-----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, Hh8dS0sm9jDZMdYBLwBzVUHI6vp/SY/08GEFw1+j4KjlEI7clPfVE51d06v7g6Zd uiCFw/k8IChIAiFqNwvumg== 0000936392-97-001611.txt : 19971205 0000936392-97-001611.hdr.sgml : 19971205 ACCESSION NUMBER: 0000936392-97-001611 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19971203 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMBICHEM INC CENTRAL INDEX KEY: 0001002276 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 330617379 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-37981 FILM NUMBER: 97732089 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/A 1 AMENDMENT #2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1997 REGISTRATION NO. 333-37981 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO 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 DECEMBER 3, 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] 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............................................................................. 40 Certain Transactions................................................................... 53 Principal Stockholders................................................................. 55 Description of Capital Stock........................................................... 57 Shares Eligible for Future Sale........................................................ 60 Underwriting........................................................................... 62 Legal Matters.......................................................................... 64 Experts................................................................................ 64 Additional Information................................................................. 64 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 13,168,505 shares(1) Offering................................ 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 and cash equivalents.......................... $ 4,287 $ 16,120 $ 40,530 Short-term investments............................. 4,115 4,115 4,115 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 $11.833 million for up-front payments and the proceeds from 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, resulting in net proceeds to the Company of $24.4 million. 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 6 8 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 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 OF COMPANY'S STRATEGY ON THIRD PARTIES 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. 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 conducting its own internally funded discovery programs by choosing biological targets of current scientific interest and working in collaboration with screening 7 9 companies. 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 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. COMPANY'S SUCCESS DEPENDENT ON INTELLECTUAL PROPERTY 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 8 10 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 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." COMPETITIVE NATURE OF COMPANY'S INDUSTRY 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 9 11 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. See "Business -- Competition." SUCCESS OF COMPANY DEPENDENT 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 OF COMPANY 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 10 12 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 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 11 13 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." 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. COMPANY'S USE OF 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. 12 14 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 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 13 15 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 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." RISK OF IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution estimated at $8.77 per share 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 (approximately $10.0 million), expansion of laboratory and office facilities (approximately $5.0 million), working capital (approximately $2.0 million) and the remainder for 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, 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(2) ADJUSTED(2)(3) -------- ------------ -------------- (in thousands) Cash and cash equivalents............................ $ 4,287 $ 16,120 $ 40,530 Short-term investments............................... 4,115 4,115 4,115 ======== ======== ======== 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. (2) 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 $11.833 million for up-front payments and the proceeds from the sale of an aggregate of 1,250,000 shares of Common Stock to ImClone and Elan/Athena in October 1997. (3) 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, resulting in net proceeds to the Company of $24.4 million. See "Use of Proceeds." 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 (based on value received by the Company at the time of issuance) 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. The shares purchased and total consideration paid by existing shareholders reflects the proceeds from the sale of 1,250,000 shares of Common Stock to ImClone and Elan/Athena, and does not include costs incurred by the Company to issue Common and Preferred 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: Collaborative................. -- -- 420 263 2,631 Proprietary................... 413 4,763 4,820 3,547 3,354 ------ -------- -------- -------- -------- 413 4,763 5,240 3,810 5,985 General and administrative...... 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 and cash equivalents.................... $ 1,622 $ 3,136 $ 367 $ 4,287 Short-term investments....................... -- -- 12,166 4,115 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, of which $1.5 million was recognized in connection with the Teijin collaboration, $3.7 million was recognized in connection with the Roche Bioscience collaboration and $2.3 million was recognized in connection with the Sumitomo collaboration. 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. Cost of services under the Company's collaborative agreements generally approximate the research revenue received under the agreement. 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. 19 21 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. The revenue for the nine-month period ended September 30, 1997 included $2.3 million from Sumitomo, $1.8 million from Roche Bioscience and $0.5 million from Teijin. The revenue from the nine-month period ended September 30, 1996 included $0.8 from Teijin. This was attributable to revenue related to the Company's increased number of collaborative agreements and the technology access fee received from Sumitomo. The Company 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. In October 1997, the Company entered into collaborations with ImClone and Elan/Athena. The collaborative activities under these agreements for which the Company receives revenue typically occur over a one to three-year period, although the agreements provide for earlier termination in certain circumstances. See "Business -- CombiChem's Collaborative Arrangements." While the termination of any individual collaboration would not have a material adverse effect on the Company's financial condition and results of operations, the failure of the Company to enter into additional collaborative agreements on favorable terms would have a material adverse effect on the Company's financial condition and results of operations. 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 through the addition of chemists and software application staff for each project team and in support of the development of the Company's technology including the addition of software development and analytical staff, the depreciation of laboratory equipment and the establishment of an advanced technology group. 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, including outside consulting fees and increased travel costs, 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. The revenue for the year ended December 31, 1996 included $2.0 million from Roche Bioscience and $1.0 million from Teijin. No revenue was received from the Company's collaborators in the year ended December 31, 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. 20 22 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 discontinued development of its automated synthesis instruments in the second quarter of 1996, after incurring expenses of approximately $4.0 million from inception of the Company through discontinuance. 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. 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 $13.0 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 $4.6 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 21 23 investment. Net cash provided by financing activities for the year ended December 31, 1995 was $7.3 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 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. However, the Company does not believe such limitation will have a material effect upon the utilization of these carryforwards. 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: [LOGO] 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 24 26 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 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 [GRAPHIC] 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 27 29 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 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." 28 30 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. 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, which are molecules with the potential to bind to many different targets. Screening against the UIL is therefore intended to provide a few, weakly active 29 31 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. 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. 30 32 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 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 31 33 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 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 32 34 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 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 33 35 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 purchased 250,000 shares of Common Stock for $2.0 million, (representing a $1.5 million equity investment, and a $0.5 million premium over the deemed fair market value of the stock), and made advance payments for contract research of $500,000. The Company deferred the premium component of the equity investment which constitutes advance payments for contract research. 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 written notice. In connection with the collaborative agreement, Elan International Services Ltd., an affiliate of Elan/Athena, purchased 1,000,000 shares of Common Stock for $8.0 million, (representing a $6.0 million equity investment, and a $2.0 million premium over the deemed fair market value of the stock) and paid a $1.333 million up-front technology license and access fee. The Company recognized the premium component of the equity investment as revenue which constitutes a technology license and access fee. RESEARCH AND DEVELOPMENT The Company's expenses for Company-sponsored research and development activities for the years ended December 31, 1994, 1995 and 1996 were $0.4 million, $4.8 million and $4.8 respectively. The Company's expenses for collaborator-sponsored research and development activities for the years ended December 31, 1994, 1995 and 1996 were $0, $0 and $0.4 million respectively. 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, 34 36 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 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 35 37 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 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 36 38 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 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. 37 39 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. 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. 38 40 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. 39 41 MANAGEMENT EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS The executive officers, key employees and directors of the Company as of October 15, 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 40 42 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 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. 41 43 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, 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. 42 44 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. 43 45 (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." 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. 44 46 (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. 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 45 47 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 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 46 48 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. 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. Each non-employee Board member who is serving as such on the effective date of the 1997 Stock Incentive Plan will receive a similar 20,000-share option, provided he or she has not received a prior option grant from the Company. 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. In addition, 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 20,000-share automatic option grant will vest over a four-year period, with 25% of the option 47 49 shares vesting upon completion of one year of Board service from the grant date and the balance of the option shares vesting in equal monthly installments over the optionee's continued period of Board service over the next three years. The shares subject to each 5,000-share annual automatic option will vest upon the optionee's completion of one year of Board service measured from the grant date. 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 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 48 50 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. 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 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 49 51 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 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 each non-employee Board member who is serving as such on the Plan Effective Date and who has not received such a grant will automatically receive an option at that time to purchase 20,000 shares of Common Stock. Each individual who first becomes a non-employee Board member at any time after the Plan Effective Date will also receive a 20,000-share option grant on the date such individual joins the Board. In addition 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 initial 20,000-share 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. The shares subject to each annual 5,000-share grant will vest upon the optionee's completion of one year of Board service measured from the grant date. However, the shares subject to each automatic option grant 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 50 52 become exercisable for the option shares in a series of 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. 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 12 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 January 1999. The next offering period will commence on the first business day in February 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 the employee's base salary, 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. 51 53 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. 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. 52 54 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 53 55 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." 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. 54 56 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% 4370 La Jolla Village Dr., Suite 1040 San Diego, CA 92122 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 * * One Sherman Square 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 55 57 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. (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. 56 58 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 57 59 warrant without payment of cash by surrendering the warrant and receiving shares of Common Stock equal to the value of the warrant surrendered. 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 58 60 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. 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. 59 61 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. 60 62 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 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. 61 63 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 62 64 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." 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. The offering is being conducted in accordance with Rule 2720 ("Rule 2720") of the National Association of Securities Dealers, Inc. (the "NASD") which provides that, among other things, when an NASD member firm participates in the offering of equity securities of a company with whom such member has a "conflict of interest" (as defined in Rule 2720), the initial public offering price can be no higher than that recommended by a "qualified independent underwriter" (as defined in Rule 2720) (a "QIU"). BancAmerica Robertson Stephens is serving as the QIU in the offering and will recommend a price in compliance with the requirements of Rule 2720. BancAmerica Robertson Stephens has performed due diligence investigations and reviewed and participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part. BancAmerica Robertson Stephens, in its capacity as QIU, will receive no additional compensation as such in connection with the offering. 63 65 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. 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. 64 66 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 67 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 San Diego, California October 15, 1997 F-2 68 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 69 COMBICHEM, INC. STATEMENTS OF OPERATIONS
PERIOD FROM MAY 23, 1994 NINE MONTHS ENDED (INCEPTION) TO YEAR ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31 ------------------------- ------------------------- 1994 1995 1996 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: Collaborative............. -- -- 420,000 262,500 2,630,775 Proprietary............... 413,305 4,763,043 4,820,253 3,547,828 3,354,590 --------- ----------- ----------- ----------- ----------- 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 70 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 71 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 72 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 F-7 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) long-lived assets that are expected to be disposed of. The adoption had no impact on the Company's financial statements. 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. Research and development costs are expensed as incurred. Costs of services under the Company's collaborative agreements generally approximate the research revenue received under such agreements. 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 YEAR ENDED DECEMBER 31, NINE MONTHS 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 ========= ========= ========= ========= =========
F-8 74 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) 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), 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. F-9 75 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 2. BALANCE SHEET INFORMATION (CONTINUED) 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 ==========
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 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 76 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 one share of the California corporation to one share of the Delaware corporation. Subsequent to the reincorporation, the Company effected a one-for-four reverse stock split of the Common Stock. 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, the reverse stock split and the related change in shares outstanding. F-11 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) 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 --------- ----------- 7,563,613 $22,677,466 ========= ===========
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 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 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 and D redeemable convertible preferred stock and Series Z convertible preferred stock are convertible at any time into common stock on a one-for-four 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 7,563,613 shares of common stock for issuance upon conversion of the Series A, B, C and D 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 and D redeemable convertible preferred stock and Series Z 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 received options to purchase the Company's Series J convertible preferred stock exercisable upon the achievement of certain mile- F-12 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) stones. 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 2.15 Exercised......................................... (1,159,377) 0.36 Cancelled......................................... (30,074) 0.33 ---------- ----- Balance at September 30, 1997....................... 441,696 $ 2.81 ========== =====
F-13 79 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) At September 30, 1997, options to purchase 441,696 shares were exercisable and 681,407 shares remain available for grant. 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. F-14 80 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 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 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 F-15 81 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) 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 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 82 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........................... $ -- $ -- =========== ===========
The Company recorded foreign tax expense of $200,000 in the nine months ended September 30, 1997 for taxes payable to a Japanese tax authority resulting from the revenue recognized on the Sumitomo collaboration. 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 purchased 250,000 shares of Common Stock for $2.0 million, (representing a $1.5 million equity investment, and a $0.5 million premium over the deemed fair market value of the stock), and made advance payments for contract research of $500,000. The Company deferred the premium component of the equity investment which constitutes advance payments for contract research. 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, purchased 1,000,000 shares of Common Stock for $8.0 million, (representing a F-17 83 COMBICHEM, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 IS UNAUDITED) 10. SUBSEQUENT EVENTS (CONTINUED) $6.0 million equity investment, and a $2.0 million premium over the deemed fair market value of the stock) and paid a $1.333 million up-front technology license and access fee. The Company recognized the premium component of the equity investment as revenue which constitutes a technology license and access fee. 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 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 84 [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. 85 [LOGO] 86 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 II-1 87 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 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. II-2 88 (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. (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. II-3 89 (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. (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.
II-4 90
EXHIBIT NUMBER DESCRIPTION - -------- -------------------------------------------------------------------------------- 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. 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.
II-5 91
EXHIBIT NUMBER DESCRIPTION - -------- -------------------------------------------------------------------------------- 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. 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. 10.48 1997 Stock Incentive Plan Form of Notice of Grant of Stock Option 10.49 1997 Stock Incentive Plan Form of Stock Option Agreement 10.50 1997 Stock Incentive Plan Form of Addendum to Stock Option Agreement (Involuntary Termination Following Corporate Transaction/Change in Control) 10.51 1997 Stock Incentive Plan Form of Addendum to Stock Option Agreement (Limited Stock Appreciation Right) 10.52 1997 Stock Incentive Plan Form of Stock Issuance Agreement 10.53 1997 Stock Incentive Plan Form of Addendum to Stock Issuance Agreement (Involuntary Termination Following Corporate Transaction/Change in Control) 10.54 1997 Stock Incentive Plan Form of Notice of Grant of Automatic Stock Option (Initial Grant) 10.55 1997 Stock Incentive Plan Form of Notice of Grant of Automatic Stock Option (Annual Grant) 10.56 1997 Stock Incentive Plan Form of Automatic Stock Option Agreement 10.57 1997 Employee Stock Purchase Plan Form of Stock Purchase Agreement 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.
- --------------- ++ Previously filed with the Commission. II-6 92 * 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 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 93 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Amendment No. 2 to 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 3rd day of December, 1997. COMBICHEM, INC. By: /s/ VICENTE ANIDO, JR. ------------------------------------ Vicente Anido, Jr. President and Chief Executive Officer 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 December 3, 1997 - ------------------------------------ and Director (Principal Executive (Vicente Anido, Jr.) Officer) Vice President of December 3, 1997 Finance and Administration and Chief /s/ KARIN EASTHAM Financial Officer (Principal - ------------------------------------ Financial (Karin Eastham) and Accounting Officer) * Chairman of the Board and Director December 3, 1997 - ------------------------------------ (Pierre Lamond) /s/ PETER L. MYERS Director December 3, 1997 - ------------------------------------ (Peter L. Myers) * Director December 3, 1997 - ------------------------------------ (Philippe O. Chambon) * Director December 3, 1997 - ------------------------------------ (Arthur Reidel) * Director December 3, 1997 - ------------------------------------ (William Scott)
By: /s/ VICENTE ANIDO, JR. ---------------------------------- Vicente Anido, Jr., Attorney-in-fact II-8 94 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.
95
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ------------------------------------------------------------------- ------------ 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. 10.39++ 1995 Stock Option/Stock Issuance Plan. 10.40++ 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant.
96
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ------------------------------------------------------------------- ------------ 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. 10.48 1997 Stock Incentive Plan Form of Notice of Grant of Stock Option 10.49 1997 Stock Incentive Plan Form of Stock Option Agreement 10.50 1997 Stock Incentive Plan Form of Addendum to Stock Option Agreement (Involuntary Termination Following Corporate Transaction/Change in Control) 10.51 1997 Stock Incentive Plan Form of Addendum to Stock Option Agreement (Limited Stock Appreciation Right) 10.52 1997 Stock Incentive Plan Form of Stock Issuance Agreement 10.53 1997 Stock Incentive Plan Form of Addendum to Stock Issuance Agreement (Involuntary Termination Following Corporate Transaction/Change in Control) 10.54 1997 Stock Incentive Plan Form of Notice of Grant of Automatic Stock Option (Initial Grant) 10.55 1997 Stock Incentive Plan Form of Notice of Grant of Automatic Stock Option (Annual Grant) 10.56 1997 Stock Incentive Plan Form of Automatic Stock Option Agreement 10.57 1997 Employee Stock Purchase Plan Form of Stock Purchase Agreement 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.
- --------------- ++ Previously filed with the Commission. * 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-1.1 2 EXHIBIT 1.1 1 EXHIBIT 1.1 2,250,000 SHARES(1) COMBICHEM, INC. COMMON STOCK UNDERWRITING AGREEMENT ____________, 1997 BancAmerica Robertson Stephens Donaldson, Lufkin & Jenrette Securities Corporation UBS Securities LLC As Representatives of the several Underwriters c/o BancAmerica Robertson Stephens 555 California Street Suite 2600 San Francisco, California 94104 Ladies and Gentlemen: COMBICHEM, INC., a Delaware corporation (the "Company"), addresses you as the Representatives of each of the persons, firms and corporations listed in Schedule A hereto (herein collectively called the "Underwriters") and hereby confirms its agreement with the several Underwriters as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 2,250,000 shares of its authorized and unissued Common Stock, par value $.001 per share (the "Firm Shares") to the several Underwriters. The Company also proposes to grant to the Underwriters an option to purchase up to 337,500 additional shares of the Company's Common Stock, par value $.001 per share (the "Option Shares"), as provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. All shares of Common Stock, par value $.001 per share, of the Company to be outstanding after giving effect to the sales contemplated hereby, including the Shares, are hereinafter referred to as "Common Stock." - -------- 1 Plus an option to purchase up to 337,500 additional shares from the Company to cover over-allotments. 1. 2 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. (a) registration statement on Form S-1 (File No. 333-37981) with respect to the Shares, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements pursuant to Rule 462(b) of the Rules and Regulations as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements as may hereafter be required. Copies of such registration statement and amendments, of each related prospectus subject to completion (the "Preliminary Prospectuses") and of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information omitted from the registration statement pursuant to Rule 430A(a), (i) pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus) or (ii) if BancAmerica Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus, or, if BancAmerica Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment thereto or the filing of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the effective date of such registration statement, 2. 3 shall also mean (from and after the effectiveness of such amendment or the filing of such abbreviated registration statement) such registration statement as so amended, together with any such abbreviated registration statement. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations); provided, however, that if in reliance on Rule 434 of the Rules and Regulations and with the consent of BancAmerica Robertson Stephens, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to completion" (as defined in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters by the Company and circulated by the Underwriters to all prospective purchasers of the Shares (including the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus referred to in the immediately preceding sentence (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. If in reliance on Rule 434 of the Rules and Regulations and with the consent of BancAmerica Robertson Stephens, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be materially different from the prospectus in the Registration Statement. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements 3. 4 thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter specifically for use in the preparation thereof. (c) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Prospectus; the Company has no subsidiaries; the Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company; no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; the Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect; the Company is not in violation of its charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which it or its properties may be bound; and the Company is not in material violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties of which it has knowledge. The Company does not own or control, directly or indirectly, any corporation, association or other entity. 4. 5 (d) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a material breach or violation of any of the terms and provisions of, or constitute a material default under, (i) any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which it or its properties may be bound, (ii) the charter or bylaws of the Company, or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its properties is required for the execution and delivery of this Agreement and the consummation by the Company of the transactions herein contemplated, except such as may be required under the Act or under state or other securities or Blue Sky laws, all of which requirements have been satisfied in all material respects. (e) There is not any pending or, to the best of the Company's knowledge, threatened action, suit, claim or proceeding against the Company or any of its officers or any of its properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or over its officers or properties or otherwise which (i) is reasonably likely to result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company or is reasonably likely to materially and adversely affect its properties, assets or rights, (ii) might reasonably be expected to prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement or Prospectus and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations which have not been accurately described in all material respects in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. (f) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued 5. 6 in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Firm Shares and the Option Shares have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders exists with respect to any of the Firm Shares or Option Shares or the issuance and sale thereof other than those that have been expressly waived prior to the date hereof and those that will automatically expire upon and will not apply to the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act or under state or other securities or Blue Sky laws. Except as disclosed in the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, the Company does not have outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (g) Ernst & Young LLP, which has examined the consolidated financial statements of the Company, together with the related schedules and notes, as of September 30, 1997 and for each of the years in the three (3) years ended December 31, 1996 filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited consolidated financial statements of the Company, together with the related schedules and 6. 7 notes, and the unaudited consolidated financial information, forming part of the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply; and all audited consolidated financial statements of the Company, together with the related schedules and notes, and the unaudited consolidated financial information, filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company, (ii) any transaction that is material to the Company, except transactions entered into in the ordinary course of business, (iii) any obligation, direct or contingent, that is material to the Company, incurred by the Company, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company that is material to the Company, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (vi) any loss or damage (whether or not insured) to the property of the Company which has been sustained or will have been sustained which is reasonably likely to have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (i) Except as set forth in the Registration Statement and Prospectus (i) the Company has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company, (ii) the agreements to which the Company is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) the Company has valid and enforceable leases for all material properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted. 7. 8 (j) The Company has timely filed (including extensions) all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, might be asserted against the Company that might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company; and all tax liabilities are adequately provided for on the books of the Company. (k) The Company maintains insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for its business and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect; the Company has not been refused any insurance coverage sought or applied for; and the Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (l) To the best of Company's knowledge, no labor disturbance by the employees of the Company exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, that might be expected to result in a material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. No collective bargaining agreement exists with any of the Company's employees and, to the best of the Company's knowledge, no such agreement is imminent. (m) The Company owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the expiration of any patents, patent rights, trademarks, service marks, trade names or copyrights would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the 8. 9 aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (n) To the Company's knowledge, none of the material patent rights owned or licensed by the Company, as set forth on Schedule B, are unenforceable or invalid. The Company has duly and properly filed or caused to be filed with the U.S. Patent and Trademark Office (the "PTO") and appropriate foreign and international patent authorities all patent applications described or referred to in the Prospectus and as set forth on Schedule B, and has complied with the PTO's duty of candor and disclosure for each of the U.S. patent applications set forth on Schedule B; the Company is unaware of any facts which would preclude their grant of a patent from each of the patent applications set forth on Schedule B; the Company has no knowledge of any facts which would preclude it from having clear title to its patent applications referenced in the Prospectus. The Company is not aware of the granting of any patent rights to third parties or the filing of patent applications by third parties or any other rights to any of the Company's intellectual property. (o) The Common Stock has been approved for quotation on The Nasdaq National Market, subject to official notice of issuance. (p) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (q) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (r) The Company has not at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. 9. 10 (s) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (t) Each officer and director of the Company and each beneficial owner of 200,000 or more shares of Common Stock has agreed in writing that such person will not, for a period of one hundred eighty (180) days from the date that the Registration Statement is declared effective by the Commission (the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") 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 (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of BancAmerica Robertson Stephens. The foregoing restriction has been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person has also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors and stockholders have agreed to such or similar restrictions (the "Lock-up Agreements") presently in effect or effected hereby. The Company hereby represents and warrants that it will not release any of its officers, directors or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of BancAmerica Robertson Stephens. (u) Except as set forth in the Registration Statement and Prospectus, (i) the Company is in compliance with all current rules, laws and regulations relating to 10. 11 the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business and which might reasonably be expected to have a material adverse effect on the Company's business, financial condition or results of operations, (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (iii) the Company will not be required to make future material capital expenditures to comply with Environmental Laws and (iv) no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law. (v) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (w) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus and except such as individually do not exceed $50,000 or, in the aggregate, exceed $150,000. 3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company at a purchase price of $_____ per share, the respective number of Firm Shares as hereinafter set forth. The obligation of each Underwriter to the Company shall be to purchase from the Company that number of Firm Shares which is set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10). Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks 11. 12 drawn in same-day funds, payable to the order of the Company, at the offices of Brobeck, Phleger & Harrison LLP, 550 West C Street, Suite 1300, San Diego, California 92101 (or at such other place as may be agreed upon among the Representatives and the Company), at 7:00 a.m., San Francisco time (a) on the third (3rd) full business day following the first day that Shares are traded, (b) if this Agreement is executed and delivered after 1:30 p.m., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (c) at such other time and date not later than seven (7) full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date"; provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 4(d) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in San Francisco or New York City, as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to the Closing Date. If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. After the Registration Statement becomes effective, the several Underwriters intend to make an initial public offering (as such term is described in Section 11 hereof) of the Firm Shares at an initial public offering price of [$_____] per share. After the initial public offering, the several Underwriters may, in their discretion, vary the public offering price. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), on the inside front cover concerning stabilization and over-allotment by the Underwriters, and under the first, second, sixth, eighth, ninth and tenth paragraphs under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes the only information furnished 12. 13 by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the respective Underwriters, represent and warrant to the Company that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; the Company will use its best efforts to cause any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations as may be required subsequent to the date the Registration Statement is declared effective to become effective as promptly as possible; the Company will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement, any subsequent amendment to the Registration Statement or any abbreviated registration statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations, have been filed, within the time period prescribed, with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; promptly upon your request, it will prepare and file with the Commission any amendments or 13. 14 supplements to the Registration Statement or Prospectus which, in the opinion of counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the provisions of this Agreement. (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts to cooperate with you to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be required by the laws of such jurisdiction. (d) The Company will furnish to you, as soon as available, and, in the case of the Prospectus and any term sheet or abbreviated term sheet under Rule 434, in no event later than the first (1st) full business day following the first day that Shares are traded, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all in such quantities as you may from time to time 14. 15 reasonably request. Notwithstanding the foregoing, if BancAmercia Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the Company shall provide to you copies of a Preliminary Prospectus updated in all respects through the date specified by you in such quantities as you may from time to time reasonably request. (e) The Company will make generally available to its securityholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. (f) During a period of five (5) years after the date hereof, the Company will furnish to its stockholders as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its stockholders, statements of operations of the Company for each of the first three (3) quarters in the form furnished to the Company's stockholders, (ii) concurrently with furnishing to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to stockholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the National Association of Securities Dealers, Inc. ("NASD"), (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to stockholders or prepared by the Company or its subsidiaries, if any, and (vi) any additional information of a public nature concerning the Company or its subsidiaries, if any, or its business which you may reasonably request. During such five (5) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. 15. 16 (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the Company will reimburse the several Underwriters for all reasonable out-of-pocket expenses (including fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in investigating or preparing to market or marketing the Shares. (j) If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your reasonable opinion the market price of the Common Stock has been, or is likely to be, materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (k) During the Lock-up Period, the Company will not, without the prior written consent of BancAmerica Robertson Stephens, effect the Disposition of, directly or indirectly, any Securities other than the sale of the Firm Shares and the Option Shares hereunder, and the Company's issuance of options or Common Stock under the Company's presently authorized 1997 Stock Incentive Plan, the Company's issuance of Common Stock under the Company's presently authorized 1997 Employee Stock Purchase Plan, presently outstanding warrants and up to _____________ shares in connection with an acquisition of technology or companies or a corporate partnering transaction. 5. EXPENSES. (a) The Company agrees with each Underwriter that: (i) The Company will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; the copying and/or printing of 16. 17 this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any, the cost of all certificates representing the Shares and transfer agents' and registrars' fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent certified public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus, and any amendments or supplements to any of the foregoing; NASD filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including filing fees and fees and disbursements of Underwriters' Counsel in connection with such NASD filings and Blue Sky qualifications); and all other expenses directly incurred by the Company in connection with the performance of their obligations hereunder. (ii) In addition to its other obligations under Section 8(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (b) In addition to their other obligations under Section 8(b) hereof, the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b) hereof, they will reimburse the Company on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the 17. 18 Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (c) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 5(a)(ii) and 5(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a) and 8(b) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(d) hereof. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 2:00 p.m., San Francisco time, on the date following the date of this Agreement, or such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel. 18. 19 (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, or any later date on which Option Shares are to be purchased, as the case may be, there shall not have been any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus; and (d) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, the following opinion of counsel for the Company, dated as of the Closing Date or such later date on which Option Shares are to be purchased addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, with full corporate power and authority to own or lease it properties and conduct its business as described in the Registration Statement and Prospectus. (ii) The Company is duly qualified to do business as a foreign corporation and is in good standing in the State of California. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity. (iii) The authorized capital stock of the Company conforms as to legal matters in all material respects to the description thereof contained in the Registration Statement and Prospectus. (iv) The authorized and (to such counsel's knowledge) issued and outstanding capital stock of the Company was as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein. Such outstanding shares of capital stock of the Company have been duly and validly authorized and issued, are nonassessable and (to such counsel's knowledge) fully paid, and are not subject to any preemptive or similar right pursuant to any agreement to which the Company is a party. 19. 20 (v) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or threatened or are pending under the Act. (vi) This Agreement has been duly authorized, executed and delivered by the Company. (vii) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the certificate of incorporation or bylaws of the Company or, to such counsel's knowledge, any judgment, order, writ or decree of any governmental body, agency or court having jurisdiction over the Company or any of its property, or, to such counsel's knowledge, constitute a breach or default under any agreement or other instrument binding upon the Company and identified to such counsel by the Company as material, and no consent, approval, authorization or order of or qualification with any United States federal or California court, government or governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or blue sky laws of the various states (on which such counsel expresses no opinion) in connection with the purchase and distribution of the Shares by the Underwriters. (viii) The Shares have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right. (ix) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder. (x) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the form of certificate evidencing the Common Stock and filed as an exhibit to the Registration Statement complies with the laws of the State of Delaware. (xi) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Act and the applicable Rules and Regulations. 20. 21 (xii) Such counsel does not know of any legal or governmental proceeding pending or overtly threatened to which the Company is or may become a party or to which any of the properties of the Company is or may become subject that is required to be described in the Registration Statement or the Prospectus and is not so described, or of any statute, regulation, contract or other document that is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described or filed as required. (xiii) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of California or the State of Delaware upon opinions of local counsel, and as to questions of fact upon representations or 21. 22 certificates of officers of the Company, and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, the following opinion of Townsend and Townsend and Crew LLP, patent counsel for the Company, dated the Closing Date or such later date on which Option Shares are purchased, addressed to the Underwriters and in form and substance satisfactory to counsel for the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The statements in the eighth, ninth, tenth and eleventh sentences under the captions "Risk Factors - Company's Success Dependent on Intellectual Property Rights" and "Business - Patents and Proprietary Information" (collectively, the "Patent Sentences") in the Registration Statement and the Prospectus, respectively, referring to certain patents held by a third party (the "Third-Party Patents") insofar as such statements constitute statements or summaries of matters of law, to such counsel's knowledge, are, in all material respects, accurate and complete statements or summaries, as the case may be, of the matters referred to therein. (ii) To such counsel's knowledge, the Company has not received any notice of infringement of or conflict with asserted rights with respect to the Third-Party Patents. To such counsel's knowledge, the Company's practice of its [3D Technology] does not infringe on or otherwise violate the patent rights under the Third-Party Patents. In addition, although such counsel have not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus, and based upon and subject to the foregoing, nothing has come to such counsel's attention that leads such counsel to believe that the Patent Sentences of the Registration Statement, at the time the Registration Statement became effective or at the date hereof, contained or contain an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Patent Sentences of the Prospectus, as of the date of the Prospectus or at the date hereof, contained or contain an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 22. 23 (f) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, the following opinion of Lyon & Lyon, patent counsel for the Company, dated the Closing Date or such later date on which Option Shares are purchased, addressed to the Underwriters and in form and substance satisfactory to counsel for the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: (i) The statements under the captions "Risk Factors - Company's Success Dependent on Intellectual Property Rights" and "Business - Patents and Proprietary Information," other than the eighth, ninth, tenth and eleventh sentences thereof, concerning which such counsel need not express an opinion (collectively, the "Patent Paragraphs") in the Registration Statement and the Prospectus, respectively, insofar as such statements constitute statements or summaries of matters of law related to patents and patent applications of the Company as to which we have been retained to advise the Company, to such counsel's knowledge, are, in all material respects, accurate and complete statements or summaries, as the case may be, of the matters referred to therein; provided, however, that such counsel need not express an opinion with respect to the eighth, ninth, tenth and eleventh sentences of the Patent Paragraphs. (ii) To such counsel's knowledge, there are no judicial proceedings pending relating to patents or patent applications to which the Company is a party, and, to such counsel's knowledge, no such judicial proceedings are threatened by any person. To such counsel's knowledge, the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any patents. (iii) To such counsel's knowledge, the Company's patent applications set forth on Schedule C hereto have been properly prepared and filed on behalf of the Company, and to such counsel's knowledge, each of the applications is held by the Company, and, to such counsel's knowledge, except as set forth in the Prospectus, no other entity or individual has any right or claim in any of the applications or any patent to be issued therefrom by virtue of any contract, license or other agreement known to such counsel entered into between such entity or individual and the Company. To such counsel's knowledge, all information submitted to the PTO in the relevant applications, and in connection with the prosecution of the relevant applications, was accurate; to such counsel's knowledge, neither such counsel nor the Company made any misrepresentations or concealed any material information from the PTO in any such applications, or in connection with the prosecution of such applications in violation of 37 C.F.R. Section 1.56. In addition, although such counsel have not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus, and based upon and subject to the foregoing, nothing has 23. 24 come to such counsel's attention that leads such counsel to believe that the Patent Paragraphs of the Registration Statement, at the time the Registration Statement became effective or at the date hereof, contained or contain an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Patent Paragraphs of the Prospectus, as of the date of the Prospectus or at the date hereof, contained or contain an untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Cooley Godward LLP, in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (h) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a letter from Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in the letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning 24. 25 of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of December 31, 1996 and related consolidated statements of operations, stockholders' equity, and cash flows for the twelve (12) months ended December 31, 1996, (iii) state that Ernst & Young LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of Ernst & Young LLP as described in SAS 71 on the financial statements for the nine (9) months period ended September 30, 1997 (the "Quarterly Financial Statements"), (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Quarterly Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented, and (v) address other matters agreed upon by Ernst & Young LLP and you. In addition, you shall have received from Ernst & Young LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of September 30, 1997, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (i) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a certificate of the Company, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Act and the Rules and 25. 26 Regulations and in all material respects conformed to the requirements of the Act and the Rules and Regulations, the Registration Statement, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company, (b) any transaction that is material to the Company, (c) any obligation, direct or contingent, that is material to the Company, incurred by the Company, (d) any change in the capital stock or outstanding indebtedness of the Company that is material to the Company, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company , or (f) any loss or damage (whether or not insured) to the property of the Company which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (j) The Company shall have obtained and delivered to you a Lock-up Agreement from each officer and director of the Company and each beneficial owner of 200,000 or more shares of Common Stock in writing prior to the date hereof. (k) The Company shall have furnished to you such further certificates and documents as you shall reasonably request, including certificates of officers of the Company, as to the accuracy of the representations and warranties of the Company herein, as to the performance by the Company of its obligations hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to Underwriters' Counsel. The Company will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 7. OPTION SHARES. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby 26. 27 grants to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase up to an aggregate of 337,500 Option Shares at the purchase price per share for the Firm Shares set forth in Section 3 hereof. Such option may be exercised by the Representatives on behalf of the several Underwriters on one (1) or more occasions in whole or in part during the period of thirty (30) days after the date on which the Firm Shares are initially offered to the public, by giving written notice to the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to the total number of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representatives in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in same-day funds, payable to the order of the Company. Such delivery and payment shall take place at the offices of Brobeck, Phleger & Harrison LLP, 550 West C Street, Suite 1300, San Diego, California 92101, or at such other place as may be agreed upon among the Representatives and the Company (i) on the Closing Date, if written notice of the exercise of such option is received by the Company at least two (2) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the third (3rd) full business day following the date the Company receives written notice of the exercise of such option, if such notice is received by the Company less than two (2) full business days prior to the Closing Date. The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in San Francisco or New York City, as you may reasonably request for checking at least one (1) full business day prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to such date of payment and delivery. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. 27. 28 (b) Upon exercise of any option provided for in Section 7(a) hereof, the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Company herein, to the accuracy of the statements of the Company and officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, to the conditions set forth in Section 6 hereof, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company or the satisfaction of any of the conditions herein contained. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the 28. 29 preparation thereof and, provided further, that the indemnity agreement provided in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company against any losses, claims, damages or liabilities, joint or several, to which the Company may become subject under the Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof, and agrees to reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement and each director of the Company, and each person, if any, who controls the Company within the meaning of the Act or the Exchange 29. 30 Act. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8, unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a) or 8(b) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided that such consent shall not be unreasonably withheld or delayed. No indemnifying party shall, without the prior written consent of the indemnified party, which shall not be unreasonably withheld or delayed, effect any settlement of any pending or threatened proceeding in respect of which any 30. 31 indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding. (d) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Underwriters severally and not jointly are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the initial public offering price, and the Company are responsible for the remaining portion, provided, however, that (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of damages which such Underwriter has otherwise required to pay and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The contribution agreement in this Section 8(d) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter, the Company within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company. (e) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. 9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, covenants and agreements of the Company and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter within the meaning of the Act or the Exchange 31. 32 Act, or by or on behalf of the Company or any of its officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty-four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement, supplements to the Prospectus or other such documents which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the 32. 33 Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, neither the Company shall be liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company, and the other Underwriters for damages, if any, resulting from such default) be liable to the Company (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at the earlier of (i) 6:30 a.m., San Francisco time, on the first full business day following the effective date of the Registration Statement, or (ii) the time of the initial public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the initial public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 4(i), 5 and 8 hereof. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time on or prior to the Closing Date or on or prior to any later date on which Option Shares are to be purchased, as the case may be, (i) if the Company shall have failed, refused or been unable to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse, or (ii) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York 33. 34 Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such exchange or in the over the counter market by the NASD, or if a banking moratorium shall have been declared by federal, New York or California authorities, or (iii) if the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the reasonable opinion of the Representatives, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. In the event of termination pursuant to subparagraph (i) above, the Company shall remain obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8 hereof. Any termination pursuant to any of subparagraphs (ii) through (v) above shall be without liability of any party to any other party except as provided in Sections 5 and 8 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone, telecopy or telegram, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone, telecopy or telegram, in each case, confirmed by letter. 12. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California Street, Suite 2600, San Francisco, California 94104, facsimile number (415) 781-0278, Attention: General Counsel; if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to CombiChem, Inc. facsimile number (619) 271-9339, Attention: Vicente Anido, Jr., Ph.D., President and Chief Executive Officer. 13. PARTIES. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and their respective executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or entity, other than the parties hereto and their respective executors, administrators, successors and assigns, and the controlling persons 34. 35 within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8 hereof, any legal or equitable right, remedy or claim in respect of this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or entity. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. In all dealings with the Company under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you jointly or by BancAmerica Robertson Stephens on behalf of you. 14. APPLICABLE LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without regard to its choice of laws provisions. 15. COUNTERPARTS. This Agreement may be signed in several counterparts, each of which will constitute an original. 35. 36 If the foregoing correctly sets forth the understanding among the Company and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company and the several Underwriters. Very truly yours, COMBICHEM, INC. By ______________________________________ Vicente Anido, Jr., Ph.D. President and Chief Executive Officer Accepted as of the date first above written: BANCAMERICA ROBERTSON STEPHENS DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION UBS SECURITIES LLC On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto. By: BANCAMERICA ROBERTSON STEPHENS By: ___________________________________ Authorized Signatory 36. 37 SCHEDULE A
NUMBER OF FIRM SHARES TO BE UNDERWRITERS PURCHASED BancAmerica Robertson Stephens............................................... Donaldson, Lufkin & Jenrette Securities Corporation.......................... UBS Securities LLC........................................................... Total...................................................................
EX-4.1 3 EXHIBIT 4.1 1 EXHIBIT 4.1 [Certificate Face] [Logo] COMBICHEM NUMBER CBC SHARES INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 20009P 10 3 SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT is the record holder of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE OF CombiChem, Inc. transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [Faye H. Russell] Secretary [Corporate Seal] [Vicente Anido, Jr.,] President and Chief Executive Officer COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER AND TRUST COMPANY (New York, New York) Transfer Agent and Registrar By Authorized Signature 2 [Certificate Back] CombiChem, Inc. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with the right of survivorship and not as tenants in common UNIF GIFT MIN ACT ___Custodian_____ (Cust) (Minor) under Uniform Gifts to Minors Act_________ (State) Additional abbreviations may also be used though not in the above list. For Value Received, _________________________hereby sell(s), assign(s), and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE_________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE(S)______________________________________________________ of shares of capital stock represented by the within Certificate and do(es) hereby irrevocably constitute and appoint__________________________________________________Attorney, to transfer the said Shares on the books of the within named Corporation with full power of substitution in the premises. Dated____________________________________________________________ NOTE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular, without alteration or enlargement or any change whatever. Signature must be guaranteed. Signature(s) Guaranteed By_______________________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKER, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad.15. EX-10.44 4 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 - 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. 2 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 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 2. 3 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 (i) those individuals serving as non-employee Board members on the Underwriting Date who have not previously received a stock option grant from the Corporation, (ii) 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 (iii) those individuals who 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 3. 4 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 under the Plan to the extent (i) those options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. 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 4. 5 issuance. Shares of Common Stock underlying one or more stock appreciation rights exercised under Section IV of Article Two of the Plan shall NOT be available for subsequent issuance under the Plan. 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 as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or 7. 8 (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. 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. 8. 9 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. 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 9. 10 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. 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 10. 11 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. 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 11. 12 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 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. (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. 12. 13 (iv) The balance of the option (if any) shall remain outstanding and exercisable in accordance with the documents evidencing such option. 13. 14 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): 14. 15 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 15. 16 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 Take-Over 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. 16. 17 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 17. 18 (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. 18. 19 II. CORPORATE TRANSACTION/CHANGE IN CONTROL 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. 19. 20 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 serving as a non-employee Board member on the Underwriting Date shall automatically be granted at that time 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 and has not previously received a stock option grant from the Corporation. 2. 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. 3. 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. C. OPTION TERM. Each option shall have a term of ten (10) years measured from the option grant date. 20. 21 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 initial 20,000-share 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 upon the Optionee's completion of each additional month of Board service over the thirty-six (36)-month period measured from the first anniversary of the option grant date. Each annual 5,000-share automatic option shall vest, and the Corporation's repurchase right shall lapse, upon the Optionee's completion of one (1) year of Board service measured from the 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 Permanent Disability, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. 21. 22 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 Take-Over. C. 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 or Change in Control. D. 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. E. 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. 22. 23 F. 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. 23. 24 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 24. 25 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 TAKE- OVER 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 to the effective date of the Corporate Transaction, become fully exercisable with respect to the 25. 26 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. 26. 27 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. 27. 28 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. 28. 29 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. 29. 30 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. 31 (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. 32 (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. 33 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 Issuance Programs with respect to Section 16 Insiders and to administer the Salary Investment A-4. 34 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 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 Take-Over 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. 35 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 5 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. 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. 2 B. Each offering period shall be of such duration (not to exceed twelve (12) months) as determined by the Plan Administrator prior to the start date of such offering period. However, the initial offering period shall commence at the Effective Time and terminate on the last business day in January 1999. The next offering period shall commence on the first business day in February 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. However, 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 twelve (12) 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 Semi-Annual 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. 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. 2. 3 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 Base Salary 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 the next Purchase Date. However, any payroll deductions not applied to the purchase of 4. 5 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. 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 5. 6 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. B. For purposes of applying such accrual limitations to the purchase rights granted under the Plan, the following provisions shall be in effect: 6. 7 (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 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. 7. 8 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. BASE SALARY shall mean the (i) regular base salary paid 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 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. The following items of compensation shall NOT be included in Base Salary: (i) all overtime payments, bonuses, commissions (other than those functioning as base salary equivalents), profit-sharing distributions and other incentive-type payments and (ii) any and all 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. B. BOARD shall mean the Corporation's Board of Directors. 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 1997 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-10.48 6 EXHIBIT 10.48 1 EXHIBIT 10.48 COMBICHEM, INC. NOTICE OF GRANT OF STOCK OPTION Notice is hereby given of the following option grant (the "Option") to purchase shares of the Common Stock of CombiChem, Inc. (the "Corporation"): Optionee:_____________________________________________________ Grant Date:___________________________________________________ Vesting Commencement Date:____________________________________ Exercise Price: $__________________________________ per share Number of Option Shares:_______________________________ shares Expiration Date:______________________________________________ Type of Option: ______ Incentive Stock Option ______ Non-Statutory Stock Option Exercise Schedule: The Option shall become exercisable for twenty-five percent (25%) of the Option Shares upon Optionee's completion of one (1) year of Service measured from the Vesting Commencement Date and shall become exercisable for the balance of the Option Shares in thirty-six (36) successive equal monthly installments upon Optionee's completion of each additional month of Service over the thirty-six (36) month period measured from the first anniversary of the Vesting Commencement Date. In no event shall the Option become exercisable for any additional Option Shares after Optionee's cessation of Service. Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the CombiChem, Inc. 1997 Stock Incentive Plan (the "Plan"). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit A. Optionee hereby acknowledges receipt of a copy of the official prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the Plan is available upon request made to the Corporate Secretary at the Corporation's principal offices. 2 No Employment or Service Contract. Nothing in this Notice or in the attached Stock Option Agreement or in the Plan shall confer upon Optionee 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 Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee's Service at any time for any reason, with or without cause. Definitions. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Stock Option Agreement. DATED: _________________________, 199 ___ COMBICHEM, INC. By:________________________________ Title:_____________________________ ___________________________________ OPTIONEE Address:___________________________ ___________________________________ ATTACHMENTS EXHIBIT A - STOCK OPTION AGREEMENT EXHIBIT B - PLAN SUMMARY AND PROSPECTUS 2. 3 EXHIBIT A STOCK OPTION AGREEMENT 4 EXHIBIT B PLAN SUMMARY AND PROSPECTUS EX-10.49 7 EXHIBIT 10.49 1 EXHIBIT 10.49 COMBICHEM, INC. STOCK OPTION AGREEMENT RECITALS A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or of the board of directors of any Parent or Subsidiary and consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation's grant of an option to Optionee. C. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix. NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price. 2. OPTION TERM. This option shall have a maximum term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6. 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. However, if this option is designated a Non-Statutory Option in the Grant Notice, then this option may, in connection with the Optionee's estate plan, be assigned in whole or in part during Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established for the exclusive benefit of one or more such family members. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment. 2 4. DATES OF EXERCISE. This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6. 5. CESSATION OF SERVICE. The option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable: (a) Should Optionee cease to remain in Service for any reason (other than death, Permanent Disability or Misconduct) while holding this option, then Optionee shall have a period of three (3) 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. (b) Should Optionee die while holding this option, then the personal representative of Optionee's estate or the person or persons to whom the option is transferred pursuant to Optionee's will or in accordance with the laws of inheritance shall have the right to exercise this option. Such right shall lapse, and this option shall cease to be outstanding, upon the earlier of (i) the expiration of the twelve (12)-month period measured from the date of Optionee's death or (ii) the Expiration Date. (c) Should Optionee cease Service by reason of Permanent Disability while holding this option, then Optionee shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this option. In no event shall this option be exercisable at any time after the Expiration Date. (d) During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of vested Option Shares for which the option is exercisable at the time of Optionee's cessation of Service. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any vested Option Shares for which the option has not been exercised. However, this option shall, immediately upon Optionee's cessation of Service for any reason, terminate and cease to be outstanding with respect to any Option Shares in which Optionee is not otherwise at that time vested or for which this option is not otherwise at that time exercisable. 2. 3 (e) Should Optionee's Service be terminated for Misconduct, then this option shall terminate immediately and cease to remain outstanding. 6. SPECIAL ACCELERATION OF OPTION. (a) This option to the extent outstanding at the time of a Corporate Transaction, but not otherwise fully exercisable, shall automatically accelerate so that this option shall, immediately prior to the effective date of such Corporate Transaction, become exercisable for all of the Option Shares at the time subject to this option and may be exercised for any or all of those Option Shares as fully vested shares of Common Stock. No such acceleration of this option shall occur, however, if and to the extent: (i) this option is, in connection with the Corporate Transaction, to be assumed by the successor corporation (or parent thereof) or (ii) this 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 the Option Shares for which this option is not otherwise at that time exercisable (the excess of the Fair Market Value of those Option Shares over the aggregate Exercise Price payable for such shares) and provides for subsequent payout in accordance with the same option exercise/vesting schedule set forth in the Grant Notice. (b) Immediately following the Corporate Transaction, this option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in connection with the Corporate Transaction. (c) If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in 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 Exercise Price, provided the aggregate Exercise Price shall remain the same. (d) This Agreement shall not in any 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. 7. ADJUSTMENT IN OPTION SHARES. 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 3. 4 consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 8. STOCKHOLDER RIGHTS. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares. 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 any other person or persons exercising the option) must take the following actions: (i) Execute and deliver to the Corporation a Notice of Exercise for the Option Shares for which the option is exercised. (ii) Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms: (A) cash or check made payable to the Corporation; (B) a promissory note payable to the Corporation, but only to the extent authorized by the Plan Administrator in accordance with Paragraph 13; (C) shares of Common Stock held by Optionee (or any other person or persons exercising the option) 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 (D) through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable instructions (I) to 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 4. 5 to be withheld by the Corporation by reason of such exercise and (II) to 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 the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Notice of Exercise delivered to the Corporation in connection with the option exercise. (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. (iv) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax withholding requirements applicable to the option exercise. (b) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto. (c) 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 the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance. (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. 11. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate. 5. 6 12. 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 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 effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 13. FINANCING. The Plan Administrator may, in its absolute discretion and without any obligation to do so, permit Optionee to pay the Exercise Price for the purchased Option Shares by delivering a full-recourse promissory note payable to the Corporation. The terms of any such promissory note (including the interest rate, the requirements for collateral and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. 14. 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 terms 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. 15. 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. 16. EXCESS SHARES. If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may without stockholder approval be issued under the Plan, then this option shall be void with respect to those excess shares, unless stockholder 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 the Plan. 17. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the event this option is designated an Incentive 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 Option if (and to the extent) this option is exercised for one or more Option Shares: (A) more than three (3) months after the date Optionee ceases to be an Employee for any reason other than death or Permanent Disability or (B) more than twelve (12) months after the date Optionee ceases to be an Employee by reason of Permanent Disability. 6. 7 (b) No installment under this option shall qualify for favorable tax treatment as an Incentive Option if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which such installment first becomes exercisable hereunder would, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock or other securities for which this option or any other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Should such One Hundred Thousand Dollar ($100,000) limitation be exceeded in any calendar year, this option shall nevertheless become exercisable for the excess shares in such calendar year as a Non-Statutory Option. (c) Should the exercisability of this option be accelerated upon a Corporate Transaction, then this option shall qualify for favorable tax treatment as an Incentive Option only to the extent the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option first becomes exercisable in the calendar year in which the Corporate Transaction occurs does not, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock or other securities for which this option or one or more other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. Should the applicable One Hundred Thousand Dollar ($100,000) limitation be exceeded in the calendar year of such Corporate Transaction, the option may nevertheless be exercised for the excess shares in such calendar year as a Non-Statutory Option. (d) Should Optionee hold, in addition to this option, one or more other options to purchase Common Stock which become exercisable for the first time in the same calendar year as this option, then the foregoing limitations on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. 7. 8 EXHIBIT I NOTICE OF EXERCISE I hereby notify CombiChem, Inc. (the "Corporation") that I elect to purchase _________________ shares of the Corporation's Common Stock (the "Purchased Shares") at the option exercise price of $ ______________________ per share (the "Exercise Price") pursuant to that certain option (the "Option") granted to me under the Corporation's 1997 Stock Incentive Plan on _______________________________, 199___. Concurrently with the delivery of this Exercise Notice to the Corporation, I shall hereby pay to the Corporation the Exercise Price for the Purchased Shares in accordance with the provisions of my agreement with the Corporation (or other documents) evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise. Alternatively, I may utilize the special broker-dealer sale and remittance procedure specified in my agreement to effect payment of the Exercise Price. __________________________, 199__ Date ___________________________________ Optionee Address:___________________________ ___________________________________ Print name in exact manner it is to appear on the stock certificate: ___________________________________ Address to which certificate is to be sent, if different from address above: ___________________________________ ___________________________________ Social Security Number: ___________________________________ Employee Number: ___________________________________ 9 APPENDIX The following definitions shall be in effect under the Agreement: A. AGREEMENT shall mean this Stock Option Agreement. B. BOARD shall mean the Corporation's Board of Directors. C. COMMON STOCK shall mean shares of the Corporation's common stock. D. CODE shall mean the Internal Revenue Code of 1986, as amended. E. 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 Corporation's assets in complete liquidation or dissolution of the Corporation. F. CORPORATION shall mean CombiChem, Inc., a Delaware corporation. G. 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. H. EXERCISE DATE shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement. I. EXERCISE PRICE shall mean the exercise price per Option Share as specified in the Grant Notice. J. EXPIRATION DATE shall mean the date on which the option expires as specified in the Grant Notice. 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 deemed equal to the closing selling price per share of Common Stock on the date in question, as the price is reported A-1. 10 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 deemed equal to 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. L. GRANT DATE shall mean the date of grant of the option as specified in the Grant Notice. M. GRANT NOTICE shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. N. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. O. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by Optionee 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 Optionee or any other individual in the Service of the Corporation (or any Parent or Subsidiary). P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. Q. NOTICE OF EXERCISE shall mean the notice of exercise in the form attached hereto as Exhibit I. R. OPTION SHARES shall mean the number of shares of Common Stock subject to the option as specified in the Grant Notice. S. OPTIONEE shall mean the person to whom the option is granted as specified in the Grant Notice. A-2. 11 T. 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. U. PERMANENT DISABILITY shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. V. PLAN shall mean the Corporation's 1997 Stock Incentive Plan. W. PLAN ADMINISTRATOR shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan. X. SERVICE shall mean the Optionee's performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor. Y. STOCK EXCHANGE shall mean the American Stock Exchange or the New York Stock Exchange. Z. 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. A-3. EX-10.50 8 EXHIBIT 10.50 1 EXHIBIT 10.50 ADDENDUM TO STOCK OPTION AGREEMENT The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement (the "Option Agreement") by and between CombiChem, Inc. (the "Corporation") and _____________________________________ ("Optionee") evidencing the stock option (the "Option") granted on _____________________, 199___ to Optionee under the terms of the Corporation's 1997 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to them in the Option Agreement. INVOLUNTARY TERMINATION FOLLOWING CORPORATE TRANSACTION/CHANGE IN CONTROL 1. To the extent the Option is, in connection with a Corporate Transaction, to be assumed in accordance with Paragraph 6 of the Option Agreement, the Option shall not accelerate upon the occurrence of that Corporate Transaction, and the Option shall accordingly continue, over Optionee's period of Service after the Corporate Transaction, to become exercisable for the Option Shares in one or more installments in accordance with the provisions of the Option Agreement. However, immediately upon an Involuntary Termination of Optionee's Service within eighteen (18) months following such Corporate Transaction, the assumed Option, to the extent outstanding at the time but not otherwise fully exercisable, shall automatically accelerate so that the Option shall become immediately exercisable for all the Option Shares at the time subject to the Option and may be exercised for any or all of those Option Shares as fully vested shares. 2. The Option shall not accelerate upon the occurrence of a Change in Control, and the Option shall, over Optionee's period of Service following such Change in Control, continue to become exercisable for the Option Shares in one or more installments in accordance with the provisions of the Option Agreement. However, immediately upon an Involuntary Termination of Optionee's Service within eighteen (18) months following the Change in Control, the Option, to the extent outstanding at the time but not otherwise fully exercisable, shall automatically accelerate so that the Option shall become immediately exercisable for all the Option Shares at the time subject to the Option and may be exercised for any or all of those Option Shares as fully vested shares. 3. The Option as accelerated under Paragraph 1 or 2 shall remain so exercisable until the earlier of (i) the Expiration Date or (ii) the expiration of the one (1)-year period measured from the date of the Optionee's Involuntary Termination. 2 4. For purposes of this Addendum the following definitions shall be in effect: (i) An INVOLUNTARY TERMINATION shall mean the termination of Optionee's Service by reason of: (A) Optionee's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (B) Optionee's voluntary resignation following (A) a change in Optionee's position with the Corporation (or Parent or Subsidiary employing Optionee) which materially reduces Optionee's duties and responsibilities or the level of management to which Optionee reports, (B) a reduction in Optionee's 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 Optionee'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 Optionee's consent. (ii) A CHANGE IN CONTROL shall be deemed to occur in the event of a change in ownership or control of the Corporation effected through either of the following transactions: (A) 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 (B) 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 (i) have been Board members continuously since the beginning of such period or (ii) 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 (i) who were still in office at the time the Board approved such election or nomination. 2. 3 5. The provisions of Paragraph 1 of this Addendum shall govern the period for which the Option is to remain exercisable following the Involuntary Termination of Optionee's Service within eighteen (18) months after the Corporate Transaction or Change in Control and shall supersede any provisions to the contrary in Paragraph 5 of the Option Agreement. IN WITNESS WHEREOF, CombiChem, Inc. has caused this Addendum to be executed by its duly-authorized officer as of the Effective Date specified below. COMBICHEM, INC. By:________________________________ Title:_____________________________ EFFECTIVE DATE: _________________, 199__ 3. EX-10.51 9 EXHIBIT 10.51 1 EXHIBIT 10.51 ADDENDUM TO STOCK OPTION AGREEMENT The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement (the "Option Agreement") by and between CombiChem, Inc. (the "Corporation") and ___________________ ("Optionee") evidencing the stock option (the "Option") granted on ______________________, 199____ to Optionee under the terms of the Corporation's 1997 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to them in the Option Agreement. LIMITED STOCK APPRECIATION RIGHT 1. Optionee is hereby granted a limited stock appreciation right exercisable upon the following terms and conditions: (i) Optionee shall have the unconditional right, exercisable at any time during the thirty (30)- day period immediately following a Hostile Take-Over, to surrender the Option to the Corporation, to the extent the Option is at the time exercisable for one or more shares of Common Stock. In return for the surrendered Option, 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 for which the surrendered option (or surrendered portion) is at the time exercisable over (B) the aggregate Exercise Price payable for such shares. (ii) To exercise this limited stock appreciation right, Optionee must, during the applicable thirty (30)-day exercise period, provide the Corporation with written notice of the option surrender in which there is specified the number of Option Shares as to which the Option is being surrendered. Such notice must be accompanied by the return of Optionee's copy of the Option Agreement, together with any written amendments to such Agreement. The cash distribution shall be paid to Optionee within five (5) business days following such delivery date. The exercise of the limited stock appreciation right in accordance with the terms of this Addendum is hereby approved by the Plan Administrator, in advance of such exercise, and no further approval of the Plan Administrator or the Board shall be required at the time of the actual option surrender and cash distribution. Upon receipt of such cash distribution, the Option shall be cancelled with respect to the Option Shares for which the Option has been surrendered, and Optionee shall cease to have any further right to acquire those Option Shares 2 under the Option Agreement. The Option shall, however, remain outstanding and exercisable for the balance of the Option Shares (if any) in accordance with the terms of the Option Agreement, and the Corporation shall issue a replacement stock option agreement (substantially in the same form of the surrendered Option Agreement) for those remaining Option Shares. (iii) In no event may this limited stock appreciation right be exercised when there is not a positive spread between the Fair Market Value of the Option Shares subject to the surrendered option and the aggregate Exercise Price payable for such shares. This limited stock appreciation right shall in all events terminate upon the expiration or sooner termination of the Option term and may not be assigned or transferred by Optionee, except to the extent the Option is transferable in accordance with the provisions of the Option Agreement. 2. For purposes of this Addendum, the following definitions shall be in effect: (i) A HOSTILE TAKE-OVER shall be deemed to occur upon 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. (ii) The TAKE-OVER PRICE per share shall be deemed to be equal to the greater of (A) the Fair Market Value per Option Share on the option surrender date or (B) the highest reported price per share of Common Stock paid by the tender offeror in effecting the Hostile Take-Over. However, if the surrendered Option is designated as an Incentive Option in the Grant Notice, then the Take-Over Price shall not exceed the clause (A) price per share. 2. 3 IN WITNESS WHEREOF, CombiChem, Inc. has caused this Addendum to be executed by its duly-authorized officer as of the Effective Date specified below. COMBICHEM, INC. By:________________________________ Title:_____________________________ EFFECTIVE DATE: ___________________, 199__ 3. EX-10.52 10 EXHIBIT 10.52 1 EXHIBIT 10.52 COMBICHEM, INC. STOCK ISSUANCE AGREEMENT AGREEMENT made this _____ day of ___________________ 19____, by and between CombiChem, Inc., a Delaware corporation, and __________________________________________________, a Participant in the Corporation's 1997 Stock Incentive Plan. All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement or in the attached Appendix. A. PURCHASE OF SHARES 1. PURCHASE. Participant hereby purchases _____________ shares of Common Stock (the "Purchased Shares") pursuant to the provisions of the Stock Issuance Program at the purchase price of $______ per share (the "Purchase Price"). 2. PAYMENT. Concurrently with the delivery of this Agreement to the Corporation, Participant shall pay the Purchase Price for the Purchased Shares in cash or check payable to the Corporation and shall deliver a duly-executed blank Assignment Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares. 3. STOCKHOLDER RIGHTS. Until such time as the Corporation exercises the Repurchase Right, Participant (or any successor in interest) shall have all the rights of a stockholder (including voting, dividend and liquidation rights) with respect to the Purchased Shares, subject, however, to the transfer restrictions of this Agreement. 4. ESCROW. The Corporation shall have the right to hold the Purchased Shares in escrow until those shares have vested in accordance with the Vesting Schedule. 5. COMPLIANCE WITH LAW. Under no circumstances shall shares of Common Stock or other assets be issued or delivered to Participant pursuant to the provisions of this Agreement unless, in the opinion of counsel for the Corporation or its successors, there shall have been compliance with all applicable requirements of Federal and state securities laws, all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock is at the time listed for trading and all other requirements of law or of any regulatory bodies having jurisdiction over such issuance and delivery. 2 B. TRANSFER RESTRICTIONS 1. RESTRICTION ON TRANSFER. Except for any Permitted Transfer, Participant shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to the Repurchase Right. 2. RESTRICTIVE LEGEND. The stock certificate for the Purchased Shares shall be endorsed with the following restrictive legend: "The shares represented by this certificate are unvested and subject to certain repurchase rights granted to the Corporation 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 ____________, 199__ between the Corporation and the registered holder of the shares (or the predecessor in interest to the shares). A copy of such agreement is maintained at the Corporation's principal corporate offices." 3. TRANSFEREE OBLIGATIONS. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means of a Permitted Transfer 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 the Repurchase Right to the same extent such shares would be so subject if retained by Participant. C. REPURCHASE RIGHT 1. GRANT. The Corporation is hereby granted the right (the "Repurchase Right"), exercisable at any time during the ninety (90)-day period following the date Participant ceases for any reason to remain in Service, to repurchase at the Purchase Price all or any portion of the Purchased Shares in which Participant is not, at the time of his or her cessation of Service, vested in accordance with the Vesting Schedule or the special vesting accleration provisions of Paragraph C.5 of this Agreement (such shares to be hereinafter referred to as the "Unvested Shares"). 2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall be exercisable by written notice delivered to each Owner of the Unvested Shares prior to the expiration of the ninety (90)-day exercise period. 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 such notice. The certificates representing the Unvested Shares to be repurchased shall be delivered to the Corporation on or before the close of business on the date specified for the repurchase. Concurrently with the receipt of such stock certificates, the Corporation shall pay to Owner, in cash or cash equivalent (including the cancellation of any purchase-money indebtedness), an amount equal to the Purchase Price previously paid for the Unvested Shares to be repurchased from Owner. 5. 3 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 C.2. In addition, the Repurchase Right shall terminate and cease to be exercisable with respect to any and all Purchased Shares in which Participant vests in accordance with the following Vesting Schedule: (i) Upon Participant's completion of one (1) year of Service measured from ______________, 199__, Participant shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, twenty-five percent (25%) of the Purchased Shares. (ii) Participant shall acquire a vested interest in, and the Repurchase Right shall lapse with respect to, the remaining Purchased Shares in a series of thirty six (36) successive equal monthly installments upon Participant's completion of each additional month of Service over the thirty-six (36)-month period measured from the initial vesting date under subparagraph (i) above. 4. RECAPITALIZATION. Any new, substituted or additional securities or other property (including cash paid other than as a regular cash dividend) which is by reason of any Recapitalization distributed with respect to the Purchased Shares shall be immediately subject to the Repurchase Right and any escrow requirements hereunder, but only to the extent the Purchased Shares are at the time covered by such right or escrow requirements. Appropriate adjustments to reflect such distribution shall be made to the number and/or class of securities subject to this Agreement 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 Recapitalization upon the Corporation's capital structure; provided, however, that the aggregate purchase price shall remain the same. 5. CORPORATE TRANSACTION. (a) Immediately prior to the consummation of any Corporate Transaction, the Repurchase Right shall automatically lapse in its entirety and the Purchased Shares shall vest in full, except to the extent the Repurchase Right is to be assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction. (b) To the extent the Repurchase Right remains in effect following a Corporate Transaction, such right shall apply to the new capital stock or other property (including any cash payments) received in exchange for the Purchased Shares in consummation of the Corporate Transaction, but only to the extent the Purchased 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. The new securities or other property (including cash payments) issued or distributed with respect to the Purchased Shares in consummation of the Corporate Transaction shall immediately be 3. 4 deposited in escrow with the Corporation (or the successor entity) and shall not be released from escrow until Participant vests in such securities or other property in accordance with the same Vesting Schedule in effect for the Purchased Shares. (c) The Repurchase Right may also be subject to termination in whole or in part on an accelerated basis, and the Purchased Shares subject to immediate vesting, in accordance with the terms of any special Addendum attached to this Agreement. D. SPECIAL TAX ELECTION 1. SECTION 83(b) ELECTION. Under Code Section 83, the excess of the fair market value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Purchase Price paid for such shares will be reportable as ordinary income on the 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. Participant may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are acquired, 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 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 II HERETO. PARTICIPANT UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE FORFEITURE RESTRICTIONS LAPSE. 2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT IT IS PARTICIPANT'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(B), EVEN IF PARTICIPANT REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF. E. GENERAL PROVISIONS 1. ASSIGNMENT. The Corporation may assign the Repurchase Right to any person or entity selected by the Board, including (without limitation) one or more stockholders of the Corporation. 2. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement or in the Plan shall confer upon 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 Participant) or of Participant, which rights are hereby expressly reserved by each, to terminate Participant's Service at any time for any reason, with or without cause. 4. 5 3. NOTICES. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly 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 to all other parties to this Agreement. 4. NO WAIVER. The failure of the Corporation in any instance to exercise the Repurchase Right shall not constitute a waiver of any other repurchase rights that may subsequently arise under the provisions of this Agreement or any other agreement between the Corporation and Participant. 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. 5. CANCELLATION OF SHARES. If the Corporation 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). Such shares shall be deemed purchased in accordance with the applicable provisions hereof, and the Corporation shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement. 6. PARTICIPANT UNDERTAKING. Participant hereby agrees to take whatever additional action and execute whatever additional documents the Corporation may deem necessary or advisable in order to carry out or effect one or more of the obligations or restrictions imposed on either Participant or the Purchased Shares pursuant to the provisions of this Agreement. 7. 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 terms of the Plan. 8. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California without resort to that State's conflict-of-laws rules. 9. 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. 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 upon 5. 6 Participant, Participant's assigns and the legal representatives, heirs and legatees of Participant's estate, 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 hereof. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above. COMBICHEM, INC. By:________________________________ Title:_____________________________ Address:___________________________ ___________________________________ PARTICIPANT Address:___________________________ ___________________________________ 6. 7 SPOUSAL ACKNOWLEDGMENT The undersigned spouse of the Participant has read and hereby approves the foregoing Stock Issuance Agreement. In consideration of the Corporation's granting the Participant 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 of such Agreement, including (without limitation) the right of the Corporation (or its assigns) to purchase any Purchased Shares in which the Participant is not vested at the time of his or her termination of Service. ___________________________________ PARTICIPANT'S SPOUSE Address:___________________________ ___________________________ 7. 8 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 or her name on the books of the Corporation represented by Certificate No. ___________________ herewith and do(es) hereby irrevocably constitute and appoint _______________________________ Attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. Dated: ________________, 199__. Signature__________________________ INSTRUCTION: Please do not fill in any blanks other than the signature line. Please sign exactly as you would like your name to appear on the issued stock certificate. The purpose of this assignment is to enable the Corporation to exercise the Repurchase Right without requiring additional signatures on the part of Participant. 9 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 _____________, 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 issuer has the right to acquire the property at the original purchase price if for any reason taxpayer's service with the issuer terminates. The issuer's repurchase right lapses in a series of annual and monthly installments over a four (4)-year period ending on ______________. (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 on ________________________, 199__. _________________________ ___________________________________ Spouse (if any) Taxpayer This election must be filed with the Internal Revenue Service Center with which taxpayer files his or her Federal income tax returns and must be made within thirty (30) days after the execution date of the Stock Issuance Agreement. This filing should be made by registered or certified mail, return receipt requested. Participant must retain two (2) copies of the completed form for filing with his or her Federal and state tax returns for the current tax year and an additional copy for his or her records. 10 APPENDIX The following definitions shall be in effect under the Agreement: A. AGREEMENT shall mean this Stock Issuance Agreement. B. BOARD shall mean the Corporation's Board of Directors. C. COMMON STOCK shall mean shares of the Corporation's common stock. D. CODE shall mean the Internal Revenue Code of 1986, as amended. E. CORPORATE TRANSACTION shall mean either of the following stockholder-approved transactions: (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 Corporation's assets in complete liquidation or dissolution of the Corporation. F. CORPORATION shall mean CombiChem, Inc., a Delaware corporation. G. OWNER shall mean Participant and all subsequent holders of the Purchased Shares who derive their chain of ownership through a Permitted Transfer from Participant. 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. PARTICIPANT shall mean the person to whom the Purchased Shares are issued under the Stock Issuance Program. A-1. 11 J. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the Purchased Shares, provided and only if Participant obtains the Corporation's prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to Participant's will or the laws of intestate succession following Participant's death or (iii) a transfer to the Corporation in pledge as security for any purchase-money indebtedness incurred by Participant in connection with the acquisition of the Purchased Shares. K. PLAN shall mean the Corporation's 1997 Stock Incentive Plan. L. PLAN ADMINISTRATOR shall mean either the Board or a committee of the Board acting in its administrative capacity under the Plan. M. PURCHASE PRICE shall have the meaning assigned to such term in Paragraph A.1. N. PURCHASED SHARES shall have the meaning assigned to such term in Paragraph A.1. O. RECAPITALIZATION shall mean any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the Corporation's outstanding Common Stock as a class without the Corporation's receipt of consideration. P. REPURCHASE RIGHT shall mean the right granted to the Corporation in accordance with Article C. Q. SERVICE shall mean the Participant's performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an employee, 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, a non-employee member of the board of directors or a consultant. R. STOCK ISSUANCE PROGRAM shall mean the Stock Issuance Program under the Plan. S. 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. T. VESTING SCHEDULE shall mean the vesting schedule specified in Paragraph C.3, subject to the special vesting acceleration provisions of Paragraph C.5. U. UNVESTED SHARES shall have the meaning assigned to such term in Paragraph C.1. A-2. EX-10.53 11 EXHIBIT 10.53 1 EXHIBIT 10.53 ADDENDUM TO STOCK ISSUANCE AGREEMENT The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Issuance Agreement dated ____________________, 199___(the "Issuance Agreement") by and between CombiChem, Inc. (the "Corporation") and ____________________ ("Participant") evidencing the stock issuance made on such date to Participant under the terms of the Corporation's 1997 Stock Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to such terms in the Issuance Agreement. INVOLUNTARY TERMINATION FOLLOWING CORPORATE TRANSACTION/CHANGE IN CONTROL 1. To the extent the Repurchase Right is assigned to the successor corporation (or parent thereof) in connection with a Corporate Transaction, no accelerated vesting of the Purchased Shares shall occur upon such Corporate Transaction, and the Repurchase Right shall continue to remain in full force and effect in accordance with the provisions of the Issuance Agreement. The Participant shall, over Participant's period of Service following the Corporate Transaction, continue to vest in the Purchased Shares in one or more installments in accordance with the provisions of the Issuance Agreement. 2. No accelerated vesting of the Purchased Shares shall occur upon a Change in Control, and the Repurchase Right shall continue to remain in full force and effect in accordance with the provisions of the Issuance Agreement. The Participant shall, over Participant's period of Service following the Change in Control, continue to vest in the Purchased Shares in one or more installments in accordance with the provisions of the Issuance Agreement. 3. Immediately upon an Involuntary Termination of Participant's Service within eighteen (18) months following the Corporate Transaction or Change in Control, the Repurchase Right shall terminate automatically and all the Purchased Shares shall vest in full. 4. For purposes of this Addendum, the following definitions shall be in effect: An INVOLUNTARY TERMINATION shall mean the termination of Participant's Service by reason of: (i) Participant's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or 2 (ii) Participant's voluntary resignation following (A) a change in Participant's position with the Corporation (or Parent or Subsidiary employing Participant) which materially reduces Participant's duties and responsibilities or the level of management to which Participant reports, (B) a reduction in Participant's 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 Participant'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 Participant's consent. A CHANGE IN CONTROL shall be deemed to occur in the event of 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. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Participant, any unauthorized use or disclosure by the Participant of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by the Participant 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 the Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). 2. 3 IN WITNESS WHEREOF, CombiChem, Inc. has caused this Addendum to be executed by its duly-authorized officer as of the Effective Date specified below. COMBICHEM, INC. By:________________________________ Title:_____________________________ EFFECTIVE DATE: _________________, 199__ 3. EX-10.54 12 EXHIBIT 10.54 1 EXHIBIT 10.54 INITIAL GRANT COMBICHEM, INC. NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR AUTOMATIC STOCK OPTION Notice is hereby given of the following option grant (the "Option") to purchase shares of the Common Stock of CombiChem, Inc. (the "Corporation"): Optionee:_____________________________________________________ Grant Date:___________________________________________________ Exercise Price: $__________________________________ per share Number of Option Shares: 20,000 shares Expiration Date:______________________________________________ Type of Option: Non-Statutory Stock Option Date Exercisable: Immediately Exercisable Vesting Schedule: The Option Shares shall initially be unvested and subject to repurchase by the Corporation at the Exercise Price paid per share. Optionee shall acquire a vested interest in, and the Corporation's repurchase right shall accordingly lapse with respect to, the Option Shares as follows: (i) twenty-five percent (25%) upon Optionee's completion of one (1) year of service as a member of the Corporation's Board of Directors (the "Board") measured from the Grant Date and (ii) the balance in a series of thirty-six (36) successive equal monthly installments upon Optionee's completion of each additional month of Board service over the thirty-six (36) month period measured from the first anniversary of the Grant Date. In no event shall any additional Option Shares vest after Optionee's cessation of Board service. Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the automatic option grant program under the CombiChem, Inc. 1997 Stock Incentive Plan (the "Plan"). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Automatic Stock Option Agreement attached hereto as Exhibit A. 2 Optionee hereby acknowledges receipt of a copy of the official prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the Plan is available upon request made to the Corporate Secretary at the Corporation's principal offices. REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO A REPURCHASE RIGHT EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION EXERCISE. No Impairment of Rights. Nothing in this Notice or the attached Automatic Stock Option Agreement or in the Plan shall interfere with or otherwise restrict in any way the rights of the Corporation and the Corporation's stockholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law. Definitions. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Automatic Stock Option Agreement. ________________________, 199__ Date COMBICHEM, INC. By:________________________________ Title:_____________________________ ___________________________________ OPTIONEE Address:___________________________ ___________________________________ ATTACHMENTS Exhibit A - Automatic Stock Option Agreement Exhibit B - Plan Summary and Prospectus 2. 3 EXHIBIT A AUTOMATIC STOCK OPTION AGREEMENT 4 EXHIBIT B PLAN SUMMARY AND PROSPECTUS EX-10.55 13 EXHIBIT 10.55 1 EXHIBIT 10.55 ANNUAL GRANT COMBICHEM, INC. NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR AUTOMATIC STOCK OPTION Notice is hereby given of the following option grant (the "Option") to purchase shares of the Common Stock of CombiChem, Inc. (the "Corporation"): Optionee:_____________________________________________________ Grant Date:___________________________________________________ Exercise Price: $__________________________________ per share Number of Option Shares: 5,000 shares Expiration Date:______________________________________________ Type of Option: Non-Statutory Stock Option Date Exercisable: Immediately Exercisable Vesting Schedule: The Option Shares shall initially be unvested and subject to repurchase by the Corporation at the Exercise Price paid per share. Optionee shall acquire a vested interest in, and the Corporation's repurchase right shall accordingly lapse with respect to, the Option Shares upon the Optionee's completion of one (1) year of service as a member of the Corporation's Board of Directors (the "Board") measured from the Grant Date. In no event shall any additional Option Shares vest after Optionee's cessation of Board service. Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the automatic option grant program under the CombiChem, Inc. 1997 Stock Incentive Plan (the "Plan"). Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Automatic Stock Option Agreement attached hereto as Exhibit A. Optionee hereby acknowledges receipt of a copy of the official prospectus for the Plan in the form attached hereto as Exhibit B. A copy of the Plan is available upon request made to the Corporate Secretary at the Corporation's principal offices. 2 REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO A REPURCHASE RIGHT EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION EXERCISE. No Impairment of Rights. Nothing in this Notice or the attached Automatic Stock Option Agreement or in the Plan shall interfere with or otherwise restrict in any way the rights of the Corporation and the Corporation's stockholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law. Definitions. All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Automatic Stock Option Agreement. ________________________, 199__ Date COMBICHEM, INC. By:________________________________ Title:_____________________________ ___________________________________ OPTIONEE Address: __________________________ ___________________________________ ATTACHMENTS Exhibit A - Automatic Stock Option Agreement Exhibit B - Plan Summary and Prospectus 2. 3 EXHIBIT A AUTOMATIC STOCK OPTION AGREEMENT 4 EXHIBIT B PLAN SUMMARY AND PROSPECTUS EX-10.56 14 EXHIBIT 10.56 1 EXHIBIT 10.56 COMBICHEM, INC. AUTOMATIC STOCK OPTION AGREEMENT RECITALS A. The Corporation has implemented an automatic option grant program under the Plan pursuant to which eligible non-employee members of the Board will automatically receive special option grants at periodic intervals over their period of Board service in order to provide such individuals with a meaningful incentive to continue to serve as members of the Board. B. Optionee is an eligible non-employee Board member, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the automatic grant of an option to purchase shares of Common Stock under the Plan. C. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix. NOW, THEREFORE, it is hereby agreed as follows: 1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of the Grant Date, a Non-Statutory Option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price. 2. OPTION TERM. This option shall have a term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5, 6 or 7. 3. LIMITED TRANSFERABILITY. This option may, in connection with the Optionee's estate plan, be assigned in whole or in part during Optionee's lifetime to one or more members of the Optionee's immediate family or to a trust established for the exclusive benefit of one or more such family members. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment. Should the Optionee die while holding this option, then this option shall be transferred in accordance with Optionee's will or the laws of descent and distribution. 2 4. EXERCISABILITY/VESTING. (a) This option shall be immediately exercisable for any or all of the Option Shares, whether or not the Option Shares are at the time vested in accordance with the Vesting Schedule, and shall remain so exercisable until the Expiration Date or sooner termination of the option term under Paragraph 5, 6 or 7. (b) Optionee shall, in accordance with the Vesting Schedule set forth in the Grant Notice, vest in the Option Shares in one or more installments over his or her period of Board service. Vesting in the Option Shares may be accelerated pursuant to the provisions of Paragraph 5, 6 or 7. In no event, however, shall any additional Option Shares vest following Optionee's cessation of service as a Board member. 5. CESSATION OF BOARD SERVICE. Should Optionee's service as a Board member cease while this option remains outstanding, then the option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date in accordance with the following provisions: (a) Should Optionee cease to serve as a Board member for any reason (other than death or Permanent Disability) while this option is outstanding, then the period for exercising this option shall be reduced to a twelve (12)-month period (commencing with the date of such cessation of Board service), but in no event shall this option be exercisable at any time after the Expiration Date. During such limited period of exercisability, this option may not be exercised in the aggregate for more than the number of Option Shares (if any) in which Optionee is vested on the date of his or her cessation of Board service. Upon the earlier of (i) the expiration of such twelve (12)- month period or (ii) the specified Expiration Date, the option shall terminate and cease to be exercisable with respect to any vested Option Shares for which the option has not been exercised. (b) Should Optionee die during the twelve (12)-month period following his or her cessation of Board service and hold this option, at the time of his or her death, then the personal representative of Optionee's estate or the person or persons to whom the option is transferred pursuant to Optionee's will or in accordance with the laws of descent and distribution shall have the right to exercise this option for any or all of the Option Shares in which Optionee is vested at the time of Optionee's cessation of Board service (less any Option Shares purchased by Optionee after such cessation of Board service but prior to death). Such right of exercise shall terminate, and this option shall accordingly cease to be exercisable for such vested Option Shares, upon the earlier of (i) the expiration of the twelve (12)- month period measured from the date of Optionee's cessation of Board service or (ii) the specified Expiration Date. (c) Should Optionee cease service as a Board member by reason of death or Permanent Disability, then all Option Shares at the time subject to this option but not otherwise vested shall vest in full so that this option may be exercised for any or all of the Option Shares as fully vested shares of Common Stock at any time prior to the earlier of (i) the 2. 3 expiration of the twelve (12)-month period measured from the date of Optionee's cessation of Board service or (ii) the specified Expiration Date, whereupon this option shall terminate and cease to be outstanding. (d) Upon Optionee's cessation of Board service for any reason other than death or Permanent Disability, this option shall immediately terminate and cease to be outstanding with respect to any and all Option Shares in which Optionee is not otherwise at that time vested in accordance with the normal Vesting Schedule or the special vesting acceleration provisions of Paragraph 6 or 7 below. 6. CORPORATE TRANSACTION. (a) In the event of a Corporate Transaction, all Option Shares at the time subject to this option but not otherwise vested shall automatically vest so that this option shall, immediately prior to the specified effective date for the Corporate Transaction, become exercisable for all of the Option Shares at the time subject to this option and may be exercised for all or any portion of such shares as fully vested shares of Common Stock. Immediately following the consummation of the Corporate Transaction, this option shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or its parent company. (b) All outstanding repurchase rights shall also terminate automatically, and the unvested shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction. (c) If this option is assumed in connection with a Corporate Transaction, then this option shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to Optionee in 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 Exercise Price, provided the aggregate Exercise Price shall remain the same. 7. CHANGE IN CONTROL/HOSTILE TAKE-OVER. (a) All Option Shares subject to this option at the time of a Change in Control but not otherwise vested shall automatically vest so that this option shall, immediately prior to the effective date of such Change in Control, become exercisable for all of the Option Shares at the time subject to this option and may be exercised for all or any portion of such shares as fully-vested shares of Common Stock. This option shall remain exercisable for such fully-vested Option Shares until the earliest to occur of (i) the specified Expiration Date, (ii) the sooner termination of this option in accordance with Paragraph 5 or 6 or (iii) the surrender of this option under Paragraph 7(b). 3. 4 (b) All outstanding repurchase rights shall also terminate automatically, and the unvested shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control. (c) Optionee shall have an unconditional right, exercisable at the time during the thirty (30)-day period immediately following the consummation of a Hostile Take-Over to surrender this option to the Corporation in exchange for a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the Option Shares at the time subject to the surrendered option (whether or not those Option Shares are otherwise at the time vested) over (ii) the aggregate Exercise Price payable for such shares. This Paragraph 7(b) limited stock appreciation right shall in all events terminate upon the expiration or sooner termination of the option term and may not be assigned or transferred by Optionee. (d) To exercise the Paragraph 7(b) limited stock appreciation right, Optionee must, during the applicable thirty (30)-day exercise period, provide the Corporation with written notice of the option surrender in which there is specified the number of Option Shares as to which the option is being surrendered. Such notice must be accompanied by the return of Optionee's copy of this Agreement, together with any written amendments to such Agreement. The cash distribution shall be paid to Optionee within five (5) business days following such delivery date. The exercise of such limited stock appreciation right in accordance with the terms of this Paragraph 7 has been pre-approved pursuant to the express provisions of the Automatic Option Grant Program, and neither the approval of the Plan Administrator nor the consent of the Board shall be required at the time of the actual option surrender and cash distribution. Upon receipt of the cash distribution, this option shall be cancelled with respect to the shares subject to the surrendered option (or the surrendered portion), and Optionee shall cease to have any further right to acquire those Option Shares under this Agreement. The option shall, however, remain outstanding for the balance of the Option Shares (if any) in accordance with the terms and provisions of this Agreement, and the Corporation shall accordingly issue a replacement stock option agreement (substantially in the same form as this Agreement) for those remaining Option Shares. 8. ADJUSTMENT IN OPTION SHARES. 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 total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 9. STOCKHOLDER RIGHTS. The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become a holder of record of the purchased shares. 4. 5 10. 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 any other person or persons exercising the option) must take the following actions: (i) To the extent the option is exercised for vested Option Shares, execute and deliver to the Corporation a Notice of Exercise for the Option Shares for which the option is exercised. To the extent this option is exercised for unvested Option Shares, execute and deliver to the Corporation a Purchase Agreement for those unvested Option Shares. (ii) Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms: (A) cash or check made payable to the Corporation, (B) shares of Common Stock held by Optionee (or any other person or persons exercising the option) 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 (C) to the extent the option is exercised for vested Option Shares, through a special sale and remittance procedure pursuant to which Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable instructions (I) to 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 (II) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. (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) Except to the extent the sale and remittance procedure is utilized in connection with the option exercise, payment of the Exercise Price must accompany the Notice 5. 6 of Exercise (or the Purchase Agreement) delivered to the Corporation in connection with the option exercise. (c) As soon after the Exercise Date as practical, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto. To the extent any such Option Shares are unvested, the certificates for those Option Shares shall be endorsed with an appropriate legend evidencing the Corporation's repurchase rights and may be held in escrow with the Corporation until such shares vest. (d) In no event may this option be exercised for any fractional shares. 11. NO IMPAIRMENT OF RIGHTS. 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. In addition, this Agreement shall not in any way be construed or interpreted so as to affect adversely or otherwise impair the right of the Corporation or the stockholders to remove Optionee from the Board at any time in accordance with the provisions of applicable law. 12. COMPLIANCE WITH LAWS AND REGULATIONS. (a) The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance. (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. 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 Corporation and its successors and assigns and Optionee, Optionee's assigns and the legal representatives, heirs and legatees of Optionee's estate. 14. 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 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 6. 7 Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified. 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 terms of the Plan. 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. 7. 8 EXHIBIT I NOTICE OF EXERCISE I hereby notify CombiChem, Inc. (the "Corporation") that I elect to purchase __________ shares of the Corporation's Common Stock (the "Purchased Shares") at the option exercise price of $___________ per share (the "Exercise Price") pursuant to that certain option (the "Option") granted to me under the Corporation's 1997 Stock Incentive Plan on ____________________, 199___. Concurrently with the delivery of this Exercise Notice to the Corporation, I shall hereby pay to the Corporation the Exercise Price for the Purchased Shares in accordance with the provisions of my agreement with the Corporation (or other documents) evidencing the Option and shall deliver whatever additional documents may be required by such agreement as a condition for exercise. Alternatively, I may utilize the special broker-dealer sale and remittance procedure specified in my agreement to effect payment of the Exercise Price for any Purchased Shares in which I am vested at the time of exercise of the Option. _______________________, 199__ Date ___________________________________ Optionee Address:___________________________ ___________________________________ Print name in exact manner it is to appear on the stock certificate: ___________________________________ Address to which certificate is to be sent, if different from address above: ___________________________________ ___________________________________ Social Security Number: ___________________________________ 9 APPENDIX The following definitions shall be in effect under the Agreement: A. AGREEMENT shall mean this Automatic Stock Option Agreement. 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. COMMON STOCK shall mean shares of the Corporation's common stock. E. CODE shall mean the Internal Revenue Code of 1986, as amended. 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 Corporation's assets in complete liquidation or dissolution of the Corporation. A-2. 10 G. CORPORATION shall mean CombiChem, Inc., a Delaware corporation. H. EXERCISE DATE shall mean the date on which the option shall have been exercised in accordance with Paragraph 10 of the Agreement. I. EXERCISE PRICE shall mean the exercise price per share as specified in the Grant Notice. J. EXPIRATION DATE shall mean the date on which the option expires as specified in the Grant Notice. 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 the 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 which serves as 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. L. GRANT DATE shall mean the date of grant of the option as specified in the Grant Notice. M. GRANT NOTICE shall mean the Notice of Grant of Automatic Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby. N. HOSTILE TAKEOVER 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. A-3. 11 O. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. Q. NOTICE OF EXERCISE shall mean the notice of exercise in the form of Exhibit I. R. OPTION SHARES shall mean the number of shares of Common Stock subject to the option. S. OPTIONEE shall mean the person to whom the option is granted as specified in the Grant Notice. T. PERMANENT DISABILITY shall mean the inability of Optionee to perform his or her usual duties as a member of the Board by reason of any medically determinable physical or mental impairment which is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. U. PLAN shall mean the Corporation's 1997 Stock Incentive Plan. V. PURCHASE AGREEMENT shall mean the stock purchase agreement (in form and substance satisfactory to the Corporation) which grants the Corporation the right to repurchase, at the Exercise Price, any and all unvested Option Shares held by Optionee at the time of Optionee's cessation of Board service and which precludes the sale, transfer or other disposition of any purchased Option Shares while those shares are unvested and subject to such repurchase right. W. STOCK EXCHANGE shall mean the American Stock Exchange or the New York Stock Exchange. X. 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 Take-Over or (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting the Hostile Take-Over. Y. VESTING SCHEDULE shall mean the vesting schedule specified in the Grant Notice, pursuant to which the Option Shares will vest in one or more installments over the Optionee's period of Board service, subject to acceleration in accordance with the provisions of the Agreement. A-4. EX-10.57 15 EXHIBIT 10.57 1 EXHIBIT 10.57 COMBICHEM, INC. STOCK PURCHASE AGREEMENT I hereby elect to participate in the 1997 Employee Stock Purchase Plan (the "ESPP") for the offering period specified below, and I hereby subscribe to purchase shares of Common Stock of CombiChem, Inc. (the "Corporation") in accordance with the provisions of this Agreement and the ESPP. I hereby authorize payroll deductions from each of my paychecks following my entry into the offering period in the 1% multiple of my salary (not to exceed a maximum of 10%) specified in my attached Enrollment Form. The offering period is divided into a series of consecutive purchase intervals. With the exception of the initial purchase interval which begins at the time of the initial public offering of the Common Stock, those purchase intervals will be of six months duration and begin on the first business day of February and August each year during the offering period. My participation will automatically remain in effect from one purchase interval to the next during the term of the ESPP in accordance with my payroll deduction authorization, unless I withdraw from the ESPP or change the rate of my payroll deduction or unless my employment status changes. I may reduce the rate of my payroll deductions on one occasion per purchase interval and I may increase my rate of payroll deductions to become effective at the beginning of any subsequent purchase interval. My payroll deductions will be accumulated for the purchase of shares of the Corporation's Common Stock on the last business day of each purchase interval within the offering period. The purchase price per share will be equal to 85% of the lower of (i) the fair market value per share of Common Stock on my entry date into the offering period or (ii) the fair market value per share on the purchase date. However, the clause (i) amount will in no event be less than the fair market value per share of Common Stock on the start date of the offering period. I will also be subject to ESPP restrictions (i) limiting the maximum number of shares which I may purchase during any purchase interval and (ii) prohibiting me from purchasing more than $25,000 worth of Common Stock for each calendar year my purchase right remains outstanding. I may withdraw from the ESPP at any time prior to the last business day of a purchase interval and elect either to have the Corporation refund all my payroll deductions for that interval or to have such payroll deductions applied to the purchase of Common Stock at the end of such interval. However, I may not rejoin that particular offering period at any later date. Upon the termination of my employment for any reason including death or disability or my loss of eligible employee status, my participation in the ESPP will immediately cease and all my payroll deductions for the purchase interval in which my employment terminates or my loss of eligibility occurs will automatically be refunded. If I take an unpaid leave of absence, my payroll deductions will immediately cease, and any payroll deductions for the purchase interval in which my leave begins will, at my election, either be refunded or applied to the purchase of shares of Common Stock at the end of that purchase interval. Upon my return to active service, my payroll deductions will automatically resume at the rate in effect when my leave began. The Corporation will issue a stock certificate for the shares purchased on my behalf after the end of each purchase interval. The certificate will be issued in the name or names I have selected on the Enrollment Form accompanying this Agreement or will be deposited directly in my brokerage account. I will notify the Corporation of any disposition of shares purchased under the ESPP and I will satisfy all applicable income and employment tax withholding requirements at the time of such disposition. The Corporation has the right, exercisable in its sole discretion, to amend or terminate the ESPP at any time, with such amendment or termination to become effective immediately following the exercise of outstanding purchase rights at the end of any current purchase interval. Should the Corporation elect to terminate the ESPP, I will have no further rights to purchase shares of Common Stock pursuant to this Agreement. I have received a copy of the official Plan Prospectus summarizing the major features of the ESPP. I have read this Agreement and the Prospectus and hereby agree to be bound by the terms of both this Agreement and the ESPP. The effectiveness of this Agreement is dependent upon my eligibility to participate in the ESPP. Date: ___________________, 199__ ___________________________________ Signature of Employee Printed Name:______________________ Duration of Offering Period: From: __________________, 1997 to January 31, 1999 Entry Date into Offering Period: _____________________, 1997 EX-11.1 16 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, excluding 2,525 shares which are included using the treasury stock method in the Adjustments to reflect requirements of the Securities and Exchange Commission (Effect of SAB 83) 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 17 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 Amendment No. 2 to 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 December 3, 1997 -----END PRIVACY-ENHANCED MESSAGE-----