknowledge and agree that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Lease, including the Exhibits and any Addenda attached hereto. All captions in this Lease are for reference only and shall not be used in the interpretation of this Lease. Whenever required by the context of this Lease, the singular shall include the plural, the masculine shall include the feminine, and vice versa. If any provision of this Lease 46 54 shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect. 47. REPRESENTATIONS AND WARRANTIES OF TENANT Tenant hereby makes the following representations and warranties, each of which is material and being relied upon by Landlord, is true in all respects as of the date of this Lease, and shall survive the expiration or termination of the Lease. (a) If Tenant is an entity, Tenant is duly organized, validly existing and in good standing under the laws of the state of its organization and the persons executing this Lease on behalf of Tenant have the full right and authority to execute this Lease on behalf of Tenant and to bind Tenant without the consent or approval of any other person or entity. Tenant has full power, capacity, authority and legal right to execute and deliver this Lease and to perform all of its obligations hereunder. This Lease is a legal, valid and binding obligation of Tenant, enforceable in accordance with its terms. (b) Tenant has not (1) made a general assignment for the benefit of creditors, (2) filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by any creditors, (3) suffered the appointment of a receiver to take possession of all or substantially all of its assets, (4) suffered the attachment or other judicial seizure of all or substantially all of its assets, (5) admitted in writing its inability to pay its debts as they come due, or (6) made an offer of settlement, extension or composition to its creditors generally. 48. SECURITY (a) Tenant acknowledges and agrees that, while Landlord may engage security personnel to patrol the Building or the Project, Landlord is not providing any security services with respect to the Premises, the Building or the Project and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises, the Building or the Project. (b) Tenant hereby agrees to the exercise by Landlord and Landlord's Agents, within their sole discretion, of such security measures as, but not limited to, the evacuation of the Premises, the Building or the Project for cause, suspected cause or for drill purposes, the denial of any access to the Premises, the Building or the Project and other similarly related actions that it deems necessary to prevent any threat of property damage or bodily injury. The exercise of such security measures by Landlord and Landlord's Agents, and the resulting interruption of service and cessation of Tenant's business, if any, shall not be deemed an eviction or disturbance of Tenant's use and possession of the Premises, or any part thereof, or 47 55 render Landlord or Landlord's Agents liable to Tenant for any resulting damages or relieve Tenant from Tenant's obligations under this Lease. 49. JURY TRIAL WAIVER Tenant hereby waives any right to trial by jury with respect to any action or proceeding (i) brought by Landlord, Tenant or any other party, relating to (A) this Lease and/or any understandings or prior dealings between the parties hereto, or (B) the Premises, the Building or the Project or any part thereof, or (ii) to which Landlord is a party. Tenant hereby agrees that this Lease constitutes a written consent to waiver of trial by jury pursuant to the provisions of California Code of Civil Procedure Section 631, and Tenant does hereby constitute and appoint Landlord its true and lawful attorney-in-fact, which appointment is coupled with an interest, and Tenant does hereby authorize and empower Landlord, in the name, place and stead of Tenant, to file this Lease with the clerk or judge of any court of competent jurisdiction as a statutory written consent to waiver of trial by jury. Landlord and Tenant have executed and delivered this Lease as of the Lease Date specified in the Basic Lease Information. LANDLORD: TENANT: HARBOR INVESTMENT PARTNERS, COMBICHEM, INC., a California general partnership a California corporation By: Aetna Life Insurance Company, a Connecticut corporation, General Partner By: /s/ KARIN EASTHAM --------------------------- Print Name: Karin Eastham ------------------- By: Allegis Realty Investors LLC, Its: Vice President Finance/ Its Investment Advisor -------------------------- and Agent Administration -------------------------- By: --------------------------- Print Name: ------------------- By: /s/ CYNTHIA STEVENIN Its: --------------------------- -------------------------- Cynthia Stevenin Vice President 48 56 EXHIBIT A DIAGRAM OF THE PREMISES A-1 57 EXHIBIT B COMMENCEMENT AND EXPIRATION DATE MEMORANDUM LANDLORD: HARBOR INVESTMENT PARTNERS TENANT: COMBICHEM, INC. LEASE DATE: October 6, 1997 PREMISES: Located at 1804 Embarcadero Road, Suite 201, Palo Alto, California 94303 Tenant hereby accepts the Premises as being in the condition required under the Lease, with all Tenant Improvements completed (except for minor punchlist items which Landlord agrees to complete). The Commencement Date of the Lease is hereby established as____________________, 1997 and the Expiration Date is___________________, _____. TENANT: COMBICHEM, INC., a California corporation By: ____________________________________ Print Name: ____________________________ Its: ___________________________________ B-1 58 Approved and Agreed: LANDLORD: HARBOR INVESTMENT PARTNERS, a California general partnership By: Aetna Life Insurance Company, a Connecticut corporation, General Partner By: Allegis Realty Investors LLC, Its Investment Advisor and Agent By:_________________________________ Cynthia Stevenin Vice President B-2 59 EXHIBIT C RULES AND REGULATIONS This exhibit, entitled "Rules and Regulations," is and shall constitute EXHIBIT C to the Lease Agreement, dated as of the Lease Date, by and between landlord and Tenant for the Premises. The terms and conditions of this EXHIBIT C are hereby incorporated into and are made a part of the Lease. Capitalized terms used, but not otherwise defined, in this EXHIBIT C have the meanings ascribed to such terms in the Lease. 1. Tenant shall not use any method of heating or air conditioning other than that supplied by Landlord without the consent of Landlord. 2. All window coverings installed by Tenant and visible from the outside of the building require the prior written approval of Landlord. 3. Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance or any flammable or combustible materials on or around the Premises, except to the extent that Tenant is permitted to use the same under the terms of Paragraph 33 of the Lease. 4. Tenant shall not alter any lock or install any new locks or bolts on any door at the Premises without the prior consent of Landlord. 5. Tenant shall not make any duplicate keys without the prior consent of Landlord. 6. Tenant shall park motor vehicles in parking areas designated by Landlord except for loading and unloading. During those periods of loading and unloading, Tenant shall not unreasonably interfere with traffic flow around the Building or the Project and loading and unloading areas of other tenants. Tenant shall not park motor vehicles in designated parking areas after the conclusion of normal daily business activity. 7. Tenant shall not disturb, solicit or canvas any tenant or other occupant of the Building or Project and shall cooperate to prevent same. 8. No person shall go on the roof without Landlord's permission. 9. Business machines and mechanical equipment belonging to Tenant which cause noise or vibration that may be transmitted to the structure of the Building, to such a degree as to be objectionable to Landlord or other tenants, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or in noise-dampening housing or other devices sufficient to eliminate noise or vibration. C-1 60 10. All goods, including material used to store goods, delivered to the Premises of Tenant shall be immediately moved into the Premises and shall not be left in parking or receiving areas overnight. 11. Tractor trailers which must be unhooked or parked with dolly wheels beyond the concrete loading areas must use steel plates or wood blocks under the dolly wheels to prevent damage to the asphalt paving surfaces. No parking or storing of such trailers will be permitted in the auto parking areas of the Project or on streets adjacent thereto. 12. Forklifts which operate on asphalt paving areas shall not have solid rubber tires and shall only use tires that do not damage the asphalt. 13. Tenant is responsible for the storage and removal of all trash and refuse. All such trash and refuse shall be contained in suitable receptacles stored behind screened enclosures at locations approved by Landlord. 14. Tenant shall not store or permit the storage or placement of goods or merchandise in or around the common areas surrounding the Premises. No displays or sales of merchandise shall be allowed in the parking lots or other common areas. 15. Tenant shall not permit any animals, including but not limited to, any household pets, to be brought or kept in or about the Premises, the Building, the Project or any of the common areas. INITIALS: TENANT:______________ LANDLORD:____________ C-2 61 EXHIBIT D HAZARDOUS MATERIALS DISCLOSURE CERTIFICATE Your cooperation in this matter is appreciated. Initially, the information provided by you in this Hazardous Materials Disclosure Certificate is necessary for the Landlord to evaluate your proposed uses of the premises (the "PREMISES") and to determine whether to enter into a lease agreement with you as tenant. If a lease agreement is signed by you and the Landlord (the "LEASE AGREEMENT"), on an annual basis in accordance with the provisions of Paragraph 33 of the Lease Agreement, you are to provide an update to the information initially provided by you in this certificate. Any questions regarding this certificate should be directed to, and when completed, the certificate should be delivered to: Landlord: Harbor Investment Partners c/o Allegis Realty Investors LLC 455 Market, Suite 1540 San Francisco, California 94105 Attention: Cynthia Stevenin Phone: (415) 538-4800 Name of (Prospective) Tenant: CombiChem, Inc. Mailing Address: __________________________________________________________ ___________________________________________________________________________ Contact Person, Title and Telephone Number(s): ____________________________ Contact Person for Hazardous Waste Materials Management and Manifests and Telephone Number(s):_______________________________________________________ ___________________________________________________________________________ Address of (Prospective) Premises: ________________________________________ ___________________________________________________________________________ Length of (Prospective) initial Term: _____________________________________ ___________________________________________________________________________ D-1 62 1. GENERAL INFORMATION: Describe the proposed operations to take place in, on, or about the Premises, including, without limitation, principal products processed, manufactured or assembled, and services and activities to be provided or otherwise conducted. Existing tenants should describe any proposed changes to on-going operations. 2. USE, STORAGE AND DISPOSAL OF HAZARDOUS MATERIALS 2.1 Will any Hazardous Materials (as hereinafter defined) be used, generated, treated, stored or disposed of in, on or about the Premises? Existing tenants should describe any Hazardous Materials which continue to be used, generated, treated, stored or disposed of in, on or about the Premises. Wastes Yes [ ] No [ ] Chemical Products Yes [ ] No [ ] Other Yes [ ] No [ ]
If Yes is marked, please explain: _______________________________ _________________________________________________________________ _________________________________________________________________ 2.2 If Yes is marked in Section 2.1, attach a list of any Hazardous Materials to be used, generated, treated, stored or disposed of in, on or about the Premises, including the applicable hazard class and an estimate of the quantities of such Hazardous Materials to be present on or about the Premises at any given time; estimated annual throughput; the proposed location(s) and method of storage (excluding nominal amounts of ordinary household cleaners and janitorial supplies which are not regulated by any Environmental Laws, as hereinafter defined); and the proposed location(s) and method(s) of treatment or disposal for each Hazardous Material, including, the estimated frequency, and the proposed contractors or subcontractors. Existing tenants should attach a list setting forth the information requested above and such list should include actual data from on-going operations and the identification of any variations in such information from the prior year's certificate. D-2 63 3. STORAGE TANKS AND SUMPS 3.1 Is any above or below ground storage or treatment of gasoline, diesel, petroleum, or other Hazardous Materials in tanks or sumps proposed in, on or about the Premises? Existing tenants should describe any such actual or proposed activities. Yes [ ] No [ ] If yes, please explain: _________________________________________ _________________________________________________________________ _________________________________________________________________ 4. WASTE MANAGEMENT 4.1 Has your company been issued an EPA Hazardous Waste Generator I.D. Number? Existing tenants should describe any additional identification numbers issued since the previous certificate. Yes [ ] No [ ] 4.2 Has your company filed a biennial or quarterly reports as a hazardous waste generator? Existing tenants should describe any new reports filed. Yes [ ] No [ ] If yes, attach a copy of the most recent report filed. 5. WASTEWATER TREATMENT AND DISCHARGE 5.1 Will your company discharge wastewater or other wastes to: _____ storm drain? _____ sewer? _____ surface water? _____ no wastewater or other wastes discharged.
Existing tenants should indicate any actual discharges. If so, describe the nature of any proposed or actual discharge(s). _________________________________________________________________ _________________________________________________________________ D-3 64 5.2 Will any such wastewater or waste be treated before discharge? Yes [ ] No [ ] If yes, describe the type of treatment proposed to be conducted. Existing tenants should describe the actual treatment conducted. _________________________________________________________________ _________________________________________________________________ 6. AIR DISCHARGES 6.1 Do you plan for any air filtration systems or stacks to be used in your company's operations in, on or about the Premises that will discharge into the air; and will such air emissions be monitored? Existing tenants should indicate whether or not there are any such air filtration systems or stacks in use in, on or about the Premises which discharge into the air and whether such air emissions are being monitored. Yes [ ] No [ ] If yes, please explain: _________________________________________ _________________________________________________________________ _________________________________________________________________ 6.2 Do you propose to operate any of the following types of equipment, or any other equipment requiring an air emissions permit? Existing tenants should specify any such equipment being operated in, on or about the Premises. _____ Spray booth(s) _____ Incinerator(s) _____ Dip tank(s) _____ Other (Please describe) _____ Drying oven(s) _____ No Equipment Requiring Air Permits
If yes, please explain: _________________________________________ _________________________________________________________________ _________________________________________________________________ 6.3 Please describe (and submit copies of with this Hazardous Materials Disclosure Certificate) any reports you have filed in the past [thirty-six] months with any governmental or quasi-governmental agencies or authorities related to air discharges or clean air requirements and any such reports which have been issued during such period by any such agencies or authorities with respect to you or your business operations. D-4 65 7. HAZARDOUS MATERIALS DISCLOSURES 7.1 Has your company prepared or will it be required to prepare a Hazardous Materials management plan ("MANAGEMENT PLAN") or Hazardous Materials Business Plan and Inventory ("BUSINESS PLAN") pursuant to Fire Department or other governmental or regulatory agencies' requirements? Existing tenants should indicate whether or not a Management Plan is required and has been prepared. Yes [ ] No [ ] If yes, attach a copy of the Management Plan or Business Plan. Existing tenants should attach a copy of any required updates to the Management Plan or Business Plan. 7.2 Are any of the Hazardous Materials, and in particular chemicals, proposed to be used in your operations in, on or about the Premises listed or regulated under Proposition 65? Existing tenants should indicate whether or not there are any new Hazardous Materials being so used which are listed or regulated under Proposition 65. Yes [ ] No [ ] If yes, please explain: _________________________________________ _________________________________________________________________ _________________________________________________________________ D-5 66 8. ENFORCEMENT ACTIONS AND COMPLAINTS 8.1 With respect to Hazardous Materials or Environmental Laws, has your company ever been subject to any agency enforcement actions, administrative orders, or consent decrees or has your company received requests for information, notice or demand letters, or any other inquiries regarding its operations? Existing tenants should indicate whether or not any such actions, orders or decrees have been, or are in the process of being, undertaken or if any such requests have been received. Yes [ ] No [ ] If yes, describe the actions, orders or decrees and any continuing compliance obligations imposed as a result of these actions, orders or decrees and also describe any requests, notices or demands, and attach a copy of all such documents. Existing tenants should describe and attach a copy of any new actions, orders, decrees, requests, notices or demands not already delivered to Landlord pursuant to the provisions of Paragraph 33 of the Lease Agreement. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ 8.2 Have there ever been, or are there now pending, any lawsuits against your company regarding any environmental or health and safety concerns? Yes [ ] No [ ] If yes, describe any such lawsuits and attach copies of the complaint(s), cross-complaint(s), pleadings and other documents related thereto as requested by Landlord. Existing tenants should describe and attach a copy of any new complaint(s), cross-complaint(s), pleadings and other related documents not already delivered to Landlord pursuant to the provisions of Paragraph 33 of the Lease Agreement. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ D-6 67 8.3 Have there been any problems or complaints from adjacent tenants, owners or other neighbors at your company's current facility with regard to environmental or health and safety concerns? Existing tenants should indicate whether or not there have been any such problems or complaints from adjacent tenants, owners or other neighbors at, about or near the Premises and the current status of any such problems or complaints. Yes [ ] No [ ] If yes, please describe. Existing tenants should describe any such problems or complaints not already disclosed to Landlord under the provisions of the signed Lease Agreement and the current status of any such problems or complaints. _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ 9. PERMITS AND LICENSES 9.1 Attach copies of all permits and licenses issued to your company with respect to its proposed operations in, on or about the Premises, including, without limitation, any Hazardous Materials permits, wastewater discharge permits, air emissions permits, and use permits or approvals. Existing tenants should attach copies of any new permits and licenses as well as any renewals of permits or licenses previously issued. As used herein, "HAZARDOUS MATERIALS" shall mean and include any substance that is or contains (a) any "hazardous substance" as now or hereafter defined in Section 101(14) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA") (42 U.S.C. Section 9601 et seq.) or any regulations promulgated under CERCLA; (b) any "hazardous waste" as now or hereafter defined in the Resource Conservation and Recovery Act, as amended ("RCRA") (42 U.S.C. Section 6901 et seq.) or any regulations promulgated under RCRA; (c) any substance now or hereafter regulated by the Toxic Substances Control Act, as amended ("TSCA") (15 U.S.C. Section 2601 et seq.) or any regulations promulgated under TSCA; (d) petroleum, petroleum by-products, gasoline, diesel fuel, or other petroleum hydrocarbons; (e) asbestos and asbestos-containing material, in any form, whether friable or non-friable; (f) polychlorinated biphenyls; (g) lead and lead-containing materials; or (h) any additional substance, material or waste (A) the presence of which on or about the Premises (i) requires reporting, investigation or remediation under any Environmental Laws (as hereinafter defined), (ii) causes or threatens to cause a nuisance on the Premises or any adjacent property or poses or threatens to pose a hazard to the health or safety of persons on the Premises or any adjacent property, or (iii) which, if it emanated or migrated from the Premises, D-7 68 could constitute a trespass, or (B) which is now or is hereafter classified or considered to be hazardous or toxic under any Environmental Laws; and "ENVIRONMENTAL LAWS" shall mean and include (a) CERCLA, RCRA and TSCA; and (b) any other federal, state or local laws, ordinances, statutes, codes, rules, regulations, orders or decrees now or hereinafter in effect relating to (i) pollution, (ii) the protection or regulation of human health, natural resources or the environment, (iii) the treatment, storage or disposal of Hazardous Materials, or (iv) the emission, discharge, release or threatened release of Hazardous Materials into the environment. The undersigned hereby acknowledges and agrees that this Hazardous Materials Disclosure Certificate is being delivered to Landlord in connection with the evaluation of a Lease Agreement and, if such Lease Agreement is executed, will be attached thereto as an exhibit. The undersigned further acknowledges and agrees that if such Lease Agreement is executed, this Hazardous Materials Disclosure Certificate will be updated from time to time in accordance with Paragraph 33 of the Lease Agreement. The undersigned further acknowledges and agrees that the Landlord and its partners, lenders and representatives may, and will, rely upon the statements, representations, warranties, and certifications made herein and the truthfulness thereof in entering into the Lease Agreement and the continuance thereof throughout the term, and any renewals thereof, of the Lease Agreement. I [print name] , acting with full authority to bind the (proposed) Tenant and on behalf of the (proposed) Tenant, certify, represent and warrant that the information contained in this certificate is true and correct. (PROSPECTIVE) TENANT: CombiChem, Inc., a California corporation By: ____________________________________ Title: ____________________________________ Date: ____________________________________ INITIALS: TENANT: ______________ LANDLORD: ______________ D-8 EX-10.39 43 EXHIBIT 10.39 1 EXHIBIT 10.39 COMBICHEM, INC. 1995 STOCK OPTION/STOCK ISSUANCE PLAN Amended as of August 10, 1995 Further Amended as of May 9, 1996 Further Amended as of May 8, 1997 ARTICLE I GENERAL PROVISIONS 1. PURPOSE This 1995 Stock Option/Stock Issuance Plan ("Plan") is intended to promote the interests of CombiChem, Inc. (the "Corporation"), by providing individuals who render valuable services to the Corporation (or any Parent or Subsidiary) with the opportunity to acquire ownership interests in the Corporation so as to encourage them to continue to render services to the Corporation (or any Parent or Subsidiary). 2. STRUCTURE OF THE PLAN; TERMINOLOGY This Plan has two separate components: the Option Grant Program set forth in Article II and the Stock Issuance Program set forth in Article III. For the purposes of this Plan, any capitalized term shall have the meaning assigned under Article IV, Section 8 hereof. 3. ADMINISTRATION OF THE PLAN A. This Plan shall be administered either the Board or a committee of two (2) or more Board members appointed by the Board to which the Board has delegated administrative functions under the Plan (the "Plan Administrator"). Members of any committee to which the Board has delegated any administrative functions shall serve for such terms as the Board shall determine and subject to the Board's right of removal. All delegations of authority to any committee shall be and remain revocable by the Board. B. The Plan Administrator shall have full power and authority to implement, interpret and administer the Plan, to establish all such rules and regulations as it deems appropriate, and to make such determinations under the Plan and any outstanding option grants or share issuances as it deems necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any outstanding option or share issuance. 2 4. SELECTION OF OPTIONEES AND PARTICIPANTS A. The persons eligible to receive share issuances under the Stock Issuance Program and/or option grants pursuant to the Option Grant Program are limited to Employees; non-employee members of the Board of the Corporation (or of any Parent or Subsidiary); and consultants and other independent contractors who provide valuable services to the Corporation (or of any Parent or Subsidiary). B. The Plan Administrator shall have the absolute discretion and authority to determine, subject to the provisions of this Plan, the terms of any option grant or share issuance. In addition to any other matters over which the Plan Administrator has discretion hereunder, the Plan Administrator shall determine which, if any, eligible individuals will be granted options in accordance with Article II of the Plan and which will be issued shares in accordance with Article III of the Plan. With respect to option grants made under the Plan, the Plan Administrator will determine the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each granted option is to become exercisable, the vesting schedule (if any) applicable to shares issued pursuant to the granted options, and the maximum term for which the option may remain outstanding. With respect to share issuances under the Stock Issuance Program, in addition to other matters over which the Plan Administrator has discretion hereunder, the Plan Administrator will determine the number of shares to be issued to each issuee, the vesting schedule (if any) applicable to the issued shares, and the consideration to be paid by the individual for such shares. C. Common Stock issuable under the Plan, whether under the Option Grant Program or the Stock Issuance Program, may be subject to such restrictions on transfer, repurchase rights or other restrictions as may be imposed by the Plan Administrator and set forth in the documents governing such option or issuance. 5. STOCK SUBJECT TO THE PLAN A. Common Stock of the Corporation will be issued under the Plan. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 6,220,274 shares, subject to adjustment from time to time in accordance with the provisions of this Section 5 of Article I. The maximum number of shares of Common Stock which may be issued over the term of the Plan at any one time shall not exceed 30% of the then outstanding shares of the Corporation. B. Shares reserved for issuance under granted options but not in fact issued pursuant to options granted under the Plan due to the expiration or termination of the option or the cancellation of the option in accordance with Section 3 of Article II, will again become available for issuance under the Plan. Shares actually issued under the Plan, whether pursuant to the exercise of an option under the Option Grant Program -2- 3 or a stock issuance pursuant to the Stock Issuance Program, which are subsequently repurchased by the Corporation will not become available for future issuance. C. In the event any change is made to the Common Stock issuable under the Plan by reason of any stock dividend, stock split, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the aggregate number and/or class of shares issuable under the Plan and (ii) the aggregate number and/or class of shares and the option price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 6. AMENDMENT OF THE PLAN AND AWARDS A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects whatsoever. However, no such amendment or modification shall adversely affect the rights and obligations of an optionee with respect to options at the time outstanding under the Plan, nor adversely affect the rights of any issuee with respect to Common Stock issued under the Plan prior to such action unless such optionee or issuee consents to such amendment. In addition, the Board shall not, without the approval of the Corporation's shareholders, amend the Plan so as to (i) increase the maximum number of shares issuable under the Plan (except for adjustments required under Article I, Section 5.C), (ii) materially increase the benefits accruing to individuals who participate in the Plan, or (iii) materially modify the eligibility requirements for participation in the Plan. B. Options to purchase shares of Common Stock may be granted under the Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program, which are in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under the Option Grant Program or the Stock Issuance Program are held in escrow until shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan is obtained. If such approval is not obtained within twelve (12) months after the date the initial excess issuances are made, then (I) any unexercised options representing such excess shall terminate and cease to be exercisable and (II) the Corporation shall promptly refund to the optionees and issuees the option or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. -3- 4 7. EFFECTIVE DATE AND TERM OF PLAN A. The Plan shall become effective when adopted by the Board. Options to purchase shares of Common Stock may be granted under the Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program from and after the effective date, provided any shares actually issued under the Plan are held in escrow until shareholder approval of the Plan is obtained. If such approval is not obtained within twelve (12) months after the effective date, then (I) all options shall terminate and cease to be exercisable, (II) the Corporation shall promptly refund to the optionees and issuees the option or purchase price paid for any shares issued under the Plan, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding, and (III) this Plan shall terminate in its entirety. B. Unless sooner terminated by reason of Section 7A of this Article I, the Plan shall terminate upon the earlier of (i) February 28, 2005, or (ii) the date on which all shares available for issuance under the Plan have been issued pursuant to the exercise of options granted under Article II or the issuance of shares under Article III. The termination of the Plan shall have no effect on any outstanding options under or shares issued and outstanding under the Plan, and such securities shall thereafter continue to have force and effect in accordance with the provisions of the agreements evidencing such options and issuances. 8. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon any person any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary) or of the optionee or the issuee, which rights are hereby expressly reserved by each, to terminate Service of the optionee or issuee at any time for any reason whatsoever, with or without cause or to engage in any Corporate Transaction. ARTICLE II OPTION GRANT PROGRAM 1. TERMS AND CONDITIONS OF OPTIONS Options granted pursuant to the Plan shall be authorized by action of the Plan Administrator and may, at the Plan Administrator's discretion, be either Incentive Options or Non-Statutory Options except that individuals who are not Employees may only be granted Non-Statutory Options. Each granted option shall be evidenced by one or more instruments in the form approved by the Plan Administrator; provided, however, that each such instrument shall comply with the terms and conditions of Sections 1 and 3 of this Article II and each instrument evidencing an Incentive Option shall, in addition, comply with the provisions of Section 2 of this Article II. -4- 5 A. OPTION PRICE. (I) The option price per share shall be fixed by the Plan Administrator. In no event, however, shall the option price per share be less than eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the date of the option grant. (II) The option price per share shall become immediately due upon exercise of the option and shall, subject to the provisions of Article IV, Section 1 and the agreement evidencing such grant, be payable in cash or check drawn to the Corporation's order. Notwithstanding the above, should the Corporation's outstanding Common Stock be registered under Section 12(g) of the 1934 Act, at the time the option is exercised, then the option price may also be paid as follows: - in shares of Common Stock held by the optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value; or - through a special sale and remittance procedure pursuant to which the optionee provides irrevocable written instructions (I) to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, an amount sufficient to cover the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation by reason of such purchase and (II) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to effect the sale transaction. Except to the extent such sale and remittance procedure is utilized, payment of the option price must occur at the time the option is exercised. B. TERM AND EXERCISE OF OPTIONS. Each option granted under the Plan shall be exercisable at such time or times, during such period, and for such number of shares as shall be determined by the Plan Administrator and set forth in the stock option agreement evidencing such option. However, no option granted under the Plan shall have a term in excess of ten (10) years from the grant date. C. NO ASSIGNMENT. During the lifetime of the optionee, the option shall be exercisable only by the optionee and shall not be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution following the optionee's death. D. TERMINATION OF SERVICE. The following provisions shall govern the exercise period applicable to any options held by the optionee at the time of cessation of Service or death: -5- 6 (I) Should the optionee cease to remain in Service for any reason other than death or Permanent Disability, then the period during which each outstanding option held by such optionee is to remain exercisable shall be limited to the three (3)-month period following the date of such cessation of Service. (II) Should such Service terminate by reason of Permanent Disability or should the optionee die while holding one or more outstanding options, then the period during which each such option is to remain exercisable shall be limited to the twelve (12)-month period following the date of the optionee's cessation of Service or death. During the limited exercise period following the optionee's death, the option may be exercised by the personal representative of the optionee's estate or by the person or persons to whom the option is transferred pursuant to the optionee's will or in accordance with the laws of descent and distribution. (III) The Plan Administrator shall have full power and authority to extend (either at the time the option is granted or at any time while the option remains outstanding) the period of time for which the option is to remain exercisable following the optionee's cessation of Service, from the limited period otherwise applicable under subsection 1C of this Article II, to such greater period of time as the Plan Administrator may deem appropriate under the circumstances. (IV) Notwithstanding the above no option shall be exercisable after the specified expiration date of the option term. (V) Each such option shall, during the applicable limited exercise period, be exercisable only with respect to the shares for which the option was exercisable on the date of the optionee's cessation of Service. E. SHAREHOLDER RIGHTS. An optionee shall not have rights as a shareholder with respect to any shares subject to an option until such optionee shall have exercised the option and paid the option price. 2. INCENTIVE OPTIONS All provisions of the Plan shall be applicable to Incentive Options granted hereunder and, in addition, the terms and conditions specified in this Section 2 shall be applicable to Incentive Options granted under the Plan. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to such terms and conditions set forth herein. A. OPTION PRICE. (I) The option price per share of the Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the grant date. -6- 7 (II) If the individual to whom the option is granted is a 10% Shareholder, then the option price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of the option grant. B. DOLLAR LIMITATION. The aggregate Fair Market Value (determined as of the date or dates of grant) of Common Stock which first becomes exercisable during any one calendar year under Incentive Options granted to any Employee under any option plan of the Corporation (or any parent or subsidiary corporation) shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds options which become exercisable in the same calendar year, the foregoing limitation on such options shall be applied on the basis of the order in which such options are granted. Any options in excess of such limitation shall automatically be treated as Non-statutory Options. C. TERM OF OPTION FOR 10% SHAREHOLDERS. No option granted to a 10% Shareholder shall have a term in excess of five (5) years from the grant date. 3. CANCELLATION AND NEW GRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or a different numbers of shares of Common Stock but having an option price per share established at the time of such cancellation and regrant in accordance with the provisions of this Plan. ARTICLE III STOCK ISSUANCE PROGRAM 1. STOCK ISSUANCES Shares of Common Stock shall be issuable under the Stock Issuance Program through direct and immediate issuances without any intervening stock option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement ("Issuance Agreement") in a form acceptable to the Plan Administrator, which form shall be in compliance with the provisions of the Plan. 2. ISSUE PRICE The purchase price per share shall be fixed by the Plan Administrator, but in no event shall it be less than eighty-five percent (85%) of the Fair Market Value of a share of Common Stock at the time of issuance. -7- 8 3. PAYMENT OF ISSUE PRICE Except as provided in Article IV, Section 1, shares shall be issued only in exchange for cash, a check payable to the Corporation, for services previously rendered to the Corporation (or any Parent or Subsidiary) or such other lawful consideration as may be acceptable to the Plan Administrator. ARTICLE IV MISCELLANEOUS 1. LOANS A. The Plan Administrator may assist any optionee or issuee (other than a non-employee director) in the exercise of one or more options granted to such optionee under the Option Grant Program or the purchase of one or more shares to be issued to such issuee under the Stock Issuance Program, including the satisfaction of any Federal and State income and employment tax obligations arising therefrom, by (i) authorizing the extension of a loan from the Corporation to such optionee or issuee, or (ii) permitting the optionee or issuee to pay the option price or purchase price for the purchased Common Stock in installments over a period of years. B. The terms of any loan or installment method of payment (including the interest rate and terms of repayment) shall be established by the Plan Administrator in its sole discretion. Loans or installment payments may be authorized with or without security or collateral. However, any loan made to a consultant or other non-employee advisor must be secured by property other than the purchased shares of Common Stock. In all events the maximum credit available to each optionee or issuee may not exceed the sum of (i) the aggregate option price or purchase price payable for the purchased shares plus (ii) any Federal and State income and employment tax liability incurred by the optionee or issuee in connection with such exercise or purchase. C. The Plan Administrator may, in its absolute discretion, determine that one or more loans extended under the financial assistance program shall be subject to forgiveness by the Corporation in whole or in part upon such terms and conditions as the Board in its discretion deems appropriate. 2. VESTING OF SHARES AND REPURCHASE RIGHTS A. The Plan Administrator, in its absolute discretion, may issue fully and immediately vested shares of Common Stock, or the Plan Administrator may impose such vesting requirements as it deems appropriate with the Corporation retaining a right to repurchase any unvested shares. The terms of the vesting schedule and of the Corporation's repurchase rights shall be as determined by the Plan Administrator and set forth in the agreement governing such issuance. However, no option shall have a term in excess of ten (10) years measured from the option grant date. In no event, however, -8- 9 may the Plan Administrator impose a vesting schedule upon any shares issued under the Plan which results in the vesting of fewer than 20% of the total number of shares each year beginning one year after the option grant date. In extraordinary circumstances, the Plan Administrator may grant options or issue shares which are fully and immediately vested upon issuance. B. Any new, additional or different shares of stock or other property (including money paid other than as a regular cash dividend) which the holder of unvested Common Stock may have the right to receive by reason of a stock dividend, stock split, reclassification or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting and repurchase limitations applicable to the unvested Common Stock with respect to which it was paid or arose, and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. C. No person to whom shares of Common Stock have been issued pursuant to the Plan may transfer any such shares which have not vested. Notwithstanding the above, the issuee shall have the right to make a gift of unvested shares acquired under the Plan to his/her spouse, parents or issue or to a trust established for such spouse, parents or issue, provided the transferee of such shares delivers to the Corporation a written agreement to be bound by all the provisions of the Plan and the Issuance or Stock Purchase Agreement executed by the issuee at the time of his/her acquisition of the gifted shares. 3. MARKET STAND-OFF AGREEMENTS The Plan Administrator may require each person to whom any shares are issued under this Plan to enter into an agreement which restricts or prohibits the sale of any stock of the Corporation by such person for a reasonable period of time following a public offering of any shares of stock by the Corporation. 4. RIGHT OF FIRST REFUSAL Until such time as the Corporation's outstanding shares of Common Stock are first registered under Section 12(g) of the 1934 Act, the Plan Administrator may subject any shares issued pursuant to the Plan to a right of first refusal with respect to any proposed disposition of such shares other than a transfer permitted by Section 2.C of this Article IV. Such right of first refusal shall be exercisable by the Corporation (or its assignees) in accordance with the terms and conditions specified in the instrument governing the issuance of such shares. 5. SECURITIES LAWS; LEGENDS A. No shares of Common Stock or other assets shall be issued or delivered under this Plan unless and until the Corporation shall have determined that -9- 10 there has been full and adequate compliance with all applicable requirements of the Federal and state securities laws and all other applicable legal and regulatory requirements. B. Shares issued under the Plan shall bear such legends as the Plan Administrator deems necessary or appropriate, including such restrictive legends as the Plan Administrator shall require to reflect the terms of any agreement between the issuee and the Corporation. 6. SHAREHOLDER RIGHTS Subject to the rights of the Corporation set forth herein or in any other agreement entered into between the Corporation and an issuee of shares under the Plan, each person to whom shares of Common Stock have been issued under the Plan shall have all the rights of a shareholder with respect to those shares whether or not his/her interest in such shares is vested. Accordingly, the issuee shall have the right to vote such shares and to receive any cash dividends or other distributions paid or made with respect to such shares. 7. ACCELERATION Subject to Section 4.13 of that certain Series C Preferred Stock Purchase Agreement dated on or about August 17, 1995, the Plan Administrator may, in its discretion, provide for the automatic acceleration upon a Change of Control and\or Corporate Transaction of the time at which any option will become exercisable or for the lapse of any repurchase right tied to vesting. Such acceleration may be provided for at any time by the Plan Administrator in the exercise of its discretion, or may be included as a right of the optionee or issuee in the documents evidencing the rights of the optionee or issuee. 8. DEFINITIONS The following definitions shall be in effect under this Plan: A. BOARD shall mean the Board of Directors of the Corporation. B. COMMON STOCK shall mean the common stock of the Corporation. C. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) in which more than fifty percent (50%) of the Corporation's outstanding -10- 11 voting stock is transferred to a person or persons different from those who held the stock immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. D. EMPLOYEE shall mean an individual who is in the employ of the Corporation or any Parent or Subsidiary, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. E. FAIR MARKET VALUE per share of Common Stock on any relevant date under the Plan shall be the value determined in accordance with the following provisions: (i) If the Common Stock is not at the time listed or admitted to trading on any Stock Exchange but is traded on the NASDAQ National Market System, the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers through the NASDAQ National Market System or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed or admitted to trading on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed nor admitted to trading on any Stock Exchange nor traded on the NASDAQ National Market System, then such Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. F. INCENTIVE OPTION shall mean a stock option which satisfies the requirements of Internal Revenue Code Section 422. -11- 12 G. NON-STATUTORY OPTION shall mean a stock option not intended to meet the requirements of Code Section 422. H. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. I. PERMANENT DISABILITY shall have the meaning assigned to such term in Code Section 22(e)(3). J. SERVICE shall mean the provision of services to the Corporation or any Parent or Subsidiary by an individual in the capacity of an Employee, a non-employee member of the Board or a consultant or independent contractor. K. SUBSIDIARY shall mean each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. L. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing ten percent (10%) or more of the total combined voting power of all classes of stock of the Corporation. 9. USE OF PROCEEDS Any cash proceeds received by the Corporation from the issuance of shares of Common Stock under the Plan shall be used for general corporate purposes. 10. WITHHOLDING The Corporation's obligation to deliver shares upon the exercise of any options granted under Article II or the purchase of any shares issued under Article III shall be subject to the satisfaction of all applicable Federal, State and local income and employment tax withholding requirements. 11. REGULATORY APPROVALS The implementation of the Plan, the granting of any options under the Option Grant Program, the issuance of any shares under the Stock Issuance Program, and the issuance of Common Stock upon the exercise of the option grants made hereunder shall be subject to the Corporation's procurement of all approvals and permits -12- 13 required by regulatory authorities having jurisdiction over the Plan, the options granted under it, and the Common Stock issued pursuant to it. 12. INFORMATION TO OPTIONEES AND PARTICIPANTS The Corporation shall provide financial statements to all optionees and/or participants at least annually. -13- EX-10.40 44 EXHIBIT 10.40 1 EXHIBIT 10.40 COMBICHEM, INC. NOTICE OF GRANT OF STOCK OPTION Notice is hereby given of the following stock option grant (the "Option") pursuant to the 1995 STOCK OPTION/STOCK ISSUANCE PLAN (the "Plan") to purchase shares of the Common Stock of CombiChem, Inc. (the "Corporation"): Optionee: ____________________________ Grant Date: __________________________ Grant Number: _____ Option Price: $_____ per share Vesting Commencement Date: _____________________ Number of Option Shares: ___________________ shares Expiration Date: _____________________ Type of Option: _____ Incentive Stock Option _____ Non-Statutory Stock Option Date Exercisable: The Option shall be immediately exercisable for all vested and unvested shares. Vesting Schedule The Option Shares shall be vest in accordance with the following vesting schedule: (i) No Option Shares shall vest unless and until the Optionee has completed twelve (12) months of Service (as defined in the Plan) measured from the Vesting Commencement Date. (ii) Upon the completion of the twelve (12) month service period specified in subparagraph (i) above, 25% of the Option Shares shall become vested. (iii) The Remaining Option Shares shall vest in a series of successive equal monthly installments over each of the next thirty-six (36) months of Service completed by the Optionee after the initial twelve (12) month service period specified in subparagraph (i) above. 2 Optionee understands that the Option is granted pursuant to the Corporation's Plan. By signing below, optionee agrees to be bound by the terms and conditions of the Plan and the terms and conditions of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A. Optionee understands that any Option Shares purchased under the Option will be subject to the terms and conditions set forth in the Stock Purchase Agreement attached hereto as Exhibit B. Optionee hereby acknowledges receipt of a copy of the Plan in the form attached hereto as Exhibit C. REPURCHASE RIGHTS. THE OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO REPURCHASE RIGHTS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS UPON ANY PROPOSED SALE, ASSIGNMENT, TRANSFER, ENCUMBRANCE OR OTHER DISPOSITION OF THE CORPORATION'S SHARES. THE TERMS AND CONDITIONS OF SUCH RIGHTS ARE SPECIFIED IN THE STOCK PURCHASE AGREEMENT. No Employment or Service Contract. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the Service of the Corporation for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation or the Optionee, which rights are hereby expressly reserved by each, to terminate Optionee's Service at any time for any reason whatsoever, with or without cause. ________________________, 199__ Date CombiChem, Inc. By_______________________________________ Title:___________________________________ _________________________________________ Optionee Address: _________________________________________ _________________________________________ 3 EXHIBIT A STOCK OPTION AGREEMENT A-1 4 COMBICHEM, INC. STOCK OPTION AGREEMENT RECITALS A. The Board of Directors of the Corporation has adopted the CombiChem, Inc. 1995 Stock Option/Stock Issuance Plan (the "Plan") for the purpose of attracting and retaining the services of persons who contribute to the growth and financial success of the Corporation. B. Optionee is a person who the Plan Administrator believes has and will contribute to the growth and financial success of the Corporation and this Agreement is executed pursuant to and is intended to carry out the purposes of the Plan. AGREEMENT NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth in this Agreement, the Corporation hereby grants to Optionee, as of the grant date (the "Grant Date") specified in the accompanying Notice of Grant of Stock Option (the "Grant Notice"), a stock option to purchase up to that number of shares of the Corporation's Common Stock (the "Option Shares") as is specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term at the option price per share (the "Option Price") specified in the Grant Notice. 2. OPTION TERM. This option shall have a maximum term of ten (10) years measured from the Grant Date and shall expire at the close of business on the expiration date (the "Expiration Date") specified in the Grant Notice, unless sooner terminated in accordance with Paragraph 5, 6 or 17. 3. LIMITED TRANSFERABILITY. This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee's death and may be exercised, during Optionee's lifetime, only by Optionee. 4. DATES OF EXERCISE. This option may not be exercised in whole or in part at any time prior to the time the Plan is approved by the Corporation's shareholders in accordance with Paragraph 17. Provided such shareholder approval is obtained, this option shall thereupon become exercisable for the Option Shares in one or more installments as is specified in the Grant Notice. As the option becomes exercisable in one or more installments, the installments shall accumulate and the option shall remain exercisable for such installments until the Expiration Date or the sooner termination of the option term under Paragraph 5 or Paragraph 6 of this Agreement. 5 5. ACCELERATED TERMINATION OF OPTION TERM. Unless extended by the Plan Administrator in its sole discretion, the option term specified in Paragraph 2 shall terminate (and this option shall cease to be exercisable) prior to the Expiration Date should any of the following provisions become applicable: (i) Except as otherwise provided in subparagraph (ii) or (iii) below, should Optionee cease to remain in Service while this option is outstanding, then the period for exercising this option shall be reduced to a three (3)-month period commencing with the date of such cessation of Service, but in no event shall this option be exercisable at any time after the Expiration Date. Upon the expiration of such three (3)-month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (ii) Should Optionee die while this option is outstanding, then the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the law of descent and distribution shall have the right to exercise this option. Such right shall lapse and this option shall cease to be exercisable upon the earlier of (A) the expiration of the twelve (12) month period measured from the date of Optionee's death or (B) the Expiration Date. Upon the expiration of such twelve (12) month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (iii) Should Optionee become permanently disabled and cease by reason thereof to remain in Service while this option is outstanding, then the Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. Optionee shall be deemed to be permanently disabled if Optionee is unable to engage in any substantial gainful activity for the Corporation or the parent or subsidiary corporation retaining his/her services by reason of any medically determinable physical or mental impairment, which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. Upon the expiration of such limited period of exercisability or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (iv) During the limited period of exercisability applicable under subparagraph (i), (ii) or (iii) above, this option may be exercised for any or all of the Option Shares for which this option is, at the time of the Optionee's cessation of Service, exercisable in accordance with the exercise schedule specified in the Grant Notice and the provisions of Paragraph 6 of this Agreement. -2- 6 (v) For purposes of this Paragraph 5 and for all other purposes under this Agreement: A. The Optionee shall be deemed to remain in SERVICE for so long as the Optionee continues to render periodic services to the Corporation or any parent or subsidiary corporation, whether as an Employee, a non-employee member of the board of directors, or an independent contractor or consultant. B. The Optionee shall be deemed to be an EMPLOYEE of the Corporation and to continue in the Corporation's employ for so long as the Optionee remains in the employ of the Corporation or one or more of its parent or subsidiary corporations, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. C. A corporation shall be considered to be a SUBSIDIARY corporation of the Corporation if it is a member of an unbroken chain of corporations beginning with the Corporation, provided each such corporation in the chain (other than the last corporation) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. D. A corporation shall be considered to be a PARENT corporation of the Corporation if it is a member of an unbroken chain ending with the Corporation, provided each such corporation in the chain (other than the Corporation) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 6. SPECIAL TERMINATION OF OPTION. A. This Option, to the extent not previously exercised, shall terminate and cease to be exercisable upon the consummation of one or more of the following shareholder- approved transactions (a "Corporate Transaction") unless this Option is expressly assumed by the successor corporation or parent thereof: (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets, or -3- 7 (iii) any transaction (other than an issuance of shares by the Corporation for cash) in or by means of which one or more persons acting in concert acquire, in the aggregate, more than 50% of the outstanding shares of the stock of the Corporation. B. This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 7. ADJUSTMENT IN OPTION SHARES. A. In the event any change is made to the Corporation's outstanding Common Stock by reason of any stock split, stock dividend, combination of shares, exchange of shares, or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the total number of Option Shares subject to this option, (ii) the number of Option Shares for which this option is to be exercisable from and after each installment date specified in the Grant Notice and (iii) the Option Price payable per share in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. B. If this option is to be assumed in connection with a Corporate Transaction described in Paragraph 6 or is otherwise to remain outstanding, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issuable to the Optionee in the consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Option Price payable per share, provided the aggregate Option Price payable hereunder shall remain the same. 8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not have any of the rights of a shareholder with respect to the Option Shares until such individual shall have exercised the option and paid the Option Price. 9. MANNER OF EXERCISING OPTION. A. In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or in the case of exercise after Optionee's death, the Optionee's executor, administrator, heir or legatee, as the case may be) must take the following actions: (i) Execute and deliver to the Secretary of the Corporation a stock purchase agreement (the "Purchase Agreement") in substantially the form of Exhibit B to the Grant Notice. -4- 8 (ii) Pay the aggregate Option Price for the purchased shares in one or more forms approved under the Plan. (iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option, if other than Optionee, have the right to exercise this option. B. Should the Corporation's outstanding Common Stock be registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act") at the time the option is exercised, then the Option Price may also be paid as follows: (i) in shares of Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at fair market value on the Exercise Date; or (ii) through a special sale and remittance procedure pursuant to which the Optionee is to provide irrevocable written instructions (a) to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Option Price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation by reason of such purchase and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to effect the sale transaction. C. For purposes of this Agreement, the Exercise Date shall be the date on which the executed Purchase Agreement shall have been delivered to the Corporation, and the fair market value of a share of Common Stock on any relevant date shall be determined in accordance with subparagraphs (i) through (iii) below: (i) If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded on the NASDAQ National Market System, the fair market value shall be the closing selling price of one share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers through its NASDAQ system or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of fair market value. (ii) If the Common Stock is at the time listed or admitted to trading on any stock exchange, then the fair market value shall be the closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the -5- 9 Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the fair market value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. (iii) If the Common Stock at the time is neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, or if the Plan Administrator determines that the value determined pursuant to subparagraphs (i) and (ii) above does not accurately reflect the fair market value of the Common Stock, then such fair market value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. D. As soon after the Exercise Date as practical, the Corporation shall mail or deliver to Optionee or to the other person or persons exercising this option a certificate or certificates representing the shares so purchased and paid for, with the appropriate legends affixed thereto. E. In no event may this option be exercised for any fractional shares. 10. COMPLIANCE WITH LAWS AND REGULATIONS. A. The exercise of this option and the issuance of Option Shares upon such exercise shall be subject to compliance by the Corporation and the Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Corporation's Common Stock may be listed at the time of such exercise and issuance. B. In connection with the exercise of this option, Optionee shall execute and deliver to the Corporation such representations in writing as may be requested by the Corporation in order for it to comply with the applicable requirements of Federal and State securities laws. 11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of Optionee and the successors and assigns of the Corporation. 12. LIABILITY OF CORPORATION. A. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without shareholder approval be issued under the Plan, then this option shall be void with respect to such excess shares, unless -6- 10 shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of Article IV, Section 3, of the Plan. B. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals. 13. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation in care of the Corporate Secretary at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 14. LOANS. The Plan Administrator may, in its absolute discretion and without any obligation to do so, assist the Optionee in the exercise of this option by (i) authorizing the extension of a loan to the Optionee from the Corporation or (ii) permitting the Optionee to pay the option price for the purchased Common Stock in installments over a period of years. The terms of any such loan or installment method of payment (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. 15. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option. 16. GOVERNING LAW. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 17. SHAREHOLDER APPROVAL. The grant of this option is subject to approval of the Plan by the Corporation's shareholders within twelve (12) months after the adoption of the Plan by the Board of Directors. Notwithstanding any provision of this Agreement to the contrary, this option may not be exercised in whole or in part until such shareholder approval is obtained. In the event that such shareholder approval is not obtained, then this option shall thereupon -7- 11 terminate in its entirety and the Optionee shall have no further rights to acquire any Option Shares hereunder. 18. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the event this option is designated an incentive stock option in the Grant Notice, the following terms and conditions shall also apply to the grant: A. This option shall cease to qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3) months after the date the Optionee ceases to be an Employee for any reason other than death or permanent disability (as defined in Paragraph 5) or (ii) more than one (1) year after the date the Optionee ceases to be an Employee by reason of permanent disability. B. Should this option be designated as immediately exercisable in the Grant Notice, then this option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate fair market value (determined at the Grant Date) of the Corporation's Common Stock for which this option would otherwise first become exercisable in such calendar year would, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Corporation's Common Stock for which this option or one or more other incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or its parent or subsidiary corporations) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion will first become exercisable in the first calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18.B would not be contravened. C. Should this option be designated as exercisable in installments in the Grant Notice, then no installment under this option (whether annual or monthly) shall qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) the aggregate fair market value (determined at the Grant Date) of the Corporation's Common Stock for which such installment first becomes exercisable hereunder will, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Corporation's Common Stock for which one or more other incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any parent or subsidiary corporation) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. 19. WITHHOLDING. Optionee hereby agrees to make appropriate arrangements with the Corporation or parent or subsidiary corporation employing Optionee for the satisfaction of all Federal, State or local income tax withholding requirements and Federal social security employee tax requirements applicable to the exercise of this option. -8- 12 EXHIBIT B STOCK PURCHASE AGREEMENT B-1 13 IMMEDIATELY EXERCISABLE REPURCHASE RIGHT RIGHT OF FIRST REFUSAL COMBICHEM, INC. STOCK PURCHASE AGREEMENT AGREEMENT made as of this ____ day of ________, 19__, by and among CombiChem, Inc. (the "Corporation"), ______________________, the holder of a stock option (the "Optionee") under the Corporation's 1995 Stock Option/Stock Issuance Plan and _________________, the Optionee's spouse. I. EXERCISE OF OPTION 1.1 EXERCISE. Optionee hereby purchases _________ shares ("Purchased Shares") of the Corporation's common stock ("Common Stock") pursuant to that certain option ("Option") granted Optionee on ______________ ("Grant Dates") to purchase up to _________ shares of the Common Stock ("Total Purchasable Shares") under the Corporation's 1995 Stock Option/Stock Issuance Plan (the "Plan") at an option price of $_____ per share ("Option Price"). 1.2 PAYMENT. Concurrently with the delivery of this Agreement to the Corporate Secretary of the Corporation, Optionee shall pay the Option Price for the Purchased Shares in accordance with the provisions of the agreement between the Corporation and Optionee evidencing the Option (the "Option Agreement") and shall deliver whatever additional documents may be required by the Option Agreement as a condition for exercise, together with a duly- executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares. 1.3 DELIVERY OF CERTIFICATES. The certificates representing the Purchased Shares hereunder shall be held in escrow by the Corporate Secretary of the Corporation in accordance with the provisions of Article VII. 1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation actually exercises its repurchase right, rights of first refusal or special purchase right under this Agreement, Optionee (or any successor in interest) shall have all the rights of a shareholder (including voting and dividend rights) with respect to the Purchased Shares, including the Purchased Shares held in escrow under Article VII, subject, however, to the transfer restrictions of Article IV. II. SECURITIES LAW COMPLIANCE 2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and are accordingly 14 being issued to Optionee in reliance upon the exemption from such registration provided by Rule 701 of the Securities and Exchange Commission for stock issuances under compensatory benefit plans such as the Plan. Optionee hereby acknowledges previous receipt of a copy of the documentation for such Plan in the form of Exhibit C to the Notice of Grant of Stock Option (the "Grant Notice") accompanying the Option Agreement. 2.2 RESTRICTED SECURITIES. A. Optionee hereby confirms that Optionee has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. Accordingly, Optionee hereby acknowledges that Optionee is prepared to hold the Purchased Shares for an indefinite period and that Optionee is aware that Rule 144 of the Securities and Exchange Commission issued under the 1933 Act is not presently available to exempt the sale of the Purchased Shares from the registration requirements of the 1933 Act. B. Upon the expiration of the ninety (90)-day period immediately following the date on which the Corporation first becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Purchased Shares, to the extent vested under Article V, may be sold (without registration) pursuant to the applicable requirements of Rule 144. If Optionee is at the time of such sale an affiliate of the Corporation for purposes of Rule 144 or was such an affiliate during the preceding three (3) months, then the sale must comply with all the requirements of Rule 144 (including the volume limitation on the number of shares sold, the broker/market-maker sale requirement and the requisite notice to the Securities and Exchange Commission); however, the two (2)-year holding period requirement of the Rule will not be applicable. If Optionee is not at the time of the sale an affiliate of the Corporation nor was such an affiliate during the preceding three (3) months, then none of the requirements of Rule 144 (other than the broker/market-maker sale requirement for Purchased Shares held for less than three (3) years following payment in cash of the Option Price therefor) will be applicable to the sale. C. Should the Corporation not become subject to the reporting requirements of the Exchange Act, then Optionee may, provided he/she is not at the time an affiliate of the Corporation (nor was such an affiliate during the preceding three (3) months), sell the Purchased Shares (without registration) pursuant to paragraph (k) of Rule 144 after the Purchased Shares have been held for a period of three (3) years following the payment in cash of the Option Price for such shares. 2.3 DISPOSITION OF SHARES. Optionee hereby agrees that Optionee shall make no disposition of the Purchased Shares (other than a permitted transfer under paragraph 4.1) unless and until there is compliance with all of the following requirements: -2- 15 (a) Optionee shall have notified the Corporation of the proposed disposition and provided a written summary of the terms and conditions of the proposed disposition. (b) Optionee shall have complied with all requirements of this Agreement applicable to the disposition of the Purchased Shares. (c) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that (i) the proposed disposition does not require registration of the Purchased Shares under the 1933 Act or (ii) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or of any exemption from registration available under the 1933 Act (including Rule 144) has been taken. (d) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Purchased Shares pursuant to the provisions of the Commissioner Rules identified in paragraph 2.5. The Corporation shall not be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in violation of the provisions of this Article II nor (ii) to treat as the owner of the Purchased Shares, or otherwise to accord voting or dividend rights to, any transferee to whom the Purchased Shares have been transferred in contravention of this Agreement. 2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions on disposition of the Purchased Shares, the stock certificates for the Purchased Shares will be endorsed with restrictive legends, including one or more of the following legends: (i) "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a 'no action' letter of the Securities and Exchange Commission with respect to such sale or offer, or (c) satisfactory assurances to the Corporation that registration under such Act is not required with respect to such sale or offer." (ii) "The shares represented by this certificate are unvested and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated February 24, 1997 between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). Such agreement grants certain repurchase rights and rights of first refusal to the Corporation (or its assignees) upon the sale, assignment, transfer, encumbrance or other disposition of the -3- 16 Corporation's shares or upon termination of service with the Corporation. The Corporation will upon written request furnish a copy of such agreement to the holder hereof without charge." III. SPECIAL TAX ELECTION 3.1 SECTION 83(B) ELECTION APPLICABLE TO THE EXERCISE OF A NON-STATUTORY STOCK OPTION. If the Purchased Shares are acquired hereunder pursuant to the exercise of a non-statutory stock option, as specified in the Grant Notice, then the Optionee understands that under Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), the excess of the fair market value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Option Price paid for such shares will be reportable as ordinary income on such lapse date. For this purpose, the term "forfeiture restrictions" includes the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right provided under Article V of this Agreement. Optionee understands that he/she may elect under Section 83(b) of the Code to be taxed at the time the Purchased Shares are acquired hereunder, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of this Agreement. Even if the fair market value of the Purchased Shares at the date of this Agreement equals the Option Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II HERETO. OPTIONEE UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY THE OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE. 3.2 CONDITIONAL SECTION 83(B) ELECTION APPLICABLE TO THE EXERCISE OF AN INCENTIVE STOCK OPTION. If the Purchased Shares are acquired hereunder pursuant to the exercise of an incentive stock option under the Federal tax laws, as specified in the Grant Notice, then the following tax principles shall be applicable to the Purchased Shares: A. For regular tax purposes, no taxable income will be recognized at the time the Option is exercised. B. The excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (ii) the Option Price paid for the Purchased Shares will be includible in the Optionee's taxable income for alternative minimum tax purposes. C. If the Optionee makes a disqualifying disposition of the Purchased Shares, then the Optionee will recognize ordinary income in the year of such disposition equal in amount to the excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised or (if later) on the date -4- 17 any forfeiture restrictions applicable to the Purchased Shares lapse over (ii) the Option Price paid for the Purchased Shares. Any additional gain recognized upon the disqualifying disposition will be either short-term or long-term capital gain depending upon the period for which the Purchased Shares are held prior to the disposition. D. For purposes of the foregoing, the term "forfeiture restrictions" will include the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right provided under Article V of this Agreement. The term "disqualifying disposition" means any sale or other disposition 1 of the Purchased Shares within two (2) years after the Grant Date or within one (1) year after the execution date of this Agreement. E. In the absence of final Treasury Regulations relating to incentive stock options, it is not certain whether the Optionee may, in connection with the exercise of the Option for any Purchased Shares at the time subject to forfeiture restrictions, file a protective election under Section 83(b) of the Code which would limit (I) the Optionee's alternative minimum taxable income upon exercise and (II) the Optionee's ordinary income upon a disqualifying disposition, to the excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised over (ii) the Option Price paid for the Purchased Shares. THE APPROPRIATE FORM FOR MAKING SUCH A PROTECTIVE ELECTION IS ATTACHED AS EXHIBIT II TO THIS AGREEMENT AND MUST BE FILED WITH THE INTERNAL REVENUE SERVICE WITHIN THIRTY (30) DAYS AFTER THE DATE OF THIS AGREEMENT. HOWEVER, SUCH ELECTION IF PROPERLY FILED WILL ONLY BE ALLOWED TO THE EXTENT THE FINAL TREASURY REGULATIONS PERMIT SUCH A PROTECTIVE ELECTION. 3.3 OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER SECTION 83(B), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. This filing should be made by registered or certified mail, return receipt requested, - ---------- 1 Generally, a disposition of shares purchased under an incentive stock option includes any transfer of legal title, including a transfer by sale, exchange or gift, but does not include a transfer to the Optionee's spouse, a transfer into joint ownership with right of survivorship if Optionee remains one of the joint owners, a pledge, a transfer by bequest or inheritance or certain tax free exchanges permitted under the Code. -5- 18 and Optionee must retain two (2) copies of the completed form for filing with his or her State and Federal tax returns for the current tax year and an additional copy for his or her records. IV. TRANSFER RESTRICTIONS 4.1 RESTRICTION ON TRANSFER. Optionee shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to the Corporation's Repurchase Right under Article V. In addition, Purchased Shares which are released from the Repurchase Right shall not be transferred, assigned, encumbered or otherwise made the subject of disposition in contravention of the Corporation's First Refusal Right under Article VI. Such restrictions on transfer, however, shall not be applicable to (i) a gratuitous transfer of the Purchased Shares made to the Optionee's spouse or issue, including adopted children, or to a trust for the exclusive benefit of the Optionee or the Optionee's spouse or issue, provided and only if the Optionee obtains the Corporation's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to the Optionee's will or the laws of intestate succession or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by the Optionee in connection with the acquisition of the Purchased Shares. 4.2 TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of one of the permitted transfers specified in paragraph 4.1 must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) both the Corporation's Repurchase Right and the Corporation's First Refusal Right granted hereunder and (ii) the market stand-off provisions of paragraph 4.4, to the same extent such shares would be so subject if retained by the Optionee. 4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and VII of this Agreement, the term "Owner" shall include the Optionee and all subsequent holders of the Purchased Shares who derive their chain of ownership through a permitted transfer from the Optionee in accordance with paragraph 4.1. 4.4 MARKET STAND-OFF PROVISIONS. A. In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Corporation's initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the prior written consent of the Corporation or its underwriters. Such limitations shall be in effect for such period of time from and after the effective date of such registration statement as may be requested by the Corporation or such underwriters; provided, however, that in no event shall such period exceed one hundred-eighty (180) days. The -6- 19 limitations of this paragraph 4.4 shall remain in effect for the two-year period immediately following the effective date of the Corporation's initial public offering and shall thereafter terminate and cease to have any force or effect. B. Owner shall be subject to the market stand-off provisions of this paragraph 4.4 provided and only if the officers and directors of the Corporation are also subject to similar arrangements. C. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock effected as a class without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Purchased Shares shall be immediately subject to the provisions of this paragraph 4.4, to the same extent the Purchased Shares are at such time covered by such provisions. D. In order to enforce the limitations of this paragraph 4.4, the Corporation may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable stand-off period. V. REPURCHASE RIGHT 5.1 GRANT. The Corporation is hereby granted the right (the "Repurchase Right"), exercisable at any time during the sixty (60)-day period following the date the Optionee ceases for any reason to remain in Service or (if later) during the sixty (60)-day period following the execution date of this Agreement, to repurchase at the Option Price all or (at the discretion of the Corporation and with the consent of the Optionee) any portion of the Purchased Shares in which the Optionee has not acquired a vested interest in accordance with the vesting provisions of paragraph 5.3 (such shares to be hereinafter called the "Unvested Shares"). For purposes of this Agreement, the Optionee shall be deemed to remain in Service for so long as the Optionee continues to render periodic services to the Corporation or any parent or subsidiary corporation, whether as an employee, a non-employee member of the board of directors, or an independent contractor or consultant. 5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to the Owner of the Unvested Shares prior to the expiration of the applicable sixty (60)-day period specified in paragraph 5.1. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of notice. To the extent one or more certificates representing Unvested Shares may have been previously delivered out of escrow to the Owner, then Owner shall, prior to the close of business on the date specified for the repurchase, deliver to the Secretary of the Corporation the certificates representing the Unvested Shares to be repurchased, each certificate to be properly endorsed for transfer. The Corporation shall, concurrently with the receipt of such stock certificates (either from escrow in accordance with paragraph 7.3 or from Owner as herein provided), pay to Owner in cash or cash -7- 20 equivalents (including the cancellation of any purchase-money indebtedness), an amount equal to the Option Price previously paid for the Unvested Shares which are to be repurchased. 5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under paragraph 5.2. In addition, the Repurchase Right shall terminate, and cease to be exercisable, with respect to any and all Purchased Shares in which the Optionee vests in accordance with the vesting schedule specified in the Grant Notice. All Purchased Shares as to which the Repurchase Right lapses shall, however, continue to be subject to (i) the First Refusal Right of the Corporation and its assignees under Article VI, (ii) the market stand-off provisions of paragraph 4.4 and (iii) the Special Purchase Right under Article VIII. 5.4 AGGREGATE VESTING LIMITATION. If the Option is exercised in more than one increment so that the Optionee is a party to one or more other Stock Purchase Agreements ("Prior Purchase Agreements") which are executed prior to the date of this Agreement, then the total number of Purchased Shares as to which the Optionee shall be deemed to have a fully-vested interest under this Agreement and all Prior Purchase Agreements shall not exceed in the aggregate the number of Purchased Shares in which the Optionee would otherwise at the time be vested, in accordance with the vesting provisions of paragraph 5.3, had all the Purchased Shares been acquired exclusively under this Agreement. 5.5 FRACTIONAL SHARES. No fractional shares shall be repurchased by the Corporation. Accordingly, should the Repurchase Right extend to a fractional share (in accordance with the vesting provisions of paragraph 5.3) at the time the Optionee ceases Service, then such fractional share shall be added to any fractional share in which the Optionee is at such time vested in order to make one whole vested share no longer subject to the Repurchase Right. 5.6 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration, then any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which is by reason of any such transaction distributed with respect to the Purchased Shares shall be immediately subject to the Repurchase Right, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number of Purchased Shares and Total Purchasable Shares hereunder and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such transaction upon the Corporation's capital structure; provided, however, that the aggregate purchase price shall remain the same. 5.7 CORPORATE TRANSACTION. -8- 21 A. Except to the extent the Repurchase Right is to be assigned to the successor corporation (or its parent company), immediately prior to the consummation of any of the following shareholder-approved transactions (a "Corporate Transaction"): (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets, or (iii) any transaction (other than an issuance of shares by the Corporation for cash) in or by means of which one or more persons acting in concert acquire, in the aggregate, more than 50% of the outstanding shares of the stock of the Corporation, the Corporation may exercise the Repurchase Right with respect to the then Unvested Shares. The Repurchase Right shall automatically lapse with respect to all Unvested Shares not repurchased hereunder. B. To the extent the Repurchase Right remains in effect following such Corporate Transaction, it shall apply to the new capital stock or other property (including cash) received in exchange for the Shares in consummation of the Corporate Transaction, but only to the extent the Shares are at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Corporate Transaction upon the Corporation's capital structure; provided, however, that the aggregate Purchase Price shall remain the same. -9- 22 VI. RIGHT OF FIRST REFUSAL 6.1 GRANT. The Corporation is hereby granted rights of first refusal (the "First Refusal Right"), exercisable in connection with any proposed transfer of the Purchased Shares in which the Optionee has vested in accordance with the vesting provisions of Article V. For purposes of this Article VI, the term "transfer" shall include any sale, assignment, pledge, encumbrance or other disposition for value of the Purchased Shares intended to be made by the Owner, but shall not include any of the permitted transfers under paragraph 4.1. 6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner desires to accept a bona fide third-party offer for the transfer of any or all of the Purchased Shares (the shares subject to such offer to be hereinafter called the "Target Shares"), Owner shall promptly (i) deliver to the Corporate Secretary of the Corporation written notice (the "Disposition Notice") of the terms and conditions of the offer, including the purchase price and the identity of the third-party offeror, and (ii) provide satisfactory proof that the disposition of the Target Shares to such third-party offeror would not be in contravention of the provisions set forth in Articles II and IV of this Agreement. 6.3 EXERCISE OF RIGHT. The Corporation shall, for a period of forty-five (45) days following receipt of the Disposition Notice, have the right to repurchase any or all of the Target Shares specified in the Disposition Notice upon the same terms and conditions specified therein or upon terms and conditions which do not materially vary from those specified therein. Such right shall be exercisable by delivery of written notice (the "Exercise Notice") to Owner prior to the expiration of the forty-five (45)-day exercise period. If such right is exercised with respect to all the Target Shares specified in the Disposition Notice, then the Corporation (or its assignees) shall effect the repurchase of the Target Shares, including payment of the purchase price, not more than ten (10) business days after delivery of the Exercise Notice; and at such time Owner shall deliver to the Corporation the certificates representing the Target Shares to be repurchased, each certificate to be properly endorsed for transfer. To the extent any of the Target Shares are at the time held in escrow under Article VII, the certificates for such shares shall automatically be released from escrow and delivered to the Corporation for purchase. Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the Corporation (or its assignees) shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property. If the Owner and the Corporation (or its assignees) cannot agree on such cash value within ten (10) days after the Corporation's receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by the Owner and the Corporation (or its assignees) or, if they cannot agree on an appraiser within twenty (20) days after the Corporation's receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The cost of such appraisal shall be shared equally by the Owner and the Corporation. The closing shall then be held on the later of (i) the tenth business day following -10- 23 delivery of the Exercise Notice or (ii) the tenth business day after such cash valuation shall have been made. 6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is not given to Owner within forty-five (45) days following the date of the Corporation's receipt of the Disposition Notice, Owner shall have a period of thirty (30) days thereafter in which to sell or otherwise dispose of the Target Shares to the third-party offeror identified in the Disposition Notice upon terms and conditions (including the purchase price) no more favorable to such third-party offeror than those specified in the Disposition Notice; provided, however, that any such sale or disposition must not be effected in contravention of the provisions of Article II of this Agreement. To the extent any of the Target Shares are at the time held in escrow under Article VII, the certificates for such shares shall automatically be released from escrow and surrendered to the Owner. The third-party offeror shall acquire the Target Shares free and clear of the Corporation's Repurchase Right under Article V and the Corporation's First Refusal Right hereunder, but the acquired shares shall remain subject to (i) the securities law restrictions of paragraph 2.2(a) and (ii) the market stand-off provisions of paragraph 4.4. In the event Owner does not effect such sale or disposition of the Target Shares within the specified thirty (30)-day period, the Corporation's First Refusal Right shall continue to be applicable to any subsequent disposition of the Target Shares by Owner until such right lapses in accordance with paragraph 6.7. 6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or its assignees) makes a timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written notice to the Corporation delivered within thirty (30) days after the date of the Disposition Notice, to effect the sale of the Target Shares pursuant to one of the following alternatives: (i) sale or other disposition of all the Target Shares to the third-party offeror identified in the Disposition Notice, but in full compliance with the requirements of paragraph 6.4, as if the Corporation did not exercise the First Refusal Right hereunder; or (ii) sale to the Corporation (or its assignees) of the portion of the Target Shares which the Corporation (or its assignees) has elected to purchase, such sale to be effected in substantial conformity with the provisions of paragraph 6.3. Failure of Owner to deliver timely notification to the Corporation under this paragraph 6.5 shall be deemed to be an election by Owner to sell the Target Shares pursuant to alternative (i) above. 6.6 RECAPITALIZATION/MERGER. -11- 24 (a) In the event of any stock dividend, stock split, recapitalization or other transaction affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Purchased Shares shall be immediately subject to the Corporation's First Refusal Right hereunder, but only to the extent the Purchased Shares are at the time covered by such right. (b) In the event of any of the following transactions: (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) a sale, transfer or other disposition of all or substantially all of the Corporation's assets, (iii) a reverse merger in which the Corporation is the surviving entity but in which the Corporation's outstanding voting securities are transferred in whole or in part to person or persons other than those who held such securities immediately prior to the merger, or (iv) any transaction effected primarily to change the State in which the Corporation is incorporated, or to create a holding company structure, the Corporation's First Refusal Right shall remain in full force and effect and shall apply to the new capital stock or other property received in exchange for the Purchased Shares in consummation of the transaction but only to the extent the Purchased Shares are at the time covered by such right. 6.7 LAPSE. The First Refusal Right under this Article VI shall lapse and cease to have effect upon the earliest to occur of (i) the first date on which shares of the Corporation's Common Stock are held of record by more than five hundred (500) persons, (ii) a determination is made by the Corporation's Board of Directors that a public market exists for the outstanding shares of the Corporation's Common Stock, or (iii) a firm commitment underwritten public offering pursuant to an effective registration statement under the 1933 Act, covering the offer and sale of the Corporation's Common Stock in the aggregate amount of at least $5,000,000. However, the market stand-off provisions of paragraph 4.4 shall continue to remain in full force and effect following the lapse of the First Refusal Right hereunder. VII. ESCROW 7.1 DEPOSIT. Upon issuance, the certificates for any Unvested Shares purchased hereunder shall be deposited in escrow with the Corporate Secretary of the Corporation to be held in accordance with the provisions of this Article VII. Each deposited certificate shall be -12- 25 accompanied by a duly-executed Assignment Separate from Certificate in the form of Exhibit I. The deposited certificates, together with any other assets or securities from time to time deposited with the Corporate Secretary pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with paragraph 7.3. Upon delivery of the certificates (or other assets and securities) to the Corporate Secretary of the Corporation, the Owner shall be issued an instrument of deposit acknowledging the number of Unvested Shares (or other assets and securities) delivered in escrow. 7.2 RECAPITALIZATION. All regular cash dividends on the Unvested Shares (or other securities at the time held in escrow) shall be paid directly to the Owner and shall not be held in escrow. However, in the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration or in the event of a Corporate Transaction, any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Unvested Shares shall be immediately delivered to the Corporate Secretary to be held in escrow under this Article VII, but only to the extent the Unvested Shares are at the time subject to the escrow requirements of paragraph 7.1. 7.3 RELEASE/SURRENDER. The Unvested Shares, together with any other assets or securities held in escrow hereunder, shall be subject to the following terms and conditions relating to their release from escrow or their surrender to the Corporation for repurchase and cancellation: (i) Should the Corporation (or its assignees) elect to exercise the Repurchase Right under Article V with respect to any Unvested Shares, then the escrowed certificates for such Unvested Shares (together with any other assets or securities issued with respect thereto) shall be delivered to the Corporation concurrently with the payment to the Owner, in cash or cash equivalent (including the cancellation of any purchase-money indebtedness), of an amount equal to the aggregate Option Price for such Unvested Shares, and the Owner shall cease to have any further rights or claims with respect to such Unvested Shares (or other assets or securities attributable to such Unvested Shares). (ii) Should the Corporation (or its assignees) elect to exercise its First Refusal Right under Article VI with respect to any vested Target Shares held at the time in escrow hereunder, then the escrowed certificates for such Target Shares (together with any other assets or securities attributable thereto) shall, concurrently with the payment of the paragraph 6.3 purchase price for such Target Shares to the Owner, be surrendered to the Corporation, and the Owner shall cease to have any further rights or claims with respect to such Target Shares (or other assets or securities). -13- 26 (iii) Should the Corporation (or its assignees) elect not to exercise its First Refusal Right under Article VI with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for such Target Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Owner for disposition in accordance with provisions of paragraph 6.4. (iv) As the interest of the Optionee in the Unvested Shares (or any other assets or securities attributable thereto) vests in accordance with the provisions of Article V, the certificates for such vested shares (as well as all other vested assets and securities) shall be released from escrow and delivered to the Owner in accordance with the following schedule: a. The initial release of vested shares (or other vested assets and securities) from escrow shall be effected within thirty (30) days following the expiration of the initial twelve (12)- month period measured from the Grant Date. b. Subsequent releases of vested shares (or other vested assets and securities) from escrow shall be effected at semi-annual intervals thereafter, with the first such semi-annual release to occur eighteen (18) months after the Grant Date. c. Upon the Optionee's cessation of Service, any escrowed Purchased Shares (or other assets or securities) in which the Optionee is at the time vested shall be promptly released from escrow. d. Upon any earlier termination of the Corporation's Repurchase Right in accordance with the applicable provisions of Article V, any Purchased Shares (or other assets or securities) at the time held in escrow hereunder shall promptly be released to the Owner as fully-vested shares or other property. (v) All Purchased Shares (or other assets or securities) released from escrow in accordance with the provisions of subparagraph (iv) above shall nevertheless remain subject to (I) the Corporation's First Refusal Right under Article VI until such right lapses pursuant to paragraph 6.7, (II) the market standoff provisions of paragraph 4.4 until such provisions terminate in accordance therewith and (III) the Special Purchase Right under Article VIII. -14- 27 VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION 8.1 GRANT. In connection with the dissolution of the Optionee's marriage or the legal separation of the Optionee and the Optionee's spouse, the Corporation shall have the right (the "Special Purchase Right"), exercisable at any time during the thirty (30)-day period following the Corporation's receipt of the required Dissolution Notice under paragraph 8.2, to purchase from the Optionee's spouse, in accordance with the provisions of paragraph 8.3, all or any portion of the Purchased Shares which would otherwise be awarded to such spouse in settlement of any community property or other marital property rights such spouse may have in such shares. 8.2 NOTICE OF DECREE OR AGREEMENT. The Optionee shall promptly provide the Secretary of the Corporation with written notice (the "Dissolution Notice") of (i) the entry of any judicial decree or order resolving the property rights of the Optionee and the Optionee's spouse in connection with their marital dissolution or legal separation or (ii) the execution of any contract or agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree of dissolution or settlement agreement between the Optionee and the Optionee's spouse which provides for the award to the spouse of one or more Purchased Shares in settlement of any community property or other marital property rights such spouse may have in such shares. 8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase Right shall be exercisable by delivery of written notice (the "Purchase Notice") to the Optionee and the Optionee's spouse within thirty (30) days after the Corporation's receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of shares to be purchased by the Corporation, the date such purchase is to be effected (such date to be not less than five (5) business days, nor more than ten (10) business days, after the date of the Purchase Notice), and the fair market value to be paid for such Purchased Shares. The Optionee (or the Optionee's spouse, to the extent such spouse has physical possession of the Purchased Shares) shall, prior to the close of business on the date specified for the purchase, deliver to the Corporate Secretary of the Corporation the certificates representing the shares to be purchased, each certificate to be properly endorsed for transfer. To the extent any of the shares to be purchased by the Corporation are at the time held in escrow under Article VII, the certificates for such shares shall be promptly delivered out of escrow to the Corporation. The Corporation shall, concurrently with the receipt of the stock certificates, pay to the Optionee's spouse (in cash or cash equivalents) an amount equal to the fair market value specified for such shares in the Purchase Notice. If the Optionee's spouse does not agree with the fair market value specified for the shares in the Purchase Notice, then the spouse shall promptly notify the Corporation in writing of such disagreement and the fair market value of such shares shall thereupon be determined by an appraiser of recognized standing selected by the Corporation and the spouse. If they cannot agree on an appraiser within twenty (20) days after the date of the Purchase Notice, each shall select an appraiser of recognized standing, and the two appraisers shall -15- 28 designate a third appraiser of recognized standing whose appraisal shall be determinative of such value. The cost of the appraisal shall be shared equally by the Corporation and the Optionee's spouse. The closing shall then be held on the fifth business day following the completion of such appraisal; provided, however, that if the appraised value is more than fifteen percent (15%) greater than the fair market value specified for the shares in the Purchase Notice, the Corporation shall have the right, exercisable prior to the expiration of such five (5)-business-day period, to rescind the exercise of the Special Purchase Right and thereby revoke its election to purchase the shares awarded to the spouse. 8.4 LAPSE. The Special Purchase Right under this Article VIII shall lapse and cease to have effect upon the earlier to occur of (i) the first date on which the First Refusal Right under Article VI lapses or (ii) the expiration of the thirty (30)-day exercise period specified in paragraph 8.3, to the extent the Special Purchase Right is not timely exercised in accordance with such paragraph. IX. GENERAL PROVISIONS 9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right under Article V, its First Refusal Right under Article VI and/or its Special Purchase Right under Article VIII to any person or entity selected by the Corporation's Board of Directors, including (without limitation) one or more shareholders of the Corporation. If the assignee of the Repurchase Right is other than a one hundred percent (100%) owned subsidiary corporation of the Corporation or the parent corporation owning one hundred percent (100%) of the Corporation, then such assignee must make a cash payment to the Corporation, upon the assignment of the Repurchase Right, in an amount equal to the excess (if any) of (i) the fair market value of the Unvested Shares at the time subject to the assigned Repurchase Right over (ii) the aggregate repurchase price payable for the Unvested Shares thereunder. 9.2 DEFINITIONS. For purposes of this Agreement, the following provisions shall be applicable in determining the parent and subsidiary corporations of the Corporation: (i) Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a parent corporation of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (ii) Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a subsidiary of the Corporation, provided each such corporation (other than -16- 29 the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 9.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the Service of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining Optionee) for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining Optionee) or the Optionee, which rights are hereby expressly reserved by each, to terminate the Optionee's Service at any time for any reason whatsoever, with or without cause. 9.4 NOTICES. Any notice required in connection with (i) the Repurchase Right, the Special Purchase Right or the First Refusal Right or (ii) the disposition of any Purchased Shares covered thereby shall be given in writing and shall be deemed effective upon personal delivery or upon deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph 9.4 to all other parties to this Agreement. 9.5 NO WAIVER. The failure of the Corporation (or its assignees) in any instance to exercise the Repurchase Right granted under Article V, or the failure of the Corporation (or its assignees) in any instance to exercise the First Refusal Right granted under Article VI, or the failure of the Corporation (or its assignees) in any instance to exercise the Special Purchase Right granted under Article VIII shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and the Optionee or the Optionee's spouse. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 9.6 CANCELLATION OF SHARES. If the Corporation (or its assignees) shall make available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement), and such shares shall be deemed purchased in accordance with the applicable provisions hereof and the Corporation (or its assignees) shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. X. MISCELLANEOUS PROVISIONS -17- 30 10.1 OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may in its judgment deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either the Optionee or the Purchased Shares pursuant to the express provisions of this Agreement. 10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the express terms and provisions of the Plan. 10.3 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State without resort to that State's conflict-of-laws rules. 10.4 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and the Optionee and the Optionee's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof. 10.6 POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee his or her true and lawful attorney in fact, for him or her and in his or her name, place and stead, and for his or her use and benefit, to agree to any amendment or modification of this Agreement and to execute such further instruments and take such further actions as may reasonably be necessary to carry out the intent of this Agreement. Optionee's spouse further gives and grants unto Optionee as his or her attorney in fact full power and authority to do and perform every act necessary and proper to be done in the exercise of any of the foregoing powers as fully as he or she might or could do if personally present, with full power of substitution and revocation, hereby ratifying and confirming all that Optionee shall lawfully do and cause to be done by virtue of this power of attorney. -18- 31 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above. CombiChem, Inc. By:______________________________________ Title:___________________________________ Address: _________________________________________ _________________________________________ _________________________________________ Optionee * Address: _________________________________________ _________________________________________ The undersigned spouse of Optionee has read and hereby approves the foregoing Stock Purchase Agreement. In consideration of the Corporation's granting the Optionee the right to acquire the Purchased Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms and provisions of such Agreement, including (specifically) the right of the Corporation (or its assignees) to purchase any and all interest or right the undersigned may otherwise have in such shares pursuant to community property laws or other marital property rights. _________________________________________ Optionee's Spouse Address: _________________________________________ _________________________________________ - ---------- * I have executed the Section 83(b) election that was attached hereto as an Exhibit. As set forth in Article III, I understand that I, and not the Corporation, will be responsible for completing the form and filing the election with the appropriate office of the Federal and State tax authorities and that if such filing is not completed within thirty (30) days after the date of this Agreement, I will not be entitled to the tax benefits provided by Section 83(b). -19- 32 EXHIBIT I ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED ___________________ hereby sell(s), assign(s) and transfer(s) unto CombiChem, Inc. (the "Corporation"), ____________________ (____________) shares of the Common Stock of the Corporation standing in his\her name on the books of the Corporation represented by Certificate No. _____________________ and do hereby irrevocably constitute and appoint ________________________ as Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: __________________ Signature ________________________ INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Corporation to exercise its Repurchase Right set forth in the Agreement without requiring additional signatures on the part of the Optionee. 33 REPURCHASE RIGHTS EXHIBIT II SECTION 83(b) TAX ELECTION This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2. (1) The taxpayer who performed the services is: Name: Address: Taxpayer Ident. No.: (2) The property with respect to which the election is being made is ________ shares of the common stock of CombiChem, Inc. (3) The property was issued on ___________ , 19___. (4) The taxable year in which the election is being made is the calendar year 19___ . (5) The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason taxpayer's employment with the issuer is terminated. The issuer's repurchase right lapses in a series of annual and monthly installments over a four year period ending on _________, 19___ . (6) The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $_______ per share. (7) The amount paid for such property is $________ per share. (8) A copy of this statement was furnished to CombiChem, Inc. for whom taxpayer rendered the services underlying the transfer of property. (9) This statement is executed as of: ______________________. ___________________________ ____________________________ Spouse (if any) Taxpayer This form must be filed with the Internal Revenue Service Center with which taxpayer files his/her Federal income tax returns. The filing must be made within 30 days after the execution date of the Stock Purchase Agreement. EXHIBIT II-1 34 SPECIAL PROTECTIVE ELECTION PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE WITH RESPECT TO PROPERTY ACQUIRED UPON EXERCISE OF AN INCENTIVE STOCK OPTION The property described in the above Section 83(b) election is comprised of shares of common stock acquired pursuant to the exercise of an incentive stock option under Section 422 of the Code. Accordingly, it is the intent of the Taxpayer to utilize this election to achieve the following tax results: 1. The purpose of this election is to have the alternative minimum taxable income attributable to the purchased shares measured by the amount by which the fair market value of such shares at the time of their transfer to the Taxpayer exceeds the purchase price paid for the shares. In the absence of this election, such alternative minimum taxable income would be measured by the spread between the fair market value of the purchased shares and the purchase price which exists on the various lapse dates in effect for the forfeiture restrictions applicable to such shares. The election is to be effective to the full extent permitted under the Internal Revenue Code. 2. Section 421(a)(1) of the Code expressly excludes from income any excess of the fair market value of the purchased shares over the amount paid for such shares. Accordingly, this election is also intended to be effective in the event there is a "disqualifying disposition" of the shares, within the meaning of Section 421(b) of the Code, which would otherwise render the provisions of Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer hereby elects to have the amount of disqualifying disposition income measured by the excess of the fair market value of the purchased shares on the date of transfer to the Taxpayer over the amount paid for such shares. Since Section 421(a) presently applies to the shares which are the subject of this Section 83(b) election, no taxable income is actually recognized for regular tax purposes at this time, and no income taxes are payable, by the Taxpayer as a result of this election. This form should be filed with the Internal Revenue Service Center with which taxpayer files his/her Federal income tax returns. The filing must be made within 30 days after the execution date of the Stock Purchase Agreement. NOTE: PAGE 2 SHOULD BE ATTACHED ONLY IF YOU ARE EXERCISING AN INCENTIVE STOCK OPTION. 35 EXHIBIT C 1995 STOCK OPTION/STOCK ISSUANCE PLAN C-1 36 COMBICHEM, INC. 1995 STOCK OPTION/STOCK ISSUANCE PLAN Amended as of August 10, 1995 Further Amended as of May 9, 1996 Further Amended as of May 8, 1997 ARTICLE I GENERAL PROVISIONS 1. PURPOSE This 1995 Stock Option/Stock Issuance Plan ("Plan") is intended to promote the interests of CombiChem, Inc. (the "Corporation"), by providing individuals who render valuable services to the Corporation (or any Parent or Subsidiary) with the opportunity to acquire ownership interests in the Corporation so as to encourage them to continue to render services to the Corporation (or any Parent or Subsidiary). 2. STRUCTURE OF THE PLAN; TERMINOLOGY This Plan has two separate components: the Option Grant Program set forth in Article II and the Stock Issuance Program set forth in Article III. For the purposes of this Plan, any capitalized term shall have the meaning assigned under Article IV, Section 8 hereof. 3. ADMINISTRATION OF THE PLAN A. This Plan shall be administered either the Board or a committee of two (2) or more Board members appointed by the Board to which the Board has delegated administrative functions under the Plan (the "Plan Administrator"). Members of any committee to which the Board has delegated any administrative functions shall serve for such terms as the Board shall determine and subject to the Board's right of removal. All delegations of authority to any committee shall be and remain revocable by the Board. B. The Plan Administrator shall have full power and authority to implement, interpret and administer the Plan, to establish all such rules and regulations as it deems appropriate, and to make such determinations under the Plan and any outstanding option grants or share issuances as it deems necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any outstanding option or share issuance. 37 4. SELECTION OF OPTIONEES AND PARTICIPANTS A. The persons eligible to receive share issuances under the Stock Issuance Program and/or option grants pursuant to the Option Grant Program are limited to Employees; non-employee members of the Board of the Corporation (or of any Parent or Subsidiary); and consultants and other independent contractors who provide valuable services to the Corporation (or of any Parent or Subsidiary). B. The Plan Administrator shall have the absolute discretion and authority to determine, subject to the provisions of this Plan, the terms of any option grant or share issuance. In addition to any other matters over which the Plan Administrator has discretion hereunder, the Plan Administrator shall determine which, if any, eligible individuals will be granted options in accordance with Article II of the Plan and which will be issued shares in accordance with Article III of the Plan. With respect to option grants made under the Plan, the Plan Administrator will determine the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each granted option is to become exercisable, the vesting schedule (if any) applicable to shares issued pursuant to the granted options, and the maximum term for which the option may remain outstanding. With respect to share issuances under the Stock Issuance Program, in addition to other matters over which the Plan Administrator has discretion hereunder, the Plan Administrator will determine the number of shares to be issued to each issuee, the vesting schedule (if any) applicable to the issued shares, and the consideration to be paid by the individual for such shares. C. Common Stock issuable under the Plan, whether under the Option Grant Program or the Stock Issuance Program, may be subject to such restrictions on transfer, repurchase rights or other restrictions as may be imposed by the Plan Administrator and set forth in the documents governing such option or issuance. 5. STOCK SUBJECT TO THE PLAN A. Common Stock of the Corporation will be issued under the Plan. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 6,220,274 shares, subject to adjustment from time to time in accordance with the provisions of this Section 5 of Article I. The maximum number of shares of Common Stock which may be issued over the term of the Plan at any one time shall not exceed 30% of the then outstanding shares of the Corporation. B. Shares reserved for issuance under granted options but not in fact issued pursuant to options granted under the Plan due to the expiration or termination of the option or the cancellation of the option in accordance with Section 3 of Article II, will again become available for issuance under the Plan. Shares actually issued under the Plan, whether pursuant to the exercise of an option under the Option Grant Program or a stock issuance pursuant to the Stock Issuance Program, which are subsequently repurchased by the Corporation will not become available for future issuance. -2- 38 C. In the event any change is made to the Common Stock issuable under the Plan by reason of any stock dividend, stock split, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the aggregate number and/or class of shares issuable under the Plan and (ii) the aggregate number and/or class of shares and the option price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 6. AMENDMENT OF THE PLAN AND AWARDS A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects whatsoever. However, no such amendment or modification shall adversely affect the rights and obligations of an optionee with respect to options at the time outstanding under the Plan, nor adversely affect the rights of any issuee with respect to Common Stock issued under the Plan prior to such action unless such optionee or issuee consents to such amendment. In addition, the Board shall not, without the approval of the Corporation's shareholders, amend the Plan so as to (i) increase the maximum number of shares issuable under the Plan (except for adjustments required under Article I, Section 5.C), (ii) materially increase the benefits accruing to individuals who participate in the Plan, or (iii) materially modify the eligibility requirements for participation in the Plan. B. Options to purchase shares of Common Stock may be granted under the Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program, which are in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under the Option Grant Program or the Stock Issuance Program are held in escrow until shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan is obtained. If such approval is not obtained within twelve (12) months after the date the initial excess issuances are made, then (I) any unexercised options representing such excess shall terminate and cease to be exercisable and (II) the Corporation shall promptly refund to the optionees and issuees the option or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. 7. EFFECTIVE DATE AND TERM OF PLAN A. The Plan shall become effective when adopted by the Board. Options to purchase shares of Common Stock may be granted under the Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program from and after the effective date, provided any shares actually issued under the Plan are held in escrow until shareholder approval of the Plan is obtained. If such approval is not obtained within twelve (12) months after the effective date, then (I) all options shall terminate and cease to be exercisable, (II) the Corporation shall promptly refund to the optionees and issuees the option or purchase price paid for any shares issued under the Plan, together with interest (at the applicable Short Term Federal -3- 39 Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding, and (III) this Plan shall terminate in its entirety. B. Unless sooner terminated by reason of Section 7A of this Article I, the Plan shall terminate upon the earlier of (i) February 28, 2005, or (ii) the date on which all shares available for issuance under the Plan have been issued pursuant to the exercise of options granted under Article II or the issuance of shares under Article III. The termination of the Plan shall have no effect on any outstanding options under or shares issued and outstanding under the Plan, and such securities shall thereafter continue to have force and effect in accordance with the provisions of the agreements evidencing such options and issuances. 8. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon any person any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary) or of the optionee or the issuee, which rights are hereby expressly reserved by each, to terminate Service of the optionee or issuee at any time for any reason whatsoever, with or without cause or to engage in any Corporate Transaction. ARTICLE II OPTION GRANT PROGRAM 1. TERMS AND CONDITIONS OF OPTIONS Options granted pursuant to the Plan shall be authorized by action of the Plan Administrator and may, at the Plan Administrator's discretion, be either Incentive Options or Non-Statutory Options except that individuals who are not Employees may only be granted Non- Statutory Options. Each granted option shall be evidenced by one or more instruments in the form approved by the Plan Administrator; provided, however, that each such instrument shall comply with the terms and conditions of Sections 1 and 3 of this Article II and each instrument evidencing an Incentive Option shall, in addition, comply with the provisions of Section 2 of this Article II. A. OPTION PRICE. (I) The option price per share shall be fixed by the Plan Administrator. In no event, however, shall the option price per share be less than eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on the date of the option grant. (II) The option price per share shall become immediately due upon exercise of the option and shall, subject to the provisions of Article IV, Section 1 and the agreement evidencing such grant, be payable in cash or check drawn to the Corporation's order. Notwithstanding the above, should the Corporation's outstanding Common Stock be registered -4- 40 under Section 12(g) of the 1934 Act, at the time the option is exercised, then the option price may also be paid as follows: - in shares of Common Stock held by the optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value; or - through a special sale and remittance procedure pursuant to which the optionee provides irrevocable written instructions (I) to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, an amount sufficient to cover the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation by reason of such purchase and (II) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to effect the sale transaction. Except to the extent such sale and remittance procedure is utilized, payment of the option price must occur at the time the option is exercised. B. TERM AND EXERCISE OF OPTIONS. Each option granted under the Plan shall be exercisable at such time or times, during such period, and for such number of shares as shall be determined by the Plan Administrator and set forth in the stock option agreement evidencing such option. However, no option granted under the Plan shall have a term in excess of ten (10) years from the grant date. C. NO ASSIGNMENT. During the lifetime of the optionee, the option shall be exercisable only by the optionee and shall not be assignable or transferable by the optionee otherwise than by will or by the laws of descent and distribution following the optionee's death. D. TERMINATION OF SERVICE. The following provisions shall govern the exercise period applicable to any options held by the optionee at the time of cessation of Service or death: (I) Should the optionee cease to remain in Service for any reason other than death or Permanent Disability, then the period during which each outstanding option held by such optionee is to remain exercisable shall be limited to the three (3)-month period following the date of such cessation of Service. (II) Should such Service terminate by reason of Permanent Disability or should the optionee die while holding one or more outstanding options, then the period during which each such option is to remain exercisable shall be limited to the twelve (12)- month period following the date of the optionee's cessation of Service or death. During the limited exercise period following the optionee's death, the option may be exercised by the personal representative of the optionee's estate or by the person or persons to whom the option -5- 41 is transferred pursuant to the optionee's will or in accordance with the laws of descent and distribution. (III) The Plan Administrator shall have full power and authority to extend (either at the time the option is granted or at any time while the option remains outstanding) the period of time for which the option is to remain exercisable following the optionee's cessation of Service, from the limited period otherwise applicable under subsection 1C of this Article II, to such greater period of time as the Plan Administrator may deem appropriate under the circumstances. (IV) Notwithstanding the above no option shall be exercisable after the specified expiration date of the option term. (V) Each such option shall, during the applicable limited exercise period, be exercisable only with respect to the shares for which the option was exercisable on the date of the optionee's cessation of Service. E. SHAREHOLDER RIGHTS. An optionee shall not have rights as a shareholder with respect to any shares subject to an option until such optionee shall have exercised the option and paid the option price. 2. INCENTIVE OPTIONS All provisions of the Plan shall be applicable to Incentive Options granted hereunder and, in addition, the terms and conditions specified in this Section 2 shall be applicable to Incentive Options granted under the Plan. Options which are specifically designated as Non- Statutory Options when issued under the Plan shall not be subject to such terms and conditions set forth herein. A. OPTION PRICE. (I) The option price per share of the Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the Fair Market Value of a share of Common Stock on the grant date. (II) If the individual to whom the option is granted is a 10% Shareholder, then the option price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of the option grant. B. DOLLAR LIMITATION. The aggregate Fair Market Value (determined as of the date or dates of grant) of Common Stock which first becomes exercisable during any one calendar year under Incentive Options granted to any Employee under any option plan of the Corporation (or any parent or subsidiary corporation) shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds options which become exercisable in the same calendar year, the foregoing limitation on such options shall be applied -6- 42 on the basis of the order in which such options are granted. Any options in excess of such limitation shall automatically be treated as Non-statutory Options. C. TERM OF OPTION FOR 10% SHAREHOLDERS. No option granted to a 10% Shareholder shall have a term in excess of five (5) years from the grant date. 3. CANCELLATION AND NEW GRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected optionees, the cancellation of any or all outstanding options under the Plan and the grant in substitution therefor of new options under the Plan covering the same or a different numbers of shares of Common Stock but having an option price per share established at the time of such cancellation and regrant in accordance with the provisions of this Plan. ARTICLE III STOCK ISSUANCE PROGRAM 1. STOCK ISSUANCES Shares of Common Stock shall be issuable under the Stock Issuance Program through direct and immediate issuances without any intervening stock option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement ("Issuance Agreement") in a form acceptable to the Plan Administrator, which form shall be in compliance with the provisions of the Plan. 2. ISSUE PRICE The purchase price per share shall be fixed by the Plan Administrator, but in no event shall it be less than eighty-five percent (85%) of the Fair Market Value of a share of Common Stock at the time of issuance. 3. PAYMENT OF ISSUE PRICE Except as provided in Article IV, Section 1, shares shall be issued only in exchange for cash, a check payable to the Corporation, for services previously rendered to the Corporation (or any Parent or Subsidiary) or such other lawful consideration as may be acceptable to the Plan Administrator. ARTICLE IV MISCELLANEOUS 1. LOANS -7- 43 A. The Plan Administrator may assist any optionee or issuee (other than a non-employee director) in the exercise of one or more options granted to such optionee under the Option Grant Program or the purchase of one or more shares to be issued to such issuee under the Stock Issuance Program, including the satisfaction of any Federal and State income and employment tax obligations arising therefrom, by (i) authorizing the extension of a loan from the Corporation to such optionee or issuee, or (ii) permitting the optionee or issuee to pay the option price or purchase price for the purchased Common Stock in installments over a period of years. B. The terms of any loan or installment method of payment (including the interest rate and terms of repayment) shall be established by the Plan Administrator in its sole discretion. Loans or installment payments may be authorized with or without security or collateral. However, any loan made to a consultant or other non-employee advisor must be secured by property other than the purchased shares of Common Stock. In all events the maximum credit available to each optionee or issuee may not exceed the sum of (i) the aggregate option price or purchase price payable for the purchased shares plus (ii) any Federal and State income and employment tax liability incurred by the optionee or issuee in connection with such exercise or purchase. C. The Plan Administrator may, in its absolute discretion, determine that one or more loans extended under the financial assistance program shall be subject to forgiveness by the Corporation in whole or in part upon such terms and conditions as the Board in its discretion deems appropriate. 2. VESTING OF SHARES AND REPURCHASE RIGHTS A. The Plan Administrator, in its absolute discretion, may issue fully and immediately vested shares of Common Stock, or the Plan Administrator may impose such vesting requirements as it deems appropriate with the Corporation retaining a right to repurchase any unvested shares. The terms of the vesting schedule and of the Corporation's repurchase rights shall be as determined by the Plan Administrator and set forth in the agreement governing such issuance. However, no option shall have a term in excess of ten (10) years measured from the option grant date. In no event, however, may the Plan Administrator impose a vesting schedule upon any shares issued under the Plan which results in the vesting of fewer than 20% of the total number of shares each year beginning one year after the option grant date. In extraordinary circumstances, the Plan Administrator may grant options or issue shares which are fully and immediately vested upon issuance. B. Any new, additional or different shares of stock or other property (including money paid other than as a regular cash dividend) which the holder of unvested Common Stock may have the right to receive by reason of a stock dividend, stock split, reclassification or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting and repurchase limitations applicable to the unvested Common Stock with respect to which it was paid or arose, and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. -8- 44 C. No person to whom shares of Common Stock have been issued pursuant to the Plan may transfer any such shares which have not vested. Notwithstanding the above, the issuee shall have the right to make a gift of unvested shares acquired under the Plan to his/her spouse, parents or issue or to a trust established for such spouse, parents or issue, provided the transferee of such shares delivers to the Corporation a written agreement to be bound by all the provisions of the Plan and the Issuance or Stock Purchase Agreement executed by the issuee at the time of his/her acquisition of the gifted shares. 3. MARKET STAND-OFF AGREEMENTS The Plan Administrator may require each person to whom any shares are issued under this Plan to enter into an agreement which restricts or prohibits the sale of any stock of the Corporation by such person for a reasonable period of time following a public offering of any shares of stock by the Corporation. 4. RIGHT OF FIRST REFUSAL Until such time as the Corporation's outstanding shares of Common Stock are first registered under Section 12(g) of the 1934 Act, the Plan Administrator may subject any shares issued pursuant to the Plan to a right of first refusal with respect to any proposed disposition of such shares other than a transfer permitted by Section 2.C of this Article IV. Such right of first refusal shall be exercisable by the Corporation (or its assignees) in accordance with the terms and conditions specified in the instrument governing the issuance of such shares. 5. SECURITIES LAWS; LEGENDS A. No shares of Common Stock or other assets shall be issued or delivered under this Plan unless and until the Corporation shall have determined that there has been full and adequate compliance with all applicable requirements of the Federal and state securities laws and all other applicable legal and regulatory requirements. B. Shares issued under the Plan shall bear such legends as the Plan Administrator deems necessary or appropriate, including such restrictive legends as the Plan Administrator shall require to reflect the terms of any agreement between the issuee and the Corporation. 6. SHAREHOLDER RIGHTS Subject to the rights of the Corporation set forth herein or in any other agreement entered into between the Corporation and an issuee of shares under the Plan, each person to whom shares of Common Stock have been issued under the Plan shall have all the rights of a shareholder with respect to those shares whether or not his/her interest in such shares is vested. Accordingly, the issuee shall have the right to vote such shares and to receive any cash dividends or other distributions paid or made with respect to such shares. -9- 45 7. ACCELERATION Subject to Section 4.13 of that certain Series C Preferred Stock Purchase Agreement dated on or about August 17, 1995, the Plan Administrator may, in its discretion, provide for the automatic acceleration upon a Change of Control and\or Corporate Transaction of the time at which any option will become exercisable or for the lapse of any repurchase right tied to vesting. Such acceleration may be provided for at any time by the Plan Administrator in the exercise of its discretion, or may be included as a right of the optionee or issuee in the documents evidencing the rights of the optionee or issuee. 8. DEFINITIONS The following definitions shall be in effect under this Plan: A. BOARD shall mean the Board of Directors of the Corporation. B. COMMON STOCK shall mean the common stock of the Corporation. C. CORPORATE TRANSACTION shall mean either of the following stockholder- approved transactions to which the Corporation is a party: (i) any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) in which more than fifty percent (50%) of the Corporation's outstanding voting stock is transferred to a person or persons different from those who held the stock immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. D. EMPLOYEE shall mean an individual who is in the employ of the Corporation or any Parent or Subsidiary, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. E. FAIR MARKET VALUE per share of Common Stock on any relevant date under the Plan shall be the value determined in accordance with the following provisions: (i) If the Common Stock is not at the time listed or admitted to trading on any Stock Exchange but is traded on the NASDAQ National Market System, the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers through the NASDAQ National Market System or any successor system. If there is no closing selling price for the Common -10- 46 Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed or admitted to trading on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) If the Common Stock is at the time neither listed nor admitted to trading on any Stock Exchange nor traded on the NASDAQ National Market System, then such Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. F. INCENTIVE OPTION shall mean a stock option which satisfies the requirements of Internal Revenue Code Section 422. G. NON-STATUTORY OPTION shall mean a stock option not intended to meet the requirements of Code Section 422. H. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. I. PERMANENT DISABILITY shall have the meaning assigned to such term in Code Section 22(e)(3). J. SERVICE shall mean the provision of services to the Corporation or any Parent or Subsidiary by an individual in the capacity of an Employee, a non-employee member of the Board or a consultant or independent contractor. K. SUBSIDIARY shall mean each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. -11- 47 L. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing ten percent (10%) or more of the total combined voting power of all classes of stock of the Corporation. 9. USE OF PROCEEDS Any cash proceeds received by the Corporation from the issuance of shares of Common Stock under the Plan shall be used for general corporate purposes. 10. WITHHOLDING The Corporation's obligation to deliver shares upon the exercise of any options granted under Article II or the purchase of any shares issued under Article III shall be subject to the satisfaction of all applicable Federal, State and local income and employment tax withholding requirements. 11. REGULATORY APPROVALS The implementation of the Plan, the granting of any options under the Option Grant Program, the issuance of any shares under the Stock Issuance Program, and the issuance of Common Stock upon the exercise of the option grants made hereunder shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it, and the Common Stock issued pursuant to it. 12. INFORMATION TO OPTIONEES AND PARTICIPANTS The Corporation shall provide financial statements to all optionees and/or participants at least annually. -12- EX-10.41 45 EXHIBIT 10.41 1 EXHIBIT 10.41 COMBICHEM, INC. STOCK OPTION AGREEMENT RECITALS A. The Board of Directors of the Corporation has adopted the CombiChem, Inc. 1995 Stock Option/Stock Issuance Plan (the "Plan") for the purpose of attracting and retaining the services of persons who contribute to the growth and financial success of the Corporation. B. Optionee is a person who the Plan Administrator believes has and will contribute to the growth and financial success of the Corporation and this Agreement is executed pursuant to and is intended to carry out the purposes of the Plan. AGREEMENT NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. Subject to and upon the terms and conditions set forth in this Agreement, the Corporation hereby grants to Optionee, as of the grant date (the "Grant Date") specified in the accompanying Notice of Grant of Stock Option (the "Grant Notice"), a stock option to purchase up to that number of shares of the Corporation's Common Stock (the "Option Shares") as is specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term at the option price per share (the "Option Price") specified in the Grant Notice. 2. OPTION TERM. This option shall have a maximum term of ten (10) years measured from the Grant Date and shall expire at the close of business on the expiration date (the "Expiration Date") specified in the Grant Notice, unless sooner terminated in accordance with Paragraph 5, 6 or 17. 3. LIMITED TRANSFERABILITY. This option shall be neither transferable nor assignable by Optionee other than by will or by the laws of descent and distribution following Optionee's death and may be exercised, during Optionee's lifetime, only by Optionee. 4. DATES OF EXERCISE. This option may not be exercised in whole or in part at any time prior to the time the Plan is approved by the Corporation's shareholders in accordance with Paragraph 17. Provided such shareholder approval is 2 obtained, this option shall thereupon become exercisable for the Option Shares in one or more installments as is specified in the Grant Notice. As the option becomes exercisable in one or more installments, the installments shall accumulate and the option shall remain exercisable for such installments until the Expiration Date or the sooner termination of the option term under Paragraph 5 or Paragraph 6 of this Agreement. 5. ACCELERATED TERMINATION OF OPTION TERM. Unless extended by the Plan Administrator in its sole discretion, the option term specified in Paragraph 2 shall terminate (and this option shall cease to be exercisable) prior to the Expiration Date should any of the following provisions become applicable: (i) Except as otherwise provided in subparagraph (ii) or (iii) below, should Optionee cease to remain in Service while this option is outstanding, then the period for exercising this option shall be reduced to a three (3)-month period commencing with the date of such cessation of Service, but in no event shall this option be exercisable at any time after the Expiration Date. Upon the expiration of such three (3)-month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (ii) Should Optionee die while this option is outstanding, then the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the law of descent and distribution shall have the right to exercise this option. Such right shall lapse and this option shall cease to be exercisable upon the earlier of (A) the expiration of the twelve (12) month period measured from the date of Optionee's death or (B) the Expiration Date. Upon the expiration of such twelve (12) month period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (iii) Should Optionee become permanently disabled and cease by reason thereof to remain in Service while this option is outstanding, then the Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date. Optionee shall be deemed to be permanently disabled if Optionee is unable to engage in any substantial gainful activity for the Corporation or the parent or subsidiary corporation retaining his/her -2- 3 services by reason of any medically determinable physical or mental impairment, which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. Upon the expiration of such limited period of exercisability or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding. (iv) During the limited period of exercisability applicable under subparagraph (i), (ii) or (iii) above, this option may be exercised for any or all of the Option Shares for which this option is, at the time of the Optionee's cessation of Service, exercisable in accordance with the exercise schedule specified in the Grant Notice and the provisions of Paragraph 6 of this Agreement. (v) For purposes of this Paragraph 5 and for all other purposes under this Agreement: A. The Optionee shall be deemed to remain in SERVICE for so long as the Optionee continues to render periodic services to the Corporation or any parent or subsidiary corporation, whether as an Employee, a non-employee member of the board of directors, or an independent contractor or consultant. B. The Optionee shall be deemed to be an EMPLOYEE of the Corporation and to continue in the Corporation's employ for so long as the Optionee remains in the employ of the Corporation or one or more of its parent or subsidiary corporations, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. C. A corporation shall be considered to be a SUBSIDIARY corporation of the Corporation if it is a member of an unbroken chain of corporations beginning with the Corporation, provided each such corporation in the chain (other than the last corporation) owns, at the time of determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. D. A corporation shall be considered to be a PARENT corporation of the Corporation if it is a member of an unbroken chain ending with the Corporation, provided each such corporation in the chain (other than the Corporation) owns, at the time of -3- 4 determination, stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 6. SPECIAL TERMINATION OF OPTION. A. This Option, to the extent not previously exercised, shall terminate and cease to be exercisable upon the consummation of one or more of the following shareholder-approved transactions (a "Corporate Transaction") unless this Option is expressly assumed by the successor corporation or parent thereof: (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets, or (iii) any transaction (other than an issuance of shares by the Corporation for cash) in or by means of which one or more persons acting in concert acquire, in the aggregate, more than 50% of the outstanding shares of the stock of the Corporation. B. This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise make changes in its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. 7. ADJUSTMENT IN OPTION SHARES. A. In the event any change is made to the Corporation's outstanding Common Stock by reason of any stock split, stock dividend, combination of shares, exchange of shares, or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to (i) the total number of Option Shares subject to this option, (ii) the number of Option Shares for which this option is to be exercisable from and after each installment date specified in the Grant Notice and (iii) the Option Price payable per share in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. B. If this option is to be assumed in connection with a Corporate Transaction described in Paragraph 6 or is otherwise to remain outstanding, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issuable to the Optionee in the consummation of such -4- 5 Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Option Price payable per share, provided the aggregate Option Price payable hereunder shall remain the same. 8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option shall not have any of the rights of a shareholder with respect to the Option Shares until such individual shall have exercised the option and paid the Option Price. 9. MANNER OF EXERCISING OPTION. A. In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or in the case of exercise after Optionee's death, the Optionee's executor, administrator, heir or legatee, as the case may be) must take the following actions: (i) Execute and deliver to the Secretary of the Corporation a stock purchase agreement (the "Purchase Agreement") in substantially the form of Exhibit B to the Grant Notice. (ii) Pay the aggregate Option Price for the purchased shares in one or more forms approved under the Plan. (iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option, if other than Optionee, have the right to exercise this option. B. Should the Corporation's outstanding Common Stock be registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act") at the time the option is exercised, then the Option Price may also be paid as follows: (i) in shares of Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at fair market value on the Exercise Date; or (ii) through a special sale and remittance procedure pursuant to which the Optionee is to provide irrevocable written instructions (a) to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate Option Price -5- 6 payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation by reason of such purchase and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to effect the sale transaction. C. For purposes of this Agreement, the Exercise Date shall be the date on which the executed Purchase Agreement shall have been delivered to the Corporation, and the fair market value of a share of Common Stock on any relevant date shall be determined in accordance with subparagraphs (i) through (iii) below: (i) If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded on the NASDAQ National Market System, the fair market value shall be the closing selling price of one share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers through its NASDAQ system or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of fair market value. (ii) If the Common Stock is at the time listed or admitted to trading on any stock exchange, then the fair market value shall be the closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the fair market value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. (iii) If the Common Stock at the time is neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, or if the Plan Administrator determines that the value determined pursuant to subparagraphs (i) and (ii) above does not accurately reflect the fair market value of the Common Stock, then such fair market value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. -6- 7 D. As soon after the Exercise Date as practical, the Corporation shall mail or deliver to Optionee or to the other person or persons exercising this option a certificate or certificates representing the shares so purchased and paid for, with the appropriate legends affixed thereto. E. In no event may this option be exercised for any fractional shares. 10. COMPLIANCE WITH LAWS AND REGULATIONS. A. The exercise of this option and the issuance of Option Shares upon such exercise shall be subject to compliance by the Corporation and the Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which shares of the Corporation's Common Stock may be listed at the time of such exercise and issuance. B. In connection with the exercise of this option, Optionee shall execute and deliver to the Corporation such representations in writing as may be requested by the Corporation in order for it to comply with the applicable requirements of Federal and State securities laws. 11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, administrators, heirs, legal representatives and assigns of Optionee and the successors and assigns of the Corporation. 12. LIABILITY OF CORPORATION. A. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without shareholder approval be issued under the Plan, then this option shall be void with respect to such excess shares, unless shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of Article IV, Section 3, of the Plan. B. The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals. -7- 8 13. NOTICES. Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation in care of the Corporate Secretary at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee's signature line on the Grant Notice. All notices shall be deemed to have been given or delivered upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 14. LOANS. The Plan Administrator may, in its absolute discretion and without any obligation to do so, assist the Optionee in the exercise of this option by (i) authorizing the extension of a loan to the Optionee from the Corporation or (ii) permitting the Optionee to pay the option price for the purchased Common Stock in installments over a period of years. The terms of any such loan or installment method of payment (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. 15. CONSTRUCTION. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the express terms and provisions of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option. 16. GOVERNING LAW. The interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State's conflict-of-laws rules. 17. SHAREHOLDER APPROVAL. The grant of this option is subject to approval of the Plan by the Corporation's shareholders within twelve (12) months after the adoption of the Plan by the Board of Directors. Notwithstanding any provision of this Agreement to the contrary, this option may not be exercised in whole or in part until such shareholder approval is obtained. In the event that such shareholder approval is not obtained, then this option shall thereupon terminate in its entirety and the Optionee shall have no further rights to acquire any Option Shares hereunder. 18. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION. In the event this option is designated an incentive stock option in the Grant Notice, the following terms and conditions shall also apply to the grant: -8- 9 A. This option shall cease to qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3) months after the date the Optionee ceases to be an Employee for any reason other than death or permanent disability (as defined in Paragraph 5) or (ii) more than one (1) year after the date the Optionee ceases to be an Employee by reason of permanent disability. B. Should this option be designated as immediately exercisable in the Grant Notice, then this option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate fair market value (determined at the Grant Date) of the Corporation's Common Stock for which this option would otherwise first become exercisable in such calendar year would, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Corporation's Common Stock for which this option or one or more other incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or its parent or subsidiary corporations) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion will first become exercisable in the first calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18.B would not be contravened. C. Should this option be designated as exercisable in installments in the Grant Notice, then no installment under this option (whether annual or monthly) shall qualify for favorable tax treatment as an incentive stock option under the Federal tax laws if (and to the extent) the aggregate fair market value (determined at the Grant Date) of the Corporation's Common Stock for which such installment first becomes exercisable hereunder will, when added to the aggregate fair market value (determined as of the respective date or dates of grant) of the Corporation's Common Stock for which one or more other incentive stock options granted to the Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any parent or subsidiary corporation) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. 19. WITHHOLDING. Optionee hereby agrees to make appropriate arrangements with the Corporation or parent or subsidiary corporation employing Optionee for the satisfaction of all Federal, State or local income tax withholding requirements and Federal social security employee tax requirements applicable to the exercise of this option. -9- EX-10.42 46 EXHIBIT 10.42 1 EXHIBIT 10.42 IMMEDIATELY EXERCISABLE REPURCHASE RIGHT RIGHT OF FIRST REFUSAL COMBICHEM, INC. STOCK PURCHASE AGREEMENT AGREEMENT made as of this ____ day of ________, 19__, by and among CombiChem, Inc. (the "Corporation"), ______________________, the holder of a stock option (the "Optionee") under the Corporation's 1995 Stock Option/Stock Issuance Plan and _________________, the Optionee's spouse. I. EXERCISE OF OPTION 1.1 EXERCISE. Optionee hereby purchases _________ shares ("Purchased Shares") of the Corporation's common stock ("Common Stock") pursuant to that certain option ("Option") granted Optionee on ______________ ("Grant Dates") to purchase up to _________ shares of the Common Stock ("Total Purchasable Shares") under the Corporation's 1995 Stock Option/Stock Issuance Plan (the "Plan") at an option price of $_____ per share ("Option Price"). 1.2 PAYMENT. Concurrently with the delivery of this Agreement to the Corporate Secretary of the Corporation, Optionee shall pay the Option Price for the Purchased Shares in accordance with the provisions of the agreement between the Corporation and Optionee evidencing the Option (the "Option Agreement") and shall deliver whatever additional documents may be required by the Option Agreement as a condition for exercise, together with a duly-executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares. 1.3 DELIVERY OF CERTIFICATES. The certificates representing the Purchased Shares hereunder shall be held in escrow by the Corporate Secretary of the Corporation in accordance with the provisions of Article VII. 1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation actually exercises its repurchase right, rights of first refusal or special purchase right under this Agreement, Optionee (or any successor in interest) shall have all the rights of a shareholder (including voting and dividend rights) with respect to the Purchased Shares, including the Purchased Shares 2 held in escrow under Article VII, subject, however, to the transfer restrictions of Article IV. II. SECURITIES LAW COMPLIANCE 2.1 EXEMPTION FROM REGISTRATION. The Purchased Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and are accordingly being issued to Optionee in reliance upon the exemption from such registration provided by Rule 701 of the Securities and Exchange Commission for stock issuances under compensatory benefit plans such as the Plan. Optionee hereby acknowledges previous receipt of a copy of the documentation for such Plan in the form of Exhibit C to the Notice of Grant of Stock Option (the "Grant Notice") accompanying the Option Agreement. 2.2 RESTRICTED SECURITIES. A. Optionee hereby confirms that Optionee has been informed that the Purchased Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. Accordingly, Optionee hereby acknowledges that Optionee is prepared to hold the Purchased Shares for an indefinite period and that Optionee is aware that Rule 144 of the Securities and Exchange Commission issued under the 1933 Act is not presently available to exempt the sale of the Purchased Shares from the registration requirements of the 1933 Act. B. Upon the expiration of the ninety (90)-day period immediately following the date on which the Corporation first becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Purchased Shares, to the extent vested under Article V, may be sold (without registration) pursuant to the applicable requirements of Rule 144. If Optionee is at the time of such sale an affiliate of the Corporation for purposes of Rule 144 or was such an affiliate during the preceding three (3) months, then the sale must comply with all the requirements of Rule 144 (including the volume limitation on the number of shares sold, the broker/market-maker sale requirement and the requisite notice to the Securities and Exchange Commission); however, the two (2)-year holding period requirement of the Rule will not be applicable. If Optionee is not at the time of the sale an affiliate of the Corporation nor was such an affiliate during the preceding three (3) months, then none of the requirements of Rule 144 (other than the broker/market-maker sale requirement for Purchased Shares held for less than three (3) years following payment in cash of the Option Price therefor) will be applicable to the sale. -2- 3 C. Should the Corporation not become subject to the reporting requirements of the Exchange Act, then Optionee may, provided he/she is not at the time an affiliate of the Corporation (nor was such an affiliate during the preceding three (3) months), sell the Purchased Shares (without registration) pursuant to paragraph (k) of Rule 144 after the Purchased Shares have been held for a period of three (3) years following the payment in cash of the Option Price for such shares. 2.3 DISPOSITION OF SHARES. Optionee hereby agrees that Optionee shall make no disposition of the Purchased Shares (other than a permitted transfer under paragraph 4.1) unless and until there is compliance with all of the following requirements: (a) Optionee shall have notified the Corporation of the proposed disposition and provided a written summary of the terms and conditions of the proposed disposition. (b) Optionee shall have complied with all requirements of this Agreement applicable to the disposition of the Purchased Shares. (c) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that (i) the proposed disposition does not require registration of the Purchased Shares under the 1933 Act or (ii) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or of any exemption from registration available under the 1933 Act (including Rule 144) has been taken. (d) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Purchased Shares pursuant to the provisions of the Commissioner Rules identified in paragraph 2.5. The Corporation shall not be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in violation of the provisions of this Article II nor (ii) to treat as the owner of the Purchased Shares, or otherwise to accord voting or dividend rights to, any transferee to whom the Purchased Shares have been transferred in contravention of this Agreement. 2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions on disposition of the Purchased Shares, the stock -3- 4 certificates for the Purchased Shares will be endorsed with restrictive legends, including one or more of the following legends: (i) "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a 'no action' letter of the Securities and Exchange Commission with respect to such sale or offer, or (c) satisfactory assurances to the Corporation that registration under such Act is not required with respect to such sale or offer." (ii) "The shares represented by this certificate are unvested and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated February 24, 1997 between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). Such agreement grants certain repurchase rights and rights of first refusal to the Corporation (or its assignees) upon the sale, assignment, transfer, encumbrance or other disposition of the Corporation's shares or upon termination of service with the Corporation. The Corporation will upon written request furnish a copy of such agreement to the holder hereof without charge." III. SPECIAL TAX ELECTION 3.1 SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE OF A NON-STATUTORY STOCK OPTION. If the Purchased Shares are acquired hereunder pursuant to the exercise of a non-statutory stock option, as specified in the Grant Notice, then the Optionee understands that under Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), the excess of the fair market value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Option Price paid for such shares will be reportable as ordinary income on such lapse date. For this purpose, the term "forfeiture restrictions" includes the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right provided under Article V of this Agreement. Optionee understands that he/she may elect under Section 83(b) of the Code to be taxed at the time the Purchased Shares are acquired hereunder, rather than when and as such Purchased Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of this Agreement. Even if the fair market value of the Purchased Shares at the date of this Agreement equals the Option Price paid (and thus no tax is payable), the election must be -4- 5 made to avoid adverse tax consequences in the future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II HERETO. OPTIONEE UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY THE OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE. 3.2 CONDITIONAL SECTION 83(b) ELECTION APPLICABLE TO THE EXERCISE OF AN INCENTIVE STOCK OPTION. If the Purchased Shares are acquired hereunder pursuant to the exercise of an incentive stock option under the Federal tax laws, as specified in the Grant Notice, then the following tax principles shall be applicable to the Purchased Shares: A. For regular tax purposes, no taxable income will be recognized at the time the Option is exercised. B. The excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (ii) the Option Price paid for the Purchased Shares will be includible in the Optionee's taxable income for alternative minimum tax purposes. C. If the Optionee makes a disqualifying disposition of the Purchased Shares, then the Optionee will recognize ordinary income in the year of such disposition equal in amount to the excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (ii) the Option Price paid for the Purchased Shares. Any additional gain recognized upon the disqualifying disposition will be either short-term or long-term capital gain depending upon the period for which the Purchased Shares are held prior to the disposition. D. For purposes of the foregoing, the term "forfeiture restrictions" will include the right of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right provided under Article V of this Agreement. The term "disqualifying disposition" means any sale or other disposition(1) of the - ---------- (1) Generally, a disposition of shares purchased under an incentive stock option includes any transfer of legal title, including a transfer by sale, exchange or gift, but does not include a transfer to the Optionee's spouse, a transfer into -5- 6 Purchased Shares within two (2) years after the Grant Date or within one (1) year after the execution date of this Agreement. E. In the absence of final Treasury Regulations relating to incentive stock options, it is not certain whether the Optionee may, in connection with the exercise of the Option for any Purchased Shares at the time subject to forfeiture restrictions, file a protective election under Section 83(b) of the Code which would limit (I) the Optionee's alternative minimum taxable income upon exercise and (II) the Optionee's ordinary income upon a disqualifying disposition, to the excess of (i) the fair market value of the Purchased Shares on the date the Option is exercised over (ii) the Option Price paid for the Purchased Shares. THE APPROPRIATE FORM FOR MAKING SUCH A PROTECTIVE ELECTION IS ATTACHED AS EXHIBIT II TO THIS AGREEMENT AND MUST BE FILED WITH THE INTERNAL REVENUE SERVICE WITHIN THIRTY (30) DAYS AFTER THE DATE OF THIS AGREEMENT. HOWEVER, SUCH ELECTION IF PROPERLY FILED WILL ONLY BE ALLOWED TO THE EXTENT THE FINAL TREASURY REGULATIONS PERMIT SUCH A PROTECTIVE ELECTION. 3.3 OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER SECTION 83(B), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. This filing should be made by registered or certified mail, return receipt requested, and Optionee must retain two (2) copies of the completed form for filing with his or her State and Federal tax returns for the current tax year and an additional copy for his or her records. IV. TRANSFER RESTRICTIONS 4.1 RESTRICTION ON TRANSFER. Optionee shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to the Corporation's Repurchase Right under Article V. In addition, Purchased Shares which are released from the Repurchase Right shall not be transferred, assigned, encumbered or otherwise made the subject of disposition in contravention of the Corporation's First Refusal Right under Article VI. Such restrictions on transfer, however, shall not be - ---------- joint ownership with right of survivorship if Optionee remains one of the joint owners, a pledge, a transfer by bequest or inheritance or certain tax free exchanges permitted under the Code. -6- 7 applicable to (i) a gratuitous transfer of the Purchased Shares made to the Optionee's spouse or issue, including adopted children, or to a trust for the exclusive benefit of the Optionee or the Optionee's spouse or issue, provided and only if the Optionee obtains the Corporation's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to the Optionee's will or the laws of intestate succession or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by the Optionee in connection with the acquisition of the Purchased Shares. 4.2 TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of one of the permitted transfers specified in paragraph 4.1 must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) both the Corporation's Repurchase Right and the Corporation's First Refusal Right granted hereunder and (ii) the market stand-off provisions of paragraph 4.4, to the same extent such shares would be so subject if retained by the Optionee. 4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and VII of this Agreement, the term "Owner" shall include the Optionee and all subsequent holders of the Purchased Shares who derive their chain of ownership through a permitted transfer from the Optionee in accordance with paragraph 4.1. 4.4 MARKET STAND-OFF PROVISIONS. A. In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Corporation's initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the prior written consent of the Corporation or its underwriters. Such limitations shall be in effect for such period of time from and after the effective date of such registration statement as may be requested by the Corporation or such underwriters; provided, however, that in no event shall such period exceed one hundred-eighty (180) days. The limitations of this paragraph 4.4 shall remain in effect for the two-year period immediately following the effective date of the Corporation's initial public offering and shall thereafter terminate and cease to have any force or effect. -7- 8 B. Owner shall be subject to the market stand-off provisions of this paragraph 4.4 provided and only if the officers and directors of the Corporation are also subject to similar arrangements. C. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock effected as a class without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Purchased Shares shall be immediately subject to the provisions of this paragraph 4.4, to the same extent the Purchased Shares are at such time covered by such provisions. D. In order to enforce the limitations of this paragraph 4.4, the Corporation may impose stop-transfer instructions with respect to the Purchased Shares until the end of the applicable stand-off period. V. REPURCHASE RIGHT 5.1 GRANT. The Corporation is hereby granted the right (the "Repurchase Right"), exercisable at any time during the sixty (60)-day period following the date the Optionee ceases for any reason to remain in Service or (if later) during the sixty (60)-day period following the execution date of this Agreement, to repurchase at the Option Price all or (at the discretion of the Corporation and with the consent of the Optionee) any portion of the Purchased Shares in which the Optionee has not acquired a vested interest in accordance with the vesting provisions of paragraph 5.3 (such shares to be hereinafter called the "Unvested Shares"). For purposes of this Agreement, the Optionee shall be deemed to remain in Service for so long as the Optionee continues to render periodic services to the Corporation or any parent or subsidiary corporation, whether as an employee, a non-employee member of the board of directors, or an independent contractor or consultant. 5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to the Owner of the Unvested Shares prior to the expiration of the applicable sixty (60)-day period specified in paragraph 5.1. The notice shall indicate the number of Unvested Shares to be repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of notice. To the extent one or more certificates representing Unvested Shares may have been previously delivered out of escrow to the Owner, then Owner shall, prior to the close of business on the date specified for the repurchase, deliver to the Secretary of the Corporation the certificates representing the Unvested Shares to be repurchased, each certificate to be -8- 9 properly endorsed for transfer. The Corporation shall, concurrently with the receipt of such stock certificates (either from escrow in accordance with paragraph 7.3 or from Owner as herein provided), pay to Owner in cash or cash equivalents (including the cancellation of any purchase-money indebtedness), an amount equal to the Option Price previously paid for the Unvested Shares which are to be repurchased. 5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under paragraph 5.2. In addition, the Repurchase Right shall terminate, and cease to be exercisable, with respect to any and all Purchased Shares in which the Optionee vests in accordance with the vesting schedule specified in the Grant Notice. All Purchased Shares as to which the Repurchase Right lapses shall, however, continue to be subject to (i) the First Refusal Right of the Corporation and its assignees under Article VI, (ii) the market stand-off provisions of paragraph 4.4 and (iii) the Special Purchase Right under Article VIII. 5.4 AGGREGATE VESTING LIMITATION. If the Option is exercised in more than one increment so that the Optionee is a party to one or more other Stock Purchase Agreements ("Prior Purchase Agreements") which are executed prior to the date of this Agreement, then the total number of Purchased Shares as to which the Optionee shall be deemed to have a fully-vested interest under this Agreement and all Prior Purchase Agreements shall not exceed in the aggregate the number of Purchased Shares in which the Optionee would otherwise at the time be vested, in accordance with the vesting provisions of paragraph 5.3, had all the Purchased Shares been acquired exclusively under this Agreement. 5.5 FRACTIONAL SHARES. No fractional shares shall be repurchased by the Corporation. Accordingly, should the Repurchase Right extend to a fractional share (in accordance with the vesting provisions of paragraph 5.3) at the time the Optionee ceases Service, then such fractional share shall be added to any fractional share in which the Optionee is at such time vested in order to make one whole vested share no longer subject to the Repurchase Right. 5.6 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration, then any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which is by reason of any such transaction distributed with respect to the Purchased Shares shall be immediately subject to -9- 10 the Repurchase Right, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number of Purchased Shares and Total Purchasable Shares hereunder and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such transaction upon the Corporation's capital structure; provided, however, that the aggregate purchase price shall remain the same. 5.7 CORPORATE TRANSACTION. A. Except to the extent the Repurchase Right is to be assigned to the successor corporation (or its parent company), immediately prior to the consummation of any of the following shareholder-approved transactions (a "Corporate Transaction"): (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets, or (iii) any transaction (other than an issuance of shares by the Corporation for cash) in or by means of which one or more persons acting in concert acquire, in the aggregate, more than 50% of the outstanding shares of the stock of the Corporation, the Corporation may exercise the Repurchase Right with respect to the then Unvested Shares. The Repurchase Right shall automatically lapse with respect to all Unvested Shares not repurchased hereunder. B. To the extent the Repurchase Right remains in effect following such Corporate Transaction, it shall apply to the new capital stock or other property (including cash) received in exchange for the Shares in consummation of the Corporate Transaction, but only to the extent the Shares are at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Corporate Transaction upon the Corporation's capital structure; provided, however, that the aggregate Purchase Price shall remain the same. -10- 11 VI. RIGHT OF FIRST REFUSAL 6.1 GRANT. The Corporation is hereby granted rights of first refusal (the "First Refusal Right"), exercisable in connection with any proposed transfer of the Purchased Shares in which the Optionee has vested in accordance with the vesting provisions of Article V. For purposes of this Article VI, the term "transfer" shall include any sale, assignment, pledge, encumbrance or other disposition for value of the Purchased Shares intended to be made by the Owner, but shall not include any of the permitted transfers under paragraph 4.1. 6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner desires to accept a bona fide third-party offer for the transfer of any or all of the Purchased Shares (the shares subject to such offer to be hereinafter called the "Target Shares"), Owner shall promptly (i) deliver to the Corporate Secretary of the Corporation written notice (the "Disposition Notice") of the terms and conditions of the offer, including the purchase price and the identity of the third-party offeror, and (ii) provide satisfactory proof that the disposition of the Target Shares to such third-party offeror would not be in contravention of the provisions set forth in Articles II and IV of this Agreement. 6.3 EXERCISE OF RIGHT. The Corporation shall, for a period of forty-five (45) days following receipt of the Disposition Notice, have the right to repurchase any or all of the Target Shares specified in the Disposition Notice upon the same terms and conditions specified therein or upon terms and conditions which do not materially vary from those specified therein. Such right shall be exercisable by delivery of written notice (the "Exercise Notice") to Owner prior to the expiration of the forty-five (45)-day exercise period. If such right is exercised with respect to all the Target Shares specified in the Disposition Notice, then the Corporation (or its assignees) shall effect the repurchase of the Target Shares, including payment of the purchase price, not more than ten (10) business days after delivery of the Exercise Notice; and at such time Owner shall deliver to the Corporation the certificates representing the Target Shares to be repurchased, each certificate to be properly endorsed for transfer. To the extent any of the Target Shares are at the time held in escrow under Article VII, the certificates for such shares shall automatically be released from escrow and delivered to the Corporation for purchase. Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the Corporation (or its assignees) shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property. If the Owner and the Corporation (or its assignees) cannot agree on such cash value within ten (10) days -11- 12 after the Corporation's receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by the Owner and the Corporation (or its assignees) or, if they cannot agree on an appraiser within twenty (20) days after the Corporation's receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The cost of such appraisal shall be shared equally by the Owner and the Corporation. The closing shall then be held on the later of (i) the tenth business day following delivery of the Exercise Notice or (ii) the tenth business day after such cash valuation shall have been made. 6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is not given to Owner within forty-five (45) days following the date of the Corporation's receipt of the Disposition Notice, Owner shall have a period of thirty (30) days thereafter in which to sell or otherwise dispose of the Target Shares to the third-party offeror identified in the Disposition Notice upon terms and conditions (including the purchase price) no more favorable to such third-party offeror than those specified in the Disposition Notice; provided, however, that any such sale or disposition must not be effected in contravention of the provisions of Article II of this Agreement. To the extent any of the Target Shares are at the time held in escrow under Article VII, the certificates for such shares shall automatically be released from escrow and surrendered to the Owner. The third-party offeror shall acquire the Target Shares free and clear of the Corporation's Repurchase Right under Article V and the Corporation's First Refusal Right hereunder, but the acquired shares shall remain subject to (i) the securities law restrictions of paragraph 2.2(a) and (ii) the market stand-off provisions of paragraph 4.4. In the event Owner does not effect such sale or disposition of the Target Shares within the specified thirty (30)-day period, the Corporation's First Refusal Right shall continue to be applicable to any subsequent disposition of the Target Shares by Owner until such right lapses in accordance with paragraph 6.7. 6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or its assignees) makes a timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written notice to the Corporation delivered within thirty (30) days after the date of the Disposition Notice, to effect the sale of the Target Shares pursuant to one of the following alternatives: (i) sale or other disposition of all the Target Shares to the third-party offeror identified in -12- 13 the Disposition Notice, but in full compliance with the requirements of paragraph 6.4, as if the Corporation did not exercise the First Refusal Right hereunder; or (ii) sale to the Corporation (or its assignees) of the portion of the Target Shares which the Corporation (or its assignees) has elected to purchase, such sale to be effected in substantial conformity with the provisions of paragraph 6.3. Failure of Owner to deliver timely notification to the Corporation under this paragraph 6.5 shall be deemed to be an election by Owner to sell the Target Shares pursuant to alternative (i) above. 6.6 RECAPITALIZATION/MERGER. (a) In the event of any stock dividend, stock split, recapitalization or other transaction affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Purchased Shares shall be immediately subject to the Corporation's First Refusal Right hereunder, but only to the extent the Purchased Shares are at the time covered by such right. (b) In the event of any of the following transactions: (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) a sale, transfer or other disposition of all or substantially all of the Corporation's assets, (iii) a reverse merger in which the Corporation is the surviving entity but in which the Corporation's outstanding voting securities are transferred in whole or in part to person or persons other than those who held such securities immediately prior to the merger, or (iv) any transaction effected primarily to change the State in which the Corporation is incorporated, or to create a holding company structure, the Corporation's First Refusal Right shall remain in full force and effect and shall apply to the new capital stock or other property received in exchange for the Purchased Shares -13- 14 in consummation of the transaction but only to the extent the Purchased Shares are at the time covered by such right. 6.7 LAPSE. The First Refusal Right under this Article VI shall lapse and cease to have effect upon the earliest to occur of (i) the first date on which shares of the Corporation's Common Stock are held of record by more than five hundred (500) persons, (ii) a determination is made by the Corporation's Board of Directors that a public market exists for the outstanding shares of the Corporation's Common Stock, or (iii) a firm commitment underwritten public offering pursuant to an effective registration statement under the 1933 Act, covering the offer and sale of the Corporation's Common Stock in the aggregate amount of at least $5,000,000. However, the market stand-off provisions of paragraph 4.4 shall continue to remain in full force and effect following the lapse of the First Refusal Right hereunder. VII. ESCROW 7.1 DEPOSIT. Upon issuance, the certificates for any Unvested Shares purchased hereunder shall be deposited in escrow with the Corporate Secretary of the Corporation to be held in accordance with the provisions of this Article VII. Each deposited certificate shall be accompanied by a duly-executed Assignment Separate from Certificate in the form of Exhibit I. The deposited certificates, together with any other assets or securities from time to time deposited with the Corporate Secretary pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with paragraph 7.3. Upon delivery of the certificates (or other assets and securities) to the Corporate Secretary of the Corporation, the Owner shall be issued an instrument of deposit acknowledging the number of Unvested Shares (or other assets and securities) delivered in escrow. 7.2 RECAPITALIZATION. All regular cash dividends on the Unvested Shares (or other securities at the time held in escrow) shall be paid directly to the Owner and shall not be held in escrow. However, in the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration or in the event of a Corporate Transaction, any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Unvested Shares shall be immediately delivered to the Corporate Secretary to be held in escrow under this Article VII, but only to the extent the Unvested Shares are at the time subject to the escrow requirements of paragraph 7.1. -14- 15 7.3 RELEASE/SURRENDER. The Unvested Shares, together with any other assets or securities held in escrow hereunder, shall be subject to the following terms and conditions relating to their release from escrow or their surrender to the Corporation for repurchase and cancellation: (i) Should the Corporation (or its assignees) elect to exercise the Repurchase Right under Article V with respect to any Unvested Shares, then the escrowed certificates for such Unvested Shares (together with any other assets or securities issued with respect thereto) shall be delivered to the Corporation concurrently with the payment to the Owner, in cash or cash equivalent (including the cancellation of any purchase-money indebtedness), of an amount equal to the aggregate Option Price for such Unvested Shares, and the Owner shall cease to have any further rights or claims with respect to such Unvested Shares (or other assets or securities attributable to such Unvested Shares). (ii) Should the Corporation (or its assignees) elect to exercise its First Refusal Right under Article VI with respect to any vested Target Shares held at the time in escrow hereunder, then the escrowed certificates for such Target Shares (together with any other assets or securities attributable thereto) shall, concurrently with the payment of the paragraph 6.3 purchase price for such Target Shares to the Owner, be surrendered to the Corporation, and the Owner shall cease to have any further rights or claims with respect to such Target Shares (or other assets or securities). (iii) Should the Corporation (or its assignees) elect not to exercise its First Refusal Right under Article VI with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for such Target Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Owner for disposition in accordance with provisions of paragraph 6.4. (iv) As the interest of the Optionee in the Unvested Shares (or any other assets or securities attributable thereto) vests in accordance with the provisions of Article V, the certificates for such vested shares (as well as all other vested assets and securities) shall be released from escrow and delivered to the Owner in accordance with the following schedule: -15- 16 a. The initial release of vested shares (or other vested assets and securities) from escrow shall be effected within thirty (30) days following the expiration of the initial twelve (12)-month period measured from the Grant Date. b. Subsequent releases of vested shares (or other vested assets and securities) from escrow shall be effected at semi-annual intervals thereafter, with the first such semi-annual release to occur eighteen (18) months after the Grant Date. c. Upon the Optionee's cessation of Service, any escrowed Purchased Shares (or other assets or securities) in which the Optionee is at the time vested shall be promptly released from escrow. d. Upon any earlier termination of the Corporation's Repurchase Right in accordance with the applicable provisions of Article V, any Purchased Shares (or other assets or securities) at the time held in escrow hereunder shall promptly be released to the Owner as fully-vested shares or other property. (v) All Purchased Shares (or other assets or securities) released from escrow in accordance with the provisions of subparagraph (iv) above shall nevertheless remain subject to (I) the Corporation's First Refusal Right under Article VI until such right lapses pursuant to paragraph 6.7, (II) the market stand-off provisions of paragraph 4.4 until such provisions terminate in accordance therewith and (III) the Special Purchase Right under Article VIII. VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION 8.1 GRANT. In connection with the dissolution of the Optionee's marriage or the legal separation of the Optionee and the Optionee's spouse, the Corporation shall have the right (the "Special Purchase Right"), exercisable at any time during the thirty (30)-day period following the Corporation's receipt of the required Dissolution Notice under paragraph 8.2, to purchase from the Optionee's spouse, in accordance with the provisions of paragraph 8.3, all or any portion of the Purchased Shares which would otherwise be awarded to such spouse in settlement of any -16- 17 community property or other marital property rights such spouse may have in such shares. 8.2 NOTICE OF DECREE OR AGREEMENT. The Optionee shall promptly provide the Secretary of the Corporation with written notice (the "Dissolution Notice") of (i) the entry of any judicial decree or order resolving the property rights of the Optionee and the Optionee's spouse in connection with their marital dissolution or legal separation or (ii) the execution of any contract or agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree of dissolution or settlement agreement between the Optionee and the Optionee's spouse which provides for the award to the spouse of one or more Purchased Shares in settlement of any community property or other marital property rights such spouse may have in such shares. 8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase Right shall be exercisable by delivery of written notice (the "Purchase Notice") to the Optionee and the Optionee's spouse within thirty (30) days after the Corporation's receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of shares to be purchased by the Corporation, the date such purchase is to be effected (such date to be not less than five (5) business days, nor more than ten (10) business days, after the date of the Purchase Notice), and the fair market value to be paid for such Purchased Shares. The Optionee (or the Optionee's spouse, to the extent such spouse has physical possession of the Purchased Shares) shall, prior to the close of business on the date specified for the purchase, deliver to the Corporate Secretary of the Corporation the certificates representing the shares to be purchased, each certificate to be properly endorsed for transfer. To the extent any of the shares to be purchased by the Corporation are at the time held in escrow under Article VII, the certificates for such shares shall be promptly delivered out of escrow to the Corporation. The Corporation shall, concurrently with the receipt of the stock certificates, pay to the Optionee's spouse (in cash or cash equivalents) an amount equal to the fair market value specified for such shares in the Purchase Notice. If the Optionee's spouse does not agree with the fair market value specified for the shares in the Purchase Notice, then the spouse shall promptly notify the Corporation in writing of such disagreement and the fair market value of such shares shall thereupon be determined by an appraiser of recognized standing selected by the Corporation and the spouse. If they cannot agree on an appraiser within twenty (20) days after the date of the Purchase Notice, each shall select an appraiser of recognized standing, and the two appraisers shall designate a third appraiser of recognized standing whose appraisal shall be -17- 18 determinative of such value. The cost of the appraisal shall be shared equally by the Corporation and the Optionee's spouse. The closing shall then be held on the fifth business day following the completion of such appraisal; provided, however, that if the appraised value is more than fifteen percent (15%) greater than the fair market value specified for the shares in the Purchase Notice, the Corporation shall have the right, exercisable prior to the expiration of such five (5)-business-day period, to rescind the exercise of the Special Purchase Right and thereby revoke its election to purchase the shares awarded to the spouse. 8.4 LAPSE. The Special Purchase Right under this Article VIII shall lapse and cease to have effect upon the earlier to occur of (i) the first date on which the First Refusal Right under Article VI lapses or (ii) the expiration of the thirty (30)-day exercise period specified in paragraph 8.3, to the extent the Special Purchase Right is not timely exercised in accordance with such paragraph. IX. GENERAL PROVISIONS 9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right under Article V, its First Refusal Right under Article VI and/or its Special Purchase Right under Article VIII to any person or entity selected by the Corporation's Board of Directors, including (without limitation) one or more shareholders of the Corporation. If the assignee of the Repurchase Right is other than a one hundred percent (100%) owned subsidiary corporation of the Corporation or the parent corporation owning one hundred percent (100%) of the Corporation, then such assignee must make a cash payment to the Corporation, upon the assignment of the Repurchase Right, in an amount equal to the excess (if any) of (i) the fair market value of the Unvested Shares at the time subject to the assigned Repurchase Right over (ii) the aggregate repurchase price payable for the Unvested Shares thereunder. 9.2 DEFINITIONS. For purposes of this Agreement, the following provisions shall be applicable in determining the parent and subsidiary corporations of the Corporation: (i) Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a parent corporation of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. -18- 19 (ii) Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a subsidiary of the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 9.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the Service of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining Optionee) for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any parent or subsidiary corporation of the Corporation employing or retaining Optionee) or the Optionee, which rights are hereby expressly reserved by each, to terminate the Optionee's Service at any time for any reason whatsoever, with or without cause. 9.4 NOTICES. Any notice required in connection with (i) the Repurchase Right, the Special Purchase Right or the First Refusal Right or (ii) the disposition of any Purchased Shares covered thereby shall be given in writing and shall be deemed effective upon personal delivery or upon deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph 9.4 to all other parties to this Agreement. 9.5 NO WAIVER. The failure of the Corporation (or its assignees) in any instance to exercise the Repurchase Right granted under Article V, or the failure of the Corporation (or its assignees) in any instance to exercise the First Refusal Right granted under Article VI, or the failure of the Corporation (or its assignees) in any instance to exercise the Special Purchase Right granted under Article VIII shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and the Optionee or the Optionee's spouse. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 9.6 CANCELLATION OF SHARES. If the Corporation (or its assignees) shall make available, at the time and place and in -19- 20 the amount and form provided in this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement), and such shares shall be deemed purchased in accordance with the applicable provisions hereof and the Corporation (or its assignees) shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. X. MISCELLANEOUS PROVISIONS 10.1 OPTIONEE UNDERTAKING. Optionee hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may in its judgment deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either the Optionee or the Purchased Shares pursuant to the express provisions of this Agreement. 10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the express terms and provisions of the Plan. 10.3 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State without resort to that State's conflict-of-laws rules. 10.4 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and the Optionee and the Optionee's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof. 10.6 POWER OF ATTORNEY. Optionee's spouse hereby appoints Optionee his or her true and lawful attorney in fact, -20- 21 for him or her and in his or her name, place and stead, and for his or her use and benefit, to agree to any amendment or modification of this Agreement and to execute such further instruments and take such further actions as may reasonably be necessary to carry out the intent of this Agreement. Optionee's spouse further gives and grants unto Optionee as his or her attorney in fact full power and authority to do and perform every act necessary and proper to be done in the exercise of any of the foregoing powers as fully as he or she might or could do if personally present, with full power of substitution and revocation, hereby ratifying and confirming all that Optionee shall lawfully do and cause to be done by virtue of this power of attorney. -21- 22 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above. CombiChem, Inc. By: _____________________________________ Title: __________________________________ Address: _________________________________________ _________________________________________ _________________________________________ Optionee * Address: _________________________________________ _________________________________________ The undersigned spouse of Optionee has read and hereby approves the foregoing Stock Purchase Agreement. In consideration of the Corporation's granting the Optionee the right to acquire the Purchased Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms and provisions of such Agreement, including (specifically) the right of the Corporation (or its assignees) to purchase any and all interest or right the undersigned may otherwise have in such shares pursuant to community property laws or other marital property rights. ----------------------------------------- Optionee's Spouse Address: _________________________________________ _________________________________________ - ---------- * I have executed the Section 83(b) election that was attached hereto as an Exhibit. As set forth in Article III, I understand that I, and not the Corporation, will be responsible for completing the form and filing the election with the appropriate office of the Federal and State tax authorities and that if such filing is not completed within thirty (30) days after the date of this Agreement, I will not be entitled to the tax benefits provided by Section 83(b). -22- 23 EXHIBIT I ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED __________________________________ hereby sell(s), assign(s) and transfer(s) unto CombiChem, Inc. (the "Corporation"),__________________________________ (_________) shares of the Common Stock of the Corporation standing in his\her name on the books of the Corporation represented by Certificate No. ______________ and do hereby irrevocably constitute and appoint ___________________________________ as Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: ______________ Signature _______________________________ INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Corporation to exercise its Repurchase Right set forth in the Agreement without requiring additional signatures on the part of the Optionee. 24 REPURCHASE RIGHTS EXHIBIT II SECTION 83(b) TAX ELECTION This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2. (1) The taxpayer who performed the services is: Name: Address: Taxpayer Ident. No.: (2) The property with respect to which the election is being made is ___________ shares of the common stock of CombiChem, Inc. (3) The property was issued on __________________, 19___. (4) The taxable year in which the election is being made is the calendar year 19___. (5) The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason taxpayer's employment with the issuer is terminated. The issuer's repurchase right lapses in a series of annual and monthly installments over a four year period ending on ____________, 19___. (6) The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $___________ per share. (7) The amount paid for such property is $____________ per share. (8) A copy of this statement was furnished to CombiChem, Inc. for whom taxpayer rendered the services underlying the transfer of property. (9) This statement is executed as of: _______________________. - -------------------------------- -------------------------------------- Spouse (if any) Taxpayer This form must be filed with the Internal Revenue Service Center with which taxpayer files his/her Federal income tax returns. The filing must be made within 30 days after the execution date of the Stock Purchase Agreement. EXHIBIT II-1 25 SPECIAL PROTECTIVE ELECTION PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE WITH RESPECT TO PROPERTY ACQUIRED UPON EXERCISE OF AN INCENTIVE STOCK OPTION The property described in the above Section 83(b) election is comprised of shares of common stock acquired pursuant to the exercise of an incentive stock option under Section 422 of the Code. Accordingly, it is the intent of the Taxpayer to utilize this election to achieve the following tax results: 1. The purpose of this election is to have the alternative minimum taxable income attributable to the purchased shares measured by the amount by which the fair market value of such shares at the time of their transfer to the Taxpayer exceeds the purchase price paid for the shares. In the absence of this election, such alternative minimum taxable income would be measured by the spread between the fair market value of the purchased shares and the purchase price which exists on the various lapse dates in effect for the forfeiture restrictions applicable to such shares. The election is to be effective to the full extent permitted under the Internal Revenue Code. 2. Section 421(a)(1) of the Code expressly excludes from income any excess of the fair market value of the purchased shares over the amount paid for such shares. Accordingly, this election is also intended to be effective in the event there is a "disqualifying disposition" of the shares, within the meaning of Section 421(b) of the Code, which would otherwise render the provisions of Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer hereby elects to have the amount of disqualifying disposition income measured by the excess of the fair market value of the purchased shares on the date of transfer to the Taxpayer over the amount paid for such shares. Since Section 421(a) presently applies to the shares which are the subject of this Section 83(b) election, no taxable income is actually recognized for regular tax purposes at this time, and no income taxes are payable, by the Taxpayer as a result of this election. This form should be filed with the Internal Revenue Service Center with which taxpayer files his/her Federal income tax returns. The filing must be made within 30 days after the execution date of the Stock Purchase Agreement. NOTE: PAGE 2 SHOULD BE ATTACHED ONLY IF YOU ARE EXERCISING AN INCENTIVE STOCK OPTION. EX-10.43 47 EXHIBIT 10.43 1 EXHIBIT 10.43 COMBICHEM, INC. RESTRICTED STOCK ISSUANCE AGREEMENT AGREEMENT made as of this _____ day of __________________, 199__, by and among CombiChem, Inc. (the "Corporation"), _________________ ___________________ , a participant ("Participant") in the Corporation's 1995 Stock Option/Stock Issuance Plan (the "Plan") and _________________, the Participant's spouse. I. PURCHASE OF SHARES 1.1 PURCHASE. The Participant hereby purchases, and the Corporation hereby sells to Participant, __________ shares (the "Shares") of the Corporation's common stock ("Common Stock") at a purchase price of $_________ per share (the "Purchase Price") pursuant to the provisions of the Plan, with a vesting start date of _______________ ___, 199__ (the "Vesting Start Date"). 1.2 PAYMENT. Concurrently with the execution of this Agreement, the Participant shall deliver to the Corporate Secretary of the Corporation (i) the aggregate Purchase Price payable for the Shares in cash or cash equivalent and (ii) a duly-executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit A). 1.3 DELIVERY OF CERTIFICATES. The certificates representing the Shares hereunder shall be held in escrow by the Secretary of the Corporation as provided in Article VII hereof. 1.4 SHAREHOLDER RIGHTS. Until such time as the Corporation actually exercises its repurchase right, rights of first refusal or special purchase right under this Agreement, Participant (or any successor in interest) shall have all the rights of a shareholder (including voting and dividend rights) with respect to the Shares, including the Shares held in escrow under Article VII, subject, however, to the transfer restrictions of Article IV. II. SECURITIES LAW COMPLIANCE 2.1 EXEMPTION FROM REGISTRATION. The Shares have not been registered under the Securities Act of 1933, as amended (the "1933 Act"), and are accordingly being issued to Participant in reliance upon the exemption from such registration provided by Rule 701 of the Securities and Exchange Commission for stock issuances under compensatory benefit plans such as the Plan. Participant hereby acknowledges receipt of a copy of the 2 documentation for such Plan in the form of Exhibit B attached hereto. 2.2 RESTRICTED SECURITIES. A. Participant hereby confirms that Participant has been informed that the Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. Accordingly, Participant hereby acknowledges that Participant is prepared to hold the Shares for an indefinite period and that Participant is aware that Rule 144 of the Securities and Exchange Commission issued under the 1933 Act is not presently available to exempt the sale of the Shares from the registration requirements of the 1933 Act. B. Upon the expiration of the ninety (90)-day period immediately following the date on which the Corporation first becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Shares, to the extent vested under Article V, may be sold (without registration) pursuant to the applicable requirements of Rule 144. If Participant is at the time of such sale an affiliate of the Corporation for purposes of Rule 144 or was such an affiliate during the preceding three (3) months, then the sale must comply with all the requirements of Rule 144 (including the volume limitation on the number of shares sold, the broker/market-maker sale requirement and the requisite notice to the Securities and Exchange Commission); however, the two-year holding period requirement of the Rule will not be applicable. If Participant is not at the time of the sale an affiliate of the Corporation nor was such an affiliate during the preceding three (3) months, then none of the requirements of Rule 144 (other than the broker/market-maker sale requirement for Shares held for less than three (3) years following payment in cash of the Purchase Price therefor) will be applicable to the sale. C. Should the Corporation not become subject to the reporting requirements of the Exchange Act, then Participant may, provided he/she is not at the time an affiliate of the Corporation (nor was such an affiliate during the preceding three (3) months), sell the Shares (without registration) pursuant to paragraph (k) of Rule 144 after the Shares have been held for a period of three (3) years following the payment in cash of the Purchase Price for such shares. 2.3 DISPOSITION OF SHARES. Participant hereby agrees that Participant shall make no disposition of the Shares (other than a permitted transfer under paragraph 4.1) unless and until there is compliance with all of the following requirements: -2- 3 (a) Participant shall have notified the Corporation of the proposed disposition and provided a written summary of the terms and conditions of the proposed disposition. (b) Participant shall have complied with all requirements of this Agreement applicable to the disposition of the Shares. (c) Participant shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that (i) the proposed disposition does not require registration of the Shares under the 1933 Act or (ii) all appropriate action necessary for compliance with the registration requirements of the 1933 Act or of any exemption from registration available under the 1933 Act (including Rule 144) has been taken. (d) Participant shall have provided the Corporation with written assurances, in form and substance satisfactory to the Corporation, that the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares pursuant to the provisions of the Commissioner Rules identified in paragraph 2.5. The Corporation shall not be required (i) to transfer on its books any Shares which have been sold or transferred in violation of the provisions of this Article II nor (ii) to treat as the owner of the Shares, or otherwise to accord voting or dividend rights to, any transferee to whom the Shares have been transferred in contravention of this Agreement. 2.4 RESTRICTIVE LEGENDS. In order to reflect the restrictions on disposition of the Shares, the stock certificates for the Shares will be endorsed with restrictive legends, including one or more of the following legends: (i) "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a 'no action' letter of the Securities and Exchange Commission with respect to such sale or offer, or (c) satisfactory assurances to the Corporation that registration under such Act is not required with respect to such sale or offer." -3- 4 (ii) "The shares represented by this certificate are unvested and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated , 19 , between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). Such agreement grants certain repurchase rights and rights of first refusal to the Corporation (or its assignees) upon the sale, assignment, transfer, encumbrance or other disposition of the Corporation's shares or upon termination of service with the Corporation. The Corporation will upon written request furnish a copy of such agreement to the holder hereof without charge." III. SPECIAL TAX PROVISIONS 3.1 SECTION 83(B) ELECTION. The Participant understands that under Section 83 of the Code, the excess of the fair market value of the Shares on the date any forfeiture restrictions applicable to such shares lapse over the Purchase Price for such Shares will be reportable as ordinary income on such lapse date. For this purpose, the term "forfeiture restrictions" includes the right of the Corporation to repurchase the Shares pursuant to the Repurchase Right provided under Article V of this Agreement. Participant understands that he/she may elect under Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") to be taxed at the time the Shares are acquired hereunder, rather than when and as such Shares cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of this Agreement. Even if the fair market value of the Shares on the date of this Agreement equals the Purchase Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. The form for making this election is attached as Exhibit C hereto. Participant understands that failure to make this filing within the thirty (30)-day period will result in the recognition of ordinary income by the Participant as the forfeiture restrictions lapse. 3.2 PARTICIPANT ACKNOWLEDGES THAT IT IS PARTICIPANT'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER SECTION 83(B), EVEN IF PARTICIPANT REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS/HER BEHALF. This filing should be made by registered or certified mail, return receipt requested, and Participant must retain two (2) copies of the completed form for filing with his/her State and Federal tax returns for the current tax year and an additional copy for his/her personal records. -4- 5 IV. TRANSFER RESTRICTIONS 4.1 RESTRICTION ON TRANSFER. Participant shall not transfer, assign, encumber or otherwise dispose of any of the Shares which are subject to the Corporation's Repurchase Right under Article V. In addition, Shares which are released from the Repurchase Right shall not be transferred, assigned, encumbered or otherwise made the subject of disposition in contravention of the Corporation's First Refusal Right under Article VI. Such restrictions on transfer, however, shall not be applicable to (i) a gratuitous transfer of the Shares made to the Participant's spouse or issue, including adopted children, or to a trust for the exclusive benefit of the Participant or the Participant's spouse or issue, provided and only if the Participant obtains the Corporation's prior written consent to such transfer, (ii) a transfer of title to the Shares effected pursuant to the Participant's will or the laws of intestate succession or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by the Participant in connection with the acquisition of the Shares. 4.2 TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to whom the Shares are transferred by means of one of the permitted transfers specified in paragraph 4.1 must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) both the Corporation's Repurchase Right and the Corporation's First Refusal Right granted hereunder and (ii) the market stand-off provisions of paragraph 4.4, to the same extent such Shares would be so subject if retained by the Participant. 4.3 DEFINITION OF OWNER. For purposes of Articles IV, V, VI and VII of this Agreement, the term "Owner" shall include the Participant and all subsequent holders of the Shares who derive their chain of ownership through a permitted transfer from the Participant in accordance with paragraph 4.1. 4.4 MARKET STAND-OFF PROVISIONS. A. In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Corporation's initial public offering, Owner shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Shares without the prior written consent of the Corporation or its underwriters. Such limitations shall be in effect for such period of time from -5- 6 and after the effective date of such registration statement as may be requested by the Corporation or such underwriters; provided, however, that in no event shall such period exceed one hundred-eighty (180) days. The limitations of this paragraph 4.4 shall remain in effect for the two-year period immediately following the effective date of the Corporation's initial public offering and shall thereafter terminate and cease to have any force or effect. B. Owner shall be subject to the market stand-off provisions of this paragraph 4.4 provided and only if the officers and directors of the Corporation are also subject to similar arrangements. C. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock effected without receipt of consideration, then any new, substituted or additional securities distributed with respect to the Shares shall be immediately subject to the provisions of this paragraph 4.4, to the same extent the Shares are at such time covered by such provisions. D. In order to enforce the limitations of this paragraph 4.4, the Corporation may impose stop-transfer instructions with respect to the Shares until the end of the applicable stand-off period. V. REPURCHASE RIGHT 5.1 GRANT. The Corporation is hereby granted the right (the "Repurchase Right"), exercisable at any time during the sixty (60)-day period following the date the Participant ceases for any reason to remain in Service or (if later) during the sixty (60)-day period following the execution date of this Agreement, to repurchase at the Purchase Price all or (at the discretion of the Corporation and with the consent of the Participant) any portion of the Shares in which the Participant has not acquired a vested interest in accordance with the vesting provisions of paragraph 5.3 below (such shares to be hereinafter called the "Unvested Shares"). For purposes of this Agreement, the Participant shall be deemed to remain in Service for so long as the Participant continues to render periodic services to the Corporation or any parent or subsidiary corporation, whether as an employee, a non-employee member of the board of directors, or an independent contractor or consultant. 5.2 EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to the Owner of the Unvested Shares prior to the expiration of the applicable sixty (60)-day period specified in paragraph 5.1. The notice shall indicate the number of Unvested Shares to be -6- 7 repurchased and the date on which the repurchase is to be effected, such date to be not more than thirty (30) days after the date of notice. To the extent one or more certificates representing Unvested Shares may have been previously delivered out of escrow to the Owner, then Owner shall, prior to the close of business on the date specified for the repurchase, deliver to the Secretary of the Corporation the certificates representing the Unvested Shares to be repurchased, each certificate to be properly endorsed for transfer. The Corporation shall, concurrently with the receipt of such stock certificates (either from escrow in accordance with paragraph 7.3 or from Owner as herein provided), pay to Owner in cash or cash equivalents (including the cancellation of any purchase-money indebtedness), an amount equal to the Purchase Price previously paid for the Unvested Shares which are to be repurchased. 5.3 TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right shall terminate with respect to any Unvested Shares for which it is not timely exercised under paragraph 5.2. In addition, the Repurchase Right shall terminate, and cease to be exercisable, with respect to any and all Shares in which the Participant vests in accordance with the schedule below. Accordingly, as the Participant continues in Service, the Participant shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, the Shares in installments in accordance with the following provisions: (i) The Participant shall not acquire any vested interest in, nor shall the Repurchase Right lapse with respect to, any Shares unless and until the Participant has completed twelve (12) months of Service measured from the Vesting Start Date. (ii) Upon the completion of the twelve (12) month Service period specified in subparagraph (i) above, the Participant shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, 25% of the Shares. (iii) The Participant shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, the remaining Shares in a series of successive equal monthly installments over each of the next thirty-six (36) months of Service completed by the Participant after the initial vesting date under subparagraph (ii) above. All Shares as to which the Repurchase Right lapses shall, however, continue to be subject to (i) the First Refusal Right and (ii) the market stand-off provisions of paragraph 4.4. -7- 8 5.4 FRACTIONAL SHARES. No fractional shares shall be repurchased by the Corporation. Accordingly should the Repurchase Right extend to a fractional share (in accordance with the vesting computation provisions of paragraph 5.3) at the time the Participant ceases Service, then such fractional share shall be added to any fractional share in which the Participant is at such time vested in order to make one whole vested share no longer subject to the Repurchase Right. 5.5 ADDITIONAL SHARES OR SUBSTITUTED SECURITIES. In the event of any stock dividend, stock split, recapitalization or other change affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration, then any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which is by reason of any such transaction distributed with respect to the Shares shall be immediately subject to the Repurchase Right, but only to the extent the Shares are at the time covered by such right. Appropriate adjustments to reflect the distribution of such securities or property shall be made to the number of Shares at the time subject to the Repurchase Right hereunder and to the price per share to be paid upon the exercise of the Repurchase Right in order to reflect the effect of any such transaction upon the Corporation's capital structure; provided, however, that the aggregate Purchase Price shall remain the same. 5.6 CORPORATE TRANSACTION. A. Except to the extent the Repurchase Right is to be assigned to the successor corporation (or its parent company), immediately prior to the consummation of any of the following shareholder-approved transactions (a "Corporate Transaction"): (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets, or (iii) any transaction (other than an issuance of shares by the Corporation for cash) in or by means of which one or more persons acting in concert acquire, in the aggregate, more than 50% of the outstanding shares of the stock of the Corporation, the Corporation may exercise the Repurchase Right with respect to the then Unvested Shares. The Repurchase Right shall automatically lapse with respect to all Unvested Shares not repurchased hereunder. -8- 9 B. To the extent the Repurchase Right remains in effect following such Corporate Transaction, it shall apply to the new capital stock or other property (including cash) received in exchange for the Shares in consummation of the Corporate Transaction, but only to the extent the Shares are at the time covered by such right. Appropriate adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the Corporate Transaction upon the Corporation's capital structure; provided, however, that the aggregate Purchase Price shall remain the same. VI. RIGHT OF FIRST REFUSAL 6.1 GRANT. The Corporation is hereby granted rights of first refusal (the "First Refusal Right"), exercisable in connection with any proposed transfer of the Purchased Shares in which the Optionee has vested in accordance with the vesting provisions of Article V. For purposes of this Article VI, the term "transfer" shall include any sale, assignment, pledge, encumbrance or other disposition for value of the Purchased Shares intended to be made by the Owner, but shall not include any of the permitted transfers under paragraph 4.1. 6.2 NOTICE OF INTENDED DISPOSITION. In the event the Owner desires to accept a bona fide third-party offer for the transfer of any or all of the Purchased Shares (the shares subject to such offer to be hereinafter called the "Target Shares"), Owner shall promptly (i) deliver to the Corporate Secretary of the Corporation written notice (the "Disposition Notice") of the terms and conditions of the offer, including the purchase price and the identity of the third-party offeror, and (ii) provide satisfactory proof that the disposition of the Target Shares to such third-party offeror would not be in contravention of the provisions set forth in Articles II and IV of this Agreement. 6.3 EXERCISE OF RIGHT. The Corporation shall, for a period of forty-five (45) days following receipt of the Disposition Notice, have the right to repurchase any or all of the Target Shares specified in the Disposition Notice upon the same terms and conditions specified therein or upon terms and conditions which do not materially vary from those specified therein. Such right shall be exercisable by delivery of written notice (the "Exercise Notice") to Owner prior to the expiration of the forty-five (45)-day exercise period. If such right is exercised with respect to all the Target Shares specified in the Disposition Notice, then the Corporation (or its assignees) shall effect the repurchase of the Target Shares, including payment of the purchase price, not more than ten (10) business days after delivery of the Exercise Notice; and at such time Owner shall deliver to the Corporation the certificates representing the -9- 10 Target Shares to be repurchased, each certificate to be properly endorsed for transfer. To the extent any of the Target Shares are at the time held in escrow under Article VII, the certificates for such shares shall automatically be released from escrow and delivered to the Corporation for purchase. Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of indebtedness, the Corporation (or its assignees) shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property. If the Owner and the Corporation (or its assignees) cannot agree on such cash value within ten (10) days after the Corporation's receipt of the Disposition Notice, the valuation shall be made by an appraiser of recognized standing selected by the Owner and the Corporation (or its assignees) or, if they cannot agree on an appraiser within twenty (20) days after the Corporation's receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two appraisers shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The cost of such appraisal shall be shared equally by the Owner and the Corporation. The closing shall then be held on the later of (i) the tenth business day following delivery of the Exercise Notice or (ii) the tenth business day after such cash valuation shall have been made. 6.4 NON-EXERCISE OF RIGHT. In the event the Exercise Notice is not given to Owner within forty-five (45) days following the date of the Corporation's receipt of the Disposition Notice, Owner shall have a period of thirty (30) days thereafter in which to sell or otherwise dispose of the Target Shares to the third-party offeror identified in the Disposition Notice upon terms and conditions (including the purchase price) no more favorable to such third-party offeror than those specified in the Disposition Notice; provided, however, that any such sale or disposition must not be effected in contravention of the provisions of Article II of this Agreement. To the extent any of the Target Shares are at the time held in escrow under Article VII, the certificates for such shares shall automatically be released from escrow and surrendered to the Owner. The third-party offeror shall acquire the Target Shares free and clear of the Corporation's Repurchase Right under Article V and the Corporation's First Refusal Right hereunder, but the acquired shares shall remain subject to (i) the securities law restrictions of paragraph 2.2(a) and (ii) the market stand-off provisions of paragraph 4.4. In the event Owner does not effect such sale or disposition of the Target Shares within the specified thirty (30)-day period, the Corporation's First Refusal Right shall continue to be applicable to any subsequent disposition of the Target Shares by Owner until such right lapses in accordance with paragraph 6.7. -10- 11 6.5 PARTIAL EXERCISE OF RIGHT. In the event the Corporation (or its assignees) makes a timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written notice to the Corporation delivered within thirty (30) days after the date of the Disposition Notice, to effect the sale of the Target Shares pursuant to one of the following alternatives: (i) sale or other disposition of all the Target Shares to the third-party offeror identified in the Disposition Notice, but in full compliance with the requirements of paragraph 6.4, as if the Corporation did not exercise the First Refusal Right hereunder; or (ii) sale to the Corporation (or its assignees) of the portion of the Target Shares which the Corporation (or its assignees) has elected to purchase, such sale to be effected in substantial conformity with the provisions of paragraph 6.3. Failure of Owner to deliver timely notification to the Corporation under this paragraph 6.5 shall be deemed to be an election by Owner to sell the Target Shares pursuant to alternative (i) above. 6.6 RECAPITALIZATION/MERGER. (a) In the event of any stock dividend, stock split, recapitalization or other transaction affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration, then any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Purchased Shares shall be immediately subject to the Corporation's First Refusal Right hereunder, but only to the extent the Purchased Shares are at the time covered by such right. (b) In the event of any of the following transactions: (i) a merger or consolidation in which the Corporation is not the surviving entity, (ii) a sale, transfer or other disposition of all or substantially all of the Corporation's assets, (iii) a reverse merger in which the Corporation is the surviving entity but in which the Corporation's outstanding voting securities are transferred in whole or in part to person or persons -11- 12 other than those who held such securities immediately prior to the merger, or (iv) any transaction effected primarily to change the State in which the Corporation is incorporated, or to create a holding company structure, the Corporation's First Refusal Right shall remain in full force and effect and shall apply to the new capital stock or other property received in exchange for the Purchased Shares in consummation of the transaction but only to the extent the Purchased Shares are at the time covered by such right. 6.7 LAPSE. The First Refusal Right under this Article VI shall lapse and cease to have effect upon the earliest to occur of (i) the first date on which shares of the Corporation's Common Stock are held of record by more than five hundred (500) persons, (ii) a determination is made by the Corporation's Board of Directors that a public market exists for the outstanding shares of the Corporation's Common Stock, or (iii) a firm commitment underwritten public offering pursuant to an effective registration statement under the 1933 Act, covering the offer and sale of the Corporation's Common Stock in the aggregate amount of at least $5,000,000. However, the market stand-off provisions of paragraph 4.4 shall continue to remain in full force and effect following the lapse of the First Refusal Right hereunder. VII. ESCROW 7.1 DEPOSIT. Upon issuance, the certificates for any Unvested Shares purchased hereunder shall be deposited in escrow with the Corporation to be held in accordance with the provisions of this Article VII. Each deposited certificate shall be accompanied by a duly executed Assignment Separate from Certificate in the form of Exhibit A. The deposited certificates, together with any other assets or securities from time to time deposited with the Corporation pursuant to the requirements of this Agreement, shall remain in escrow until such time or times as the certificates (or other assets and securities) are to be released or otherwise surrendered for cancellation in accordance with paragraph 7.3. Upon delivery of the certificates (or other assets and securities) to the Corporation, the Owner shall be issued an instrument of deposit acknowledging the number of Unvested Shares (or other assets and securities) delivered in escrow to the Corporation. 7.2 RECAPITALIZATION. All regular cash dividends on the Unvested Shares (or other securities at the time held in escrow) shall be paid directly to the Owner and shall not be held in escrow. However, in the event of any stock dividend, stock -12- 13 split, recapitalization or other change affecting the Corporation's outstanding Common Stock as a class effected without receipt of consideration or in the event of a Corporate Transaction, any new, substituted or additional securities or other property which is by reason of such transaction distributed with respect to the Unvested Shares shall be immediately delivered to the Corporation to be held in escrow under this Article VII, but only to the extent the Unvested Shares are at the time subject to the escrow requirements of paragraph 7.1. 7.3 RELEASE/SURRENDER. The Unvested Shares, together with any other assets or securities held in escrow hereunder, shall be subject to the following terms and conditions relating to their release from escrow or their surrender to the Corporation for repurchase and cancellation: (i) Should the Corporation (or its assignees) elect to exercise the Repurchase Right under Article V with respect to any Unvested Shares, then the escrowed certificates for such Unvested Shares (together with any other assets or securities issued with respect thereto) shall be delivered to the Corporation, concurrently with the payment to the Owner, in cash or cash equivalent (including the cancellation of any purchase-money indebtedness), of an amount equal to the aggregate Purchase Price for such Unvested Shares, and the Owner shall cease to have any further rights or claims with respect to such Unvested Shares (or other assets or securities attributable to such Unvested Shares). (ii) Should the Corporation (or its assignees) elect to exercise its First Refusal Right under Article VI with respect to any vested Target Shares held at the time in escrow hereunder, then the escrowed certificates for such Target Shares (together with any other assets or securities attributable thereto) shall, concurrently with the payment of the paragraph 6.3 purchase price for such Target Shares to the Owner, be surrendered to the Corporation, and the Owner shall cease to have any further rights or claims with respect to such Target Shares (or other assets or securities). (iii) Should the Corporation (or its assignees) elect not to exercise its First Refusal Right under Article VI with respect to any Target Shares held at the time in escrow hereunder, then the escrowed certificates for such Target Shares (together with any other assets or securities attributable thereto) shall be surrendered to the Owner for -13- 14 disposition in accordance with the provisions of paragraph 6.4. (iv) As the interest of the Participant in the Unvested Shares (or any other assets or securities attributable thereto) vests in accordance with the provisions of Article V, the certificates for such vested shares (as well as all other vested assets and securities) shall be released from escrow and delivered to the Owner in accordance with the following schedule: a. The initial release of vested shares (or other vested assets and securities) from escrow shall be effected within thirty (30) days following the expiration of the initial twelve (12)-month period measured from the initial vesting date under paragraph 5.3. b. Subsequent releases of vested shares (or other vested assets and securities) from escrow shall be effected at semi-annual intervals thereafter, with the first such semi-annual release to occur six (6) months after the initial paragraph 5.3 vesting date. c. Upon the Participant's cessation of Service, any escrowed Shares (or other assets or securities) in which the Participant is at the time vested shall be promptly released from escrow. d. Upon any earlier termination of the Corporation's Repurchase Right in accordance with the applicable provisions of Article V, the Shares (or other assets or securities) at the time held in escrow hereunder shall promptly be released to the Owner as fully-vested shares or other property. (v) All Shares (or other assets or securities) released from escrow in accordance with the provisions of subparagraph (iv) above shall nevertheless remain subject to (I) the Corporation's First Refusal Right under Article VI until such right lapses pursuant to paragraph 6.7, (II) the market stand-off provisions of paragraph 4.4 until such provisions terminate in accordance therewith and (III) the Special Purchase Right under Article VIII. -14- 15 VIII. MARITAL DISSOLUTION OR LEGAL SEPARATION 8.1 GRANT. In connection with the dissolution of the Participant's marriage or the legal separation of the Participant and the Participant's spouse, the Corporation shall have the right (the "Special Purchase Right"), exercisable at any time during the thirty (30)-day period following the Corporation's receipt of the required Dissolution Notice under paragraph 8.2, to purchase from the Participant's spouse, in accordance with the provisions of paragraph 8.3, all or any portion of the Shares which would otherwise be awarded to such spouse in settlement of any community property or other marital property rights such spouse may have in such shares. 8.2 NOTICE OF DECREE OR AGREEMENT. The Participant shall promptly provide the Secretary of the Corporation with written notice (the "Dissolution Notice") of (i) the entry of any judicial decree or order resolving the property rights of the Participant and the Participant's spouse in connection with their marital dissolution or legal separation or (ii) the execution of any contract or agreement relating to the distribution or division of such property rights. The Dissolution Notice shall be accompanied by a copy of the actual decree of dissolution or settlement agreement between the Participant and the Participant's spouse which provides for the award to the spouse of one or more Shares in settlement of any community property or other marital property rights such spouse may have in such shares. 8.3 EXERCISE OF SPECIAL PURCHASE RIGHT. The Special Purchase Right shall be exercisable by delivery of the Purchase Notice to the Participant and the Participant's spouse within thirty (30) days after the Corporation's receipt of the Dissolution Notice. The Purchase Notice shall indicate the number of shares to be purchased by the Corporation, the date such purchase is to be effected (such date to be not less than five (5) business days, nor more than ten (10) business days, after the date of the Purchase Notice), and the fair market value to be paid for such Shares. The Participant (or the Participant's spouse, to the extent such spouse has physical possession of the Shares) shall, prior to the close of business on the date specified for the purchase, deliver to the Corporate Secretary of the Corporation the certificates representing the shares to be purchased, each certificate to be properly endorsed for transfer. To the extent any of the shares to be purchased by the Corporation are at the time held in escrow under Article VII, the certificates for such shares shall be promptly delivered out of escrow to the Corporation. The Corporation shall, concurrently with the receipt of the stock certificates, pay to the Participant's spouse (in cash or cash equivalents) an amount -15- 16 equal to the fair market value specified for such shares in the Purchase Notice. If the Participant's spouse does not agree with the fair market value specified for the shares in the Purchase Notice, then the spouse shall promptly notify the Corporation in writing of such disagreement and the fair market value of such shares shall thereupon be determined by an appraiser of recognized standing selected by the Corporation and the spouse. If they cannot agree on an appraiser within twenty (20) days after the date of the Purchase Notice, each shall select an appraiser of recognized standing, and the two appraisers shall designate a third appraiser of recognized standing whose appraisal shall be determinative of such value. The cost of the appraisal shall be shared equally by the Corporation and the Participant's spouse. The closing shall then be held on the fifth business day following the completion of such appraisal; provided, however, that if the appraised value is more than fifteen percent (15%) greater than the fair market value specified for the shares in the Purchase Notice, the Corporation shall have the right, exercisable prior to the expiration of such five (5) business-day period, to rescind the exercise of the Special Purchase Right and thereby revoke its election to purchase the shares awarded to the spouse. 8.4 LAPSE. The Special Purchase Right under this Article VIII shall lapse and cease to have effect upon the earlier to occur of (i) the first date on which the First Refusal Right under Article VI lapses or (ii) the expiration of the thirty (30)-day exercise period specified in paragraph 8.3, to the extent the Special Purchase Right is not timely exercised in accordance with such paragraph. IX. GENERAL PROVISIONS 9.1 ASSIGNMENT. The Corporation may assign its Repurchase Right under Article V, its First Refusal Right under Article VI and/or its Special Purchase Right under Article VIII to any person or entity selected by the Corporation's Board of Directors, including (without limitation) one or more shareholders of the Corporation. If the assignee of the Repurchase Right is other than a one hundred percent (100%) owned subsidiary corporation of the Corporation or the parent corporation owning one hundred percent (100%) of the Corporation, then such assignee must make a cash payment to the Corporation, upon the assignment of the Repurchase Right, in an amount equal to the excess (if any) of (i) the fair market value of the Unvested Shares at the time subject to the assigned Repurchase Right over (ii) the aggregate repurchase price payable for Unvested Shares thereunder. -16- 17 9.2 DEFINITIONS. For purposes of this Agreement, the following provisions shall be applicable in determining the parent and subsidiary corporations of the Corporation: (i) Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a PARENT corporation of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (ii) Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a SUBSIDIARY of the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 9.3 NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon the Participant any right to continue in the Service of the Corporation (or any parent or subsidiary corporation employing or retaining Participant) for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any parent or subsidiary corporation employing or retaining Participant) or the Participant, which rights are hereby expressly reserved by each, to terminate the Participant's Service at any time for any reason whatsoever, with or without cause. 9.4 NOTICES. Any notice required in connection with (i) the Repurchase Right, the Special Purchase Right or the First Refusal Right or (ii) the disposition of any Shares covered thereby shall be given in writing and shall be deemed effective upon personal delivery or upon deposit in the United States mail, registered or certified, postage prepaid and addressed to the party entitled to such notice at the address indicated below such party's signature line on this Agreement or at such other address as such party may designate by ten (10) days advance written notice under this paragraph 9.4 to all other parties to this Agreement. 9.5 NO WAIVER. The failure of the Corporation (or its assignees) in any instance to exercise the Repurchase Right granted under Article V, or the failure of the Corporation (or -17- 18 its assignees) in any instance to exercise the First Refusal Right granted under Article VI, or the failure of the Corporation (or its assignees) in any instance to exercise the Special Purchase Right granted under Article VIII shall not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and the Participant or the Participant's spouse. No waiver of any breach or condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different nature. 9.6 CANCELLATION OF SHARES. If the Corporation (or its assignees) shall make available, at the time and place and in the amount and form provided in this Agreement, the consideration for the Shares to be repurchased in accordance with the provisions of this Agreement, then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder of such shares (other than the right to receive payment of such consideration in accordance with this Agreement), and such shares shall be deemed purchased in accordance with the applicable provisions hereof and the Corporation (or its assignees) shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. X. MISCELLANEOUS PROVISIONS 10.1 PARTICIPANT UNDERTAKING. Participant hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may in its judgment deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either the Participant or the Shares pursuant to the express provisions of this Agreement. 10.2 AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the entire contract between the parties hereto with regard to the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed in conformity with the express terms and provisions of the Plan. 10.3 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, as such laws are applied to contracts entered into and performed in such State without resort to that State's conflict-of-laws rules. 10.4 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, -18- 19 but all of which together shall constitute one and the same instrument. 10.5 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and the Participant and the Participant's legal representatives, heirs, legatees, distributees, assigns and transferees by operation of law, whether or not any such person shall have become a party to this Agreement and have agreed in writing to join herein and be bound by the terms and conditions hereof. 10.6 POWER OF ATTORNEY. Participant's spouse hereby appoints Participant his or her true and lawful attorney in fact, for him or her and in his or her name, place and stead, and for his or her use and benefit, to agree to any amendment or modification of this Agreement and to execute such further instruments and take such further actions as may reasonably be necessary to carry out the intent of this Agreement. Participant's spouse further gives and grants unto Participant as his or her attorney in fact full power and authority to do and perform every act necessary and proper to be done in the exercise of any of the foregoing powers as fully as he or she might or could do if personally present, with full power of substitution and revocation, hereby ratifying and confirming all that Participant shall lawfully do and cause to be done by virtue of this power of attorney. [Remainder of this page is left intentionally blank.] -19- 20 IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above. CombiChem, Inc. By: _____________________________________ Title: __________________________________ Address: _________________________________________ _________________________________________ _________________________________________ Participant(1) Address: _________________________________________ _________________________________________ The undersigned spouse of Participant has read and hereby approves the foregoing Restricted Stock Purchase Agreement. In consideration of the Corporation's granting the Participant the right to acquire the Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to be irrevocably bound by all the terms and provisions of such Agreement, including, (specifically) the right of the Corporation (or its assignees) to purchase any and all interest or right the undersigned may otherwise have in such shares pursuant to community property laws or other marital property rights. ----------------------------------------- Participant's Spouse - ---------- (1) I have executed the Section 83(b) election that was attached hereto as Exhibit D. As set forth in Article III, I understand that I, and not the Corporation, will be responsible for completing the form and filing the election with the appropriate offices of the federal and state tax authorities and that if such filing is not completed within thirty (30) days after the date of this Agreement, I will not be entitled to the tax benefits provided by Section 83(b). -20- 21 EXHIBIT A ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, ______________________ hereby sell(s), assign(s) and transfer(s) unto CombiChem, Inc. (the "Corporation") ____________________________________ (_____________) shares of the Common Stock of the Corporation standing in his\her name on the books of the Corporation represented by Certificate No. ___________________ and do hereby irrevocably constitute and appoint ____________________ as Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: ______________ Signature _______________________________ INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Corporation to exercise the Repurchase Right set forth in the Agreement without requiring additional signatures on the part of the Participant. A-1 22 EXHIBIT B 1995 STOCK OPTION/STOCK ISSUANCE PLAN B-1 23 EXHIBIT C SECTION 83(b) TAX ELECTION This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2. This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2. (1) The taxpayer who performed the services is: Name: Address: Taxpayer Ident. No.: (2) The property with respect to which the election is being made is ___________ shares of the common stock of CombiChem, Inc. (3) The property was issued on __________________, 19___. (4) The taxable year in which the election is being made is the calendar year 19___. (5) The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the original purchase price if for any reason taxpayer's employment with the issuer is terminated. The issuer's repurchase right lapses in a series of annual and monthly installments over a four year period ending on ____________, 19___. (6) The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) is $___________ per share. (7) The amount paid for such property is $____________ per share. (8) A copy of this statement was furnished to CombiChem, Inc. for whom taxpayer rendered the services underlying the transfer of property. (9) This statement is executed as of: _______________________. - -------------------------------- -------------------------------------- Spouse (if any) Taxpayer This form must be filed with the Internal Revenue Service Center with which taxpayer files his/her Federal income tax returns. The filing must be made within 30 days after the execution date of the Restricted Stock Issuance Agreement. B-2 24 Optionee understands that the Option is granted pursuant to the Corporation's Plan. By signing below, optionee agrees to be bound by the terms and conditions of the Plan and the terms and conditions of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A. Optionee understands that any Option Shares purchased under the Option will be subject to the terms and conditions set forth in the Stock Purchase Agreement attached hereto as Exhibit B. Optionee hereby acknowledges receipt of a copy of the Plan in the form attached hereto as Exhibit C. REPURCHASE RIGHTS. THE OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO REPURCHASE RIGHTS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS UPON ANY PROPOSED SALE, ASSIGNMENT, TRANSFER, ENCUMBRANCE OR OTHER DISPOSITION OF THE CORPORATION'S SHARES. THE TERMS AND CONDITIONS OF SUCH RIGHTS ARE SPECIFIED IN THE STOCK PURCHASE AGREEMENT. No Employment or Service Contract. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the Service of the Corporation for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation or the Optionee, which rights are hereby expressly reserved by each, to terminate Optionee's Service at any time for any reason whatsoever, with or without cause. ________________________, 199__ Date CombiChem, Inc. By_______________________________________ Title:___________________________________ ----------------------------------------- Optionee Address: ----------------------------------------- ----------------------------------------- EX-10.44 48 EXHIBIT 10.44 1 EXHIBIT 10.44 COMBICHEM, INC. 1997 STOCK INCENTIVE PLAN ARTICLE ONE GENERAL PROVISIONS I. PURPOSE OF THE PLAN This 1997 Stock Incentive Plan is intended to promote the interests of CombiChem, Inc., a Delaware corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into five separate equity programs: - the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, - the Salary Investment Option Grant Program under which eligible employees may elect to have a portion of their base salary invested each year in special option grants, - the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), - the Automatic Option Grant Program under which eligible non-employee Board members shall automatically receive option grants at periodic intervals to purchase shares of Common Stock, and 2 - the Director Fee Option Grant Program under which non-employee Board members may elect to have all or any portion of their annual retainer fee otherwise payable in cash applied to a special option grant. B. The provisions of Articles One and Seven shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. The Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. Administration of the Discretionary Option Grant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power to administer those programs with respect to all such persons. B. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. C. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or any option or stock issuance thereunder. D. The Primary Committee shall have the sole and exclusive authority to determine which Section 16 Insiders and other highly compensated Employees shall be eligible for participation in the Salary Investment Option Grant Program for one or more calendar years. However, all option grants under the Salary Investment Option Grant Program shall be made in accordance with the express terms of that program, and the Primary Committee shall not exercise any discretionary functions with respect to the option grants made under that program. E. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or the Secondary Committee shall be liable 2 3 for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. F. Administration of the Automatic Option Grant and Director Fee Option Grant Programs shall be self-executing in accordance with the terms of those programs, and no Plan Administrator shall exercise any discretionary functions with respect to any option grants or stock issuances made under those programs. IV. ELIGIBILITY A. The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: (i) Employees, (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Only Employees who are Section 16 Insiders or other highly compensated individuals shall be eligible to participate in the Salary Investment Option Grant Program. C. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine, (i) with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive option grants, the time or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration for such shares. D. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. E. The individuals who shall be eligible to participate in the Automatic Option Grant Program shall be limited to 3 4 (i) those individuals who first become non-employee Board members after the Underwriting Date, whether through appointment by the Board or election by the Corporation's stockholders and (ii) those individuals who have previously received a stock option grant from the Corporation and continue to serve as non-employee Board members at one or more Annual Stockholders Meetings held after the Underwriting Date. A non-employee Board member who has previously been in the employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to receive an option grant under the Automatic Option Grant Program at the time he or she first becomes a non-employee Board member, but shall be eligible to receive periodic option grants under the Automatic Option Grant Program while he or she continues to serve as a non-employee Board member. F. All non-employee Board members shall be eligible to participate in the Director Fee Option Grant Program. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed 1,080,603 shares, which shall consist of (i) the number of shares which remained available for issuance, as of the Plan Effective Time, under the Predecessor Plan as last approved by the Corporation's stockholders, including the shares subject to outstanding options under that Predecessor Plan, and (ii) an additional increase of approximately 800,000 shares authorized by the Board and the stockholders prior to the Section 12 Registration Date. To the extent any unvested shares of Common Stock outstanding under the Predecessor Plan as of the Plan Effective Time are subsequently repurchased by the Corporation, at the option exercise price paid per share, in connection with the holder's termination of service prior to vesting in the shares, those repurchased shares shall be added to the reserve of Common Stock available for issuance under the Plan. B. No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stock issuances for more than 500,000 shares of Common Stock in the aggregate per calendar year, beginning with the 1997 calendar year. C. Shares of Common Stock subject to outstanding options (including options incorporated into this Plan from the Predecessor Plan) shall be available for subsequent issuance 4 5 under the Plan to the extent those options expire or terminate for any reason prior to exercise in full. Unvested shares issued under the Plan and subsequently cancelled or repurchased by the Corporation (including unvested shares issued under the Predecessor Plan and repurchased by the Corporation at or after the Plan Effective Time), at the original issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. However, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the net number of shares of Common Stock issued to the holder of such option or stock issuance. D. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year, (iii) the number and/or class of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, (iv) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan and (v) the number and/or class of securities and price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plan. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 5 6 ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. EXERCISE PRICE. 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Six and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions to (a) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 6 7 B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. EFFECT OF TERMINATION OF SERVICE. 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. (iii) Should the Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to be outstanding. (iv) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. 2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time 7 8 as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service. D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. Non-Statutory Options shall be subject to the same restrictions, except that a Non-Statutory Option may, in connection with the Optionee's estate plan, be assigned in whole or in part during the Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established exclusively for one or more such family members. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Seven shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to the terms of this Section II. A. ELIGIBILITY. Incentive Options may only be granted to Employees. 8 9 B. EXERCISE PRICE. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Class A Common Stock. However, an outstanding option shall NOT become exercisable on such an accelerated basis if and to the extent: (i) such option is, in connection with the Corporate Transaction, to be assumed by the successor corporation (or parent thereof) or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Corporate Transaction on any shares for which the option is not otherwise at that time exercisable and provides for subsequent payout in accordance with the same exercise/vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. B. All outstanding repurchase rights shall automatically terminate, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. 9 10 C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments to reflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan and (iii) the maximum number and/or class of securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year. E. The Plan Administrator shall have the discretionary authority to provide for the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed in the Corporate Transaction, so that each such option shall, immediately prior to the effect date of such Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully vested shares of Common Stock. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall not be assignable in connection with such Corporate Transaction and shall accordingly terminate upon the consummation of such Corporate Transaction, and the shares subject to those terminated rights shall thereupon vest in full. F. The Plan Administrator shall have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide for the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program in the event the Optionee's Service is subsequently terminated by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those options are assumed and do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1) year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation's outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate, and the shares subject to those terminated repurchase rights shall accordingly vest in full. 10 11 G. The Plan Administrator shall have the discretionary authority to provide for the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program upon the occurrence of a Change in Control so that each such option shall, immediately prior to the effect date of such Change in Control, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully vested shares of Common Stock. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall terminate automatically upon the consummation of such Change in Control, and the shares subject to those terminated rights shall thereupon vest in full. Alternatively, the Plan Administrator may condition the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program and the termination of one or more of the Corporation's outstanding repurchase rights under such program upon the subsequent termination of the Optionee's Service by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of such Change in Control. Each option so accelerated shall remain exercisable for fully vested shares until the earlier of (i) the expiration of the option term or (ii) the expiration of the one (1) year period measured from the effective date of Optionee's cessation of Service. H. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Nonstatutory Option under the Federal tax laws. I. The outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program (including outstanding options incorporated from the Predecessor Plan) and to grant in substitution new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new grant date. V. STOCK APPRECIATION RIGHTS A. The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights. 11 12 B. The following terms shall govern the grant and exercise of tandem stock appreciation rights: (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares. (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time. If the surrender is so approved, then the distribution to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. (iii) If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (a) five (5) business days after the receipt of the rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights be exercised more than ten (10) years after the option grant date. C. The following terms shall govern the grant and exercise of limited stock appreciation rights: (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. (ii) Upon the occurrence of a Hostile Take-Over, each individual holding one or more options with such a limited stock appreciation right shall have the unconditional right (exercisable for a thirty (30)- day period following such Hostile Take-Over) to surrender each such option to the Corporation, to the extent the option is at the time exercisable for vested shares of Common Stock. In return for the surrendered option, the Optionee shall receive a cash distribution from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock which are at the time vested 12 13 under each surrendered option (or surrendered portion thereof) over (B) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the option surrender date. 13 14 (iii) The grant of such limited stock appreciation right shall automatically constitute pre- approval by the Plan Administrator of any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Plan Administrator or the Board shall be required at the time of the actual option surrender and cash distribution. (iv) The balance of the option (if any) shall remain outstanding and exercisable in accordance with the documents evidencing such option. 14 15 ARTICLE THREE SALARY INVESTMENT OPTION GRANT PROGRAM I. OPTION GRANTS The Primary Committee shall have the sole and exclusive authority to determine the calendar year or years (if any) for which the Salary Investment Option Grant Program is to be in effect and to select the Section 16 Insiders and other highly compensated Employees eligible to participate in the Salary Investment Option Grant Program for those calendar year or years. Each selected individual who elects to participate in the Salary Investment Option Grant Program must, prior to the start of each calendar year of participation, file with the Plan Administrator (or its designate) an irrevocable authorization directing the Corporation to reduce his or her base salary for that calendar year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00). The Primary Committee shall have complete discretion to determine whether to approve the filed authorization in whole or in part. To the extent the Primary Committee approves the authorization, the individual who filed that authorization shall automatically be granted an option under the Salary Investment Grant Program on the first trading day in January of the calendar year for which the salary reduction is to be in effect. II. OPTION TERMS Each option shall be a Non-Statutory Option evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. A. EXERCISE PRICE. 1. The exercise price per share shall be thirty- three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): 15 16 X = A / (B x 66-2/3%), where X is the number of option shares, A is the dollar amount of the approved reduction in the Optionee's base salary for the calendar year, and B is the Fair Market Value per share of Common Stock on the option grant date. C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee's completion of each calendar month of Service in the calendar year for which the salary reduction is in effect. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease Service for any reason while holding one or more options under this Article Three, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Service. Should the Optionee die while holding one or more options under this Article Three, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee's cessation of Service. However, the option shall, immediately upon the Optionee's cessation of Service for any reason, terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE- OVER A. In the event of any Corporate Transaction while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall be assumed by the successor corporation (or parent thereof) in the Corporate 16 17 Transaction and shall remain exercisable for the fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Salary Investment Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. The option shall remain so exercisable until the earlier of (i) the expiration of the ten (10)-year option term, (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service or (iii) the surrender of the option in connection with a Hostile Take-Over. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each outstanding option granted him or her under the Salary Investment Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the TakeOver Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. The Primary Committee shall, at the time the option with such limited stock appreciation right is granted under the Salary Investment Option Grant Program, pre- approve any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Primary Committee or the Board shall be required at the time of the actual option surrender and cash distribution. D. The grant of options under the Salary Investment Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. REMAINING TERMS The remaining terms of each option granted under the Salary Investment Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 17 18 ARTICLE FOUR STOCK ISSUANCE PROGRAM I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. PURCHASE PRICE. 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the issuance date. 2. Subject to the provisions of Section I of Article Seven, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. VESTING PROVISIONS. 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: (i) the Service period to be completed by the Participant or the performance objectives to be attained, (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, and 18 19 (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase- money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock which would otherwise occur upon the cessation of the Participant's Service or the non-attainment of the performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. II. CORPORATE TRANSACTION/CHANGE IN CONTROL 19 20 A. All of the Corporation's outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation's repurchase rights remain outstanding under the Stock Issuance Program, to provide that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase rights are assigned to the successor corporation (or parent thereof). C. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation's repurchase rights remain outstanding under the Stock Issuance Program, to provide that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control. III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. 20 21 ARTICLE FIVE AUTOMATIC OPTION GRANT PROGRAM I. OPTION TERMS A. GRANT DATES. Option grants shall be made on the dates specified below: 1. Each individual who is first elected or appointed as a non-employee Board member at any time after the Underwriting Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that individual has not previously been in the employ of the Corporation or any Parent or Subsidiary. 2. On the date of each Annual Stockholders Meeting held after the Underwriting Date, each individual who is to continue to serve as an Eligible Director, whether or not that individual is standing for re-election to the Board at that particular Annual Meeting, shall automatically be granted a Non- Statutory Option to purchase 5,000 shares of Common Stock, provided such individual has served as a non-employee Board member for at least six (6) months. There shall be no limit on the number of such 5,000-share option grants any one Eligible Director may receive over his or her period of Board service, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary) or who have otherwise received a stock option grant from the Corporation prior to the Underwriting Date shall be eligible to receive one or more such annual option grants over their period of continued Board service. B. EXERCISE PRICE. 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 21 22 C. OPTION TERM. Each option shall have a term of ten (10) years measured from the option grant date. D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each automatic option grant shall vest, and the Corporation's repurchase right shall lapse, as follows: (i) twenty-five percent (25%) upon Optionee's completion of one (1) year of Board service measured from the grant date and (ii) the balance in a series of thirty-six (36) successive equal monthly installments over the optionee's thirty-six (36)-month period of Board service measured from the first anniversary of the option grant date. E. TERMINATION OF BOARD SERVICE. The following provisions shall govern the exercise of any options held by the Optionee at the time the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution) shall have a twelve (12)-month period following the date of such cessation of Board service in which to exercise each such option. (ii) During the twelve (12)-month exercise period, the option may not be exercised in the aggregate for more than the number of vested shares of Common Stock for which the option is exercisable at the time of the Optionee's cessation of Board service. (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the time subject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of those shares as fully-vested shares of Common Stock. (iv) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of the twelve (12)-month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Board service for any reason other than death or 22 23 Permanent Disability, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE- OVER A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). B. In connection with any Change in Control, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of those shares as fully-vested shares of Common Stock. Each such option shall remain exercisable for such fully-vested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a Hostile TakeOver. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each of his or her outstanding automatic option grants. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required in connection with such option surrender and cash distribution. D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. 23 24 E. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. III. REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 24 25 ARTICLE SIX DIRECTOR FEE OPTION GRANT PROGRAM I. OPTION GRANTS Each non-employee Board member may elect to apply all or any portion of the annual retainer fee otherwise payable in cash for his or her service on the Board to the acquisition of a special option grant under this Director Fee Option Grant Program. Such election must be filed with the Corporation's Chief Financial Officer prior to first day of the calendar year for which the annual retainer fee which is the subject of that election is otherwise payable. Each non-employee Board member who files such a timely election shall automatically be granted an option under this Director Fee Option Grant Program on the first trading day in January in the calendar year for which the annual retainer fee which is the subject of that election would otherwise be payable in cash. II. OPTION TERMS Each option shall be a Non-Statutory Option governed by the terms and conditions specified below. A. EXERCISE PRICE. 1. The exercise price per share shall be thirty- three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A / (B x 66-2/3%), where X is the number of option shares, A is the portion of the annual retainer fee subject to the non-employee Board member's election, and 25 26 B is the Fair Market Value per share of Common Stock on the option grant date. C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series of twelve (12) equal monthly installments upon the Optionee's completion of each month of Board service over the twelve (12)-month period measured from the grant date. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board service for any reason (other than death or Permanent Disability) while holding one or more options under this Director Fee Option Grant Program, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Board service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each option held by the Optionee under this Director Fee Option Grant Program at the time of his or her cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as a Board member cease by reason of death or Permanent Disability, then each option held by such Optionee under this Director Fee Option Grant Program shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may be exercised for any or all of those shares as fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. Should the Optionee die after cessation of Board service but while holding one or more options under this Director Fee Option Grant Program, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee's cessation of Board service. III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKEOVER A. In the event of any Corporate Transaction while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall, immediately prior 26 27 to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall be assumed by the successor corporation (or parent thereof) in the Corporate Transaction and shall remain exercisable for the fully-vested shares until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Board service. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. The option shall remain so exercisable until the earlier or (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)- year period measured from the date of the Optionee's cessation of Service. C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to the Corporation each outstanding option granted him or her under the Director Fee Option Grant Program. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. No approval or consent of the Board or any Plan Administrator shall be required in connection with such option surrender and cash distribution. D. The grant of options under the Director Fee Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. REMAINING TERMS The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 27 28 ARTICLE SEVEN MISCELLANEOUS I. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. II. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan (other than the options granted or the shares issued under the Automatic Option Grant or Director Fee Option Grant Program) with the right to use shares of Common Stock in satisfaction of all or part of the Taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats: Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. Stock Delivery: The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. 28 29 III. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan shall become effective immediately at the Plan Effective Time. However, the Salary Investment Option Grant Program shall not be implemented until such time as the Primary Committee may deem appropriate. Options may be granted under the Discretionary Option Grant or Automatic Option Grant Program at any time at or after the Plan Effective Time. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's stockholders. If such stockholder approval is not obtained within twelve (12) months after the Plan Effective Time, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. B. The Plan shall serve as the successor to the Predecessor Plan, and no further option grants or direct stock issuances shall be made under the Predecessor Plan after the Section 12 Registration Date. All options outstanding under the Predecessor Plan on the Section 12 Registration Date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock. C. One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Corporate Transactions and Changes in Control, may, in the Plan Administrator's discretion, be extended to one or more options incorporated from the Predecessor Plan which do not otherwise contain such provisions. D. The Plan shall terminate upon the earliest to occur of (i) October 31, 2007, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. Should the Plan terminate on October 31, 2007, then all option grants and unvested stock issuances outstanding at that time shall continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances. IV. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws or regulations. 29 30 B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant and Salary Investment Option Grant Programs and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. V. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. VI. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. VII. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. 30 31 APPENDIX The following definitions shall be in effect under the Plan: A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant program in effect under the Plan. B. BOARD shall mean the Corporation's Board of Directors. C. CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through either of the following transactions: (i) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Board approved such election or nomination. D. CODE shall mean the Internal Revenue Code of 1986, as amended. E. COMMON STOCK shall mean the Corporation's common stock. F. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or A-1 32 (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. G. CORPORATION shall mean CombiChem, Inc., a Delaware corporation, and its successors. H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option grant in effect for non-employee Board members under Article Six of the Plan. I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect under the Plan. J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to participate in the Automatic Option Grant Program in accordance with the eligibility provisions of Article One. K. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. L. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise. M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. A-2 33 (iii) For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to be sold in the initial public offering pursuant to the Underwriting Agreement. N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept. O. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. P. INVOLUNTARY TERMINATION shall mean the termination of the Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate- performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. A-3 34 S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. T. OPTIONEE shall mean any person to whom an option is granted under the Discretionary Option Grant, Salary Investment Option Grant, Automatic Option Grant or Director Fee Option Grant Program. U. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. V. PARTICIPANT shall mean any person who is issued shares of Common Stock under the Stock Issuance Program. W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant and Director Fee Option Grant Programs, Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. X. PLAN shall mean the Corporation's 1997 Stock Incentive Plan, as set forth in this document. Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. Z. PLAN EFFECTIVE TIME shall mean the time at which the Underwriting Agreement is executed and finally priced. AA. PREDECESSOR PLAN shall mean the Corporation's pre- existing Stock Option Plan in effect immediately prior to the Plan Effective Time hereunder. AB. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock A-4 35 Issuance Programs with respect to Section 16 Insiders and to administer the Salary Investment Option Grant Program solely with respect to the selection of the eligible individuals who may participate in such program. AC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary investment option grant program in effect under the Plan. AD. SECONDARY COMMITTEE shall mean a committee of one or more Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders. AE. SECTION 12 REGISTRATION DATE shall mean the date on which the Common Stock is first registered under Section 12 of Section 16 of the 1934 Act. AF. SECTION 16 INSIDER shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. AG. SERVICE shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect under the Plan. AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. AL. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile TakeOver or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (i) price per share. A-5 36 AM. TAXES shall mean the Federal, state and local income and employment tax liabilities incurred by the holder of Non- Statutory Options or unvested shares of Common Stock in connection with the exercise of those options or the vesting of those shares. AN. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). AO. UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. AP. UNDERWRITING DATE shall mean the date on which the Underwriting Agreement is executed and priced in connection with an initial public offering of the Common Stock. A-6 EX-10.45 49 EXHIBIT 10.45 1 EXHIBIT 10.45 COMBICHEM, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN I. PURPOSE OF THE PLAN This Employee Stock Purchase Plan is intended to promote the interests of CombiChem, Inc. by providing eligible employees with the opportunity to acquire a proprietary interest in the Corporation through participation in a payroll-deduction based employee stock purchase plan designed to qualify under Section 423 of the Code. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. ADMINISTRATION OF THE PLAN The Plan Administrator shall have full authority to interpret and construe any provision of the Plan and to adopt such rules and regulations for administering the Plan as it may deem necessary in order to comply with the requirements of Code Section 423. Decisions of the Plan Administrator shall be final and binding on all parties having an interest in the Plan. III. STOCK SUBJECT TO PLAN A. The stock purchasable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares of Common Stock purchased on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed One Hundred Fifty Thousand (150,000) shares. B. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and class of securities issuable under the Plan, (ii) the maximum number and class of securities purchasable per Participant on any one Purchase Date and (iii) the number and class of securities and the price per share in effect under each outstanding purchase right in order to prevent the dilution or enlargement of benefits thereunder. 2 IV. OFFERING PERIODS A. Shares of Common Stock shall be offered for purchase under the Plan through a series of successive offering periods until such time as (i) the maximum number of shares of Common Stock available for issuance under the Plan shall have been purchased or (ii) the Plan shall have been sooner terminated. B. Each offering period shall be of such duration (not to exceed twenty-four (24) months) as determined by the Plan Administrator prior to the start date of such offering period. The initial offering period shall commence at the Effective Time and terminate on the last business day in July 1999. The next offering period shall commence on the first business day in August 1999, and subsequent offering periods shall commence as designated by the Plan Administrator. C. Each offering period shall be comprised of a series of one or more successive Purchase Intervals. Purchase Intervals shall run from the first business day in February each year to the last business day in July of the same year and from the first business day in August each year to the last business day in January of the following year. Accordingly, the first Purchase Interval in effect under the initial offering period shall commence at the Effective Time and terminate on the last business day in July 1998. D. Should the Fair Market Value per share of Common Stock on any Purchase Date within an offering period be less than the Fair Market Value per share of Common Stock on the start date of that offering period, then that offering period shall automatically terminate immediately after the purchase of shares of Common Stock on such Purchase Date, and a new offering period shall commence on the next business day following such Purchase Date. The new offering period shall have a duration of twenty four (24) months, unless a shorter duration is established by the Plan Administrator within five (5) business days following the start date of that offering period. V. ELIGIBILITY A. Each individual who is an Eligible Employee on the start date of any offering period under the Plan may enter that offering period on such start date or on any subsequent SemiAnnual Entry Date within that offering period, provided he or she remains an Eligible Employee. B. Each individual who first becomes an Eligible Employee after the start date of an offering period may enter that offering period on any subsequent Semi-Annual Entry Date within that offering period on which he or she is an Eligible Employee. C. The date an individual enters an offering period shall be designated his or her Entry Date for purposes of that offering period. 2 3 D. To participate in the Plan for a particular offering period, the Eligible Employee must complete the enrollment forms prescribed by the Plan Administrator (including a stock purchase agreement and a payroll deduction authorization) and file such forms with the Plan Administrator (or its designate) on or before his or her scheduled Entry Date. VI. PAYROLL DEDUCTIONS A. The payroll deduction authorized by the Participant for purposes of acquiring shares of Common Stock during an offering period may be any multiple of one percent (1%) of the Cash Earnings paid to the Participant during each Purchase Interval within that offering period, up to a maximum of ten percent (10%). The deduction rate so authorized shall continue in effect throughout the offering period, except to the extent such rate is changed in accordance with the following guidelines: (i) The Participant may, at any time during the offering period, reduce his or her rate of payroll deduction to become effective as soon as possible after filing the appropriate form with the Plan Administrator. The Participant may not, however, effect more than one (1) such reduction per Purchase Interval. (ii) The Participant may, prior to the commencement of any new Purchase Interval within the offering period, increase the rate of his or her payroll deduction by filing the appropriate form with the Plan Administrator. The new rate (which may not exceed the ten percent (10%) maximum) shall become effective on the start date of the first Purchase Interval following the filing of such form. B. Payroll deductions shall begin on the first pay day following the Participant's Entry Date into the offering period and shall (unless sooner terminated by the Participant) continue through the pay day ending with or immediately prior to the last day of that offering period. The amounts so collected shall be credited to the Participant's book account under the Plan, but no interest shall be paid on the balance from time to time outstanding in such account. The amounts collected from the Participant shall not be required to be held in any segregated account or trust fund and may be commingled with the general assets of the Corporation and used for general corporate purposes. C. Payroll deductions shall automatically cease upon the termination of the Participant's purchase right in accordance with the provisions of the Plan. D. The Participant's acquisition of Common Stock under the Plan on any Purchase Date shall neither limit nor require the Participant's acquisition of Common Stock on any subsequent Purchase Date, whether within the same or a different offering period. 3 4 VII. PURCHASE RIGHTS A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a separate purchase right for each offering period in which he or she participates. The purchase right shall be granted on the Participant's Entry Date into the offering period and shall provide the Participant with the right to purchase shares of Common Stock, in a series of successive installments over the remainder of such offering period, upon the terms set forth below. The Participant shall execute a stock purchase agreement embodying such terms and such other provisions (not inconsistent with the Plan) as the Plan Administrator may deem advisable. Under no circumstances shall purchase rights be granted under the Plan to any Eligible Employee if such individual would, immediately after the grant, own (within the meaning of Code Section 424(d)) or hold outstanding options or other rights to purchase, stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Corporation or any Corporate Affiliate. B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be automatically exercised in installments on each successive Purchase Date within the offering period, and shares of Common Stock shall accordingly be purchased on behalf of each Participant (other than Participants whose payroll deductions have previously been refunded pursuant to the Termination of Purchase Right provisions below) on each such Purchase Date. The purchase shall be effected by applying the Participant's payroll deductions for the Purchase Interval ending on such Purchase Date to the purchase of whole shares of Common Stock at the purchase price in effect for the Participant for that Purchase Date. C. PURCHASE PRICE. The purchase price per share at which Common Stock will be purchased on the Participant's behalf on each Purchase Date within the offering period shall be equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into that offering period or (ii) the Fair Market Value per share of Common Stock on that Purchase Date. D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common Stock purchasable by a Participant on each Purchase Date during the offering period shall be the number of whole shares obtained by dividing the amount collected from the Participant through payroll deductions during the Purchase Interval ending with that Purchase Date by the purchase price in effect for the Participant for that Purchase Date. However, the maximum number of shares of Common Stock purchasable per Participant on any one Purchase Date shall not exceed One Thousand Two Hundred Fifty (1,250) shares, subject to periodic adjustments in the event of certain changes in the Corporation's capitalization. E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to the purchase of shares of Common Stock on any Purchase Date because they are not sufficient to purchase a whole share of Common Stock shall be held for the purchase of Common Stock on 4 5 the next Purchase Date. However, any payroll deductions not applied to the purchase of Common Stock by reason of the limitation on the maximum number of shares purchasable by the Participant on the Purchase Date shall be promptly refunded. F. TERMINATION OF PURCHASE RIGHT. The following provisions shall govern the termination of outstanding purchase rights: (i) A Participant may, at any time prior to the next scheduled Purchase Date in the offering period, terminate his or her outstanding purchase right by filing the appropriate form with the Plan Administrator (or its designate), and no further payroll deductions shall be collected from the Participant with respect to the terminated purchase right. Any payroll deductions collected during the Purchase Interval in which such termination occurs shall, at the Participant's election, be immediately refunded or held for the purchase of shares on the next Purchase Date. If no such election is made at the time such purchase right is terminated, then the payroll deductions collected with respect to the terminated right shall be refunded as soon as possible. (ii) The termination of such purchase right shall be irrevocable, and the Participant may not subsequently rejoin the offering period for which the terminated purchase right was granted. In order to resume participation in any subsequent offering period, such individual must re-enroll in the Plan (by making a timely filing of the prescribed enrollment forms) on or before his or her scheduled Entry Date into that offering period. (iii) Should the Participant cease to remain an Eligible Employee for any reason (including death, disability or change in status) while his or her purchase right remains outstanding, then that purchase right shall immediately terminate, and all of the Participant's payroll deductions for the Purchase Interval in which the purchase right so terminates shall be immediately refunded. However, should the Participant cease to remain in active service by reason of an approved unpaid leave of absence, then the Participant shall have the right, exercisable up until the last business day of the Purchase Interval in which such leave commences, to (a) withdraw all the payroll deductions collected to date on his or her behalf for that Purchase Interval or (b) have such funds held for the purchase of shares on his or her behalf on the next scheduled Purchase Date. In no event, however, shall any further payroll deductions be collected on the Participant's behalf during such leave. Upon the Participant's return to active service, his or her payroll deductions under the Plan shall automatically resume at the rate in effect at the time the leave began, unless the Participant withdraws from the Plan prior to his or her return. 5 6 G. CORPORATE TRANSACTION. Each outstanding purchase right shall automatically be exercised, immediately prior to the effective date of any Corporate Transaction, by applying the payroll deductions of each Participant for the Purchase Interval in which such Corporate Transaction occurs to the purchase of whole shares of Common Stock at a purchase price per share equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of Common Stock on the Participant's Entry Date into the offering period in which such Corporate Transaction occurs or (ii) the Fair Market Value per share of Common Stock immediately prior to the effective date of such Corporate Transaction. However, the applicable limitation on the number of shares of Common Stock purchasable per Participant shall continue to apply to any such purchase. The Corporation shall use its best efforts to provide at least ten (10)-days prior written notice of the occurrence of any Corporate Transaction, and Participants shall, following the receipt of such notice, have the right to terminate their outstanding purchase rights prior to the effective date of the Corporate Transaction. H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares of Common Stock to be purchased pursuant to outstanding purchase rights on any particular date exceed the number of shares then available for issuance under the Plan, the Plan Administrator shall make a pro-rata allocation of the available shares on a uniform and nondiscriminatory basis, and the payroll deductions of each Participant, to the extent in excess of the aggregate purchase price payable for the Common Stock pro-rated to such individual, shall be refunded. I. ASSIGNABILITY. The purchase right shall be exercisable only by the Participant and shall not be assignable or transferable by the Participant. J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder rights with respect to the shares subject to his or her outstanding purchase right until the shares are purchased on the Participant's behalf in accordance with the provisions of the Plan and the Participant has become a holder of record of the purchased shares. VIII. ACCRUAL LIMITATIONS A. No Participant shall be entitled to accrue rights to acquire Common Stock pursuant to any purchase right outstanding under this Plan if and to the extent such accrual, when aggregated with (i) rights to purchase Common Stock accrued under any other purchase right granted under this Plan and (ii) similar rights accrued under other employee stock purchase plans (within the meaning of Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise permit such Participant to purchase more than Twenty-Five Thousand Dollars ($25,000) worth of stock of the Corporation or any Corporate Affiliate (determined on the basis of the Fair Market Value per share on the date or dates such rights are granted) for each calendar year such rights are at any time outstanding. 6 7 B. For purposes of applying such accrual limitations to the purchase rights granted under the Plan, the following provisions shall be in effect: (i) The right to acquire Common Stock under each outstanding purchase right shall accrue in a series of installments on each successive Purchase Date during the offering period on which such right remains outstanding. (ii) No right to acquire Common Stock under any outstanding purchase right shall accrue to the extent the Participant has already accrued in the same calendar year the right to acquire Common Stock under one (1) or more other purchase rights at a rate equal to Twenty-Five Thousand Dollars ($25,000) worth of Common Stock (determined on the basis of the Fair Market Value per share on the date or dates of grant) for each calendar year such rights were at any time outstanding. C. If by reason of such accrual limitations, any purchase right of a Participant does not accrue for a particular Purchase Interval, then the payroll deductions which the Participant made during that Purchase Interval with respect to such purchase right shall be promptly refunded. D. In the event there is any conflict between the provisions of this Article and one or more provisions of the Plan or any instrument issued thereunder, the provisions of this Article shall be controlling. IX. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on October 7, 1997 and shall become effective at the Effective Time, provided no purchase rights granted under the Plan shall be exercised, and no shares of Common Stock shall be issued hereunder, until (i) the Plan shall have been approved by the stockholders of the Corporation and (ii) the Corporation shall have complied with all applicable requirements of the 1933 Act (including the registration of the shares of Common Stock issuable under the Plan on a Form S-8 registration statement filed with the Securities and Exchange Commission), all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is listed for trading and all other applicable requirements established by law or regulation. In the event such stockholder approval is not obtained, or such compliance is not effected, within twelve (12) months after the date on which the Plan is adopted by the Board, the Plan shall terminate and have no further force or effect, and all sums collected from Participants during the initial offering period hereunder shall be refunded. B. Unless sooner terminated by the Board, the Plan shall terminate upon the earliest of (i) the last business day in July 2007, (ii) the date on which all shares available for 7 8 issuance under the Plan shall have been sold pursuant to purchase rights exercised under the Plan or (iii) the date on which all purchase rights are exercised in connection with a Corporate Transaction. No further purchase rights shall be granted or exercised, and no further payroll deductions shall be collected, under the Plan following such termination. X. AMENDMENT OF THE PLAN The Board may alter, amend, suspend or discontinue the Plan at any time to become effective immediately following the close of any Purchase Interval. However, the Board may not, without the approval of the Corporation's stockholders, (i) increase the number of shares of Common Stock issuable under the Plan or the maximum number of shares purchasable per Participant on any one Purchase Date, except for permissible adjustments in the event of certain changes in the Corporation's capitalization, (ii) alter the purchase price formula so as to reduce the purchase price payable for the shares of Common Stock purchasable under the Plan or (iii) modify eligibility requirements for participation in the Plan. XI. GENERAL PROVISIONS A. All costs and expenses incurred in the administration of the Plan shall be paid by the Corporation; however, each Plan Participant shall bear all costs and expenses incurred by such individual in the sale or other disposition of any shares purchased under the Plan. B. Nothing in the Plan shall confer upon the Participant any right to continue in the employ of the Corporation or any Corporate Affiliate for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Corporate Affiliate employing such person) or of the Participant, which rights are hereby expressly reserved by each, to terminate such person's employment at any time for any reason, with or without cause. C. The provisions of the Plan shall be governed by the laws of the State of Delaware without resort to that State's conflict-of-laws rules. 8 9 SCHEDULE A CORPORATIONS PARTICIPATING IN EMPLOYEE STOCK PURCHASE PLAN AS OF THE EFFECTIVE TIME CombiChem, Inc. 10 APPENDIX The following definitions shall be in effect under the Plan: A. BOARD shall mean the Corporation's Board of Directors. B. CASH EARNINGS shall mean the (i) gross base salary payable to a Participant by one or more Participating Companies during such individual's period of participation in one or more offering periods under the Plan before deduction of any income or employment taxes plus (ii) any pre-tax contributions made by the Participant to any Code Section 401(k) salary deferral plan or any Code Section 125 cafeteria benefit program now or hereafter established by the Corporation or any Corporate Affiliate plus (iii) all gross overtime payments, bonuses, commissions, current profit-sharing distributions and other incentive-type payments before deduction of any income or employment taxes. However, Cash Earnings shall NOT include any contributions (other than Code Section 401(k) or Code Section 125 contributions) made on the Participant's behalf by the Corporation or any Corporate Affiliate under any employee benefit or welfare plan now or hereafter established. C. CODE shall mean the Internal Revenue Code of 1986, as amended. D. COMMON STOCK shall mean the Corporation's common stock. E. CORPORATE AFFILIATE shall mean any parent or subsidiary corporation of the Corporation (as determined in accordance with Code Section 424), whether now existing or subsequently established. F. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of the Corporation. G. CORPORATION shall mean CombiChem, Inc., a Delaware corporation, and any corporate successor to all or substantially all of the assets or voting stock of CombiChem, Inc. which shall by appropriate action adopt the Plan. A-1 11 H. EFFECTIVE TIME shall mean the time at which the Underwriting Agreement is executed and finally priced. Any Corporate Affiliate which becomes a Participating Corporation after such Effective Time shall designate a subsequent Effective Time with respect to its employee-Participants. I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a Participating Corporation on a basis under which he or she is regularly expected to render more than twenty (20) hours of service per week for more than five (5) months per calendar year for earnings considered wages under Code Section 3401(a). J. ENTRY DATE shall mean the date an Eligible Employee first commences participation in the offering period in effect under the Plan. The earliest Entry Date under the Plan shall be the Effective Time. K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii) For purposes of the initial offering period which begins at the Effective Time, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is sold in the initial public offering pursuant to the Underwriting Agreement. L. 1933 ACT shall mean the Securities Act of 1933, as amended. M. PARTICIPANT shall mean any Eligible Employee of a Participating Corporation who is actively participating in the Plan. A-2 12 N. PARTICIPATING CORPORATION shall mean the Corporation and such Corporate Affiliate or Affiliates as may be authorized from time to time by the Board to extend the benefits of the Plan to their Eligible Employees. The Participating Corporations in the Plan are listed in attached Schedule A. O. PLAN shall mean the Corporation's Employee Stock Purchase Plan, as set forth in this document. P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more Board members appointed by the Board to administer the Plan. Q. PURCHASE DATE shall mean the last business day of each Purchase Interval. The initial Purchase Date shall be July 31, 1998. R. PURCHASE INTERVAL shall mean each successive six (6)-month period within the offering period at the end of which there shall be purchased shares of Common Stock on behalf of each Participant. S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in February and August each year on which an Eligible Employee may first enter an offering period. T. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. U. UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. A-3. EX-10.46 50 EXHIBIT 10.46 1 EXHIBIT 10.46 INDEMNIFICATION AGREEMENT THIS AGREEMENT is made and entered into this ____ day of ___________, 1997 between CombiChem, Inc., a Delaware corporation ("Corporation"), and ________________________ ("Director"). RECITALS: A. Director, a member of the Board of Directors of Corporation, performs a valuable service in such capacity for Corporation; and B. The stockholders of Corporation have adopted Bylaws (the "Bylaws") providing for the indemnification of the officers, directors, agents and employees of Corporation to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended (the "Law"); and C. The California General Corporation Law, as amended (the "Code"), currently purports to be the controlling law governing the Corporation with respect to certain aspects of corporate law, including indemnification of directors and officers; and D. At times in the future the Code foreseeably will not purport to be the controlling law governing the Corporation with respect to such aspects, leaving the Law as the controlling law governing the Corporation with respect to such aspects; and E. The Bylaws, the Code and the Law, by their non-exclusive nature, permit contracts between Corporation and the members of its Board of Directors with respect to indemnification of such directors; and F. In accordance with the authorization as provided by the Code and the Law, Corporation may from time to time purchase and maintain a policy or policies of Directors and Officers Liability Insurance ("D & O Insurance"), covering certain liabilities which may be incurred by its directors and officers in the performance of services as directors and officers of Corporation; and G. As a result of developments affecting the terms, scope and availability of D & O Insurance there exists general uncertainty as to the extent and overall desirability of protection afforded members of the Board of Directors by such D & O Insurance, if any, and by statutory and bylaw indemnification provisions; and H. In order to induce Director to continue to serve as a member of the Board of Directors of Corporation, Corporation has determined and agreed to enter into this contract with Director, 2 NOW, THEREFORE, in consideration of Director's continued service as a director after the date hereof, the parties hereto agree as follows: 1. Indemnity of Director. Corporation hereby agrees to hold harmless and indemnify Director to the fullest extent authorized or permitted by the provisions of the Law and the Code, as each may be amended from time to time, all so as to provide the greatest benefit to Director. 2. Additional Indemnity. Subject only to the exclusions set forth in Section 3 hereof, Corporation hereby further agrees to hold harmless and indemnify Director: (a) against any and all expenses (including attorneys' fees), witness fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by Director in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of Corporation) to which Director is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Director is, was or at any time becomes a director, officer, employee or agent of Corporation, or is or was serving or at any time serves at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent as may be provided to Director by Corporation under the non-exclusivity provisions of the Bylaws of Corporation, the Code and the Law. 3. Limitations on Additional Indemnity. No indemnity pursuant to Section 2 hereof shall be paid by Corporation: (a) except to the extent the aggregate of losses to be indemnified thereunder exceeds the sum of such losses for which the Director is indemnified pursuant to Section 1 hereof or reimbursed pursuant to any D & O Insurance purchased and maintained by Corporation; (b) in respect of remuneration paid to Director if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (c) on account of any action, suit or proceeding in which judgment is rendered against Director for an accounting of profits made from the purchase or sale by Director of securities of Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (d) on account of Director's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct; -2- 3 (e) on account of Director's conduct which is the subject of an action, suit or proceeding described in Section 7(c)(ii) hereof; (f) on account of or arising in response to any action, suit or proceeding (other than an action, suit or proceeding referred to in Section 8(b) hereof) initiated by Director or any of Director's affiliates against Corporation or any officer, director or stockholder of Corporation unless such action, suit or proceeding was authorized in the specific case by action of the Board of Directors of Corporation; (g) on account of any action, suit or proceeding to the extent that Director is a plaintiff, a counter-complainant or a cross-complainant therein (other than an action, suit or proceeding permitted by Section 3(f) hereof); or (h) if a final decision by a Court having jurisdiction in the matter shall determine that such indemnification is not lawful (and, in this respect, both Corporation and Director have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication). 4. Contribution. If the indemnification provided in Sections 1 and 2 is unavailable and may not be paid to Director for any reason other than those set forth in paragraphs (b) through (g) of Section 3, then in respect of any threatened, pending or completed action, suit or proceeding in which Corporation is or is alleged to be jointly liable with Director (or would be if joined in such action, suit or proceeding), Corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Director in such proportion as is appropriate to reflect (i) the relative benefits received by Corporation on the one hand and Director on the other hand from the transaction from which such action, suit or proceeding arose, and (ii) the relative fault of Corporation on the one hand and of Director on the other hand in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of Corporation on the one hand and of Director on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. Corporation agrees that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 5. Continuation of Obligations. (a) All agreements and obligations of Corporation contained herein shall continue during the period Director is a director, officer, employee or agent of Corporation (or is or was serving at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other -3- 4 enterprise) and shall continue thereafter so long as Director shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Director was serving Corporation or such other entity in any capacity referred to herein. (b) For six years after the effective time of (i) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) or (ii) the sale of all or substantially all of the assets of the Corporation by means of any transaction or series of related transactions, the Corporation (to the extent the Corporation is not the continuing or surviving person of such reorganization, merger, consolidation or sale) shall cause the acquiring, continuing or surviving corporation to (x) indemnify and hold harmless Director in accordance with Section 1 and 2 hereof and (y) use its best efforts to provide directors' liability insurance on terms substantially similar to the terms of the Corporation's then current directors' liability insurance policy in effect on the dated thereof, or any other arrangement reasonably satisfactory to Director, in respect of acts or omissions occurring on or prior to the effective time of the reorganization, merger, consolidation or sale. 6. Notification and Defense of Claim. Not later than thirty (30) days after receipt by Director of notice of the commencement of any action, suit or proceeding, Director will, if a claim in respect thereof is to be made against Corporation under this Agreement, notify Corporation of the commencement thereof; but the omission so to notify Corporation will not relieve it from any liability which it may have to Director otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Director notifies Corporation of the commencement thereof: (a) Corporation will be entitled to participate therein at its own expense; (b) except as otherwise provided below, to the extent that it may wish, Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Director. After notice from Corporation to Director of its election so as to assume the defense thereof, Corporation will not be liable to Director under this Agreement for any legal or other expenses subsequently incurred by Director in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Director shall have the right to employ his own counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from Corporation of its assumption of the defense thereof shall be at the expense of Director unless (i) the employment of counsel by Director has been authorized by Corporation, (ii) Director shall have reasonably concluded that there may be a conflict of interest between Corporation and Director in the conduct of the defense of such action or (iii) Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Director's separate counsel shall be at the expense of Corporation. Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of Corporation or as to which Director shall have made the conclusion provided for in (ii) above; and -4- 5 (c) Corporation shall not be liable to indemnify Director under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty, out-of-pocket liability, or limitation on Director without Director's written consent. Neither Corporation nor Director will unreasonably withhold its or his consent to any proposed settlement. 7. Advancement and Repayment of Expenses. (a) In the event that Director employs his own counsel pursuant to Section 6(b)(i) through (iii) above, Corporation shall advance to Director, prior to any final disposition of any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative, any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding within ten (10) days after receiving copies of invoices presented to Director for such expenses. (b) Director agrees that Director will reimburse Corporation for all reasonable expenses paid by Corporation in defending any civil or criminal action, suit or proceeding against Director in the event and only to the extent it shall be ultimately determined by a final judicial decision (from which there is no right of appeal) that Director is not entitled, under the provisions of the Law, the Bylaws, this Agreement or otherwise, to be indemnified by Corporation for such expenses. (c) Notwithstanding the foregoing, Corporation shall not be required to advance such expenses to Director if Director (i) commences any action, suit or proceeding as a plaintiff unless such advance is specifically approved by a majority of the Board of Directors or (ii) is a party to an action, suit or proceeding brought by Corporation and approved by a majority of the Board which alleges willful misappropriation of corporate assets by Director, disclosure of confidential information in violation of Director's fiduciary or contractual obligations to Corporation, or any other willful and deliberate breach in bad faith of Director's duty to Corporation or its stockholders. 8. Enforcement. (a) Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on Corporation hereby in order to induce Director to continue as a director of Corporation, and acknowledges that Director is relying upon this Agreement in continuing in such capacity. (b) In the event Director is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, the Corporation shall reimburse Director for all Director's reasonable fees and expenses in bringing and pursuing such action. 9. Subrogation. In the event of payment under this agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Director, who -5- 6 shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable Corporation effectively to bring suit to enforce such rights. 10. Non-Exclusivity of Rights. The rights conferred on Director by this Agreement shall not be exclusive of any other right which Director may have or hereafter acquire under any statute, provision of Corporation's Certificate of Incorporation or Bylaws, agreement, vote of stockholders or directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. 11. Survival of Rights. The rights conferred on Director by this Agreement shall continue after Director has ceased to be a director, officer, employee or other agent of Corporation or such other entity and shall inure to the benefit of Director's heirs, executors and administrators. 12. Separability. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any or all of the provisions hereof shall be held to be invalid or unenforceable to any extent for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof or the obligation of the Corporation to indemnify the Director to the full extent provided by the Bylaws and the Law and, if applicable, the Code, and the affected provision shall be construed and enforced so as to effectuate the parties' intent to the maximum extent possible. 13. Governing Law. This Agreement shall be interpreted and enforced in accordance with the internal laws of the State of Delaware as applied to contracts entered into and to be performed wholly within such State. 14. Inconsistency. In the event of any inconsistency between any of the provisions of this Agreement, the controlling provision as to any particular issue with regard to any particular matter shall be the one which authorizes for the benefit of the Director the provision of the fullest, promptest, most certain or otherwise most favorable indemnification and/or advancement. 15. Binding Effect. This Agreement shall be binding upon Director and upon Corporation, its successors and assigns, and shall inure to the benefit of Director, his heirs, personal representatives and assigns and to the benefit of Corporation, its successors and assigns. 16. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless set forth in a writing signed by both parties hereto. 17. Entire Agreement. This Agreement represents the entire agreement between the parties hereto and there are no other agreements, contracts or understandings between the parties hereto with respect to the subject matter of this Agreement, except as specifically referred to herein. This Agreement supersedes any and all agreements regarding indemnification heretofore entered into by the parties. -6- 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. CORPORATION: COMBICHEM, INC., a Delaware corporation By: -------------------------------- (Signature) ----------------------------------- Print Name and Title DIRECTOR: ----------------------------------- (Signature) ----------------------------------- Print Name [SIGNATURE PAGE TO INDEMNIFICATION AGREEMENT] EX-10.47 51 EXHIBIT 10.47 1 EXHIBIT 10.47 INDEMNIFICATION AGREEMENT THIS AGREEMENT is made and entered into this _______ day of ____________________, 1997 between CombiChem, Inc., a Delaware corporation ("Corporation"), and ____________________ ("Officer"). RECITALS: A. Officer, an officer (but not currently a member of the Board of Directors) of Corporation, performs a valuable service in such capacity for Corporation; and B. The stockholders of Corporation have adopted Bylaws (the "Bylaws") providing, for the indemnification of the officers, directors, agents and employees of Corporation to the maximum extent authorized by Section 145 of the Delaware General Corporation Law, as amended (the "Law"); and C. The California General Corporation Law, as amended (the "Code"), currently purports to be the controlling law governing the Corporation with respect to certain aspects of corporate law, including indemnification of directors and officers; and D. At times in the future the Code foreseeably will not purport to be the controlling law governing the Corporation with respect to such aspects, leaving the Law as the controlling law governing the Corporation with respect to such aspects; and E. The Bylaws, the Code and the Law, by their non-exclusive nature, permit contracts between Corporation and its officers with respect to indemnification of officers; and F. In accordance with the authorization as provided by the Code and the Law, Corporation may from time to time purchase and maintain a policy or policies of Directors and Officers Liability Insurance ("D & O Insurance"), covering certain liabilities which may be incurred by its directors and officers in the performance of services as directors and officers of Corporation; and G. As a result of developments affecting the terms, scope and availability of D & O Insurance there exists general uncertainty as to the extent and overall desirability of protection afforded officers by such D & O Insurance, if any, and by statutory and bylaw indemnification provisions; and H. In order to induce Officer to continue to serve as an officer of Corporation, Corporation has determined and agreed to enter into this contract with Officer; NOW, THEREFORE, in consideration of Officer's continued service as an officer after the date hereof, the parties hereto agree as follows: 2 1. Indemnity of Officer. Corporation hereby agrees to hold harmless and indemnify Officer to the fullest extent authorized or permitted by the provisions of the Code and the Law, as it may be amended from time to time, all so as to provide the greatest possible benefit to Officer. 2. Additional Indemnity. Subject only to the exclusions set forth in Section 3 hereof, Corporation hereby further agrees to hold harmless and indemnify Officer: (a) against any and all legal expenses (including attorneys' fees), witness fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by Officer in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action by or in the right of Corporation) to which Officer is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Officer is, was or at any time becomes a director, officer, employee or agent of Corporation, or is or was serving or at any time serves at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent as may be provided to Officer by Corporation under the non-exclusivity provisions of the Bylaws of Corporation, the Code and the Law. 3. Limitations on Additional Indemnity. No indemnity pursuant to Section 2 hereof shall be paid by Corporation: (a) except to the extent the aggregate of losses to be indemnified thereunder exceeds the sum of such losses for which Officer is indemnified pursuant to Section 1 hereof or reimbursed pursuant to any D & O Insurance purchased and maintained by Corporation; (b) in respect of remuneration paid to Officer if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (c) on account of any action, suit or proceeding in which judgment is rendered against Officer for an accounting of profits made from the purchase or sale by Officer of securities of Corporation pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; (d) on account of Officer's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct; (e) on account of Officer's conduct which is the subject of an action, suit or proceeding described in Section 7(c)(ii) hereof; (f) on account of or arising in response to any action, suit or proceeding (other than an action, suit or proceeding referred to in Section 8(b) hereof) initiated by -2- 3 Officer or any of Officer's affiliates against Corporation or any officer, director or stockholder of Corporation unless such action, suit or proceeding was authorized in the specific case by action of the Board of Directors of Corporation; (g) on account of any action, suit or proceeding to the extent that Officer is a plaintiff, a counter-complainant or a cross-complainant therein (other than an action, suit or proceeding permitted by Section 3(f) hereof); or (h) if a final decision by a Court having jurisdiction in the matter shall determine that such indemnification is not lawful (and, in this respect, both Corporation and Officer have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication). 4. Contribution. If the indemnification provided in Sections 1 and 2 is unavailable and may not be paid to Officer for any reason other than those set forth in paragraphs (b) through (g) of Section 3, then in respect of any threatened, pending or completed action, suit or proceeding in which Corporation is or is alleged to be jointly liable with Officer (or would be if joined in such action, suit or proceeding), Corporation shall contribute to the amount of expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Officer in such proportion as is appropriate to reflect (i) the relative benefits received by Corporation on the one hand and Officer on the other hand from the transaction from which such action, suit or proceeding arose, and (ii) the relative fault of Corporation on the one hand and of Officer on the other hand in connection with the events which resulted in such expenses, judgments, fines or settlement amounts, as well as any other relevant equitable considerations. The relative fault of Corporation on the one hand and of Officer on the other hand shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines or settlement amounts. Corporation agrees that it would not be just and equitable if contribution pursuant to this Section 4 were determined by pro rata allocation or any other method of allocation which does not take account of the foregoing equitable considerations. 5. Continuation of Obligations. (a) All agreements and obligations of Corporation contained herein shall continue during the period Officer is a director, officer, employee or agent of Corporation (or is or was serving at the request of Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Officer shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal or investigative, by reason of the fact that Officer was serving Corporation or such other entity in any capacity referred to herein. -3- 4 (b) For six years after the effective time of (i) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation) or (ii) the sale of all or substantially all of the assets of the Corporation by means of any transaction or series of related transactions, the Corporation (to the extent the Corporation is not the continuing or surviving person of such reorganization, merger, consolidation or sale) shall cause the acquiring, continuing or surviving corporation to (x) indemnify and hold harmless Officer in accordance with Section 1 and 2 hereof and (y) use its best efforts to provide officers' liability insurance on terms substantially similar to the terms of the Corporation's then current officers' liability insurance policy in effect on the date thereof, or any other arrangement reasonably satisfactory to Officer, in respect of acts or omissions occurring on or prior to the effective time of the reorganization, merger, consolidation or sale. 6. Notification and Defense of Claim. Not later than thirty (30) days after receipt by Officer of notice of the commencement of any action, suit or proceeding, Officer will, if a claim in respect thereof is to be made against Corporation under this Agreement, notify Corporation of the commencement thereof; but the omission so to notify Corporation will not relieve it from any liability which it may have to Officer otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Officer notifies Corporation of the commencement thereof: (a) Corporation will be entitled to participate therein at its own expense; (b) except as otherwise provided below, to the extent that it may wish, Corporation jointly with any other indemnifying party similarly notified will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Officer. After notice from Corporation to Officer of its election so as to assume the defense thereof, Corporation will not be liable to Officer under this Agreement for any legal or other expenses subsequently incurred by Officer in connection with the defense thereof other than reasonable costs of investigation or as otherwise provided below. Officer shall have the right to employ his or her own counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from Corporation of its assumption of the defense thereof shall be at the expense of Officer unless (i) the employment of counsel by Officer has been authorized by Corporation, (ii) Officer shall have reasonably concluded that there may be a conflict of interest between Corporation and Officer in the conduct of the defense of such action or (iii) Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Officer's separate counsel shall be at the expense of Corporation. Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of Corporation or as to which Officer shall have made the conclusion provided for in (ii) above; and (c) Corporation shall not be liable to indemnify Officer under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty, out-of-pocket -4- 5 liability, or limitation on Officer without Officer's written consent. Neither Corporation nor Officer will unreasonably withhold its or his or her consent to any proposed settlement. 7. Advancement and Repayment of Expenses. (a) In the event that Officer employs his or her own counsel pursuant to Section 6(b)(i) through (iii) above, Corporation shall advance to Officer, prior to any final disposition of any threatened or pending action, suit or proceeding, whether civil, criminal, administrative or investigative, any and all reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding within ten (10) days after receiving copies of invoices presented to Officer for such expenses. (b) Officer agrees that Officer will reimburse Corporation for all reasonable expenses paid by Corporation in defending any civil or criminal action, suit or proceeding against Officer in the event and only to the extent it shall be ultimately determined by a final judicial decision (from which there is no right of appeal) that Officer is not entitled, under the provisions of the Law, the Bylaws, this Agreement or otherwise, to be indemnified by Corporation for such expenses. (c) Notwithstanding the foregoing, Corporation shall not be required to advance such expenses to Officer if Officer (i) commences any action, suit or proceeding as a plaintiff unless such advance is specifically approved by a majority of the Board of Directors or (ii) is a party to an action, suit or proceeding brought by Corporation and approved by a majority of the Board which alleges willful misappropriation of corporate assets by Officer, disclosure of confidential information in violation of Officer's fiduciary or contractual obligations to Corporation, or any other willful and deliberate breach in bad faith of Officer's duty to Corporation or its stockholders. 8. Enforcement. (a) Corporation expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on Corporation hereby in order to induce Officer to continue as an officer of Corporation, and acknowledges that Officer is relying upon this Agreement in continuing in such capacity. (b) In the event Officer is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, Corporation shall reimburse Officer for all of Officer's reasonable fees and expenses in bringing and pursuing such action. 9. Subrogation. In the event of payment under this agreement, Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Officer, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable Corporation effectively to bring suit to enforce such rights. -5- 6 10. Non-Exclusivity of Rights. The rights conferred on Officer by this Agreement shall not be exclusive of any other right which Officer may have or hereafter acquire under any statute, provision of Corporation's Certificate of Incorporation or Bylaws, agreement, vote of stockholders or directors, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office. 11. Survival of Rights. The rights conferred on Officer by this Agreement shall continue after Officer has ceased to be a director, officer, employee or other agent of Corporation or such other entity and shall inure to the benefit of Officer's heirs, executors and administrators. 12. Separability. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any or all of the provisions hereof shall be held to be invalid or unenforceable to any extent for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof or the obligation of Corporation to indemnify Officer to the full extent provided by the Bylaws and the Law, and, if applicable, the Code, and the affected provision shall be construed and enforced so as to effectuate the parties' intent to the maximum extent possible. 13. Governing Law. This Agreement shall be interpreted and enforced in accordance with the internal laws of the State of Delaware as applied to contracts entered into and to be performed wholly within such State. 14. Binding Effect. This Agreement shall be binding upon Officer and upon Corporation, its successors and assigns, and shall inure to the benefit of Officer, his or her heirs, personal representatives and assigns and to the benefit of Corporation, its successors and assigns. 15. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless set forth in a writing signed by both parties hereto. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -6- 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. CORPORATION: COMBICHEM, INC., a Delaware corporation By: -------------------------------- (Signature) ----------------------------------- Print Name and Title OFFICER: ----------------------------------- [SIGNATURE PAGE TO INDEMNIFICATION AGREEMENT] EX-11.1 52 EXHIBIT 11.1 1 EXHIBIT 11.1 STATEMENT OF COMPUTATION OF NET LOSS PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA)
Period From May 23, 1994 Year Ended Nine Months Ended (inception) to December 31, September 30, December 31, ----------------- ------------------ 1994 1995 1996 1996 1997 -------------- ------- ------- ------- ------- (Unaudited) HISTORICAL NET LOSS PER SHARE: Net Loss $ (706) $(6,675) $(5,118) $(4,461) $(3,669) ====== ======= ======= ======= ======= Weighted average common shares outstanding 82 544 637 637 637 Adjustments to reflect requirements of the Securities and Exchange Commission (Effect of SAB 83) 2,325 2,325 2,325 2,325 2,325 ------ ------- ------- ------- ------- Adjusted shares outstanding 2,407 2,869 2,962 2,962 2,962 ====== ======= ======= ======= ======= Historical net loss per share $(0.29) $ (2.33) $ (1.73) $ (1.51) $ (1.24) ====== ======= ======= ======= =======
Year Ended Nine Months Ended December 31, September 30, 1996 1997 ------------- ----------------- PRO FORMA NET LOSS PER SHARE: Net loss $(5,118) $(3,669) ======= ======= Weighted average common shares outstanding 637 637 Effect of assumed conversion of preferred shares 4,835 5,230 Adjustments to reflect requirements of the Securities and Exchange Commission (Effect of SAB 83) 2,325 2,325 ------- ------- Adjusted shares outstanding 7,797 8,192 ======= ======= Pro forma net loss per share $ (0.66) $ (0.45) ======= =======
EX-23.2 53 EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" and to the use of our report dated October 15, 1997, in the Registration Statement (Form S-1) and related Prospectus of CombiChem, Inc. for the registration of 2,587,500 shares of its common stock. San Diego, California /s/ Ernst & Young LLP October 15, 1997 EX-27.1 54 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 8,402 0 0 0 0 8,920 4,080 982 13,363 3,632 0 23,130 0 1,978 (1,662) 13,363 0 4,599 0 0 8,341 0 (293) (3,669) 0 (3,669) 0 0 0 (3,669) (1.24) (1.24)
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